ITEM 1. BUSINESS
THE OPERATING PARTNERSHIP
Summit Properties Partnership, L.P. (the "Operating Partnership") is an established leader in the development, acquisition, and management of luxury apartment communities. It has received numerous national awards including "Management Company of the Year" from the National Association of Home Builders in 1993 and the "National Award for Service" from CEL & Associates in 1998 and 1999. The Operating Partnership currently owns or holds an ownership interest in 70 Communities comprised of 18,198 apartment homes with an additional 2,952 apartment homes under construction in 11 new Communities (collectively, the "Communities"). The Operating Partnership is a fully integrated organization with multifamily development, construction, acquisition and management expertise which employs approximately 650 individuals.
The sole general partner of the Operating Partnership is Summit Properties Inc. ("Summit Properties"), a fully integrated real estate investment trust ("REIT"). Summit Properties' common stock, par value $.01 per share ("Common Stock"), is listed on the New York Stock Exchange under the symbol "SMT". The Operating Partnership's third party management and certain construction and other businesses are conducted through its subsidiaries, Summit Management Company, a Maryland corporation (the "Management Company"), and Summit Apartment Builders, Inc., a Florida corporation (the "Construction Company"). Except where otherwise explicitly noted, the "Operating Partnership" shall also hereinafter refer to the Operating Partnership, the Management Company and the Construction Company.
The Operating Partnership, operating throughout the Southeast, Southwest, Midwest, and Mid-Atlantic states, has chosen to focus its current efforts in its six largest high growth markets: Atlanta, Washington DC, Southeast Florida, Raleigh, Charlotte, and Dallas. In keeping with this strategy, the Operating Partnership has established city operating offices in each of these cities. These city offices have direct responsibility for development, construction, and management of the Communities in their geographic markets. The Operating Partnership believes that this decentralized structure provides it with superior local knowledge and experience in each market.
OPERATING PHILOSOPHY
The Operating Partnership views customer service as its driving force and seeks to provide its residents with experienced, well-trained and attentive management staffs. Every Community associate enters into a comprehensive training program called "Ask for Action" when he or she is hired. This training program ensures that all associates have a clear understanding of their job responsibilities, the high standards of performance expected of them, and the importance of excellent customer service. The Operating Partnership has also developed five classes focusing on excellence in property management to provide on-going training and to further enhance associate productivity. The Operating Partnership believes that this training regimen, along with a proprietary hiring process called "Success by Selection", is providing a higher quality management staff, evidenced by higher resident satisfaction at the Communities and lower associate turnover.
The Operating Partnership has long stressed the importance of developing strong customer relationships with its residents. The Operating Partnership's commitment to resident satisfaction is evidenced by its Peak Services. Peak Services include: a 30 Day Happiness Guarantee where residents can move from the Operating Partnership's property without any lease break penalties if they are not satisfied with their home; Same Day Service and 24 Hour Emergency Maintenance; Business Services; Package Acceptance and Delivery; Loaner
Living Accessories where the Operating Partnership provides convenience tools for the residents' use; No Nonsense Transfer Policy where residents can easily move from one Summit Community to another; and a free Video Library.
This excellence in service, in addition to upscale features and premium locations in high growth markets, has allowed the Operating Partnership to charge market-leading rents to its residents while maintaining high occupancy rates. The Operating Partnership's geographic market focus and decentralized city office structure further promote income growth.
GROWTH STRATEGIES
The Operating Partnership's objective is to create long term value through four strategies: Maximizing Internal Growth, Enhancing Operational Efficiency, Deploying Capital Strategically, and Optimizing Size and Diversity.
Maximizing Internal Growth. The Operating Partnership seeks to maximize internal growth by operating in a select number of high growth markets throughout the Southeast, Southwest, Midwest, and Mid-Atlantic states. These markets have typically experienced stronger upswings and recovered from downturns more quickly. The Operating Partnership believes that by operating in these markets it has a better opportunity to maximize the economic return from its Communities by optimizing the trade-off between increasing rental rates and maintaining high occupancy levels. Consistent with this strategy, the Operating Partnership is typically among the rental rate leaders in its markets. The Operating Partnership's affluent resident profile, well-trained property management staff, and management information systems support this strategy.
For the year ended December 31, 1999, average rent per occupied apartment home for the Operating Partnership's fully stabilized Communities increased 2.2%, and property operating income from these Communities increased 6.0% for the same period. Average occupancy, rental revenue, and property operating income levels for the Operating Partnership's fully stabilized Communities are as follows for the years set forth below:
(1) The Operating Partnership also has ten acquisition Communities, nine stabilized development Communities (i.e., stabilized after January 1, 1997) and fourteen Communities in lease-up. In 1999, average physical occupancy rates were 91.9% and 93.6% and average monthly rental revenue were $876 and $928 per occupied apartment home for acquisition Communities and stabilized development Communities, respectively. Annual averages for Communities in lease-up are not meaningful as the Communities were in various stages of construction/lease-up during the year.
(2) Property Operating Income is defined as total rental and other property revenues less property operating and maintenance expense (excluding depreciation and amortization).
Enhancing Operational Efficiency. The Operating Partnership has successfully integrated property management, development, and construction and will continue to leverage its strengths in each of these areas to enhance operational efficiency and increase brand recognition. As a result, the Operating Partnership believes that it will be able to select the best sites in its markets, build high quality communities both in terms of architecture and construction techniques, and operate the communities to generate market leading rents while maintaining high occupancies. The Operating Partnership believes this integrated approach will create premium quality communities with increased customer satisfaction.
Furthermore, the Operating Partnership is actively seeking ways to reduce operational expenses. The Management Company is constantly exploring new ways to manage costs and share best practices across the Operating Partnership. The Operating Partnership's development organization has moved to using a consistent design across all garden style communities, which the Operating Partnership believes will eliminate many expenses realized by designing each new community as a unique entity and will help achieve economies of scale. The Construction Company is also actively seeking methods to cut costs through more competitive bidding and on-line purchasing of commodities.
Deploying Capital Strategically. Since its initial public offering in 1994, the Operating Partnership has increased the size of its property portfolio by almost 150% to 16,765 apartment homes. Development of new Communities has been the foundation of the Operating Partnership's growth. Of its 65 completed Communities, 40 have been developed by the Operating Partnership or its predecessors. The Operating Partnership attributes much of its historical cash flow growth to the quality of the apartment Communities it has developed over the years.
The Operating Partnership maintains an active development program which provides it with a predictable and consistent stream of new revenues. Focusing on development allows the Operating Partnership to build desirable properties that generate premium rents. It also provides returns which generally exceed those achieved on acquisitions.
The Operating Partnership employs a combination of local autonomy and centralized oversight in its development process. Development officers live in their respective markets, so that critical decision-making is kept local. Development officers report to a corporate development executive, a process that is designed to ensure consistency in design, building materials and quality.
The Operating Partnership utilizes the Construction Company in addition to third-party general contractors to build its new Communities. Of the 2,952 apartment homes in development at December 31, 1999, 91% are being built by the Construction Company, which has resulted in higher quality construction, improved timeliness and cost savings.
In 1999, the Operating Partnership completed development of seven Communities, adding 1,650 apartment homes to the Operating Partnership's portfolio. These seven Communities represent a total investment of approximately $130.9 million. The Communities completed in 1999 are Summit Fair Lakes I, Summit Governor's Village, Summit Fair Lakes II, Summit Westwood, Summit Lake II, Summit Sedgebrook II and Summit Doral.
As of December 31, 1999, the Operating Partnership had eleven apartment Communities under construction (four of which are also in lease-up) containing 2,952 apartment homes, with a budgeted cost of $251.2 million. The following provides summary information regarding the Communities under construction as of December 31, 1999 (dollars in thousands):
The Operating Partnership is optimistic about the operating prospects of the Communities under construction even with the increased supply of newly constructed apartment homes of comparable quality in many of its markets. As with any development project, there are uncertainties and risks associated with the development of the Communities described above. While the Operating Partnership has prepared development budgets and has estimated completion and stabilization target dates based on what it believes are reasonable assumptions in light of current conditions, there can be no assurance that actual costs will not exceed current budgets or that the Operating Partnership will not experience construction delays due to the unavailability of materials, weather conditions or other events. Similarly, market conditions at the time these Communities become available for leasing will affect rental rates and the period of time necessary to achieve stabilization, and could result in achieving stabilization later than currently anticipated.
While the Operating Partnership has emphasized development of new apartment communities as one of its strategies for growth, it also has successfully capitalized in the past on expansion opportunities through the strategic acquisition of properties that meet the Operating Partnership's investment criteria. The Operating Partnership has acquired more than 8,612 apartment homes since its formation in 1994. Acquisitions have generally been concentrated in the Operating Partnership's targeted core markets in order to further strengthen brand identity and operational efficiencies. The Operating Partnership's extensive local-market knowledge and development expertise give it an advantage in identifying and underwriting acquisition opportunities that the Operating Partnership believes will create shareholder value. In 1999, escalating purchase prices for acquisitions would have resulted in economic performance that was unattractive when compared to the potential economic performance of the Operating Partnership's development program. As a result, the Operating Partnership made no such acquisitions in 1999. However, this pricing dynamic also created an opportunity for the Operating Partnership to increase its disposition activity.
During 1999, the Operating Partnership disposed of seven communities for over $76 million. These Communities did not align with the Operating Partnership's overall long term strategic plan and growth objectives. This is part of a strategy that the Operating Partnership calls "Capital Recycling" whereby the proceeds of these dispositions are reinvested into new communities that the Operating Partnership believes will yield higher returns.
The prices realized for the 1999 dispositions represent a source of capital with a cost below what could have been achieved through other capital sources, such as common equity. As long as this remains the case, the Operating Partnership anticipates continuing to use property dispositions as a source of capital to fund its development program as well as for general corporate purposes.
Optimizing Size and Diversity. The Operating Partnership's strategy is to be the market-leading operator of luxury apartment homes in a carefully selected group of markets. Decisions are based on maintaining a diverse portfolio whereby the economic factors of the aggregate pool mitigates the risks of placing too much of the Operating Partnership's portfolio in one or two markets.
The Operating Partnership is currently in the process of exiting its smaller markets and reinvesting the sale proceeds into new Communities in its larger core markets. The Operating Partnership believes this strategy will improve financial performance by improving economies of scale, concentrating market knowledge, and increasing brand awareness.
Furthermore, the Operating Partnership is seeking opportunities to diversify its product type. The Operating Partnership is shifting toward increasing the percentage of urban in-fill communities in its portfolio by concentrating on urban development opportunities, particularly in Washington DC, Atlanta, and Southeast Florida. This strategic shift reflects an emerging trend where many residents desire to avoid traffic congestion and live closer to work, shopping and entertainment.
THE OPERATING PARTNERSHIP
As sole general partner of the Operating Partnership, Summit Properties has the exclusive power to manage and conduct the business of the Operating Partnership subject to certain voting rights of holders (including Summit Properties) of the units of limited partnership interest ("Common Units"), including the consent of holders (including Summit Properties) of 85% of the Common Units in connection with a sale, transfer or other disposition of all or substantially all of the assets of the Operating Partnership, or any other transaction
which would result in the recognition of a significant taxable gain to the holders of Common Units, and subject to certain voting rights of holders of the preferred units of limited partnership interest discussed below. Subject to the rights and preferences of the outstanding preferred units, as of December 31, 1999, Summit Properties' general and limited partnership interests in the Operating Partnership entitle it to share in 85.6% of the cash distributions form, and in the profits and losses of, the Operating Partnership.
Each Common Unit may be redeemed by the holder thereof for cash equal to the fair market value of a share of Summit Properties' Common Stock or, at the option of Summit Properties, an equivalent number of shares of Common Stock. Summit Properties presently determines on a case-by-case basis whether it will elect to issue shares of Common Stock in connection with a redemption of Common Units rather than paying cash. With each redemption of Common Units for Common Stock, Summit Properties' percentage ownership interest in the Operating Partnership will increase. Similarly, when Summit Properties acquires a share of Common Stock under its common stock repurchase program described below or otherwise, it simultaneously disposes of one Common Unit of the Operating Partnership. In addition, whenever Summit Properties issues shares of Common Stock for cash, Summit Properties will contribute any net proceeds therefrom to the Operating Partnership and the Operating Partnership will issue an equivalent number of Common Units to Summit Properties.
On April 29, 1999, the Operating Partnership completed a private placement of 3.4 million of its 8.95% Series B Cumulative Redeemable Perpetual Preferred Units to two institutional investors. On September 3, 1999, the Operating Partnership completed a private placement of 2.2 million of its 8.75% Series C Cumulative Redeemable Perpetual Preferred Units to an institutional investor.
The Operating Partnership cannot be terminated, except in connection with a sale of all or substantially all of the assets of the Operating Partnership for a period of 99 years from the date of formation without a vote of the limited partners of the Operating Partnership.
OPERATING PARTNERSHIP HISTORY
The Operating Partnership, a Delaware limited partnership, was formed on January 14, 1994 to continue and expand the multifamily development, construction, acquisition, operation, management and leasing businesses of the predecessor entities through which the Operating Partnership historically conducted operations prior to the Initial Offering (as defined below) (the "Summit Entities"). The Summit Entities were founded by Summit Properties' Co-Chairman of the Board, William B. McGuire, Jr., in 1972. In 1981, William F. Paulsen joined the predecessor to Summit Properties as Chief Executive Officer and shepherded the growth of its multifamily development and management activities.
Summit Properties organized itself as a REIT and completed its initial public offering (the "Initial Offering") of 10,000,000 shares of Common Stock, on February 15, 1994 and sold an additional 1,500,000 shares upon exercise of the underwriters' over-allotment option on March 4, 1994. On June 2, 1995, Summit Properties completed a follow-on public offering of 4,000,000 shares of Common Stock. A second follow-on public offering of 5,000,000 shares of Summit Properties' Common Stock was completed on August 7, 1996, with an additional 750,000 shares sold upon exercise of the underwriters' over-allotment option on August 12, 1996. In addition, Summit Properties has adopted a dividend reinvestment and stock purchase program for the sale of up to 2,500,000 shares of Common Stock, pursuant to which it sells Common Stock from time to time.
On May 11, 1999, Summit Properties adopted a common stock repurchase program pursuant to which Summit Properties is authorized to purchase up to an aggregate of $50 million of outstanding Common Stock. During 1999, Summit Properties repurchased 2,414,300 shares of Common Stock for an aggregate purchase price of approximately $47.5 million.
On August 12, 1997, the Operating Partnership completed a $125 million senior unsecured debt offering. On December 12, 1997, the Operating Partnership completed an additional $30 million senior unsecured debt offering. On May 29, 1998, the Operating Partnership established a program for the sale of up to $95 million aggregate principal amount of Medium-Term Notes due nine months or more from the date of issuance (the "MTN Program"). During 1998 and 1999, the Operating Partnership issued notes with an aggregate principal amount of $80 million in connection with the MTN Program. The Operating Partnership intends to establish a similar program for the sale of Medium-Term Notes under a shelf registration statement filed with the
Securities and Exchange Commission (the "SEC") in July 1999, pursuant to which the Operating Partnership may sell debt securities with an aggregate public offering price of up to $250 million.
The executive offices of the Operating Partnership are located at 212 South Tryon Street, Suite 500, Charlotte, North Carolina 28281. The Operating Partnership's telephone number is (704) 334-3000 and its facsimile number is (704) 333-8340. The Operating Partnership also maintains offices in Atlanta, Georgia; Tampa, Florida; Bethesda, Maryland; Ft. Lauderdale, Florida; Dallas, Texas; and Raleigh, North Carolina.
ITEM 2.
ITEM 2. PROPERTIES
THE COMMUNITIES
The Operating Partnership owns and operates 65 completed Communities and four Communities which are currently under construction and in lease-up, for a total of 17,673 apartment homes. Forty-six of the Communities have been completed since January 1, 1990 and, as of December 31, 1999, the average age of the completed Communities was approximately 7.6 years. The following is a summary of Communities by market:
All of the Communities target middle to upper income apartment renters as customers and have amenities, apartment home sizes and mixes consistent with the desires of this resident population. The Communities are owned in fee simple and are located in six states throughout the southeastern, southwestern and mid-atlantic United States (Florida, Georgia, Maryland, North Carolina, Texas and Virginia), as well as in Delaware, Ohio, Indiana and Pennsylvania. The following table highlights certain information regarding the Communities:
(1) Average physical occupancy is defined as the number of apartment homes occupied divided by the total number of apartment homes contained in the Communities, expressed as a percentage. Average physical occupancy has been calculated using the average occupancy that existed on Sunday during each week of the period.
(2) Represents the average monthly net rental revenue per occupied apartment home.
(3) Collateral for fixed rate mortgage of $143.7 million.
(4) Summit Foxcroft is held by a partnership in which the Operating Partnership is a 75% managing general partner.
(5) Collateral for a fixed rate mortgage of $8.4 million.
(6) Collateral for letters of credit in an aggregate amount of $39.5 million which serve as collateral for $38.4 million in tax exempt bonds.
(7) Communities that were stabilized in 1999 but were stabilized subsequent to January 1, 1997.
(8) Summit Las Palmas was acquired effective December 31, 1998 and, accordingly, no average occupancy or average rent information is available for 1998.
(9) Communities that were in lease-up during 1999. These Communities have, and are, leasing at a rate consistent with the Operating Partnership's expectations. As with any community in lease-up, there are uncertainties and risks associated with the Operating Partnership's Communities in lease-up. While the Operating Partnership has estimated completion and stabilization budgets and target dates based on what it believes are reasonable assumptions in light of current conditions, there can be no assurance that actual costs will not exceed current budgets or that the Operating Partnership will not experience delays in reaching stabilization of such Communities.
Information with respect to total debt secured by thirty of the Operating Partnership's Communities having an aggregate net book value of $410.3 million as of December 31, 1999, is as follows (in thousands):
Scheduled annual maturities of secured debt are as follows:
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(1) Interest rate as of December 31, 1999.
(2) Annual debt service for variable rate loans represents 1999 costs and includes letter of credit fees and other bond related costs.
Each Community has many of the following features: swimming pools, tennis courts, racquetball courts, volleyball courts, saunas, whirlpools, fitness facilities, picnic areas, large clubhouses and convenient parking facilities. Most of the apartment homes offer amenities that include spacious open living areas, sunrooms, patios or balconies, sunken living rooms, fireplaces, built-in shelves or entertainment centers, large storage areas or walk-in closets, vaulted ceilings, ceiling fans and separate in-home laundry facilities or laundry hook-ups. In addition to these physical amenities, each Community has its own highly-trained and experienced on-site management and maintenance staff to ensure that courteous and responsive service is provided to its residents.
COMMUNITY MANAGEMENT
Each of the Communities is operated by the Operating Partnership's property management staff. The management team for each Community includes supervision by a regional vice-president and regional property manager, as well as on-site management, maintenance personnel and an off-site support staff. Community management teams perform leasing and rent collection functions and coordinate resident services. All personnel are extensively trained and experienced and are encouraged to continue their education through both Operating Partnership-designed and outside courses.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither the Operating Partnership nor any of the Communities is presently subject to any material litigation nor, to the Operating Partnership's knowledge, is any litigation threatened against the Operating Partnership or any of the Communities, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the business or financial condition or results of operations of the Operating Partnership.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Common Units. As of March 10, 2000 there were 112 holders of record of Common Units.
The Operating Partnership declared a distribution of $0.4175 per Common Unit for each of the four quarters in 1999, which was paid on May 13, 1999 for the first quarter, August 14, 1999 for the second quarter, November 12, 1999 for the third quarter and February 14, 2000 for the fourth quarter.
The Operating Partnership declared a distribution of $0.4075 per Common Unit for each of the four quarters in 1998, which was paid on May 15, 1998 for the first quarter, August 14, 1998 for the second quarter, November 16, 1998 for the third quarter, and February 15, 1999 for the fourth quarter.
During the three months ended December 31, 1999, the Operating Partnership issued Common Units in private placements in the reliance on the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), in the amounts and for the consideration set forth below:
A. Summit Properties issued an aggregate of 76,629 shares of Common Stock pursuant to its Dividend Reinvestment and Stock Purchase Program. Summit Properties contributed the proceeds (approximately $1.4 million) of these sales to the Operating Partnership in consideration of an aggregate of 76,629 Common Units.
B. Summit Properties issued an aggregate of 500 shares of Common Stock in connection with restricted stock awards. Each time a share of Common Stock is issued in connection with such an award, the Operating Partnership issues a Common Unit to Summit Properties during the relevant period.
C. Summit Properties issued an aggregate of 748 shares of Common Stock pursuant to its Employee Stock Purchase Plan. Summit Properties has contributed the proceeds (approximately $14,000) of these sales to the Operating Partnership in consideration of an aggregate of 748 Common Units.
In light of the circumstances under which such Common Units were issued and information obtained by the Operating Partnership in connection with such transactions, management of Summit Properties, in its capacity as general partner of the Operating Partnership, believes that the Operating Partnership may rely on such exemption.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and other information on a consolidated historical basis for the Operating Partnership as of and for each of the years in the five-year period ended December 31, 1999. This table should be read in conjunction with the Consolidated Financial Statements of Summit Properties Partnership, L.P. and the Notes thereto included elsewhere herein.
SELECTED FINANCIAL DATA SUMMIT PROPERTIES PARTNERSHIP, L.P. (HISTORICAL)
(1) The Operating Partnership considers funds from operations ("FFO") to be an appropriate measure of performance of an equity REIT. The Operating Partnership computes FFO in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO, as defined by NAREIT, represents net income (loss) excluding gains or losses from sales of property, plus depreciation of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures, all determined on a consistent basis in accordance with generally accepted accounting principles ("GAAP"). The Operating Partnership believes that Funds from Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of the ability of the Operating Partnership to incur and service debt and to make capital expenditures. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Operating Partnership's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Operating Partnership's liquidity, nor is it indicative of funds available to fund the Operating Partnership's cash needs, including its ability to make dividend or distribution payments. FFO is calculated as follows (dollars in thousands):
(2) Represents the total number of apartment homes in Communities completed and owned by the Operating Partnership during the period.
(3) Represents the total number of apartment homes in Communities completed and owned by the Operating Partnership at the end of the period.
(4) The ratios of earnings to fixed charges were computed by dividing earnings by fixed charges. For this purpose, earnings consist of pre-tax income from continuing operations (including gains on sale of real estate) plus fixed charges (excluding capitalized interest and dividends to preferred unitholders). Fixed charges consist of interest expense (whether expensed or capitalized), dividends to preferred unitholders in the Operating Partnership, the estimated interest component of rent expense, and the amortization of debt issuance costs. To date, Summit Properties has not issued any preferred stock; therefore, the ratios of earnings to combined fixed charges and preferred stock dividend requirements are the same as the ratios of earnings to fixed charges presented.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements relating to the operating performance of fully stabilized Communities, the development, acquisition or disposition of properties, estimated net asset value, anticipated construction completion and lease-up dates, and estimated development costs, as well as the costs, timing and effectiveness of Year 2000 compliance. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume" and other similar expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Operating Partnership. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Operating Partnership to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Factors which could have a material adverse effect on the operations and future prospects of the Operating Partnership include, but are not limited to: economic conditions generally and the real estate market specifically, legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts ("REITs")), availability of capital, interest rates, uncertainties associated with the Operating Partnership's development activities, the failure of acquisitions to yield expected results, construction delays due to unavailability of materials, weather conditions or other delays, competition, supply and demand for apartment communities in the Operating Partnership's current and proposed market areas, expenses of or issues related to Year 2000 compliance, changes in generally accepted accounting principles, or policies and guidelines applicable to REITs, and those factors discussed in the second paragraph under the heading "Operating Performance of the Operating Partnership's Fully Stabilized Communities,", in the section entitled "Development Activity -- Certain Factors Affecting the Performance of Development Communities," and in the section entitled "Year 2000" on pages 17, 30 and 31 respectively, of this Form 10-K. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
The following discussion should be read in conjunction with the Consolidated Financial Statements of Summit Properties Partnership, L.P. and the Notes thereto appearing elsewhere herein.
HISTORICAL RESULTS OF OPERATIONS
The Operating Partnership's net income is generated primarily from operations of its Communities. The changes in operating results from period to period reflect changes in existing Community performance and changes in the number of apartment homes due to development, acquisition and disposition of Communities. Where appropriate, comparisons are made on a "fully stabilized Communities," "acquisition Communities," "stabilized development Communities", "Communities in lease-up" and "disposition Communities" basis in order to adjust for changes in the number of apartment homes. A Community is deemed to be "stabilized" when it has attained a physical occupancy level of at least 93%. A Community that the Operating Partnership has acquired is deemed "fully stabilized" when owned by the Operating Partnership for one year or more as of the beginning of the year. A Community that the Operating Partnership has developed is deemed "fully stabilized" when stabilized for the two prior years as of the beginning of the current year. A Community is deemed to be a "stabilized development" when stabilized as of the beginning of the current year but not the entire two prior years. All Communities information presented is before real estate depreciation and amortization expense. Communities' average physical occupancy presented is defined as the number of apartment homes occupied divided by the total number of apartment homes contained in the Communities, expressed as a percentage. Average physical occupancy has been calculated using the average of the occupancy that existed on Sunday during each week of the period. Average monthly rental revenue presented represents the average monthly net rental revenue per occupied apartment home. The Operating Partnership's methodology for calculating average physical occupancy and average monthly rental revenue may differ from
the methodology used by other apartment companies, and accordingly, may not be comparable to such other apartment companies.
Effective January 1, 1999, the Operating Partnership implemented prospectively a new accounting policy whereby the cost of carpet replacements is capitalized and depreciated over their estimated useful lives. Previously, the cost of carpet replacement had been expensed. The Operating Partnership believes that the newly adopted accounting policy is preferable as it is consistent with standards and practices utilized by the majority of the Operating Partnership's peers and provides a better matching of expenses with the related benefit of the expenditure. The change in accounting policy is being treated prospectively as a change in accounting principle inseparable from a change in accounting estimate. The effect of this change for the year ended December 31, 1999 was a net increase in net income of $1.4 million. Comparative property operating information included in this section for the years ended December 31, 1998 and 1997 has been adjusted to reflect the 1999 change in accounting policy. Carpet replacement expenditures for the entire portfolio of communities for the years ended December 31, 1999, 1998 and 1997 were $1.8 million, $1.7 million and $1.7 million, respectively.
Results of Operations for the Years Ended December 31, 1999, 1998 and 1997
Income before gain on sale of real estate assets and extraordinary items increased from 1997 ($27.6 million) to 1998 ($29.3 million) and from 1998 to 1999 ($42.3 million) primarily due to increased property operating income at stabilized Communities, as well as new sources of income associated with acquisition Communities and Communities in lease-up, partially offset by a decrease in property income due to the disposition of Communities and an increase in depreciation and interest expense.
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S PORTFOLIO OF COMMUNITIES
The operating performance of the Communities is summarized below (dollars in thousands):
(1) Includes Communities which were stabilized during the entire period for each of the comparable periods presented.
(2) The 1999 and 1998 comparison includes the Communities acquired in 1998. The 1998 and 1997 comparison includes Communities acquired in 1998 and 1997.
A summary of the Operating Partnership's apartment homes for the years ended December 31, 1999, 1998 and 1997 is as follows:
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S FULLY STABILIZED COMMUNITIES
The operating performance of the Communities stabilized during the entire period in both of the comparable periods presented is summarized below (dollars in thousands except average monthly rental revenue):
(1) Effective January 1, 1999, the Operating Partnership implemented prospectively a new accounting policy whereby expenditures for carpet replacement are capitalized. Previously, the cost of carpet replacement had been expensed. While the 1998 and 1997 historical financial statements have not been restated to reflect the change, for comparative purposes only, fully stabilized Communities' building repairs and maintenance cost for the years ended December 31, 1998 and 1997 has been adjusted in the table above to reflect the new policy. Carpet replacement costs for comparison of the years ended December 31, 1999 and 1998 were $1.3 million and $1.1 million, respectively. Carpet replacement costs for comparison of the years ended December 31, 1998 and 1997 were $1.3 million and $1.3 million, respectively.
Rental and other revenue increased from 1998 to 1999 due to higher rental rates, higher occupancy rates and increased revenue from sources other than rental income such as telephone, cable and water submeter income. The 4.1% property revenue growth rate was higher than the prior year rate of growth primarily as a result of a stronger demand in the markets in which the Operating Partnership operates. The higher growth rate was especially noticeable in the Washington, DC, Atlanta and South Florida markets. In 2000, the Operating Partnership expects the rate of growth to decline due to more difficult year over year comparisons and a
different fully stabilized portfolio composition. The Operating Partnership believes its expectations relative to property revenue growth are based on reasonable assumptions as to future economic conditions and the quantity of competitive multi-family apartment communities in the markets in which the Operating Partnership does business. However, there can be no assurance that actual results will not differ from these assumptions, which could result in a lower property revenue growth rate.
Property operating and maintenance expenses were relatively stable from 1998 to 1999, increasing by 0.4%. As a percentage of total property revenues, property operating and maintenance expense decreased to 33.0% from 34.2% for the years ended December 31, 1999 and 1998, respectively.
Rental and other revenue increased from 1997 to 1998 primarily due to higher rental rates. Property operating and maintenance expenses were relatively stable from 1997 to 1998, increasing by 1.5%. As a percentage of total property revenues, property operating and maintenance expenses decreased to 34.8% from 35.3% for the years ended December 31, 1998 and 1997, respectively.
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S ACQUISITION COMMUNITIES
Acquisition Communities for the year ended December 31, 1999 consist of the following: Summit St. Clair, Summit Club at Dunwoody, Summit Lenox (representing a total of 1,093 apartment homes) and seven communities (2,465 apartment homes) which were owned by Ewing Industries and its affiliates in 1998 (the "Texas Acquisition Communities") (a total of 3,558 apartment homes). Summit Las Palmas (448 apartment homes), one of the seven Communities acquired from Ewing Industries, was acquired effective December 31, 1998 and, accordingly, its rental operations for 1998 are not reflected in the Operating Partnership's financial statements. The operations of these Communities are summarized as follows (dollars in thousands except average monthly rental revenue):
(1) Effective January 1, 1999, the Operating Partnership implemented prospectively a new accounting policy whereby expenditures for carpet replacement are capitalized. Previously, the cost of carpet replacement had been expensed. While the 1998 and 1997 historical financial statements have not been restated to reflect the change, for comparative purposes only, acquisition Communities' property operating and maintenance expense for the years ended December 31, 1998 and 1997 has been adjusted in the table above to reflect the new policy. Carpet replacement costs for comparison of the years ended December 31, 1999 and 1998 were $217,000 and $3,000, respectively. Carpet replacement costs for comparison of the years ended December 31, 1998 and 1997 were $178,000 and $113,000, respectively.
(2) Since the Ewing properties were acquired mid-fourth quarter 1998, their impact on average monthly rental revenue for the year ended December 31, 1998 was minimal. Average monthly rental revenue for
the years ended December 31, 1999 and 1998 for Summit St. Clair, Summit Club at Dunwoody and Summit Lenox were $967 and $936, respectively.
Summit Lenox (433 apartment homes) is currently undergoing a major renovation. Improvements include renovations to the interior and exterior of the apartment homes, construction of a new office, clubhouse and fitness center, and ground improvements. The renovation will require certain apartment homes to be unavailable for rental over the course of the project. The renovation work at Summit Lenox is expected to be completed by the end of the third quarter 2000. As of December 31, 1999, 130 apartment homes were out of service due to the renovation.
The unleveraged yield on investment for acquisition Communities, defined as property operating income on an annualized basis divided by total acquisition cost, for the year ended December 31, 1999 was 8.54%.
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S STABILIZED DEVELOPMENT COMMUNITIES
The Operating Partnership had nine Communities with 2,212 apartment homes (Summit Ballantyne I, Summit Fairways, Summit Lake I, Summit Norcroft II, Summit Plantation II, Summit on the River, Summit Russett, Summit Sedgebrook I and Summit Stonefield) which were stabilized during the entire year ended December 31, 1999 but were stabilized subsequent to January 1, 1997. The comparison of the years ended December 31, 1998 and 1997 represents 1,599 apartment homes (Summit Aventura, Summit Fairways, Summit on the River, Summit River Crossing and Summit Russett).
The operating performance of these stabilized development Communities is summarized below (dollars in thousands except average monthly rental revenue):
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(1) Effective January 1, 1999, the Operating Partnership implemented prospectively a new accounting policy whereby expenditures for carpet replacement are capitalized. Previously, the cost of carpet replacement had been expensed. While the 1998 and 1997 historical financial statements have not been restated to reflect the change, for comparative purposes only, stabilized development Communities' property operating and maintenance expense for the years ended December 31, 1998 and 1997 has been adjusted in the table above to reflect the new policy. Carpet replacement costs for comparison of the years ended December 31, 1999 and 1998 were $167,000 and $79,000, respectively. Carpet replacement costs for comparison of the years ended December 31, 1998 and 1997 were $155,000 and $73,000, respectively.
The unleveraged yield on stabilized development Communities, defined as property operating income divided by total development cost, for the year ended December 31, 1999 was 10.34%.
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S COMMUNITIES IN LEASE-UP
The Operating Partnership had fourteen Communities in lease-up during the year ended December 31, 1999. A Community in lease-up is defined as one that has commenced rental operations during the current year but was not stabilized as of the beginning of the current year. The following is a summary of thirteen of the fourteen Communities in lease-up during 1999 (dollars in thousands):
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(1) These properties stabilized during 1999. (2) These properties are included in the Construction in Progress category at December 31, 1999.
In addition to the Communities listed in the table above, Summit Fairview (135 apartment homes) is an existing property of the Operating Partnership which is currently undergoing a major renovation. The renovation includes upgrades of the interior of the apartment homes (new cabinets, fixtures and other interior upgrades), upgrades to the parking lots and landscaping, as well as exterior painting of buildings. The renovation will require certain apartment homes to be unavailable for rental over the course of the project. The operations of Summit Fairview are included in lease-up Communities results due to the renovation work. The renovation work at Summit Fairview is expected to be completed by the end of the first quarter of 2000.
The Operating Partnership had thirteen Communities with 3,131 apartment homes in lease up during the year ended December 31, 1998 (Summit Ballantyne I, Summit Sedgebrook , Summit Plantation II, Summit Norcroft II, Summit Stonefield, Summit Lake I, Summit Ballantyne II, Summit New Albany I, Summit Fair Lakes I, Summit Governor's Village, Summit Doral, Summit Westwood, and Summit Lake II).
The operating performance of the Operating Partnership's lease-up Communities is summarized as follows (dollars in thousands):
(1) Effective January 1, 1999, the Operating Partnership implemented prospectively a new accounting policy whereby expenditures for carpet replacement are capitalized. Previously, the cost of carpet replacement had been expensed. While the 1998 and 1997 historical financial statements have not been restated to reflect the change, for comparative purposes only, lease-up Communities' property operating and maintenance expense for the years ended December 31, 1998 and 1997 has been adjusted in the table above to reflect the new policy. Carpet replacement costs for comparison of the years ended December 31, 1999 and 1998 were $16,000 and $21,000, respectively. Carpet replacement costs for comparison of the years ended December 31, 1998 and 1997 were $33,000 and $1,000, respectively.
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S DISPOSITION COMMUNITIES
Disposition communities consist of Summit Hampton, Summit Oak, Summit Beacon Ridge, Summit Heron's Run, Summit McIntosh, Summit Perico and Summit East Ridge in 1999 (the "1999 Dispositions") (referred to herein using former community names). The 1999 Dispositions resulted in the Operating Partnership receiving net proceeds on sale of $54.4 million. The 1999 to 1998 comparison below consists of the 1999 Dispositions as well as the following communities disposed during 1998 (referred to herein using former community names): Summit Providence, Summit Springs, Summit Old Town, Summit Creek, Summit Green, Summit Hill, Summit Hollow and Summit Station (the "1998 Dispositions"). The 1998 to 1997 comparison below consists of the 1998 Dispositions as well as Summit Charleston which was disposed during 1997. The operating performance of these communities is summarized below (dollars in thousands):
(1) Effective January 1, 1999, the Operating Partnership implemented prospectively a new accounting policy whereby expenditures for carpet replacement are capitalized. Previously, the cost of carpet replacement had been expensed. While the 1998 and 1997 historical financial statements have not been restated to reflect the change, for comparative purposes only, disposition communities' property operating and maintenance expense for the years ended December 31, 1998 and 1997 has been adjusted in the table above to reflect the new policy. Carpet replacement costs for comparison of the years ended December 31, 1999 and 1998 were $155,000 and $504,000, respectively. Carpet replacement costs for comparison of the years ended December 31, 1998 and 1997 were $82,000 and $149,000, respectively.
OPERATING PERFORMANCE OF SUMMIT MANAGEMENT COMPANY
The Management Company is accounted for under the equity method of accounting. The operating performance of the Management Company and its wholly owned subsidiary, the Construction Company, is summarized below (dollars in thousands):
The change in revenue was a result of higher revenues from managing an increased weighted average number of the Operating Partnership's Communities and higher revenues from construction activity in 1997 compared to 1998 and in 1998 compared to 1999. The increase in operating expenses was a result of higher construction activity and increased personnel at the Management Company in order to better support the Operating Partnership's growth objectives, including improving the operating performance of its stabilized Communities.
Total average third party apartment homes under management were 2,435, 3,310 and 5,164 during the years ended December 31, 1999, 1998 and 1997, respectively. Property management fees include $1.3 million, $1.2 million and $1.7 million of fees from third parties for the years ended December 31, 1999, 1998 and 1997, respectively. Property management fees from third parties as a percentage of total property management revenues were 20.3%, 23.3% and 35.2% for the years ended December 31, 1999, 1998 and 1997, respectively. The Operating Partnership expects third party management revenue as a percentage of total property management revenues to continue to decline.
All of the Construction Company's revenues are from contracts with the Operating Partnership.
OTHER INCOME AND EXPENSES
Interest income increased by $1.9 million to $3.0 million in 1999 compared to 1998, primarily due to interest earned on proceeds from property sales placed in escrow in accordance with like-kind exchange income tax regulations. Interest income increased by $672,000 to $1.1 million in 1998 compared to 1997, primarily due to interest earned in 1998 on the proceeds from property sales placed in escrow in accordance with like-kind exchange income tax regulations.
Other income decreased $560,000 to $289,000 in 1999 compared to 1998, primarily as a result of an incentive fee earned in connection with a property that the Operating Partnership had developed and managed for a third party in 1998.
Depreciation expense increased $5.4 million or 18.7% to $34.4 million in 1999 compared to 1998, primarily due to depreciation expense related to the Operating Partnership's 1998 acquisitions and increased depreciation of Communities in lease-up. Depreciation expense increased $6.3 million or 28.0% to $29.0 million in 1998 compared to 1997 due to an increase in depreciation expense related to the 1998 and 1997 acquisitions and Communities in lease-up.
Interest expense, including amortization of deferred financing costs, increased by $4.8 million for the year ended December 31, 1999 compared to the year ended December 31, 1998. The increase was primarily the result of an increase of $104.7 million in the Operating Partnership's average indebtedness outstanding offset
by a decrease in the effective interest rate of .07% (6.72% to 6.65%) in 1999 as compared to the same period in 1998. Interest expense, including amortization of deferred financing costs, increased by $11.5 million during the year ended December 31, 1998 as compared to the year ended December 31, 1997. The increase was primarily the result of an increase of $174.8 million in the Operating Partnership's average indebtedness outstanding and an increase in the effective interest rate of .04% (6.68% to 6.72%) in 1998 as compared to the same period in 1997.
General and administrative expenses have remained relatively stable as a percentage of total revenues. As a percentage of total revenues, general and administrative expenses were 2.2%, 2.6% and 2.3% in 1999, 1998 and 1997, respectively.
The $17.4 million gain on sale of assets in 1999 resulted from the disposition of seven communities. The seven communities sold were:
The communities disposed of in 1999 were part of the Operating Partnership's plan to dispose of assets that no longer meet its growth objectives, to make desired changes in the number of apartment homes in each of the Operating Partnership's markets, or that are located in smaller markets. The Operating Partnership believes that by concentrating its efforts and capital in large growth markets it will gain a competitive advantage as it improves operational efficiencies, builds a more significant brand name and improves market knowledge. Also, by disposing of assets that no longer meet the Operating Partnership's long-term growth objectives, capital is provided to fund the development of new, higher growth assets. The $37.1 million gain on the sale of assets in 1998 resulted from the disposition of eight communities. The $4.4 million gain on sale of assets in 1997 resulted from the sale of one community.
The extraordinary items in the year ended December 31, 1998 resulted from the write-off of deferred financing costs in connection with the replacement by the Operating Partnership of its prior unsecured credit facility with the Unsecured Credit Facility (as hereinafter defined) and prepayment penalties incurred on six mortgage notes which were repaid during the period.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Operating Partnership's net cash provided by operating activities decreased from $63.8 million for the year ended December 31, 1998 to $62.5 million for the same period in 1999, primarily due to a $6.1 million decrease in net income and a $6.0 million increase in interest paid. The decrease in net income was due to the decrease in gain on sale of real estate assets. The increase in interest paid was primarily due to an increase in the average indebtedness outstanding during the year.
Net cash used in investing activities decreased from $219.1 million for the year ended December 31, 1998 to $36.5 million for the same period in 1999 due to no acquisition activity in 1999 and an increase in proceeds from the sale of Communities. In addition, the Operating Partnership funded $11.7 million in capital improvements during 1999. Proceeds from the sale of Communities during 1999 represent funds expended from like-kind exchange escrows. In the event that the proceeds from these property sales are not fully invested in qualified like-kind property during the required time period, a special distribution may be made or company level tax may be incurred.
Net cash provided by financing activities was $154.6 million for the year ended December 31, 1998. Net cash used in financing activities was $24.7 million for the year ended December 31, 1999, primarily due to net repayments of $75.5 million on the Operating Partnership's Unsecured Credit Facility funded partially by the use of $136.3 million of proceeds from the sale of Series B and Series C Preferred Units (as hereinafter defined) by the Operating Partnership during the year. Other uses of cash during the year ended December 31, 1999 which caused an increase in cash used in financing activities as compared to the same period in 1998 were the payment of higher distributions to unitholders, Summit Properties' repurchase of Common Stock for an aggregate purchase price of approximately $47.5 million and a decrease in equity proceeds from Summit Properties' dividend reinvestment and stock purchase plans.
The ratio of earnings to fixed charges was 1.85 to 1 for the year ended December 31, 1999 compared to 2.52 to 1 for the year ended December 31, 1998. The decrease is primarily due to a decrease in the gain on real estate assets offset by increased interest charges as discussed in "Historical Results of Operations -- Other Income and Expenses" above.
The Operating Partnership's outstanding indebtedness at December 31, 1999 totaled $649.6 million. This amount includes approximately $263.2 million in fixed rate conventional mortgages, $38.3 million of variable rate tax-exempt bonds, $266.0 million of unsecured notes, $4.1 million of tax-exempt fixed rate loans, and $78.0 million under the Unsecured Credit Facility (as hereinafter defined).
The Operating Partnership expects to meet its short-term liquidity requirements (i.e., liquidity requirements arising within 12 months) including recurring capital expenditures relating to maintaining its existing properties, generally through its working capital, net cash provided by operating activities and borrowings under its line of credit. The Operating Partnership believes that its cash provided by operating activities will be adequate to meet operating requirements and payments of dividends and distributions during the next twelve months.
The Operating Partnership expects to meet its long-term liquidity requirements (i.e., liquidity requirements arising after 12 months), such as scheduled mortgage debt maturities, property acquisitions, financing of construction and development activities and other non-recurring capital improvements, through the issuance of unsecured notes and equity securities, from undistributed Funds from Operations (see page 32), from proceeds received from the disposition of certain properties, and, in connection with the acquisition of land or improved property, through the issuance of Units.
CREDIT FACILITY
In March 1998, the Operating Partnership obtained a new syndicated unsecured line of credit (the "Unsecured Credit Facility") in the amount of $175 million which replaced the existing $150 million credit facility. The Unsecured Credit Facility was increased in December 1998 to $200 million. The Unsecured Credit Facility provides funds for new development, acquisitions and general working capital purposes. The Unsecured Credit Facility has a three year term with two one-year extension options and bears interest at LIBOR + 90 basis points based upon the Operating Partnership's current credit rating of BBB- by Standard & Poor's Rating Services and Baa3 by Moody's Investors Service. The spread component of the aggregate interest rate will be reduced in the event of an upgrade of the Operating Partnership's unsecured credit rating. The Unsecured Credit Facility is repayable monthly on an interest only basis with principal due at maturity. The Operating Partnership's credit facility had an average interest rate and average balance outstanding during the years ended December 31, 1999, 1998 and 1997 of 6.06%, 6.67%, 6.73% and $99.2 million, $98.0 million and $53.9 million, respectively. In addition, the maximum outstanding during 1999, 1998 and 1997 was $176.0 million, $175.0 million and $121.9 million, respectively.
The Unsecured Credit Facility also provides a bid option sub-facility equal to a maximum of fifty percent of the total facility ($100 million). This sub-facility provides the Operating Partnership with the option to place borrowings in fixed LIBOR contract periods of thirty, sixty, ninety and one hundred eighty days. The Operating Partnership may have up to seven fixed LIBOR contracts outstanding at any one time. Upon proper notifications, all lenders participating in the Unsecured Credit Facility may, but are not obligated to, participate in a competitive bid auction for these fixed LIBOR contracts.
The Unsecured Credit Facility requires the Operating Partnership to comply with certain affirmative and negative covenants including the following requirements: (i) Summit Properties maintain its qualification as a REIT; (ii) the Operating Partnership maintain a ratio of EBITDA (as defined therein) to fixed charges (as defined therein) of not less that 1.75 to 1; (iii) dividends not exceed 90% of funds from operations (as defined therein); (iv) the Operating Partnership maintain a ratio of total funded debt (as defined therein) to implied capitalization value (as defined therein) of less than .55 to 1; and (v) the Operating Partnership maintain a ratio of unencumbered asset value (as defined therein) to unsecured debt of less than 1.75 to 1. In addition, the Unsecured Notes and the Unsecured Bank Notes require the Operating Partnership to comply with certain affirmative and negative covenants including the following requirements: (i) the ratio of unencumbered assets (as defined therein) to unsecured debt equal or exceed 150%; (ii) the ratio of debt to assets (as defined therein) not exceed 60%; and (iii) secured debt not exceed 40% of assets (as defined therein). The Operating Partnership was in compliance with these covenants at December 31, 1999.
Medium-Term Notes
On May 29, 1998, the Operating Partnership established a program for the sale by the Operating Partnership of up to $95 million aggregate principal amount of Medium-Term Notes due nine months or more from the date of issuance (the "MTN Program"). The Operating Partnership issued Medium-Term Notes with an aggregate principal amount of $80 million in connection with the MTN Program as follows: (i) on July 28, 1998, the Operating Partnership sold $30 million of notes which are due on July 30, 2001 and bear interest at 6.75% per year; (ii) on October 5, 1998, the Operating Partnership sold $25 million of notes which are due on October 5, 2000 and bear interest at 6.71% per year; and (iii) on March 18, 1999, the Operating Partnership sold $25 million of notes which are due on March 16, 2009 and bear interest at 7.59% per year. In July 1999, Summit Properties and the Operating Partnership filed a shelf registration statement with the SEC, pursuant to which the Operating Partnership may issue debt securities with an aggregate public offering price of up to $250 million. The Operating Partnership intends to establish a new, similar program for the sale of Medium-Term Notes by the Operating Partnership under such registration statement, pursuant to which the Operating Partnership may issue Medium-Term Notes from time to time in the future subject to certain market conditions and other factors.
Private Placement of Preferred Units
On April 29, 1999, the Operating Partnership completed a private placement of 3.4 million of its 8.95% Series B Cumulative Redeemable Perpetual Preferred Units (the "Series B Preferred Units") to two institutional investors at a price of $25.00 per unit. The net proceeds of approximately $83 million were used to repay amounts outstanding under the Operating Partnership's Unsecured Credit Facility. The Series B Preferred Units may be exchanged by the holders into shares of 8.95% Series B Cumulative Redeemable Perpetual Preferred Stock of Summit Properties ("Series B Preferred Shares") on a one-for-one basis. Holders of the Series B Preferred Units may exercise their exchange right (a) at any time on or after April 29, 2009, (b) at any time if full quarterly distributions are not made for six quarters, or (c) upon the occurrence of specified events related to the treatment of the Operating Partnership or the Series B Preferred Units for federal income tax purposes. The Operating Partnership may redeem the Series B Preferred Units at any time on or after April 29, 2004 for cash at a redemption price equal to the redeemed holder's capital account (initially $25.00 per unit), plus all accumulated, accrued and unpaid distributions or dividends. In lieu of cash, the Operating Partnership may elect to deliver Series B Preferred Shares on a one-for-one basis, plus an amount equal to all accumulated, accrued and unpaid distributions or dividends. The Series B Preferred Units have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of Summit Properties or the Operating Partnership. Distributions on the Series B Preferred Units are cumulative from the date of original issuance and are payable quarterly at the rate of 8.95% per annum of the $25.00 original capital contribution. Holders of the Series B Preferred Units received distributions in the aggregate amount of approximately $5.1 million during 1999.
On September 3, 1999, the Operating Partnership completed a private placement of 2.2 million of its 8.75% Series C Cumulative Redeemable Perpetual Preferred Units (the "Series C Preferred Units") to an
institutional investor at a price of $25.00 per unit. The net proceeds of approximately $54 million were used to repay amounts outstanding under the Operating Partnership's Unsecured Credit Facility. The Series C Preferred Units may be exchanged by the holder into shares of 8.75% Series C Cumulative Redeemable Perpetual Preferred Stock of Summit Properties ("Series C Preferred Shares") on a one-for-one basis. The holder of the Series C Preferred Units may exercise its exchange right (a) at any time on or after September 3, 2009, (b) at any time if full quarterly distributions are not made for six quarters, (c) upon the occurrence of specified events related to the treatment of the Operating Partnership or the Series C Preferred Units for federal income tax purposes, or (d) at any time that such institutional investor's holdings in the Operating Partnership exceed 18% of the total profits of or capital interests in the Operating Partnership for a taxable year. The Operating Partnership may redeem the Series C Preferred Units at any time on or after September 3, 2004 for cash at a redemption price equal to the redeemed holder's capital account (initially $25.00 per unit), plus all accumulated, accrued and unpaid distributions or dividends. The Series C Preferred Units have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of Summit Properties or the Operating Partnership. Distributions on the Series C Preferred Units are cumulative from the date of original issuance and are payable quarterly at the rate of 8.75% per annum of the $25.00 original capital contribution. The holder of the Series C Preferred Units received distributions in the aggregate amount of approximately $1.5 million during 1999.
Common Stock Repurchase Program
On May 11, 1999, the Board of Directors of Summit Properties authorized a common stock repurchase program pursuant to which Summit Properties is authorized to purchase up to an aggregate of $50 million of outstanding Common Stock. All repurchases have been and will be made on the open market at prevailing prices. This authority may be exercised from time to time and in such amounts as market conditions warrant. During the year ended December 31, 1999, Summit Properties repurchased 2,414,300 shares of Common Stock for an aggregate purchase price, including commissions, of approximately $47.5 million at an average price of $19.67 per share.
Market Risk
The fair market value of long-term fixed rate debt is subject to changes in interest rates. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Operating Partnership's total fixed rate long-term debt at December 31, 1999 was $501.3 million. Fair values were determined from quoted market prices, where available, and from information received from investment bankers using current interest rates considering credit ratings and remaining terms to maturity.
While the Operating Partnership has historically had limited involvement with derivative financial instruments, the Operating Partnership may utilize such instruments in certain situations to hedge interest rate exposure by modifying the interest rate characteristics of related balance sheet instruments and prospective financing transactions. The Operating Partnership does not utilize derivative financial instruments for trading or speculative purposes. On September 16, 1999, the Operating Partnership entered into an interest rate swap agreement with a notional amount of $30 million, relating to $30 million of notes issued by the Operating Partnership under the MTN Program which carry a fixed interest rate of 6.625% per annum (the "Fixed Rate"). Under the interest rate swap agreement, through the maturity date of such notes of December 15, 2003, (i) the Operating Partnership has agreed to pay to the counterparty the interest on a $30 million notional amount at a floating interest rate of LIBOR plus 11 basis points (the "Floating Rate"), and (ii) the counterparty has agreed to pay to the Operating Partnership the interest on the same notional amount at the Fixed Rate. The Floating Rate at December 31, 1999 was 6.23%. Under the interest rate swap agreement, an increase in LIBOR will increase the amount of interest that the Operating Partnership will be required to pay, and a decrease in LIBOR will decrease the amount of interest that the Operating Partnership will be required to pay. The fair value of the interest rate swap was $445,000 at December 31, 1999.
Schedule of Debt
The following table sets forth certain information regarding debt financing as of December 31, 1999 and 1998 (dollars in thousands):
(1) With the exception of the Mortgage Loan referred to in Note 2 below, which has a $143.7 million balance at December 31, 1999, all the secured debt can be prepaid at any time. Such Mortgage Loan can be prepaid after February 15, 2001. Prepayment of all such secured debt is generally subject to penalty or premium; however, the tax exempt mortgage notes can be prepaid at any time without penalty or premium.
(2) Mortgage Loan secured by the following Communities:
(3) Mortgage Loan secured by Summit Simsbury and Summit Touchstone Communities.
(4) The tax exempt bonds (the "Bonds") bear interest at various rates set by a remarketing agent at the demand note index plus 0.50%, set weekly, or the lowest percentage of prime which allows the resale at a price of par. The Bonds are enhanced by letters of credit from a financial institution (the "Credit Enhancements"), each of which Credit Enhancements will terminate prior to the maturity dates of the related Bonds. In the event such Credit Enhancements are not renewed or replaced upon termination, the related loan obligations will be accelerated.
The one-month LIBOR rate at December 31, 1999 was 5.82%.
The Operating Partnership's outstanding indebtedness (excluding the Unsecured Credit Facility) had an average maturity of 6.9 years as of December 31, 1999. The aggregate maturities of all outstanding debt (excluding the Unsecured Credit Facility) as of December 31, 1999 for each of the years ended after December 31, 1999 are as follows (in thousands):
Of the significant maturities in the above table, $15.0 million and $16.0 million relate to the unsecured bank notes that mature in 2000 and 2002, respectively; $25 million relates to unsecured notes due in 2000; $30 million relates to unsecured notes due in 2001 and $25 million relates to unsecured notes due in 2002.
ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1999, the Operating Partnership sold seven communities comprising 1,518 apartment homes for approximately $76.0 million, resulting in a gain on sale of approximately $17.4 million. Net proceeds of $54.4 million, were placed in escrow with a qualified intermediary in accordance with like-kind exchange income tax rules and regulations. The communities sold were Summit Hampton, Summit Oak, Summit Beacon Ridge, Summit Perico, Summit McIntosh, Summit Heron's Run and Summit East Ridge (referred to herein using former community names).
During the year ended December 31, 1999, the Operating Partnership acquired no communities.
The Operating Partnership completed the acquisition of three communities located in Atlanta, Georgia in 1998: Summit St. Clair, purchased effective March 1, 1998, Summit Club at Dunwoody, purchased effective May 22, 1998, and Summit Lenox, purchased effective July 8, 1998 (the "Atlanta Acquisitions"). The Atlanta Acquisitions added a total of 1,093 apartment homes to the Operating Partnership's portfolio at an aggregate purchase price of $88.3 million. The Atlanta Acquisitions were financed with the issuance of 259,871 Common Units (valued at $5.2 million) and the assumption of $8.8 million of mortgage debt. The balance of the purchase price was paid in cash.
In individual property transactions, the Operating Partnership sold three communities for $48.9 million (formerly known as Summit Providence on May 8, 1998, Summit Springs on October 23, 1998 and Summit Old Town on November 2, 1998). The total gain on sale recognized for these three disposition transactions was $17.0 million.
On December 16, 1998, the Operating Partnership (i) sold five communities (the "Sold Communities") to Hollow Creek, LLC., a newly-formed North Carolina limited liability company for approximately $68 million and (ii) contributed two communities with an approximate value of $22 million (together with the Sold Communities, the "Joint Venture Communities") to Station Hill, LLC., a newly-formed North Carolina limited liability company ("Station Hill"). On the same date, Hollow Creek, LLC contributed the Sold Communities to Station Hill. Station Hill is a joint venture limited liability company, the membership of which is comprised of the Operating Partnership and a wholly owned subsidiary of a major financial services company (the "Joint Venture Member"). The disposition was effected pursuant to a Real Estate Sale Agreement dated November 20, 1998 between the Operating Partnership and the Joint Venture Member and pursuant to the Operating Agreement of Station Hill, also dated November 20, 1998. The Operating Partnership's contribution to Station Hill (approximately $5.6 million) represents a 25 percent equity interest in Station Hill. In addition, the Operating Partnership is the managing member of Station Hill and will also retain management of the Joint Venture Communities through a management agreement with Station Hill. The cash flow of Station Hill will be distributed pro rata to each member based on its equity contribution until certain economic benchmarks are achieved, at which point the Operating Partnership will receive an escalated portion of the cash flow and residual interest. Station Hill has obtained five separate mortgages totaling $70.15 million from Fannie Mae. These mortgages have a ten-year maturity and a 6.70% interest rate. The proceeds of the mortgages were distributed on a pro rata basis to Station Hill's two members. The Joint Venture Communities involved in the transaction were Summit Green, Summit Hollow I and II and Summit Creek in Charlotte, North Carolina; Summit Hill I and II in Raleigh, North Carolina; and Summit Station in Tampa, Florida. The Joint Venture Communities include 1,433 apartment homes. The Operating Partnership recognized a gain of approximately $20.2 million on the disposition. The gain is net of $5.6 million elimination of gain relative to the Operating Partnership's retained portion of the joint venture. The elimination of the gain reduced the Operating Partnership's investment in the joint venture to zero at the initial joint venture formation.
Proceeds from the sale of Summit Springs, Summit Old Town and the Sold Communities were put in escrow with a qualified intermediary in accordance with like-kind exchange income tax rules and regulations. These proceeds were used to fund future developments.
On November 4, 1998, the Operating Partnership acquired a portfolio of multifamily properties in Texas (the "Ewing Portfolio") through a merger with Ewing Industries, a private developer of luxury apartment homes.
The Ewing Portfolio consists of 2,465 apartment homes in seven communities located in Dallas, Austin and San Antonio. The acquisition of the Ewing Portfolio was effected pursuant to an Agreement and Plan of Reorganization dated as of October 31, 1998 (the "Merger Agreement") among the Operating Partnership, affiliates of the Operating Partnership including the Operating Partnership, Ewing Industries, Inc., an Ohio corporation ("Ewing Industries"), affiliates of Ewing, and their respective partners, shareholders and members (together with Ewing Industries, "Ewing"). Pursuant to the Merger Agreement, the acquisition was funded through (i) the issuance to Ewing of 1,008,988 shares of Common Stock of the Operating Partnership and 141,921 Units, valued at $20.7 million in the aggregate, (ii) the assumption of $84.0 million in long-term fixed-rate mortgage indebtedness, (iii) the payment of $50.6 million in cash and (iv) receipt of $3.8 million of credit for customary prorations and reserves. A portion of the consideration was deferred until stabilization of one community (Summit Las Palmas) which was in lease-up at the time of the acquisition of the Ewing Portfolio. The Summit Las Palmas purchase closed on December 31, 1998 with the additional consideration of (i) 1,027,771 shares of Common Stock and 36,124 Common Units valued at $29.2 million in the aggregate and (ii) cash in the amount of approximately $600,000.
At December 31, 1999, the Operating Partnership had three apartment communities for sale with a net book value of approximately $13.8 million. The Operating Partnership does not anticipate incurring a loss on any individual apartment Community sale. Proceeds from the sale of the Communities will be used to fund future development. The three apartment communities held for sale represented approximately 2% of property operating income for the Operating Partnership for the year ended December 31, 1999.
DEVELOPMENT ACTIVITY
The Operating Partnership's developments in process at December 31, 1999 are summarized as follows (dollars in thousands):
(1) These communities were in lease-up at December 31, 1999.
(2) Consists primarily of land held for development and other predevelopment costs.
Estimated cost to complete the development Communities represents substantially all of the Operating Partnership's material commitments for capital expenditures at December 31, 1999.
Certain Factors Affecting the Performance of Development Communities
The Operating Partnership is optimistic about the operating prospects of the Communities under construction, even with the increased supply of newly constructed apartment homes of comparable quality in many of its markets. As with any development community, there are uncertainties and risks associated with the development of the Communities described above. While the Operating Partnership has prepared development budgets and has estimated completion and stabilization target dates based on what it believes are reasonable assumptions in light of current conditions, there can be no assurance that actual costs will not
exceed current budgets or that the Operating Partnership will not experience construction delays due to the unavailability of materials, weather conditions or other events.
Other development risks include the possibility of incurring additional costs or liabilities resulting from increased costs for materials or labor or other unexpected costs or defects in construction material, and the possibility that financing may not be available on favorable terms, or at all, to pursue or complete development activities. Similarly, market conditions at the time these Communities become available for leasing will affect the rental rates that may be charged and the period of time necessary to achieve stabilization, which could make one or more of the development Communities unprofitable or result in achieving stabilization later than currently anticipated.
In addition, the Operating Partnership is conducting feasibility and other pre-development work for eleven Communities. The Operating Partnership could abandon the development of any one or more of these potential Communities in the event that it determines that market conditions do not support development, financing is not available on favorable terms, it is unable to obtain necessary permits and authorizations, or due to other circumstances which may prevent development. Similarly, there can be no assurance that, if the Operating Partnership does pursue one or more of these potential Communities, that it will be able to complete construction within the currently estimated development budgets or that construction can be started at the time currently anticipated.
INFLATION
Substantially all of the leases at the Communities are for a term of one year or less, which may enable the Operating Partnership to seek increased rents upon renewal of existing leases or commencement of new leases. The short-term nature of these leases generally serves to reduce the risk to the Operating Partnership of the adverse effect of inflation.
YEAR 2000
The term "Year 2000 issue" is a general term used to describe various problems that may result from the improper processing by computer systems of dates after 1999. These problems arise from the inability of some hardware and software to distinguish dates before the year 2000 from dates in and after the year 2000. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations.
The Operating Partnership's efforts to address its Year 2000 issues prior to January 1, 2000, were focused in the following three areas: (i) reviewing and taking any necessary steps to attempt to correct the Operating Partnership's computer information systems (i.e., software applications and hardware platforms), (ii) evaluating and making any necessary modifications to other computer systems that do not relate to information technology but include embedded technology, such as telecommunications, security, HVAC, elevator, fire and safety systems, and (iii) communicating with certain significant third-party service providers to determine whether there will be any interruption in their systems that could affect the Operating Partnership.
The Operating Partnership has not experienced any business or service disruptions as a result of any Year 2000 issues, nor has the Operating Partnership been contacted by any vendors or customers as to any Year 2000 issues with respect to their various products or services. Costs incurred to date related to Year 2000 issues have not been material, nor does the Operating Partnership expect to incur additional material costs related to Year 2000 issues. The Operating Partnership is continuing to evaluate potential disruptions or complications that might result in the future from Year 2000 related problems; although at this time, the Operating Partnership has not identified any specific business functions that are likely to suffer material disruption as a result of Year 2000 related issues. Due to the unique and pervasive nature of the Year 2000 issue, however, it is not possible to anticipate each of the wide variety of Year 2000 issues that might arise, particularly outside of the Operating Partnership, which might have a material adverse impact on the Operating Partnership's business, financial condition and results of operations.
FUNDS FROM OPERATIONS
The Operating Partnership considers funds from operations ("FFO") to be an appropriate measure of performance of an equity REIT. The Operating Partnership computes FFO in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO, as defined by NAREIT, represents net income (loss) excluding gains or losses from sales of property, plus depreciation of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures, all determined on a consistent basis in accordance with generally accepted accounting principles ("GAAP"). Funds Available for Distribution ("FAD") is defined as FFO less capital expenditures funded by operations (recurring capital expenditures). The Operating Partnership's methodology for calculating FFO and FAD may differ from the methodology for calculating FFO and FAD utilized by other real estate companies, and accordingly, may not be comparable to other real estate companies. FFO and FAD do not represent amounts available for management's discretionary use because of needed capital expenditures or expansion, debt service obligations, property acquisitions, development, dividends and distributions or other commitments and uncertainties. FFO and FAD should not be considered as alternatives to net income (determined in accordance with GAAP) as an indication of the Operating Partnership's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Operating Partnership's liquidity, nor are they indicative of funds available to fund the Operating Partnership's cash needs, including its ability to make dividends/distributions. The Operating Partnership believes FFO and FAD are helpful to investors as measures of the performance of the Operating Partnership because, along with cash flows from operating activities, financing activities and investing activities, they provide investors with an understanding of the ability of the Operating Partnership to incur and service debt and make capital expenditures.
Funds from Operations and Funds Available for Distribution are calculated as follows (dollars in thousands):
(1) Recurring capital expenditures are expected to be funded from operations and consist primarily of exterior painting, carpets in 1999, new appliances, vinyl, blinds, tile, and wallpaper. In contrast, non-recurring capital expenditures, such as major improvements, new garages and access gates, are expected to be funded by financing activities and are, therefore, not included in the calculation of Funds Available for Distribution. The increase in recurring capital expenditures for the year ended December 31, 1999 was primarily due to the Operating Partnership's change in accounting policy to capitalize carpets starting January 1, 1999. Without carpet, recurring capital expenditures for the year ended December 31, 1999
would have been $4.6 million. Recurring capital expenditures for 1998 and 1997 have not been restated for the change in accounting policy.
(2) Non-recurring capital expenditures for the year ended December 31, 1999 and 1998 primarily consisted of major renovations in the amount of $3.5 million in 1999 and $1.3 million in 1998 respectively; $740,000 and $446,000 for access gates and security fences in 1999 and 1998 respectively; $10,000 and $1.0 million for water meters in 1999 and 1998, respectively; $1.0 million and $1.7 million in other revenue enhancement expenditures in 1999 and 1998, respectively.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk".
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are contained on the pages indicated on the Index to Financial Statements and Supplementary Data on page 51 of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Operating Partnership is managed by Summit Properties, in its capacity as the general partner of the Operating Partnership. Consequently, the Operating Partnership has no directors or executive officers. This Item 10 reflects information with respect to the directors and executive officers of Summit Properties.
Directors
Terms Expiring in 2000
WILLIAM B. MCGUIRE, JR. Mr. McGuire has served as Co-Chairman of the Board of Directors of Summit Properties since December 1999 and as Chairman of the Board from 1994 to December 1999. Prior to the formation of Summit Properties, Mr. McGuire served as a senior partner of the predecessor to Summit Properties and as a general partner of each of the partnerships which transferred multifamily apartment communities to Summit Properties when it was formed. Mr. McGuire founded the predecessor to Summit Properties in 1972. Mr. McGuire also founded McGuire Properties, Inc., a real estate brokerage firm, in 1972. He has been active in the following professional and community organizations: Residential, Multifamily and Urban Development Mixed Use Councils of the Urban Land Institute; Charlotte Advisory Board of NationsBank of North Carolina, N.A.; and The Charlotte City Club, serving on its Board of Governors as President. He was a Trustee of the North Carolina Nature Conservancy; a Founder and Director of Habitat for Humanity of Charlotte; and the Founder and President of The Neighborhood Medical Clinic. Mr. McGuire is 55 years old.
WILLIAM F. PAULSEN. Mr. Paulsen is Co-Chairman of the Board of Directors and the Chief Executive Officer of Summit Properties. He has held the position of Co-Chairman of the Board since December 1999 and the position of Chief Executive Officer since 1994. Mr. Paulsen has been a director of Summit Properties since 1994. Prior to the formation of Summit Properties, Mr. Paulsen was a senior partner and the Chief Executive Officer of the predecessor to Summit Properties and a general partner of each of the partnerships which transferred multifamily apartment communities to Summit Properties when it was formed. Mr. Paulsen joined the predecessor to Summit Properties in 1981. He was selected as North Carolina Entrepreneur of the Year in 1991. In addition to his responsibilities with Summit Properties, Mr. Paulsen is a full member and Residential Council member of the Urban Land Institute. He is a member of the Board of Directors of The Beach Company, a real estate investment company specializing primarily in commercial and resort development in the southeastern United States, and is a trustee of The Asheville School. Mr. Paulsen also served as a Vice President of the Charlotte Apartment Association. He is 53 years old.
JAMES M. ALLWIN. Mr. Allwin has been a director of Summit Properties since 1999. Mr. Allwin is President of Aetos Capital, a newly formed independent investment management firm. Prior to January 1, 1999, he was head of the investment management business of Morgan Stanley Dean Witter, which included Morgan Stanley Asset Management, Miller Anderson & Sherrerd and the firm's Private Equity Funds: Capital Partners, Venture Capital and Real Estate. Together, these businesses had over $160 billion of assets under management and $10 billion of private equity commitments. In addition, he oversaw Morgan Stanley Trust Company, with $400 billion in custody, which was sold to Chase Bank in 1998. He was a member of the Morgan Stanley Dean Witter Management Committee. Mr. Allwin joined Morgan Stanley in 1976, and during the course of his career, he also worked in areas such as corporate finance, mergers and acquisitions and real estate. He is a graduate of Yale University, where he currently serves as a member of the Investment Committee, and a graduate of the Amos Tuck School of Business Administration at Dartmouth College, where he is a member of the Board of Overseers. He is a member of the Chairman's Council of the Museum of Modern Art in New York, the Board of Trustees of Greenwich Academy and the Board of Directors of The National Mentoring Partnership. He is also Chairman of Communities In Schools, Inc., the nation's largest non-profit stay-in-school program. Mr. Allwin is 47 years old.
Terms Expiring in 2001
JAMES H. HANCE, JR. Mr. Hance has been a director of Summit Properties since 1994. Mr. Hance is Vice Chairman and Chief Financial Officer of Bank of America and is a member of such corporation's Policy Committee. He is also responsible for the Finance Group, comprised of the finance, accounting and control functions, and for Treasury, including balance sheet management. Additionally, he is responsible for Technology & Operations, which encompasses such corporation's operations and technology development functions, Investor Relations, the legal department, and Management Services, which provides for such corporation's real estate needs. The global payment business, which provides depository and treasury services to customers worldwide, also reports to Mr. Hance. Mr. Hance, a certified public accountant, spent 17 years with the Price Waterhouse accounting firm in Philadelphia and Charlotte. For six years, he was a partner in the Charlotte office and served as the audit partner responsible for the firm's relationship with NCNB Corporation (predecessor to NationsBank and Bank of America). From August 1985 until December 1986, he was Chairman and co-owner of Consolidation Coin Caterers Corp. in Charlotte. He joined NationsBank (predecessor to Bank of America) in March 1987. Mr. Hance is Chairman of the Board of Trustees of both Novant Health Services and Charlotte Country Day School. He also is a member of the Boards of Directors of Caraustar Industries Inc., Family Dollar Stores Inc., Lance Inc. and Bank of America Corporation. Mr. Hance is a Trustee of Washington University in St. Louis and is a member of Washington University's National Council for the John M. Olin School of Business. He is a member of the Board of Visitors of Duke University Fuqua School of Business, and serves on the Board of Trustees of the North Carolina Blumenthal Performing Arts Center and the Boards of Directors of the Foundation for the Carolinas, the United Negro College Fund and the Foundation for the University of North Carolina at Charlotte. In addition, he is the 1996 past chairman of the Charlotte Chamber of Commerce and a 1998 International Business Fellow. Mr. Hance is 55 years old.
HENRY H. FISHKIND. Dr. Fishkind has been a director of Summit Properties since 1994. He is the President of Fishkind & Associates, Inc., a private economic and financial consulting firm based in Orlando, Florida that he founded in 1987. Dr. Fishkind is a member of the Board of Directors of Engle Homes. Dr. Fishkind served on the Florida Governor's Economic Advisory Board from 1979 to 1981. He is 50 years old.
Terms Expiring in 2002
NELSON SCHWAB III. Mr. Schwab has been a director of Summit Properties since 1994. He has been a Managing Director of Carousel Capital, a merchant banking firm based in Charlotte, North Carolina specializing in middle market acquisitions, since 1996. Mr. Schwab served as Chairman and Chief Executive Officer of Paramount Parks from 1992 to 1995. Mr. Schwab is a member of the Boards of Directors of First Union National Bank, Silver Dollar City, Inc., Griffin Corporation, Go America Inc., Children First, Claremont Restaurant Group, Critical Care Concepts, Simpson Performance Products and Burlington Industries. Mr. Schwab previously served as the Chairman of the Carolinas Partnership and the Charlotte Chamber of Commerce. Mr. Schwab is 55 years old.
STEVEN R. LEBLANC. Mr. LeBlanc is the President, Chief Operating Officer and a director of Summit Properties. Mr. LeBlanc has been a director of Summit Properties since 1998. Prior to joining Summit Properties, Mr. LeBlanc served as President of Urban Growth Property Trust from 1997 to 1998 where he developed Summit Properties' strategic business plan, orchestrated the transition to REIT status and initiated over $200 million in acquisitions and developments. From 1992 to 1997, Mr. LeBlanc served in a number of senior management positions with the Security Capital Group where he implemented a fully integrated operating company strategy focused on long-term sustainable cash flow growth. While at these companies, he was responsible for the acquisition and development of 11,000 apartment homes and the purchase of land for an additional 10,000 apartment homes. From 1984 to 1992, Mr. LeBlanc was a partner with Lincoln Property Company where he was a member of the senior management team and was responsible for the management of 17,000 apartments as well as the firm's acquisition and development activities throughout Texas and the Northeast. Mr. LeBlanc is a member of the Board of Directors of the National Multifamily Council and a member of the Urban Land Institute. He has served on the Boards of Directors of the Rio Grand School, the
Santa Fe Pro-Musica and the Austin Apartment Association. Mr. LeBlanc has taught various real estate courses at Austin Community College in Austin, Texas. Mr. LeBlanc is 42 years old.
Executive Officers Who Are Not Directors
MICHAEL L. SCHWARZ. Mr. Schwarz is an Executive Vice President and Chief Financial Officer of Summit Properties. Prior to joining Summit Properties in 1994, Mr. Schwarz served as co-founder, Senior Vice President and Chief Financial Officer of Industrial Developments International, Inc. ("IDI"), a developer of industrial real estate. While at IDI, Mr. Schwarz was responsible for the company's capital markets activities, accounting operations and information technology efforts. In this capacity, Mr. Schwarz arranged over $500 million in financing including IDI's initial capitalization. At Summit Properties, Mr. Schwarz is responsible for Summit Properties' capital markets, accounting, information technology and legal activities. He is a certified public accountant. Mr. Schwarz served as the Chairman of the Board of The Study Hall of Emmaus House, a non-profit educational facility serving inner-city youths, and is currently active in Junior Achievement, Inc. Mr. Schwarz also sits on the Long Term Planning committee of St. Patrick's School and the board of the MACS Education Foundation. Mr. Schwarz is 39 years old.
WILLIAM B. HAMILTON. Mr. Hamilton is an Executive Vice President of Summit Properties and the President of Summit Management Company. Prior to joining Summit Properties in December 1996, Mr. Hamilton spent one year as a Senior Vice President with Insignia Management Group in Atlanta, Georgia where he was responsible for property and asset management for 50,000 multifamily apartments. For the four years immediately prior thereto, Mr. Hamilton was the President of NPI Property Management Corporation, where his management portfolio consisted of 31,000 multifamily apartments. Mr. Hamilton's experience in the property and asset management field for multifamily apartments has spanned more than 20 years. Mr. Hamilton has been designated a certified property manager by the Institute of Real Estate Management and a Certified Apartment Supervisor by the National Apartment Association. Mr. Hamilton is 51 years old.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Summit Properties' executive officers and directors, and persons who are beneficial owners of more than 10% of a registered class of the Operating Partnership's equity securities to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish Summit Properties with copies of all Section 16(a) forms they file. To Summit Properties' knowledge, based solely on a review of the copies of such reports furnished to Summit Properties by the executive officers, directors and greater than 10% beneficial owners, all Section 16(a) filing requirements were satisfied during 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Operating Partnership is managed by Summit Properties, in its capacity as the general partner of the Operating Partnership. Consequently, the Operating Partnership has no directors or executive officers and pays no compensation. This Item 11 reflects the compensation paid to the directors and executive officers of Summit Properties.
DIRECTOR COMPENSATION
Directors of Summit Properties who are also employees receive no additional compensation for their services as directors. Non-employee directors of Summit Properties (the "Independent Directors") received an annual director's fee of $12,000 in 1999. Each Independent Director also receives $1,000 for each regular meeting of the Board of Directors attended, $1,000 for each special meeting of the Board of Directors attended, $250 for each committee meeting attended if held concurrently with a Board of Directors regular or special meeting and $500 for each committee meeting attended if not held concurrently with a Board of Directors regular or special meeting. Under Summit Properties' amended and restated 1994 Stock Option and Incentive Plan (the "1994 Plan"), following each annual meeting of stockholders, each Independent Director receives a non- qualified stock option to purchase 2,000 shares of Common Stock at a price equal to the market price of the
Common Stock on the date of grant. Following the Annual Meeting, each Independent Director will receive a non-qualified stock option to purchase an additional 3,000 shares of Common Stock at a price equal to the market price of the Common Stock on the date of grant.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash and non-cash compensation awarded to the Chief Executive Officer and the three other most highly compensated executive officers of Summit Properties who were serving as executive officers at the end of 1999, each of whose compensation exceeded $100,000 during the fiscal year ended December 31, 1999 (collectively the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
(1) Includes amounts deferred under Summit Properties' 401(k) plan. Under the plan, employees generally are permitted to invest up to 17% of their salary on a pre-tax basis, subject to a statutory maximum.
(2) Amounts represent matching contributions made by Summit Properties to the Named Executive Officer's account under the Company's 401(k) plan.
(3) Pursuant to a Summit Properties policy which requires any cash bonus earned in excess of 50% of base salary to be paid in the form of Common Stock, Mr. Paulsen received (a) an award of 1,564 shares of restricted stock on January 20, 2000 under the 1994 Stock Plan that vests in two equal annual installments beginning in January 2001 (the value of vested and unvested shares of such restricted stock as of December 31, 1999 would have been $27,957), (b) an award of 4,122 shares of restricted stock on January 13, 1999 under the 1994 Stock Plan that vests in two equal annual installments beginning in January 2000 (the value of vested and unvested shares of such restricted stock as of December 31, 1999 was $73,681) and (c) an award of 1,157 shares of restricted stock on January 1, 1998 under the 1994 Stock Plan that vests in two equal annual installments beginning in January 1999 (the value of vested and unvested shares of such restricted stock as of December 31, 1999 was $20,681). Moreover, Mr. Paulsen received an award of 11,700 shares of restricted stock on January 12, 1996 under the 1994 Stock Plan that vests in five equal annual installments beginning in January 1996 (the value of vested and unvested shares of such restricted stock as of December 31, 1999 was $209,138). Dividends will be paid on the shares of restricted stock.
(4) Mr. LeBlanc began employment on July 1, 1998.
(5) Pursuant to a Summit Properties policy which requires any cash bonus earned in excess of 50% of base salary to be paid in the form of Common Stock, Mr. LeBlanc received an award of 1,460 shares of restricted stock on January 20, 2000 under the 1994 Stock Plan that vests in two equal annual
installments beginning in January 2001 (the value of vested and unvested shares of such restricted stock as of December 31, 1999 would have been $26,098).
(6) Mr. Schwarz received an award of 7,908 shares of restricted stock on January 2, 1997 under the 1994 Stock Plan that vests in four equal annual installments beginning in January 1998 (the value of vested and unvested shares of such restricted stock as of December 31, 1999 was $141,356). Pursuant to a Summit Properties policy which requires any cash bonus earned in excess of 50% of base salary to be paid in the form of Common Stock, Mr. Schwarz received an award of 1,126 shares of restricted stock on January 1, 1998 under the 1994 Stock Plan that vests in two equal annual installments beginning in January 1999 (the value of vested and unvested shares of such restricted stock as of December 31, 1999 was $20,127). Dividends will be paid on the shares of restricted stock.
(7) Mr. Hamilton received an award of 8,200 shares of restricted stock on January 2, 1997 under the 1994 Stock Plan that vests in four equal annual installments beginning in January 1998 (the value of vested and unvested shares of such restricted stock as of December 31, 1999 was $146,575). Dividends will be paid on the shares of restricted stock.
Option Grants in Fiscal Year 1999. The following table sets forth the options granted with respect to the fiscal year ended December 31, 1999 to Summit Properties' Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
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(1) These options, of which 28,880 are incentive stock options and 121,120 are non-qualified stock options, vest in five equal annual installments beginning on December 13, 1999, the date of grant of such options.
(2) These options, all of which are non-qualified stock options, vest in five equal annual installments beginning on December 13, 1999, the date of grant of such options.
(3) These options, of which 2,915 are incentive stock options and 117,085 are non-qualified stock options, vest in five equal annual installments beginning on December 13, 1999, the date of grant of such options.
(4) These options, all of which are incentive stock options, vest in five equal annual installments beginning on January 13, 1999, the date of grant of such options.
Option Exercises and Year-End Holdings. The following table sets forth the aggregated number of options to purchase shares of Common Stock exercised in 1999 and the value of options to purchase shares of Common Stock held on December 31, 1999 by Summit Properties' Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR-END 1999 OPTION VALUES
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(1) Based on a closing price of $17.875 per share of Common Stock on December 31, 1999, the last 1999 trading day for Summit Properties' Common Stock.
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
Summit Properties has entered into employment agreements (the "Employment Agreements") with each of Messrs. Paulsen, LeBlanc, Schwarz and Hamilton. The Employment Agreement with Mr. Paulsen expired on February 15, 1999 and Summit Properties entered into a new Employment Agreement with him. The Employment Agreement with Mr. LeBlanc has an original term which expires on July 1, 2001. The Employment Agreement with Mr. Schwarz had an original term through February 16, 1996, and has been automatically extended until such time as terminated pursuant to its terms. Mr. Hamilton's Employment Agreement provided for an original term through December 5, 1998 and has been automatically extended pursuant to its terms. The Employment Agreements provide that the officers will be paid the base salaries set forth next to their names in the Summary Compensation Table above, which amounts may be increased or decreased (subject to certain limitations) at the discretion of the Compensation Committee of the Board of Directors of Summit Properties (the "Compensation Committee"), plus any other amounts the Compensation Committee, in its discretion, determines to award. The Employment Agreements also provide for certain severance benefits. If the employment of Mr. LeBlanc is terminated by either Summit Properties without "cause" or by Mr. LeBlanc for "cause" (as defined in his Employment Agreement) during the original term or any extended term of the Employment Agreement, Mr. LeBlanc will be entitled to receive as severance an amount equal to his base salary, as in effect on the date of termination, through the remainder of his original term of employment or the then current extended term, as the case may be, under his Employment Agreement, payable over time. If the employment of Mr. Hamilton is terminated by Summit Properties without "cause" or by Mr. Hamilton for "cause" (as defined in his Employment Agreement), Mr. Hamilton will be entitled to receive as severance an amount equal to his base salary as in effect on the date of termination for a period of six months, payable over time. Upon the termination of the employment of Mr. LeBlanc by reason of death or disability, his estate or he, as the case may be, will be entitled to receive a payment equal to his base salary, as in effect on the date of termination, through the remainder of his original term or the then current extended term, but in no event less than one year, except that in the case of termination by reason of disability the amount of such benefit shall be offset by the proceeds of any disability plan awards provided by Summit Properties. Upon the termination of the employment of Mr. Hamilton by reason of death or disability, his estate or he, as the case may be, will be entitled to receive a payment equal to his base salary, as in effect on the date of termination, for a period of twelve months, except that in the case of termination by reason of disability, the amount of such benefit shall be offset by the proceeds of any disability plan awards provided by Summit Properties. The Employment Agreements provide that if the employment of either of Messrs. LeBlanc or Hamilton is terminated by Summit Properties for "cause" or if they voluntarily terminate their employment other than for "cause" (as defined in the Employment Agreements), no
severance amount will be payable. If the employment of either of Messrs. Paulsen or Schwarz is terminated for any reason, no severance amount will be payable other than as provided in the Severance Agreements (as defined below) of Messrs. Paulsen and Schwarz.
Each of these officers also entered into a noncompetition agreement with Summit Properties (collectively, the "Noncompetition Agreements"). Subject to certain limited exceptions, the Noncompetition Agreements prohibit all of the executive officers from engaging in any businesses prior to their termination of employment, other than those of Summit Properties, without the prior written consent of the Board of Directors (or in the case of Messrs. Schwarz and Hamilton, without the prior written consent of the President of Summit Properties). The Noncompetition Agreements also prohibit the officers for certain periods after the termination of their employment with Summit Properties from hiring certain key employees of Summit Properties or participating in any efforts to persuade such employees to leave Summit Properties and from engaging in any manner, directly or indirectly, in any business which engages or attempts to engage in the acquisition, development, construction, operation, management or leasing of any of Summit Properties then existing communities or development or acquisition opportunities. Under the Noncompetition Agreements, such officers are prohibited from disclosing trade secrets and, for certain periods, other confidential information of Summit Properties.
SEVERANCE AGREEMENTS
Summit Properties entered into Severance Agreements ("Severance Agreements") with (a) each of Messrs. Paulsen, Schwarz and Hamilton on January 2, 1997 and (b) Mr. LeBlanc on July 1, 1998. The Severance Agreements provide for the payment of severance benefits of up to three times such officer's annual base salary and cash bonus in the event of the termination of the officer's employment under certain circumstances following certain "change in control" or "combination transactions" involving a consolidation or merger. The benefits payable under the terms of the Severance Agreements are subject to reduction by the amount of any severance benefits payable under applicable Employment Agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Allwin, Fishkind, Hance and Schwab. None of these individuals has served as an officer of Summit Properties. Messrs. Hance and Schwab serve as officers and directors of lending institutions that have provided financing and related services to Summit Properties. James H. Hance, Jr. is Vice Chairman and Chief Financial Officer of Bank of America and Nelson Schwab III is a member of the Board of Directors of First Union National Bank ("First Union"). Bank of America and First Union have provided Summit Properties with credit enhancements on certain of Summit Properties' apartment communities financed with tax-exempt bonds and are both members of a group of banks that provide Summit Properties' $200 million unsecured credit facility.
John Crosland, Jr., a former director of Summit Properties, served as a member of the Compensation Committee for a portion of 1999. Mr. Crosland declined nomination for re-election to the Board of Directors at the 1999 annual meeting of stockholders. Accordingly, after the 1999 meeting, Mr. Crosland ceased to be a member of the Compensation Committee. Mr. Crosland is a member of the Board of Directors of First Union.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Units for (i) each of the directors and Named Executive Officers of Summit Properties, (ii) the directors and Named Executive Officers of Summit Properties as a group and (iii) each limited partner of the Operating Partnership that the Operating Partnership believes holds more than a 5% beneficial interest in the Operating Partnership. All such beneficial interests are owned directly, and the indicated person has sole voting and investment power. The information
in the following table was provided by the unitholders listed and reflects their beneficial ownership known by the Operating Partnership and Summit Properties as of December 31, 1999.
* Less than one percent.
(1) The business address of each person is: c/o Summit Properties Inc., 212 South Tryon Street, Suite 500, Charlotte, NC 28281.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Operating Partnership is managed by Summit Properties, in its capacity as the general partner of the Operating Partnership.
Messrs. Hance and Schwab serve as officers and directors of lending institutions that have provided financing and related services to the Operating Partnership. James H. Hance, Jr. is Vice Chairman and Chief Financial Officer of Bank of America, and Nelson Schwab III is a member of the Board of Directors of First Union. Both Bank of America and First Union provided the Operating Partnership with credit enhancements on certain of its communities financed with tax-exempt bonds and are both members of a group of banks that provide the Operating Partnership's $200 million unsecured credit facility.
LOANS TO OFFICERS AND EMPLOYEES
The Board of Directors of Summit Properties, including the Compensation Committee thereof, believes that ownership of Summit Properties' Common Stock by executive officers and certain other qualified employees of Summit Properties and its subsidiaries aligns the interests of such officers and employees with the interests of the stockholders of Summit Properties. To further such goal of aligning the interests of such officers and employees with the interests of the stockholders of Summit Properties, the Board of Directors on September 8, 1997 approved and Summit Properties instituted a loan program. The Board of Directors has amended the terms of the loan program from time to time since its inception. Currently, Summit Properties may lend amounts to or on behalf of certain of Summit Properties' executive officers and key employees (hereinafter, a "Loan") for one or more of the following purposes: (i) to finance the purchase of Common Stock on the open market at then-current market prices; (ii) to finance an employee's payment of the exercise price of one or more stock options to purchase shares of Common Stock granted to such employee under the 1994 Stock Plan; or (iii) to finance the annual tax liability or other expenses of an executive officer related to the vesting of shares of Common Stock which constitute a portion of a restricted stock award granted to such executive officer under the 1994 Stock Plan.
The maximum aggregate amount that Summit Properties may loan to an executive officer is $500,000 (unless such limit is otherwise waived by the Board of Directors or the Compensation Committee thereof), and the
maximum aggregate amount that Summit Properties may loan to a qualified employee is $200,000 (unless similarly waived). The Board of Directors has increased such limit to $1,000,000, $3,000,000, $1,750,000 and $1,250,000 for Messrs. Paulsen, LeBlanc, Schwarz and Hamilton, respectively. As of March 1, 2000, Loans have been extended to Mr. McGuire and each of the Named Executive Officers for the purpose of financing the purchase of Common Stock or the payment of the annual tax liability related to the vesting of shares of Common Stock which constitute a portion of a restricted stock award.
The relevant employee shall execute a Promissory Note and Security Agreement (the "Note") related to each Loan made by Summit Properties. Each Note will bear interest at the applicable federal rate, as established by the Internal Revenue Service (the "Applicable Federal Rate"), in effect on the date of the Note and such rate shall be fixed and the Note shall become due and payable in full no later than the tenth anniversary of the Note (the "Maturity Date"). Shares of Common Stock which are the subject of a Loan serve as collateral (the "Collateral Stock") for the Note until such time as the Note has been paid in full. Until the Maturity Date, the employee to whom a Loan has been extended will only be required to repay such Loan through the application to the outstanding Loan balance of all dividends and distributions related to the Collateral Stock, first to interest, and the remainder, if any, to outstanding principal. Unless otherwise determined by the Board of Directors or the Compensation Committee, Loans made by Summit Properties after December 31, 1999 will be full recourse against the employee. All of the outstanding Loans extended by Summit Properties after December 31, 1999 are full recourse against the employee. Summit Properties' recourse against the executive officers under the outstanding Notes for satisfaction of the Loans made prior to January 1, 2000, however, is limited to Summit Properties' rights to the Collateral Stock and 25% or 10%, in the case of Mr. LeBlanc, of the principal of the Note for which the executive officer is personally liable in the event of any deficiency which may arise upon a foreclosure and sale or other disposition of the Collateral Stock.
As of March 1, 2000, Summit Properties had extended Loans totaling $12,672,070 to its employees, including the amounts of $499,814, $999,995, $2,961,040, $1,427,273 and $499,980 which were extended to Messrs. McGuire, Paulsen, LeBlanc, Schwarz and Hamilton, respectively. Loans to Messrs. McGuire and Paulsen in the amounts of $499,814 and $999,995, respectively, bear interest at 6.21% per year (i.e., the Applicable Federal Rate for Loans made in January 2000). Loans to Mr. LeBlanc in the amount of (i) $960,578 bear interest at 5.56% per year (i.e., the Applicable Federal Rate for Loans made in August 1998), (ii) $1,000,467 bear interest at 4.71% per year (i.e., the Applicable Federal Rate for Loans made in February 1999), and (iii) $999,995 bear interest at 6.21% per year (i.e., the Applicable Federal Rate for Loans made in January 2000). Loans to Mr. Schwarz in the amount of (i) $404,044 bear interest at 6.13% per year (i.e., the Applicable Federal Rate for Loans made in January 1998), (ii) $55,838 bear interest at 5.68% per year (i.e., the Applicable Federal Rate for Loans made in July 1998), (iii) $17,425 bear interest at 5.56% per year (i.e., the Applicable Federal Rate for Loans made in August 1998), (iv) $449,997 bear interest at 4.71% per year (i.e., the Applicable Federal Rate for Loans made in February 1999), and (v) $499,969 bear interest at 6.21% per year (i.e., the Applicable Federal Rate for Loans made in January 2000). Loans to Mr. Hamilton in the amount of $499,980 bear interest at 6.13% per year (i.e., the Applicable Federal Rate for Loans made in January 1998).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The consolidated financial statements of the Operating Partnership are listed in the Index to Financial Statements on page 51 of this Report.
(b) Reports on Form 8-K
None
(c) Exhibits
As noted below, certain of the exhibits required by Item 601 of Regulation S-K have been filed with previous reports by the Operating Partnership and are incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Summit Properties Partnership, L.P. certifies that it has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Charlotte, North Carolina on March 23, 2000.
SUMMIT PROPERTIES PARTNERSHIP, L.P. By: Summit Properties Inc., as General Partner
/s/ WILLIAM F. PAULSEN -------------------------------------- William F. Paulsen, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. Each person below has signed this report as an officer or director of Summit Properties Inc., in its capacity as general partner of Summit Properties Partnership, L.P.
The following financial statements of the Operating Partnership required to be included in Item 14(a)(1) are listed below:
SUMMIT PROPERTIES PARTNERSHIP, L.P.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Unitholders Summit Properties Partnership, L.P. Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of Summit Properties Partnership, L.P. (the "Operating Partnership") as of December 31, 1999 and 1998, and the related consolidated statements of earnings, partners' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Operating Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Operating Partnership as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, in 1999 the Operating Partnership changed its method of accounting for carpet replacements.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina January 20, 2000
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMIT PROPERTIES PARTNERSHIP, L.P. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements
SUMMIT PROPERTIES PARTNERSHIP, L. P. CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
See notes to consolidated financial statements.
SUMMIT PROPERTIES PARTNERSHIP, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
SUMMIT PROPERTIES PARTNERSHIP, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
SUMMIT PROPERTIES PARTNERSHIP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
Summit Properties Partnership, L.P. (the "Operating Partnership"), a Delaware limited partnership, was formed on January 14, 1994 to conduct the business of developing, leasing and managing multifamily apartment communities for Summit Properties Inc. ("Summit Properties"). On February 15, 1994, Summit Properties completed an initial public offering ("Initial Offering"). In connection with the Initial Offering, the Operating Partnership consummated a business combination involving the partnerships (the "Property Partnerships") which owned the 27 communities acquired in connection with the Initial Offering and the affiliated entities which provided development, construction, management and leasing services to each of those communities prior to the Initial Offering (collectively, the "Summit Entities"). A portion of the proceeds from the Initial Offering was used by Summit Properties to acquire an economic and voting interest in the Operating Partnership, which was formed to succeed to substantially all of the interests of the Property Partnerships in the 27 communities and the operations of the Summit Entities (the "Formation"). Summit Properties became the sole general partner and the majority owner of the Operating Partnership upon completion of the Initial Offering. Summit Properties is a self-administered and self-managed equity real estate investment trust ("REIT").
In June 1995, Summit Properties completed the sale of 4 million shares of Common Stock (the "1995 Offering"). In August 1996, Summit Properties completed the sale of 5.75 million shares of Common Stock (the "1996 Offering"). The net proceeds of $65.9 million and $97.6 million from the 1995 and 1996 Offerings, respectively, were contributed to the Operating Partnership in exchange for common units of limited partnership interest in the Operating Partnership ("Common Units"), and the Operating Partnership used the proceeds to repay mortgage debt and to fund current development projects.
Summit Properties conducts all of its business through the Operating Partnership and its subsidiaries. As of December 31, 1999, Summit Properties held 85.6% of the outstanding partnership interests of the Operating Partnership, consisting of a 1% general partner interest and an 84.6% limited partner interest. The Operating Partnership is obligated to redeem each Common Unit at the request of the holder for cash equal to the fair market value of one share of Summit Properties' common stock, par value $.01 per share ("Common Stock"), except that Summit Properties may elect to acquire each Common Unit presented for redemption for cash or one share of Common Stock. With each redemption of outstanding Common Units for Common Stock, Summit Properties percentage ownership interest in the Operating Partnership will increase. In addition, whenever Summit Properties issues shares of Common Stock, Summit Properties will contribute any new proceeds therefrom to the Operating Partnership and the Operating Partnership will issue an equivalent number of Common Units to Summit Properties.
Distributions to holders of Common Units are made to enable distributions to be made to Summit Properties' stockholders under Summit Properties dividend policy. Federal income tax laws require Summit Properties, as a REIT, to distribute 95% of its ordinary taxable income (90% effective for tax years beginning after December 31, 2000). The Operating Partnership makes distributions to Summit Properties to enable it to satisfy this requirement.
2. BASIS OF PRESENTATION
In conjunction with the Initial Offering, construction, management and leasing activities for third parties were transferred to Summit Management Company (the "Management Company") and its wholly-owned subsidiary, Summit Apartment Builders, Inc. (the "Construction Company"). The Operating Partnership has a 99% economic interest in the Management Company but controls only 1% of the voting stock. The remaining 99% of the voting stock is held by an executive officer of the Operating Partnership, which stock is subject to certain restrictions on transfer designed to ensure that the holder of the Management Company's voting stock will have interests aligned with those of the Operating Partnership. Because of the Operating Partnership's ability to exercise significant influence, the Management Company is accounted for on the equity method of accounting.
As a result of the Formation, the partners and owners of the entities comprising the Summit Entities either retained their existing ownership interests, received shares of Common Stock or received Common Units. Purchase accounting was applied to the acquisition of all non-controlled interests in which cash consideration was paid. The acquisition of all other interests was accounted for as a reorganization of entities under common control and, accordingly, was reflected at historical cost in a manner similar to that in pooling of interests accounting.
All significant intercompany accounts and transactions have been eliminated in consolidation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE ASSETS AND DEPRECIATION -- The Operating Partnership records its real estate assets at cost less accumulated depreciation and adjusts carrying value in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that long-lived assets such as real estate assets be reviewed whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. If the sum of the estimated future net cash flows (undiscounted and without interest charges) from an asset to be held and used is less than the book value of the asset, an impairment loss must be recognized in the amount of the difference between book value and fair value. For long-term assets like apartment communities, the determination of whether there is an impairment loss is dependent primarily on the Operating Partnership's estimates on occupancy, rent and expense increases, which involves numerous assumptions and judgments as to future events over a period of many years. Assets to be disposed of are reported at the lower of carrying value or fair value less costs to sell. At December 31, 1999, the Operating Partnership did not hold any assets that meet the impairment criteria of SFAS No. 121. At December 31, 1999, the Operating Partnership had three apartment communities for sale with a net book value of approximately $13.8 million. The Operating Partnership does not anticipate incurring a loss on the sale of any individual apartment community. The three apartment communities held for sale represented approximately 2.0% of property operating income for the Operating Partnership for the year ended December 31, 1999.
Expenditures directly related to the acquisition, development and improvement of real estate assets are capitalized at cost as land, buildings and improvements. Improvements are categorized as either recurring capital expenditures or non-recurring capital expenditures. Non-recurring capital expenditures primarily consist of the cost of improvements such as new garages, water submeters and improvements made in conjunction with acquisitions and major renovations. All other improvements are deemed as recurring capital expenditures.
Ordinary repairs and maintenance, including interior painting, are expensed as incurred; major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets (buildings -- 40 years; building improvements -- 5 to 15 years; land improvements -- 15 years; furniture, fixtures and equipment -- 5 to 7 years).
Effective January 1, 1999, the Operating Partnership implemented prospectively a new accounting policy whereby expenditures for carpet replacement are capitalized and depreciated over their estimated useful lives. Previously, the cost of carpet replacements had been expensed. The Operating Partnership believes that the newly adopted accounting policy is preferable as it is consistent with the standards and practices utilized by the majority of the Operating Partnership's peers and provides a better matching of expenses with the related benefit of the expenditure. The change in accounting policy is being treated as a change in accounting principle inseparable from a change in accounting estimate. The effect of this change for the year ended December 31, 1999 was a net increase in net income of $1.4 million, or $0.04 per basic and diluted Common Unit, respectively.
Interest costs incurred during the construction period are capitalized and depreciated over the lives of the constructed assets. Interest capitalized was $7.9 million, $6.1 million and $5.9 million for the years ended December 31, 1999, 1998 and 1997, respectively.
RENTAL REVENUE RECOGNITION -- The Operating Partnership leases its residential properties under operating leases with terms generally one year or less. Rental revenue is recognized on the accrual method of accounting as earned.
PROPERTY MANAGEMENT -- The Management Company provides property management services for both Operating Partnership owned properties as well as properties owned by third parties. Revenue is recognized when earned, as the services are provided.
CASH AND CASH EQUIVALENTS -- For purposes of the statement of cash flows, the Operating Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
RESTRICTED CASH -- Restricted cash is comprised primarily of resident security deposits, bond repayment escrows, replacement reserve escrows, and proceeds from apartment community sales deposited with a qualified intermediary in accordance with like-kind exchange rules and regulations.
DEFERRED FINANCING COSTS -- Deferred financing costs include fees and costs incurred in conjunction with long-term financings and are amortized on the straight-line method over the terms of the related debt. Such amortization is included in interest expense in the accompanying consolidated statements of earnings.
ADVERTISING COSTS -- The Operating Partnership expenses advertising costs as incurred.
INCOME TAXES -- In accordance with partnership taxation, each partner is responsible for reporting its share of taxable income or loss. Accordingly, no provision has been made in the accompanying financial statements for federal, state or local income taxes.
A schedule of per Common Unit distributions paid by the Operating Partnership to be reported by the partners is set forth in the following table:
Financial Accounting Standard No. 109, "Accounting for Income Taxes" requires a public enterprise to disclose the aggregate difference in the basis of its net assets for financial and tax reporting purposes. The carrying value reported in the Operating Partnership's consolidated financial statements exceeded the tax basis by approximately $90.6 million as of December 31, 1999 and 1998. The change between December 31, 1999 and 1998 was primarily due to financial depreciation exceeding tax depreciation by approximately $9.2 million offset by the carrying value exceeding the tax basis by $11.5 million for the Operating Partnership's 1999 Development communities and recurring capital expenditures and the carrying value exceeding the tax value by $2.4 million for the Operating Partnership's 1999 Disposition communities.
A reconciliation of net income as reported for financial reporting purposes for the years ended December 31, 1999, 1998 and 1997 is as follows (in thousands):
PER UNIT DATA -- Basic earnings per Common Unit with respect to the Operating Partnership for the years ended December 31, 1999, 1998 and 1997 is computed based upon the weighted average number of Common Units outstanding during the period. The difference between "basic" and "diluted" weighted average Common Units is the dilutive effect of Summit Properties' stock options outstanding (70,991, 9,384 and 36,421 Common Units added to weighted Common Units outstanding in 1999, 1998 and 1997, respectively). Dilution caused by these options had no impact on earnings per Common Unit.
ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME -- Comprehensive income is the same as net income for all periods presented.
NEW ACCOUNTING PRONOUNCEMENTS -- On January 1, 2001, the Operating Partnership is required to adopt Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Operating Partnership is currently assessing the impact, if any, that the adoption of SFAS 133 will have on the Operating Partnership's financial statements.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the 1999 presentation.
4. REAL ESTATE JOINT VENTURES
The Operating Partnership obtained a 25% interest in a joint venture named Station Hill, LLC, a North Carolina limited liability company ("Station Hill"), the membership of which is comprised of the Operating Partnership and Hollow Creek LLP, a wholly owned subsidiary of a major financial services company, in exchange for the contribution of two communities in December 1998. Station Hill also owns, and the Operating Partnership thereby holds a 25% interest in, five apartment communities that were previously 100% owned by the Operating Partnership. These five communities were sold by the Operating Partnership to Hollow Creek, LLC on December 16, 1998 and were concurrently contributed to Station Hill by Hollow Creek, LLC for a 75% joint venture interest (See Acquisitions and Dispositions -- Note 7). The seven communities are Summit Green, Summit Hill I & II, Summit Creek, Summit Hollow I & II and Summit Station. The Operating Partnership's initial investment in Station Hill was reduced to zero when the Operating Partnership eliminated the portion of the gain on disposal related to the percentage of joint venture ownership interest retained. Station Hill is accounted for on the equity method of accounting.
The Operating Partnership owns a 49% interest in each of three joint ventures ("Construction Projects"), each of which is developing an apartment community. All of the Construction Projects are under construction and two are in lease-up. The Construction Projects are accounted for under the equity method of accounting and, therefore, the operating results of the two Construction Projects in lease-up are presented in "Loss (income) on equity investments: Real estate joint ventures" in the consolidated statements of earnings. The construction costs are being funded primarily through separate construction loans to each joint venture from unrelated third parties equal to 100% of the construction costs. During the construction period, in lieu of equity contribution to each of the respective joint ventures, the Operating Partnership has under certain circumstances, subsequent to demand by the third party lenders, agreed to make contributions which would reduce the respective construction loan by an amount not to exceed 25% of the total construction loan amount. Any such contribution would be deemed to be all or a portion of the equity required to be contributed by the Operating Partnership to the respective joint venture at the end of the construction and lease-up period. The Operating Partnership has the right to purchase its joint venture partner's interest in each of the joint ventures for a period of six months after each project becomes stabilized. None of the Construction Projects have reached stabilization as of December 31, 1999 and the Operating Partnership has not made a determination
about whether it will exercise any of its options. If the Operating Partnership does not exercise an option with respect to a joint venture, it will be required to make a capital contribution of 25% of that joint venture's total construction loan amount.
The following is a condensed balance sheet and income statement for Station Hill as of and for the year ended December 31, 1999 (in thousands). The balance sheet and income statement set forth below reflect the financial position and operations of Station Hill in its entirety, not only the Operating Partnership's respective interest therein. The balance sheet and income statement information for the Construction Projects is not material.
5. PROPERTY MANAGEMENT AND RELATED PARTY TRANSACTIONS
In conjunction with the Formation, construction, management and leasing activities for third parties were transferred to the Management Company.
The Management Company also provides property management services to the Operating Partnership's Communities. Total fees for management services provided to the Operating Partnership's Communities were $5.0 million, $3.9 million and $3.1 million for the years ended December 31, 1999, 1998 and 1997, respectively.
In addition, the Management Company provides management services to apartment communities in which executive officers and certain directors of Summit Properties are general partners. The Management Company received management fees of approximately $239,000, $233,000 and $214,000 for the performance of such services for the years ended December 31, 1999, 1998 and 1997, respectively.
Construction Company revenue consists of fees on contracts with the Operating Partnership. Revenue from construction contracts with the Operating Partnership was $1.8 million, $1.1 million and $1.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. The Construction Company's profits on these contracts are eliminated in consolidation against the Operating Partnership's investment in real estate. The Operating Partnership had $13.3 million and $5.7 million payable to the Construction Company as of December 31, 1999 and 1998, respectively. This amount is included in "Accounts payable and accrued expenses" in the accompanying consolidated balance sheets. Also included in the accompanying consolidated balance sheets under the caption "Other assets" is a receivable from the Construction Company of $3.3 million as a result of construction advances.
The Operating Partnership's investment in the Management Company as of December 31, 1999 and 1998, reported on the equity method, includes the amounts shown below. The Operating Partnership's investment in the Management Company is not considered material to the consolidated financial statements of the Operating Partnership taken as a whole (in thousands):
The consolidated statement of earnings of the Management Company and its wholly owned subsidiary, the Construction Company, are summarized below (in thousands):
6. NOTES PAYABLE
Notes payable consist of the following (in thousands):
The one-month London Interbank Offered Rate (LIBOR) at December 31, 1999 was 5.82%.
MORTGAGE LOANS -- On September 23, 1998, the Operating Partnership consolidated and renewed two mortgage loans which had a $147.2 million balance. The original loans matured in February 2001 ($118.3 million at 5.88%) and December 2005 ($28.9 million at 7.71%). The consolidation and renewal combined the two mortgage loans into one loan at an interest rate equal to the existing weighted average interest rate of the two previous mortgage loans (6.24%) up to February 2001. As of February 2001, the rate of interest on the loan will increase to 6.76% until the loan matures in October of 2008.
The 8.00% Mortgage Loan requires monthly principal and interest payments on a 30-year amortization schedule with a balloon payment due at maturity in September 2005.
MORTGAGE NOTES -- The Mortgage Notes bear interest at fixed rates ranging from 6.75% to 9.80% and require monthly interest and principal payments over the life of the notes which range from the year 2002 to 2029. The weighted average interest rate and debt maturity at December 31, 1999 for these nine Mortgage Notes were 7.19% and 7.0 years, respectively.
TAX EXEMPT MORTGAGE NOTE -- The Tax Exempt Mortgage Note bears interest at a fixed rate of 6.95% and requires monthly interest and principal payments over the life of the note which matures November 2025.
MEDIUM-TERM NOTES -- On May 29, 1998, the Operating Partnership established a program for the sale by the Operating Partnership of up to $95 million aggregate principal amount of Medium-Term Notes due nine
months or more from the date of issuance (the "MTN Program"). The Operating Partnership issued Medium-Term Notes with an aggregate principal amount of $80 million in connection with the MTN Program as follows: (i) on July 28, 1998, the Operating Partnership sold $30 million of notes which are due on July 30, 2001 and bear interest at 6.75% per year; (ii) on October 5, 1998, the Operating Partnership sold $25 million of notes which are due on October 5, 2000 and bear interest at 6.71% per year; and (iii) on March 18, 1999, the Operating Partnership sold $25 million of notes which are due on March 16, 2009 and bear interest at 7.59% per year. In July 1999, Summit Properties and the Operating Partnership filed a shelf registration statement with the Securities and Exchange Commission, pursuant to which the Operating Partnership may issue debt securities with an aggregate public offering price of up to $250 million. The Operating Partnership intends to establish a new, similar program for the sale of Medium-Term Notes by the Operating Partnership under such registration statement, pursuant to which the Operating Partnership may issue Medium-Term Notes from time to time in the future subject to certain market conditions and other factors.
UNSECURED NOTES -- The unsecured notes consist of $25.0 million of notes due 2002, $30.0 million of notes due 2003, $50.0 million of notes due 2004 and $50.0 million of notes due 2007 (collectively, the "Unsecured Notes"). The Unsecured Notes require semi-annual interest payments until the end of the respective terms.
UNSECURED BANK NOTES -- The unsecured bank notes consist of a $16.0 million note due 2002 and a $15.0 million note due 2000 (collectively, the "Unsecured Bank Notes"). The Unsecured Bank Notes require quarterly interest only payments until the end of the respective terms.
UNSECURED CREDIT FACILITY -- In March 1998, the Operating Partnership obtained a new syndicated unsecured line of credit (the "Unsecured Credit Facility") in the amount of $175 million which replaced the existing $150 million credit facility. The Unsecured Credit Facility was increased in December 1998 to $200 million. The Unsecured Credit Facility provides funds for new development, acquisitions and general working capital purposes. The Unsecured Credit Facility has a three year term with two one-year extension options and bears interest at LIBOR + 90 basis points based upon the Operating Partnership's current credit rating of BBB- by Standard & Poor's Rating Services and Baa3 by Moody's Investors Service. The interest rate will be reduced in the event of an upgrade of the Operating Partnership's unsecured credit rating. The Unsecured Credit Facility is repayable monthly on an interest only basis with principal due at maturity. The Operating Partnership's credit facility had an average interest rate and average balance outstanding during the years ended December 31, 1999, 1998 and 1997 of 6.06%, 6.67%, 6.73% and $99.2 million, $98.0 million and $53.9 million, respectively. In addition, the maximum outstanding during 1999, 1998 and 1997 was $176.0 million, $175.0 million and $121.9 million, respectively.
The Unsecured Credit Facility also provides a bid option sub-facility equal to a maximum of fifty percent of the total facility ($100 million). This sub-facility provides the Operating Partnership with the option to place borrowings in fixed LIBOR contract periods of thirty, sixty, ninety and one hundred eighty days. The Operating Partnership may have up to seven fixed LIBOR contracts outstanding at any one time. Upon proper notifications, all lenders participating in the Unsecured Credit Facility may, but are not obligated to, participate in a competitive bid auction for these fixed LIBOR contracts.
The Unsecured Credit Facility requires the Operating Partnership to comply with certain affirmative and negative covenants including the following requirements: (i) Summit Properties maintain its qualification as a REIT; (ii) the Operating Partnership maintain a ratio of EBITDA (as defined therein) to fixed charges (as defined therein) of not less that 1.75 to 1; (iii) dividends not exceed 90% of funds from operations (as defined therein); (iv) the Operating Partnership maintain a ratio of total funded debt (as defined therein) to implied capitalization value (as defined therein) of less than .55 to 1; and (v) the Operating Partnership maintain a ratio of unencumbered asset value (as defined therein) to unsecured debt of less than 1.75 to 1. In addition, the Unsecured Notes and the Unsecured Bank Notes require the Operating Partnership to comply with certain affirmative and negative covenants including the following requirements: (i) the ratio of unencumbered assets (as defined therein) to unsecured debt equal or exceed 150%; (ii) the ratio of debt to assets (as defined therein) not exceed 60%; and (iii) secured debt not exceed 40% of assets (as defined therein). The Operating Partnership was in compliance with these covenants at December 31, 1999.
VARIABLE RATE TAX EXEMPT BONDS -- The average effective interest rate of the Variable Rate Tax Exempt Bonds was 4.85% for the year ended December 31, 1999. These bonds bear interest at various rates set by a remarketing agent at the demand note index plus 0.50%, set weekly, or the lowest percentage of prime which allows the resale at a price of par. The bonds contain covenants which require that the Operating Partnership lease or hold for lease 20% (or 25% under certain state or local requirements) of the apartment homes for moderate-income residents. The bonds require maintenance of letters of credit or surety bonds (credit enhancements) aggregating to $39.5 million at December 31, 1999. The credit enhancements on three of the four tax exempt bonds ($30.1 million of debt and $31 million of letters of credit) provide for a principal amortization schedule which approximates a 25-year term during the term of the credit enhancement.
Real estate assets with a net book value of $410.3 million serve as collateral for the various debt agreements.
The aggregate maturities of all debt for each of the years ending December 31 are as follows (in thousands):
EXTRAORDINARY ITEMS -- The extraordinary items in the year ended December 31, 1998 resulted from the write-off of deferred financing cost in connection with the replacement by the Operating Partnership of its prior credit facility with the Unsecured Credit Facility and prepayment penalties on six mortgage notes which were repaid during the period.
7. ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1999, the Operating Partnership sold seven communities comprising 1,518 apartment homes for approximately $76.0 million, resulting in a gain on sale of approximately $17.4 million. Net proceeds of $54.4 million, were placed in escrow with a qualified intermediary in accordance with like-kind exchange income tax rules and regulations. The communities sold were Summit Hampton, Summit Oak, Summit Beacon Ridge, Summit Perico, Summit McIntosh, Summit Heron's Run and Summit East Ridge (referred to herein using former community names). In the event that the proceeds from these property sales are not fully invested in qualified like-kind property during the required time period, a special distribution may be made or company level tax may be incurred.
During the year ended December 31, 1999 the Operating Partnership acquired no communities.
The Operating Partnership completed the acquisition of three communities located in Atlanta, Georgia in 1998: Summit St. Clair, purchased effective March 1, 1998, Summit Club at Dunwoody, purchased effective May 22, 1998, and Summit Lenox, purchased effective July 8, 1998 (the "Atlanta Acquisitions"). The Atlanta Acquisitions added a total of 1,093 apartment homes to the Operating Partnership's portfolio at an aggregate purchase price of $88.3 million. The Atlanta Acquisitions were financed with the issuance of 259,871 Common Units (valued at $5.2 million) and the assumption of $8.8 million of mortgage debt. The balance of the purchase price was paid in cash.
In individual property transactions, the Operating Partnership sold three communities for $48.9 million (formerly known as Summit Providence on May 8, 1998, Summit Springs on October 23, 1998 and Summit Old Town on November 2, 1998). The total gain on sale recognized for these three disposition transactions was $17.0 million.
On December 16, 1998, the Operating Partnership (i) sold five communities (the "Sold Communities") to Hollow Creek, LLC, a newly-formed North Carolina limited liability company for approximately $68 million and (ii) contributed two communities with an approximate value of $22 million (together with the Sold Communities, the "Joint Venture Communities") to Station Hill. On the same date, Hollow Creek, LLC contributed the Sold Communities to Station Hill. Station Hill is a joint venture limited liability company, the membership of which is comprised of the Operating Partnership and a wholly owned subsidiary of a major financial services company (the "Joint Venture Member"). The disposition was effected pursuant to a Real Estate Sale Agreement dated November 20, 1998 between the Operating Partnership and the Joint Venture Member and pursuant to the Operating Agreement of Station Hill, also dated November 20, 1998. The Operating Partnership's net contribution to Station Hill (approximately $5.6 million) represents a 25 percent equity interest in Station Hill. In addition, the Operating Partnership is the managing member of Station Hill and will also retain management of the Joint Venture Communities through a management agreement with Station Hill. The cash flow of Station Hill will be distributed pro rata to each member based on its equity contribution until certain economic benchmarks are achieved, at which point the Operating Partnership will receive an escalated portion of the cash flow and residual interest. Station Hill has obtained five separate mortgages totaling $70.15 million from Fannie Mae. These mortgages have a ten-year maturity and a 6.70% interest rate. The proceeds of the mortgages were distributed on a pro rata basis to Station Hill's two members. The Joint Venture Communities involved in the transaction were Summit Green, Summit Hollow I and II and Summit Creek in Charlotte, North Carolina; Summit Hill I and II in Raleigh, North Carolina; and Summit Station in Tampa, Florida. The Joint Venture Communities include 1,433 apartment homes. The Operating Partnership recognized a gain of approximately $20.2 million on the disposition. The gain is net of $5.6 million elimination of gain relative to the Operating Partnership's retained portion of the joint venture. The elimination of the gain reduced the Operating Partnership's investment in the joint venture to zero at the initial joint venture formation.
Proceeds from the sale of Summit Springs, Summit Old Town and the Sold Communities were put in escrow with a qualified intermediary in accordance with like-kind exchange income tax rules and regulations. These proceeds were used to fund future developments.
On November 4, 1998, the Operating Partnership acquired a portfolio of multifamily properties in Texas (the "Ewing Portfolio") through a merger with Ewing Industries, a private developer of luxury apartment homes. The Ewing Portfolio consists of 2,465 apartment homes in seven communities located in Dallas, Austin and San Antonio. The acquisition of the Ewing Portfolio was effected pursuant to an Agreement and Plan of Reorganization dated as of October 31, 1998 (the "Merger Agreement") among Summit Properties, affiliates of Summit Properties including the Operating Partnership, Ewing Industries, Inc., an Ohio corporation ("Ewing Industries"), affiliates of Ewing, and their respective partners, shareholders and members (together with Ewing Industries, "Ewing"). Pursuant to the Merger Agreement, the acquisition was funded through (i) the issuance to Ewing of 1,008,988 shares of Common Stock and 141,921 Common Units, valued at $20.7 million in the aggregate, (ii) the assumption of $84.0 million in long-term fixed-rate mortgage indebtedness, (iii) the payment of $50.6 million in cash and (iv) receipt of $3.8 million of credit for customary prorations and reserves. A portion of the consideration was deferred until stabilization of one community (Summit Las Palmas) which was in lease-up at the time of the acquisition of the Ewing Portfolio. The Summit Las Palmas purchase closed on December 31, 1998 with the additional consideration of (i) 1,027,771 shares of Common Stock and 36,124 Common Units valued at $29.2 million in the aggregate and (ii) cash in the amount of approximately $600,000.
The following summary of selected unaudited pro forma results of operations presents information as if the Atlanta Acquisitions and the Ewing Portfolio purchase (except Summit Las Palmas) had occurred as of January 1, 1998 for the 1998 pro forma information. Pro forma information for 1998 excludes Las Palmas as it was in construction and lease-up and had insignificant operations. Pro forma information for the year ended December 31, 1997 presents information as if the Summit Lenox and the Ewing Portfolio acquisitions (except for Summit Las Palmas) had occurred as of January 1, 1997. Pro forma information for 1997 has not been presented for Summit St. Clair, Summit Club at Dunwoody and Summit Las Palmas as they were under construction during the period and had insignificant operations. The pro forma information for the year ended December 31, 1998 and 1997 is provided for informational purposes only and is not indicative of results that would have occurred or which may occur in the future (dollars in thousands except per Common Unit amounts):
During the year ended December 31, 1997, the Operating Partnership completed the acquisition of five communities: Summit Portofino, purchased on January 6, 1997: Summit Mayfaire, purchased on January 15, 1997: Summit Sand Lake purchased on February 20, 1997: Summit Windsor II, purchased on July 18, 1997: and Summit Fair Oaks, purchased on December 31, 1997 (the "1997 Acquisitions"). The 1997 Acquisitions added a total of 1,434 apartment homes to the Operating Partnership's portfolio. The total purchase price for the 1997 Acquisitions was $104.5 million which consisted of $15.2 million in assumed debt, 243,608 Common Units (valued at $4.9 million) issued to Summit Properties in exchange for Summit Properties issuing 243,608 shares of Common Stock to the seller, 194,495 Common Units (valued at $3.9 million) issued to the seller and $78.9 million of cash. Concurrently with the purchase of Summit Portofino, Summit Properties sold 315,029 shares of Common Stock to the public for cash. Summit Properties contributed the proceeds of these sales of Common Stock to the Operating Partnership in exchange for Common Units. The proceeds were then used to fund a portion of the purchase. The Summit Windsor II purchase was partially funded by the proceeds from the sale of a property formerly known as Summit Charleston in May, 1997. The property formerly known as Summit Charleston was sold for $9.5 million and a gain on the sale of approximately $4.4 million was recognized.
8. NOTES RECEIVABLE FROM EMPLOYEES
On September 8, 1997, the Board of Directors of Summit Properties approved a Statement of Company Policy, which has subsequently been amended and restated by the Board from time to time, on loans to executive officers and certain key employees relating to purchases of Common Stock (as amended through December 31, 1999, the "Loan Program"). Pursuant to the Loan Program, Summit Properties may lend amounts to certain of Summit Properties' executive officers and certain of its key employees for one or more of the following purposes: (i) to finance the purchase of Common Stock of Summit Properties on the open market at the then-current market prices; (ii) to finance an executive officer's or key employee's payment of the exercise price of one or more stock options to purchase shares of Common Stock granted to such employees under Summit Properties' 1994 Stock Option and Incentive Plan, as amended and restated (the "1994 Stock Plan"); or (iii) to finance the annual tax liability of certain executive officers related to the vesting of shares of Common Stock which constitute a portion of a restricted stock award granted to such employees under the 1994 Stock Option Plan. Unless otherwise determined on a case-by-case basis by the Board of Directors or the Compensation Committee thereof, the maximum aggregate amount Summit Properties may loan to an executive officer is $500,000, and the maximum aggregate amount Summit
Properties may loan to a qualified employee other than an executive officer is $200,000. Shares of Common Stock which are the subject of a loan serve as collateral for the notes until the notes have been paid in full. Each note bears interest at the applicable federal rate, as established by the Internal Revenue Service, in effect on the date of the note. The notes are payable through the application to the outstanding loan balance of all dividends and distributions related to the collateral stock, first to interest, with the remainder, if any, to outstanding principal. Each note becomes due and payable in full on the tenth anniversary of the respective note. As of December 31, 1999, Summit Properties had loans receivable in the net amount of $4,861,000.
9. COMMITMENTS AND CONTINGENCIES
The estimated cost to complete eleven development projects currently under construction was approximately $127.8 million at December 31, 1999. Anticipated construction completion dates of the projects range from the first quarter of 2000 to the third quarter of 2001.
The Operating Partnership rents office space in several locations. Rental expense for the years ended December 31, 1999, 1998 and 1997 amounted to $170,000, $121,000 and $101,000, respectively ($481,000 in 1999, $406,000 in 1998 and $347,000 in 1997 including amounts recorded by the Management Company). Future minimum rental payments for the years 2000 through 2003 for those operating leases (including those of the Management Company) that have initial or remaining non-cancelable lease terms in excess of one year are as follows (in thousands):
10. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN
The employees of Summit Properties, the Operating Partnership and its subsidiaries (the "Summit Employees") are participants in Summit Properties' defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code which covers all employees with one year or greater service. The Operating Partnership's contributions are equal to one-half of each employee's contribution up to a maximum of 3% of each employee's compensation. Aggregate contributions of approximately $306,000, $242,000 and $217,000 were made for the years ended December 31, 1999, 1998 and 1997, respectively.
STOCK OPTION PLAN
In 1994, Summit Properties established the 1994 Stock Option and Incentive Plan (the "Incentive Plan") under which 1,000,000 shares of Summit Properties' Common Stock were reserved for issuance. The Incentive Plan was amended and restated in 1998 to, among other things, increase the number of shares reserved for issuance thereunder from 1,000,000 to 3,000,000 shares. The Incentive Plan provides that the option price shall not be less than the fair market value of the shares at the date of grant. The options have ten-year lives and vest in three or five annual installments on the anniversaries of the date of grant, except for shares granted to independent directors of Summit Properties, which vest on the date of grant. The Operating Partnership applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for its stock options.
A summary of changes in common stock options for the three years ended December 31, 1999 is as follows:
Exercise prices for options outstanding as of December 31, 1999 ranged from $16.50 to $20.75. The weighted average remaining contractual life of those options is 8.2 years.
As of December 31, 1999, 1998 and 1997, options to purchase 556,979, 369,528 and 359,218 shares, respectively, of Common Stock were exercisable. The weighted average exercise price for the shares exercisable as of December 31, 1999, 1998 and 1997 was $18.33, $18.84 and $18.86, respectively.
The estimated weighted average fair value of options granted was $1.83 per share in 1999 and $2.18 per share in 1998 (none granted in 1997). Had compensation cost for the Operating Partnership's stock options been determined based on the fair value at the grant dates, consistent with the method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Operating Partnership's net income and net income per share for the years ended December 31, 1999 and 1998 would have been as follows (dollars in thousands except per unit amounts):
The fair value of options granted in 1999 was estimated on the date of grant using the Binomial option-pricing model with the following weighted-average assumptions: dividend yields ranging from 8.39% to 10.10%, expected volatility of 20%, risk free interest rates ranging from 4.7% to 6.1%, and expected lives of ten years.
The fair value of options granted during 1998 was estimated on the date of grant using the Binomial option-pricing model with the following weighted average assumptions: dividend yield of 9.3%, expected volatility of 20%, risk free interest rate of 6.0%, and expected lives of ten years.
In addition, the Incentive Plan provides for the grant of stock to Summit Employees. Summit Properties granted 17,669 shares of restricted stock under the Incentive Plan in 1999. The market value of the restricted stock totaled $304,000, which was recorded as unamortized restricted stock compensation. Unearned compensation is being amortized to expense over the five year vesting period. Restricted stock of 8,372 shares with a market value of $162,000 was granted in the year ended December 31, 1998. Restricted stock of 26,528 shares with a market value of $546,000 was granted in the year ended December 31, 1997. The Operating
Partnership recognized $365,000, $314,000 and $292,000 of expense in the statement of earnings in the years ended December 31, 1999, 1998 and 1997, respectively, relative to the stock grants.
PERFORMANCE STOCK AWARD PLAN
In January 1998, Summit Properties agreed to award key Summit Employees certain amounts of Common Stock under Summit Properties' Performance Stock Award Plan. The amount of Common Stock to be granted to the key Summit Employees is based upon Summit Properties' average annual return (share appreciation and distributions) from the date of the award to the third anniversary of the award. The number of shares to be granted under the Performance Stock Award Plan ranges from none (in the event Summit Properties achieves less than a 11% average annual return) to 147,713 (in the event Summit Properties achieves a 15% or greater annual return). The starting Common Stock price for the purposes of calculating appreciation was $21.375 ($19.87 for one key employee) and represents fair market value at the date of award. Since the attainment of the minimum performance target that would result in shares being granted is not considered probable at December 31, 1999, no compensation cost has been recorded.
EMPLOYEE STOCK PURCHASE PLAN
In 1996, Summit Properties established a non-qualified employee stock purchase plan. From 1996 through 1999, the plan allowed Summit Employees to purchase up to $100,000 (with certain executive officers limited to $25,000) per year of Summit Properties' Common Stock. In December 1999, the plan was amended to decrease the maximum annual purchase amount by a participant from $100,000 to $25,000. The price of the shares of the Common Stock purchased will be the lesser of 85 percent of the closing price of such shares either on (a) the first day of each six month purchase period, or (b) the last day of each six month purchase period. Total shares issued under the plan in 1999, 1998 and 1997 were 144,513, 65,541 and 62,117 with a market value of $2.7 million, $1.3 million and $1.3 million, respectively. The Company applies APB Opinion 25 and related Interpretations in accounting for its Employee Stock Purchase Plan and, accordingly, no compensation cost is required to be recognized for such plan. An additional 34,455 shares with a market value of $616,000 were issued in January 2000 under the plan.
11. DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASE PLAN
In November 1997, Summit Properties replaced its existing dividend reinvestment plan with a new dividend reinvestment and direct stock purchase plan ("the Plan"). The Plan provides both new investors and existing shareholders of Summit Properties' stock (including Common Stock and other classes of outstanding stock) with a method to purchase shares of Common Stock under the Stock Purchase Program of the Plan. The Plan also permits shareholders to designate all, a portion or none of the cash dividends on their newly purchased Common Stock and cash dividends on their existing stock for reinvestment in more shares of Common Stock through the Dividend Reinvestment Program of the Plan. With respect to reinvested dividends and optional cash payments, shares of Common Stock will be purchased for the Plan at a discount ranging from 0% to 5% (established by Summit Properties from time to time) from the market price, as more fully described in the Prospectus relating to the Plan. Common Stock will be purchased by the Plan's Agent (First Union National Bank) directly from Summit Properties or in open market or privately negotiated transactions, as determined from time to time by Summit Properties, to fulfill requirements for the Plan. At present, Summit Properties expects that shares usually will be purchased directly from Summit Properties. On December 31, 1998, Summit Properties received $9.5 million under the optional cash component of the plan for shares to be issued January 2, 1999. These proceeds are included in accounts payable and accrued expenses at December 31, 1998. Summit Properties received no amounts on December 31, 1999 related to the optional cash component of the Plan.
12. BUSINESS SEGMENTS
Effective December 31, 1998, the Operating Partnership adopted Financial Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (FAS 131). FAS 131 established standards for the way public enterprises report information about operating segments in annual financial statements. FAS 131 also established standards for related disclosures about
products and services, geographic areas and major customers. The adoption of FAS 131 did not affect the Operating Partnership's results of operations or financial position.
The Operating Partnership reports as a single business segment with activities related to the operation, development and acquisition of "Class A" luxury apartments primarily in the southeastern, southwestern, midwestern and mid-atlantic United States. The Operating Partnership develops apartments solely for its own use and does not perform development activities for third parties.
13. PRIVATE PLACEMENT OF PREFERRED UNITS
On April 29, 1999, the Operating Partnership completed a private placement of 3.4 million of its 8.95% Series B Cumulative Redeemable Perpetual Preferred Units (the "Series B Preferred Units") to two institutional investors at a price of $25.00 per unit. The net proceeds of approximately $83 million were used to repay amounts outstanding under the Operating Partnership's unsecured credit facility. The Series B Preferred Units may be exchanged by the holders into shares of 8.95% Series B Cumulative Redeemable Perpetual Preferred Stock of Summit Properties ("Series B Preferred Shares") on a one-for-one basis. Holders of the Series B Preferred Units may exercise their exchange right (a) at any time on or after April 29, 2009, (b) at any time if full quarterly distributions are not made for six quarters, or (c) upon the occurrence of specified events related to the treatment of the Operating Partnership or the Series B Preferred Units for federal income tax purposes. The Operating Partnership may redeem the Series B Preferred Units at any time on or after April 29, 2004 for cash at a redemption price equal to the redeemed holder's capital account (initially $25.00 per unit), plus all accumulated, accrued and unpaid distributions or dividends. In lieu of cash, the Operating Partnership may elect to deliver Series B Preferred Shares on a one-for-one basis, plus an amount equal to all accumulated, accrued and unpaid distributions or dividends. The Series B Preferred Units have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of Summit Properties or the Operating Partnership. Distributions on the Series B Preferred Units are cumulative from the date of original issuance and are payable quarterly at the rate of 8.95% per annum of the $25.00 original capital contribution. The Operating Partnership paid holders of the Series B Preferred Units distributions in the aggregate amount of approximately $5.1 million during 1999.
On September 3, 1999, the Operating Partnership completed a private placement of 2.2 million of its 8.75% Series C Cumulative Redeemable Perpetual Preferred Units (the "Series C Preferred Units") to an institutional investor at a price of $25.00 per unit. The net proceeds of approximately $54 million were used to repay amounts outstanding under the Operating Partnership's unsecured credit facility. The Series C Preferred Units may be exchanged by the holder into shares of 8.75% Series C Cumulative Redeemable Perpetual Preferred Stock of Summit Properties ("Series C Preferred Shares") on a one-for-one basis. The holder of the Series C Preferred Units may exercise its exchange right (a) at any time on or after September 3, 2009, (b) at any time if full quarterly distributions are not made for six quarters, (c) upon the occurrence of specified events related to the treatment of the Operating Partnership or the Series C Preferred Units for federal income tax purposes, or (d) at any time that such institutional investor's holdings in the Operating Partnership exceed 18% of the total profits of or capital interests in the Operating Partnership for a taxable year. The Operating Partnership may redeem the Series C Preferred Units at any time on or after September 3, 2004 for cash at a redemption price equal to the redeemed holder's capital account (initially $25.00 per unit), plus all accumulated, accrued and unpaid distributions or dividends. The Series C Preferred Units have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of the Operating Partnership or the Operating Partnership. Distributions on the Series C Preferred Units are cumulative from the date of original issuance and are payable quarterly at the rate of 8.75% per annum of the $25.00 original capital contribution. The Operating Partnership paid the holder of the Series C Preferred Units distributions in the aggregate amount of approximately $1.5 million during 1999.
14. COMMON STOCK REPURCHASE PROGRAM
On May 11, 1999, the Board of Directors of Summit Properties authorized a common stock repurchase program pursuant to which Summit Properties is authorized to purchase up to an aggregate of $50 million of
outstanding Common Stock. All repurchases have been and will be made on the open market at prevailing prices. This authority may be exercised from time to time and in such amounts as market conditions warrant. During the year ended December 31, 1999, Summit Properties repurchased 2,414,300 shares of Common Stock for an aggregate purchase price, including commissions, of approximately $47.5 million and at an average price of $19.67 per share.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended December 31, 1999, 1998 and 1997 are as follows:
A. The Operating Partnership sold seven communities during the year ended December 31, 1999. The respective purchasers of three of the communities assumed the related outstanding debt balances associated with such communities of $19.7 million.
B. The Operating Partnership purchased the Atlanta Acquisitions and the Ewing Portfolio by issuing 2.5 million Common Units, assuming mortgage notes, assuming certain liabilities and the payment of cash. The recording of the purchases is summarized as follows (in thousands):
C. In the year ended December 31, 1997, the Operating Partnership purchased five communities (Summit Mayfaire, Summit Portofino, Summit Sand Lake, Summit Windsor II and Summit Fair Oaks). The Operating Partnership completed the purchase of the five communities by assuming debt, issuing 438,103 Common Units, assuming certain liabilities and current assets, and the payment of cash. The recording of the purchases is summarized as follows (in thousands):
D. Summit Properties granted 17,669 (net of 6,828 shares forfeited), 8,372 and 26,528 shares of restricted stock in 1999, 1998 and 1997 valued at $304,000, $162,000 and $546,000, respectively, to Summit Employees.
E. The Operating Partnership accrued a distribution payable of $13.0 million, $12.7 million and $11.0 million at December 31, 1999, 1998 and 1997, respectively.
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by management using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on information available to management as of December 31, 1999 and 1998. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been
comprehensively re-valued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.
Cash and cash equivalents, rents receivable, accounts payable, accrued expenses, security deposits, other liabilities, tax-exempt bond indebtedness and the credit facility are carried at amounts which reasonably approximate their fair values at December 31, 1999 and 1998 due to either the short-term nature or variable interest rates associated with such balances.
Fixed rate mortgage debt and fixed rate unsecured notes with a carrying value of $533.2 million have an estimated aggregate fair value of approximately $501.3 million at December 31, 1999. Fixed rate mortgage debt and unsecured notes with a carrying value of $520.9 million have an estimated aggregate fair value of approximately $521.0 million at December 31, 1998. Rates currently available to the Operating Partnership for debt with similar terms and maturities were used to estimate the fair value of this debt.
The fair market value of long-term fixed rate debt is subject to changes in interest rates. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Operating Partnership's total fixed rate long-term debt at December 31, 1999 was $501.3 million. Fair values were determined from quoted market prices, where available, and from information received from investment advisors using current interest rates considering credit ratings and remaining terms to maturity.
While the Operating Partnership has historically had limited involvement with derivative financial instruments, the Operating Partnership may utilize such instruments in certain situations to hedge interest rate exposure by modifying the interest rate characteristics of related balance sheet instruments and prospective financing transactions. The Operating Partnership does not utilize derivative financial instruments for trading or speculative purposes. On September 16, 1999, the Operating Partnership entered into an interest rate swap agreement with a notional amount of $30 million, relating to $30 million of notes issued by the Operating Partnership under the MTN Program which carry a fixed interest rate of 6.625% per annum (the "Fixed Rate"). Under the interest rate swap agreement, through the maturity date of such notes of December 15, 2003, (i) the Operating Partnership has agreed to pay to the counterparty the interest on a $30 million notional amount at a floating interest rate of LIBOR plus 11 basis points (the "Floating Rate"), and (ii) the counterparty has agreed to pay to the Operating Partnership the interest on the same notional amount at the Fixed Rate. The Floating Rate at December 31, 1999 was 6.23%. Under the interest rate swap agreement, an increase in LIBOR will increase the amount of interest that the Operating Partnership will be required to pay, and a decrease in LIBOR will decrease the amount of interest that the Operating Partnership will be required to pay. The fair value of the interest rate swap was $445,000 at December 31, 1999.
17. GEOGRAPHIC CONCENTRATION
The Operating Partnership's Communities are concentrated in six major markets as follows:
18. REAL ESTATE AND ACCUMULATED DEPRECIATION
Real estate and accumulated depreciation by apartment community consisted of the following at December 31, 1999 (dollars in thousands):
(1) The aggregate cost for federal income tax purposes at December 31, 1999 is $1.0 billion. (2) Encumbered by fixed rate mortgages of $143.7 million. (3) Encumbered by fixed rate mortgage of $8.4 million. (4) Collateral for $39.5 million of letters of credit which serve as collateral for $38.4 million in tax exempt bonds. (5) Property purchased by Operating Partnership. Date reflects date construction completed. (6) Includes furniture, fixtures and equipment.
A summary of activity for real estate assets and accumulated depreciation is as follows:
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(1) Includes only apartment communities and does not include fixed assets used in property development, construction and management of apartment communities.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years 1999 and 1998 is as follows (in thousands except per unit data):