ITEM 1. BUSINESS
Introduction
Gables Realty Limited Partnership (the "Operating Partnership") is the entity through which Gables Residential Trust (the "Trust"), a real estate investment trust (a "REIT"), conducts substantially all of its business and owns, either directly or indirectly through subsidiaries, substantially all of its assets. In 1993, the Trust was formed under Maryland law and the Operating Partnership was organized as a Delaware limited partnership to continue and expand the multifamily apartment community management, development, construction, acquisition and disposition operations of its privately owned predecessor organization. The Trust completed its initial public offering on January 26, 1994 (the "IPO") and its common shares are listed on the NYSE under the symbol GBP.
At December 31, 2001, the Trust was an 80.0% economic owner of the common equity of the Operating Partnership. The Trust controls the Operating Partnership through Gables GP, Inc. ("Gables GP"), a wholly-owned subsidiary and the sole general partner of the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT or UPREIT. The board of directors of Gables GP, the members of which are the same as the members of the board of trustees of the Trust, manages the affairs of the Operating Partnership by directing the affairs of Gables GP. The Trust's limited partner and indirect general partner interests in the Operating Partnership entitle it to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to its ownership interest therein and entitles the Trust to vote on all matters requiring a vote of the limited partners.
Generally, the other limited partners of the Operating Partnership are persons who contributed their direct or indirect interests in certain real estate assets to the Operating Partnership primarily in connection with the IPO and the acquisition of Trammell Crow Residential South Florida. The Operating Partnership is obligated to redeem each common unit of limited partnership interest ("Unit") held by a person other than the Trust, at the request of the holder, for an amount equal to the fair market value of a common share at the time of such redemption, provided that the Trust, at its option, may elect to acquire any such Unit presented for redemption for one common share or cash. With each redemption, the Trust's percentage ownership interest in the Operating Partnership will increase. In addition, whenever the Trust issues common shares or preferred shares, it is obligated to contribute any net proceeds to the Operating Partnership and the Operating Partnership is obligated to issue an equivalent number of common or preferred units, as applicable, to the Trust.
The Operating Partnership may issue additional Units to acquire land parcels for the development of apartment communities or operating apartment communities in transactions that in certain circumstances defer some or all of the seller's tax consequences. The Operating Partnership believes that many potential sellers of multifamily residential properties have a low tax basis in their properties and would be more willing to sell the properties in transactions that defer federal income taxes. Offering Units instead of cash for properties may provide potential sellers partial federal income tax deferral.
Unless the context otherwise requires, all references to "we," "our" or "us" in this report refer collectively to the Trust and the Operating Partnership.
Business Objectives and Strategy
We are one of the largest owners, operators and developers of multifamily apartment communities in demand-driven markets that have high job growth and have shown resiliency to national economic downturns in the United States. Our objective is to increase shareholder value by producing consistent, high quality earnings that result in dividend growth and annual total returns which exceed the multifamily sector average. To achieve this objective, we employ a number of business strategies which are outlined below: Investment Strategy. Our long-term investment strategy is research-driven and aimed at achieving sustainable growth in operating cash flow while reducing exposure to inherent volatility associated with real estate supply/demand dynamics. We believe the success of a real estate investment is predicated on three basic factors: (1) macro-market fundamentals, (2) specific sub-market dynamics, and (3) product decisions.
Our objective is to have a portfolio of assets in approximately six to eight strategically selected markets that are complementary through economic diversity and characterized by high job growth and resiliency to national economic downturns. We believe such a portfolio will provide predictable growth in operating cash flow on a sustainable basis.
Real estate is a cyclical business and, as a long-term owner and operator of apartment communities, we believe it is important to evaluate performance potential throughout various economic cycles. It is also our belief that job creation and household formation are key components of demand for apartment communities. Research has shown that certain markets in the United States create more jobs and are more resilient to national economic downturns than others. In addition, the industrial job base of various markets can provide economic diversity through portfolio allocation that, in turn, can reduce volatility in performance. These factors, along with other macro-demographic characteristics, have led us to identify markets in which to make real estate investments. We believe that within a macro-market environment, apartment communities located in different sub-markets can have different economic performance, and that specific sub-market locations are an important factor in determining the potential economic success of an investment. Factors that differentiate specific sub-markets within a macro-market include, among other items, proximity to employment centers, entertainment and shopping, quality of education systems, availability of land that could be used to introduce new apartment communities, and the local entitlement process. It is our belief that apartment communities located in close proximity to these areas and areas with high barriers to entry through lack of available land and/or difficult entitlement processes should produce economic performance that exceeds that of apartment communities in locations without those characteristics. We generally refer to our desired locations as "in-fill" or "master-planned community" locations versus suburban locations that lack many of these differentiating characteristics. A key component used to identify in-fill/master-planned communities is the average cost per square foot for single family housing. We believe the single family housing market is very efficient in pricing the quality of housing and the proximity of neighborhoods to employment centers, entertainment, shopping, and quality education systems. By identifying these highly desirable sub-markets where people are spending the most on a per square foot basis to live, and targeting them for investment, we believe we can achieve above-average economic performance from our apartment communities.
The third component of our investment strategy is product specific. Our target customer is the affluent renter-by-choice who desires a high quality apartment community in which to live. We perform extensive market research, both internal and external, in an effort to design apartment communities that meet the current and future desires of our target customers. In addition, we invest for the long term by acquiring and developing apartment communities with high quality construction materials and amenities. We believe that long-term maintenance and capital expenditure requirements are reduced by investing additional capital up front in apartment communities built with quality construction materials. The timeless design and high quality of the product targeted to the affluent renter-by-choice also gives us a competitive advantage over many other apartment owners through our ability to sell assets to condominium converters at prices in excess of apartment valuations. We have received numerous local and national awards and recognition for the quality of our apartment communities.
In order to execute our investment strategy, we believe it is important to maintain a strong local presence in each of our markets. Through our local expertise, we stay abreast of current market conditions and can proactively adjust tactics in anticipation of changes in market fundamentals. In addition, we believe we have a competitive advantage over many other apartment community owners through the vertical integration of our organization. We have expertise in all facets of apartment community investment, including the disciplines of construction, development, acquisition and disposition. Since 1982, we have been involved in the development, acquisition and disposition of approximately 34,000, 20,000 and 27,000 apartment homes, respectively.
Operating Strategy. We adhere to a strategy of owning and operating high quality, class AA/A apartment communities under the Gables brand. We believe that such communities, when located in highly desirable areas to live and supplemented with high quality service and amenities, attract the affluent renter-by-choice who is willing to pay a premium for location preference, superior service and high quality communities. The resulting portfolio should maintain high levels of occupancy and rental rates. This, coupled with more predictable operating expenses and reduced capital expenditure requirements associated with high quality construction materials, should lead to operating margins that exceed national averages for the multifamily sector and sustainable growth in operating cash flow.
We are continuing to pursue a long-standing strategy of brand name development by linking the "Gables" name to our communities. This strategy is intended to reinforce our reputation for excellent service and build recognition of our multifamily communities as a high quality, recognizable brand. We believe that increased consumer recognition of the "Gables" brand name in each of our markets enhances our ability to attract new residents, increases the markets' perception of our communities as high quality residential developments, and enhances our relationships with local authorities.
We operate our communities to maximize sustainable cash flow growth and create long-term value. This is achieved by proactive marketing and leasing of apartment homes, providing the best possible resident service, generating economies of scale to lower expenses, and maintaining the communities to the highest standards. We believe that
excellent service and branding thereof will distinguish us from our competitors, retain current residents and attract new prospects.
We employ a number of operating strategies based on market fundamentals and prediction models in order to maximize the sustainability of growth in operating cash flow. Financial and marketing information is collected and distributed through local and wide-area networks from on-site computer systems at all of our communities, and effectively summarizes operating and marketing data critical for making accurate daily decisions. The system also compiles demographic profile information on prospective and current residents, allowing us to effectively target our customer base through our branding efforts. We also utilize the Internet extensively as a marketing tool to attract new customers through our award-winning web site at www.gables.com. Capturing and analyzing macro-market and sub-market data through our sophisticated operating systems allows us to perform analyses via our proprietary prediction models. As a result of these analyses, we may choose an operating strategy for a particular market aimed at maximizing rental rate growth while increasing short-term vacancy exposure. In other scenarios, a focus on maximizing occupancy at the expense of rental rate growth may deliver the best operating cash flow growth. We may also utilize different operating strategies for assets that are targeted for disposition in order to maximize the sales price based on current market underwriting conditions. These and other operating strategies are employed to maximize sustainable cash flow growth and create long-term value for shareholders.
Human Resources Strategy. Our aim is to be the employer of choice within the industry, with a mission of Taking Care of the Way People Live. A cornerstone of our strategy involves innovative human resource practices that we believe will attract and retain the highest caliber associates. Because of our long-established presence as a fully integrated apartment management, development, construction, acquisition and disposition company within our markets, we have the ability to offer multi-faceted career opportunities among the various disciplines within the industry. Approximately 10% of our associates have tenure in excess of 10 years. Average tenure for executive officers, vice presidents and regional managers, and property managers is over thirteen years, ten years and four years, respectively. We believe the experience, expertise and depth of our bench strength is a competitive advantage.
We believe our success with human resource strategies is primarily due to our empowerment of associates and our career development and training. By empowering associates to make decisions at a local level where the point of service occurs, we increase customer and associate satisfaction. We operate each of our apartment communities as a business unit. Property managers and staff are responsible for achieving specific economic goals associated with revenues, occupancy and expenses, in addition to maintaining assets to a high standard in order to ensure long-term success potential. Empowering associates with responsibility and encouraging decision making requires hiring the highest caliber associate and allocating extensive resources to training and career development.
We are committed to training at all levels within the organization, from newly hired associates to the board of trustees. This commitment is aimed at ensuring the competitive advantage inherent in the expertise of our associates and deep bench strength, which facilitates succession planning at all levels. Our service-oriented philosophy is branded and reinforced through our college of career development, Gables University. This comprehensive training system for our employees is overseen by full-time training coordinators and offers classes in a variety of different schools, such as the School of Leasing, School of People Resources and School of Maintenance Development. Additionally, there are "degree" programs which are completed with graduation ceremonies. Service is also reinforced with quarterly "I Made a Difference" recognition ceremonies, where personal achievement by associates is acknowledged by senior management in each of the markets where we operate. We believe recognition programs reinforce our culture and branding philosophy.
A key component to achieving our objectives is the alignment of interests between associates and shareholders. Ownership of stock options and shares is held at all levels within our company and includes property and maintenance managers as well as members of the board of trustees. Approximately 460 of our associates have equity ownership in Gables, and therefore have their interests aligned with all other shareholders.
Capital Strategy. Our objective is to maximize return on invested capital. By doing so, we believe we will achieve growth in earnings per share and net asset value per share. An integral part of our capital strategy involves maintaining financial flexibility via a conservative balance sheet that is investment grade. We have investment grade, senior unsecured debt ratings from Moody's Investors Service and Standard and Poor's of Baa2 and BBB, respectively. Our preferred shares are also investment grade rated by those firms at baa3 and BBB-, respectively. We believe our conservative credit profile provides security for shareholders and is a competitive advantage over companies without the financial flexibility associated with investment grade balance sheets.
Our attention to return on invested capital manifests itself through a very focused approach to managing our capital structure. We are able to recycle existing capital through asset dispositions, which allows us to re-deploy capital into investments with higher return potential. In certain situations, we may also capitalize on the arbitrage that exists between the private market valuation of our assets and a discounted public market valuation of our common shares by selling assets and repurchasing stock. We have access to capital through a variety of sources, including common equity, preferred equity and private equity via direct investment, in addition to internally generated equity through asset dispositions and retained cash flow.
Ancillary Business Strategy. We are involved in ancillary businesses related to our core competencies. These business lines include third-party property management, furnished corporate apartments, development and construction services, and asset disposition brokerage services. Our expertise in these areas stems from our core competencies. In addition, we are innovative in identifying and capitalizing on new services to our resident customers that provide for increases in earnings and high returns on invested capital. Regular feedback from resident customers and our clients provides avenues for enhanced service and earnings potential.
As of December 31, 2001, we managed 79 multifamily communities for third parties, comprising approximately 22,937 apartment homes. These fee management contracts are maintained with a total of approximately 50 owners. In addition to contributing to earnings, engaging in fee management allows us to create economies of scale by leveraging our management operations costs and providing access to development and acquisition opportunities, as well as providing additional market knowledge.
2001 Significant Events. During 2001, we entered the Washington, D.C. apartment market. Our research identified Washington, D.C. as a market that would complement economic growth dynamics in other Gables' markets, while reducing portfolio volatility. Our entry included the hiring of a local investment vice president and the purchase of a management company. These moves gave us immediate market knowledge and the critical mass of apartment homes so important for operating efficiencies. Our first acquisition, Gables Dupont Circle, has performed better than forecast. We expect to grow our presence in Washington, D.C. selectively and carefully.
During 2001, we continued our disposition and acquisition efforts aimed at strategically repositioning our portfolio for optimal performance. We disposed of $94 million of operating real estate assets and acquired $117 million of operating real estate assets. We also contributed our interests in certain land and development rights to a joint venture in which our economic ownership interest is 20%. The business purpose of the venture is to develop, own and operate four multifamily apartment communities comprising 1,077 apartment homes, located in three of our four markets. We serve as the managing member of the venture and have responsibility for all day-to-day operating matters. We also serve as the property manager, developer and general contractor for construction activities. The capital budget for the development of the four communities is $109 million which is expected to be funded with equity of $47 million and debt of $62 million. The equity component is being funded 80% by our venture partner and 20% by us. Our portion of the equity will be funded through contributions of cash and property. As of December 31, 2001, we had funded $7.7 million of our budgeted $9.4 million equity commitment to the joint venture.
Apartment Portfolio. As of December 31, 2001, we owned 75 stabilized multifamily apartment communities comprising 21,085 apartment homes, an indirect 25% interest in one stabilized apartment community comprising 345 apartment homes, an indirect 20% interest in four stabilized apartment communities comprising 1,359 apartment homes, and an indirect 8.3% interest in three stabilized apartment communities comprising 1,118 apartment homes. We also owned seven multifamily apartment communities under development or in lease-up at December 31, 2001 that are expected to comprise 1,586 apartment homes upon completion and an indirect 20% interest in five apartment communities under development or in lease-up at December 31, 2001 that are expected to comprise 1,367 apartment homes upon completion. In addition, as of December 31, 2001, we owned parcels of land on which we intend to develop two apartment communities that we currently expect will comprise an estimated 761 apartment homes. We also have rights to acquire additional parcels of land on which we believe we could develop communities. Any future development is subject to permits and other governmental approvals, as well as our ongoing business review, and may not be undertaken or completed.
Our apartment communities generate rental revenue and other income through the leasing of apartment homes to a diverse base of residents. We evaluate the performance of each of our apartment communities on an individual basis. However, because each of our apartment communities has similar economic characteristics, residents, and products and services, they have been aggregated into one reportable segment which comprises 96%, 95%, and 95% of our total revenues for the years ended December 31, 2001, 2000, and 1999, respectively.
Management Structure. We have been responsible for the development or acquisition of approximately 54,000 apartment homes since 1982 and our senior management team has, on average, in excess of 13 years experience in the multifamily industry. We provide a full range of integrated real estate services through a staff of approximately 1,210 employees who have expertise in property operations, development, acquisition, disposition and construction. We maintain offices in Atlanta, Boca Raton, Houston, Dallas and Washington, D.C., each with its own fully integrated organization, including experienced in-house management, development, acquisition, and disposition staffs with specific knowledge of the particular markets served. We believe that our competitive strength and growth potential lie in our in-depth knowledge of the changing opportunities available in each local market and in our locally focused management structure, which enables highly experienced development, acquisition, and disposition personnel to pursue opportunities in each market and highly experienced on-site managers to make the day-to-day decisions needed to maximize the performance of our existing properties. Our finance, accounting and administrative functions are controlled by a central staff located in Atlanta.
Competitive Advantages. We believe that we have several competitive advantages. These advantages include:
A fully integrated organization: a fully integrated organization with a track record of approximately 19 years in all phases of real estate property management, development, acquisition, disposition, construction, rehabilitation, financing and marketing.
Product focus: a portfolio concentration of Class AA/A apartment communities that are targeted toward the affluent renter-by-choice, are located primarily in in-fill locations and master-planned communities, and include garden, townhome and higher density apartment communities.
Local presence in multiple markets: an established local presence in each of our markets, which we serve through an experienced staff with superior knowledge of local markets and a culture which provides incentives for outstanding performance at all levels.
Strategic portfolio diversification: an established market presence in strategically selected major markets that are geographically independent, rely on diverse economic foundations, and have shown job growth substantially above national averages and resiliency to national economic downturns.
Brand recognition: a service-oriented philosophy which focuses on offering extensive resident amenities and services in high quality apartment homes to increase occupancy, rental rates and net operating income.
The Management Company
Our fee management operations are conducted through Gables Residential Services, Inc., a wholly-owned subsidiary of the Operating Partnership. Gables Residential Services also provides other services to third parties, including construction, brokerage and corporate rental housing. A portion of these services are, or may also be, provided by the Operating Partnership directly, to the extent consistent with the gross income requirements for REITs under the Internal Revenue Code (the "Code").
Competition
All of our communities are located in developed areas that include other apartment communities. The number of competitive multifamily communities in a particular area could have a material effect on our ability to lease apartment homes at our present communities or any newly developed or acquired community, as well as on the rents charged. We may be competing for development and acquisition opportunities with others that have greater resources than we do, including other REITs. In addition, our communities must compete for residents against new and existing homes and condominiums. The home affordability index in all of our markets is above the national average. This competitive environment is partially offset by the propensity to rent for households in our markets which in all cases exceeds the national average.
The fee management business is highly competitive, and we face competition from a variety of local, regional and national firms. We compete against these firms by stressing the quality and experience of our employees, the services provided by us, and the market presence and experience we have developed over the past 19 years. We may nevertheless lose some of our third party management business, particularly when such properties are sold.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination. Such laws, ordinances and regulations typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances or the failure to properly remediate the contamination on such property may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Finally, the owner or operator of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. In connection with the ownership, operation, management and development of our communities and other real properties, we may be potentially liable for such damages and costs.
Certain federal, state and local laws, ordinances and regulations govern the removal, encapsulation and disturbance of asbestos-containing materials ("ACMs") when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws, ordinances and regulations may impose liability for release of ACMs and may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership, operation, management and development of our communities and other real properties, we may be potentially liable for such costs.
In addition, recent studies have linked radon, a naturally-occurring substance, to increased risks of lung cancer. While there are currently no state or federal requirements regarding the monitoring for, presence of, or exposure to radon in indoor air, the U.S. Environmental Protection Agency and the Surgeon General recommend testing residences for the presence of radon in indoor air, and the EPA further recommends that concentrations of radon in indoor air be limited to less than 4 picocuries per liter of air (the "Recommended Action Level"). The presence of radon in concentrations equal to or greater than the Recommended Action Level in a community may adversely affect our ability to rent apartment homes in that community and the market value of the community.
Finally, recently-enacted federal legislation will eventually require owners and landlords of residential housing constructed prior to 1978 to disclose to potential tenants or purchasers any known lead-paint hazards and will impose treble damages for failure to so notify. In addition, lead-based paint in any of our communities may result in lead poisoning in children residing in that community if chips or particles of such lead-based paint are ingested, and we may be held liable under state laws for any such injuries caused by ingestion of lead-based paint by children living at our communities.
Our assessments of our communities have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations, nor are we aware of any such material environmental liability. Nevertheless, it is possible that our assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, there can be no assurance that (1) future laws, ordinances or regulations will not impose any material environmental liability, or (2) the current environmental condition of our communities will not be affected by tenants, the condition of land or operations in the vicinity of the properties, such as the presence of underground storage tanks, or the actions of third parties unrelated to us.
We believe that no ACMs were used in connection with the construction of our communities or will be used in connection with future construction. Our environmental assessments have revealed the presence of "potentially friable" ACMs at two of our communities. We have programs in place to maintain and monitor ACMs. We believe our communities are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. We have not been notified by any governmental authority and are not otherwise aware of any material non-compliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our present properties that would involve substantial expenditure, and we do not believe that compliance with applicable environmental laws or regulations will have an adverse material effect on us, our financial condition or results of operations.
Costs of Compliance with Americans with Disabilities Act and Similar Laws
Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. We believe that our communities are substantially in compliance with present requirements of the ADA as they apply to multifamily dwellings. A number of additional federal, state and local laws exist which also may require modifications to our communities or regulate certain further renovations with respect to access by disabled persons. For example, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Non-compliance with the FHAA could result in the imposition of fines or an award of damages to private litigants. We believe that our communities that are subject to the FHAA are substantially in compliance with this law.
Additional legislation may impose further burdens or restrictions on owners with respect to access by disabled persons. The ultimate amount of the cost of compliance with the ADA or related legislation is not currently ascertainable, and while these costs are not expected to have a material effect on us, they could be substantial. Limitations or restrictions on the completion of certain renovations may limit application of our investment strategy in certain instances or reduce overall returns on our investments.
Insurance
We carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to all of our completed communities, with policy specifications, insured limits and deductibles customarily carried for similar properties. We carry similar insurance with respect to our development properties, but with certain appropriate exceptions given the undeveloped nature of these properties. There are, however, certain types of losses, such as losses arising from acts of war, that are not generally insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in a particular property as well as the anticipated future revenues from the property and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any uninsured loss or loss in excess of insured limits would adversely affect us.
Employees
We provide a full range of real estate services through a staff of approximately 1,210 employees, including an experienced management team. There are no collective bargaining agreements with any of our employees. We believe relations with our employees are excellent.
Tax Matters
We have elected to be taxed as a REIT under the Code. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of the REIT's ordinary taxable income to shareholders. It is our current intention to adhere to these requirements and maintain our REIT status. As a REIT, we generally will not be subject to federal income tax on distributed taxable income. Even if we qualify as a REIT, we may be subject to certain state and local taxes on our income and real estate assets, and to federal income and excise taxes on our undistributed taxable income.
We utilize Gables Residential Services, a taxable REIT subsidiary, to provide management and other services to third parties that a REIT may be prohibited from providing. Taxable REIT subsidiaries are subject to federal, state and local income taxes.
Policies with Respect to Significant Business Activities
The following is a discussion of our investment, financing and other significant policies. These policies have been determined by our board of trustees and may be amended or revised from time to time by the board of trustees without a vote of the shareholders, except that (1) we cannot change our policy of holding assets and conducting business only through the Operating Partnership, Gables Residential Services and other permitted subsidiaries without the consent of the holders of Units as provided in the partnership agreement of the Operating Partnership, (2) changes in policies with respect to conflicts of interest must be consistent with legal requirements, and (3) we cannot take any action intended to terminate our qualification as a REIT without the approval of the holders of two-thirds of our common shares.
Investment Policies. We will conduct all of our investment activities through the Operating Partnership and its subsidiaries. Our investment objectives are to provide quarterly cash distributions and achieve long-term capital appreciation through increases in our value. We may purchase income-producing multifamily apartments or other types of properties for long-term investment, expand and improve the communities presently owned or other properties purchased, or sell communities or other properties, in whole or in part, when circumstances warrant. We may also participate with third parties in apartment community ownership through joint ventures or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness or financing or indebtedness incurred in connection with acquiring or refinancing these investments. Debt service on such financing or indebtedness will have a priority over common shares and any distributions thereon.
While we emphasize equity real estate investments in multifamily apartment communities, we may, at the discretion of the board of trustees, invest in other types of equity real estate investments and mortgages, including participating or convertible mortgages and other real estate interests. We currently intend to invest in apartment communities in specifically identified markets. However, future development or investment activities will not be limited to any geographic area or product type or to a specified percentage of our assets. We will not have any limit on the amount or percent of our assets invested in one property. Subject to the percentage of ownership limitations and gross income and asset tests necessary for REIT qualification, we may also invest in securities of other REITs, other entities engaged in real estate activities or which provide services to the real estate industry, or securities of other issuers, including for the purpose of exercising control over such entities. We may enter into joint ventures or partnerships for the purpose of obtaining an equity interest in a particular property in accordance with our investment policies. These investments may permit us to own interests in larger assets without unduly restricting diversification and, therefore, add flexibility in structuring our portfolio. We will not enter into a joint venture or partnership to make an investment that would not otherwise meet our investment policies. Investment in these securities is also subject to our policy not to be treated as an investment company under the Investment Company Act of 1940.
Financing Policies. Our debt to total market capitalization ratio, defined as our total consolidated debt as a percentage of the December 31, 2001 market value of our outstanding common shares and Units plus total consolidated debt and preferred shares and Units at liquidation value, was 45.0% at December 31, 2001. Excluding construction-related indebtedness, this ratio was 40.5% at December 31, 2001. This ratio will fluctuate with changes in the price of our common shares and the number of outstanding common shares or other forms of shares of beneficial interest, and differs from the debt-to-book capitalization ratio, which is based upon book values. This percentage will increase as we use financing to continue construction of our development communities and acquire additional multifamily apartment communities. As the debt-to-book capitalization ratio may not reflect the current income potential of a company's assets and operations, we believe that, in most circumstances, the debt to total market capitalization ratio may provide an alternate indication of leverage for a company whose assets are primarily income-producing real estate and should be evaluated along with the debt service coverage and underlying components of our indebtedness.
We currently have a policy of incurring debt only if the ratio of debt to total market capitalization would be 60% or less. Our declaration of trust and bylaws do not, however, limit the amount or percentage of indebtedness that we may incur. In addition, we may from time to time modify our debt policy in light of current economic conditions, relative costs of debt and equity capital, market values of our communities, general conditions in the market for debt and equity securities, fluctuations in the market price of common shares, growth opportunities and other factors. Accordingly, we may increase our debt to total market capitalization ratio beyond the limits described above. To the extent that the board of trustees decides to obtain additional capital, we may raise capital through asset dispositions, additional equity offerings, debt financings or retention of funds from operations as allowable under the Code in order to maintain REIT tax status, or a combination of these methods. We presently anticipate that any additional borrowings would be made through the Operating Partnership, although we might incur indebtedness, the proceeds of which would be loaned to the Operating Partnership. Borrowings may be unsecured or may be secured by any or all of our assets, the Operating Partnership or any existing or new property owning partnership, and may have full or limited recourse to all or any portion of our assets, the Operating Partnership or any existing or new property owning partnership. Indebtedness incurred by us may be in the form of bank borrowings, tax-exempt bonds, purchase money obligations to sellers of apartment communities or other properties, publicly or privately placed debt instruments or financing from institutional investors or other lenders. The proceeds from any of our borrowings may be used for working capital to refinance existing indebtedness and to finance acquisitions, expansions or development of new communities and other properties, and for the payment of distributions. We have not established any limit on the number or amount of mortgages that may be placed on any single property or on our portfolio as a whole.
We currently have a senior unsecured debt rating of BBB from Standard and Poor's and Baa2 from Moody's Investors Service. Our Series A Preferred Shares currently have a rating of BBB- from Standard and Poor's and baa3 from Moody's Investors Service. We intend to adhere to financing policies that will allow us to maintain these investment grade credit ratings.
Conflict of Interest Policies. As part of their employment agreements, each of Chris Wheeler (Chairman, President and Chief Executive Officer), Mike Hefley (Chief Operating Officer), and Marvin Banks (Chief Financial Officer) is bound by a non-competition covenant. These non-competition covenants provide that, during the term of employment and for a period of one year following termination of employment, under certain circumstances, each individual is prohibited from directly or indirectly competing with us with respect to any multifamily apartment residential real estate property management, development, construction, acquisition or disposition activities undertaken or being considered by us. These employment agreements also contain certain non-solicitation covenants wherein each individual subject to the agreement is prohibited, during the term of employment and for a period of one year following employment, from directly or indirectly (1) soliciting or inducing any of our present or future employees to accept employment with such individual or any person or entity associated with such individual, (2) employing, or causing any person or entity associated with such individual to employ, any of our present or future employees without providing us prior written notice of such proposed employment, or (3) either for himself or for any other person or entity, competing for or soliciting the third party owners with whom we have an existing property management agreement. The employment agreements terminate on January 1, 2003, but are automatically extended for additional one-year periods unless notice is given by us or the employee three months prior to the agreement's expiration that the agreement will not be renewed.
In addition, trustees as well as officers ("Senior Management") are bound by a conflict of interest policy which narrowly focuses on business activities of Senior Management which may compete directly with our business in the multifamily sector. Under this policy, Senior Management must refrain from engaging in activities such as serving as a director, trustee, officer, employee, partner, consultant, agent, investor, lender, or a significant financial stakeholder in an enterprise that engages, or proposes to engage in the acquisition, development, management, ownership, operation or disposition of multifamily residential real estate assets in any market in which we are currently present or contemplating entering.
Senior Management may engage in certain permissible competitive activities, although potentially competitive with us. These activities which are similar to the activities described in the preceding paragraph, include any proposed activity that is fully disclosed to and approved by the chairman of the board, any proposed activity which involves either fewer than 30 residential units or a total value of less than $3.0 million, and relates to a property that is not located within a five mile radius of our existing or proposed properties, and any activity by a trustee, if such activity is an incidental or non-recurring part of the regular duties and responsibilities associated with his or her employment.
We have adopted a policy that, without the approval of a majority of our trustees who are neither officers nor affiliated with us, we will not (1) acquire from or sell to any trustee, officer or employee or any entity in which a trustee, officer or employee of our company beneficially owns more than a 1% interest, or acquire from or sell to any affiliate of any of the foregoing, any of our assets or other property, (2) make any loan to or borrow from any of the foregoing persons, or (3) engage in any other transaction with any of the foregoing persons.
Risk Factors
Before you invest in our securities, you should be aware that there are various risks, including those described below. You should consider carefully these risk factors together with all of the information included or incorporated by reference in this document before you decide to purchase our securities. This section includes certain forward-looking statements.
Development and construction risks could impact our profitability.We intend to continue to develop and construct multifamily apartment home communities. Our development activities may be exposed to the following risks:
We may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to the project for which we are unable to obtain permits or authorizations;
We may abandon development opportunities that we have already begun to explore and as a result we may fail to recover expenses already incurred in connection with exploring such development opportunities;
We may incur construction costs for a community which exceed our original estimates due to increased materials, labor or other costs, which could make completion of the community uneconomical and we may not be able to increase rents to compensate for the increase in construction costs;
Occupancy rates and rents at a newly completed development may fluctuate depending on a number of factors, including market and economic conditions, and may result in the community not being profitable;
We may not be able to obtain financing with favorable terms for the development of a community, which may make us unable to proceed with its development; and
We may be unable to complete construction and lease-up of a community on schedule, resulting in increased debt service expense and construction costs.
Construction costs have been increasing in our target markets, and the cost to update acquired communities has, in some cases, exceeded our original estimates. We may experience similar cost increases in the future. Our inability to charge rents that will be sufficient to offset the effects of any increases in construction costs may impact our profitability. A
cquisitions may not yield anticipated results.We intend to continue to acquire multifamily apartment home communities on a select basis. Our acquisition activities and their success may be exposed to the following risks:
The acquired property may fail to perform as we expected in analyzing our investment; and
Our estimate of the costs of repositioning or redeveloping the acquired property may prove inaccurate.
Policy of limiting debt level may be changed.While our current policy is not to incur debt that would make our ratio of debt to total market capitalization greater than 60%, our declaration of trust and bylaws do not contain any such limitations. Our ratio of debt to total market capitalization as of December 31, 2001 was 45%. Because we do not have any debt incurrence restrictions in our declaration of trust or bylaws, we could increase the amount of outstanding debt at any time. In the event that the price of our common shares increases, we could incur additional debt without increasing the ratio of debt to total market capitalization and without a concurrent increase in our ability to service such additional debt.
Incurrence of additional debt and related issuance of equity may be dilutive to shareholders.Future issuance of equity may dilute the interest of existing shareholders. To the extent that additional equity securities are issued to finance future developments and acquisitions instead of incurring additional debt, the interests of our existing shareholders could be diluted. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity.
Insufficient cash flow could affect our debt financing and create refinancing risk.We are subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. We anticipate that only a small portion of the principal of our debt will be repaid prior to maturity. Although we may be able to use cash flow to make future principal payments, we cannot assure you that sufficient cash flow will be available to make all required principal payments. Therefore, we are likely to need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt.
Rising interest rates would increase interest costs and could affect the market price of our securities.We expect to incur variable rate debt under credit facilities in connection with the acquisition, construction and reconstruction of multifamily apartment communities in the future, as well as for other purposes. Accordingly, if interest rates increase, so will our interest costs to the extent the variable rate increase is not hedged effectively. In addition, an increase in market interest rates may lead purchasers of our securities to demand a higher annual yield, which could adversely affect the market price of our outstanding securities.
Interest rate hedging contracts may involve material changes and may not provide adequate protection.From time to time when we anticipate offerings of debt securities, we may seek to decrease our exposure to fluctuations in interest rates during the period prior to the pricing of the securities by entering into interest rate hedging contracts. We may do so to increase the predictability of our financing costs. Also, from time to time we rely on interest rate hedging contracts to offset our exposure to moving interest rates with respect to debt financing arrangements at variable interest rates. The settlement of interest rate hedging contracts has in the past and may in the future involve charges to earnings that may be material in amount. Such charges are typically driven by the extent and timing of fluctuations in interest rates. Despite our efforts to minimize our exposure to interest rate fluctuations, there is no guarantee that we will be able to maintain our hedging contracts at their existing levels of coverage or that the amount of coverage maintained will cover all of our outstanding indebtedness at any such time. If our efforts are unsuccessful, we may not meet our objective of reducing the extent of our exposure to interest rate fluctuations.
Bond compliance requirements could limit income and restrict use of communities and cause favorable financing to become unavailable.Some of our multifamily apartment communities are financed with obligations issued by various local government agencies or instrumentalities, the interest on which is exempt from federal income taxation. These obligations are commonly referred to as "tax-exempt bonds." The bond compliance requirements for our current tax-exempt bonds, and the requirements of any future tax-exempt bond financing, may have the effect of limiting our income from communities subject to such financing. Under the terms of our tax-exempt bonds, we must comply with various restrictions on the use of the communities financed by such bonds, including a requirement that a percentage of apartments be made available to low and middle income households. In addition, some of our tax-exempt bond financing documents require that a financial institution guarantee payment of the principal of, and interest on, the bonds. The guarantee may take the form of a letter of credit, surety bond, guarantee agreement or other additional collateral. If the financial institution defaults in its guarantee obligations, or we are unable to renew the applicable guarantee or otherwise post satisfactory collateral, a default will occur under the applicable tax-exempt bonds and the community could be foreclosed upon.
Failure to generate sufficient revenue could limit cash flow available for distribution shareholders. If our communities do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our shareholders will be adversely affected. The following factors, among others, may adversely affect the revenues generated by our apartment communities:
the national and local economic climates;
local real estate market conditions, such as oversupply of apartment homes;
the perceptions by prospective residents of the safety, convenience and attractiveness of our communities and the neighborhoods where they are located;
our ability to provide adequate management, maintenance and insurance; and
increased operating costs including real estate taxes, insurance and utilities.
Significant expenditures associated with each investment such as debt service payments, if any, real estate taxes, insurance and maintenance costs are generally not reduced when circumstances cause a reduction in income from a community. For example, if we mortgage a community to secure payment of debt and are unable to meet the mortgage payments, we could sustain a loss as a result of foreclosure on the community or the exercise of other remedies by the mortgagee.
Unfavorable changes in market and economic conditions could hurt occupancy or rental rates.The market and economic conditions in metropolitan areas of our current markets in the United States may significantly affect apartment home occupancy or rental rates. Occupancy and rental rates in those markets, in turn, may significantly affect our profitability and our ability to satisfy our financial obligations. The risks that may affect conditions in those markets include the following:
the economic climate which may be adversely impacted by plant closings, industry slowdowns and other factors;
real estate conditions such as an oversupply of, or a reduced demand for, apartment homes;
a decline in household formation that adversely affects occupancy or rental rates;
the inability or unwillingness of residents to pay rent increases;
the potential effect of rent control or rent stabilization laws, or other laws regulating housing, on any of our communities, which could prevent us from raising rents to offset increases in operating costs; and
the rental market which may limit the extent to which rents may be increased to meet increased expenses without decreasing occupancy rates.
Any of these risks could adversely affect our ability to achieve our desired yields on our communities and to make expected distributions to shareholders.
Difficulty of selling apartment communities could limit flexibility. Real estate in metropolitan areas of the United States can be hard to sell, especially if market conditions are poor. This may limit our ability to change our portfolio promptly in response to changes in economic or other conditions. In addition, federal tax laws limit our ability to sell communities that we have owned for fewer than four years, and this may affect our ability to sell communities without adversely affecting returns to our shareholders.
Increased competition could limit our ability to lease apartment homes or increase or maintain rents. Our apartment communities in metropolitan areas compete with numerous housing alternatives in attracting residents, including other rental apartments and single-family homes that are available for rent, as well as new and existing single-family homes for sale. Competitive residential housing in a particular area could adversely affect our ability to lease apartment homes and to increase or maintain rents.
Significant new operations and acquired communities under management require integration with the existing business and, if not properly integrated, could create inefficiencies.Our ability to manage growth effectively will require us, among other things, to successfully apply our experience in managing our existing portfolio of multifamily apartment communities to a larger number of properties. In addition, we must be able to successfully manage the integration of new management and operations personnel as our organization grows in size and complexity.
Failure to succeed in new markets may limit growth.We may make selected acquisitions outside of our current market areas from time to time, if appropriate opportunities arise. Our historical experience in our current markets located in the United States does not ensure that we will be able to operate successfully in other market areas new to us. We may be exposed to a variety of risks if we choose to enter into new markets. These risks include, among others:
a lack of market knowledge and understanding of the local economies;
an inability to obtain land for development or to identify acquisition opportunities;
an inability to obtain construction tradespeople; and
an unfamiliarity with local governmental and permitting procedures.
Decrease of fee management business would result in decrease in revenues.We manage properties owned by third parties for a fee. Most of our management contracts are terminable upon 30-days notice. There is a risk that the management contracts will be terminated and/or that the rental revenues upon which management fees are based will decline and management fee income will decrease accordingly.
Share ownership limit may prevent takeovers beneficial to shareholders. For us to maintain our qualification as a REIT for federal income tax purposes, not more than 50% in value of our outstanding shares of beneficial interest may be owned, directly or indirectly, by five or fewer individuals. As defined for federal income tax purposes, the term "individuals" includes a number of specified entities. Our declaration of trust includes restrictions regarding transfers of our shares of beneficial interest and ownership limits that are intended to assist us in satisfying such limitations. The ownership limit may have the effect of delaying, deferring or preventing someone from taking control of us, even though such a change of control could involve a premium price for our shareholders or otherwise could be in our shareholders' best interests.
Limits on changes in control may discourage takeover attempts beneficial to shareholders.Our declaration of trust, our bylaws and Maryland law may have the effect of discouraging a third party from attempting to acquire us which makes a change in control more unlikely. The result may be a limitation on the opportunity for shareholders to receive a premium for their common shares over then-prevailing market prices.
Compliance or failure to comply with Americans with Disabilities Act and other similar laws could result in substantial costs. The ADA generally requires that public accommodations, including office buildings and hotels be made accessible to disabled persons. Noncompliance could result in imposition of fines by the federal government or the award of damages to private litigants. If, pursuant to the ADA, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations, as well as the amount of cash available for distribution to our shareholders.
A number of additional federal, state and local laws exist that impact our communities with respect to access thereto by disabled persons. For example, the FHAA requires that apartment communities first occupied after March 13, 1990 be accessible to the handicapped. Noncompliance with the FHAA could result in the imposition of fines or an award of damages to private litigants.
We cannot predict the ultimate cost of compliance with the ADA or other similar legislation. The costs could be substantial.
Failure to qualify as a REIT would cause us to be taxed as a corporation which would significantly lower funds available for distribution to shareholders. If we fail to qualify as a REIT for federal income tax purposes, we will be taxed as a corporation. We believe that we are organized and qualified as a REIT and intend to operate in a manner that will allow us to continue to qualify. However, we cannot assure you that we are qualified as such, or that we will remain qualified as such in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.
If, in any taxable year, we fail to qualify as a REIT, we will be subject to federal income tax on our taxable income at regular corporate rates, plus any applicable alternative minimum tax. In addition, unless we are entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year in which we lose our qualification. The additional tax liability resulting from the failure to qualify as a REIT would significantly reduce or eliminate the amount of funds available for distribution to our shareholders. Furthermore, we would no longer be required to make distributions to our shareholders.
Potential liability for environmental contamination could result in substantial costs.We are in the business of acquiring, owning, operating and developing real estate properties. From time to time we will sell to third parties some of our properties. Under various federal, state and local environmental laws, we may be required, often regardless of our knowledge or responsibility but solely because of our current or previous ownership or operation of real estate, to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases at those properties. We may also be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by us in connection with any contamination. These costs could be substantial. The presence of such substances or the failure to properly remediate the contamination may materially and adversely affect our ability to borrow against, sell or rent the affected property. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with the contamination.
Finally, when excessive moisture accumulates in buildings or on building materials, mold growth will often occur, particularly if the moisture problem remains undiscovered or is not addressed. Some molds are known to produce potent toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold can cause a variety of health effects and symptoms in certain individuals, including severe allergic or other reactions. As a result, the presence of mold at a property we own could require us to undertake a costly remediation program to contain or remove the mold from the affected property. Such a remediation program could necessitate the temporary relocation of some or all of the property's tenants or the complete rehabilitation of the property.
Potential liability for losses not covered by insurance could result in substantial costs. We may incur casualty losses that are not covered by insurance. We carry insurance coverage on our properties of types and in amounts that we believe are in line with coverage customarily obtained by owners of similar properties. We believe all of our properties are adequately insured. The property insurance that we maintain for our properties has historically been on an "all risk" basis, including losses covered by acts of terrorism. However, following the recent terrorist activity of September 11, 2001, and in light of the resulting uncertainty in the insurance market, many insurance companies have indicated that they will exclude insurance against acts of terrorism from their "all risk" policies. Our "all risk" insurance coverage in place for the current policy year does not contain specific exclusions for losses attributable to acts of terrorism; however, there is a high probability that such exclusions will be present as we renew and replace existing insurance coverage. The cost and limited availability of specific third party insurance coverage for losses from acts of terrorism have made it commercially unreasonable for us to secure such coverage in the future. Further, there are other types of losses, such as from wars or catastrophic acts of nature, for which we cannot obtain insurance at all or at a reasonable cost. In the event of an uninsured loss or a loss in excess of our insurance limits, we could lose both the revenues generated from the affected property and the capital we have invested in the affected property; depending on the specific circumstances of the affected property it is possible that we could be liable for any mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect our business and financial condition and results of operations.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 2001, we owned or had an interest in 83 stabilized communities consisting of 23,907 apartment homes, and owned or had an interest in 12 development/lease-up communities consisting of 2,953 apartment homes. The communities, comprising a total of 26,860 apartment homes, are located in Texas, Georgia, Florida, Tennessee and Washington, D.C. The following table shows the locations of the communities and the number of apartment homes in each metropolitan area:
Houston, TX (a)
6,222 6,704 25.0%
Atlanta, GA (b)
5,798 6,335 23.6%
Boca Raton, FL (c)
5,049 5,339 19.9%
Dallas, TX (d)
1,645 2,357 8.8%
Austin, TX -
1,677 - 1,677 6.2%
Memphis, TN (e) -
1,309 - 1,309 4.9%
Orlando, FL
1,274 4.7%
Nashville, TN (f) -
1,166 - 1,166 4.3%
Tampa, FL (g) -
- 2.3%
Washington, D.C. -
- 0.3%
Totals
23,907 2,953 26,860 100.0%
(a)
Includes a stabilized community comprising 382 apartment homes and a development/lease-up community comprising 186 apartment homes in which we have a 20% interest.
(b)
Includes a stabilized community comprising 435 apartment homes and a development/lease-up community comprising 274 apartment homes in which we have a 20% interest.
(c)
Includes a stabilized community comprising apartment homes and a development/lease-up community comprising 290 apartment homes in which we have a 20% interest.
(d)
Includes a stabilized community comprising 222 apartment homes in which we have a 20% interest.
(e)
Includes a stabilized community comprising 345 apartment homes in which we have a 25% interest and a stabilized community comprising 500 apartment homes in which we have an 8.26% interest.
(f)
Includes two stabilized communities comprising 618 apartment homes in which we have an 8.26% interest.
(g)
Represents two development/lease-up communities comprising 617 apartment homes in which we have a 20% interest.
Stabilized Communities. We developed 41 communities consisting of 12,004 apartment homes and acquired 42 communities consisting of 11,903 apartment homes. We manage and operate all of the stabilized communities, which are typically two and three-story garden apartments, townhomes and higher-density apartments. As of December 31, 2001, the communities had an average scheduled monthly rental rate per apartment home of $973 or $0.96 per square foot and a physical occupancy rate of 94%. The average age of the communities is approximately ten years.
Most of our communities offer many attractive features designed to enhance their market appeal, such as vaulted ceilings, fireplaces, dishwashers, disposals, washer/dryer connections, ice-makers, patios and decks. Recreational facilities include swimming pools, fitness facilities, playgrounds, picnic areas and tennis and racquetball courts. In many communities, we make amenities and services such as aerobic classes, resident social events, dry cleaning pickup and delivery, and the use of fax, computer and copy equipment available to residents. In-depth market research, including periodic focus groups with residents and feedback from on-site management personnel, is used to refine and enhance management services and community design. Additional information regarding our stabilized communities at December 31, 2001 follows:
Stabilized Community Features as of December 31, 2001
Community (a)
No. of
Apt.
Homes Approx.
Rentable
Sq. Ft. (b) Total Acreage Year Constructed/
Renovated Year Acquired Average
Unit Size
(Sq. Ft.) Occupancy
at
12/31/01 Scheduled Rent
at 12/31/01 Per
Unit Sq. Ft.
Houston, TX
Gables Austin Colony (c)
Gables Bradford Place (c)
Gables Bradford Pointe (c)
Gables Champions
Gables CityPlaza
Gables Cityscape (c)
Gables Citywalk/
Waterford Sq. (c)
Gables Edgewater
Gables Lions Head (c)
Gables Metropolitan Uptown
Gables Meyer Park I
Gables New Territory
Gables of First Colony
Gables Piney Point (c)
Gables Pin Oak Green
Gables Pin Oak Park
Gables Raveneaux (d)
Gables Rivercrest I (c)
Gables Rivercrest II (c)
Gables Windmill
Landing (c)
Totals/Averages
Atlanta, GA
Briarcliff Gables
Buckhead Gables
Dunwoody Gables (c)
Gables Cityscape
Gables Metropolitan I (d)
Gables Mill
Gables Northcliff
Gables Vinings
Gables Walk
Gables Wood Arbor (c)
Gables Wood Crossing (c)
Gables Wood Glen (c)
Gables Wood Knoll (c)
Lakes at Indian Creek (c)
Rock Springs Estates (f)
Roswell Gables I (c)
Roswell Gables II (c)
Spalding Gables (c)
Wildwood Gables (c), (f)
Totals/Averages
Boca Raton, FL
Cotton Bay (c)
Gables Boca Place (c), (f)
Gables Boynton Beach I
Gables Boynton Beach II
Gables Grand Isle (d)
Gables Kings Colony (c)
Gables Mizner on the Green
Gables Palma Vista
Gables San Michele I
Gables San Michele II
Gables San Remo
Gables Town Colony (c)
Gables Town Place (c)
Gables Wellington
Hampton Lakes (c)
Hampton Place
Mahogany Bay (c)
Vinings at Hampton
Village (c)
Totals/ Averages
6,222
5,798
5,049
231,621
320,322
276,417
367,588
217,374
214,824
255,823
257,339
233,796
290,141
297,054
233,652
321,848
227,880
592,709
483,740
401,327
118,020
118,020
224,689
5,684,184
128,976
122,548
290,396
150,610
487,472
406,676
127,990
336,735
367,226
127,540
257,012
377,340
311,064
552,384
295,302
417,288
334,268
249,333
619,710
5,959,870
436,460
175,812
302,148
357,653
340,776
426,590
311,176
273,606
332,683
475,506
329,978
147,724
260,192
297,138
317,004
352,528
330,459
202,752
5,670,185
11.0
13.3
13.5
29.7
7.5
6.8
8.7
12.2
10.3
8.9
11.0
15.0
13.3
7.5
14.4
11.9
20.9
5.1
5.0
9.8
235.8
5.2
3.5
10.4
5.5
15.0
36.1
12.7
15.2
19.7
9.9
22.3
23.8
19.6
49.8
28.7
28.3
28.3
11.2
37.9
383.1
37.6
9.4
18.0
15.9
20.0
18.8
8.9
12.0
32.4
32.4
11.8
10.0
13.0
12.7
11.0
14.1
25.4
8.6
312.0
1990/
1996-97
1985-86
1969-72
1945-92
1992-93
(e)
(e)
--
--
--
--
--/
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
1,020
1,020
1,051
1,240
1,121
1,561
1,069
1,185
1,018
1,087
1,177
1,135
1,028
1,199
1,208
1,065
1,265
1,448
1,336
1,386
1,833
1,338
1,057
1,007
1,207
1,123
98%
97%
93%
99%
99%
98%
97%
95%
98%
91%
95%
94%
98%
98%
94%
94%
95%
99%
96%
95%
96%
95%
94%
93%
96%
91%
91%
93%
92%
91%
84%
87%
88%
92%
91%
94%
94%
94%
90%
94%
92%
97%
90%
95%
93%
96%
98%
92%
93%
93%
95%
94%
93%
95%
96%
96%
95%
96%
97%
95%
$ 953
1,114
1,002
1,065
1,097
1,014
$ 928
$1,196
1,217
1,285
1,088
1,161
$ 932
$763
1,045
1,003
1,725
1,608
1,525
1,505
1,320
1,049
$1,048
$0.98
0.82
0.94
0.92
1.08
1.17
1.24
0.97
0.92
1.22
1.12
1.03
0.99
1.08
1.04
1.08
0.97
0.91
0.89
0.84
$1.02
$0.96
1.18
0.98
1.14
1.09
0.98
0.82
1.02
0.98
0.87
0.81
0.75
0.78
0.75
0.92
0.88
0.81
0.99
0.87
$0.91
$0.78
1.07
0.82
0.81
0.94
1.00
1.36
1.11
1.14
1.09
0.72
1.05
1.07
0.78
0.76
0.82
0.82
0.73
$0.93
Stabilized Community Features as of December 31, 2001
Community (a)
No. of
Apt.
Homes Approx.
Rentable
Sq. Ft. (b) Total Acreage Year Constructed/
Renovated Year Acquired Average
Unit Size
(Sq. Ft.) Occupancy
at
12/31/01 Scheduled Rent
at 12/31/01 Per
Unit Sq. Ft.
Austin, TX
Gables at the Terrace
Gables Barton Creek (c)
Gables Bluffstone
Gables Central Park
Gables Great Hills
Gables Park Mesa
Gables Town Lake
Totals/Averages
Dallas, TX
Gables at Pearl Street
Gables CityPlace
Gables Green Oaks
Gables Mirabella
Gables San Raphael (d)
Gables Spring Park
Gables Turtle Creek
Gables Valley Ranch (c)
Totals/Averages
Memphis, TN
Arbors of Harbortown (g)
Gables Cordova (c)
Gables Stonebridge (h)
Totals/Averages
Nashville, TN
Brentwood Gables (h)
Gables Hendersonville (h)
Gables Hickory Hollow I (c)
Gables Hickory Hollow II (c)
Totals/Averages
Orlando, FL
Gables Celebration
Gables Chatham Square (i)
The Commons at Little Lake
Bryan (i)
Totals/Averages
Washington D.C.
Gables Dupont Circle
Totals/Averages
1,677
1,645
1,309
1,166
292,292
185,846
251,909
257,043
228,930
161,540
239,264
1,616,824
117,688
244,056
286,740
114,902
200,478
198,178
150,930
325,534
1,638,506
341,258
434,461
439,646
1,215,365
287,594
342,982
247,322
259,704
1,137,602
267,417
503,263
289,436
1,060,116
79,895
79,895
18.6
11.6
32.7
6.9
23.7
24.3
12.0
129.8
3.6
7.1
12.8
1.4
5.4
12.3
3.1
14.8
60.5
15.0
32.2
34.0
81.2
14.5
21.0
19.0
18.0
72.5
8.8
29.6
16.5
54.9
0.5
0.5
1993-96
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
1,162
1,091
1,090
1,052
1,054
1,006
1,020
1,132
1,158
1,123
1,034
1,105
88%
91%
88%
100%
91%
93%
93%
92%
97%
96%
91%
97%
95%
97%
97%
97%
95%
88%
94%
93%
92%
91%
91%
91%
91%
91%
85%
100%
100%
96%
99%
99%
$1,201
1,561
1,166
1,318
1,230
1,359
$1,225
$1,346
1,381
1,196
1,197
$1,069
$856
$733
$894
$714
$1,194
--
--
$1,194
$2,392
$2,392
$1.27
1.34
1.18
1.40
1.07
1.13
1.45
$1.27
$1.24
1.31
0.90
1.31
1.07
0.93
1.19
0.94
$1.07
$0.87
0.74
0.78
$0.79
$0.79
0.73
0.71
0.69
$0.73
$1.03
--
--
$1.03
$2.46
$2.46
Grand Totals/Averages
23,907 24,062,547 1,330.3
1,007 94%
$973
$0.96
(a)
Except as noted in notes (d), (g), and (h), we hold fee simple title to each of the communities. Except as noted in notes (c), (d), (g), and (h), the communities are unencumbered.
(b)
In the Atlanta and Tennessee markets, rentable area is measured including any patio or balcony. In the Texas markets, rentable area is measured using only the heated area. In the Florida markets, rentable area is measured using only the air conditioned area.
(c)
The denoted communities secure indebtedness totaling $379.4 million as of December 31, 2001.
(d)
We hold an indirect 20% interest in these communities. These communities secure indebtedness totaling $58.4 million at December 31, 2001.
(e)
Year renovated; these communities were originally constructed as follows: Buckhead Gables: 1964 and Wildwood Gables: 1972.
(f)
These communities are in renovation; therefore, occupancy is based on units available for lease.
(g)
We hold an indirect 25% interest in this community. This community secures indebtedness of $16.4 million at December 31, 2001.
(h)
We hold an indirect 8.26% interest in these communities. These communities secure indebtedness totaling $52.1 million at December 31, 2001.
(i)
These communities are leased to a single user group pursuant to a triple net master lease. Accordingly, scheduled rent data is not reflected.
Development and Lease-up Communities. The development communities have been designed to generally resemble the stabilized communities we developed previously and to offer similar amenities. The development communities and recently completed communities reflect our continuing research of consumer preferences for upscale multifamily rental housing and incorporate and emphasize garage parking, increased privacy, high quality interiors, high speed internet access, and private telephone and television systems. Additional information regarding our development and lease-up communities at December 31, 2001 follows:
(a) Stabilized occupancy is defined as the earlier to occur of (i) 93% occupancy or (ii) one year after completion of construction.
(b) These communities were contributed into the GRAP JV or the GRAP JV Two, as applicable.
(c) This development community includes 40,000 square feet of commercial space which was 85% leased at December 31, 2001.
(d) Construction loan proceeds are expected to fund $43 million of these costs. The remaining costs will be funded by capital
contributions to the venture from our venture partner and us in a funding ratio of 80% and 20%, respectively.
Undeveloped Sites. As of December 31, 2001, we owned the following two undeveloped sites on which we intend to develop multifamily communities in the future. We also owned additional sites at December 31, 2001 that are excluded from the table below because we do not currently intend to develop apartment communities on these sites in the foreseeable future.
Undeveloped Sites
Metropolitan Area Estimated Number
of Apartment
Homes
Gables Jupiter
Gables Montecito
Total South Florida
South Florida
There can be no assurance of when or if the undeveloped sites will be developed.
Development Rights. As of December 31, 2001, we had three development rights.
Development Rights
Metropolitan Area Estimated Number
of Apartment
Homes
Gables Stuart
Gables West Park Village
Phase II (a)
Gables Rothbury Square
Total South Florida
Tampa, FL
Washington, D.C.
(a) This land parcel is under option.
There can be no assurance of when or if the development rights will be exercised.
The following is a "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. The projections contained in the tables above under the captions "Development and Lease-up Communities," "Undeveloped Sites" and "Development Rights" are forward-looking statements. These forward-looking statements involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. Risks associated with our development, construction and land acquisition activities, which could impact the forward-looking statements made, include: development and acquisition opportunities may be abandoned; construction costs of a community may exceed original estimates, possibly making the community uneconomical; and construction and lease-up may not be completed on schedule, resulting in increased debt service and construction costs. Development of the undeveloped sites and development rights is subject to permits and other governmental approvals as well as our ongoing business review of the underlying real estate fundamentals and the impact on our capital structure. There can be no assurance that we will decide or be able to develop the undeveloped sites, complete development of all or any of the communities subject to the development rights, or complete the number of apartment homes shown above.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither we nor any of our communities is presently subject to any material litigation or, to our knowledge, is any litigation threatened against us or any of our 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 our business or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for the Operating Partnership's Units. As of March 15, 2002, there were 94 holders of records of Units.
The following table sets forth the quarterly distributions per Unit to holders of Units for the periods indicated.
Quarter Ended
Distribution
Declared
March 31, 2000
June 30, 2000
September 30, 2000
December 31, 2000
March 31, 2001
June 30, 2001
September 30, 2001
December 31, 2001
March 31, 2002
$0.5300
0.5300
0.5675
0.5675
0.5675
0.5675
0.6025
0.6025
0.6025
The Operating Partnership currently intends to make quarterly distributions to holders of its Units. Distributions are declared at the discretion of the board of directors of Gables GP, the general partner of the Operating Partnership, and will depend on actual funds from operations, its financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code, and other factors the board of directors may deem relevant. The board of directors may modify the Operating Partnership's distribution policy from time to time.
Certain of our debt agreements contain customary representations, covenants and events of default, including covenants which restrict the ability of the Operating Partnership to make distributions in excess of stated amounts, which in turn restricts the Trust's discretion to declare and pay dividends. In general, during any fiscal year, the Operating Partnership may only distribute up to 95% of its consolidated income that is available for distribution, as defined in the related agreement, exclusive of distributions of capital gains for such year. The applicable debt agreements contain exceptions to these limitations to allow the Operating Partnership to make any distributions necessary to allow the Trust to maintain its status as a REIT. We do not anticipate that this provision will adversely effect the ability of the Operating Partnership to make distributions or the Trust's ability to declare dividends, under our current dividend policy.
Each time the Trust issues shares of beneficial interest, it contributes the proceeds of such issuance to the Operating Partnership in return for a like number of Units with rights and preferences analogous to the shares issued. During the period commencing on October 1, 2001 and ending on December 31, 2001, in connection with issuances of common shares by the Trust during that time period, the Operating Partnership issued an aggregate 60,346 Units to the Trust. Such Units were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.
ITEM 6.
ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected financial and operating information which should be read in conjunction with our financial statements and notes included elsewhere in this document. The consolidated operating information for the years ended December 31, 2001, 2000 and 1999 has been derived from our financial statements audited by Arthur Andersen LLP, independent public accountants, whose report is included in this document. The consolidated operating information for the years ended December 31, 1998 and 1997 has been derived from our audited financial statements not included in Arthur Andersen's report.
NOTES TO SELECTED FINANCIAL AND OPERATING INFORMATION
(Amounts in Thousands, Except Property Per Unit Data)
(a) Unusual items of $8,847 in 2001 are comprised of (1) a $5,006 charge associated with the write-off of building components at Gables State Thomas Ravello that will be replaced in connection with a remediation program, (2) $2,200 of severance charges, (3) $920 in reserves associated with certain technology investments and (4) $721 of abandoned real estate pursuit costs resulting from recent events which have impacted the U.S. economy. Unusual items of $2,800 in 1999 relate to severance charges. Unusual items of $5,637 in 1998 and $1,178 in 1997 relate to loss on treasury locks.
(b) We consider funds from operations ("FFO") to be a useful performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund distributions and capital expenditures. We believe that in order to facilitate a clear understanding of our operating results, FFO should be examined in conjunction with net income as presented in the financial statements and data included elsewhere in this report. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"). Effective January 1, 2000, NAREIT amended its definition of FFO to include in FFO all non-recurring items, except those defined as extraordinary items under GAAP and gains and losses from sales of depreciable operating property. We are using the amended definition of FFO in reporting our results for all periods on or after January 1, 2000. In addition, we have restated FFO reported for prior periods. FFO, as defined by NAREIT, represents net income (loss) determined in accordance with generally accepted accounting principles ("GAAP"), excluding extraordinary items as defined under GAAP and gains or losses from sales of depreciable operating property, plus certain non-cash items, such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies due to the fact that not all real estate companies use the same definition. However, our FFO is comparable to the FFO of real estate companies that use the NAREIT definition. FFO should not be considered an alternative to net income as an indicator of our operating performance or an alternative to cash flows as a measure of liquidity. FFO does not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital expenditures and distributions to unitholders. Additionally, FFO does not represent cash flows from operating, investing or financing activities as defined by GAAP. Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a discussion of our cash needs and cash flows.
(c) Average monthly revenue per apartment home is equal to the average monthly rental revenue collected during the period divided by the average monthly number of apartment homes occupied during the period.
(d) Gross operating margin represents (1) total property revenues less property operating and maintenance expenses (exclusive of real estate asset depreciation expense) as a percentage of (2) total property revenues.
(e) Includes our share of depreciation of real estate assets owned by unconsolidated joint ventures.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to "we," "our" or "us" refer collectively to Gables Realty Limited Partnership and its subsidiaries.
We are the entity through which Gables Residential Trust (the "Trust"), a real estate investment trust (a "REIT"), conducts substantially all of its business and owns, either directly or indirectly through subsidiaries, substantially all of its assets. We are focused within the multifamily industry in demand-driven markets throughout the United States that have high job growth and are resilient to economic downturns. Our operating performance relies predominantly on net operating income from our apartment communities. Net operating income is determined by rental revenues and operating expenses, which are affected by the demand and supply dynamics within our markets. Our performance is also affected by the general availability and cost of capital and our ability to develop and acquire additional apartment communities with returns in excess of our blended cost of capital.
Business Objectives and Strategy
The Trust's objective is to increase shareholder value by producing consistent high quality earnings to sustain dividend growth and annual total returns that exceed the multifamily sector average. To achieve that objective, we employ a number of business strategies. First, our long-term investment strategy is research-driven, with the objective of creating a portfolio of high quality assets in approximately six to eight strategically selected markets that are complementary through economic diversity and characterized by high job growth and resiliency to national economic downturns. We believe such a portfolio will provide predictable growth in operating cash flow on a sustainable basis. Second, we adhere to a strategy of owning and operating high quality, class AA/A apartment communities under the Gables brand. We believe that such communities, when located in highly desirable areas to live and supplemented with high quality service and amenities, attract the affluent renter-by-choice who is willing to pay a premium for location preference, superior service and high quality communities. The resulting portfolio should maintain high levels of occupancy and rental rates. This, coupled with more predictable operating expenses and reduced capital expenditure requirements associated with high quality construction materials, should lead to operating margins that exceed national averages for the multifamily sector and sustainable growth in operating cash flow. Third, our aim is to be recognized as the employer of choice within the industry. Our mission of Taking Care of the Way People Live is a cornerstone of our strategy, involving innovative human resource practices that we believe will attract and retain the highest caliber associates. Because of our long-established presence as a fully integrated apartment management, development, construction, acquisition and disposition company within our markets, we have the ability to offer multi-faceted career opportunities among the various disciplines within the industry. Finally, our capital strategy is to maximize return on invested capital while maintaining financial flexibility through a conservative, investment grade credit profile. We judiciously manage our capital and are able to recycle existing capital through asset dispositions. We believe the successful execution of these strategies will result in operating cash flow and dividend growth, producing annual total returns that exceed the multifamily REIT sector average.
We believe we are well positioned to continue achieving our objectives because of our long-established presence as a fully integrated real estate company in our markets. This local market presence creates a competitive advantage in generating increased cash flow from (1) property operations during different economic cycles and (2) new investment opportunities that involve site selection, market information and requests for entitlements and zoning petitions.
Portfolio-wide occupancy levels have remained high, but portfolio-wide rental rate growth slowed in 2001 as a result of national economic weakness. We expect portfolio-wide rental expenses to increase at a rate ahead of both inflation and property revenues for the upcoming year. Our ongoing evaluation of the growth prospects for a specific asset may result in a determination to dispose of the asset. In that event, we would intend to sell the asset and utilize the net proceeds from any such sale to invest in new assets expected to have better growth prospects, reduce indebtedness or, in certain circumstances with appropriate approval from the Trust's board of trustees, repurchase outstanding common shares. We maintain staffing levels sufficient to meet existing construction, acquisition and leasing activities. When market conditions warrant, we adjust staffing levels to mitigate a negative impact on results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Forward-Looking Statements
This report contains 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. Actual results or developments could differ materially from those projected in such statements as a result of the risk factors set forth in the relevant paragraphs of "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying consolidated financial statements and notes thereto.
Common and Preferred Equity Activity
Secondary Common Share Offerings
Since the IPO, the Trust has issued a total of 14,831 common shares in eight offerings, generating $347,771 in net proceeds which were generally used (1) to reduce outstanding indebtedness under interim financing vehicles utilized to fund our development and acquisition activities and (2) for general working capital purposes, including funding of future development and acquisition activities.
Preferred Share Offerings
On July 24, 1997, the Trust issued 4,600 shares of 8.30% Series A Cumulative Redeemable Preferred Shares (liquidation preference $25.00 per share). The net proceeds from this offering of $111.0 million were used to reduce outstanding indebtedness under interim financing vehicles. The Series A Preferred Shares may be redeemed at $25.00 per share plus accrued and unpaid dividends on or after July 24, 2002. The Series A Preferred Shares have no stated maturity, sinking fund or mandatory redemption, and are not convertible into any other securities of the Trust.
On June 18, 1998, the Trust issued 180 shares of 5.0% Series Z Cumulative Redeemable Preferred Shares (liquidation preference $25.00 per share) in connection with the acquisition of a parcel of land for future development. The Series Z Preferred Shares, which are subject to mandatory redemption on June 18, 2018, may be redeemed at any time for $25.00 per share plus accrued and unpaid dividends. The Series Z Preferred Shares are not subject to any sinking fund or convertible into any other securities of the Trust.
Issuances of Common Operating Partnership Units
Since the IPO, we have issued a total of 4,421 common units of limited partnership interest ("Units") in connection with the 1998 acquisition of the real estate assets and operations of Trammell Crow Residential South Florida, the acquisition of other operating apartment communities and the acquisition of a parcel of land for future development.
Issuance of Preferred Operating Partnership Units
On November 12, 1998, we issued 2,000 of our 8.625% Series B Preferred Units to an institutional investor. The net proceeds from this issuance of $48.7 million were used to reduce outstanding indebtedness under interim financing vehicles. The Trust has the option to redeem the Series B Preferred Units after November 14, 2003. These Units are exchangeable by the holder into 8.625% Series B Cumulative Redeemable Preferred Shares of the Trust on a one-for-one basis; however, this exchange right is generally not exercisable until after November 14, 2008. The Series B Preferred Units have no stated maturity, sinking fund or mandatory redemption.
Common Equity Repurchase Program
We have a common equity repurchase program pursuant to which the Trust is authorized to purchase up to $150 million of its outstanding common shares or Units. The Trust has repurchased shares from time to time in open market and privately negotiated transactions, depending on market prices and other conditions, using proceeds from sales of selected assets. Whenever the Trust repurchases common shares from shareholders, we are required to redeem from the Trust an equivalent number of Units on the same terms and for the same aggregate price. After redemption, the Units redeemed by us are no longer deemed outstanding. Units have also been repurchased for cash upon their presentation
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
for redemption by unitholders. As of December 31, 2001, we had redeemed 4,267 Units, for a total of $102,048, including 3,980 Units redeemed by the Trust.
Shelf Registration Statement
We have an effective shelf registration statement on file with the Securities and Exchange Commission providing $500 million of equity capacity and $300 million of debt capacity. We believe it is prudent to maintain shelf registration capacity in order to facilitate future capital-raising activities. To date, there have been no issuances under this shelf registration statement other than the issuance of $150 million of senior unsecured notes in February 2001.
Portfolio and Other Financing Activity
Community and Land Dispositions
During 2001, we sold an apartment community located in Atlanta comprising 386 apartment homes, an apartment community located in Houston comprising 776 apartment homes, an apartment community located in Dallas comprising 536 apartment homes and a 2.5 acre parcel of land adjacent to one of our development communities located in Atlanta. The net proceeds from these sales totaled $93.6 million, $9 million of which was deposited into an escrow account and was used to fund acquisition activities. The balance of the net proceeds was used to repay a $16 million note assumed in connection with our September 2001 acquisition of the Gables State Thomas Ravello community and to paydown outstanding borrowings under interim financing vehicles. The total gain from these sales was $35.0 million, all of which was recognized in 2001. In addition, we recognized $0.7 million of deferred gain associated with a parcel of land we sold in 2000 during the year ended December 31, 2001.
During 2001, we contributed our interest in certain land and development rights to the Gables Residential Apartment Portfolio JV Two (the "GRAP JV Two") in return for (1) cash of $18.5 million and (2) capital account credit of $4.6 million. The $2.8 million of gain we will record associated with this contribution is being recognized when earned using the percentage of completion method since we serve as the developer and general contractor for the joint venture. We recognized $1.6 million of this gain during the year ended December 31, 2001.
During 2000, we sold an apartment community located in Dallas comprising 126 apartment homes, an apartment community located in Houston comprising 228 apartment homes, two apartment communities located in San Antonio comprising 544 apartment homes and a parcel of land adjacent to an existing apartment community located in Atlanta. In addition, on December 28, 2000, we sold substantially all of our interests in three apartment communities located in Nashville and Memphis, comprising 1,118 apartment homes, to the CMS Tennessee Multifamily JV. The net proceeds from these sales totaled $142.0 million, $30.2 million of which was deposited into an escrow account and was used to fund development and acquisition activities. The balance of the net proceeds was used to (1) repay an $18.6 million note that encumbered one of the assets sold, (2) paydown outstanding borrowings under interim financing vehicles and (3) purchase common shares and Units under the Trust's common equity repurchase program. The total gain recognized from these sales in 2000 was $29.5 million. Gain of $0.8 million associated with the land sale was deferred at December 31, 2000 and is being recognized when earned using the percentage of completion method because we serve as the general contractor for the construction of an apartment community on the parcel of land sold.
During 1999, we sold three apartment communities located in Atlanta comprising 676 apartment homes, two apartment communities located in Memphis comprising 490 apartment homes, an apartment community located in Houston comprising 412 apartment homes and an outparcel of land from an existing development community located in Dallas. The net proceeds from these sales totaled $96.7 million and were used to paydown outstanding borrowings under interim financing vehicles and to purchase common shares and Units under the Trust's common equity repurchase program. The total gain from these sales was $8.9 million.
During 1999, we contributed our interest in certain land and development rights to the Gables Residential Apartment Portfolio JV (the "GRAP JV") in return for (1) cash of $65.1 million and (2) capital account credit of $16.4 million. There was no gain or loss associated with this contribution.
Community Acquisitions
On September 28, 2001, we acquired the 80% membership interest of our venture partner in the GRAP JV in the Gables State Thomas Ravello apartment community located in Dallas comprising 290 apartment homes. In consideration for such community, we paid $12 million in cash and assumed a $16 million secured variable-rate note.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
This consideration was based on a valuation of the asset of $31 million and is net of our $3 million share of the venture distribution. We recorded a $5 million charge to unusual items in 2001 associated with the write-off of building components that will be replaced in connection with a remediation program to address water infiltration issues plaguing the asset.
On August 28, 2001, we acquired an apartment community located in Washington, D.C. comprising 82 apartment homes for approximately $25 million.
On August 1, 2001, we acquired the 75% interest of our venture partner in the Gables Metropolitan Uptown apartment community located in Houston comprising 318 apartment homes. The asset was valued at approximately $27 million.
On March 30, 2001, we acquired the 80% membership interests of our venture partner in the GRAP JV in the Gables Palma Vista and Gables San Michelle II apartment communities located in South Florida comprising 532 apartment homes for $66 million. This cash consideration was based on a valuation of the assets of $75 million and is net of our $9 million share of the venture distribution.
During the third quarter of 2000, we acquired an apartment community located in Austin comprising 160 apartment homes. In consideration for such community, we paid $6 million in cash and assumed a $14 million secured fixed-rate note.
Other Acquisition
In May 2001, we acquired a property management company based in Washington, D.C. that manages approximately 3,600 units in 24 multifamily apartment communities located in Washington, D.C. and the surrounding area (the "D.C. Management Co."). The total investment is approximately $1.6 million and is structured to be paid in three installments based on results of the acquired business operations.
Senior Unsecured Note Issuance
In February 2001, we issued $150 million of senior unsecured notes which bear interest at 7.25%, were priced to yield 7.29% and mature in February 2006. The net proceeds of $148.5 million were used to reduce borrowings under our unsecured credit facilities and repay our $40 million term loan, which had a November 2001 maturity date.
Critical Accounting Policies and Recent Accounting Pronouncements
Our financial statements are prepared in accordance with United States generally accepted accounting principles (GAAP) and a summary of our significant accounting policies is included in Notes 4 and 5 to the consolidated financial statements. Note 4 also includes a summary of recent accounting pronouncements and their expected impact on our financial statements. Our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from these estimates. As an owner, operator and developer of apartment communities, our critical accounting policies relate to cost capitalization and asset impairment evaluation.
Cost Capitalization
As a vertically integrated real estate company, we have in-house investment professionals involved in development, construction and acquisition. We include direct costs associated with development and construction activities in the capitalized development cost of wholly-owned assets. We charge direct costs associated with development and construction activities for third parties and unconsolidated joint ventures against our revenues from the services being provided. Such costs are ultimately reflected in net development revenues using the percentage of completion method. As required by GAAP, we expense all internal costs associated with the acquisition of operating apartment communities to general and administrative expense in the period such costs are incurred. We maintain staffing levels sufficient to meet existing development, construction and acquisition activities. When market conditions warrant, we adjust staffing levels to mitigate a negative impact on results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Our real estate development pursuits are subject to permits and other governmental approvals, as well as our ongoing business review of the underlying real estate fundamentals and the impact on our capital structure. We do not always move forward with development of our real estate pursuits, and therefore, we evaluate the viability of real estate pursuits and the recoverability of capitalized pursuit costs regularly. Based on this periodic review, we expense any costs that are deemed unrealizable at that time to general and administrative expense.
During the development and construction of a new apartment community, we capitalize related interest costs, as well as other carrying costs such as property taxes and insurance. We begin to expense these items as the construction of the community becomes substantially complete and the residential apartment homes become available for initial occupancy. Accordingly, we gradually reduce the amounts we capitalize as construction is being completed. During the lease-up period, as a community transitions from initial occupancy to stabilized occupancy, revenues are generally insufficient to cover interest, carrying costs and operating expenses. The size and duration of this lease-up deficit depends on how quickly construction is completed, how quickly the apartments available for occupancy are leased, and what rent levels are achieved at the community.
Asset Impairment Evaluation
Under GAAP, real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. As noted above, the cost of buildings and improvements includes interest, property taxes, insurance, and allocated development overhead incurred during the construction period. Ordinary repairs and maintenance 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 estimated useful lives of 20-40 years for buildings and improvements and 5 years for furniture, fixtures and equipment. As required by GAAP, we periodically evaluate our real estate assets to determine if there has been any impairment in their carrying value and record impairment losses if there are indicators of impairment and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. At December 31, 2001, we did not own any real estate assets that meet the impairment criteria.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Results of Operations Comparison of operating results for the year ended December 31, 2001 to the year ended December 31, 2000
Our net income is generated primarily from the operation of our apartment communities. For purposes of evaluating comparative operating performance, we categorize our operating communities based on the period each community reaches stabilized occupancy. A community is considered to have achieved stabilized occupancy on the earlier to occur of (1) attainment of 93% physical occupancy or (2) one year after completion of construction. The operating performance for all of our apartment communities combined for the years ended December 31, 2001 and 2000 is summarized as follows:
Total property revenues increased $4,889, or 2.1%, from $229,789 to $234,678 due primarily to an increase in the number of apartment homes resulting from the development and acquisition of additional communities and an increase in rental rates on communities stabilized throughout both periods ("same store"). This increase is offset by the sale of one apartment community during the second quarter of 2001, two apartment communities in the fourth quarter of 2001 and seven apartment communities in the second half of 2000. Following is additional data regarding the increases in total property revenues for three of the six community categories presented in the preceding table:
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Same store communities:
Market
Number of
Communities Number of Apartment
Homes Percent of Total Occupancy During 2001 Change
in
Occupancy Change
in
Revenues
Percent
Change in
Revenues
Development and lease-up communities:
Market
Number of
Communities Number of
Apartment
Homes Percent of Total Occupancy
During 2001 Change
in
Revenues
Renovation communities:
Market
Number of
Communities Number of
Apartment
Homes Percent of Total Occupancy
During 2001 Change
in
Revenues
Atlanta
So. Florida
Total
1,016
82.3%
17.7%
100.0%
93.5%
90.3%
93.0%
$(27)
(20)
$(47)
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Property management revenues increased $1,041, or 20.1%, from $5,172 to $6,213 due primarily to the May 2001 acquisition of the D.C. Management Co., in addition to increased joint venture activity for which we serve as the property manager.
Development revenues, net decreased $2,190, or 76.0%, from $2,883 to $693 due primarily to a portion of our third-party projects nearing completion, coupled with fewer new project starts in 2001. In addition, a $425 reduction in the estimated net development revenues from the GRAP JV was recorded in 2001.
Equity in income of joint ventures decreased $157, or 39.3%, from $399 to $242 due primarily to the March 2001 acquisition of the membership interests of our venture partner in two stabilized communities in the GRAP JV and the August 2001 acquisition of our venture partner's 75% interest in Gables Metropolitan Uptown, a stabilized community. This decrease is also impacted by increased property taxes at certain of the communities and the suspension of lease-up activities at Gables State Thomas Ravello.
Our share of the operating results for the apartment communities in which we have a joint venture interest for 2001 and 2000 is as follows:
Interest income decreased $282, or 27.4%, from $1,029 to $747 due primarily to a decrease in interest rates.
Other revenues decreased $214, or 7.6%, from $2,821 to $2,607 due primarily to a gain on sale of cable equipment to a cable service provider in 2000, which is offset in part due to income earned during 2001 related to certain non-routine items.
Property operating and maintenance expense (exclusive of depreciation and amortization) increased $2,314, or 3.1%, from $75,444 to $77,758 due to the increase in the number of apartment homes resulting from the development and acquisition of additional communities, as well as increased payroll, property taxes, insurance, utilities and maintenance costs at our same store communities. This increase is offset in part by the sale of one apartment community during the second quarter of 2001, two apartment communities during the fourth quarter of 2001 and seven apartment communities in the second half of 2000.
Real estate asset depreciation and amortization increased $3,776, or 8.6%, from $43,829 to $47,605 due primarily to the impact of the development and acquisition of additional communities and capital improvements made to existing operating communities, offset by the sale of one apartment community during the second quarter of 2001, two apartment communities during the fourth quarter of 2001 and seven apartment communities in the second half of 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Property management expense for owned communities and third-party properties on a combined basis increased $1,130, or 11.3%, from $10,007 to $11,137 due primarily to the May 2001 acquisition of the D.C. Management Co. We allocate property management expenses to both owned communities and third-party properties based on the proportionate share of total apartment homes and units managed.
Interest expense and credit enhancement fees decreased $849, or 1.9%, from $45,539 to $44,690 due primarily to a decrease in interest rates and a decrease in outstanding indebtedness associated with the sale of one apartment community in the second quarter of 2001, two apartment communities during the fourth quarter of 2001 and seven apartment communities in the second half of 2000. This decrease is offset in part by an increase in operating debt associated with the development and acquisition of additional communities.
Amortization of deferred financing costs increased $143, or 16.0%, from $895 to $1,038 due primarily to increased financing costs associated with the issuance of $150 million of senior unsecured notes in February 2001.
General and administrative expense increased $55, or 0.8%, from $7,154 to $7,209 due primarily to an increase in (1) internal acquisition costs associated with the acquisition of operating apartment communities and the D.C. Management Co., (2) long-term compensation expense and (3) inflationary increases in expenses. Such increases were offset in part by a decrease in abandoned real estate pursuit costs and marketing and branding campaign costs.
Unusual items of $8,847 in 2001 are comprised of (1) a $5,006 charge associated with the write-off of building components at Gables State Thomas Ravello that will be replaced in connection with a remediation program, (2) $2,200 of severance charges associated with organizational changes adopted in the fourth quarter of 2001, (3) $920 in reserves associated with certain technology investments and (4) $721 of abandoned real estate pursuit costs as a result of recent events which have impacted the U.S. economy.
Corporate asset depreciation and amortization increased $149, or 22.2%, from $671 to $820 due primarily to an increase in amortization resulting from the management contracts acquired in connection with the May 2001 acquisition of the D.C. Management Co.
Gain on sale of real estate assets of $37,330 in 2001 is comprised of (1) $34,110 related to the 2001 sales of an apartment community in Atlanta comprising 386 apartment homes, an apartment community in Houston comprising 776 apartment homes and an apartment community in Dallas comprising 536 apartment homes, (2) $934 associated with the 2001 sale of 2.5 acres of land in Atlanta, (3) $1,590 associated with the 2001 contribution of land and development rights into the GRAP JV Two and (4) recognition of $696 of deferred gain associated with a land sale in 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Results of Operations
Comparison of operating results for the year ended December 31, 2000 to the year ended December 31, 1999
Our net income is generated primarily from the operation of our apartment communities. For purposes of evaluating comparative operating performance, we categorize our operating communities based on the period each community reaches stabilized occupancy. A community is considered to have achieved stabilized occupancy on the earlier to occur of (1) attainment of 93% physical occupancy or (2) one year after completion of construction. The operating performance for all of our apartment communities combined for the years ended December 31, 2000 and 1999 is summarized as follows:
Total property revenues decreased $4,021, or 1.7%, from $233,810 to $229,789 due primarily to the sale of seven apartment communities during the second half of 2000 and six apartment communities during the second half of 1999. This decrease is offset in part by an increase in rental rates on communities stabilized throughout both periods ("same store") and an increase in the number of apartment homes resulting from the development of additional communities, as well as the acquisition of an apartment community in Austin. Following is additional data regarding the increases in total property revenues for three of the five community categories presented in the preceding table:
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Same store communities:
Market
Number of
Communities Number of Apartment
Homes Percent of Total Occupancy During 2000 Change
in
Occupancy Change
in
Revenues
Percent
Change in
Revenues
Communities stabilized during 2000, but not 1999:
Market
Number of
Communities Number of
Apartment
Homes Percent of Total Occupancy
During 2000 Change
in
Revenues
Atlanta
Houston
So. Florida
Orlando
Total
1,122
34.4%
22.8%
22.2%
20.6%
100.0%
95.9%
94.8%
94.1%
89.9%
93.7%
$ 368
$1,160
Development and lease-up communities:
Market
Number of
Communities Number of
Apartment
Homes Percent of Total Occupancy
During 2000 Change
in
Revenues
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Interest income increased $355, or 52.7%, from $674 to $1,029 due primarily to an increase in interest-bearing cash deposits associated with escrowed sales proceeds.
Other revenues increased $69, or 2.5%, from $2,752 to $2,821 due primarily to a gain on sale of cable equipment to a cable service provider in 2000 offset by income earned during 1999 related to certain non-routine items.
Property operating and maintenance expense (exclusive of depreciation and amortization) decreased $3,245, or 4.1%, from $78,689 to $75,444 due primarily to the sale of seven apartment communities during the second half of 2000 and six apartment communities during the second half of 1999. This decrease is offset by a $1,090, or 1.7%, increase in property operating and maintenance expense for same store communities. The same store increase represents payroll costs, maintenance and property taxes offset by reduced marketing costs.
Real estate asset depreciation and amortization decreased $1,709, or 3.8%, from $45,538 to $43,829 due primarily to the sale of seven apartment communities during the second half of 2000 and six apartment communities during the second half of 1999.
Property management expense for owned communities and third-party properties on a combined basis increased $1,114, or 12.5%, from $8,893 to $10,007 due primarily to (1) increased staffing and equipment support costs related to our strategic initiatives for enhanced management information systems, (2) increased staffing costs related to regional maintenance and other positions added to enhance the support infrastructure necessary to provide our residents with high quality service and (3) inflationary increases in expenses. We allocate property management expenses to both owned communities and third-party properties based on the proportionate share of total apartment homes and units managed.
Interest expense and credit enhancement fees increased $1,280, or 2.9%, from $44,259 to $45,539 due to higher interest rates and an increase in operating debt associated with the development of additional communities, as well as the acquisition of an apartment community in Austin. This increase has been offset in part by the sale of apartment communities in 2000 and 1999, the proceeds of which were partially used to reduce outstanding indebtedness.
General and administrative expense increased $1,358, or 23.4%, from $5,796 to $7,154 due primarily to (1) an increase in long-term compensation expense, (2) internal acquisition costs related to the acquisition of an apartment community in Austin, (3) an increase in abandoned real estate pursuit costs, (4) costs associated with a new marketing and branding campaign and (5) inflationary increases in expenses.
Unusual items of $2,800 in 1999 relate to severance charges associated with organizational changes adopted in 1999.
Gain on sale of real estate assets of $29,467 in 2000 relates to the sale of an apartment community located in Dallas comprising 126 apartment homes, an apartment community located in Houston comprising 228 apartment homes, two apartment communities located in San Antonio comprising 544 apartment homes, two apartment communities located in Nashville comprising 618 apartment homes, one apartment community located in Memphis comprising 500 apartment homes and a parcel of land adjacent to an existing apartment community located in Atlanta.
Gain on sale of real estate assets of $8,864 in 1999 relates to the sale of three apartment communities located in Atlanta comprising 676 apartment homes, two apartment communities located in Memphis comprising 490 apartment homes, one apartment community located in Houston comprising 412 apartment homes and an outparcel of land from an existing development community located in Dallas.
Liquidity and Capital Resources
We had $103,784 of net cash provided by operating activities for the year ended December 31, 2001, compared to $106,062 for the year ended December 31, 2000. The related decrease of $2,278 was due to (1) a change in other assets between periods of $8,267 and (2) a change in restricted cash between periods of $1,519. Such decreases were offset in part by (1) a change in other liabilities between periods of $6,660 and (2) an increase of $848 in income (a) before certain non-cash or non-operating items, including depreciation, amortization, equity in income of joint ventures, gain on sale of real estate assets, long-term compensation expense and unusual items and (b) after operating distributions received from joint ventures.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
We had $126,638 of net cash used in investing activities for the year ended December 31, 2001, compared to $18,694 of net cash provided by investing activities for the year ended December 31, 2000. During the year ended December 31, 2001, we expended $215.6 million related to acquisition and development activities, $11.8 million related to recurring, non-revenue enhancing capital expenditures for operating apartment communities, $10.9 million related to non-recurring, renovation/revenue enhancing capital expenditures, $4.2 million related to our investment in joint ventures, and $4.2 million related to other investments, including the D.C. Management Co., management information systems and technology. During the year ended December 31, 2001, we received cash of (1) $18.5 million in connection with our contribution of interests in certain land and development rights to the GRAP JV Two and (2) $93.6 million in connection with the sale of three apartment communities, as well as the sale of a parcel of land adjacent to one of our development communities. In addition, during the year ended December 31, 2001, $7.9 million of the $8.5 million in sales proceeds held in escrow at December 31, 2000 was released to fund development activities. During the year ended December 31, 2000, we expended $90.4 million related to acquisition and development activities, $10.9 million related to recurring, non-revenue enhancing capital expenditures for operating apartment communities, $9.6 million related to non-recurring, renovation/revenue enhancing capital expenditures, $3.0 million related to our investment in joint ventures and $0.9 million related to technology investments. During the year ended December 31, 2000, we received cash of $142.0 million in connection with the sale of six apartment communities. We deposited $30.2 million of the cash received in connection with the sale of these apartment communities into an escrow account to fund development and acquisition activities facilitated through a like-kind exchange transaction, of which $0.6 million and $8.5 million remained in escrow at December 31, 2001 and 2000, respectively. We had $22,833 of net cash provided by financing activities for the year ended December 31, 2001, compared to $128,467 of net cash used in financing activities for the year ended December 31, 2000. During the year ended December 31, 2001, we had net borrowings of $94.9 million and proceeds from the exercise of share options of $15.1 million. These net borrowings and share option proceeds were offset by payments for distributions totaling $84.6 million, and payments of deferred financing costs and principal escrow deposits totaling $2.6 million. During the year ended December 31, 2000, we had payments for distributions totaling $80.4 million and payments for treasury share purchases and Unit redemptions in connection with the Trust's common equity repurchase program totaling $47.3 million, net repayment of borrowings of $3.7 million and payments of deferred financing costs and principal escrow deposits totaling $1.8 million. These payments were offset in part by proceeds from the exercise of share options of $4.7 million.
As of December 31, 2001, we had total indebtedness of $877,231, cash and cash equivalents of $4,231, and principal escrow deposits reflected in restricted cash of $4,087. Our indebtedness has an average of 4.1 years to maturity at December 31, 2001. The aggregate maturities of notes payable at December 31, 2001 are as follows:
2007 and thereafter
Total
$86,072
47,892
212,460
119,831
206,241
204,735
$877,231
The maturities in 2002 include $83.3 million of unsecured notes that mature in December 2002. The indebtedness outstanding under each of our credit facilities is reflected in the preceding table using the May 2004 maturity date of our $225 million credit facility. We have an option to extend the maturity date of our $225 million credit facility to May 2005, which is exercisable in May 2002.
Distributions through the fourth quarter of 2001 have been paid from cash provided by operating activities. We anticipate that distributions will continue to be paid on a quarterly basis from cash provided by operating activities.
We have met and expect to continue to meet our short-term liquidity requirements, generally through net cash provided by operations. Our net cash provided by operations has been adequate, and we believe that it will continue to be adequate, to meet both operating requirements and payment of dividends in accordance with REIT requirements. The
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
budgeted expenditures for improvements and renovations to our communities, in addition to monthly principal amortization payments, are also expected to be funded from net cash provided by operations. We anticipate that construction and development activities, as well as land purchases, will be initially funded primarily through borrowings under our credit facilities described below.
We expect to meet certain of our long-term liquidity requirements, such as scheduled debt maturities, repayment of short-term financing of construction and development activities and possible property acquisitions, through long-term secured and unsecured borrowings, the issuance of debt securities or equity securities, private equity investments in the form of joint ventures, or through the disposition of assets which, in our evaluation, may no longer meet our investment requirements.
$225 Million Credit Facility
We have a $225 million unsecured revolving credit facility provided by a consortium of banks. The facility currently has a maturity date of May 2004 with a one-year extension option. Borrowings under the facility currently bear interest at our option of LIBOR plus 0.85% or prime minus 0.25%. Such scheduled interest rates may be adjusted up or down based on changes in our senior unsecured credit ratings. We may also enter into competitive bid loans with participating banks for up to $112.5 million at rates below the scheduled rates. In addition, we pay an annual facility fee currently equal to 0.20% of the $225 million commitment. Availability under the facility, which is based on the value of our unencumbered real estate assets as compared to the amount of our unsecured indebtedness, was $219 million at December 31, 2001. As of December 31, 2001, we had $80.0 million in borrowings outstanding under the facility and, therefore, had $139 million of remaining capacity on the $219 million available.
$75 Million Borrowing Facility
We have a $75 million unsecured borrowing facility with a bank that matures in April 2002. The interest rate and maturity date related to each draw on this facility is agreed to by both parties prior to each draw. We expect the facility to be renewed for an additional one-year term at maturity. At December 31, 2001, we had $52.2 million in borrowings outstanding under this facility.
$25 Million Credit Facility
We have a $25 million unsecured revolving credit facility with a bank that currently bears interest at LIBOR plus 0.85%. The facility currently has a maturity date of October 2002 with unlimited one-year extension options. We had $0.7 million in borrowings outstanding under this facility at December 31, 2001.
Restrictive Covenants
Certain of our debt agreements contain customary representations, covenants and events of default, including covenants which restrict our ability to make distributions in excess of stated amounts, which in turn restricts the Trust's discretion to declare and pay dividends. In general, during any fiscal year, we may only distribute up to 95% of our consolidated income available for distribution (as defined in the related agreement), exclusive of distributions of capital gains for such year. The applicable debt agreements contain exceptions to these limitations to allow us to make any distributions necessary to allow the Trust to maintain its status as a REIT. We do not anticipate that this provision will adversely effect our ability to make distributions or the Trust's ability to declare dividends, under its current dividend policy.
Inflation
Substantially all leases at our communities are for a term of one year or less, which may enable us to seek increased rents upon renewal of existing leases or commencement of new leases in times of rising prices. The short-term nature of these leases generally serves to lessen the impact of cost increases arising from inflation.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Certain Factors Affecting Future Operating Results
This report contains 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. The words "believe," "expect," "anticipate," "intend," "estimate," "assume" and other similar expressions, which are predictions of or indicate future events and trends and which do not relate solely to historical matters, identify forward-looking statements. These statements include, among other things, statements regarding our intent, belief or expectations with respect to the following: (1) the declaration or payment of distributions, (2) potential developments or acquisitions or dispositions of properties, assets or other entities, (3) our policies regarding investments, indebtedness, acquisitions, dispositions, financings, conflicts of interest and other matters, (4) the Trust's qualification as a REIT under the Internal Revenue Code, (5) the real estate markets in which we operate, (6) in general, the availability of debt and equity financing, interest rates and general economic conditions and (7) trends affecting our financial condition or results of operations.
Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such a difference include, but are not limited to, the following: (1) we may abandon or fail to secure development opportunities, (2) construction costs of a community may exceed original estimates, (3) construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs and reduced rental revenues, (4) occupancy rates and market rents may be adversely affected by local economic and market conditions that are beyond our control, (5) financing may not be available or may not be available on favorable terms, (6) our cash flow may be insufficient to meet required payments of principal and interest and (7) existing indebtedness may mature in an unfavorable credit environment, preventing such indebtedness from being refinanced or, if financed, causing such refinancing to occur on terms that are not as favorable as the terms of existing indebtedness. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
Supplemental Discussion - Funds From Operations and Adjusted Funds From Operations
We consider funds from operations ("FFO") to be a useful performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund distributions and capital expenditures. We believe that in order to facilitate a clear understanding of our operating results, FFO should be examined in conjunction with net income as presented in the financial statements and data included elsewhere in this report. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"). Effective January 1, 2000, NAREIT amended its definition of FFO to include in FFO all non-recurring items, except those defined as extraordinary items under GAAP and gains and losses from sales of depreciable operating property. We are using the amended definition of FFO in reporting our results for all periods on or after January 1, 2000. In addition, we have restated FFO reported for prior periods. FFO as defined by NAREIT represents net income (loss) determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of depreciable operating property, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies due to the fact that not all real estate companies use the same definition. However, our FFO is comparable to the FFO of real estate companies that use the amended NAREIT definition. Adjusted funds from operations ("AFFO") is defined as FFO less recurring, non-revenue enhancing capital expenditures. FFO and AFFO should not be considered alternatives to net income as indicators of our operating performance or as alternatives to cash flows as measures of liquidity. FFO does not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital expenditures and distributions to unitholders. Additionally, FFO does not represent cash flows from operating, investing or financing activities as defined by GAAP. Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a discussion of our cash needs and cash flows. A reconciliation of FFO and AFFO follows:
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Data)
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our capital structure includes the use of variable-rate and fixed-rate indebtedness. As such, we are exposed to the impact of changes in interest rates. We periodically seek input from third-party consultants regarding market interest rate and credit risk in order to evaluate our interest rate exposure. In certain situations, we may utilize derivative financial instruments in the form of rate caps, rate swaps or rate locks to hedge interest rate exposure by modifying the interest rate characteristics of related balance sheet instruments and prospective financing transactions. We do not utilize such instruments for trading or speculative purposes. We did not have any derivative instruments in place at December 31, 2001 or 2000.
We typically refinance maturing debt instruments at then-existing market interest rates and terms which may be more or less than the interest rates and terms on the maturing debt.
The following table provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates and should be read in conjunction with the accompanying consolidated financial statements and notes thereto. For debt obligations, the table presents principal cash flows and related weighted average interest rates in effect at December 31, 2001 by expected maturity dates. The indebtedness outstanding under each of our credit facilities is reflected in the table using the May 2004 maturity date of our $225 million credit facility. The weighted average interest rates presented in this table are inclusive of credit enhancement fees. There have been no substantial changes in our market risk profile from the preceding year and the assumptions are consistent with prior year assumptions.
Expected Year of Maturity
2005
2007 and
Thereafter
Total
Fair Value
Total
Debt:
Conventional fixed rate
Average interest rate $85,882
8.28% $ 2,757
7.79% $ 21,151
7.22% $109,516
6.83% $180,256
7.29% $104,500
8.13% $504,062
7.53% $476,928
5.78% $372,290
7.61%
Tax-exempt fixed rate
Average interest rate $
7.63% $
7.63% $ 58,405
6.26% $
7.63% $
7.63% $ 10,035
7.63% $ 69,310
6.47% $ 66,898
4.56% $ 80,290
6.38%
Tax-exempt variable rate
Average interest rate -
- $44,930
2.55% -
- $ 10,085
2.45% $ 25,740
2.50% $ 90,200
2.43% $170,955
2.47% $170,955
2.47% $160,155
5.70%
Credit facilities
Average interest rate -
- -
- $132,904
2.94% -
- -
- -
- $132,904
2.94% $132,904
2.94% $108,617
7.29%
Variable-rate loans
Average interest rate -
- -
- -
- -
- -
- -
- -
- -
- $ 44,575
7.46%
Total debt
Average interest rate $86,072
8.28% $47,892
2.87% $212,460
4.28% $119,831
6.46% $206,241
6.69% $204,735
5.60% $877,231
5.77% $847,685
4.57% $765,927
7.03%
The estimated fair value of our debt at December 31, 2001 is based on a discounted cash flow analysis using current borrowing rates for debt with similar terms and remaining maturities.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed under Item 14(a) and filed as part of this report on the pages indicated.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Gables GP, the sole general partner of the Registrant, is a wholly-owned subsidiary of Gables Residential Trust (the "Trust"). The members of the board of directors of Gables GP are the same as the members of the board of trustees of the Trust. The "executive officers" of Gables GP are the same as the "executive officers" of the Trust. Other than the Trust, which beneficially owns 80.6% of the Registrant's outstanding common Units as of March 15, 2002, no person beneficially owns more than 5% of the Registrant's outstanding common Units. All applicable information required by this Part III with respect to the Registrant will be included in the Trust's Proxy Statement to be filed in connection with its 2002 Annual Meeting of Shareholders.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Directors and Executive Officers of the Registrant required by Item 10 shall be included in the Trust's Proxy Statement to be filed relating to the 2002 Annual Meeting of its Shareholders and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning Executive Compensation required by Item 11 shall be included in the Trust's Proxy Statement to be filed relating to the 2002 Annual Meeting of its Shareholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning Security Ownership of Certain Beneficial Owners and Management required by Item 12 shall be included in the Trust's Proxy Statement to be filed relating to the 2002 Annual Meeting of its Shareholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning Certain Relationships and Related Transactions required by Item 13 shall be included in the Trust's Proxy Statement to be filed relating to the 2002 Annual Meeting of its Shareholders and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K
14(a)(1) and (2) Financial Statements and Schedule
The financial statements and schedule listed below are filed as part of this annual report on the pages indicated.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2001 and December 31,
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Partners' Capital for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Schedule III - Real Estate Investments and Accumulated Depreciation as of December 31, 2001
14(a)(3) Exhibits
Certain of the exhibits required by Item 601 of Regulation S-K have been filed with previous reports by the Registrant, referred to herein as the Operating Partnership (File No. 0-22683), or the Trust (File No. 1-12590) and are incorporated herein by reference to the filing in the corresponding numbered footnote.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12) The Trust's Current Report on Form 8-K dated November 12, 1998 (File No. 1-12590).
The Trust's Registration Statement on Form S-11, as amended (File No. 33-70570).
The Trust's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-12590).
The Trust's Current Report on Form 8-K dated July 24, 1997 (File No. 1-12590).
The Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 1-12590).
The Operating Partnership's Current Report on Form 8-K dated March 23, 1998 (File No. 0-22683).
The Operating Partnership's Current Report on Form 8-K dated February 22, 2001 (File No.0- 22683).
The Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 1-12590).
The Trust's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-12590).
The Trust's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-12590).
The Trust's Current Report on Form 8-K dated March 16, 1998 (File No. 1-12590).
The Trust's Current Report on Form 8-K dated April 1, 1998, as amended (File No. 1-12590).
The Registrant's Proxy Statement is to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2001 (the end of the fiscal year covered by this Annual Report on Form 10-K).
14(b) Reports on Form 8-K
None
14(c) Exhibits
See Item 14(a)(3) above
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Gables Realty Limited Partnership certifies that it has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Gables GP, Inc., as general partner of Gables Realty Limited Partnership, and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Chris D. Wheeler
Chris D. Wheeler
/s/ Marvin R. Banks, Jr.
Marvin R. Banks, Jr.
/s/ Dawn H. Severt
Dawn H. Severt
/s/ Marcus E. Bromley
Marcus E. Bromley
/s/ C. Jordan Clark
C. Jordan Clark
/s/ Lauralee E. Martin
Lauralee E. Martin
/s/ John W. McIntyre
John W. McIntyre
/s/ Mike E. Miles
Mike E. Miles
/s/ James D. Motta
James D. Motta
Chairman of the Board of Directors, President and
Chief Executive Officer
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
March 15, 2002
March 15, 2002
March 15, 2002
March 15, 2002
March 15, 2002
March 15, 2002
March 15, 2002
March 15, 2002
March 15, 2002
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gables Realty Limited Partnership:
We have audited the accompanying consolidated balance sheets of Gables Realty Limited Partnership and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the management of Gables Realty Limited Partnership. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gables Realty Limited Partnership and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 8,
GABLES REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Amounts in Thousands, Except Per Unit Data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
Unless the context otherwise requires, all references to "we," "our" or "us" in this report refer collectively to Gables Realty Limited Partnership and its subsidiaries.
1. ORGANIZATION AND FORMATION
Gables Realty Limited Partnership (the "Operating Partnership") is the entity through which Gables Residential Trust (the "Trust"), a real estate investment trust (a "REIT"), conducts substantially all of its business and owns, either directly or indirectly through subsidiaries, substantially all of its assets. The Trust was formed in 1993 under Maryland law to continue and expand the operations of its privately owned predecessor organization. The Trust completed its initial public offering on January 26, 1994.
We are a fully integrated real estate company engaged in the multifamily apartment community management, development, construction, acquisition and disposition businesses. We also provide related brokerage and corporate rental housing services. Substantially all of our third-party management businesses are conducted through a wholly-owned subsidiary, Gables Residential Services.
As of December 31, 2001, the Trust was an 80.0% economic owner of our common equity. The Trust controls us through Gables GP, Inc. ("Gables GP"), a wholly-owned subsidiary of the Trust and our sole general partner. This structure is commonly referred to as an umbrella partnership REIT or "UPREIT." The board of directors of Gables GP, the members of which are the same as the members of the Trust's board of trustees, manages our affairs by directing the affairs of Gables GP. The Trust's limited partnership and indirect general partnership interests in us entitle it to share in our cash distributions, and in our profits and losses in proportion to its ownership interest therein and entitles the Trust to vote on all matters requiring a vote of the limited partners. Generally, our other limited partners are persons who contributed their direct or indirect interests in certain of our properties primarily in connection with the IPO and the 1998 acquisition of the real estate assets and operations of Trammell Crow Residential South Florida ("South Florida"). We are obligated to redeem each common unit of limited partnership interest ("Units") held by a person other than the Trust at the request of the holder for an amount equal to the fair market value of a share of the the Trust's common shares at the time of such redemption, provided that the Trust, at its option, may elect to acquire each Unit presented for redemption for one common share or cash. Such limited partners' redemption rights are reflected in "limited partners' capital interest" in our accompanying consolidated balance sheets at the cash redemption amount at the balance sheet date. The Trust's percentage ownership interest in us will increase with each redemption. In addition, whenever the Trust issues common shares or preferred shares, it is obligated to contribute any net proceeds to us and we are obligated to issue an equivalent number of common or preferred Units, as applicable, to the Trust.
Distributions to holders of Units are made to enable distributions to be made to the Trust's shareholders under its dividend policy. The Trust must currently distribute 90% of its ordinary taxable income to its shareholders. We make distributions to the Trust to enable it to satisfy this requirement.
As of December 31, 2001, we managed a total of 156 multifamily apartment communities comprising 44,453 apartment homes for assets owned by us and our third-party clients. At December 31, 2001, we owned 75 stabilized multifamily apartment communities comprising 21,085 apartment homes, an indirect 25% interest in one stabilized apartment community comprising 345 apartment homes, an indirect 20% interest in four stabilized apartment communities comprising 1,359 apartment homes, and an indirect 8.3% interest in three stabilized apartment communities comprising 1,118 apartment homes. We also owned seven multifamily apartment communities under development or in lease-up at December 31, 2001 that are expected to comprise 1,586 apartment homes upon completion and an indirect 20% interest in five apartment communities under development or in lease-up at December 31, 2001 that are expected to comprise 1,367 apartment homes upon completion. In addition, as of December 31, 2001, we owned parcels of land on which we intend to develop two apartment communities that we currently expect will comprise an estimated 761 apartment homes. We also have rights to acquire additional parcels of land on which we believe we could develop communities. Any future development is subject to permits and other governmental approvals, as well as our ongoing business review, and may not be undertaken or completed.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
2. COMMON AND PREFERRED EQUITY ACTIVITY
Secondary Common Share Offerings
Since the IPO, the Trust has issued a total of 14,831 common shares in eight offerings, generating $347,771 in net proceeds which were generally used (1) to reduce outstanding indebtedness under interim financing vehicles utilized to fund our development and acquisition activities and (2) for general working capital purposes, including funding of future development and acquisition activities.
Preferred Share Offerings
On July 24, 1997, the Trust issued 4,600 shares of 8.30% Series A Cumulative Redeemable Preferred Shares (liquidation preference $25.00 per share). The net proceeds from this offering of $111.0 million were used to reduce outstanding indebtedness under interim financing vehicles. The Series A Preferred Shares may be redeemed at $25.00 per share plus accrued and unpaid dividends on or after July 24, 2002. The Series A Preferred Shares have no stated maturity, sinking fund or mandatory redemption, and are not convertible into any other securities of the Trust.
On June 18, 1998, the Trust issued 180 shares of 5.0% Series Z Cumulative Redeemable Preferred Shares (liquidation preference $25.00 per share) in connection with the acquisition of a parcel of land for future development. The Series Z Preferred Shares, which are subject to mandatory redemption on June 18, 2018, may be redeemed at any time for $25.00 per share plus accrued and unpaid dividends. The Series Z Preferred Shares are not subject to any sinking fund or convertible into any other securities of the Trust.
Issuances of Common Operating Partnership Units
Since the IPO, we have issued a total of 4,421 Units in connection with the 1998 acquisition of the real estate assets and operations of South Florida, the acquisition of other operating apartment communities and the acquisition of a parcel of land for future development. The 4,421 Units issued include 470 Units valued at $10.4 million that were issued on January 1, 2000, related to a deferred portion of the South Florida acquisition purchase price.
Issuance of Preferred Operating Partnership Units
On November 12, 1998, we issued 2,000 of our 8.625% Series B Preferred Units to an institutional investor. The net proceeds from this issuance of $48.7 million were used to reduce outstanding indebtedness under interim financing vehicles. The Trust has the option to redeem the Series B Preferred Units after November 14, 2003. These Units are exchangeable by the holder into 8.625% Series B Cumulative Redeemable Preferred Shares of the Trust on a one-for-one basis; however, this exchange right is generally not exercisable until after November 14, 2008. The Series B Preferred Units have no stated maturity, sinking fund or mandatory redemption.
Common Equity Repurchase Program
We have a common equity repurchase program pursuant to which the Trust is authorized to purchase up to $150 million of its outstanding common shares or Units. The Trust has repurchased shares from time to time in open market and privately negotiated transactions, depending on market prices and other conditions, using proceeds from sales of selected assets. Whenever the Trust repurchases common shares from shareholders, we are required to redeem from the Trust an equivalent number of Units on the same terms and for the same aggregate price. After redemption, the Units redeemed by us are no longer deemed outstanding. Units have also been repurchased for cash upon their presentation for redemption by unitholders. As of December 31, 2001, we had redeemed 4,267 Units, for a total of $102,048, including 3,980 Units redeemed by the Trust.
Shelf Registration Statement
We have an effective shelf registration statement on file with the Securities and Exchange Commission providing $500 million of equity capacity and $300 million of debt capacity. We believe it is prudent to maintain shelf registration capacity in order to facilitate future capital-raising activities. To date, there have been no issuances under this shelf registration statement other than the issuance of $150 million of senior unsecured notes in February 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
3. PORTFOLIO AND OTHER FINANCING ACTIVITY
Community and Land Dispositions
During 2001, we sold an apartment community located in Atlanta comprising 386 apartment homes, an apartment community located in Houston comprising 776 apartment homes, an apartment community located in Dallas comprising 536 apartment homes and a 2.5 acre parcel of land adjacent to one of our development communities located in Atlanta. The net proceeds from these sales totaled $93.6 million, $9 million of which was deposited into an escrow account and used to fund acquisition activities. The balance of the net proceeds was used to repay a $16 million note assumed in connection with our September 2001 acquisition of the Gables State Thomas Ravello community and to paydown outstanding borrowings under interim financing vehicles. The total gain from these sales was $35.0 million, all of which was recognized in 2001. In addition, we recognized $0.7 million of deferred gain associated with a parcel of land we sold in 2000 during the year ended December 31, 2001.
During 2001, we contributed our interest in certain land and development rights to the Gables Residential Apartment Portfolio JV Two (the "GRAP JV Two") in return for (1) cash of $18.5 million and (2) capital account credit of $4.6 million (see Note 5). The $2.8 million of gain we will record associated with this contribution is being recognized when earned using the percentage of completion method since we serve as the developer and general contractor for the joint venture. We recognized $1.6 million of this gain during the year ended December 31, 2001.
During 2000, we sold an apartment community located in Dallas comprising 126 apartment homes, an apartment community located in Houston comprising 228 apartment homes, two apartment communities located in San Antonio comprising 544 apartment homes and a parcel of land adjacent to an existing apartment community located in Atlanta. In addition, on December 28, 2000, we sold substantially all of our interests in three apartment communities located in Nashville and Memphis, comprising 1,118 apartment homes, to the CMS Tennessee Multifamily JV (see Note 5). The net proceeds from these sales totaled $142.0 million, $30.2 million of which was deposited into an escrow account and used to fund development and acquisition activities. The balance of the net proceeds was used to (1) repay an $18.6 million note that encumbered one of the assets sold, (2) paydown outstanding borrowings under interim financing vehicles and (3) purchase common shares and Units under the Trust's common equity repurchase program. The total gain recognized from these sales in 2000 was $29.5 million. Gain of $0.8 million associated with the land sale was deferred at December 31, 2000 and is being recognized when earned using the percentage of completion method because we serve as the general contractor for the construction of an apartment community on the parcel of land sold.
During 1999, we sold three apartment communities located in Atlanta comprising 676 apartment homes, two apartment communities located in Memphis comprising 490 apartment homes, an apartment community located in Houston comprising 412 apartment homes and an outparcel of land from an existing development community located in Dallas. The net proceeds from these sales totaled $96.7 million and were used to paydown outstanding borrowings under interim financing vehicles and purchase common shares and Units under the Trust's common equity repurchase program. The total gain from these sales was $8.9 million.
During 1999, we contributed our interest in certain land and development rights to the Gables Residential Apartment Portfolio JV (the "GRAP JV") in return for (1) cash of $65.1 million and (2) capital account credit of $16.4 million. There was no gain or loss associated with this contribution.
Community Acquisitions
On September 28, 2001, we acquired the 80% membership interest of our venture partner in the GRAP JV in the Gables State Thomas Ravello apartment community located in Dallas comprising 290 apartment homes. In consideration for such community, we paid $12 million in cash and assumed a $16 million secured variable-rate note. This consideration was based on a valuation of the asset of $31 million and is net of our $3 million share of the venture distribution. We recorded a $5 million charge to unusual items in 2001 associated with the write-off of building components that will be replaced in connection with a remediation program to address water infiltration issues plaguing the asset.
On August 28, 2001, we acquired an apartment community located in Washington, D.C. comprising 82 apartment homes for approximately $25 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
On August 1, 2001, we acquired the 75% interest of our venture partner in the Gables Metropolitan Uptown apartment community located in Houston comprising 318 apartment homes. The asset was valued at approximately $27 million.
On March 30, 2001, we acquired the 80% membership interests of our venture partner in the GRAP JV in the Gables Palma Vista and Gables San Michelle II apartment communities located in South Florida comprising 532 apartment homes for $66 million. This cash consideration was based on a valuation of the assets of $75 million and is net of our $9 million share of the venture distribution.
During the third quarter of 2000, we acquired an apartment community located in Austin comprising 160 apartment homes. In consideration for such community, we paid $6 million in cash and assumed a $14 million secured fixed-rate note.
Other Acquisition
In May 2001, we acquired a property management company based in Washington, D.C. that manages approximately 3,600 units in 24 multifamily apartment communities located in Washington, D.C. and the surrounding area (the "D.C. Management Co."). The total investment is approximately $1.6 million and is structured to be paid in three installments based on results of the acquired business operations.
Senior Unsecured Note Issuance
In February 2001, we issued $150 million of senior unsecured notes which bear interest at 7.25%, were priced to yield 7.29% and mature in February 2006. The net proceeds of $148.5 million were used to reduce borrowings under our unsecured credit facilities and repay our $40 million term loan, which had a November 2001 maturity date.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
We are a fully integrated real estate company engaged in the multifamily apartment community management, development, construction, acquisition and disposition businesses. We also provide related brokerage and corporate rental housing services. Our operating performance relies predominantly on net operating income from the multifamily apartment communities we own, which are located in major markets in Texas, Georgia, Florida, Washington, D.C. and Tennessee.
Basis of Presentation
The accompanying consolidated financial statements represent the consolidated accounts of Gables Realty Limited Partnership and its subsidiaries, including Gables Residential Services. We consolidate the financial statements of all entities in which we have a controlling financial interest, as that term is defined under United States generally accepted accounting principles ("GAAP"), through either majority voting interest or contractual agreements. Our investments in non-majority owned and/or non-controlled joint ventures are accounted for using the equity method. Information regarding these unconsolidated joint ventures is included in Note 5. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the 2000 and 1999 financial statements have been reclassified to conform to the 2001 presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
Real Estate Assets and Depreciation
Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. The cost of buildings and improvements includes interest, property taxes, insurance and allocated development overhead incurred during the construction period. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments are capitalized and depreciated over their useful lives. Depreciation is computed on a straight-line basis over the estimated useful lives of 20-40 years for buildings and improvements and 5 years for furniture, fixtures and equipment. We periodically evaluate our real estate assets to determine if there has been any impairment in the carrying value of the assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. At December 31, 2001, we did not own any real estate assets that meet the impairment criteria of SFAS No. 121.
Revenue Recognition
Rental: We lease our residential properties under operating leases with terms generally equal to one year or less. Rental income is recognized when earned, which materially approximates revenue recognition on a straight-line basis.
Property management: We provide property management services for properties in which we do not own a controlling interest. Income is recognized when earned.
Development and construction services: We provide development and construction services for properties in which we do not own a controlling interest. Income is recognized when earned using the percentage of completion method.
Cash and Cash Equivalents
For purposes of the statements of cash flows, all investments purchased with an original maturity of three months or less are considered to be cash equivalents.
Restricted Cash
Restricted cash is primarily comprised of residential security deposits, tax escrow funds, repairs and maintenance reserve funds and principal escrow bond funds. In certain situations, we have deposited sales proceeds into escrow accounts to fund development and acquisition activities. At December 31, 2001 and 2000, we had $0.6 million and $8.5 million, respectively, of such escrowed sales proceeds included in restricted cash in the accompanying balance sheets.
Deferred Financing Costs and Amortization
Deferred financing costs include fees and costs incurred to obtain financing and are capitalized and amortized over the terms of the related notes payable.
Interest Rate Protection Agreements
In the ordinary course of business, we are exposed to interest rate risks. We periodically seek input from third party consultants regarding market interest rate and credit risk in order to evaluate our interest rate exposure. In certain situations, we may utilize derivative financial instruments in the form of rate caps, rate swaps or rate locks to hedge interest rate exposure by modifying the interest rate characteristics of related balance sheet instruments and prospective financing transactions. We do not utilize such instruments for trading or speculative purposes. Derivatives used as hedges must be effective at reducing the risk associated with the exposure being hedged; correlate in nominal amount, rate, and term with the balance sheet instrument being hedged and be designated as a hedge at the inception of the derivative contract.
Lump sum payments made or received at the inception or settlement of derivative instruments designated as hedges are capitalized and amortized as an adjustment to interest expense over the life of the associated balance sheet instrument. Monthly amounts paid or received under rate cap and rate swap hedge agreements are recognized as adjustments to interest expense as incurred. In the event that circumstances arise that indicate that an existing
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
derivative instrument no longer meets the hedge criteria described above, the derivative is marked to market in the statements of operations.
Property Management Expenses
We manage owned properties as well as properties owned by third parties for which we provide services for a fee. Property management expenses have been allocated between owned and third-party properties in the accompanying statements of operations based on the proportionate number of owned and third-party apartment homes managed by us during the applicable periods.
Income Taxes
No federal or state income taxes are reflected in the accompanying financial statements since we are a partnership and our partners are required to include their respective share of profits and losses in their income tax returns. We provide management and other services through Gables Residential Services. The taxable income of this subsidiary, if any, is subject to tax at regular corporate rates. The tax attributes of this subsidiary are immaterial to the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued, establishing accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statements of operations, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, was effective for us beginning January 1, 2001. The impact of SFAS No. 133 on our financial statements will depend on the extent, type and effectiveness of our hedging activities. SFAS No. 133 could increase volatility in net income and other comprehensive income. We had no derivative instruments in place at December 31, 2001 or for the year then ended.
In June 2001, SFAS No. 141, "Business Combinations," (effective for us July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets," (effective for us January 1, 2002) were issued. SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. We believe that the adoption of SFAS No. 141 and SFAS No. 142 will not have a significant impact on our financial statements.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations," (effective for us January 1, 2003) was issued. SFAS No. 143 requires that entities recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We believe that the adoption of SFAS No. 143 will not have a significant impact on our financial statements.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," (effective for us January 1, 2002) was issued. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and among other factors, establishes criteria beyond that previously specified in SFAS No. 121 to determine when a long-lived asset is to be considered as held for sale. We currently believe that the implementation of SFAS No. 144 will require operating results of real estate assets sold to be included in discontinued operations in the statements of operations. We believe that the impairment provisions of SFAS No. 144 are similar to SFAS No. 121 and that the adoption thereof will not have a significant impact on our financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
Our interests in the following unconsolidated joint ventures are accounted for using the equity method of accounting:
Condensed financial information of the unconsolidated joint ventures is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
Arbors of Harbortown JV
The Arbors of Harbortown JV was formed in May 1990 to develop, own and operate the Arbors of Harbortown community located in Memphis comprising 345 apartment homes. We have a 25% ownership interest in this venture. The Arbors of Harbortown apartment community is secured by a $16.4 million tax-exempt bond obligation which bears interest at a variable low-floater rate. The credit enhancement for the bond obligation is provided by our venture partner and expires in May 2006. The maturity date of the underlying bond issue is April 2013. The bond obligation is recourse to us up to $1.0 million. The recourse amount is fully cash-collateralized and held by the venture.
Gables Residential Apartment Portfolio JV
The Gables Residential Apartment Portfolio JV was formed in March 1999 to develop, own and operate eight multifamily apartment communities comprising 2,471 apartment homes located in four of our markets. Since inception, our economic ownership interest in the venture has been 20%. During 1999, we contributed our interest in the land and development rights associated with these eight communities to the venture in return for (1) cash of $65.1 million and (2) capital account credit of $16.4 million. We serve as the managing member of the venture and have responsibility for all day-to-day operating matters. We also serve as the property manager, developer and general contractor for construction activities. The $238 million capital budget for the development of the eight communities was funded with 50% equity and 50% debt. The equity component was funded 80% by our venture partner and 20% by us. Our portion of the equity was funded through contributions of cash and property. As of December 31, 2001, we had funded our total equity commitment of $23.8 million to the joint venture.
On March 30, 2001, we acquired the membership interests of our venture partner in two of the stabilized communities comprising 532 apartment homes. In April 2001, development and lease-up activities at Gables State Thomas Ravello comprising 290 apartment homes were suspended due to water infiltration issues, and all residents were subsequently relocated. On September 28, 2001, we acquired the membership interest of our venture partner in this community. At December 31, 2001, construction was complete with respect to the remaining five owned communities and all but one of the completed communities had reached a stabilized occupancy level.
Each of the five communities owned by the venture is secured by a construction loan. The construction loans have an initial maturity of March 25, 2002, with two one-year extension options. We expect the construction loans to be extended for a one-year period prior to maturity. As of December 31, 2001, there was an aggregate $71.3 million of indebtedness outstanding under these construction loans which currently bears interest at spreads over LIBOR ranging from 1.45% to 1.65%.
Gables Residential Apartment Portfolio JV Two
The Gables Residential Apartment Portfolio JV Two was formed in March 2001 to develop, own and operate four multifamily apartment communities comprising 1,077 apartment homes, located in three of our markets. Since inception, our economic ownership interest in the venture has been 20%. During 2001, we contributed our interest in the land and development rights associated with these four communities in return for (1) cash of $18.5 million and (2) capital account credit of $4.6 million.
We serve as the managing member of the venture and have responsibility for all day-to-day operating matters. We also serve as the property manager, developer and general contractor for construction activities. The capital budget for the development of the four communities is $109 million which is expected to be funded with equity of $47 million and debt of $62 million. The equity component is being funded 80% by our venture partner and 20% by us. Our portion of the equity will be funded through contributions of cash and property. As of December 31, 2001, we had funded $7.7 million of our budgeted $9.4 million equity commitment to the joint venture.
Three of the four development communities owned by the venture is secured by a construction loan. We expect to close on the construction loan for the fourth development community in the second quarter of 2002. The construction loans have an initial maturity of April 1, 2004, with two one-year extension options. As of December 31, 2001, there was an aggregate $18.1 million of indebtedness outstanding under these construction loans which currently bears interest at a spread over LIBOR of 1.60%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
CMS Tennessee Multifamily JV
In December 2000, we sold substantially all of our interests in three apartment communities located in Nashville and Memphis, comprising 1,118 apartment homes, to the CMS Tennessee Multifamily JV which was created to own and operate these apartment communities. At inception, we had a 1% general partner interest and an 8% limited partner interest in this venture. Our venture partner contributed additional capital to the venture in 2001 which diluted our limited partner interest to 7.26%. Our initial capital investment in the joint venture of $1.0 million has been substantially offset by $1.0 million in deferred gain associated with our minority interest ownership in the underlying assets sold. Each of the three apartment communities owned by the venture is secured by a conventional fixed-rate loan with a maturity of January 2011. As of December 31, 2001, there was an aggregate $52.1 million of indebtedness outstanding under these loans which bears interest at a rate of 7.22%.
Metropolitan Apartments JV
The Metropolitan Apartments JV was formed in December 1993 to develop, own and operate the Gables Metropolitan Uptown community located in Houston comprising 318 apartment homes. We held a 25% ownership interest in this venture through July 31, 2001. On August 1, 2001, we acquired the 75% interest of our venture partner in the Gables Metropolitan Uptown community.
Related-Party Transactions and Relevant Accounting Policies
Management fees for services provided to these unconsolidated joint ventures totaled $1,204, $886 and $347 for the years ended December 31, 2001, 2000 and 1999, respectively. We provide development and construction services to the GRAP JV and GRAP JV Two in return for development and construction fees. We calculate our net development profit associated with these services based on the fees contractually owed us by the venture and the amount of internal overhead associated with the provision of such services that will be charged against those fees. We then recognize into income 80% of the net development profit when earned using the percentage of completion method. The remaining 20% is deferred and classified as a reduction to our investment in joint venture account. As general contractor, we are responsible for funding any construction cost overruns. As general contractor and venture partner, we are entitled to an incentive fee on any construction cost savings. During 1999, we had accrued $425 in incentive fees from the GRAP JV that were reversed in 2001 as a result of the cost overruns associated with the water infiltration issues at Gables State Thomas Ravello. We recognized net development revenues into income of $(132), $699 and $2,495 for the years ended December 31, 2001, 2000 and 1999, respectively.
We generated a gain of $3.5 million associated with our contribution of land and development rights to the GRAP JV Two. We will recognize 80% or $2.8 million of the gain into income when earned using the percentage of completion method. The $0.7 million in deferred gain has been classified as a reduction to our investment in joint venture account. During the year ended December 31, 2001, we recognized $1.6 million of the $2.8 million gain. We generated a gain of $10.9 million associated with the sale of our real estate asset interests to the CMS JV. We recognized 91% or $9.9 million of the gain into income on the December 2000 sale date. The $1.0 million in deferred gain has been classified as a reduction to our investment in joint venture account. There was no gain or loss associated with the contribution of land and development rights to the GRAP JV.
We record our share of income from unconsolidated joint ventures based on our economic ownership interest therein, after making any necessary adjustments to conform to our accounting policies. The gain on sale of real estate assets at the joint venture level of $12,170 in 2001 pertains entirely to sales from the venture to us. We eliminated our share of the gain on sale in consolidation and, as a result, our equity in income of joint ventures of $242 in 2001 excludes our share of the gain.
Our investment in joint ventures is based on the fair value of our cash and real estate asset contributions thereto and includes capitalized interest on our investment account during the construction period of the underlying real estate assets. Deferrals of any development and construction fees and gains, as applicable, associated with our minority ownership interest in the joint ventures are classified as a reduction to our investment in joint ventures.
The initial basis in the real estate assets we acquired from our joint ventures is equal to the purchase price paid to the venture or venture partner, as applicable, after elimination of our share of any underlying gain. In addition, other outside basis differences associated with capitalized interest and the 20% development and construction fee deferrals are included in real estate assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
6. NOTES PAYABLE
Notes payable consist of the following:
Unsecured Senior Notes
In March 1998, we issued $100,000 of senior unsecured notes which bear interest at 6.80%, were priced to yield 6.84%, and mature in March 2005. In October 1998, we issued (1) $50,000 of senior unsecured notes which bore interest at 6.55%, were priced to yield 6.59%, and matured in October 2000 and (2) $15,000 of senior unsecured notes which bore interest at 6.60%, were priced at par, and matured in October 2001. We repaid the $50,000 and $15,000 notes at maturity. In February 2001, we issued $150,000 of senior unsecured notes which bear interest at 7.25%, were priced to yield 7.29% and mature in February 2006.
Tax-Exempt Variable-Rate Notes Payable Totaling $44,930
At December 31, 2001 and 2000, the variable-rate mortgage notes payable securing tax-exempt bonds totaling $44,930 were comprised of four loans, each of which is collateralized by an apartment community included in real estate assets. These bonds bear interest at variable rates of interest, adjusted weekly based upon a negotiated rate. The interest rates in effect at December 31, 2001 and 2000 were 1.6% and 4.9%, respectively. Effective interest rates were 2.7%, 4.2% and 3.3% for the years ended December 31, 2001, 2000 and 1999, respectively. The bonds are currently enhanced by four letters of credit provided by a letter of credit facility entered into in October 1997. The fee for the letters of credit under this facility is 0.95% per annum. The letter of credit facility has an initial term of five years with unlimited one-year extension options. We have exercised the first of our one-year extension options resulting in a maturity date for the facility of October 2003. Three of the underlying bond issues mature in December 2007 and the fourth matures in August 2024.
Tax-Exempt Variable-Rate Notes Payable Totaling $126,025 and $115,225, respectively
On April 1, 1998, we assumed five variable-rate bond issues totaling $105,140 in connection with the South Florida acquisition. On August 15, 2000, we refunded a $10,085 bond issue that we assumed in connection with the South Florida acquisition from a fixed rate of 4.75% to a variable rate. On April 1, 2001, we refunded a $10,800 bond issue that we assumed in connection with the South Florida acquisition from a fixed rate of 4.75% to a variable rate. At December 31, 2001 and 2000, the interest rates on these variable-rate bonds ranged from 1.4% to 1.5% (weighted average of 1.5%) and 4.5% to 4.7% (weighted average of 4.6%), respectively. Effective interest rates averaged 2.7%, 4.2% and 3.3% for the years ended December 31, 2001, 2000 and 1999, respectively. These bond issues are enhanced by letters of credit provided by a letter of credit facility entered into on April 1, 1998 (the "South Florida Enhancement Facility"). The fee for the letters of credit is 1.0% per annum. The South Florida Enhancement Facility has an initial term of ten years with three five-year extension options and is collateralized by (1) each apartment community induced for tax-exempt financing for which a letter of credit is issued and outstanding and (2) two additional communities. The maturity dates of the underlying bond issues range from December 2005 to April 2036.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
Secured Conventional Fixed-Rate Notes Payable
At December 31, 2001 and 2000, the fixed-rate notes payable were comprised of nine loans collateralized by 12 apartment communities included in real estate assets. The interest rates on these notes payable range from 6.75% to 8.77% (weighted average of 7.71%) and the maturity dates range from February 2004 to December 2015. Principal amortization payments are required for eight of the nine loans based on amortization schedules ranging from 25 to 30 years.
$225 Million Credit Facility
We have a $225 million unsecured revolving credit facility that is provided by a consortium of banks. The facility currently has a maturity date of May 2004 with a one-year extension option. Borrowings under the facility currently bear interest at our option of LIBOR plus 0.85% or prime minus 0.25%. Such scheduled interest rates may be adjusted up or down based on changes in our senior unsecured credit ratings. We may also enter into competitive bid loans with participating banks for up to $112.5 million at rates below the scheduled rates. In addition, there is an annual facility fee currently equal to 0.20% of the $225 million commitment. Availability under the facility, which is based on the value of our unencumbered real estate assets as compared to the amount of our unsecured indebtedness, was $219 million at December 31, 2001. As of December 31, 2001, we had $80,000 in borrowings outstanding under the facility and, therefore, had $139,000 of remaining capacity on the $219 million commitment. As of December 31, 2000, we had $70,000 in borrowings outstanding under the facility.
$75 Million Borrowing Facility
At December 31, 2000, we had a $50 million unsecured borrowing facility with a bank. In connection with the extension of the April 2001 maturity date to April 2002, the availability under the facility was increased to $75 million. The interest rate and maturity date related to each draw on this facility is agreed to by both parties prior to each draw. We expect the facility to be renewed for an additional one-year term at maturity. At December 31, 2001 and 2000, we had $52,192 and $38,194, respectively, in borrowings outstanding under this facility at an interest rate of 2.7% and 7.3%, respectively.
$25 Million Credit Facility
We have a $25 million unsecured revolving credit facility with a bank that currently bears interest at LIBOR plus 0.85%. The facility currently has a maturity date of October 2002 with unlimited one-year extension options. We had $712 and $423 in borrowings outstanding under this facility at December 31, 2001 and 2000, respectively.
Unsecured Conventional Fixed-Rate Notes Payable
At December 31, 2001 and 2000, the unsecured fixed-rate notes payable totaling $114,919 and $116,190, respectively, were comprised of four loans. The interest rates on these notes payable range from 5.25% to 8.62% (weighted average of 8.32%) and the maturity dates range from December 2002 to November 2018. Principal amortization payments are required based on amortization schedules ranging from 20 to 30 years.
Tax-Exempt Fixed-Rate Notes Payable
At December 31, 2001 and 2000, the tax-exempt fixed-rate indebtedness was comprised of three and four loans, respectively. One loan outstanding at December 31, 2001 and 2000 has a principal balance of $48,365 and is collateralized by three communities induced for tax-exempt financing and three additional communities. Principal amortization payments based on a 30-year amortization schedule are required on a monthly basis. These payments are retained in an escrow account and are not applied to reduce the outstanding principal balance of the loan. Principal payments through December 31, 2001 and 2000 are included in restricted cash in the accompanying balance sheets. The note payable bears interest at 6.38% and matures in August 2004. The three underlying tax-exempt bond issues mature in August 2024. The second loan, with an outstanding principal balance of $11,120 and $11,300 as of December 31, 2001 and 2000, respectively, represents a tax-exempt bond financing secured by one apartment community. The bond issue, which has a maturity of January 2025, was credit enhanced for an annual fee of 0.60% and bears interest at 7.03%. Monthly escrow payments are required each year based on the annual principal payment due to the bondholders.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
On April 1, 1998, we assumed three bond issues totaling $30,710 in connection with the South Florida acquisition. One of these bond issues for $10,085 was refunded on August 15, 2000 from a fixed rate of 4.75% to a variable rate. The second bond issue for $10,800 was refunded on April 1, 2001 from a fixed rate of 4.75% to a variable rate and is enhanced by a letter of credit provided by the South Florida Enhancement Facility previously described. The third bond issue, which initially bore interest at 5.75%, was refunded in May 1999 to a fixed rate of 4.65% and is now enhanced by the South Florida Enhancement Facility. The maturity date of the remaining fixed-rate bond issue at December 31, 2001 is February 2004. The bonds do not require principal amortization payments.
Unsecured Variable-Rate Term Loan
At December 31, 2000, we had a $40,000 unsecured variable-rate term loan which bore interest at our option of LIBOR plus 0.80% or prime minus 0.25%. This loan was repaid in February 2001 with proceeds of the $150,000 senior unsecured note issuance.
Maturities
The aggregate maturities of notes payable at December 31, 2001 are as follows:
2007 and thereafter
Total
$86,072
47,892
212,460
119,831
206,241
204,735
$877,231
The indebtedness outstanding under each of our credit facilities is reflected in the preceding table using the May 2004 maturity date of our $225 million credit facility. We have an option to extend the maturity date of our $225 million credit facility to May 2005, which is exercisable in May 2002.
Restrictive Covenants
Certain of our debt agreements contain customary representations, covenants and events of default, including covenants which restrict our ability to make distributions in excess of stated amounts, which in turn restricts the Trust's discretion to declare and pay dividends. In general, during any fiscal year, we may only distribute up to 95% of our consolidated income available for distribution (as defined in the related agreement), exclusive of distributions of capital gains for such year. The applicable debt agreements contain exceptions to these limitations to allow us to make any distributions necessary to allow the Trust to maintain its status as a REIT. We do not anticipate that this provision will adversely effect our ability to make distributions or the Trust's ability to declare dividends, under its current dividend policy.
The tax-exempt bonds contain certain covenants which require a certain percentage of the apartments in such communities be rented to individuals based upon income levels specified by U.S. government programs, as defined.
Pledged Assets
The aggregate net book value at December 31, 2001 of real estate assets pledged as collateral for indebtedness was $485,188.
7. COMMITMENTS AND CONTINGENCIES
Office Leases
We are party to office operating leases with various terms. Future minimum lease payments and rent expense for such leases are not material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
Contingencies
The various entities comprising Gables are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our financial position or results of our operations.
8. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure about the estimated fair value of financial instruments is based on pertinent information available to us as of December 31, 2001 and 2000. Such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and current estimates of fair value may differ significantly from the amounts presented herein.
Cash Equivalents
We estimate that the fair value of cash equivalents approximates carrying value due to the relatively short maturity of these instruments.
Notes Payable
Notes payable with an aggregate carrying value of $877,231 and $765,927 had an estimated fair value of $847,685 and $749,515 at December 31, 2001 and 2000, respectively. The estimated fair value of our notes payable is based on a discounted cash flow analysis using current borrowing rates for notes payable with similar terms and remaining maturities.
9. EARNINGS PER UNIT
Basic earnings per Unit are computed based on net income available to common unitholders and the weighted average number of common Units outstanding. Diluted earnings per Unit reflect the assumed issuance of common Units under the Trust's share option and incentive plan and upon settlement of long-term liability, as applicable. The numerator and denominator used for both basic and diluted earnings per Unit computations are as follows:
Options to purchase 1,130 and 1,557 shares were outstanding at December 31, 2000 and 1999, respectively, but were not included in the computation of diluted earnings per Unit because the effect was anti-dilutive. There were no anti-dilutive options outstanding at December 31, 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
10. SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our senior management group.
We own, operate and develop multifamily apartment communities in major markets located in Texas, Georgia, Florida, Washington, D.C. and Tennessee. Such apartment communities generate rental revenue and other income through the leasing of apartment homes to a diverse base of residents. We evaluate the performance of each of our apartment communities on an individual basis. However, because each of the apartment communities has similar economic characteristics, residents, and products and services, they have been aggregated into one reportable segment. This segment comprises 96%, 95% and 95% of our total revenues for the years ended December 31, 2001, 2000 and 1999, respectively.
The primary financial measure for our reportable business segment is net operating income ("NOI"), which represents total property revenues less property operating and maintenance expenses (as reflected in the accompanying statements of operations). Accordingly, NOI excludes certain expenses included in the determination of net income. Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance. The NOI yield or return on total capitalized costs is an additional measure of financial performance. NOI from apartment communities totaled $156,920, $154,345 and $155,121 for the years ended December 31, 2001, 2000 and 1999, respectively. All other segment measurements are disclosed in our consolidated financial statements.
We also provide management, brokerage, corporate apartment home and development and construction services to third parties. These operations, on an individual and aggregate basis, do not meet the quantitative thresholds for segment reporting per SFAS No. 131.
11. PROFIT SHARING PLAN
Eligible employees may participate in a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. Under the plan, employees may defer a portion of their salary on a pre-tax basis. We also have the discretion to make matching contributions, currently equal to 50% of an employee's first 4% salary deferral contribution. Expenses under this plan for the years ended December 31, 2001, 2000 and 1999 were not material.
During January 1996, we added the Gables Residential Trust Stock Fund as an investment option for the plan. The fund is comprised of the Trust's' common shares. In connection with the addition of this fund to the plan, 100 common shares were registered for issuance under the plan. The plan trustee will purchase the Trust's common shares for the fund at the direction of the plan investment committee, either on the open market or directly from the Trust.
12. DISTRIBUTIONS AND SHARE BUILDER PLAN
We have declared and paid distributions to common unitholders for the years ended December 31, 2001, 2000 and 1999 as follows:
Year
Per Unit
Distributions
$2.340
2.195
2.080
In January 1995, the Trust adopted a dividend reinvestment and share purchase program pursuant to which shareholders could elect to reinvest dividends in additional common shares at a 2% discount to the then current market price of common shares, and purchase additional common shares for cash (up to $20 per quarter) at 100% of the then current market price (the "Share Builder Plan").
As of December 31, 1999, the Trust had issued all of the 500 shares registered for issuance under the Share Builder Plan. Given the Trust's capital market strategy to repurchase shares under its common equity repurchase program, the Trust resolved not to establish a new Share Builder Plan at that time. Accordingly, effective with the first quarter
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
dividend payable on March 31, 2000, shareholders no longer had a dividend reinvestment option available.
13. 1994 SHARE OPTION AND INCENTIVE PLAN AND OTHER SHARE GRANTS
The Trust adopted the 1994 Share Option and Incentive Plan to provide incentives to officers, employees and non-employee trustees. The plan provides for the grant of options to purchase a specified number of common shares or the grant of restricted or unrestricted common shares. The total number of shares reserved for issuance under the plan, as amended, is the greater of 2,953 shares or 9% of the total number of outstanding common shares and Units. At December 31, 2001, the number of shares reserved for issuance was 2,953. The number of common shares which may be issued as restricted or unrestricted shares is equal to 50% of the number of shares available for issuance under the plan at such time. The Operating Partnership will issue a Unit for each common share of the Trust under the plan.
To date, options have been granted with an exercise price equal to the fair value of the Trust's' common shares on the dates the options were granted. The options granted are generally exercisable in installments over three years, beginning one year after the date of grant. At December 31, 2001, 1,196 common shares are subject to outstanding options granted to the Trust's officers, employees and trustees. These outstanding options have exercise prices ranging from $19.125 to $27.95 and a weighted average remaining contractual life of 6.3 years at December 31, 2001.
A summary of the options activity for the years ended December 31, 2001, 2000 and 1999 is as follows:
We account for share options issued under the plan in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized since all options have been granted with an exercise price equal to the fair value of the Trust's common shares on the date of grant. Had compensation cost for these plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," our net income and earnings per Unit would have been reduced to the following pro forma amounts:
Net income available to common unitholders:
As Reported
Pro Forma
$69,323
68,772
$73,938
73,121
$52,949
52,086
Basic earnings per Unit: As Reported
Pro Forma $2.30
2.29
$2.43
2.40
$1.64
1.61
Diluted earnings per Unit: As Reported
Pro Forma $2.29
2.27
$2.43
2.40
$1.64
1.61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
The weighted average fair value of options granted is $3.18, $2.62 and $2.36 for 2001, 2000 and 1999, respectively. The fair value of each option grant as of the date of grant has been estimated using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2001, 2000 and 1999, respectively: risk-free interest rates of 5.12%, 6.71% and 5.69%; expected lives of 5.20, 5.83 and 6.86; dividend yields of 8.62%, 9.27% and 8.88% and expected volatility of 27%, 25% and 25%.
The Trust has made the following grants of unrestricted shares and restricted shares:
Grant
Date Unrestricted
Shares
Granted Restricted
Shares
Granted Per Share
Grant
Value
Vesting Period for Restricted Shares
02-97
02-98
04-98
02-99
02-99
04-99
11-99
01-00
03-00
03-00
10-00
02-01
02-01
10-01
02-02
$25.8750
26.6875
27.0625
23.2500
23.2500
21.9375
24.6250
22.6250
21.8750
21.8750
25.8125
27.3000
27.3000
26.9500
29.7500 Two equal annual installments, beginning 1-1-98
Three equal annual installments, beginning 1-1-99
Three equal annual installments, beginning 4-1-99
Three equal annual installments, beginning 1-1-00
Two equal annual installments, beginning 1-1-00
Two equal annual installments, beginning 4-1-00
One installment, on 12-1-02
Three equal annual installments, beginning 1-1-01
Three equal annual installments, beginning 1-1-01
Two equal annual installments, beginning 1-1-01
One installment, on 12-1-03
Three equal annual installments, beginning 1-1-02
Two equal annual installments, beginning 1-1-02
One installment, on 12-1-04
Three equal installments, beginning 1-1-03
All of the share grants have been made under the plan with the exception of the February 2001 and February 2002 grants, which were satisfied with shares acquired by the Trust pursuant to its common equity repurchase program.
The value of the unrestricted shares granted is accrued as long-term compensation expense in the year the related service was provided. Upon issuance of the share grants, the value of the shares issued is recorded to the partners' capital and the value of the restricted shares is recorded as a reduction to partners' capital as deferred compensation. Such deferred compensation is amortized ratably over the term of the vesting period.
14. UNUSUAL ITEMS
Unusual items of $8,847 in 2001 are comprised of (1) a $5,006 charge associated with the write-off of building components at Gables State Thomas Ravello that will be replaced in connection with a remediation program, (2) $2,200 of severance charges, (3) $920 in reserves associated with certain technology investments and (4) $721 of abandoned real estate pursuit costs resulting from recent events which have impacted the U.S. economy. Unusual items of $2,800 in 1999 relate to severance charges.
The $2,200 severance charge in 2001 is associated with organizational changes adopted in the fourth quarter of 2001, including (1) the departure of the chief investment officer effective January 1, 2002, who became entitled to severance benefits in accordance with the terms of his employment agreement and (2) the departure of two senior vice presidents effective in early 2002. These severance costs will be paid in 2002 and include approximately $400 of deferred compensation related to the accelerated vesting of restricted shares unvested at the effective date of separation and approximately $700 related to the modification of certain outstanding share options to extend the exercise period and accelerate the vesting thereof.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Property and Per Unit Data)
The $2,800 severance charge in 1999 is associated with organizational changes resulting from management succession directives, including the departure of the former chairman and chief executive officer effective January 1, 2000 and the departure of the former chief operating officer effective May 21, 1999, who became entitled to severance benefits in accordance with the terms of their employment agreements. Severance costs paid in 1999 and 2000 totaled $1,440 and $1,360, respectively, and included $214 and $336, respectively, of deferred compensation related to the accelerated vesting of restricted shares unvested at the effective date of separation.
15. RELATED-PARTY TRANSACTIONS
Transactions with our unconsolidated joint ventures are disclosed in Note 5.
During the third quarter of 2000, we acquired an apartment community located in Austin comprising 160 apartment homes from a partnership in which our chairman, president and chief executive officer held a 15% limited partnership interest. In consideration for such community, we paid $5.7 million in cash and assumed a $14.1 million secured fixed-rate note. The purchase price and other terms of this transaction were negotiated at arms' length between us and representatives of the seller.
16. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Quarterly financial information for the years ended December 31, 2001 and 2000 is as follows:
17. SUBSEQUENT EVENTS
In January 2002, we sold two apartment communities in Houston comprising 502 apartment homes and a parcel of land adjacent to one of the communities sold. The net proceeds from these sales totaled $38 million and were used to paydown outstanding borrowings under our credit facilities. The total gain from these sales was $11 million.
Gables Realty Limited Partnership
Real Estate Investments and Accumulated Depreciation as of December 31, 2001
(Dollars in Thousands)
Schedule III
(a) Depreciation of apartment communities is calculated on a straight-line basis over an estimated useful life ranging
from 20 to 40 years for buildings and improvements and an estimated useful life of 5 years for furniture, fixtures,
and equipment.
(b) The year acquired represents the year we acquired a completed community or the year we acquired the real estate for
the development of an apartment community.
(c) Represents renovation costs incurred to date on three completed communities; the remaining information applicable
to these communities is included in the Completed Apartment Communities category above.
(d) Excludes our investment in joint ventures totaling $20,898.
Schedule III