Item 1. Business
Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, Cornerstone REIT, Limited Partnership, Apple Residential Advisors, Inc., Apple Residential Management Group, Inc., and CRIT-NC, LLC, the "Company"), a Virginia corporation, was incorporated in August 1989. Initial capitalization occurred on August 18, 1992. Operations of rental property commenced on June 1, 1993. The business of the Company is to acquire and operate existing residential apartment complexes located in the mid-Atlantic and southeastern United States. The Company owned fifty-eight properties comprising 13,462 apartment units within that region as of December 31, 1998. The Company's property acquisitions are described in Item 2
Item 2 of this report, which is hereby incorporated herein by reference. Currently, Cornerstone Realty Income Trust, Inc. owns directly all of its properties other than those in North Carolina, and those in North Carolina are owned by CRIT-NC, LLC, a Virginia limited liability company organized in December 1997 that is wholly-owned by Cornerstone Realty Income Trust, Inc. The Company formed Cornerstone REIT, LP to acquire properties allowing a structure that allows the Company to issue operating partnership units. As of December 31, 1998, Cornerstone Realty Income Trust, Inc. owns 1,403,445 operating units representing an 88% interest in Cornerstone REIT, LP.
The Company, a self-administered and self-managed equity REIT headquartered in Richmond, Virginia, is a fully integrated real estate organization with expertise in the management, acquisition and renovation of apartment communities. The Company maintains an intense focus on the operations of its properties to generate consistent, sustained growth in net operating income ("NOI"), which it believes is the key to growing funds from operations per common share. The Company believes that successful
implementation of this strategy will allow it to continue to increase its NOI from its apartment portfolio. Through renovation and enhanced property management of the apartment communities, the Company strives to increase cash flows, thereby adding value to the underlying real estate.
The Company's objective is to increase distributable cash flow and common share value by:
- Increasing rental rates, maintaining high economic occupancy rates, and controlling costs at the properties; and
- Acquiring additional properties at attractive prices that provide the opportunity to improve operating performance through the application of the Company's management, marketing, and renovation programs.
The Company has seven regional property management offices, located in Blacksburg and Virginia Beach, Virginia; Raleigh, Charlotte and Wilmington, North Carolina; Columbia, South Carolina; and Atlanta, Georgia. The Company currently has approximately 475 employees, including specialists in acquisition, management, marketing, leasing, development, accounting and information systems. The Company's executive officers have substantial experience with apartment properties, having been responsible for the management, acquisition and renovation of more than 20,000 apartment units over the last 24 years using the strategies and techniques described below. The Company's top three executive officers have an average of approximately 16 years each in the management, acquisition and renovation of residential apartment communities.
History
The Company began operations in 1993 to continue and expand the apartment community acquisition, renovation and management strategies of Glade M. Knight, the Company's Chairman, Chief Executive Officer and President. During his career, Mr. Knight has been involved in the ownership and management of over 20,000 apartment units, mainly located in the mid-Atlantic region of the United States. Senior management of the Company, which consists of Mr. Knight, Debra A. Jones, Chief Operating Officer, and Stanley J. Olander, Jr., Chief Financial Officer, has worked together, in the same business as the Company, for more than 16 years. Management believes that its long-term operating experience is invaluable in enabling the Company to operate its properties efficiently and to identify and act upon acquisition opportunities.
Growth through Management and Leasing
The Company seeks to increase net operating income through active property management, which includes keeping rental rates at or above market levels, maintaining high economic occupancy through tenant retention, creating a property identity and effectively marketing each property, and controlling operating expenses at the property level.
Management develops the overall management and leasing strategy, including goals and budgets, for each property. In order to achieve each property's objectives, management delegates significant decision-making responsibility to regional and on-site employees, thereby instilling in its employees a sense of ownership of their property. Management believes that this strategy is an effective way to maximize each property's potential. In order to achieve desired results, the Company emphasizes training for its on-site employees as well as raising rents to be at or above the market for comparable properties. The Company also ties on-site employees' bonuses to both net operating income targets established for their respective properties and the Company's overall financial performance.
Management believes that tenant retention is critical to generating net operating income growth. Tenant retention maintains or increases economic occupancy and minimizes the costs associated with preparing apartments for new occupants. The Company employs one person at each property who has a primary focus on tenant retention. The tenant retention specialist's objective is to make tenants feel at home in the community through personal attention, which includes organizing social functions and activities as well as responding promptly to any tenant problems that may arise in conjunction with the apartment or community. The Company's philosophy is to market its properties continually to existing tenants in order to achieve a low turnover rate. The Company believes that the turnover rate of its properties is below the average turnover rate for comparable apartment communities.
The Company seeks to create a unique identity for each property by emphasizing curb appeal, signage, and attractive common area facilities, such as clubhouses and swimming pools. The Company has upgraded or renovated many of the properties' common area facilities after acquisition. Each property is marketed as a "Cornerstone Community" but typically has an individual property name tied to a local theme. Each property has a dedicated on-site marketing person whose responsibility is to position and market the property within the local community through such activities as media advertising, on-site promotional events and personal calls to local businesses.
Operating expenses are controlled at each property by setting budgets at the corporate level and requiring that any expense over budget at a property be approved by management. Purchase discounts are sought at both the corporate level and locally in those areas where the Company has a significant presence. All contracts for goods and services are re-bid annually to ensure competitive pricing. The Company has a preventive maintenance program and the ability to perform work using in-house personnel, which helps the Company to reduce expenses at the properties. For example, the maintenance manager at each property is qualified to perform HVAC and plumbing work which otherwise would be contracted outside the Company.
Growth through Acquisitions, Renovations and Expansion
The Company seeks to generate growth in net operating income through acquisitions by: (i) acquiring under-performing assets at less than replacement cost; (ii) correcting operational problems; (iii) making selected renovations; (iv) increasing economic occupancy; (v) raising rental rates; (vi) implementing cost controls; and (vii) providing enhanced property and centralized management. In markets that it targets for acquisition opportunities, the Company attempts to gain a significant local presence in order to achieve operating efficiencies. In analyzing acquisition opportunities, the Company considers acquisitions of property portfolios as well as individual properties.
The Company has demonstrated an ability to grow through acquisitions. The Company's first two properties were acquired in June of 1993. At December 31, 1998, the Company owned and operated 58 apartment communities.
The Company analyzes specific criteria in connection with a proposed acquisition. These criteria include: (i) the market in which a property is located and whether it has a diversified economy, stable employment base and increasing average household income; (ii) the property's current and projected cash flow and the ability to increase net operating income; (iii) the condition and design of the property and whether the property can benefit from renovations; (iv) historical and projected occupancy rates; (v) geographic location in light of the Company's diversification objectives; and (vi) the purchase price of the property as it relates to the cost of new construction.
The Company believes it has been and will be able to purchase properties at less than replacement cost because of the presence of deferred maintenance, management neglect, or prior owner's financial distress. Upon acquisition, the Company seeks to improve both operating results and property identity through a 24-month renovation policy which includes selective renovations such as new roofs, new exterior siding, exterior painting, clubhouse renovation and construction, and interior refurbishment. The Company has invested in renovations to its properties approximately $26 million in 1998, $23 million in 1997, approximately $19.0 million in 1996, and approximately $7.1 million in 1995. To date, these actions have permitted the Company to increase rental rates and improve economic occupancy rates at the properties.
Because the Company has grown and plans to grow through property acquisitions, management has created a system establishing "Takeover Teams" to provide immediate transitional management and leasing services to newly-acquired properties and to implement quickly the Company's operational programs and policies. A Takeover Team consists of senior property management personnel as well as marketing and maintenance specialists from other communities owned by the Company. The Takeover Team remains at a property until the Company's management and leasing programs have been installed and the new on-site team is fully operational. Typically, this process takes two to four weeks to complete.
The Company has also made, and may in the future make, acquisitions of established apartment communities involved in foreclosure proceedings. In this situation, the Company seeks properties that have below market-rate leases, correctable vacancy problems or inefficient property management. The Company also may make acquisitions of properties from over-leveraged owners of properties, governmental regulatory authorities, lending institutions that have taken control of such properties, mortgagees-in-possession and, possibly, through bankruptcy reorganization proceedings.
If sufficient tenant demand exists and suitable land is available, the Company may construct additional apartment units on land adjacent to certain properties. The Company believes that its successful experience with large-scale property renovation will also permit strategic and cost-effective property expansion. It is the Company's policy to acquire such additional apartment units on a "turn-key" basis from a third party contractor, thereby minimizing the risks normally associated with development and lease-up.
Currently, the Company has planned expansion projects for two existing properties: Glen Eagles and The Meadows. Glen Eagles is a 166-unit apartment community located in Winston-Salem, North Carolina. The land adjacent to the community will accommodate approximately 220 additional apartment units which can be served by existing amenities. At The Meadows, a 176-unit community in Asheville, North Carolina, there is additional land for approximately 250 additional apartment units. The Company outsources its development to third party developers who build and initially operate the property. The Company is only required to purchase such developed property if certain rental rate and occupancy results are achieved. The Company does not fund any development activities for the developer. The developer has completed the clubhouse and the first building will be ready for occupancy at the end of February. The Company anticipates construction and lease-up to be completed in the fourth
quarter of 1999. The Company does not have interests in any land adjacent to any other properties it now owns, but may acquire land or options to acquire land of this type adjacent to other properties it may acquire in the future.
Financing Policy
The Company's objective is to seek capital as needed at the lowest possible cost. In addition to obtaining capital from future sales of common shares (or preferred shares, if authorized in the future), the Company may obtain lines of credit or other unsecured borrowings. The Company is also not precluded from engaging in secured borrowings, although its current policy is to hold its properties on an unmortgaged basis, and as of December 31 1998 it had no secured debt. The Company may also seek eventually to issue investment-grade debt, although there is no assurance that this will occur.
During 1998, the Company raised $30 million by issuing 2.6 million common shares through its participation in a Unit Investment Trust, which resulted in $28.1 million net proceeds to the Company, after underwriting discounts, commissions and other direct costs. The Company used the proceeds to pay down its line of credit, to acquire of additional apartment communities and for working capital.
The Company uses an unsecured line of credit for interim financing to assist in property acquisitions. Historically, the Company has drawn on its unsecured lines of credit to accomplish in a timely manner property acquisitions deemed desirable by management, and has thereafter curtailed the outstanding balances on the lines of credit with proceeds of future offerings. The Company currently expects to continue to use this strategy.
During October 1998, the Company closed a $25 million extension on the Unsecured Line of Credit, bringing the maximum permitted borrowing to $200 million. The lenders are a syndicate of banks with First Union National Bank as agent. The Unsecured Line of Credit currently bears interest equal to one-month LIBOR plus 1.35%. The interest rate is adjusted monthly and the formula for determination of the interest rate can change based on changes in financial condition and debt level of the Company.
The $25 million extension on the Unsecured Line of Credit is due on April 15, 1999 and the remaining balance is due on October 30, 2000. On December 31, 1998, the outstanding balance on the Unsecured Line of Credit was $196 million. In negotiating and closing the Unsecured Line of Credit, the Company was able to increase the amount of and reduce the interest rate on its prior unsecured borrowings. The Company is currently negotiating with its lenders to extend the maturities of these obligations. The Company currently is seeking alternatives to reduce its interest cost and is considering replacing a portion of the amounts outstanding under its line of credit with fixed rate longer maturity debt.
The Company has also obtained from First Union National Bank of Virginia a $5 million unsecured line of credit for general corporate purposes. This line of credit bears interest at LIBOR plus 1.60%, adjusted monthly, and is due on March 31, 1999. On December 31, 1998, the outstanding balance on this loan was approximately $343,000.
The Company intends to maintain a debt policy (the "Debt Limitation") limiting the Company's total combined indebtedness plus its pro rata share of indebtedness of any unconsolidated investments ("Joint Venture Debt") to 40% of the Company's total equity market capitalization plus its combined indebtedness (including its pro rata share of Joint Venture Debt).
Apple Residential Income Trust
In August 1996, Mr. Knight organized Apple Residential Income Trust, Inc. ("Apple") for the purpose of acquiring apartment communities in Texas. Apple has elected to be taxed as a REIT. The Company will participate in Apple's growth through its direct or indirect receipt of acquisition, disposition, management and advisory fees, ownership of Apple common shares and possible future acquisition of Apple. As of December 31, 1998, Apple had raised gross proceeds of $281,228,183 in an ongoing best-efforts equity offering and had acquired 26 properties in the Dallas, Texas area since its inception.
The Company has a continuing right to acquire and own up to 9.8% of the common shares of Apple. The purchase price under the option equals the public offering price for the common shares of Apple (currently $10.00 per common share) less the related selling commissions (currently $1.00 per common share). As of December 31, 1998, the Company owned 417,778 common shares of Apple, representing approximately 1.5% of the total common shares of Apple outstanding as of that date.
The Company also has a right of first refusal to purchase the properties and business of Apple. The Company and Apple have hired financial advisors to evaluate a potential merger. In addition, the Company and Apple have appointed independent committees of the board of directors to evaluate the potential merger.
The Company or its affiliates provides advisory, property management and real estate brokerage services to Apple in exchange for fees and expense reimbursements under a contract with Apple. The Company owns all of the nonvoting preferred shares of its affiliates, which entitle it to 95% of the economic benefits of such corporations.
Environmental Matters
In connection with each of its property acquisitions, the Company obtains a Phase I Environment Report, and such additional environmental reports and surveys as are necessitated by such preliminary report. Based on such reports, the Company is not aware of any environmental situations requiring remediation at its properties which have not been or are not currently being remediated as necessary. No material remediation costs have or are expected to occur.
Property Acquisitions in 1998
The following is a summary of the 7 property acquisitions made by the Company during 1998.
On January 15, 1998, the Company purchased Sterling Point Apartments (which was subsequently renamed "Stone Point"), in Charlotte, North Carolina. Information with respect to this property is hereby incorporated herein by reference from pages 3 through 7 of the Company's Report on Form 8-K dated January 15, 1998.
On March 31, 1998, the Company acquired Hampton Pointe Apartments in Charleston, South Carolina. Information with respect to this property is hereby incorporated herein by reference from pages 4 through 7 of the Company's Report on Form 8-K dated March 31, 1998.
On April 1, 1998, the Company acquired Edgewood Knoll Apartments (which was subsequently renamed "Pinnacle Ridge") in Asheville, North Carolina. Information with respect to these properties is hereby incorporated herein by reference from pages 8 through 11 of the Company's Report on Form 8-K dated March 31, 1998.
On June 4, 1998, the Company acquired The Timbers Apartments in Raleigh, North Carolina. Information with respect to these properties is hereby incorporated herein by reference from pages 3 through 6 of the Company's Report on Form 8-K dated June 4, 1998.
On July 2, 1998, the Company acquired The Gables Apartments, in Richmond, Virginia. Information with respect to this property is hereby incorporated herein by reference from pages 3 through 6 of the Company's Report on Form 8-K dated July 2, 1998.
On August 12, 1998, the Company acquired Spring Lake Apartments in Morrow, Georgia. Information with respect to this property is hereby incorporated herein by reference from pages 4 through 8 of the Company's Report on Form 8-K dated August 12, 1998.
On October 16, 1998, the Company acquired Cape Landing Apartments in Myrtle Beach, South Carolina. Information with respect to these properties is hereby incorporated herein by reference from pages 4 through 8 of the Company's Report on Form 8-K dated October 16, 1998.
Recent Developments
The Company's Board of Directors met on March 30, 1999, and voted to approve a merger with Apple Residential Income Trust, Inc. subject to, among other requirements, an affirmative vote of the Company's shareholders.
Item 2. Properties
PROPERTY DESCRIPTIONS AND CHARACTERISTICS
As of December 31, 1998, the Company owned 58 apartment communities comprising 13,462 apartment units. The properties are located in North Carolina (31 communities), Virginia (12 communities), South Carolina (8 communities) and Georgia (7 communities).
The following table sets forth specific information regarding the properties:
--------------- Notes to Table of Properties:
(1) "Total Investment" includes the purchase price of the property plus real estate commissions, closing costs and improvements capitalized since the date of acquisition.
(2) An open item denotes that the Company did not own the property during the period indicated.
(3) Heatherwood Apartments is comprised of Heatherwood (completed in 1980) and Italian Village and Villa Marina Apartments (completed in 1980), acquired in September 1996 and August 1997, respectively, at a cost of $10,205,457 and $7,425,000. They are adjoining properties and are operated as one apartment community.
(4) Trolley Square Apartments is comprised of Trolley Square East Apartments (completed in 1964) and Trolley Square West Apartments (completed in 1965) acquired in June 1996 and December 1996, respectively, at a cost of $6,000,000 and $4,242,575. They are adjacent properties and are operated as one apartment community.
(5) Average rent per month reflects December' monthly gross potential less concessions divided by the property's number of units
(6) Economic occupancy percentage reflects Adjusted Scheduled Rent divided by Adjusted Gross Potential where Adjusted Gross Potential consists of Gross Potential net of concessions, model unit costs, and employee unit costs, and Adjusted Scheduled Rent consists of Adjusted Gross Potential net of vacancies and bad debt expense.
Item 3.
Item 3. Legal Proceedings
Neither the Company nor any of its apartment properties is presently subject to any material litigation nor, to the Company's knowledge, is any litigation threatened against the Company or any of the properties, other than routine actions arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the business or financial condition or results of operations of the Company.
Item 4.
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
The Company's common shares are traded on the New York Stock Exchange ("NYSE"). The common shares were listed on the NYSE under the symbol "TCR" on April 18, 1997. Before that date, there was no active trading market for the common shares. The following table sets forth the high and low sale prices on the NYSE for the common shares (as reported by the NYSE) and the cash distributions declared and paid for each quarterly period indicated. On March 18, 1999, the last reported sale price on the NYSE was $9.875 per common share.
Distributions of $38,317,602 and $31,324,870 were made to the shareholders during 1998 and 1997, respectively.
The timing and amounts of distributions to shareholders are within the discretion of the Company's board of directors. Future distributions will depend on the Company's results of operations, cash flow from operations, economic conditions and other factors, such as working capital, cash requirements to fund investing and financing activities, capital expenditure requirements, including improvements to and expansions of properties and the acquisition of additional properties, as well as the distribution requirements under federal income tax provisions for qualification as a REIT.
For federal income tax purposes, distributions paid to shareholders may consist of ordinary income, capital gains distributions, non-taxable return of capital, or a combination thereof. Distributions constitute ordinary income to the extent of the Company's current and accumulated earnings and profits. Distributions which exceed the Company's current and accumulated earnings and profits constitute a return of capital rather than a dividend to the extent of a shareholder's basis in his common shares and reduce the shareholder's basis in the common shares. To the extent that a distribution exceeds both the Company's current and accumulated earnings and profits and the shareholder's basis in his common shares, it is generally treated as gain from the sale or exchange of that shareholder's common shares. The Company notifies shareholders annually as to the taxability of
distributions paid during the preceding year. In 1998, approximately 20% of distributions represented a return of capital, and the balance represented ordinary income.
The Company has adopted a Dividend Reinvestment and Share Purchase Plan under which any record holder of common shares may reinvest cash dividends and may invest additional cash payments of up to $15,000 per quarter in common shares.
The agreement pertaining to the Company's Unsecured Line of Credit contains certain covenants that, among other things, require maintenance of certain financial ratios, and include restrictions on the Company's ability to make distribution to its shareholders over certain amounts.
On March 18, 1999, there were 18,946 shareholders of record of the Company's common shares.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected financial data for the registrant and should be read in conjunction with the financial statements and related notes of the Company included under Item 8 of this report.
(a) Included in the 1997 and 1996 operating results are $402,907 and $16,526,012, respectively, of management contract termination expense resulting from the company's conversion to "self-administered" and "self-managed" status. See Note 6 to the consolidated financial statements.
(b) "Funds from operations" is defined as income before gains (losses) on investments, minority interest of unitholders in operating partnership, and extraordinary items (computed in accordance with generally accepted accounting principles), plus real estate depreciation and after adjustment for significant nonrecurring items, if any. This definition conforms to the recommendations set forth in a White Paper adopted by the National Association of Real Estate Investment Trusts (NAREIT). Funds from operations for years prior to 1996 have been adjusted to conform to the NAREIT definition. The company considers funds from operations in evaluating property acquisitions and its operating performance, and believes that funds from operations should be considered along with, but not as an alternative to, net income and cash flows as a measure of the company's operating performance and liquidity. Funds from operations, which may not be comparable to other similarly titled measures of other REITs, does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs.
Item 7
Item 7 and 7A. Management's Discussion and Analysis of Financial Condition and Results of Operations/Market Risk Disclosure.
Overview The company operates in 10 major markets and 16 markets overall. At December 31, 1998, the company did not own more than 20% of its apartment communities in any one market. The following table summarizes the company's major apartment market information.
The following discussion is based on the financial statements of the company as of December 31, 1998, 1997, and 1996. This information should be read in conjunction with the selected financial data and the company's consolidated financial statements included elsewhere in this annual report. The company is operated and has elected to be treated as a real estate investment trust (REIT) for federal income tax purposes.
Results of Operations
Comparison of the year ended December 31, 1998 to December 31, 1997
Income and Occupancy. The results of the company's property operations for the year ended December 31, 1998 include the results of operations from the pre-1998 acquisitions and from the seven properties acquired in 1998 from their respective acquisition dates. The company's portfolio consisted of 58 properties at December 31, 1998. The increased rental income and operating expenses for the year ended December 31, 1998, over the year ended December 31, 1997, is primarily due to a full year of operation in 1998 of the 1997 acquisitions as well as the incremental effect of the 1998 acquisitions.
The principal source of the company's revenue is the rental operation of its apartment communities. Rental income increased 27% in 1998 to $88,752,254, up $18,636,576 over 1997 due to the factors described above. Rental income is expected to continue to increase from the impact of planned improvements, which are being made in an effort to improve the properties' marketability, economic occupancies, and rental rates.
Overall average economic occupancy was 92% in 1998 and 1997. Rental rates for the portfolio increased 4% to $608 on December 31,1998 from $582 on December 31, 1997. This increase is due to a combination of increased rental rates from new leases and property renovation and the acquisition of properties with higher average rental rates.
Expenses. Total property expenses, excluding management contract termination, increased 29% to $58,236,673 in 1998 from $45,111,959 in 1997, due largely to the increase in the number of apartments. The operating expense ratio (the ratio of operating expenses, excluding depreciation, amortization, general and administrative, and other expenses, to rental income) decreased to 38% in 1998 from 39% in 1997 and is attributable to economies of scale achieved in property management and certain property operation functions.
General and administrative expenses totaled 1.9% of revenues in 1998 and 1997. These expenses represent the administrative expenses of the company as distinguished from the operations of the company's properties. In 1998, the company has continued to expand its internal administrative infrastructure to keep pace with its growth.
Depreciation of real estate increased to $20,741,130 in 1998 from $15,163,593 in 1997, and is directly attributable to the acquisition of apartment communities in 1998 and a full year of depreciation of properties acquired in 1997.
Interest and Investment Income and Expense. The company earned interest income of $71,474 in 1998 and $77,942 in 1997 from the investment of its cash and cash reserves. The company incurred $12,004,120 and $7,006,182 of interest expense in 1998 and 1997, respectively, associated with short-term borrowings under its line of credit. This is a result of the increased use of
its line of credit to fund acquisitions. The weighted average interest rate on the line of credit was 6.9% and 7.2% during 1998 and 1997, respectively.
Income and Expense from Relationship with Apple Residential Income Trust. The company or affiliates provides property management, advisory, and real estate brokerage services for Apple Residential Income Trust, Inc. ("Apple"), a real estate investment trust established by Glade Knight. The company also owns 417,778 shares of Apple which represents approximately 1.5% of Apple's outstanding shares at December 31, 1998 and has first right of refusal to purchase Apple.
Property management fees charged to Apple are 5% of monthly gross revenues. Advisory fees charged to Apple are .1% to .25% of total capital raised by Apple. Real estate commissions are generally 2% of the purchase price of each property Apple acquires. The company received $2,220,593 in 1998 and $822,934 in 1997 for advisory and property management services. The company received $2,665,100 in 1998 and $1,031,066 in 1997 in real estate brokerage commissions under separate contract. The company amortized into expense $1,054,470 in 1998 and $546,000 in 1997 of the $2 million purchase price the company paid for the acquisition of the brokerage services contract with Apple. Income from the company's investment in Apple was $340,483 in 1998 and $253,172 in 1997. (See Note 6 to the consolidated financial statements.)
Same Property Results. On a comparative basis, the 38 properties owned during all of 1998 and 1997 provided rental and operating income of $58,849,953 and $37,432,526, respectively, in 1998 and $56,493,897 and $35,480,876 in 1997. This represents an increase from 1997 to 1998 of 4% and 6%, respectively. Certain current reported expenses, which approximated $228,000, have been excluded to make for a more meaningful comparison to 1997.
Comparison of the year ended December 31, 1997 to December 31, 1996
Conversion to Self-Administration. Effective October 1, 1996, the company agreed with its affiliated advisor and management companies on a series of transactions, the effect of which was to convert the company into a "self-administered" and "self-managed" REIT. The Board of Directors of the company unanimously approved the transactions. The conversion was approved because it was expected to reduce future operating expenses compared to what those expenses would have been under the formerly "externally managed and advised" arrangements. The net effect of these savings on earnings basic and diluted per share is partially offset by the issuance of common shares to effect the transaction as described below.
Pursuant to this conversion, the company agreed to issue 1.4 million common shares, with 700,000 shares issued in October 1996 and 700,000 shares on September 30, 1997, and paid approximately $1,913,000 to the various entities for several assets and various contracts. This transaction was accounted for as the termination of management contracts and resulted in an expense of $16,526,012 in 1996 and $402,907 in 1997. This expense was the primary factor in the company's net loss of $4,169,849 ($.21 per share) for 1996 versus net income of $19,225,553 ($.59 per share) in 1997. (See Note 6 to the consolidated financial statements.)
Income and Occupancy. The company had increased rental income and expenses in 1997 and 1996 due to the full year of operations from the pre-1997 acquisitions and from the 13 properties acquired in 1997 from their respective acquisition dates. Rental income increased 74% to $70,115,678 in 1997 from $40,261,674 in 1996.
The properties had an average occupancy of 92% during 1997 and 91% in 1996. Overall, rental rates for the portfolio increased 6% to $582 on December 31,1997 from $549 on December 31, 1996. This increase is due to a combination of increased rental rates from new leases and property renovation and the acquisition of properties with higher average rental rates.
Same Property Results. On a comparative basis, the 19 properties owned during all of 1997 and 1996 provided rental and operating income of $27,476,460 and $16,566,239, respectively, in 1997 and $25,508,627 and $14,587,654 in 1996. This represents an increase from 1996 to 1997 of 8% and 14%, respectively. The conversion to "self-administration" took place in October 1996. Therefore, the actual results for property operations contained a partial year of management fees in 1996. In order to make a meaningful comparison of operating income for these properties between 1996 and 1997, property management fees were eliminated in 1996. This adjustment allows for a comparison on a "self-administered" and "self-managed" basis. As adjusted, the properties provided operating income of $15,429,270 in 1996. This represents an operating increase of 7% for 1997 over 1996. The eliminated expenses included property management fees of $841,616 in 1996.
Expenses. Total property expenses, excluding management contract termination, increased 69% to $45,111,959 in 1997 from $26,764,844 in 1996, due largely to the increase in the number of apartments. The operating expense ratio (the ratio of operating expenses, excluding depreciation, amortization, general and administrative expenses, and other expenses to rental income) was 39% in 1997 and 43% in 1996. The decline in the operating expense ratio is attributable to the conversion of the company to "self-administered" and "self-advised" status and increasing economies of scale based on the company's growing portfolio of properties.
General and administrative expenses totaled 1.9% of revenues in 1997 and 3.2% in 1996. These expenses represent the administrative expenses of the company as distinguished from the operations of the company's properties. In 1997, the company continued to expand its internal administrative infrastructure to keep pace with its growth.
Depreciation of real estate increased to $15,163,593 in 1997 from $8,068,063 in 1996, and the increase is directly attributable to the acquisition of apartment communities in 1996 and 1997.
Interest and Investment Income and Expense. The company earned interest income of $75,927 in 1997 and $287,344 in 1996 from the investment of its cash and cash reserves. The decrease is due to the company's cash management policy of paying down on the unsecured line of credit which incurred a higher rate of interest than what the company would have earned. The company incurred $7,006,182 and $1,272,530 of interest expense in 1997 and 1996, respectively, associated with short-term borrowings under its line of credit. This is a result of the increased use of its line of credit to fund acquisitions. The weighted average interest rate on the line of credit during 1997 and 1996 was 7.2%.
Liquidity and Capital Resources
Equity. During 1998, the company raised $30 million by issuing 2.6 million common shares through its participation in a Unit Investment Trust, which resulted in $28.1 million net proceeds to the company after the payment of underwriting discounts, commissions, and other direct costs. The net proceeds were used to curtail the company's unsecured line of credit.
During 1998, the company purchased seven properties consisting of 1,540 apartment units for $74 million and made $26 million of property improvements through use of increases in its line of credit, reinvestment of distributions, additional equity raises, and issuance of operating partnership units. These acquisitions brought the total number of residential rental communities to 58 and the total apartment units owned at year-end to 13,462.
Notes Payable. The company intends to acquire additional properties and may seek to fund these acquisitions through a combination of equity offerings and unsecured corporate debt. In 1997, the company obtained a $175 million unsecured line of credit (the "Unsecured Line") with a consortium of six banks. During October 1998, the company closed a $25 million extension on the Unsecured Line, bringing the maximum permitted borrowing to $200 million. The $25 million extension is due on April 15, 1999, and the remaining balance expires on October 30, 2000. The company is currently in negotiations with its lenders to extend the maturities of these obligations. The line currently bears interest at the LIBOR rate plus 135 basis points. The company anticipates curtailing the line of credit with the proceeds of future offerings.
In addition to the above, the company also has an additional unsecured line of credit which is used for general corporate purposes (the "General Purpose Line") in the amount of $5 million. The General Purpose Line bears interest at LIBOR plus 160 basis points and is due on March 31, 1999.
At year-end, the company had an outstanding balance of $196 million on the Unsecured Line and $343,000 on the General Purpose Line.
The company also carried a $5.5 million unsecured debenture bearing an effective interest rate of 6.65% per annum. This debt is to a private lender and is due in June 1999.
Capital Requirements. The company has an ongoing capital expenditure commitment to fund its renovation program for recently acquired properties. In addition, the company expects to acquire new properties during the year. The company anticipates that it will continue to operate as it did in 1998 and fund these cash needs from a variety of sources including equity, excess cash flow from operations over distributions, debt provided by its line of credit, and issuance of operating partnership units. The company may seek to obtain additional debt financing to meet its objectives. Given the company's current debt level, the company is confident that it will be able to obtain debt financing from a variety of sources, both secured and unsecured.
The company continues to renovate its properties. In connection with these renovations, the company capitalized improvements of $26 million in 1998. Approximately $18 million of additional capital improvements are budgeted for 1999 on the existing property portfolio.
The company has short-term cash flow needs in order to conduct the operation of its properties. The rental income generated from the properties supplies sufficient cash to provide for the payment of these operating expenses and the payment of distributions.
Capital resources are expected to grow with the future sale of its shares and from cash flow from operations. Approximately 28% of all 1998 distributions, totaling $10,873,529, were reinvested in additional common shares. In general, the company's liquidity and capital resources are believed to be more than adequate to meet its cash requirements during 1999.
The company is operated as, and annually elects to be taxed as, a real estate investment trust under the Internal Revenue Code. As a result, the company has no provision for taxes and thus there is no effect on the company's liquidity from taxes.
Apple Residential Income Trust. In 1997, Apple granted the company a continuing right to own up to 9.8% of the common shares of Apple at the market price, net of selling commissions. Apple also has granted the company a first right of refusal to purchase the business or properties of Apple. (See Note 6 to the consolidated financial statements.)
Impact of Year 2000. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including among other things a temporary inability to process transactions, send invoices or engage in similar normal business activities.
The company has completed an assessment of its programs and determined that it will require upgrading portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter, as well as upgrading certain computer hardware. The company is actively engaged in upgrading the computer systems. The company's accounting, property management, human resource, and payroll applications are classified as year 2000 compliant by their respective software vendors once upgraded. As the software is upgraded, the company will begin testing their compliancy, which will be included in the overall system testing which is scheduled to be completed in the second quarter of 1999. To the extent such vendors are unable to perform services due to their year 2000 related issues, the company will seek other similar vendors who are capable of providing services.
The company is also exposed to the risk that one or more of its vendors or service providers could experience year 2000 problems that impact the ability of such vendor or service provider to provide goods and services. Though this is not considered as significant a risk with respect to the suppliers of goods, due to the availability of alternative suppliers, the disruption of certain services, such as utilities, could, depending upon the extent of the disruption, have a material adverse impact on the company's operations. To date, the company is not aware of any vendor or service provider year 2000 issue that management believes would have a material adverse impact on the company's operations. However, the company has no means of ensuring that its vendors or service providers will be year 2000 ready. The inability of vendors or service providers to complete their year 2000 resolution process in a timely fashion could have an adverse impact on the company. The effect on non-compliance by vendors or service providers is not determinable at this time.
The company utilizes microprocessors which are imbedded in systems which are part of the company's operations. In particular, year 2000 problems in the HVAC, elevator, telephone, security, or other such systems at the properties could disrupt operations at the affected properties. The company completed an assessment of these systems in 1998 and has an ongoing plan to make all systems compliant. At this point, based on the status of its assessment, the company does not believe these systems will be materially non-compliant. Additionally, many of these systems, which operate automatically, can be operated manually; and consequently in the event these systems experience a failure as a result of the year 2000 problem, the disruption caused by such failure should not be material to the company's operations.
Failure to correct a material year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. The company believes that, with the implementation of new or upgraded business systems and completion of the year 2000 project as scheduled, the possibility of significant interruptions of normal operations due to the failure of those systems will be reduced. However, the company is also dependent upon the power and telecommunications infrastructure within the United States. The most reasonable likely worst-case scenario would be that the company may experience disruption in its operations if any of these third-party suppliers reported a system failure. Although the company's year 2000 project will reduce the level of uncertainty about the compliance and readiness of its material third-party providers, due to the general uncertainty over year 2000 readiness of these third-party suppliers, the company is unable to determine at this time whether the consequences of year 2000 failures will have a material impact.
There should be no additional cost to the company for the software and computer hardware upgrades. The software upgrades are included in the annual maintenance fee paid by the company to the vendors and the computer hardware upgrades are included in the ordinary course of operations regardless of the year 2000 issue. Substantially all of those costs have been expensed as incurred in 1998 and the remaining will be expensed as incurred during the first quarter of 1999.
The company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and contracting with vendors capable of providing services.
Management believes it is devoting the resources necessary to achieve year 2000 readiness in a timely manner.
Market Risk Disclosure
Substantially all of the company's market risk is exposure to short-term interest rates from variable rate borrowings under its line of credit. The line of credit bears interest at one month LIBOR plus 135 basis points. The company utilizes variable rate debt up to specified limits to total market capitalization. The company currently is seeking alternatives to reduce its interest costs and is considering replacing a portion of the amounts outstanding under its lines of credit with fixed rate longer maturity debt.
The company has analyzed its interest rate risk exposure. The company believes that interest rates will remain stable at current levels. However, if market interest rates for this type of credit facility average 100 basis points more in 1999 than they did in 1998, the company's interest expense would increase, and net income would decrease by $1.72 million. These amounts are determined by considering the impact of hypothetical interest rates on the company's borrowing cost. These analyses do not consider the effects of the reduced overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the company's financial structure.
Impact of Inflation. The company does not believe that inflation had any significant impact on its operation of the company in 1998. Future inflation, if any, would likely cause increased operating expenses, but the company believes that increases in expenses would be more than offset by increases in rental revenues. Continued inflation may also cause capital appreciation of the companys properties over time, as rental rates and replacement costs increase.
Item 8.
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors
The Board of Directors and Shareholders Cornerstone Realty Income Trust, Inc.
We have audited the accompanying consolidated balance sheets of Cornerstone Realty Income Trust, Inc. (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cornerstone Realty Income Trust, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Richmond, Virginia January 25, 1999
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1 General Information and Summary of Significant Accounting Policies
Business. Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, the "company"), a Virginia corporation, is an owner-operator of one business segment consisting of residential apartment communities in the mid-Atlantic and southeastern regions of the United States. The accompanying consolidated financial statements include the accounts of the company along with its subsidiaries, Cornerstone REIT Limited Partnership, Apple Residential Advisors, Inc., Apple Residential Management Group, Inc., and CRIT-NC, LLC. As of December 31, 1998, Cornerstone Realty Income Trust, Inc. owns 1,403,445 operating units representing an 88% interest in Cornerstone REIT, L.P. All significant intercompany accounts and transactions have been eliminated in consolidation. The company's common stock trades on the New York Stock Exchange under the ticker symbol "TCR."
Certain previously reported amounts have been reclassified to conform to the current year presentation.
Summary of New Accounting Pronouncements. As of January 1, 1998, the company adopted Statement 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the company's net income or shareholders' equity. The company does not currently have any items of comprehensive income requiring separate reporting and disclosure.
Cash and Cash Equivalents. Cash equivalents include highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value.
Investment in Rental Property. The investment in rental property is recorded at the cost, net of depreciation, and includes real estate brokerage commissions paid to Cornerstone Realty Group, a related party, for purchases prior to October 1, 1996. (See Note 6 to the consolidated financial statements.)
The company records impairment losses on rental property used in the operations if indicators of impairment are present, and the undiscounted cash flows estimated to be generated by the respective properties are less than their carrying amount. Impairment losses are measured as the difference between the asset's fair value less cost to sell, and its carrying value. No impairment losses have been recorded to date.
Repairs and maintenance costs are expensed as incurred while significant improvements, renovations, and replacements are capitalized. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which are 27.5 years for buildings and major improvements and a range from five to seven years for furniture and fixtures.
Income Recognition. Rental income, interest, and other income are recorded on an accrual basis. The company's properties are leased under leases that, typically, have terms that do not exceed one year.
Stock Incentive Plans. The company elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. As discussed in Note 5, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("FASB 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Advertising Costs. Costs incurred for the production and distribution of advertising are expensed as incurred.
Earnings Per Common Share. Basic and diluted earnings per common share are calculated in accordance with FASB Statement No. 128 "Earnings Per Share." Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the year. Diluted earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. Operating Partnership units are not included in diluted earnings per share calculations since the impact is not dilutive.
Federal Income Taxes. The company is operated as, and annually elects to be taxed as, a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). Generally, a real estate investment trust which complies with the provisions of the Code and distributes at least 95% of its taxable income to its shareholders does not pay federal income taxes on its distributed income. Accordingly, no provision has been made for federal income taxes.
For income tax purposes, distributions paid to shareholders consist of ordinary income and return of capital or a combination thereof. Distributions per share were $1.03, $1.00, and $.993 in the years ended December 31, 1998, 1997, and 1996, respectively. In 1998, of the total distribution, 80% was taxable as ordinary income, and 20% was a non-taxable return of capital.
In 1997, of the total distribution, 77% was taxable as ordinary income, and 23% was a non-taxable return of capital. In 1996, 86.4% was taxable as ordinary income, and 13.6% was a non-taxable return of capital.
Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make certain estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Note 2 Investment in Rental Property
The following is a summary of rental property owned at December 31, 1998.
* Includes real estate commissions, closing costs, and improvements capitalized since the date of acquisition. ** Heatherwood Apartments is comprised of Heatherwood and Italian Village/Villa Marina Apartments acquired in September 1996 and August 1997, respectively, at a cost of $10,205,457 and $7,425,000. They are adjoining properties and are operated as one apartment community. *** Trolley Square Apartments is comprised of Trolley Square East and Trolley Square West Apartments acquired in June 1996 and December 1996, respectively, at a cost of $6,000,000 and $4,242,575. They are adjacent properties and are operated as one apartment community.
Note 2 Continued
The following is a reconciliation of the carrying amount of real estate owned:
The following is a reconciliation of accumulated depreciation:
Note 3 Notes Payable
During 1997, the company obtained a $175 million unsecured line of credit ("Unsecured Line") with a consortium of six banks. During October 1998, the company closed a $25 million extension on the Unsecured Line, bringing the maximum permitted borrowing to $200 million. The Unsecured Line bears interest at one month LIBOR plus 135 basis points at December 31, 1998 and 1997. In addition, the company is obligated to pay lenders a quarterly commitment fee equal to .20% per annum of the unused portion of the line. The $25 million extension is due on April 15, 1999 and the remaining balance is due on October 30, 2000. At December 31,1998 and 1997, borrowings under the agreement were $196 million and $144 million, respectively. The weighted average interest rates incurred under the lines of credit were 6.9% in 1998 and 7.2% in 1997.
The line of credit agreement contains certain covenants which, among other things, require maintenance of certain financial ratios and includes restrictions on the company's ability to make distributions to its shareholders over certain amounts. At December 31, 1998, the company was in compliance with these covenants.
During 1997, the company obtained a $5 million unsecured line of credit for general corporate purposes ("General Purpose Line"). The general purpose line of credit bears interest at LIBOR plus 160 basis points and is due on March 31,1999. At December 31, 1998 and 1997, borrowings under this arrangement were $343,000 and $2.5 million, respectively.
On June 25, 1996, in connection with the acquisition of rental property, an unsecured note was executed by the company in the amount of $5.5 million. The note bears an effective interest rate of 6.65% per annum. Annual interest payments are due on January 1, 1999 and the principal balance with any accrued interest is due on June 1, 1999. The note is prepayable at any time, without penalty.
The fair market value of the borrowings approximate the recorded amounts. No interest was capitalized in 1998, 1997, or 1996. Interest paid was $11,636,307, $7,221,104, and $1,075,360 for 1998, 1997, and 1996, respectively.
Note 4 Common Stock
During 1998, the company raised $30 million by issuing 2.6 million common shares through its participation in a Unit Investment Trust, which resulted in $28 million net proceeds to the company, after underwriting discounts, commissions, and other direct costs. The company used the proceeds to pay down its line of credit, for the acquisition of additional apartment communities, and for working capital.
In April 1997, the company completed its firm-commitment initial public offering of 5,175,000 shares of its common stock at $10.50 per share. Net proceeds, after deducting underwriting discounts and commissions and direct offering costs, aggregated approximately $49 million and were used to repay $44 million of a previous line of credit.
The company raised capital through a series of continuous "best-efforts" offerings of shares during 1996. The company received gross proceeds of $161,558,958 from the sale of 14,687,178 shares at $11 per share, including shares sold through the reinvestment of distributions for the year ended December 31, 1996. The underwriter received selling commissions and a marketing expense allowance equal to 7.5% and 2.5%, respectively, of the gross proceeds of shares sold. During 1996, the underwriter earned $16,159,634. The net proceeds of the offering, after deducting selling commissions and other offering expenses, were $144,798,035 in 1996.
The company provides a plan, which allows shareholders to reinvest distributions in the purchase of additional shares of the company. In 1997, the company adopted a Dividend Reinvestment and Share Purchase Plan, ("Plan"), which allows any recordholder to reinvest distributions without payment of any brokerage commissions or other fees. Of the total proceeds raised from common shares during the years ended December 31, 1998, 1997, and 1996, $10,873,529, $14,198,868, and $9,572,255, respectively, were provided through the reinvestment of distributions.
As of December 31, 1998, the company has an approximately 88% interest as a general partner in Cornerstone REIT Limited Partnership., a Virginia limited partnership ( the "Limited Partnership") which was organized by the company to acquire Cape Landing Apartments, a 288-unit apartment community located in Myrtle Beach, South Carolina. The purchase price of the property was $17.1 million. The company entered into an agreement of limited partnership (the "Agreement") with Cape Landing Apartments, LLC, a North Carolina limited liability company (the "Limited Partner"). Pursuant to the Agreement, the Limited Partner contributed an approximately 12% interest in the property to the Limited Partnership in exchange for 185,887 partnership units valued at $2 million. The Limited Partner sold its remaining interest in the property to the Limited Partnership for $15.1 million. The operating partnership units can be exchanged at the option of the holder. The company determines if the options will be converted to cash or common stock, at a ratio of one share of common stock for every operating partnership unit.
Note 5 Benefits Plans
Stock Incentive Plan Based on the outstanding shares under the 1992 Incentive Plan, as amended, a maximum of 1,650,054 options could be granted, at the discretion of the Board of Directors, to certain officers and key employees of the company. Also under the Directors Plan, as amended, a maximum of 702,315 options could be granted to the directors of the company. In 1998, the company granted 38,605 options to purchase shares under the Directors Plan and 460,000 options to purchase shares under the incentive plan.
Both of the plans generally provide, among other things, that options be granted at exercise prices not lower than the market value of the shares on the date of grant. Under the Incentive Plan, options become exercisable at the date of grant. Generally the optionee has up to 10 years from the date on which the options first become exercisable during which to exercise the options. Activity in the company's share option plans during the three years ended December 31, 1998 is summarized in the following table:
Pro forma information regarding net income and earnings per share is required by FASB 123, which also requires that the information be determined as if the company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method described in that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997, and 1996, respectively: risk-free interest rates of 5.5% for 1998, 6.7% for 1997, and 6.4% for 1996; a dividend yield of 9.0% for 1998 and 7.0% for 1997 and 1996; volatility factors of the expected market price of the company's common stock of .160 for 1998, .161 for 1997 and .122 for 1996; and a weighted-average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of FASB 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. As the options are immediately exercisable, the full impact of the pro forma adjustment to net income is disclosed below.
401(K) Savings Plan Eligible employees of the company participate in a contributory employee savings plan. Under the plan, the company may match a percentage of contributions made by eligible employees, such percentage to apply to a maximum of 1% of their annual salary. Expenses under this plan for 1998 were $42,288.
Note 6 Related-Party Transactions
Relationship with Apple Residential Income Trust
Apple Residential Income Trust, Inc. ("Apple") is a real estate investment trust whose operations began in 1997. Mr. Knight, Chairman and Chief Executive Officer of the company, also serves as the Chairman and Chief Executive Officer of Apple. Common equity is being raised by Apple on a "best efforts" basis in a manner similar to that used by the company from 1993 through 1996.
During 1997, the company purchased 417,778 common shares of Apple for $3,760,000, which represents approximately 1.5% of Apple's common shares outstanding at December 31, 1998. The company has a right to purchase up to 9.8% of the common shares of Apple and has a first right of refusal to purchase the assets and business of Apple. The company received distributions on this investment of $340,483 in 1998 and $253,172 in 1997.
The company or its affiliates provides real estate brokerage, property management, and advisory services to Apple. In March 1997, the company purchased the right to provide brokerage services to Apple by purchasing the assets of Apple Realty Group, Inc., for $2 million, $350,000 in cash, and 150,000 company common shares valued at $1,650,000. The principal asset of Apple Realty Group, Inc. was its brokerage contract with Apple. Under the terms of the brokerage contract with Apple, the company receives a real estate commission equal to 2% of the purchase price of the properties acquired plus reimbursement of certain expenses. During 1998 and 1997, the company earned $2,665,100 and $1,031,066, respectively, in real estate brokerage commissions. The company amortized $1,054,470 and $546,000, in 1998 and 1997, respectively, of the purchase price for the brokerage contract. The company is amortizing the purchase price of the contract in relationship to the assets acquired.
The company provides property management services for Apple for a fee of 5% of monthly rental revenues plus reimbursement of certain expenses. The company provides advisory services to Apple for a fee of .1% to .25% based on total capital raised by Apple and the financial performance of Apple. During 1998 and 1997, the company earned $2,220,593 and $822,497, respectively, for management and advisory services.
Relationship with Advisory, Management, and Acquisition Companies
Prior to September 30, 1996, the company operated as an "externally advised" and "externally managed" REIT. Cornerstone Advisors, Inc. served as the advisor, Cornerstone Management Group, Inc. served as the property manager, and acquisition services were provided by Cornerstone Realty Group, Inc. Glade M. Knight, Chairman and Chief Executive Officer of the company, held all of the stock of Cornerstone Advisors, Inc., Cornerstone Management Group, Inc., and Cornerstone Realty Group, Inc. (collectively, the "External Companies"). By agreement, Mr. Knight held part of the stock of the External Companies for the account and interest of Stanley J. Olander, Jr., Chief Financial Officer of the company, and Debra A. Jones, Chief Operating Officer of the company.
As of October 1, 1996, the company entered into a series of related-party transactions with the External Companies, the effect of which was to convert the company into a "self-administered" and "self-managed" REIT. The transactions were unanimously approved by the independent members of the company's Board of Directors.
To effect the transaction, the company agreed to issue 1.4 million shares to Cornerstone Management Group, Inc. in exchange for the assignment of all of its rights and interest in, to and under, its management agreements with the company. The company issued 700,000 shares on October 1,1996 and 700,000 shares on September 30, 1997. The consideration for the transaction totaled approximately $15.4 million based upon the fair market value of $11 per share of the company's common stock. Imputed interest of $402,907 and $134,302 were recognized in 1997 and 1996, respectively, related to issuance of 700,000 shares in September 1997. In addition, on October 1, 1996, the company paid to Cornerstone Realty Group, Inc. and Cornerstone Advisors, Inc. $1,325,000 in exchange for the assignment by them of all of their rights and interests in, to and under, their property acquisition agreement and advisory agreement with the company. Immediately following the assignment by each of the External Companies of its rights and interest in, to and under, its respective agreements, the company terminated such agreements. The consideration for all of the above transactions, plus related transaction costs and imputed interest, was accounted for as a termination of the management administration contracts.
Also on October 1, 1996, the company paid to Cornerstone Realty Group, Inc. $100,000 and paid to Glade Knight $350,000 for the personal property and building, respectively, located at 306 E. Main Street, Richmond, Virginia, which serves as the principal executive office of the company. The company also paid approximately $138,000 to certain lenders, representing the balance owed on certain automobile loans, in exchange for the conveyance by Cornerstone Realty Group, Inc., to the company of such automobiles.
Prior to the October 1, 1996 transaction, Cornerstone Advisors, Inc. (The "Advisor") was the advisor to the company and provided its day-to-day management. The Advisor earned a quarterly fee not to exceed .25% of the company's assets based on the company's financial performance as defined in the agreement with the Advisor. The Advisor earned $295,759 in 1996.
As properties were acquired, the company paid real estate commissions of 2% of the purchase prices of properties to Cornerstone Realty Group, Inc., and Cornerstone Realty Group, Inc. earned commissions of $1,957,624 in 1996. In addition the company entered into agreements with Cornerstone Management Group, Inc. (the "Management Company") to manage the properties. The Management Company earned a management fee equal to 5% of rental income and was entitled to be reimbursed for certain expenses. The Management Company earned management fees of $1,243,215 in 1996.
Other Relationships Leslie A. Grandis, a director of the company, is also a partner in McGuire, Woods, Battle & Boothe LLP, which serves as counsel to the company. Martin Zuckerbrod and Harry S. Taubenfeld, directors of the company, provide real estate legal services to the company.
Note 7 Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Note 8 Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations for the years ended December 31, 1998 and 1997:
(a) Included in the 1997 operating results is $402,907 of management contract termination expense resulting from the company's conversion to "self-administered" and "self-managed" status. See Note 6 to the consolidated financial statements.
Note 9 Pro Forma Information (Unaudited)
The following unaudited pro forma information for the year ended December 31, 1997 reflects adjustments for the actual rental income and rental expenses of 11 of the 13 properties acquired in 1997 for the respective periods in 1997 prior to acquisition by the company. The unaudited pro forma information is presented as if (a) the company had qualified as a REIT, distributed all of its taxable income and, therefore, incurred no federal income tax expense during the period; and (b) the company had used proceeds from its best efforts offering to acquire the properties, for properties acquired before the completion of the offering. Properties acquired after the completion of the offering were assumed to be acquired using the company's line of credit or from proceeds of an equity offering completed in April 1997. The pro forma information does not purport to represent what the company's results of operations would have been if such transactions, in fact, had occurred on January 1, 1997, nor does it purport to represent the results of operations for future periods.
Unaudited Pro Forma Totals 1997 ----
Income $80,147,371 Net income 20,342,399 Basic and diluted earnings per common share .58
Net income has been adjusted as follows: (1) interest expense has been increased for the properties funded by the company's line of credit based on market rates at the time of acquisition available to the company for applicable properties; (2) the number of weighted average common shares outstanding was increased for properties funded by proceeds from equity offerings; and (3) depreciation has been adjusted based on the company's basis in the properties.
The 1998 acquisitions were not material to require pro forma disclosure.
Note 10 Subsequent Events (Unaudited)
The Company's Board of Directors met on March 30, 1999, and voted to approve a merger with Apple Residential Income Trust, Inc. subject to, among other requirements, an affirmative vote of the Company's shareholders.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Ownership of Equity Securities
"Beneficial Ownership" as used herein has been determined in accordance with the rules and regulations of the Securities and Exchange Commission and is not to be construed as an admission that any of such Common Shares are in fact beneficially owned by any person. As of the Record Date, there are no shareholders known to the Company who own beneficially more than 5% of the outstanding Common Shares.
Beneficial Ownership of Common Shares held by directors and executive officers of the Company as of the Record Date is indicated in the table below. Each person named in the table and included in the director/officer group has sole voting and investment powers as to such Common Shares, or shares such powers with his or her spouse or minor children, if any.
- ----------------------- * Less than one percent of outstanding Common Shares.
(1) Includes Common Shares that may be acquired upon the exercise of stock options, as follows: Messrs. Bunting and Grandis and Ms. Kyle - 26,329 Common Shares each; Mr. Knight -280,440 Common Shares; Mr. Olander and Ms. Jones - 144,310 Common Shares each; and Messrs. Taubenfeld and Zuckerbrod - 52,413 Common Shares each.
Election of Directors
Nominees for Directors. At the Annual Meeting three directors of Class II are to be elected, each to hold office for an ensuing three-year term, or until his or her successor is duly elected and qualified, except in the event of death, resignation or removal. The nominees for election to the three positions on the Board of Directors to be voted upon at the Annual Meeting are Glade M. Knight, Glenn W. Bunting and Leslie A. Grandis. If elected, Messrs. Knight, Bunting and Grandis will serve until the Annual Meeting of Shareholders in the year 2002.
Of the directors whose terms do not expire in 1999, Messrs. Olander and Zuckerbrod (the Class I directors) will serve until the 2000 Annual Meeting of Shareholders, and Ms. Kyle and Mr. Taubenfeld will serve until the 2001 Annual Meeting of Shareholders.
Unless otherwise specified, Common Shares represented by the proxies will be voted for the election of the nominees listed, except that in the event either of those named should not continue to be available for election, discretionary authority may be exercised to vote for a substitute. No circumstances are presently known that would render any nominee named herein
unavailable. Each of the nominees is now a member of the Board of Directors. If a quorum is present, the two candidates receiving the greatest number of affirmative votes of Common Shares represented and voting at the Annual Meeting will be elected directors of the Company.
The nominees, their ages, the year of election of each to the Board of Directors of the Company, their principal occupations during the past five years or more, and directorships of each in public companies in addition to the Company are as follows:
Glenn W. Bunting, Jr., 54, is a director of the Company. He has been President of American KB Properties, Inc., which develops and manages shopping centers, since 1985. He has been President of G.B. Realty Corporation, which brokers shopping centers and apartment communities, since 1980. Mr. Bunting was first elected to the Board of the Company in 1993 and his term expires in 1999.
Leslie A. Grandis, 54, is a director of the Company. He has been a partner in the law firm of McGuire, Woods, Battle & Boothe LLP in Richmond, Virginia since 1974. Mr. Grandis concentrates his practice in the areas of corporate finance and securities law. He is a director of Markel Corporation and CSX Trade Receivables Corporation. Mr. Grandis was first elected to the Board of the Company in 1993 and his term expires in 1999.
Glade M. Knight, 55, is a director, Chairman, Chief Executive Officer and President of the Company. Since 1972, Mr. Knight has held executive and/or ownership positions in several corporations involved in the management of and investment in real estate, and has served, directly or indirectly, as a general or limited partner of 71 limited partnerships owning 80 properties comprising over 13,000 apartment units. Mr. Knight is also a director, Chairman of the Board and President of Apple Residential Income Trust, Inc. Mr. Knight was first elected to the Board of the Company in 1989 and his term expires in 1999. Mr. Knight serves as Chief Executive Officer and President of the Company under an employment agreement which has a one-year term ending on August 31, 1999, and which may be extended by the Company for up to two additional one-year terms.
Other Directors and Officers. The following are the directors of the Company whose terms expire after 1999 and the executive officers of the Company:
Debra A. Jones, 44, is the Chief Operating Officer of the Company. From June 1991 through August 1996, Ms. Jones was employed by Cornerstone Realty Group, Inc. Through Cornerstone Realty Group, Inc., Cornerstone Management Group, Inc. and Cornerstone Advisors, Inc., which had contracts to provide management and administration services to the Company, Ms. Jones provided the same general types of services as she now provides as the Company's Chief Operating Officer. Ms. Jones has held executive positions in real estate companies organized by Mr. Knight since 1979. Ms. Jones has been the Company's Chief Operating Officer since September 1, 1996, and serves in such capacity under an employment agreement which has a five-year term ending on August 31, 2001.
Stanley J. Olander, Jr., 44, is a director, Chief Financial Officer and Secretary of the Company. From June 1991 through August 1996, Mr. Olander was employed by Cornerstone Realty Group, Inc. Through Cornerstone Realty Group, Inc., Cornerstone Management Group, Inc. and Cornerstone Advisors, Inc., which had contracts to provide management and administration services to the Company, Mr. Olander provided the same general types of services as he now provides as the Company's Chief Financial Officer. Mr. Olander has held various executive positions in real estate companies organized by Mr. Knight since 1981. Mr. Olander was first elected to the Board of the Company in 1992 and his term expires in 2000. Mr. Olander has been the Company's Chief Financial Officer since September 1, 1996, and serves in such capacity under an employment agreement which has a five-year term ending on August 31, 2001.
Martin Zuckerbrod, 68, is a director of the Company. He has practiced law, and been involved in mortgage and real estate investment activities, in the firm of Zuckerbrod & Taubenfeld of Cedarhurst, New York since 1959. He has practiced law since 1956. Mr. Zuckerbrod's areas of professional concentration are real estate and commercial law. Mr. Zuckerbrod also serves as a judge in the Village of Cedarhurst, New York. Mr. Zuckerbrod was first elected to the Board of the Company in 1992 and his term expires in 2000.
Penelope W. Kyle, 51, has been the director of the Virginia Lottery since September 1, 1994. Ms. Kyle worked in various capacities for CSX Corporation and its affiliated companies from 1981 until August 1994. She served as Vice President, Administration and Finance for CSX Realty, Inc. beginning in 1991, as Vice President, Administration for CSX Realty, Inc. from 1989 to 1991, and as Assistant Vice President and Assistant to the President for CSX Realty, Inc. from 1987 to 1989. Ms. Kyle is also a director of Apple Residential Income Trust, Inc. Ms. Kyle was first elected to the Board of the Company in 1993 and her term expires in 2001.
Harry S. Taubenfeld, 69, has practiced law, and been involved in mortgage and real estate investment activities, in the firm of Zuckerbrod & Taubenfeld of Cedarhurst, New York since 1959, and has practiced law since 1956. Mr. Taubenfeld specializes in real estate and commercial law. Mr. Taubenfeld is a Trustee of the Village of Cedarhurst, New York, and a past President of the Nassau County Village Officials. Mr. Taubenfeld was first elected to the Board of the Company in 1992 and his term expires in 2001.
Executive Officers
The Company's executive officers are Glade M. Knight, Debra A. Jones and Stanley J. Olander, Jr. Information with regard to Messrs. Knight and Olander and Ms. Jones is set forth above under the caption "Election of Directors."
Item 11.
Item 11. Executive Compensation
Compensation of Directors
During 1998, independent directors (all directors other than Messrs. Knight and Olander) received annual directors' fees of $10,000 payable $5,000 in cash and $5,000 in Common Shares (valued at the current market price at the time of issuance), plus $500 for each meeting of the Board and $100 for each committee meeting attended; however independent directors did not receive any compensation for attending a committee meeting if it occurred on the same day as a meeting of the entire Board of Directors. Independent directors received an additional $1,000 for serving on the Executive Committee in 1998. Non-independent directors received no compensation from the Company for their service as directors. All directors were reimbursed by the Company for their travel and other out-of-pocket expenses incurred in attending meetings of the directors or a committee and in conducting the business of the Company.
In addition, in 1998, each independent director received an option to purchase 7,721 Common Shares, exercisable at $11.68per Common Share. Independent directors will receive additional Common Share options in 1999.
Compensation of Executive Officers
General. The following table sets forth the compensation awarded during the fiscal years ended December 31, 1998, 1997 and 1996, to the Company's Chief Executive Officer and all executive officers of the Company whose total salary and bonus exceeded $100,000 (collectively the "Named Executive Officers") during the fiscal year ending December 31, 1998. The Company did not pay salaries to its officers for the period before September 1, 1996. During such prior period, the Company operated as an "externally-advised" and "externally-managed" real estate investment trust ("REIT"). Effective October 1, 1996, the Company converted to "self-administered" and "self-managed" status.
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(1) Bonuses may be awarded in 1999 and in future years in the discretion of the Board of Directors.
(2) The Company provides each of the Named Executive Officers with use of a Company automobile, and pays premiums for term life, disability and health insurance for the Named Executive Officers. The value of such items was less than the lesser of either $50,000 or 10% of the total salary and bonus of the Named Executive Officer in 1998.
(3) At December 31, 1998, Mr. Knight held 8,350 restricted Common Shares (with an aggregate value as of December 31, 1998 of $87,675) issued under the Company's Incentive Plan and each of Ms. Jones and Mr. Olander held 4,500 restricted Common Shares (each with an aggregate value as of December 31, 1998 of $47,250) issued under the Incentive Plan. All of these restricted Common Shares were issued on July 1, 1995 and March 24, 1998 and vest in equal 1/5 portions in each of the five years from the date of issuance. If the holder of such restricted Common Shares ceases to be either an officer or employee of the Company for any reason other than death or permanent disability, the unvested restricted Common Shares will revert to the Company. Distributions are payable on all of these restricted Common Shares, both vested and unvested. The table set forth above shows only the vested restricted Common Shares and reflects the fair market value of the vested restricted Common Shares on the date of their issuance.
The following table sets forth information with respect to the Common Share options held by the Named Executive Officers during the year ended December 31, 1998. There were no option grants to the Named Executive Officers during the year ended December 31, 1998.
---------------------------
--------------------------
* The fair market value based on closing sale price of Common Shares on date of grant.
Employment Agreements. Each of Glade M. Knight, Stanley J. Olander, Jr. and Debra A. Jones has, effective September 1, 1996, entered into an employment agreement with the Company. Mr. Knight's employment agreement had a term of one year, was extended for one additional one-year term and may be extended by the Company for up to three additional one-year terms. The employment agreements with Ms. Jones and Mr. Olander have five year terms ending on August 31, 2001. Mr. Olander and Ms. Jones are obligated to devote all of their business time to the Company. Mr. Knight is not similarly restricted, although he has agreed to devote as much of his attention and energies to the business of the Company as is reasonably required in the judgment of him and the Board of Directors.
Each employment agreement contains a limited non-compete provision. The officer agrees that during the term of his or her employment, and for a period of one year thereafter if the officer terminates his or her employment, such officer will not be employed by or affiliated with a business that competes with the Company in Virginia, North Carolina, or South Carolina, or solicit or attempt to solicit any person employed by the Company to leave such employment for employment with a competing business. Notwithstanding the foregoing, Mr. Knight will be permitted (1) to continue to act as a general partner of various real estate partnerships in which he was a general partner as of September 1, 1996, and (2) to pursue other ventures, including without limitation real estate ventures, except any such ventures that compete with the Company in Virginia, North Carolina or South Carolina.
Each employment agreement terminates automatically upon the officer's death. The Company is obligated to pay to the decedent's personal representative an amount equal to the decedent's current annual salary in a one-time lump sum payment.
The Company may terminate the officer's employment and the Company's obligations under the employment agreement in the event of the "disability" of the officer or for "cause," as defined in the agreement. "Disability" means inability to perform the essential functions of the position, after reasonable accommodation in accordance with the Americans with Disabilities Act, if such a disability results from a physical or mental impairment which can be expected to result in death or to continue for at least six consecutive months. In the event of termination for disability, the Company must pay the officer or his representative an amount equal to the officer's current annual salary in a one-time lump sum payment. "Cause" is defined in the employment agreement as including continued or deliberate neglect of duties, willful misconduct of the officer injurious to the Company, violation of any code or standard of ethics applicable to Company employees, active disloyalty to the Company, conviction of a felony, habitual drunkenness or drug abuse, excessive absenteeism unrelated to a disability, or breach by the officer of the employment agreement. If the Company terminates the officer for "cause," it will have no further obligation to the officer except under any applicable benefits policy.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information on security ownership of certain beneficial owners and management is included in Item 10.
Item 13.
Item 13. Certain Relationships and Related Transactions
Messrs. Zuckerbrod and Taubenfeld are principals in the law firm of Zuckerbrod & Taubenfeld of Cedarhurst, New York, which acted as counsel to the Company in connection with the Company's acquisition of certain of its real properties in 1998 and received legal fees totaling approximately $118,000. This law firm is expected to render additional services to the Company in 1999 and will receive compensation for such services.
Mr. Grandis, who is a director of the Company, is also a partner in the law firm of McGuire, Woods, Battle & Boothe LLP, which serves as general counsel to the Company and certain of its affiliates and received legal fees for its services. Such representation is expected to continue in 1999. The husband of Penelope W. Kyle, who is a director of the Company, is also a partner in McGuire, Woods, Battle & Boothe LLP.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of the report
1. Financial Statements
The following consolidated financial statements of the registrant are included in Item 8:
Independent Auditors' Report Ernst & Young LLP
Consolidated Balance Sheets December 31, 1998 and 1997
Consolidated Statements of Operations Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation (Included on pages 36 through 40 of this Form 10-K Report)
All other financial statement schedules have been omitted because they are not applicable or not required or because the required information is included elsewhere in the financial statements or notes thereto.
3. Exhibits
Incorporated herein by reference are the exhibits listed under "Exhibits Index" on pages 42 through 46 of this Form 10-K Report.
(b) Reports on Form 8-K
During the last quarter of 1998, the Company filed the following Current Reports on Form 8-K:
On October 26, 1998, the registrant filed a Report on Form 8-K/A to a Report on Form 8-K dated August 12, 1998. The item reported was Item 7.
On December 28, 1998, the registrant filed a Report on Form 8-K dated October 16, 1998. The items reported were Items 2, 5, and 7. The financial statement filed was a Statement of Income and Direct Operating Expenses (exclusive of certain items) for Cape Landing Apartments for the twelve months ended September 30, 1998.
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998) DECEMBER
Subsequently Initial Cost Capitalized Encum- ------------------------------------------------- Description brances Land Bldg. Impr. Land - -------------------------------------------------------------------------------- 1) Polo Club $- $ 264,698 $4,035,302 $3,205,936 $ 264,698 * Greenville, SC * Multi-family housing
2) The Hollows $- $1,374,840 $2,825,160 $1,973,553 $1,390,671 * Raleigh, NC * Multi-family housing $-
3) Mayflower Seaside $2,258,169 $5,375,975 $2,557,214 $2,258,248 * Virginia Beach, VA * Multi-family housing * Retail shops
4) Stone Ridge $- $ 374,271 $2,950,729 $2,489,292 $ 374,293 * Columbia, SC * Multi-family housing
5) County Green $- $ 319,250 $3,480,750 $1,499,670 $ 327,484 * Lynchburg, VA * Multi-family housing
6) Wimbledon Chase $- $ 304,590 $2,995,410 $2,374,978 $ 304,815 * Wilmington, NC * Multi-family housing
7) Harbour Club $- $1,019,895 $4,230,105 $ 996,147 $1,020,274 * Virginia Beach, VA * Multi-family housing
8) Chase Mooring $- $ 258,126 $3,335,874 $2,170,709 $ 258,209 * Wilmington, NC * Multi-family housing
9) The Trestles $- $2,650,884 $7,699,116 $1,148,537 $2,686,006 * Raleigh, NC * Multi-family housing
10) Wind Lake $- $1,051,200 $7,708,800 $2,325,542 $1,088,780 * Greensboro, NC * Multi-family housing
11) Magnolia Run $- $ 495,000 $5,005,000 $1,409,344 $ 509,001 * Greenville, SC * Multi-family housing
12) Breckinridge $- $1,512,000 $4,088,000 $1,462,749 $1,558,060 * Greenville, SC * Multi-family housing
Gross Amount Carried - ----------------------------- Date of Date Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life - -------------------------------------------------------------------------------- $ 7,241,238 $ 7,505,936 $ 1,770,648 1972 June 3, 1993 27.5 yrs.
$ 4,782,882 $ 6,173,553 $ 1,083,582 1974 June 1, 1993 27.5 yrs.
$ 7,933,111 $10,191,359 $ 1,409,626 1950 Oct. 26, 1993 27.5 yrs.
$ 5,439,998 $ 5,814,292 $ 1,215,180 1975 Dec. 8, 1993 27.5 yrs.
$ 4,972,186 $ 5,299,670 $ 1,031,996 1976 Dec. 1, 1993 27.5 yrs.
$ 5,370,163 $ 5,674,978 $ 1,032,249 1976 Feb. 1, 1994 27.5 yrs.
$ 5,225,874 $ 6,246,147 $ 923,702 1988 May 1, 1994 27.5 yrs.
$ 5,506,501 $ 5,764,709 $ 874,015 1968 Aug. 1, 1994 27.5 yrs.
$ 8,812,531 $11,498,537 $ 1,518,361 1987 Dec. 30, 1994 27.5 yrs.
$ 9,996,762 $11,085,542 $ 1,313,936 1985 April 1, 1995 27.5 yrs.
$ 6,400,343 $ 6,909,344 $ 933,528 1972 June 1, 1995 27.5 yrs.
$ 5,504,689 $ 7,062,749 $ 786,475 1973 June 21, 1995 27.5 yrs.
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
Subsequently Initial Cost Capitalized Encum- ------------------------------------------------- Description brances Land Bldg. Impr. Land - -------------------------------------------------------------------------------- 13) Bay Watch Pointe $- $ 775,680 $ 2,596,845 $1,623,956 $ 813,936 * Virginia Beach, VA * Multi-family housing
14) Hanover Landing $- $ 801,500 $ 4,923,500 $1,724,266 $ 822,285 * Charlotte, NC * Multi-family housing
15) Mill Creek $- $1,368,000 $ 7,182,000 $1,034,482 $1,417,614 * Winston-Salem, NC * Multi-family housing
16) Glen Eagles $- $1,095,000 $ 6,205,000 $1,733,017 $1,595,458 * Winston-Salem, NC * Multi-family housing
17) Sailboat Bay $- $2,002,000 $ 7,098,000 $4,364,303 $2,066,930 * Charlotte, NC * Multi-family housing
18) Tradewinds $- $1,428,000 $ 8,772,000 $ 878,865 $1,436,890 * Hampton, VA * Multi-family housing
19) Osprey Landing $- $ 393,750 $ 3,981,250 $2,873,041 $ 403,842 * Wilmington, NC * Multi-family housing
20) The Meadows $- $ 186,000 $ 6,014,000 $1,242,434 $ 190,568 * Asheville, NC * Multi-family housing
21) West Eagle Green $- $ 326,400 $ 3,693,600 $2,324,127 $ 316,095 * Augusta, GA * Multi-family housing
22) Ashley Park $- $1,586,650 $10,618,350 $ 942,418 $1,589,251 * Richmond, vA * Multi-family housing
23) Arbor Trace $- $1,100,000 $ 3,900,000 $1,022,029 $1,130,749 * Virginia Beach, VA * Multi-family housing
24) Bridgetown Bay $- $ 603,000 $ 4,422,000 $ 820,929 $ 624,169 * Charlotte, NC * Multi-family housing
Gross Amount Carried - ----------------------------- Date of Date Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life - -------------------------------------------------------------------------------- $ 4,182,544 $ 4,996,481 $ 619,857 1972 July 18, 1995 27.5 yrs.
$ 6,626,980 $ 7,449,266 $ 825,849 1972 Aug. 22, 1995 27.5 yrs.
$ 8,166,868 $ 9,584,482 $ 1,012,893 1984 Sept. 1, 1995 27.5 yrs.
$ 7,437,558 $ 9,033,017 $ 947,596 1990 Oct. 1, 1995 27.5 yrs.
$11,397,373 $13,464,303 $ 1,414,467 1972 Nov. 1, 1995 27.5 yrs.
$ 9,641,975 $11,078,865 $ 1,220,735 1988 Nov. 1, 1995 27.5 yrs.
$ 6,844,199 $ 7,248,041 $ 861,051 1973 Nov. 1, 1995 27.5 yrs.
$ 7,251,866 $ 7,442,434 $ 857,142 1974 Jan. 31, 1996 27.5 yrs.
$ 6,028,032 $ 6,344,127 $ 691,426 1974 March 1, 1996 27.5 yrs.
$11,558,167 $13,147,418 $ 1,302,148 1988 March 1, 1996 27.5 yrs.
$ 4,891,281 $ 6,022,029 $ 568,303 1985 March 1, 1996 27.5 yrs.
$ 5,221,760 $ 5,845,929 $ 565,523 1986 April 1, 1996 27.5 yrs.
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
Subsequently Initial Cost Capitalized Encum- ------------------------------------------------- Description brances Land Bldg. Impr. Land - -------------------------------------------------------------------------------- 25) Trophy Chase $- $ 853,300 $ 2,856,700 $3,019,365 $ 880,843 * Charlottesville, VA * Multi-family housing
26) Beacon Hill $- $3,121,587 $10,457,616 $1,116,410 $ 3,075,732 * Charlotte, NC * Multi-family housing
27) Summerwalk $- $1,528,200 $ 4,131,800 $1,878,671 $ 1,565,051 * Concord, NC * Multi-family housing
28) The Landing $- $1,001,400 $ 7,343,600 $1,710,764 $ 1,023,951 * Raleigh, NC * Multi-family housing
29) Meadowcreek $- $1,110,000 $ 9,990,000 $1,404,352 $ 1,134,435 * Pineville, NC * Multi-family housing
30) Trolley Square East $- $1,620,000 $ 4,380,000 $3,019,708 $ 2,817,605 Trolley Square West $1,145,495 $ 3,097,080 * Richmond, VA * Multi-family housing
31) Savannah West $- $ 627,860 $ 9,215,760 $3,445,736 $ 1,161,511 * Augusta, GA * Multi-family housing
32) Paces Glen $- $2,153,250 $ 5,271,750 $ 704,400 $ 2,226,399 * Charlotte, NC * Multi-family housing
33) Signature Place $- $ 491,665 $ 4,971,283 $1,795,362 $ 502,648 * Greenville, NC * Multi-family housing
34) Hampton Glen $- $1,391,992 $10,207,939 $1,146,678 $ 1,414,237 * Richmond, VA * Multi-family housing
35) Heatherwood $- $2,449,310 $ 7,756,147 $5,767,240 $ 4,186,842 Italian Village/Villa Marina $ 1,707,750 $ 5,717,250 * Charlotte, NC * Multi-family housing
Gross Amount Carried - ----------------------------- Date of Date Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life - -------------------------------------------------------------------------------- $ 5,848,522 $ 6,729,365 $ 694,015 1970 April 1, 1996 27.5 yrs.
$11,619,880 $14,695,613 $ 1,176,300 1985 May 1, 1996 27.5 yrs.
$ 5,973,619 $ 7,538,671 $ 622,468 1983 May 1, 1996 27.5 yrs.
$ 9,031,813 $10,055,764 $ 910,146 1984 May 1, 1996 27.5 yrs.
$11,369,917 $12,504,352 $ 1,170,665 1984 May 31, 1996 27.5 yrs.
$10,444,677 $13,262,283 $ 1,058,022 1968 June 25, 1996 27.5 yrs. 1964 Dec. 31, 1996 27.5 yrs.
$12,127,845 $13,289,356 $ 1,158,056 1976 July 1, 1996 27.5 yrs.
$ 5,903,002 $ 8,129,400 $ 554,771 1986 July 19, 1996 27.5 yrs.
$ 6,755,662 $ 7,258,310 $ 675,438 1981 August 1, 1996 27.5 yrs.
$11,332,372 $12,746,609 $ 1,061,727 1986 August 1, 1996 27.5 yrs.
$19,210,856 $23,397,697 $ 1,312,815 1980 Sept. 1, 1996 27.5 yrs. 1980 Aug. 29, 1997
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
Subsequently Initial Cost Capitalized Encum- ------------------------------------------------- Description brances Land Bldg. Impr. Land - -------------------------------------------------------------------------------- 36) Highland Hills $- $1,210,000 $10,890,000 $2,321,444 $1,198,724 * Carrboro, NC * Multi-family housing
37) Parkside at Woodlake $- $2,932,778 $11,731,108 $ 455,523 $2,884,355 * Durham, NC * Multi-family housing
38) Greenbrier $- $ 998,957 $10,100,568 $1,392,309 $1,009,698 * Fredericksburg, VA * Multi-family housing
39) Deerfield $- $ 427,000 $10,248,000 $ 543,179 $ 430,416 * Durham, NC * Multi-family housing
40) The Arbors at Windsor $- $ 978,750 $ 9,896,250 $ 644,973 $ 994,426 Lake * Columbia, SC * Multi-family housing
41) Westchase $- $1,980,000 $ 9,020,000 $1,811,352 $2,012,327 * Charleston, SC * Multi-family housing
42) Paces Arbor $- $1,173,526 $ 4,414,693 $ 382,096 $1,181,172 * Raleigh, NC * Multi-family housing
43) Paces Forest $- $1,359,431 $ 5,114,050 $ 485,146 $1,370,590 * Raleigh, NC * Multi-family housing
44) Carlyle Club $- $3,589,800 $ 7,990,200 $1,274,800 $3,607,026 * Lawrenceville, GA * Multi-family housing
45) Ashley Run $- $3,780,000 $14,220,000 $1,482,278 $3,793,621 * Norcross, GA * Multi-family housing
46) Charleston Place $- $1,516,000 $ 7,959,000 $ 735,482 $1,534,603 * Charlotte, NC * Multi-family housing
47) Dunwoody Springs $- $3,648,000 $11,552,000 $3,024,312 $3,666,146 * Dunwoody, GA * Multi-family housing
Gross Amount Carried - ----------------------------- Date of Date Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life - -------------------------------------------------------------------------------- $13,222,720 $14,421,444 $1,238,766 1987 Sept. 27, 1996 27.5 yrs.
$12,235,054 $15,119,409 $1,106,811 1996 Aug. 31, 1996 27.5 yrs.
$11,482,137 $12,491,834 $1,532,856 1980 Oct. 1, 1996 27.5 yrs.
$10,787,763 $11,218,179 $ 878,888 1985 Nov. 1, 1996 27.5 yrs.
$10,525,547 $11,519,973 $ 810,376 1991 Jan. 1, 1997 27.5 yrs.
$10,799,026 $12,811,352 $ 837,847 1985 Jan. 15, 1997 27.5 yrs.
$ 4,789,142 $ 5,970,315 $ 335,625 1986 March 1, 1997 27.5 yrs.
$ 5,588,037 $ 6,958,627 $ 393,683 1986 March 1, 1997 27.5 yrs.
$ 9,247,774 $12,854,800 $ 641,638 1974 Apr. 30, 1997 27.5 yrs.
$15,688,657 $19,482,278 $1,046,144 1987 Apr. 30, 1997 27.5 yrs.
$ 8,675,879 $10,210,482 $ 559,521 1986 May 13, 1997 27.5 yrs.
$14,558,166 $18,224,312 $ 827,490 1981 July 25, 1997 27.5 yrs.
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
Subsequently Initial Cost Capitalized Encum- ----------------------------------------------- Description brances Land Bldg. Impr. Land - -------------------------------------------------------------------------------- 48) Clarion Crossing $- $ 3,180,000 $ 7,420,000 $ 476,591 $ 3,235,960 * Raleigh, NC * Multi-family housing
49) Stone Brook $- $ 1,570,000 $ 6,280,000 $ 861,137 $ 1,582,468 * Norcross, GA * Multi-family housing
50) St. Regis $- $ 2,156,000 $ 7,644,000 $ 335,730 $ 2,170,353 * Raleigh, NC * Multi-family housing
51) Remington Place $- $ 1,422,000 $ 6,478,000 $ 557,508 $ 1,433,609 * Raleigh, NC * Multi-family housing
52) Stone Point $- $ 1,164,000 $ 8,536,000 $ 476,529 $ 1,170,756 * Charlotte, NC * Multi-family housing
53) Pinnacle Ridge $- $ 1,547,411 $ 4,183,740 $ 316,863 $ 1,572,517 * Ashville, NC * Multi-family housing
54) Hampton Point $- $ 1,589,250 $ 10,635,750 $ 2,048,203 $ 1,648,342 * Charleston, NC * Multi-family housing
55) The Timbers $- $ 1,944,000 $ 6,156,000 $ 252,596 $ 1,955,632 * Raleigh, NC * Multi-family housing
56) The Gables $- $ 2,185,000 $ 9,315,000 $ 304,432 $ 2,200,603 * Richmond, VA * Multi-family housing
57) Spring Lake $- $ 900,000 $ 8,100,000 $ 363,025 $ 907,555 * Morrow, GA * Multi-family housing
58) Cape Landing $- $ 1,026,000 $ 16,074,000 $ 165,961 $ 1,015,486 * Myrtle Beach, SC * Multi-family housing -------------------------------------------------------- $- $85,028,615 $412,492,050 $89,917,693 $87,013,965 ========================================================
Gross Amount Carried - ----------------------------- Date of Date Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life - -------------------------------------------------------------------------------- $ 7,840,631 $ 11,076,591 $ 392,229 1972 Sept. 30, 1997 27.5 yrs.
$ 7,128,669 $ 8,711,137 $ 328,088 1986 Oct. 31, 1997 27.5 yrs.
$ 7,965,377 $ 10,135,730 $ 348,402 1986 Oct. 31, 1997 27.5 yrs.
$ 7,023,899 $ 8,457,508 $ 299,125 1985 Oct. 31, 1997 27.5 yrs.
$ 9,005,773 $ 10,176,529 $ 345,740 1986 Jan.15, 1998 27.5 yrs.
$ 4,475,496 $ 6,048,013 $ 142,257 1951 April 1, 1998 27.5 yrs.
$ 12,624,861 $ 14,273,203 $ 385,775 1986 Mar 31, 1998 27.5 yrs.
$ 6,396,963 $ 8,352,596 $ 139,998 1983 June 4, 1998 27.5 yrs.
$ 9,603,829 $ 11,804,432 $ 180,293 1987 July 2, 1998 27.5 yrs.
$ 8,455,469 $ 9,363,025 $ 128,844 1986 Aug. 12, 1998 27.5 yrs.
$ 16,250,475 $ 17,265,961 $ 152,653 1997/98 Oct. 16, 1998 27.5 yrs. - -------------------------------------------
$500,424,393 $587,438,358(1) $48,227,760 ===========================================
(1) Represents the aggregate cost for Federal Income tax purposes.
(2) The reconciliations of the carrying amount of real estate owned and accumulated depreciation is contained in Note 2 of the audited financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 29th day of March 1999.
CORNERSTONE REALTY INCOME TRUST, INC.
By: /s/ Glade M. Knight ------------------------- Glade M. Knight, Chairman of the Board, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
The Company agrees to furnish the Commission on request a copy of any instrument with respect to long-term debt of the Company or its subsidiaries the total amount of securities authorized under which does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis.