UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission file number: 1-12110 CAMDEN PROPERTY TRUST (Exact Name of Registrant as Specified in Its Charter) TEXAS 76-6088377 (State or Other Jurisdiction of (I.R.S. Employer Identification Incorporation or Organization) Number) 3 Greenway Plaza, Suite 1300, Houston, Texas 77046 (Address of Principal Executive Offices) (Zip Code) (713) 354-2500 (Registrant's Telephone Number, Including Area Code) N/A (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 9, 2001, there were 40,773,622 shares of Common Shares of Beneficial Interest, $0.01 par value outstanding.
1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CAMDEN PROPERTY TRUST CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (In thousands) ASSETS September 30, December 31, 2001 2000 --------------- -------------- (Unaudited) <S> <C> <C> Real Estate Assets, at cost: Land $ 362,413 $ 350,248 Buildings and improvements 2,223,661 2,124,740 --------------- -------------- 2,586,074 2,474,988 Less: accumulated depreciation (400,278) (326,723) --------------- -------------- Net operating real estate assets 2,185,796 2,148,265 Properties under development, including land 108,395 148,741 Investment in joint ventures 17,374 22,612 Advances to third party development properties 87,885 72,893 --------------- -------------- Total real estate assets 2,399,450 2,392,511 Accounts receivable - affiliates 4,360 3,236 Notes receivable: Affiliates 1,800 1,800 Other 3,704 Other assets, net 34,798 23,923 Cash and cash equivalents 3,213 4,936 Restricted cash 3,644 4,475 --------------- -------------- Total assets $ 2,450,969 $ 2,430,881 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable: Unsecured $ 907,781 $ 799,026 Secured 284,407 339,091 Accounts payable 13,396 13,592 Accrued real estate taxes 30,367 26,781 Accrued expenses and other liabilities 42,617 36,981 Distributions payable 30,284 28,900 --------------- -------------- Total liabilities 1,308,852 1,244,371 Minority Interests: Units convertible into perpetual preferred shares 149,815 149,815 Units convertible into common shares 57,473 60,562 --------------- -------------- Total minority interests 207,288 210,377 7.33% Convertible Subordinated Debentures 1,950 Shareholders' Equity: Convertible preferred shares of beneficial interest 42 Common shares of beneficial interest 476 450 Additional paid-in capital 1,297,265 1,312,323 Distributions in excess of net income (176,939) (153,972) Unearned restricted share awards (9,626) (6,680) Less: treasury shares, at cost (176,347) (177,980) --------------- -------------- Total shareholders' equity 934,829 974,183 --------------- -------------- Total liabilities and shareholders' equity $ 2,450,969 $ 2,430,881 =============== ============== </TABLE> See Notes to Consolidated Financial Statements.
2 CAMDEN PROPERTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> (In thousands, except per share amounts) Three Months Nine Months Ended September 30, Ended September 30, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenues Rental income $ 94,746 $ 92,251 $ 280,072 $ 273,429 Other property income 7,777 7,250 22,100 20,226 ---------- ---------- ---------- ---------- Total property income 102,523 99,501 302,172 293,655 Equity in income of joint ventures 5,437 190 8,361 670 Fee and asset management 2,225 1,545 5,488 4,471 Other income 2,033 1,159 6,111 3,640 ---------- ---------- ---------- ---------- Total revenues 112,218 102,395 322,132 302,436 ========== ========== ========== ========== Expenses Property operating and maintenance 30,471 29,312 86,835 85,292 Real estate taxes 10,292 10,057 30,806 30,091 General and administrative 3,426 2,926 9,818 9,691 Impairment provision for technology investments 1,090 Other expenses 905 905 Interest 17,755 17,640 52,672 51,829 Depreciation and amortization 26,574 23,700 75,918 73,543 ---------- ---------- ---------- ---------- Total expenses 89,423 83,635 258,044 250,446 ---------- ---------- ---------- ---------- Income before gain on sales of properties, minority interests and extraordinary charge 22,795 18,760 64,088 51,990 Gain of sales of properties 123 16,440 2,495 18,373 Income allocated to minority interest Distributions on units convertible into perpetual preferred shares (3,218) (3,219) (9,654) (9,627) Income allocated to units convertible into common shares (1,216) (1,435) (2,765) (2,234) ---------- ---------- ---------- ---------- Income before extraordinary charge 18,484 30,546 54,164 58,502 Extraordinary charge (early retirement of debt) (388) (388) ---------- ---------- ---------- ---------- Net income 18,096 30,546 53,776 58,502 Preferred share dividends (2,343) (2,545) (7,029) ---------- ---------- ---------- ---------- Net income to common shareholders $ 18,096 $ 28,203 $ 51,231 $ 51,473 ========== ========== ========== ========== Basic earnings per share before extraordinary charge $ 0.45 $ 0.74 $ 1.31 $ 1.35 Basic earnings per share $ 0.44 $ 0.74 $ 1.30 $ 1.35 Diluted earnings per share before extraordinary charge $ 0.43 $ 0.72 $ 1.25 $ 1.30 Diluted earnings per share $ 0.42 $ 0.72 $ 1.24 $ 1.30 Distributions declared per common share $ 0.61 $ 0.5625 $ 1.83 $ 1.6875 Weighted average number of common shares outstanding 40,669 38,050 39,490 38,156 Weighted average number of common and common dilutive equivalent shares outstanding 42,649 44,746 41,264 41,388 </TABLE> See Notes to Consolidated Financial Statements.
3 CAMDEN PROPERTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> (In thousands) Nine Months Ended September 30, ---------------------- 2001 2001 ---------- ---------- <S> <C> <C> CASH FLOW FROM OPERATING ACTIVITIES Net income $ 53,776 $ 58,502 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 75,918 73,543 Equity in income of joint ventures, net of cash received 7,110 1,247 Gain on sale of properties (2,495) (18,373) Extraordinary charge (early retirement of debt) 338 Income allocated to units convertible into common shares 2,765 2,234 Accretion of discount on unsecured notes payable 312 300 Net change in operating accounts 14,288 2,647 ---------- ---------- Net cash provided by operating activities 152,012 120,100 CASH FLOW FROM INVESTING ACTIVITIES Increase in real estate assets (76,713) (103,487) Net proceeds from sale of properties and townhomes 9,780 150,141 Increase in investment in joint ventures (1,881) (1,497) Increase in notes receivable (3,704) Increase in advances to third party development properties (22,227) (28,684) Decrease in advances to third party development properties 7,235 Other (3,829) (1,110) ---------- ---------- Net cash (used in)/provided by investing activities (91,339) 15,363 CASH FLOW FROM FINANCING ACTIVITIES Net decrease in unsecured lines of credit and short-term borrowings (105,000) (31,000) Proceeds from notes payable 313,443 Proceeds from issuance of preferred units, net 17,136 Repayment of notes payable (154,684) (3,790) Distributions to shareholders and minority interests (89,322) (84,219) Repurchase of preferred shares (26,922) Repurchase of common shares and units convertible into common shares (26,306) Extraordinary charge (early retirement of debt) (338) Other 427 595 ---------- ---------- Net cash used in financing activities (62,396) (127,584) ---------- ---------- Net (decrease)/increase in cash and cash equivalents (1,723) 7,879 Cash and cash equivalents, beginning of period 4,936 5,517 ---------- ---------- Cash and cash equivalents, end of period $ 3,213 $ 13,396 ========== ========== SUPPLEMENTAL INFORMATION Cash paid for interest, net of interest capitalized $ 47,364 $ 50,514 Interest capitalized 8,273 11,871 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Conversion of 7.33% subordinated debentures to common shares, net $ 1,950 $ 1,160 Value of shares issued under benefit plans, net 5,468 6,099 Conversion of operating partnership units to common shares 1,166 136 </TABLE> See Notes to Consolidated Financial Statements.
4 CAMDEN PROPERTY TRUST Notes to Consolidated Financial Statements (Unaudited) 1. Interim Unaudited Financial Information The accompanying interim unaudited financial information has been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted according to such rules and regulations. Management believes that the disclosures included are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Camden Property Trust as of September 30, 2001 and the results of operations and cash flows for the three and nine months ended September 30, 2001 and 2000 have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. Business Camden Property Trust is a real estate company engaged in the ownership, development, construction and management of multifamily apartment communities. At September 30, 2001, we owned interests in, operated or were developing 146 multifamily properties containing 51,883 apartment homes located in nine states from Florida to California. One of our multifamily properties containing 538 apartment homes was under development at September 30, 2001. Two of our newly developed multifamily properties containing 1,000 apartment homes were in lease-up at September 30, 2001. Additionally, we have several sites which we intend to develop into multifamily apartment communities. Property Update During the first nine months of 2001, stabilization occurred at three properties totaling 1,256 apartment homes: The Park at Oxmoor in Louisville, The Park at Lee Vista in Orlando, and The Park at Arizona Center in Phoenix. We consider a property stabilized once it reaches 90% occupancy, or generally one year from opening the leasing office, with some allowances for larger than average properties. We completed construction of 1,000 apartment homes at The Park at Farmers Market, Phase I in Dallas and The Park at Crown Valley in Mission Viejo. Construction continued at one property totaling 538 apartment homes: Camden Harbour View in Long Beach, which will begin leasing during the third quarter of 2002. During the second quarter of 2001, we acquired Camden Pecos Ranch, a 272 apartment home property located in Phoenix, Arizona for $20.6 million. Camden Pecos Ranch was developed under our third party development pipeline and was completed during the fourth quarter 2000. It stabilized during the first quarter 2001. Dispositions during the first nine months of 2001 included two parcels of land totaling 22.7 acres located in Houston and three operating properties with a total of 1,264 apartment homes located in North Carolina and Dallas. The proceeds from the land sales totaled $8.6 million and were used to reduce indebtedness outstanding under our unsecured line of credit. The operating properties were held through a joint venture and the gains from these dispositions, totaling $6.6 million, are included in "Equity in income of joint ventures".
5 Real Estate Assets at Cost We capitalized $19.4 million and $22.0 million in the nine months ended September 30, 2001 and 2000, respectively, of renovation and improvement costs which we believe extended the economic lives and enhanced the earnings of our multifamily properties. Property Operating and Maintenance Expenses Property operating and maintenance expenses included normal repairs and maintenance totaling $7.1 million and $20.7 million for the three and nine months ended September 30, 2001, compared to $7.2 million and $21.4 million for the three and nine months ended September 30, 2000. Common Share Dividend Declaration In September 2001, we announced that our Board of Trust Managers had declared a dividend of $0.61 per share for the third quarter of 2001 which was paid on October 17, 2001 to all common shareholders of record as of September 28, 2001. We paid an equivalent amount per unit to holders of common operating partnership units. This distribution to common shareholders and holders of common operating partnership units equates to an annualized dividend rate of $2.44 per share or unit. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. We have adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on our financial position, results of operations, or cash flows. In June 2001, FASB issued SFAS No. 141, "Business Combinations", which is effective for business combinations initiated after June 30, 2001. SFAS No. 141 requires all business combinations to be accounted for under the purchase method and that the pooling-of-interest method is no longer allowed. The adoption of SFAS No. 141 will not have a material impact on our financial position, results of operations, or cash flows. In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The adoption of SFAS No. 142 will not have a material impact on our financial position, results of operations, or cash flows. In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS No. 143 will not have a material impact on our financial position, results of operations, or cash flows. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses accounting and reporting for the
6 impairment or disposal of a segment of a business. The adoption of SFAS No. 144 will not have a material impact on our financial position, results of operations or cash flows. Earnings Per Share The following table presents information necessary to calculate basic and diluted earnings per share for the three and nine months ended September 30, 2001 and 2000: <TABLE> <CAPTION> Three Months Nine Months Ended September 30, Ended September 30, --------------------- --------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Basic earnings per share: Weighted average common shares outstanding 40,669 38,050 39,490 38,156 ========== ========== ========== ========== Basic earnings per share $ 0.44 $ 0.74 $ 1.30 $ 1.35 ========== ========== ========== ========== Diluted earnings per share: Weighted average common shares outstanding 40,669 38,050 39,490 38,156 Shares issuable from assumed conversion of: Common share options and awards granted 1,407 847 1,201 684 Convertible preferred shares (a) 3,207 Units convertible into common shares 573 2,545 573 2,548 Convertible subordinated debentures (a) 97 ---------- ---------- ---------- ---------- Weighted average common shares outstanding, as adjusted 42,649 44,746 41,264 41,388 ========== ========== ========== ========== Diluted earnings per share $ 0.42 $ 0.72 $ 1.24 $ 1.30 ========== ========== ========== ========== Earnings for basic and diluted computation: Net income $ 18,096 $ 30,546 $ 53,776 $ 58,502 Less: Preferred share dividends (2,343) (2,545) (7,029) ---------- ---------- ---------- ---------- Net income to common shareholders 18,096 28,203 51,231 51,473 (Basic diluted earnings per share computation) Preferred share dividends (a) 2,343 Income allocated to operating partnership units 1,435 2,234 Interest on convertible subordinated debentures (a) 5 Amortization of deferred costs on convertible debentures (a) 42 ---------- ---------- ---------- ---------- Net income to common shareholders, as adjusted (Diluted earnings per share computation) $ 18,096 $ 32,028 $ 51,231 $ 53,707 ========== ========== ========== ========== </TABLE> (a) The convertible preferred shares and subordinated debentures were anti-dilutive for the three and nine months ended September 30, 2001 and for the nine months ended September 30, 2000. 2. Advances to Third Party Development Properties We have entered into agreements with unaffiliated third parties to develop, construct, and manage eight multifamily projects containing a total of 2,840 apartment homes. We are providing financing for a portion of each project in the form of notes receivable which mature through 2005. These notes earn interest at 10% annually and are secured by second liens on the assets and partial guarantees by the third party owners. We expect these notes to be repaid from operating cash flow or proceeds from the sale of the individual properties. At September 30, 2001 and 2000, these notes had principal balances totaling $87.9 million and $59.9 million, respectively. Subsequent to quarter end, we purchased the three third party construction projects which were in pre- development at September 30, 2001. Advances to these
7 projects totaled approximately $23 million as of September 30, 2001. During the third quarter, all net fees and interest earned from these projects have been reversed since we now own these properties. We anticipate funding an additional $10 million on the remaining five third party development properties. We earn fees for managing the development, construction and eventual operations of these properties. The related fees we earned for these projects totaled $1.4 million and $1.9 million for the nine months ended September 30, 2001 and 2000, respectively. Construction has commenced on five of these projects, and initial occupancy has begun on three of the projects. During the second quarter of 2001, we acquired Camden Pecos Ranch which was developed under our third party development pipeline for $20.6 million. Camden Pecos Ranch contains 272 apartment homes and is located in Phoenix, Arizona. The note receivable relating to Camden Pecos Ranch at time of acquisition was $7.2 million. The following is a detail of our third party construction subject to notes receivable. <TABLE> <CAPTION> Number of Estimated Estimated/ Estimated/ Apartment Cost Actual Date Actual Date of Property and Location Homes ($ millions) of Completion Stabilization - ---------------------------------- --------- ------------ ------------- ---------------- <S> <C> <C> <C> <C> Stabilized Marina Pointe II Tampa, FL 352 $ 30 1Q01 3Q01 Creekside Denver, CO 279 32 3Q01 3Q01 In lease-up Ybor City Tampa, FL 454 40 4Q01 3Q02 Under Construction Little Italy San Diego, CA 160 36 4Q02 3Q03 Otay Ranch San Diego, CA 422 57 4Q02 4Q03 Pre-Development California Oaks Murietta, CA 264 35 Lee Vista II Orlando, FL 366 31 Midtown West Houston, TX 543 54 --------- ------------ Total Third Party Development 2,840 $ 315 ========= ============ </TABLE> 3. Technology Investments During 2000, our Board of Trust Managers authorized us to invest in non-real estate initiatives, including investments in e-commerce initiatives with other multi-family real estate owners. These investments may be made in companies that we believe will provide our residents with a broad range of real estate technology services including high-speed data, video and entertainment services, as well as resident portals. These portals should provide our residents with a variety of online services, including online rental payments and maintenance requests, which we believe will improve their overall living experience. Additionally, we have invested in companies that we believe will improve the efficiency of our internal operations through revenue management, credit scoring and purchasing. As of September 30, 2001, we had $5.0 million invested into various e-commerce companies. These investments are being accounted for under the cost
8 method and are included in other assets in our consolidated financial statements. In addition to our investments, we have $3.7 million in notes receivable relating to our e-commerce investments. We have commitments outstanding to fund an additional $2.6 million on current e-commerce investments. During the first nine months of 2001, we wrote-off $1.1 million of e-commerce investments relating to BroadBand Residential Inc. The $1.1 million included a note receivable of approximately $600,000, and represented our total investment, including notes receivable, in BroadBand Residential at the time of the write-off. 4. Notes Payable The following is a summary of our indebtedness: <TABLE> <CAPTION> (In millions) September 30, December 31, 2001 2000 ------------- ----------- <S> <C> <C> Unsecured Line of Credit and Short Term Borrowings $ 91.0 $ 196.0 Senior Unsecured Notes 6.73% - 6.76% Notes, due 2001 50.0 150.0 7.03% Notes, due 2003 50.0 50.0 7.14% Notes, due 2004 199.4 199.2 7.11% - 7.28% Notes, due 2006 174.2 124.3 7.69% Notes, due 2011 149.3 6.77% Notes, due 2010 99.9 ------------- ----------- 722.8 523.5 Medium Term Notes 6.68% - 6.74% Notes, due 2002 34.5 34.5 6.88% - 7.17% Notes, due 2004 30.0 30.0 7.63% Notes, due 2009 15.0 15.0 6.79% Notes, due 2010 14.5 ------------- ----------- 94.0 79.5 ------------- ----------- Total Unsecured Notes 907.8 799.0 Secured Notes 7.00% - 8.50% Conventional Mortgage Notes, due 2003 - 2009 183.5 237.6 3.99% - 7.29% Tax-exempt Mortgage Notes, due 2023 - 2031 100.9 101.5 ------------- ----------- 284.4 339.1 ------------- ----------- Total Notes Payable $ 1,192.2 $ 1,138.1 ============= =========== </TABLE> In August 2001, we amended our line of credit to increase total capacity by $20 million to $420 million and extended the maturity to August 2004. The scheduled interest rate is currently based on a spread over LIBOR or Prime. The scheduled interest rates are subject to change as our credit ratings change. Advances under the line of credit may be priced at the scheduled rates, or we may enter into bid rate loans with participating banks at rates below the scheduled rates. These bid rate loans have terms of six months or less and may not exceed the lesser of $200 million or the remaining amount available under the line of credit. The line of credit is subject to customary financial covenants and limitations. At quarter end, we were in compliance with all covenants and limitations. On February 7, 2001, we issued from our $750 million shelf registration an aggregate principal amount of $50 million of 7% five-year senior unsecured notes maturing on February 15, 2006 and $150 million of 7.625% ten-year senior unsecured notes maturing on February 15, 2011. Interest on the notes is payable
9 semiannually on February 15 and August 15, commencing on August 15, 2001. We may redeem the notes at any time at a redemption price equal to the principal amount and accrued interest, plus a make- whole provision. The notes are direct, senior unsecured obligations and rank equally with all other unsecured and unsubordinated indebtedness. The proceeds from the sale of the notes were $197.8 million, net of issuance costs. We used the net proceeds to reduce indebtedness outstanding under the unsecured line of credit. In August 2001, we issued $14.5 million aggregate principal amounts of senior unsecured medium- term notes. These fixed rate notes, due in August 2010, bear interest at a rate of 6.79% payable semiannually on March 15 and September 15. The net proceeds were used to reduce indebtedness outstanding under the unsecured lines of credit. In September 2001, we issued an aggregate principal amount of $100 million of 6.75% nine-year senior unsecured notes maturing on September 15, 2010. Interest on the notes is payable semiannually on March and September 15, commencing on March 15, 2002. We may redeem the notes at any time at a redemption price equal to the principal amount and accrued interest, plus a make-whole provision. The notes are direct, senior unsecured obligations and rank equally with all other unsecured and unsubordinated indebtedness. The proceeds from the sale of the notes were $99.2 million, net of issuance costs. We used the net proceeds to reduce indebtedness outstanding under the unsecured line of credit. During the third quarter of 2001, we paid off four mortgage notes totaling $38.7 million. The interest rates on the notes ranged from 7.50% to 7.89%. We incurred prepayment penalties totaling $388,000 in connection with the mortgage payoffs. We repaid these mortgages using proceeds available under our unsecured line of credit. The interest rate on the line of credit is significantly lower than the rate on the repaid mortgages. At September 30, 2001, the weighted average interest rate on floating rate debt was 4.09%. 5. Net Change in Operating Accounts The effect of changes in the operating accounts on cash flows from operating activities is as follows: (In thousands) Nine Months Ended September 30, ---------------------- 2001 2000 ---------- ---------- Decrease (increase) in assets: Accounts receivable - affiliates $ (670) $ 218 Other assets, net (4,149) (9,081) Restricted cash 831 (635) Increase (decrease) in liabilities: Accounts payable (80) (3,862) Accrued real estate taxes 3,792 4,413 Accrued expenses and other liabilities 14,564 11,594 ---------- ---------- Net change in operating accounts $ 14,288 $ 2,647 ========== ========== 6. Convertible Subordinated Debentures In April 1994, we issued $86.3 million aggregate principal amount of 7.33% Convertible Subordinated Debentures which matured on April 1, 2001. The debentures were convertible at any time prior to maturity into our common
10 shares. Prior to maturity, $86.2 million in principal amount of the debentures were converted into 3.6 million common shares. In addition, $3.2 million of unamortized debenture issue costs were reclassified to additional paid-in-capital. 7. Preferred Units In 1999, our operating partnership issued $100 million of 8.5% Series B Cumulative Redeemable Perpetual Preferred Units. Also during 1999 and 2000, our operating partnership issued $53 million of 8.25% Series C Cumulative Redeemable Perpetual Preferred Units. Distributions on the preferred units are payable quarterly in arrears. The preferred units are redeemable for cash by the operating partnership on or after the fifth anniversary of issuance at par plus the amount of any accumulated and unpaid distributions. The preferred units are convertible after 10 years by the holder into corresponding Cumulative Redeemable Perpetual Preferred Shares. The preferred units are subordinate to present and future debt. 8. Restricted Share and Option Awards During the first nine months of 2001, we granted 264,343 restricted shares in lieu of cash compensation to certain key employees and non-employee trust managers. The restricted shares were issued based on the market value of our common shares at the date of grant and have vesting periods of up to five years. We granted no options during the nine months ended September 30, 2001. During the nine month period ended September 30, 2001, previously granted options to purchase 582,131 shares became exercisable and 89,478 restricted shares vested. 9. Securities Repurchase Program Beginning in 1998, the Board of Trust Managers authorized us to repurchase or redeem up to $200 million of our securities through open market purchases and private transactions. As of September 30, 2001, we had repurchased 6,857,726 common shares and redeemed 105,814 units convertible in to common shares for a total cost of $178.0 million and $2.9 million, respectively. 10. Convertible Preferred Shares The 4,165,000 preferred shares paid a cumulative dividend quarterly in arrears in an amount equal to $2.25 per share per annum. The preferred shares generally had no voting rights and had a liquidation preference of $25 per share plus accrued and unpaid distributions. The preferred shares were convertible at the option of the holder at any time into common shares at a conversion price of $32.4638 per common share (equivalent to a conversion rate of 0.7701 per common share for each preferred share), subject to adjustment in certain circumstances. The preferred shares were not redeemable prior to April 30, 2001. In April 2001, we announced that our issued and outstanding preferred shares would be redeemed effective April 30, 2001 at a redemption price of $25.00 per share plus an amount equal to all accumulated, accrued and unpaid dividends as of April 30, 2001. Prior to redemption, 3.1 million preferred shares were converted into 2.4 million common shares. The remaining preferred shares were redeemed for an aggregate of $27.1 million, including unpaid dividends, using funds available under our unsecured line of credit. 11. Townhome Sales We are currently constructing 17 for-sale townhomes in the downtown Dallas area at a total cost of approximately $5.4 million. During the nine months ended September 30, 2001, we sold three units at a total sales price of approximately $1 million. The proceeds received from these townhome sales are included in other income in our consolidated financial statements. Other expenses in our consolidated financial statements represents the construction costs associated with the townhomes sold during the quarter.
11 12. Contingencies Prior to our merger with Oasis Residential, Inc. in April 1998, Oasis had been contacted by certain regulatory agencies with regards to alleged failures to comply with the Fair Housing Amendments Act (the "Fair Housing Act") as it pertained to nine properties (seven of which we currently own) constructed for first occupancy after March 31, 1991. On February 1, 1999, the Justice Department filed a lawsuit against us and several other defendants in the United States District Court for the District of Nevada alleging (1) that the design and construction of these properties violates the Fair Housing Act and (2) that we, through the merger with Oasis, had discriminated in the rental of dwellings to persons because of handicap. The complaint requests an order that (i) declares that the defendant's policies and practices violate the Fair Housing Act; (ii) enjoins us from (a) failing or refusing, to the extent possible, to bring the dwelling units and public use and common use areas at these properties and other covered units that Oasis has designed and/or constructed into compliance with the Fair Housing Act, (b) failing or refusing to take such affirmative steps as may be necessary to restore, as nearly as possible, the alleged victims of the defendants alleged unlawful practices to positions they would have been in but for the discriminatory conduct and (c) designing or constructing any covered multi-family dwellings in the future that do not contain the accessibility and adaptability features set forth in the Fair Housing Act; and requires us to pay damages, including punitive damages, and a civil penalty. With any acquisition, we plan for and undertake renovations needed to correct deferred maintenance, life/safety and Fair Housing matters. On January 30, 2001, a consent decree was ordered and executed in the above Justice Department action. Under the terms of the decree, we were ordered to make certain retrofits and implement certain educational programs and fair housing advertising. These changes are to take place over the next five years. In management's opinion, the costs associated with complying with the decree are not expected to have a material impact on our financial statements. We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse effect on our consolidated financial statements. In the ordinary course of our business, we issue letters of intent indicating a willingness to negotiate for the purchase or sale of multifamily properties or development land. In accordance with the local real estate market practice, such letters of intent are non-binding, and neither party to the letter of intent is obligated to pursue the transaction unless and until a definitive contract is entered into by the parties. The letters of intent and any resulting definitive contracts provide the purchaser with time to evaluate the properties and conduct due diligence and during which periods the purchaser will have the ability to terminate the contracts without penalty or forfeiture of any deposit or earnest money. There can be no assurance that definitive contracts will be entered into with respect to any properties covered by letters of intent or that we will acquire or sell any property as to which we may have entered into a definitive contract. Further, due diligence periods are frequently extended as needed. An acquisition or sale becomes probable at the time that the due diligence period expires and the definitive contract has not been terminated. We are then at risk under an acquisition contract, but only to the extent of any earnest money deposits associated with the contract, and are obligated to sell under a sales contract. We are currently in the due diligence period on contracts for the purchase of land for development. No assurance can be made that we will complete the purchases or will be satisfied with the outcome of the due diligence.
12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Overview The following discussion should be read in conjunction with all of the financial statements and notes appearing elsewhere in this report as well as the audited financial statements appearing in our 2000 Annual Report to Shareholders. Where appropriate, comparisons are made on a dollars per-weighted-average-unit basis in order to adjust for changes in the number of apartment homes owned during each period. The statements contained in this report that are not historical facts are forward-looking statements, and actual results may differ materially from those included in the forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: changes in general economic conditions, changes in financial markets and interest rates, our failure to qualify as a real estate investment trust ("REIT") and environmental uncertainties and natural disasters. Business Camden Property Trust is a real estate investment trust which reports as a single business segment. At September 30, 2001, we owned interests in, operated or were developing 146 multifamily properties containing 51,883 apartment homes located in nine states from Florida to California. One of our multifamily properties containing 538 apartment homes was under development at September 30, 2001. Two of our newly developed multifamily properties containing 1,000 apartment homes were in lease-up at September 30, 2001. Additionally, we have several sites which we intend to develop into multifamily apartment communities. Property Update During the first nine months of 2001, stabilization occurred at three properties totaling 1,256 apartment homes: The Park at Oxmoor in Louisville, The Park at Lee Vista in Orlando, and The park at Arizona Center in Phoenix. We consider a property stabilized once it reaches 90% occupancy, or generally one year from opening the leasing office, with some allowances for larger than average properties. We completed construction of 1,000 apartment homes at The Park at Farmers Market, Phase I in Dallas and The Park at Crown Valley in Mission Viejo. Construction continued at one property totaling 538 apartment homes: Camden Harbour View in Long Beach, which will begin leasing during the third quarter of 2002. During the second quarter of 2001, we acquired Camden Pecos Ranch, a 272 apartment home property located in Phoenix, Arizona for $20.6 million. Camden Pecos Ranch was developed under our third party development pipeline and was completed during the fourth quarter 2000. It stabilized during the first quarter 2001. Dispositions during the first nine months of 2001 included two parcels of land totaling 22.7 acres located in Houston and three operating properties with a total of 1,264 apartment homes located in North Carolina and Dallas. The proceeds from the land sale totaled $8.6 million and were used to reduce indebtedness outstanding under our unsecured line of credit. The operating properties were held through a joint venture and the gains from these dispositions, totaling $6.6 million, are included in "Equity in income of joint ventures".
13 Property Portfolio Our multifamily property portfolio, excluding land held for future development is summarized as follows: <TABLE> <CAPTION> September 30, 2001 December 31, 2000 --------------------- --------------------- Apartment Apartment Homes Properties Homes Properties --------- ---------- --------- ---------- <S> <C> <C> <C> <C> Operating Properties West Las Vegas, Nevada (a) 10,653 37 10,653 37 Denver, Colorado (a) 2,529 8 2,529 8 Phoenix, Arizona 2,109 7 1,837 6 Southern California 1,653 4 1,272 3 Tucson, Arizona 821 2 821 2 Reno, Nevada 450 1 450 1 Central Dallas, Texas (b) 8,359 23 8,447 23 Houston, Texas 7,190 16 7,190 16 St. Louis, Missouri 2,123 6 2,123 6 Austin, Texas 1,745 6 1,745 6 Corpus Christi, Texas 1,663 4 1,663 4 Kansas City, Missouri 596 1 596 1 East Tampa, Florida 5,023 11 5,023 11 Orlando, Florida 2,804 6 2,804 6 Charlotte, North Carolina (b) 1,659 6 1,879 7 Louisville, Kentucky 1,448 5 1,448 5 Greensboro, North Carolina (b) 520 2 856 3 --------- ---------- --------- ---------- Total Operating Properties 51,345 145 51,336 145 --------- ---------- --------- ---------- Properties Under Development West Southern California 538 1 918 2 Central Dallas, Texas 620 1 --------- ---------- --------- ---------- Total Properties Under Development 538 1 1,538 3 --------- ---------- --------- ---------- Total Properties 51,883 146 52,874 148 --------- ---------- --------- ---------- Less: Joint Venture Properties (a) (b) 5,239 20 6,503 23 --------- ---------- --------- ---------- Total Properties Owned 100% 46,644 126 46,371 125 ========= ========== ========= ========== </TABLE> (a) Include properties held in joint ventures as follows: one property with 320 apartment homes in Colorado in which we own a 50% interest, the remaining interest is owned by an unaffiliated private investor; and 19 properties with 4,919 apartment homes in Nevada in which we own a 20% interest, the remaining interest is owned by an unaffiliated private investor. (b) In addition to the properties listed in footnote (a), the December 31, 2000 balances include properties held in joint ventures as follows: one property with 708 apartment homes in Dallas and two properties with 556 apartment homes in North Carolina in which we own a 44% interest, the remaining interest is owned by unaffiliated private investors.
14 At September 30, 2001, we had two completed properties under lease-up as follows: <TABLE> <CAPTION> Number of Estimated Product Apartment % Leased Date of Date of Property and Location Type Homes at 11/09/01 Completion Stabilization - ------------------------------------ ------- --------- ----------- ---------- ------------- <S> <C> <C> <C> <C> <C> The Park at Farmers Market, Phase I Dallas, TX Urban 620 80% 2Q01 1Q02 The Park at Crown Valley Mission Viejo, CA Garden 380 61% 3Q01 1Q02 </TABLE> At September 30, 2001, we had one development property under construction as follows: <TABLE> <CAPTION> Number of Estimated Estimated Estimated Product Apartment Cost Date of Date of Property and Location Type Homes ($ millions) Completion Stabilization - ------------------------------------ ------- --------- ------------ ---------- ------------- <S> <C> <C> <C> <C> <C> Under Construction Camden Harbour View Long Beach, CA Urban 538 $ 120.0 2Q03 2Q04 </TABLE> We stage our construction to allow leasing and occupancy during the construction period which we believe minimizes the duration of the lease-up period following completion of construction. Our accounting policy related to properties in the development and leasing phase is that all operating expenses, excluding depreciation, associated with occupied apartment homes are expensed against revenues generated by those apartment homes as they become occupied. All construction and carrying costs are capitalized and reported on the balance sheet in "Properties under development, including land" until individual buildings are completed. Upon completion of each building, the total cost of that building and the associated land is transferred to "Land" and "Buildings and improvements" and the assets are depreciated over their estimated useful lives using the straight-line method of depreciation. Upon achieving 90% occupancy, or generally one year from opening the leasing office (with some allowances for larger than average properties), whichever occurs first, all apartment homes are considered operating and we begin expensing all items that were previously considered as carrying costs. Our consolidated financial statements includes $136.9 million related to the development of three urban land projects located in Dallas, Houston and Long Beach, California. Of this amount, $88.5 million relates to two of our current development projects - The Park at Farmers Market in Dallas and Camden Harbour View in Long Beach. We have an additional $19.3 million invested in Dallas, which we may use for the future development of Farmers Market, Phase II, and we are also in the construction phase of for-sale townhomes in this area. We have $29.1 million invested in additional land under development in Houston and Long Beach. We are currently in the planning phase with respect to these properties to determine whether to further develop apartment homes in these areas. We may also sell certain parcels of all three properties to third parties for commercial and retail development. We are currently constructing 17 for-sale townhomes in the downtown Dallas area at a total cost of approximately $5.4 million. During the nine months ended September 30, 2001, we sold three of the units at a total sales price of approximately $1.0 million. The proceeds received from the townhome sales are included in other income in our consolidated financial statements. Other expenses in our consolidated financial statements represents the construction costs associated with the townhomes sold during the quarter. Subsequent to quarter end, we purchased the three third party construction projects which were in pre-development at September 30, 2001.
15 Comparison of the Quarter Ended September 30, 2001 and September 30, 2000 Earnings before interest, depreciation and amortization increased $7.0 million, or 11.7%, from $60.1 million to $67.1 million for the three months ended September 30, 2000 and 2001, respectively. The weighted average number of apartment homes for the third quarter of 2001 decreased by 1,205 apartment homes, or 2.6%, from 46,940 to 45,735. The decrease in the weighted average number of apartment homes is due to the disposition of 3,599 apartment homes in the third quarter of 2000, offset by property development and acquisition. Total operating properties were 125 and 122 at September 30, 2001 and 2000, respectively. The 45,735 weighted average apartment homes and the 125 operating properties exclude the impact of our ownership interest in properties owned in joint ventures. Our apartment communities generate rental revenue and other income through the leasing of apartment homes. Revenues from our rental operations comprised 91% and 97% of our total revenues for the quarters ended September 30, 2001 and 2000, respectively. The decrease in rental revenue as a percent of total revenue is due to the increase in the equity in income from our joint ventures due to gains recognized in those joint ventures and an increase in fees and asset management income. Our primary financial focus for our apartment communities is net operating income. Net operating income represents total property revenues less property operating and maintenance expenses, including real estate taxes. Net operating income increased $1.6 million, or 2.7%, from $60.1 million to $61.8 million for the quarters ended September 30, 2000 and 2001, respectively. Rental income for the quarter ended September 30, 2001 increased $2.5 million, or 2.7%, over the quarter ended September 30, 2000. Rental income per apartment home per month increased $35 or 5.4%, from $655 to $691 for the third quarters of 2000 and 2001, respectively. The increase was primarily due to increased revenue growth from the stabilized real estate portfolio and higher average rental rates on the completed development properties. Additionally, properties sold in 2000 had average rental rates which were significantly lower than the portfolio average. Overall average occupancy was 94.6% for the quarters ended September 30, 2000 and 2001. Other property income increased $527,000 from $7.3 million to $7.8 million for the three months ended September 30, 2000 and 2001, respectively, which represents a monthly increase of $5 per apartment home. The increase in other property income was due primarily to increases from revenue sources such as telephone, cable, water and other miscellaneous property fees. Equity in income of joint ventures increased $5.2 million over the third quarter of 2000, primarily from gains recognized in one of our joint ventures from the sale of one property totaling 708 apartment homes. Other income for the nine months ended September 30, 2001 increased $900,000 over the same period in 2000. This increase was primarily due to the sale of townhomes during the period. Property operating and maintenance expenses increased $1.2 million, from $29.3 million for the quarter ended September 30, 2000 to $30.5 million for the quarter ended September 30, 2001. On an annualized basis, property operating and maintenance expenses increased $167 per unit, or 6.7%. This increase is primarily due to significant increases in property insurance costs, as well as increases in salary and benefit expenses per unit. Property operating and maintenance expenses as a percent of total property income increased from 29.5% to 29.7% for the quarters ended September 30, 2000 and 2001, respectively. Our operating expense ratios increased primarily as a result of increases in property insurance costs and salary and benefit costs, offset by operating efficiencies generated by our newly developed properties. Additionally, the operating expense ratios for the properties sold in 2000 were higher than the portfolio average. Real estate taxes increased $235,000 from $10.1 million to $10.3 million for the third quarters of 2000 and 2001, respectively, which represents an
16 annual increase of $43 per apartment home. The increase was primarily due to increases in the valuations of renovated and developed properties and increases in property tax rates. General and administrative expenses increased $500,000 from $2.9 million to $3.4 million, and increased as a percent of revenues from 2.9% to 3.1% for the quarters ended September 30, 2000 and 2001 respectively. The increase was primarily due to increases in costs associated with our third party construction and an increase in salary and benefit expenses. Gross interest cost before interest capitalized to development properties decreased from $21.4 million for the quarter ended September 30, 2000 to $20.2 million for the quarter ended September 30, 2001. This decrease is primarily due to lower debt balances in 2001 arising from proceeds received from the dispositions in the third quarter of 2000 and lower interest rates on variable debt. The overall decrease in interest expense was offset by increases in the debt used to fund new development, acquisitions, advances to third party development properties and the repurchase of our preferred shares. Interest capitalized was $2.5 million and $3.8 million for the quarters ended September 30, 2001 and 2000, respectively. Depreciation and amortization increased from $23.7 million to $26.6 million. This increase was due primarily to new development, property acquisition and capital improvements partially offset by dispositions in the third quarter of 2000. Gains on sales of properties for the quarter ended September 30, 2001 decreased $16.3 million from the same period in 2000 due to the sale of eleven properties containing a total of 3,599 apartment homes during the third quarter of 2000. Comparison of the Nine Months Ended September 30, 2001 and September 30, 2000 Earnings before interest, depreciation and amortization increased $15.3 million, or 8.6%, from $177.4 million to $192.7 million for the nine months ended September 30, 2000 and 2001, respectively. The weighted average number of apartment homes for the first nine months of 2001 decreased by 1,696 apartment homes, or 3.6%, from 47,076 to 45,380. The decrease in the weighted average number of apartment homes is due to the disposition of 3,599 apartment homes in the third quarter of 2000, offset by property development and acquisition. Total operating properties were 125 and 122 at September 30, 2001 and 2000, respectively. The weighted average apartment homes and the number of operating properties exclude the impact of our ownership interest in properties owned in joint ventures. Revenues from our rental operations comprised 94% and 97% of our total revenues for the nine months ended September 30, 2001 and 2000, respectively. The decrease in rental revenue as a percent of total revenue is due to the increase in the equity in income from our joint ventures due to gains recognized in those joint ventures and an increase in fees and asset management income. Net operating income increased $6.3 million, or 3.5%, from $178.3 million to $184.5 million for the nine months ended September 30, 2000 and 2001, respectively. Rental income for the nine months ended September 30, 2001 increased $6.6 million, or 2.4%, over the nine months ended September 30, 2000. Rental income per apartment home per month increased $40 or 6.3%, from $645 to $686 for the first nine months of 2000 and 2001, respectively. The increase was primarily due to increased revenue growth from the stabilized real estate portfolio and higher average rental rates on the completed development properties. Additionally, properties sold in 2000 had average rental rates which were significantly lower than the portfolio average. Other property income increased $1.9 million from $20.2 million to $22.1 million for the nine months ended September 30, 2000 and 2001, respectively,
17 which represents a monthly increase of $6 per apartment home. The increase in other property income was due primarily to increases from revenue sources such as telephone, cable, water and other miscellaneous property fees. Equity in income of joint ventures increased $7.7 million over the first nine months of 2000, primarily from gains recognized in one of our joint ventures from the sale of three properties totaling 1,264 apartment homes. Other income for the nine months ended September 30, 2001 increased $2.5 million over the same period in 2000. This increase was due to interest earned on our advances to third party development properties and from sales of townhomes. Property operating and maintenance expenses increased $1.5 million, from $85.3 million to $86.8 million, but decreased as a percent of total property income from 29.0% to 28.7% for the nine months ended September 30, 2000 and 2001, respectively. On an annualized basis, property operating and maintenance expenses increased $136 per unit, or 5.6%. This increase is primarily due to significant increases in property insurance costs as well as increases in salary and benefit expenses per unit. Our operating expense ratios decreased primarily as a result of operating efficiencies generated by our newly developed properties. Additionally, the operating expense ratios for the properties sold in 2000 were higher than the portfolio average. Real estate taxes increased $715,000 from $30.1 million to $30.8 million for the first nine months of 2000 and 2001, respectively, which represents an annual increase of $53 per apartment home. The increase was primarily due to increases in the valuations of renovated and developed properties and increases in property tax rates. General and administrative expenses increased $127,000 from $9.7 million to $9.8 million, but decreased as a percent of revenues from 3.2% to 3.0% for the nine months ended September 30, 2000 and 2001, respectively. Gross interest cost before interest capitalized to development properties decreased from $63.7 million for the quarter ended September 30, 2000 to $60.9 million for the quarter ended September 30, 2001. This decrease is primarily due to lower debt balances in 2001 arising from proceeds received from the dispositions in the third quarter of 2000 and lower interest rates on variable debt. The overall decrease in interest expense was offset by increases in the debt used to fund new development, acquisitions, advances to third party development properties and the repurchase of our preferred shares. Interest capitalized was $2.5 million and $3.8 million for the quarters ended September 30, 2001 and 2000, respectively. Depreciation and amortization increased from $73.5 million to $75.9 million. This increase was due primarily to new development, property acquisition and capital improvements, partially offset by dispositions during the third quarter of 2000. Gains on sale of properties for the nine months ended September 30, 2001 totaled $2.5 million due primarily to the sale of 22.7 acres of undeveloped land located in Houston. Gains on sales of properties for the nine months ended September 30, 2000 totaled $18.4 million due primarily to the sale of eleven properties containing a total of 3,599 apartment homes. Also included in the 2000 gain is the sale of a mini- storage facility in Las Vegas and the sale of approximately 61 acres of undeveloped land located in Las Vegas, Dallas and Houston. Liquidity and Capital Resources Financial Structure We intend to continue maintaining what management believes to be a conservative capital structure by:
18 (i) using a prudent combination of debt and common and preferred equity; (ii) extending and sequencing the maturity dates of our debt where possible; (iii) managing interest rate exposure using fixed rate debt and hedging where management believes it is appropriate; (iv) borrowing on an unsecured basis in order to maintain a substantial number of unencumbered assets; and (v) maintaining conservative coverage ratios. The interest expense coverage ratio, net of capitalized interest, was 3.7 and 3.4 times for the nine months ended September 30, 2001 and 2000, respectively. At September 30, 2001 and 2000, 80.2% and 75.5%, respectively, of our properties (based on invested capital) were unencumbered. Liquidity We intend to meet our short-term liquidity requirements through cash flows provided by operations, our unsecured line of credit discussed in the financial flexibility section and other short-term borrowings. We expect that our ability to generate cash will be sufficient to meet our short-term liquidity needs, which include: (i) normal operating expenses; (ii) current debt service requirements; (iii) recurring capital expenditures; (iv) property developments; (v) common share repurchases; and (vi) distributions on our common and preferred equity. We consider our long-term liquidity requirements to be the repayment of maturing secured debt and borrowings under our unsecured line of credit and funding of acquisitions. We intend to meet our long-term liquidity requirements through the use of common and preferred equity capital, senior unsecured debt and property dispositions, if the dispositions fit our strategy of portfolio balancing discussed below. We intend to concentrate our growth efforts toward selective development and acquisition opportunities in our current markets, and through the acquisition of existing operating portfolios and the development of properties in selected new markets. During the nine months ended September 30, 2001, we incurred $38.2 million in development costs and $20.6 million in acquisition costs. We are developing one property at an aggregate cost of approximately $120.0 million, $27.9 million of which was incurred through September 30, 2001. We intend to fund our developments and acquisitions through a combination of equity capital, partnership units, medium-term notes, construction loans, other debt securities and the unsecured line of credit. We also seek to selectively dispose of assets that management believes have a lower projected net operating income growth rate than the overall portfolio, or no longer conform to our operating and investment strategies. Additionally, over the next three years, we will continue rebalancing our portfolio with the goal of limiting any one market to no more than 12% of total real estate assets. We expect that any such sales should generate capital for acquisitions and new developments or for debt reduction. During the first nine months of 2001 we sold 22.7 acres of undeveloped land located in Houston. Net proceeds from these sales were approximately $8.6 million. We used the proceeds to reduce indebtedness outstanding under our unsecured line of credit. Net cash provided by operating activities totaled $152.0 million for the nine months ended September 30, 2001, an increase of $31.9 million, or 26.6%,
19 over the same period in 2000. This increase was attributable to a $6.3 million increase in net operating income from the real estate portfolio for the nine months ended September 30, 2001 as compared to the same period in 2000. Equity in income of joint ventures increased $7.7 million due to the sales of three joint venture properties. Fee and asset management and other income increased a total of $3.5 million from third party construction fees and interest on notes receivable. Also, other assets increased $10.9 million during 2001, primarily from increases in third party construction receivables and technology investments. Net cash used in investing activities totaled $91.3 million for the nine months ended September 30, 2001 compared to $15.4 million provided by investing activities for the same period in 2000. Total real estate assets, before joint ventures and accumulated depreciation, increased $70.7 million during the nine months ended September 30, 2001, compared to a decrease $51.7 million during the nine months ended September 30, 2000. For the nine months ended September 30, 2001, net cash flows provided by investing activities included $9.8 million in net proceeds received from property dispositions. This increase in cash was offset by expenditures for acquisitions, property development and capital improvements totaling $20.6 million, $38.2 million and $19.4 million, respectively for the nine months ended September 30, 2001. Additionally, net advances to third party development properties totaled $15.0 million during the period. For the nine months ended September 30, 2000, net cash flows provided by investing activities included $150.1 million in net proceeds received from property dispositions during 2000. This increase in cash was offset by expenditures for property development and capital improvements totaling $80.9 million and $22.0 million, respectively. Advances to third party development properties totaled $28.7 million during the nine months ended September 30, 2000. Net cash used in financing activities totaled $62.4 million for the nine months ended September 30, 2001 compared to $127.6 million for the nine months ended September 30, 2000. During the nine months ended September 30, 2001, we paid distributions totaling $89.3 million. We also paid $26.9 million during the first nine months of 2001 to repurchase our unconverted preferred shares. We received proceeds totaling $313.4 million from the issuance of senior unsecured notes and mortgage notes. The proceeds from these issuances were used to pay down borrowings under our line of credit and repay notes payable, which decreased $105.0 million and $154.7 million, respectively, for the nine months ended September 30, 2001. During the nine months ended September 30, 2000, we paid $84.2 million for distributions and repurchased $26.3 million common shares and units convertible into common shares. These payments were funded by the issuance of $17.5 million in preferred units and the proceeds received from the property dispositions, which were also used to reduce borrowings under our line of credit which decreased $31.0 million. In 1998, we began repurchasing our securities under a program approved by our Board of Trust Managers. The plan allows us to repurchase or redeem up to $200 million of our securities through open market purchases and private transactions. Management consummates these repurchases and redemptions at the time when they believe that we can reinvest available cash flow into our own securities at yields which exceed those currently available on direct real estate investments. These repurchases were made and we expect that future repurchases, if any, will be made without incurring additional debt and, in management's opinion, without reducing our financial flexibility. At September 30, 2001, we had repurchased approximately 6.9 million common shares and redeemed approximately 106,000 units at a total cost of $180.9 million. In September 2001, we announced that our Board of Trust Managers had declared a dividend in the amount of $0.61 per share for the third quarter of 2001 which was paid on October 17, 2001 to all common shareholders of record as of September 28, 2001. We paid an equivalent amount per unit to holders of the common operating partnership units. This distribution to common shareholders and holders of common operating partnership units equates to an annualized dividend rate of $2.44 per share or unit. In April 2001, we announced that our issued and outstanding preferred shares would be redeemed effective April 30, 2001 at a redemption price of
20 $25.00 per share plus an amount equal to all accumulated, accrued and unpaid dividends as of April 30, 2001. Prior to redemption, 3.1 million preferred shares were converted into 2.4 million common shares. The remaining preferred shares were redeemed for an aggregate of $27.1 million, including unpaid dividends, using funds available under our unsecured line of credit. As of September 30, 2001, we had senior unsecured debt totaling $907.8 million and secured mortgage loans totaling $284.4 million. Our indebtedness, excluding our unsecured line of credit, has a weighted average maturity of 6.8 years as of September 30, 2001. Scheduled principal repayments on all notes payable outstanding at September 30, 2001 is as follows: (In thousands) Year Amount ---------- ------------ 2001 $ 51,134 2002 39,284 2003 87,268 2004 325,753 2005 61,372 2006 and thereafter 627,377 ------------ Total $ 1,192,188 ============ The scheduled principal repayments in 2001 include $50.0 million senior unsecured notes due November 2001, which were issued in November 1996 and which we expect to repay from the unsecured line of credit. Financial Flexibility We have a $420 million line of credit with a group of 14 banks which matures August 2004. The scheduled interest rate on the line of credit is currently based on a spread over LIBOR or Prime. The scheduled interest rates are subject to change as our credit ratings change. Advances under the line of credit may be priced at the scheduled rates, or we may enter into bid rate loans with participating banks at rates below the scheduled rates. These bid rate loans have terms of six months or less and may not exceed the lesser of $200 million or the remaining amount available under the line of credit. The line of credit is subject to customary financial covenants and limitations. As an alternative to our unsecured line of credit, we from time to time borrow using competitively bid unsecured short-term notes with lenders who may or may not be a part of the unsecured line of credit bank group. Such borrowings vary in term and pricing and are typically priced at interest rates comparable to or below those available under the unsecured line of credit. As of September 30, 2001, we had $329 million available under the unsecured line of credit and $435.5 million available under our universal shelf registration. We have significant unencumbered real estate assets which could be sold or used as collateral for financing purposes should other sources of capital not be available. On February 7, 2001, we issued from our $750 million shelf registration an aggregate principal amount of $50 million of 7% five-year senior unsecured notes maturing on February 15, 2006 and $150 million of 7.625% ten-year senior unsecured notes maturing on February 15, 2011. Interest on the notes is payable semiannually on February 15 and August 15, commencing on August 15, 2001. We may redeem the notes at any time at a redemption price equal to the principal amount and accrued interest, plus a make- whole provision. The notes are direct, senior unsecured obligations and rank equally with all other unsecured and unsubordinated indebtedness. The proceeds from the sale of the notes were $197.8
21 million, net of issuance costs. We used the net proceeds to reduce indebtedness outstanding under the unsecured line of credit. In August 2001, we issued $14.5 million aggregate principal amounts of senior unsecured medium- term notes. These fixed rate notes, due in August 2010, bear interest at a rate of 6.79% payable semiannually on March 15 and September 15. The net proceeds were used to reduce indebtedness outstanding under the unsecured lines of credit. In September 2001, we issued an aggregate principal amount of $100 million of 6.75% nine-year senior unsecured notes maturing on September 15, 2010. Interest on the notes is payable semiannually on March and September 15, commencing on March 15, 2002. We may redeem the notes at any time at a redemption price equal to the principal amount and accrued interest, plus a make-whole provision. The notes are direct, senior unsecured obligations and rank equally with all other unsecured and unsubordinated indebtedness. The proceeds from the sale of the notes were $99.2 million, net of issuance costs. We used the net proceeds to reduce indebtedness outstanding under the unsecured line of credit. During the third quarter of 2001, we paid off four mortgage notes totaling $38.7 million. The interest rates on the notes ranged from 7.50% to 7.89%. We incurred prepayment penalties totaling $388,000 in connection with the mortgage payoffs. We repaid these mortgages using proceeds available under our unsecured line of credit. The interest rate on the line of credit is significantly lower than the rate on the repaid mortgages. At September 30, 2001, the weighted average interest rate on floating rate debt was 4.09%. Funds from Operations Management considers FFO to be an appropriate measure of performance of an equity REIT. The National Association of Real Estate Investment Trusts currently defines FFO as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our definition of diluted FFO assumes conversion at the beginning of the period of all dilutive convertible securities, including minority interests, which are convertible into common equity. We believe that in order to facilitate a clear understanding of our consolidated historical operating results, FFO should be examined in conjunction with net income as presented in the consolidated financial statements and data included elsewhere in this report. FFO is not defined by generally accepted accounting principles. FFO should not be considered as an alternative to net income as an indication of our operating performance or to net cash provided by operating activities as a measure of our liquidity. Further, FFO as disclosed by other REITs may not be comparable to our calculation. Our diluted FFO for the three and nine months ended September 30, 2001 increased $2.8 million and $8.0 million over the three and nine months ended September 30, 2000, respectively. On a per share basis, diluted FFO for the three and nine months ended September 30, 2001 increased approximately 8.0% and 7.3%, respectively over the same periods in 2000. The increase in diluted FFO was primarily due to a $1.6 million and $6.3 million increase in net operating income from our real estate portfolio for the three and nine months ended September 30, 2001 compared to the same period in 2000.
22 The calculation of basic and diluted FFO for the three and nine months ended September 30, 2001 and 2000 follows: <TABLE> <CAPTION> (In thousands) Three Months Nine Months Ended September 30, Ended September 30, -------------------- -------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Funds from operations: Net income to common shareholders $ 18,096 $ 28,203 $ 51,231 $ 51,473 Real estate depreciation 25,586 23,141 73,591 71,443 Adjustments for unconsolidated joint ventures (2,838) 814 (3,632) 2,432 Gain on sales of properties (123) (16,440) (2,495) (18,373) Extraordinary charge (early retirement of debt) 388 388 --------- --------- --------- --------- Funds from operations - basic 41,109 35,718 119,083 106,975 Preferred share dividends 2,343 2,545 7,029 Income allocated to operating partnership units 1,216 1,435 2,765 2,234 Adjustments for convertible subordinated debentures 47 37 155 --------- --------- --------- --------- Funds from operations - diluted $ 42,325 $ 39,543 $124,430 $116,393 ========= ========= ========= ========= Weighted average shares - basic 40,669 38,050 39,490 38,156 Common share options and awards granted 1,407 847 1,201 684 Preferred shares 3,207 1,406 3,207 Minority interest units 2,493 2,545 2,515 2,548 Convertible subordinated debentures 97 25 111 --------- --------- --------- --------- Weighted average shares - diluted 44,569 44,746 44,637 44,706 ========= ========= ========= ========= </TABLE> Inflation We lease apartments under lease terms generally ranging from six to thirteen months. Management believes that such short-term lease contracts lessen the impact of inflation due to our ability to adjust rental rates to market levels as leases expire. Impact of New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. We have adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on our financial position, results of operations, or cash flows. In June 2001, FASB issued SFAS No. 141, "Business Combinations", which is effective for business combinations initiated after June 30, 2001. SFAS No. 141 requires all business combinations to be accounted for under the purchase method and that the pooling-of-interest method is no longer allowed. The adoption of SFAS No. 141 will not have a material impact on our financial position, results of operations, or cash flows. In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001.
23 SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The adoption of SFAS No. 142 will not have a material impact on our financial position, results of operations, or cash flows. In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS No. 143 will not have a material impact on our financial position, results of operations or cash flows. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of a segment of a business. The adoption of SFAS No. 144 will not have a material impact on our financial position, results of operations or cash flows. Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes have occurred since our Annual Report on Form 10-K for the year ended December 31, 2000.
24 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K Current report on Form 8-K dated September 12, 2001 and filed with the Commission on September 17, 2001, contained information under Item 5 (Other Events) and Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits).
25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized. CAMDEN PROPERTY TRUST /s/ G. Steven Dawson November 14, 2001 - ------------------------------------------ -------------------------------- G. Steven Dawson Date Sr. Vice President of Finance, Chief Financial Officer and Treasurer /s/ Dennis M. Steen November 14, 2001 - ------------------------------------------ -------------------------------- Dennis M. Steen Date Vice President - Controller and Chief Accounting Officer