UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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)
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 May 8, 2003, there were 39,284,469 shares of Common Shares of Beneficial Interest, $0.01 par value outstanding.
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See Notes to Consolidated Financial Statements.
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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 March 31, 2003 and the results of operations and cash flows for the three months ended March 31, 2003 and 2002 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 investment trust (“REIT”) organized on May 25, 1993. We, with our subsidiaries, report as a single business segment, with activities related to the ownership, development, construction and management of multifamily apartment communities. As of March 31, 2003, we owned interests in, operated or were developing 147 multifamily properties containing 52,274 apartment homes located in nine states. At March 31, 2003, we had two recently completed multifamily properties containing 718 apartment homes in lease-up. Four of our multifamily properties containing 1,484 apartment homes were in various stages of construction at March 31, 2003. Additionally, we have several sites which we intend to develop into multifamily apartment communities.
As of March 31, 2003, we had operating properties in 16 markets. No one market contributed more than 15% of our net operating income for the quarter then ended. Currently, Houston, Dallas and Las Vegas contribute 14.5%, 14.4% and 14.1% of our net operating income, respectively. We continually evaluate our portfolio to ensure appropriate geographic diversification. We also seek to selectively dispose of assets that management believes are highly capital intensive, have a lower projected net operating income growth rate than the overall portfolio, or no longer conform to our operating and investment strategies.
Approximately 24% of our multifamily apartment units at March 31, 2003 were held in Camden Operating, L.P. This operating partnership has issued both common and preferred limited partnership units. As of March 31, 2003, we held 83.1% of the common limited partnership units and the sole 1% general partnership interest of the operating partnership. The remaining 15.9% of the common limited partnership units are primarily held by former officers, directors and investors of Paragon Group, Inc., which we acquired in 1997.
Real Estate Assets, at Cost
We capitalized $4.7 million and $7.6 million in the quarters ended March 31, 2003 and 2002, respectively, of renovation and improvement costs which we believe extended the economic lives and enhanced the earnings of our multifamily properties. Capital expenditures are capitalized and depreciated over their useful lives, which range from 3 to 20 years.
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Property operating and maintenance expenses included repairs and maintenance expenses totaling $6.8 million and $5.9 million for the quarters ended March 31, 2003 and 2002, respectively. Costs recorded as repairs and maintenance include all costs which do not alter the primary use, extend the expected useful life or improve the safety or efficiency of the related asset. Our largest repair and maintenance expenditures related to landscaping, interior painting and floor coverings.
Carrying charges, principally interest and real estate taxes, of land under development and buildings under construction are capitalized as part of properties under development and buildings and improvements to the extent that such charges do not cause the carrying value of the asset to exceed its net realizable value. Capitalized interest was $4.3 million for the three months ended March 31, 2003, and $2.3 million for the three months ended March 31, 2002. Capitalized real estate taxes were $486,000 for the three months ended March 31, 2003 and $545,000 for the three months ended March 31, 2002. All operating expenses, excluding depreciation, associated with completed apartment homes for properties in the development and leasing phase are expensed against revenues generated by those apartment homes. Upon substantial completion of the project, all apartment homes are considered operating and we begin expensing all items that were previously considered carrying costs.
Common Share Dividend Declaration
In March 2003, we announced that our Board of Trust Managers had declared a dividend of $0.635 per share for the first quarter of 2003 which was paid on April 17, 2003 to all common shareholders of record as of March 31, 2003. 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 $2.54 per share or unit.
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which is effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Our adoption of the prospective method set forth in SFAS No. 148 will not have a material impact on our financial position, results of operations or cash flows. See further discussion of our accounting for stock-based compensation in Note 8.
In January 2003, FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 establishes criteria to identify and assess a company’s interest in variable interest entities and for consolidating those entities. FIN 46 is currently effective for variable interest entities created or obtained after January 31, 2003, and will be effective for all variable interest entities for interim periods beginning after June 15, 2003. Our application of FIN 46 did not require the consolidation of any additional entities.
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Reclassifications
Certain reclassifications have been made to amounts in prior year financial statements to conform with current year presentation.
Basic earnings per share is computed using income from continuing operations and the weighted average number of common shares outstanding. Diluted earnings per share reflects common shares issuable from the assumed conversion of common share options and awards granted and units convertible into common shares. Only those items that have a dilutive impact on our basic earnings per share are included in diluted earnings per share.
The following table presents information necessary to calculate basic and diluted earnings per share for the three months ended March 31, 2003 and 2002:
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The components of net income that are presented as discontinued operations include net operating income, depreciation and property specific interest expense, if any. In addition, the net gain or loss on the disposal of communities will be presented in discontinued operations when recognized. The operating results of discontinued operations related to properties held through our investment in joint ventures that are subsequently sold will continue to be reported in “Equity in income of joint ventures.” There were no property sales included in discontinued operations for the first quarter of 2003. The operating results of the three properties included in discontinued operations for the three months ended March 31, 2002 is as follows:
Our construction division performs services for our internally developed construction pipeline, as well as provides construction management and general contracting services for third party owners of multifamily, commercial and retail properties. We are currently under contract for projects ranging from $2.2 million to $19.7 million. We earn fees on these projects ranging from 3% to 7% of the total contracted construction cost which we recognize when they are earned. Fees earned from third party construction projects totaled $949,000 and $466,000 for the three months ended March 31, 2003 and 2002, respectively, and are included in the revenues section of our consolidated statements of operations under “Fee and asset management.” For projects where our fee is based on a fixed price, any cost overruns, as compared to the original budget, incurred during construction will reduce the fee generated on those projects. For any project where cost overruns are expected to be in excess of the fee generated on the project, we will recognize the total loss in the period in which the loss is first estimated. During the three months ended March 31, 2003, we recorded cost overruns of $1.2 million on fixed fee projects, which represented our estimate of the remaining costs to complete the projects.
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The following is a summary of our indebtedness:
We have a $500 million unsecured line of credit which matures in August 2006. The scheduled interest rate is currently based on spreads over LIBOR or Prime. The scheduled interest rate spreads 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 $250 million or the remaining amount available under the line of credit. The line of credit is subject to customary financial covenants and limitations all of which we were in compliance with at quarter end.
Our line of credit provides us with the ability to issue up to $100 million in letters of credit. While our issuance of letters of credit does not increase our borrowings outstanding under our line, it does reduce the amount available to us. At March 31, 2003 we had outstanding letters of credit totaling $2.7 million.
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 below those available under the unsecured line of credit.
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At March 31, 2003, our floating rate debt, which includes our unsecured line of credit, totaled $205.2 million and had a weighted average interest rate of 2.2%
The effect of changes in the operating accounts on cash flows from operating activities is as follows:
Our operating partnership has issued $100 million of 8.5% Series B Cumulative Redeemable Perpetual Preferred Units and $53 million of 8.25% Series C Cumulative Redeemable Perpetual Preferred Units. Distributions on the preferred units are payable quarterly. The preferred units are redeemable for cash by the operating partnership beginning in 2004 at par plus the amount of any accumulated and unpaid distributions. The preferred units are convertible beginning in 2009 by the holder into corresponding Series B or C Cumulative Redeemable Perpetual Preferred Shares. The preferred units are subordinate to present and future debt.
During the first quarter of 2003, we granted 125,010 restricted shares 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. During the three month period ended March 31, 2003, 130,476 restricted shares vested.
During the first quarter of 2003, we also granted 517,000 options with an exercise price of $31.48, which was equal to the market value on the date of grant. The options become exercisable in equal increments over three years, beginning on the first anniversary of the date of grant. During the three month period ended March 31, 2003, previously granted options to purchase 174,015 shares became exercisable, and 21,053 options were exercised at $24.88 per share.
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The fair value of each option granted in 2003 was estimated on the date of grant utilizing the Black-Scholes option pricing model with the following assumptions: risk-free interest rates of 4.0%, expected life of ten years, dividend yield of 8.1%, and expected share volatility of 18.3%. The fair value of options granted in 2003 was $1.38 per share, and will be amortized over the vesting period in accordance with SFAS No. 148.
For option grants prior to January 1, 2003, we continue to use the intrinsic value method. If the fair value method had been applied to all outstanding stock option grants, our net income and earnings per share at March 31, 2003 and 2002 would have been as follows:
In 1998, we began repurchasing our securities under a program approved by our Board of Trust Managers. The program allows us to repurchase or redeem up to $250 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. As of March 31, 2003, we had repurchased 8.8 million common shares and redeemed approximately 106,000 units convertible into common shares for a total cost of $243.6 million. No common shares or units convertible into common shares have been repurchased in 2003.
We have completed construction of 17 for-sale townhomes in the downtown Dallas area at a total cost of approximately $5.5 million. During the three months ended March 31, 2003, we sold three of our remaining four units at a total sales price of approximately $1.0 million. The proceeds received from these townhome sales are included in other income in our consolidated statements of operations. Other expenses in our consolidated statements of operations includes the construction costs and marketing expenses associated with the townhomes sold during the quarter. Subsequent to March 31, 2003, the last remaining unit was sold.
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Construction Contracts. As of March 31, 2003, we were obligated for approximately $10.8 million of additional expenditures on our four development properties (a substantial amount of which we expect to be funded with debt).
Contingencies.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 local real estate market practice, such letters of intent are non-binding, and neither party to the letter of intent is obligated to pursue negotiations unless and until a definitive contract is entered into by the parties. Even if definitive contracts are entered into, the letters of intent and resulting contracts contemplate that such contracts will 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 for the purchase of land for development. No assurance can be made that we will be able to complete the negotiations or become satisfied with the outcome of the due diligence.
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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 2002 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:
Camden Property Trust is a real estate investment trust (“REIT”) and, with our subsidiaries, reports as a single business segment with activities related to the ownership, development, construction and management of multifamily apartment communities. As of March 31, 2003, we owned interests in, operated or were developing 147 multifamily properties containing 52,274 apartment homes located in nine states. Our properties, excluding properties in lease-up and under development, had a weighted average occupancy rate of 91.4% for the quarter ended March 31, 2003. Weighted average occupancy was 91.7% for the quarter ended March 31, 2002. At March 31, 2003, we had two recently completed multifamily apartment properties containing 718 apartment homes in lease-up. Four of our multifamily properties containing 1,484 apartment homes were in various stages of construction at March 31, 2003. Additionally, we have several sites which we intend to develop into multifamily apartment communities.
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Property Portfolio
Our multifamily property portfolio, excluding land held for future development and joint venture properties which we do not manage is summarized as follows:
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Construction and Development Properties
At March 31, 2003, we had two completed properties in lease-up as follows:
At March 31, 2003, we had four properties in various stages of construction as follows:
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Real estate assets are carried at cost plus capitalized carrying charges. Carrying charges are principally interest and real estate taxes which are capitalized as part of properties under development. Expenditures directly related to the development, acquisition and improvement of real estate assets, excluding internal costs relating to acquisitions, are capitalized at cost as land, buildings and improvements. All construction and carrying costs are capitalized and reported on the balance sheet in “Properties under development, including land” until individual apartment homes are substantially completed. Upon substantial completion of each apartment home, the total cost for the completed apartment home and the associated land is transferred to “Buildings and improvements” and “Land”, respectively and the assets are depreciated over their estimated useful lives using the straight-line method of depreciation.
Where possible, 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 associated with completed apartment homes are expensed against revenues generated by those apartment homes. Upon substantial completion of the project, all apartment homes are considered operating and we begin expensing all items that were previously considered carrying costs.
If an event or change in circumstance indicates a potential impairment in the value of a property has occurred, our policy is to assess any potential impairment by making a comparison of the current and projected operating cash flows for such property over its remaining useful life, on an undiscounted basis, to the carrying amount of the property. If such carrying amounts were in excess of the estimated projected operating cash flows of the property, we would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value.
Our consolidated balance sheet at March 31, 2003 included $264.3 million related to properties under development, including land. Of this amount, $136.2 million relates to our four development projects currently under construction. Additionally, we have $128.1 million invested in land held for future development. Included in this amount is $74.4 million related to projects we expect to begin constructing throughout 2003. We also have $34.3 million invested in land tracts adjacent to current development projects which are being utilized in conjunction with those projects. Upon completion of these current development projects we expect to utilize this land to further develop apartment homes in these areas. We may also sell certain parcels of these undeveloped land tracts to third parties for commercial and retail development.
Changes in revenues and expenses related to our operating properties from period to period are primarily due to property developments, dispositions, acquisitions, and the performance of the stabilized properties in the portfolio. Where appropriate, comparisons are made on a dollars-per-weighted-average-apartment home basis in order to adjust for such changes in the number of apartments homes owned during each period. Selected weighted averages for the quarters ended March 31, 2003 and 2002 are as follows:
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Comparison of the Quarters Ended March 31, 2003 and March 31, 2002
Income from continuing operations decreased $4.9 million, or 36.8% from $13.2 million to $8.3 million for the quarter ended March 31, 2002 and 2003, respectively. The weighted average number of apartment homes for the first quarter of 2003 increased by 1,363 apartment homes, or 3.1%, to 45,911 from 44,548 for the first quarter of 2002. The increase in the weighted average number of apartment homes is due to the acquisition of three properties totaling 936 apartment homes and an increase in occupancy at our newly constructed properties. These increases were offset by our disposition of two properties with 786 apartment homes. Total operating properties we owned 100% were 124 and 125 at March 31, 2003 and 2002, respectively. The weighted average number of apartment homes and the number of operating properties exclude the impact of our ownership interest in properties owned in joint ventures, and the impact from properties classified as discontinued operations.
Our apartment communities generate rental revenue and other income through the leasing of apartment homes. Total property revenues comprised 97% and 96% of our total revenues for the quarters ended March 31, 2003 and 2002, respectively. Our primary financial focus for our apartment communities is net operating income. Net operating income represents total property revenues less total property expenses. Net operating income decreased $4.1 million, or 6.5%, from $62.2 million to $58.2 million for the quarters ended March 31, 2002 and 2003, respectively.
The following table presents the components of net operating income for the three months ended March 31, 2003 and 2002.
Same property communities are stabilized communities we have owned since January 1, 2002. Non-same property communities are stabilized communities we have acquired or developed since January 1, 2002. Development and lease-up communities are non-stabilized communities we have developed or acquired after January 1, 2002. Dispositions represent communities we have sold since January 1, 2002 but are not included in discontinued operations.
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Total property revenues for the quarter ended March 31, 2003 increased slightly as compared to the same quarter in 2002, but decreased from $728 to $707 on a per apartment home per month basis. Total property revenues from our same store properties decreased from $90.4 million for the first quarter of 2002 to $87.2 million for the first quarter of 2003, which represents a decrease of $25 on a per apartment home per month basis. This decrease in revenues is primarily due to higher concessions and vacancy rates during 2003. Property revenues from our non-same store, development and lease-up properties increased from $4.6 million for the first quarter of 2002 to $10.1 million for the first quarter of 2003. The decrease in property revenues from the first quarter of 2002 to the first quarter of 2003 from property dispositions totaled $2.2 million. Our weighted average occupancy, excluding current development and lease up properties, was 91.4% for the first quarter of 2003, compared to 91.7% for the first quarter of 2002.
Fee and asset management revenues in 2003 increased $234,000 over 2002. This increase is primarily due to fees earned on third party construction projects. Other income for the quarter ended March 31, 2003 decreased $1.2 million from the same quarter ended 2002. This decrease was due to a reduction in interest earned on third party development projects offset by interest earned on our second lien financing program.
Total property expenses for the quarter ended March 31, 2003 increased $4.2 million, or 11.9%, as compared to the same quarter in 2002, and increased from $3,150 to $3,419 on an annualized per apartment home basis. Total property expenses from our same store properties increased from $32.5 million for the first quarter of 2002 to $34.4 million for the first quarter of 2003, which represents an increase of $175 on an annualized per apartment home basis. The increase in same store property expenses per apartment home is primarily due to a $62 annualized increase in property insurance premiums, a $61 annualized increase in repairs and maintenance expenses and a $23 annualized increase in property taxes. Property expenses from our non-same store, development and lease-up properties increased from $1.9 million for the first quarter of 2002 to $4.8 million for the first quarter of 2003. The decrease in property expenses from the first quarter of 2002 to the first quarter of 2003 from property dispositions totaled $0.7 million.
Property management expense, which represents regional supervision and accounting costs related to property operations, increased from $2.4 million for the quarter ended March 31, 2002 to $2.5 million for the quarter ended March 31, 2003. This increase is primarily due to increases in salary and benefit expenses.
Fee and asset management expense, which represents expenses related to third party construction projects and property management for third parties, increased from $702,000 for the quarter ended March 31, 2002 to $1.6 million for the quarter ended March 31, 2003. This increase is primarily due to increased costs associated with our third party construction division, including cost overruns on fixed fee projects which totaled $1.2 million for the first quarter of 2003.
General and administrative expenses increased $526,000 from $3.1 million to $3.6 million, and increased as a percent of revenues from 3.0% to 3.6% for the quarters ended March 31, 2002 and 2003 respectively. The increase was primarily due to increases in salary and benefit expenses, marketing expenses and costs associated with pursuing potential transactions that were not consummated.
Gross interest cost before interest capitalized to development properties increased $3.3 million, or 16.8%, from $19.4 million for the quarter ended March 31, 2002 to $22.6 million for the quarter ended March 31, 2003. The overall increase in interest expense was due to higher average debt balances during 2003. Interest capitalized increased to $4.3 million from $2.3 million for the quarters ended March 31, 2003 and 2002, respectively, due to higher average balances in our development pipeline.
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Depreciation and amortization increased from $25.5 million for the first quarter of 2002 to $26.6 million for the first quarter of 2003. This increase was due to new development, property acquisition and capital improvements placed in service during the past year.
Gain on sale of properties for the quarter ended March 31, 2003 was from the sale of 23.9 acres of undeveloped land located in Houston. No sales were recorded during the first quarter 2002.
Equity in income of joint ventures increased $2.4 million from the first quarter of 2002, primarily from income earned and gains recognized on the sale of a property which was located in California and held in a joint venture.
Financial Structure
We intend to continue maintaining what management believes to be a conservative capital structure by:
The interest expense coverage ratio, net of capitalized interest, was 2.9 and 3.5 times for the quarters ended March 31, 2003 and 2002, respectively. At March 31, 2003 and 2002, 84.0% and 80.6%, respectively, of our properties (based on invested capital) were unencumbered. Our weighted average maturity of debt, excluding our line of credit, was 6.4 years and 6.8 years at March 31, 2003 and 2002, respectively. Interest expense coverage ratio is derived by dividing interest expense for the period into the sum of income from continuing operations before gain on sale of properties, equity in income of joint ventures and minority interests, depreciation and amortization and interest.
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:
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We consider our long-term liquidity requirements to be the repayment of maturing debt, including borrowings under our unsecured line of credit which were used to fund development and acquisition activities. We intend to meet our long-term liquidity requirements through the use of common and preferred equity capital, senior unsecured debt and property dispositions.
We intend to continue rebalancing our portfolio by selectively disposing of assets that management believes are highly capital intensive, have a lower projected net operating income growth rate than the overall portfolio, or no longer conform to our operating and investment strategies. We expect to use the proceeds from any such sales for reinvestment in acquisitions or new developments, reduction of debt or share repurchases.
We intend to concentrate our growth efforts toward selective development and acquisition opportunities in our current markets, and through the acquisition of existing operating properties and the development of properties in selected new markets. During the quarter ended March 31, 2003, we incurred $28.1 million in development costs and no acquisition costs. We are developing four properties at an aggregate cost of approximately $260.9 million, $235.8 million of which was incurred through March 31, 2003. At quarter end, we were obligated for approximately $10.8 million under construction contracts related to these projects (a substantial amount of which we expect to fund with debt). 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 our unsecured line of credit.
Net cash provided by operating activities totaled $25.2 million for the quarter ended March 31, 2003, a decrease of $4.4 million, or 14.9%, over the same period in 2002. The decrease in operating cash flow was primarily due to an overall increase in expenses for 2003 as compared to 2002 with no significant increase in revenues during the same period, combined with a decrease in cash flows from property sales included in discontinued operations.
Net cash used in investing activities totaled $23.7 million for the quarter ended March 31, 2003 compared to $34.9 million for the same period in 2002. For the quarter ended March 31, 2003, net cash used in investing activities included expenditures for property development and capital improvements totaling $28.1 million and $4.7 million, respectively. These expenditures were offset by $4.9 million in net proceeds received from townhome and land sales during 2003. Additionally, decreases in investment in joint ventures totaled $4.2 million during 2003. For the quarter ended March 31, 2002, net cash used in investing activities included expenditures for property development and capital improvements totaling $25.3 million and $7.6 million, respectively. These expenditures were offset by $1.1 million in net proceeds received from townhome sales during 2002. Additionally, advances to third party development properties increased $2.9 million in the first quarter of 2002.
Net cash provided by financing activities totaled $57,000 for the quarter ended March 31, 2003 compared to $7.3 million for the quarter ended March 31, 2002. During the quarter ended March 31, 2003, we paid distributions totaling $30.2 million. Our line of credit increased $31.0 million, for the quarter ended March 31, 2003, primarily from the funding of development activities. During the quarter ended March 31, 2002, we paid distributions totaling $29.9 million. Our line of credit increased $69.0 million, for the quarter ended March 31, 2002, primarily from the repayment of notes payable, which decreased $35.8 million, and the funding of development activities.
In 1998, we began repurchasing our common equity securities under a program approved by our Board of Trust Managers, which allowed us to repurchase or redeem up to $250 million of our securities through open
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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 March 31, 2003, we had repurchased approximately 8.8 million common shares and redeemed approximately 106,000 units convertible into common shares at a total cost of $243.6 million. No common shares or units convertible into common shares have been repurchased in 2003.
In March 2003, we announced that our Board of Trust Managers had declared a dividend in the amount of $0.635 per share for the first quarter of 2003 which was paid on April 17, 2003 to all common shareholders of record as of March 31, 2003. 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 $2.54 per share or unit.
As of March 31, 2003, we had unsecured debt totaling $1,208.5 million and secured mortgage loans totaling $248.5 million. Our indebtedness, excluding our unsecured line of credit, has a weighted average maturity of 6.4 years as of March 31, 2003. Scheduled repayments on outstanding debt, including our line of credit, at March 31, 2003 is as follows:
(In millions)
Financial Flexibility
We have a $500 million unsecured line of credit which matures in August 2006. The scheduled interest rate is currently based on spreads over LIBOR or Prime. The scheduled interest rate spreads 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 $250 million or the remaining amount available under the line of credit. The line of credit is subject to customary financial covenants and limitations, all of which we were in compliance with at quarter end.
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As of March 31, 2003, we had $370.3 million available under our unsecured line of credit. In February 2003, we filed a universal shelf registration statement providing for the issuance of up to $1.0 billion in debt securities, preferred shares, common shares or warrants. This registration statement was combined with the $85.5 million remaining from our previous $750 million universal shelf. At March 31, 2003, the total balance of $1.1 billion was available for issuance. 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.
At March 31, 2003, our floating rate debt totaled $205.2 million and had a weighted average interest rate of 2.2%.
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 property sales, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our definition of diluted FFO also assumes conversion at the beginning of the period of all dilutive convertible securities, including minority interests, which are convertible into common equity. We consider FFO to be a useful performance measure of our operating performance because FFO, together with net income and cash flows, provides investors with an additional basis to evaluate our ability to incur and service debt and to fund capital expenditures and distributions to shareholders and unitholders.
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 statements of operations 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 REIT’s may not be comparable to our calculation.
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A reconciliation of net income to basic and diluted FFO for the three months ended March 31, 2003 and 2002 follows:
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 the ability to adjust rental rates to market levels as leases expire.
The Securities and Exchange Commission has issued guidance for the disclosure of “critical accounting policies.” The SEC defines “critical account policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We follow financial accounting and reporting policies that are in accordance with generally accepted accounting principles. The more significant of these policies relate to cost capitalization and asset valuation and are discussed in the “Business” section of this Item 2 under “Construction and Development Properties.”
In December 2002, FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which is effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Our adoption of the prospective method set forth in SFAS No. 148 will not have a material impact on our financial position, results of operations or cash flows.
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No material changes have occurred since our Annual Report on Form 10-K for the year ended December 31, 2002.
Within the 90-day period prior to the date of this report, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of May 12, 2003.
There were no significant changes in our internal controls or in the other factors that could significantly affect those controls subsequent to the date of the evaluation.
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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.
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I, Richard J. Campo, certify that:
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I, G. Steven Dawson, certify that:
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