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, 1999 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 10, 1999, there were 40,213,320 shares of Common Shares of Beneficial Interest, $0.01 par value outstanding.
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CAMDEN PROPERTY TRUST CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> ASSETS SEPTEMBER 30, DECEMBER 31, 1999 1998 --------------- -------------- (Unaudited) <S> <C> <C> Real estate assets, at cost: Land $ 349,388 $ 321,752 Buildings and improvements 2,070,162 1,917,026 --------------- -------------- 2,419,550 2,238,778 Less: accumulated depreciation (230,431) (167,560) --------------- -------------- Net operating real estate assets 2,189,119 2,071,218 Projects under development, including land 191,408 216,680 Investment in joint ventures 22,397 32,484 --------------- -------------- Total real estate assets 2,402,924 2,320,382 Accounts receivable - affiliates 1,252 831 Notes receivable: Affiliates 1,800 1,800 Other 27,331 Other assets, net 16,406 15,036 Cash and cash equivalents 13,790 5,647 Restricted cash - escrow deposits 5,169 4,286 --------------- -------------- Total assets $ 2,468,672 $ 2,347,982 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable: Unsecured $ 739,526 $ 632,923 Secured 345,960 369,645 Accounts payable 18,644 24,180 Accrued real estate taxes 26,731 21,474 Accrued expenses and other liabilities 34,927 28,278 Distributions payable 27,573 25,735 --------------- -------------- Total liabilities 1,193,361 1,102,235 Minority Interests: Preferred units 132,712 Common units 65,539 71,783 --------------- ------------- Total minority interests 198,251 71,783 7.33% Convertible Subordinated Debentures 3,451 3,576 Shareholders' Equity: Preferred shares of beneficial interest 42 42 Common shares of beneficial interest 447 447 Additional paid-in capital 1,303,395 1,299,539 Distributions in excess of net income (123,788) (98,897) Unearned restricted share awards (9,316) (10,039) Less: treasury shares, at cost (97,171) (20,704) --------------- -------------- Total shareholders' equity 1,073,609 1,170,388 --------------- -------------- Total liabilities and shareholders' equity $ 2,468,672 $ 2,347,982 =============== ============== See Notes to Consolidated Financial Statements. </TABLE>
3 CAMDEN PROPERTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- 1999 1998 1999 1998 ----------- ------------ ----------- ------------ <S> <C> <C> <C> <C> REVENUES Rental income $ 86,753 $ 79,802 $ 252,582 $ 219,601 Other property income 6,006 4,973 16,585 13,539 ----------- ---------- ----------- ----------- Total property income 92,759 84,775 269,167 233,140 Equity in income of joint ventures (472) 317 472 1,039 Fee and asset management 1,404 510 3,627 859 Other income 486 947 1,158 1,690 ----------- ---------- ----------- ----------- Total revenues 94,177 86,549 274,424 236,728 ----------- ---------- ----------- ----------- EXPENSES Property operating and maintenance 28,205 25,506 80,344 72,755 Real estate taxes 9,165 8,153 27,669 23,122 General and administrative 2,473 2,013 7,272 5,532 Interest 14,709 13,414 42,227 36,680 Depreciation and amortization 22,703 20,411 65,541 57,388 ----------- ---------- ----------- ----------- Total expenses 77,255 69,497 223,053 195,477 ----------- ---------- ----------- ----------- Income before gain on sale of properties and joint venture interests and minority interests 16,922 17,052 51,371 41,251 Gain on sale of properties and joint venture interests 2,259 2,979 ----------- ---------- ----------- ----------- Income before minority interests 19,181 17,052 54,350 41,251 Minority interests Preferred unit distributions (2,411) (5,392) Minority interest (892) (59) (1,850) (1,043) ----------- ----------- ----------- ----------- Total minority interests (3,303) (59) (7,242) (1,043) ----------- ----------- ----------- ----------- Net income 15,878 16,993 47,108 40,208 Preferred share dividends (2,343) (2,343) (7,029) (7,029) ----------- ----------- ----------- ----------- Net income to common shareholders $ 13,535 $ 14,650 $ 40,079 $ 33,179 =========== =========== =========== =========== Basic earnings per share $ 0.33 $ 0.33 $ 0.96 $ 0.83 Diluted earnings per share $ 0.32 $ 0.31 $ 0.94 $ 0.79 Distributions declared per common share $ 0.520 $ 0.505 $ 1.560 $ 1.515 Weighted average number of common shares outstanding 40,939 44,370 41,668 40,115 Weighted average number of common and common dilutive equivalent shares outstanding 42,025 47,437 44,728 43,116 </TABLE> See Notes to Consolidated Financial Statements.
4 CAMDEN PROPERTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) <TABLE> <CAPTION> Nine Months Ended September 30, ---------------------------- 1999 1998 ------------ ------------ <S> <C> <C> CASH FLOW FROM OPERATING ACTIVITIES Net income $ 47,108 $ 40,208 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 65,541 57,388 Equity in income of joint ventures, net of cash received 1,963 486 Gain on sale of properties and joint venture interests (2,979) Minority interest 1,850 1,043 Accretion of discount on unsecured notes payable 223 124 Net change in operating accounts 7,464 (3,789) ------------ ------------ Net cash provided by operating activities 121,170 95,460 CASH FLOW FROM INVESTING ACTIVITIES Cash of Oasis at acquisition 7,253 Net proceeds from Third Party Transaction 226,128 Increase in real estate assets (166,990) (271,742) Net proceeds from sale of properties 13,226 42,513 Net proceeds from sale of joint venture interests 5,465 6,841 Increase in investment in joint ventures (2,012) (4,795) Decrease in investment in joint ventures 6,400 1,478 Net (increase) decrease in notes receivable (27,331) 1,750 Net decrease in affiliate notes receivable 5,389 Other (1,488) (1,146) ------------ ------------ Net cash (used in) provided by investing activities (172,730) 13,669 CASH FLOW FROM FINANCING ACTIVITIES Net (decrease) increase in unsecured lines of credit and short-term borrowings (147,000) 113,792 Debt repayments from Third Party Transaction (114,248) Proceeds from notes payable 253,380 50,600 Proceeds from issuance of preferred units, net 132,712 Repayment of notes payable (23,685) (65,001) Distributions to shareholders and minority interests (79,722) (63,055) Repurchase of common shares and units (79,247) (1,616) Other 3,265 (120) ------------ ------------ Net cash provided by (used in) financing activities 59,703 (79,648) ------------ ------------ Net increase in cash and cash equivalents 8,143 29,481 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,647 6,468 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,790 $ 35,949 ============ ============ SUPPLEMENTAL INFORMATION Cash paid for interest, net of interest capitalized $ 35,526 $ 31,767 Interest capitalized $ 12,306 $ 6,385 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of Oasis (including the Third Party Transaction), net of cash acquired and fair value adjustment from the acquisitions of Oasis and Paragon: Fair value of assets acquired $ 835 $ 783,500 Liabilities assumed 835 495,708 Common shares issued 395,528 Preferred shares issued 104,125 Fair value of minority interest 21,520 Conversion of 7.33% subordinated debentures to common shares, net $ 125 $ 2,242 Value of shares issued under benefit plans, net $ 2,004 $ 6,180 Conversion of operating partnership units to common shares $ 387 $ 9,581 Note payable assumed upon purchase of a property $ 22,424 </TABLE> See Notes to Consolidated Financial Statements.
5 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, although management believes that the disclosures 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, 1999 and the results of operations for the three and nine months ended September 30, 1999 and 1998 and cash flows for the nine months ended September 30, 1999 and 1998 have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. BUSINESS We are a Houston-based real estate investment trust ("REIT") and report as a single business segment with activities related to the ownership, development, acquisition, management and disposition of multifamily apartment communities in the Southwest, Southeast, Midwest and Western regions of the United States. At September 30, 1999, we owned interests in, operated or were developing 159 multifamily properties containing 55,785 apartment homes located in nine states. Eight of our multifamily properties containing 3,570 apartment homes were under development at September 30, 1999. Two of our newly developed multifamily properties containing 820 apartment homes were in lease-up at September 30, 1999. We have several additional sites which we intend to develop into multifamily apartment communities. ACQUISITION OF OASIS RESIDENTIAL, INC. On April 8, 1998, we acquired, through a tax-free merger, Oasis Residential, Inc., a publicly traded Las Vegas-based multifamily REIT. The acquisition increased the size of our portfolio from 100 to 152 completed multifamily properties, and from 34,669 to 50,183 apartment homes at the date of acquisition. Each share of Oasis common stock outstanding on April 8, 1998 was exchanged for 0.759 of a Camden common share. Each share of Oasis Series A cumulative convertible preferred stock outstanding on April 8, 1998 was reissued as one Camden Series A cumulative convertible preferred share with terms and conditions comparable to the Oasis preferred stock. We issued 12.4 million common shares and 4.2 million preferred shares in exchange for the outstanding Oasis common and preferred stock, respectively. Approximately $484 million of Oasis debt, at fair value, was assumed in the merger. In connection with the merger with Oasis, on June 30, 1998, we completed a transaction in which Camden USA, Inc., one of our wholly owned subsidiaries, and TMT-Nevada, L.L.C., a Delaware limited liability company, formed Sierra-Nevada Multifamily Investments, LLC. We entered into this transaction to reduce our market risk in the Las Vegas area. TMT-Nevada holds an 80% interest in Sierra-Nevada and Camden USA holds the remaining 20% interest. In this transaction, we transferred to Sierra-Nevada 19 apartment communities containing 5,119 apartment homes for an aggregate of $248 million. Prior to the merger, Oasis owned 100% of each of these communities. In the merger, Camden USA acquired these communities. As a result, after the merger and prior to the Sierra-Nevada transaction, Camden USA owned 100% of each of these 19 properties. These properties are located in Las Vegas, Nevada. This transaction was funded with capital invested by the members of Sierra-Nevada,
6 the assumption of $9.9 million of existing nonrecourse indebtedness, the issuance of 17 nonrecourse cross collateralized and cross defaulted loans totaling $180 million and the issuance of two nonrecourse second lien mortgages totaling $7 million. REAL ESTATE ASSETS AT COST We capitalized $19.2 million and $18.7 million in the nine months ended September 30, 1999 and 1998, respectively, of renovation and improvement costs which we believe extended the economic lives and enhanced the earnings of our multifamily properties. If we had adopted the accounting policy described below as of January 1, 1998, the amounts capitalized for the nine months ended September 30, 1998 would have been $19.8 million. Effective April 1, 1998, we implemented prospectively a new accounting policy where expenditures for floor coverings, appliances and HVAC unit replacements are capitalized and depreciated over their estimated useful lives. Previously, all such replacements had been expensed. We believe that the newly adopted accounting policy is preferable as it is consistent with standards and practices utilized by the majority of our peers and provides a better matching of expenses with the related benefit of the expenditure. The change in accounting principle is inseparable from the effect of the change in accounting estimate and is therefore treated as a change in accounting estimate. See Recent Accounting Pronouncements below for the effect of this change and our adoption of a recent accounting pronouncement on our financial results for the nine months ended September 30, 1998. PROPERTY OPERATING AND MAINTENANCE EXPENSES Property operating and maintenance expenses included normal repairs and maintenance totaling $6.8 million and $18.4 million for the three and nine months ended September 30, 1999, and $6.0 million and $15.7 million for the three and nine months ended September 30, 1998, respectively. COMMON SHARE DIVIDEND DECLARATION In September 1999, we announced that our Board of Trust Managers had declared a dividend in the amount of $0.52 per share for the third quarter of 1999 which was paid on October 15, 1999 to all common shareholders of record as of September 30, 1999. 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 $2.08 per share or unit. PREFERRED SHARE DIVIDEND DECLARATION In September 1999, we announced that our Board of Trust Managers had declared a quarterly dividend on our preferred shares in the amount of $0.5625 per share payable November 15, 1999 to all preferred shareholders of record as of September 30, 1999. RECENT ACCOUNTING PRONOUNCEMENTS On March 19, 1998, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus decision on Issue No. 97-11, Accounting for Internal Costs Relating to Real Estate Property Acquisitions, which requires that internal costs of identifying and acquiring operating properties be expensed as incurred for transactions entered into on or after March 20, 1998. Prior to our adoption of this policy, we had been capitalizing such costs. Had we adopted Issue No. 97-11 and the new accounting policy for floor coverings, appliances and HVAC unit replacements as of January 1, 1998, net income to common shareholders would have increased $650,000 or $0.02 per basic and diluted earnings per share for the nine months ended September 30, 1998.
7 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, 1999 and 1998: <TABLE> <CAPTION> THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ ------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> BASIC EARNINGS PER SHARE: Weighted Average Common Shares Outstanding 40,939 44,370 41,668 40,115 =========== =========== =========== =========== Basic Earnings Per Share $ 0.33 $ 0.33 $ 0.96 $ 0.83 =========== =========== =========== =========== DILUTED EARNINGS PER SHARE: Weighted Average Common Shares Outstanding 40,939 44,370 41,668 40,115 Shares Issuable from Assumed Conversion of: Common Share Options and Awards Granted 452 387 414 414 Minority Interest Units 634 2,680 2,646 2,587 ----------- ----------- ----------- ----------- Weighted Average Common Shares Outstanding, as Adjusted 42,025 47,437 44,728 43,116 =========== =========== =========== =========== Diluted Earnings Per Share $ 0.32 $ 0.31 $ 0.94 $ 0.79 =========== =========== =========== =========== EARNINGS FOR BASIC AND DILUTED COMPUTATION: Net Income $ 15,878 $ 16,993 $ 47,108 $ 40,208 Less: Preferred Share Dividends 2,343 2,343 7,029 7,029 ----------- ----------- ----------- ----------- Net Income to Common Shareholders 13,535 14,650 40,079 33,179 (Basic Earnings Per Share Computation) Minority Interest 59 1,850 1,043 ----------- ----------- ----------- ----------- Net Income to Common Shareholders, as Adjusted (Diluted Earnings Per Share Computation) $ 13,535 $ 14,709 $ 41,929 $ 34,222 =========== =========== =========== =========== </TABLE> RECLASSIFICATIONS Certain reclassifications have been made to amounts in prior year financial statements to conform with current year presentations. 2. NOTES RECEIVABLE We have entered into agreements with unaffiliated third parties to develop, construct, and manage four multifamily projects. We are providing financing for a portion of each project in the form of four year notes receivable. These notes earn interest at 10% and are secured by liens on the assets and partial guarantees by the third party owners. At September 30, 1999, these notes had principal balances totaling $21.0 million. We anticipate funding up to an aggregate of $41 million in connection with these projects. We earn fees for managing the development, construction and eventual operations of these properties. We have the option to purchase these properties in the future at a price to be determined based upon the property's performance and an agreed valuation model.
8 3. NOTES PAYABLE The following is a summary of our indebtedness: (In millions) <TABLE> <CAPTION> September 30, December 31, 1999 1998 ----------------- ---------------- <S> <C> <C> Senior Unsecured Notes: 6.73% - 7.28% Notes, due 2001-2006 $ 523.0 $ 323.9 6.68% - 7.63% Medium Term Notes, due 2000 - 2009 181.5 127.0 Unsecured Lines of Credit and Short-Term Borrowings 35.0 182.0 --------------- ------------- 739.5 632.9 Secured Notes - Mortgage loans (5.45% - 8.63%), due 2001 - 2028 346.0 369.7 --------------- ------------- Total notes payable $ 1,085.5 $ 1,002.6 =============== ============= </TABLE> In August 1999, we entered into a line of credit with 14 banks for a total commitment of $375 million. This line of credit replaces our three previous lines of credit which totaled $275 million. The new line of credit is scheduled to mature in August 2002. 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 $187.5 million or the remaining amount available under the line of credit. The line of credit is subject to customary financial covenants and limitations. During September 1999, we executed three interest rate swap agreements totaling $70 million which are scheduled to mature in October 2000. These swaps are being used as a hedge of interest rate exposure on our $90 million medium term notes issued in October 1998 which mature in October 2000. Currently, the interest rate on the medium term notes is fixed at 7.23%. The interest rates on the swaps are based on the one-month LIBOR rate plus a spread resulting in an effective interest rate on the swaps of 6.58% at September 30, 1999. During the first quarter of 1999, we issued $39.5 million aggregate principal amounts of senior unsecured notes from our $196 million medium-term note shelf registration. These fixed rate notes, due in January 2002 through January 2009, bear interest at a weighted average rate of 7.07%, payable semiannually on January 15 and July 15. The net proceeds were used to reduce indebtedness outstanding under the unsecured lines of credit. In April 1999, we issued $15 million aggregate principal amounts of senior unsecured notes from our $196 million medium-term note shelf registration. These fixed rate notes, due in March 2002, bear interest at a rate of 6.74%, payable semiannually on March 15 and September 15. The net proceeds were used to reduce indebtedness outstanding under the unsecured lines of credit. In April 1999, we issued from our $500 million shelf registration an aggregate principal amount of $200 million of five-year senior unsecured notes. Interest on the notes accrues at an annual rate of 7.0% and is payable semi-annually on April 15 and October 15, commencing on October 15, 1999. The notes are direct, senior unsecured obligations and rank equally with all other unsecured and unsubordinated indebtedness. The notes may be redeemed at any time at our option subject to a make-whole provision. We used the net proceeds of $197.7 million to reduce $171 million of indebtedness under the unsecured lines of credit and for general working capital purposes.
9 At September 30, 1999, the weighted average interest rate on floating rate debt was 6.07%. 4. NET CHANGE IN OPERATING ACCOUNTS The effect of changes in the operating accounts on cash flows from operating activities is as follows: (In thousands) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1999 1998 ----------- ----------- <S> <C> <C> Decrease (increase) in assets: Accounts receivable - affiliates $ (175) $ 1,298 Other assets, net (1,787) 421 Restricted cash - escrow deposits (883) 1,337 Increase (decrease) in liabilities: Accounts payable (6,551) (5,027) Accrued real estate taxes 5,257 5,028 Accrued expenses and other liabilities 11,603 (6,846) ----------- ----------- Net change in operating accounts $ 7,464 $ (3,789) =========== =========== </TABLE>
10 5. PREFERRED UNITS In February 1999, our operating partnership issued $100 million of 8.5% Series B 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 our 8.5% Series B Cumulative Redeemable Perpetual Preferred Shares. The preferred units are subordinate to present and future debt. During the third quarter of 1999, our operating partnership issued $35.5 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 our 8.25% Series C Cumulative Redeemable Perpetual Preferred Shares. The preferred units are subordinate to present and future debt. 6. RESTRICTED SHARE AND OPTION AWARDS During the first nine months of 1999, we granted 132,144 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 ourcommon shares at the date of grant and have vesting periods of up to five years. We also granted 603,071 options with an exercise price equal to the market value of our common shares on the date of grant. The options become exercisable in equal increments over three years, beginning on the first anniversary of the grant. During the nine month period ended September 30, 1999, previously granted options to purchase 649,119 shares became exercisable and 113,324 restricted shares vested. 7. COMMON SHARE REPURCHASE PROGRAM In March 1999, the Board of Trust Managers authorized us to repurchase up to $50 million of our common shares and units through open market purchase and private transactions. This amount is in addition to the initial $50 million the Board of Trust Managers authorized for repurchase in September 1998. As of
11 September 30, 1999, we had repurchased 3,900,560 common shares and units for a total cost of $100.0 million. Additionally, in October 1999, the Board of Trust Managers authorized us to repurchase up to $100 million of our common shares and units through open market purchases and private transactions. Subsequent to September 30, 1999, we repurchased 722,200 shares and units at a total cost of $19.2 million under the new program. 8. CONVERTIBLE PREFERRED SHARES The 4,165,000 preferred shares issued in conjunction with the Oasis merger pay a cumulative dividend quarterly in arrears in an amount equal to $2.25 per share per annum. The preferred shares generally have no voting rights and have a liquidation preference of $25 per share plus accrued and unpaid distributions. The preferred shares are 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 are not redeemable prior to April 30, 2001. 9. CONTINGENCIES Prior to our merger, 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 defendants' 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 had 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. We are currently in the process of determining the extent of the alleged noncompliance on the properties discussed above and the remaining changes that may be necessitated. At this time, we are not able to provide an estimate of costs and expenses associated with the resolution of this matter, however, management does not expect the amount to be material. There can be no assurance that we will be successful in the defense of the Justice Department action. 10. SUBSEQUENT EVENTS 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 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
12 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 be able to complete the negotiations or become satisfied with the outcome of the due diligence. We seek to selectively dispose of assets that have a lower projected net operating income growth rate than the overall portfolio, or no longer conform to our operating and investment strategies. The proceeds from these sales may be reinvested in acquisitions or developments, used to retire debt or repurchase shares.
13 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 1998 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 unexpected Year 2000 problems. BUSINESS We are a Houston-based REIT and report as a single business segment with activities related to the ownership, development, acquisition, management and disposition of multifamily apartment communities in the Southwest, Southeast, Midwest and Western regions of the United States. At September 30, 1999, we owned interests in, operated or were developing 159 multifamily properties containing 55,785 apartment homes located in nine states. Eight of our multifamily properties containing 3,570 apartment homes were under development at September 30, 1999. Two of our newly developed multifamily properties containing 820 apartment homes were in lease-up at September 30, 1999. We have several additional sites which we intend to develop into multifamily apartment communities. ACQUISITION OF OASIS RESIDENTIAL, INC. On April 8, 1998, we acquired, through a tax-free merger, Oasis Residential, Inc., a publicly traded Las Vegas-based multifamily REIT. The acquisition increased the size of our portfolio from 100 to 152 completed multifamily properties, and from 34,669 to 50,183 apartment homes at the date of acquisition. Each share of Oasis common stock outstanding on April 8, 1998 was exchanged for 0.759 of a Camden common share. Each share of Oasis Series A cumulative convertible preferred stock outstanding on April 8, 1998 was reissued as one Camden Series A cumulative convertible preferred share with terms and conditions comparable to the Oasis preferred stock. We issued 12.4 million common shares and 4.2 million preferred shares in exchange for the outstanding Oasis common and preferred stock, respectively. Approximately $484 million of Oasis debt, at fair value, was assumed in the merger. In connection with the merger with Oasis, on June 30, 1998, we completed a transaction in which Camden USA, Inc., one of our wholly owned subsidiaries, and TMT-Nevada, L.L.C., a Delaware limited liability company, formed Sierra-Nevada Multifamily Investments, LLC. We entered into this transaction to reduce our market risk in the Las Vegas area. TMT-Nevada holds an 80% interest in Sierra-Nevada and Camden USA holds the remaining 20% interest. In this transaction, we transferred to Sierra-Nevada 19 apartment communities containing 5,119 apartment homes for an aggregate of $248 million. Prior to the merger, Oasis owned 100% of each of these communities. In the merger, Camden USA acquired these communities. As a result, after the merger and prior to the Sierra-Nevada transaction, Camden USA owned 100% of each of these 19 properties. These properties are located in Las Vegas, Nevada. This transaction was funded with capital invested by the members of Sierra-Nevada, the assumption of $9.9 million of existing nonrecourse indebtedness, the
14 issuance of 17 nonrecourse cross collateralized and cross defaulted loans totaling $180 million and the issuance of two nonrecourse second lien mortgages totaling $7 million. PROPERTY PORTFOLIO Our multifamily property portfolio, excluding land held for future development and joint venture properties that we do not manage, is summarized as follows: <TABLE> <CAPTION> September 30,1999 December 31, 1998 ------------------------------- ----------------------------- Apartment Apartment Homes Properties % (a) Homes Properties % (a) ----------- ------------ ------ --------- ------------ ------ <S> <C> <C> <C> <C> <C> <C> Operating Properties Texas Houston 7,502 18 15% 6,345 15 13% Dallas (b) 9,381 26 18 9,381 26 17 Austin 1,745 6 4 1,745 6 4 Other 1,641 5 3 1,641 5 3 ----------- ------------ ------ --------- ------------ ------ Total Texas Operating Properties 20,269 55 40 19,112 52 37 Arizona 2,326 7 5 2,326 7 5 California 1,272 3 3 1,272 3 3 Colorado (b) 1,972 6 3 1,972 6 3 Florida 7,335 17 15 7,261 17 14 Kentucky 1,016 4 2 1,142 5 2 Missouri 3,327 8 7 3,327 8 7 Nevada (b) 11,963 41 14 12,163 41 14 North Carolina (b) 2,735 10 4 2,735 10 4 ----------- ----------- ------ --------- ------------ ------ Total Operating Properties 52,215 151 93 51,310 149 89 ----------- ----------- ------ --------- ------------ ------ Properties Under Development Texas Houston (c) 756 1 1 2,213 5 4 Dallas 620 1 1 600 1 1 ----------- ----------- ------ --------- ------------ ------ Total Texas Development Properties 1,376 2 2 2,813 6 5 Arizona 332 1 1 325 1 1 California 380 1 1 380 1 1 Colorado 558 2 1 558 2 1 Florida (c) 492 1 1 1,150 3 2 Kentucky 432 1 1 432 1 1 ----------- ----------- ------ --------- ------------ ------ Total Properties Under Development 3,570 8 7 5,658 14 11 ----------- ----------- ------ --------- ------------ ------ Total Properties 55,785 159 100% 56,968 163 100% =========== =========== ====== ========= ============ ====== Less: Joint Venture Apartment Homes (b) 6,504 6,704 ----------- ----------- Total Apartment Homes - Owned 100% 49,281 50,264 =========== =========== </TABLE> (a) Based on number of apartment homes owned 100% (b) The figures 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; one property with 321 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 (5,119 apartment homes at December 31, 1998) in Nevada owned through Sierra-Nevada Multifamily Investments, LLC in which we own a 20% interest. (c) The September 30, 1999 amounts exclude one property with 300 apartment homes in Houston which is now classified as land held for future development and one property with 352 apartment homes in Florida which was sold during the year.
15 At September 30, 1999, we had two completed properties under lease-up as follows: <TABLE> <CAPTION> Product Number of % Leased Estimated Type Apartment at 11/10/99 Date of Date of Property and Location Homes Completion Stabilization - ----------------------------------------- ------------ -------------- ------------- -------------- ----------------- <S> <C> <C> <C> <C> <C> The Park at Goose Creek Baytown, TX Affordable 272 77% 3Q99 4Q99 The Park at Holly Springs Houston, TX Garden 548 49% 3Q99 4Q00 </TABLE> At September 30, 1999, we had 8 development properties in various stages of construction as follows: <TABLE> <CAPTION> Product Number of Estimated Estimated Estimated Type Apartment Cost Date of Date of Property and Location Homes ($ millions) Completion Stabilization - ----------------------------------------- ------------------- ------------ -------------- -------------- --------------- <S> <C> <C> <C> <C> <C> In Lease-up The Park at Interlocken Denver, CO Garden 340 $ 34.9 4Q99 1Q00 The Park at Greenway Houston, TX Urban 756 57.5 4Q99 3Q00 The Park at Caley Denver, CO Garden 218 18.3 1Q00 2Q00 The Park at Lee Vista Orlando, FL Garden 492 32.8 1Q00 1Q01 The Park at Oxmoor Louisville, KY Garden 432 22.1 1Q00 1Q01 ---------- ----------- Subtotal 2,238 165.6 ---------- ----------- Under Construction The Park at Arizona Center Phoenix, AZ Urban 332 24.5 1Q00 1Q01 The Park at Farmers Market, Phase I Dallas, TX Urban 620 49.8 4Q00 4Q01 The Park at Crown Valley Mission Viejo, CA Garden 380 42.0 1Q01 3Q01 ---------- ---------- Subtotal 1,332 116.3 ---------- ----------- Total for 8 development properties 3,570 $ 281.9 ========== =========== </TABLE> We stage our construction to allow leasing and occupancy during the construction period which we believe minimizes 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 "Projects under development, including land" until such apartment homes are completed. Upon completion of each building of the project, 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, all apartment homes are considered operating and we begin expensing all items that were previously considered as carrying costs. Generally, this occurs within one year of opening the leasing office, with some allowances for larger than average properties.
16 COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 The changes in operating results from period to period are primarily due to the development of five properties totaling 1,759 apartment homes, the acquisition of three properties containing 1,626 apartment homes, the disposition of two properties containing 358 apartment homes and an increase in net operating income generated by the stabilized portfolio. The weighted average number of apartment homes for the third quarter of 1999 increased by 1,986 apartment homes, or 4.5%, from 44,006 to 45,992. Total operating properties were 128 and 125 at September 30, 1999 and 1998, respectively. The 45,992 weighted average apartment homes and the 128 operating properties exclude the impact of our ownership interest in properties owned in joint ventures. The 125 operating properties at September 30, 1998 have been restated to reflect the combination of operations of two adjacent properties in Nevada, Texas and Florida at December 31, 1998. Rental income for the quarter ended September 30, 1999 increased $7.0 million or 8.7% over the quarter ended September 30, 1998. Rental income per apartment home per month increased $25 or 4.1%, from $604 to $629 for the third quarters of 1998 and 1999, respectively. The increase was primarily due to increased revenue growth from the stabilized real estate portfolio and higher average rental rates on two of the three acquired properties and four of the five completed development properties. Additionally, the two disposed properties had average rental rates significantly lower than the portfolio average. Overall average occupancy increased slightly from 93.8% for the quarter ended September 30, 1998 to 94.0% for the quarter ended September 30, 1999. Other property income for the quarter ended September 30, 1999 increased $1.0 million over the quarter ended September 30, 1998. The increase in other property income was due primarily to a $700,000 increase from revenue sources such as telephone, cable and water. Property operating and maintenance expenses increased $2.7 million or 10.6%, from $25.5 million to $28.2 million and increased as a percent of total property income from 30.1% to 30.4% for the quarters ended September 30, 1998 and 1999, respectively. The increase in operating expense was due to a larger number of apartment homes owned and in operation. Our operating expense ratios increased primarily as a result of an increase in repairs and maintenance costs. Real estate taxes increased $1.0 million from $8.2 million to $9.2 million for the third quarters of 1998 and 1999, respectively, which represents an annual increase of $56 per apartment home. The increase was primarily due to increases in the valuations of properties held in our Texas and Florida portfolios and increases in property tax rates. General and administrative expenses increased $460,000 from $2.0 million to $2.5 million, and increased as a percent of revenues from 2.3% to 2.6% for the quarters ended September 30, 1998 and 1999, respectively. The increase is primarily due to increases in salary and payroll related costs. Interest expense increased from $13.4 million to $14.7 million primarily due to interest on debt incurred to repurchase our shares under the common share repurchase program. Interest capitalized was $4.1 million and $2.9 million for the quarters ended September 30, 1999 and 1998, respectively. Depreciation and amortization increased from $20.4 million to $22.7 million. This increase was due primarily to developments, renovations and property acquisitions. Gains on sale of properties and joint venture investments increased $2.3 million due to gains from the disposition of one multifamily property containing 232 units and our joint venture investment in two commercial office buildings. The gains recorded on these dispositions were partially offset by a loss on the
17 sale of a retail/commercial center. These gains do not include a loss on the sale of a 408 unit property held in a joint venture of $738,000 which is included in "Equity in Income of Joint Ventures". COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 The changes in operating results from period to period are primarily due to the Oasis merger, the transfer of 19 properties totaling 5,119 apartment homes into the Sierra-Nevada joint venture, development of five properties aggregating 1,759 apartment homes, the acquisition of five properties containing 2,226 apartment homes, the disposition of eight properties containing 1,752 apartment homes and an increase in net operating income generated by the stabilized portfolio. The weighted average number of apartment homes for the first nine months of 1999 increased by 3,592 apartment homes, or 8.6%, from 41,712 to 45,304. Total operating properties were 128 and 125 at September 30, 1999 and 1998, respectively, and exclude those owned through joint venture investments. The weighted average number of apartment homes of 45,304 and 41,712 exclude the impact of our ownership interest in apartment homes owned in joint ventures throughout the nine month periods. The 125 operating properties at September 30, 1998 have been restated to reflect the combination of operations of two adjacent properties in Nevada, Texas and Florida at December 31, 1998. Rental income increased $33.0 million or 15.0% from $219.6 million to $252.6 million for the nine months ended September 30, 1998 and 1999, respectively. Rental income per apartment home per month increased $34 or 5.8%, from $585 to $619 for the nine months ended September 30, 1998 and 1999, respectively. The increase was primarily due to increased revenue growth from the stabilized real estate portfolio, higher average rental rates on properties added to the portfolio through the Oasis merger, four of the five acquired properties and completion of new development properties. Additionally, seven of the eight disposed properties had average rental rates significantly lower than the portfolio average. Other property income increased $3.0 million from $13.5 million to $16.6 million for the nine months ended September 30, 1998 and 1999, respectively. The increase in other property income was due to a larger number of apartment homes owned and in operation and a $1.9 million increase from revenue sources such as telephone, cable and water. Property operating and maintenance expenses increased $7.6 million, from $72.8 million to $80.3 million, but decreased as a percent of total property income from 31.2 % to 29.8% for the nine months ended September 30, 1998 and 1999, respectively. Our operating expense ratio decreased from the prior year primarily as a result of the impact of our April 1, 1998 adoption of a new accounting policy, whereby expenditures for floor coverings, appliances and HVAC unit replacements are expensed in the first five years of a property's life and capitalized thereafter. Prior to the adoption of this policy, we had been expensing these costs. Had this policy been adopted as of January 1, 1998, the nine months ended September 30, 1998 operating expense ratio would have been 30.7%. Real estate taxes increased $4.5 million from $23.1 million to $27.7 million for the nine months ended September 30, 1998 and 1999, respectively, which represents an annual increase of $75 per apartment home. The increase was primarily due to increases in the valuations of renovated, acquired and developed properties and increases in property tax rates. This increase per apartment home was partially offset by lower property taxes in the portfolio added through the Oasis merger. General and administrative expenses increased $1.7 million from $5.5 million to $7.3 million, and increased as a percent of revenues from 2.3% to 2.6%. The general and administrative expense ratio increase is mainly attributable to the impact of our March 20, 1998 adoption of Issue No. 97-11, Accounting for Internal Costs Relating to Real Estate Property Acquisitions, discussed in Note 1, which is partially offset by efficiencies resulting from operating a larger portfolio.
18 Interest expense increased from $36.7 million to $42.2 million due to increased indebtedness related to the Oasis merger, completed developments, renovations and property acquisitions. Additionally, interest expense increased due to interest on debt incurred to repurchase our shares under the common share repurchase program. Interest capitalized was $6.4 million and $12.3 million for the nine months ended September 30, 1998 and 1999, respectively. Depreciation and amortization increased from $57.4 million to $65.5 million. This increase was due primarily to the Oasis merger, developments, renovations and property acquisitions. Gains on sale of properties and joint venture investments increased $3.0 million due to gains from the disposition of two multifamily properties containing 358 units and our joint venture investment in two commercial office buildings. The gains recorded on these dispositions were partially offset by a loss on the sale of a retail/commercial center. These gains do not include a loss on the sale of a 408 unit property held in a joint venture of $738,000 which is included in "Equity in Income of Joint Ventures". LIQUIDITY AND CAPITAL RESOURCES FINANCIAL STRUCTURE We intend to continue maintaining what management believes to be a conservative capital structure by: (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 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 3.8 and 3.7 times for the nine months ended September 30, 1999 and 1998, respectively, and 3.7 times and 3.8 times for the quarters ended September 30, 1999 and 1998, respectively. At September 30, 1999 and 1998, 75.7% and 70.6%, 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) debt service requirements; (iii) capital expenditures; (iv) property developments; (v) common share repurchases; and (vi) common and preferred distributions. 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. As of September 30, 1999, we had $340 million available under the unsecured line of credit, $75 million available under our
19 universal shelf registration, and $14.5 million available under our medium-term note program. 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. In September 1999, we announced that our Board of Trust Managers had declared a dividend in the amount of $0.52 per share for the third quarter of 1999 which was paid on October 15, 1999 to all common shareholders of record as of September 30, 1999. 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 $2.08 per share or unit. In September 1999, we declared a quarterly dividend on our Series A Cumulative Preferred Shares, which were issued in conjunction with the merger of Oasis. The dividend in the amount of $0.5625 per share is payable November 15, 1999 to all preferred shareholders of record as of September 30, 1999. FINANCIAL FLEXIBILITY We concentrate our growth efforts toward selective development and acquisition opportunities in our current markets, and through the acquisition of existing operating portfolios and development properties in selected new markets. During the nine months ended September 30, 1999, we incurred $154.9 million in development costs and no acquisition costs. We are developing eight additional properties at an aggregate cost of approximately $281.9 million. We 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 have a lower projected net operating income growth rate than the overall portfolio, or no longer conform to our operating and investment strategies. Such sales generate capital for acquisitions and new developments or for debt reduction. In August 1999, we entered into a line of credit with 14 banks for a total commitment of $375 million. This line of credit replaces our three previous lines of credit which totaled $275 million. The new line of credit is scheduled to mature in August 2002. 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 $187.5 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 below those available under the unsecured line of credit. During the third quarter of 1999, our operating partnership issued $35.5 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 in to our 8.25% Series C Cumulative Redeemable Perpetual Preferred Shares. The preferred units are subordinate to present and future debt. On February 23, 1999, our operating partnership issued $100 million of 8.5% Series B 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
20 into our 8.5% Series B Cumulative Redeemable Perpetual Preferred Shares. The preferred units are subordinate to present and future debt. During the first quarter of 1999, we issued $39.5 million aggregate principal amounts of senior unsecured notes from our $196 million medium-term note shelf registration. These fixed rate notes, due in January 2002 through January 2009, bear interest at a weighted average rate of 7.07%, payable semiannually on January 15 and July 15. The net proceeds were used to reduce indebtedness outstanding under the unsecured lines of credit. On April 9, 1999, we issued $15 million principal amounts of senior unsecured notes from our $196 million medium-term note shelf registration. These fixed rate notes, due in March 2002, bear interest at a rate of 6.74%, payable semiannually on March 15 and September 15. The net proceeds were used to reduce indebtedness outstanding under the unsecured lines of credit. On April 15, 1999, we issued from our $500 million shelf registration an aggregate principal amount of $200 million of five-year senior unsecured notes. Interest on the notes accrues at an annual rate of 7.0% and is payable semi-annually on April 15 and October 15, commencing on October 15, 1999. The notes are direct, senior unsecured obligations and rank equally with all other unsecured and unsubordinated indebtedness. The notes may be redeemed at any time at our option subject to a make-whole provision. The proceeds from the sale of the notes were $197.7 million, net of issuance costs. We used the net proceeds to reduce $171 million of indebtedness under the unsecured lines of credit and for general working capital purposes. During September 1999, we executed three interest rate swap agreements totaling $70 million which are scheduled to mature in October 2000. These swaps are being used as a hedge of interest rate exposure on our $90 million medium term notes issued in October 1998 which mature in October 2000. Currently, the interest rate on the medium term notes is fixed at 7.23%. The interest rates on the swaps are based on the one-month LIBOR rate plus a spread resulting in an effective interest rate on the swaps of 6.58% at September 30, 1999. At September 30, 1999, the weighted average interest rate on floating rate debt was 6.07%. 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 interest, 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 months ended September 30, 1999 increased slightly over the three months ended September 30, 1998. The increase in diluted FFO during the three months ended September 30, 1999 from property acquisitions, developments and improvements in the performance of the stabilized properties was offset by the repurchase of our shares under our common share repurchase program. Our diluted
21 FFO for the nine months ended September 30, 1999 increased $14.4 million over the nine months ended September 30, 1998. This increase in diluted FFO was due to the Oasis merger, property acquisitions, developments and improvements in the performance of the stabilized properties in our portfolio. The calculation of basic and diluted FFO for the three and nine months ended September 30, 1999 and 1998 follows: (In thousands) <TABLE> <CAPTION> Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ----------- ---------- <S> <C> <C> <C> <C> FUNDS FROM OPERATIONS: Net income to common shareholders $ 13,535 $ 14,650 $ 40,079 $ 33,179 Real estate depreciation 22,315 20,070 64,388 56,364 Real estate depreciation from unconsolidated ventures 797 754 2,423 1,498 Preferred share dividends 2,343 Loss on sale of property held in unconsolidated ventures 738 738 Gain on sale of properties and joint venture interests (2,259) (2,979) ---------- ---------- ----------- ---------- FUNDS FROM OPERATIONS - BASIC 35,126 35,474 104,649 93,384 Preferred share dividends 2,343 2,343 7,029 4,686 Minority interest 892 59 1,850 1,043 Interest on convertible subordinated debentures 63 69 195 249 Amortization of deferred costs on convertible debentures 7 6 19 24 ---------- ---------- ----------- ---------- FUNDS FROM OPERATIONS - DILUTED $ 38,431 $ 37,951 $ 113,742 $ 99,386 ========== ========== =========== ========== WEIGHTED AVERAGE SHARES - BASIC 40,939 44,370 41,668 40,115 Common share options and awards granted 452 387 414 414 Preferred shares 3,207 3,207 3,207 2,150 Minority interest units 2,621 2,680 2,646 2,587 Convertible subordinated debentures 145 156 148 188 ========== ========== =========== ========== WEIGHTED AVERAGE SHARES - DILUTED 47,364 50,800 48,083 45,454 ========== ========== =========== ========== </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. YEAR 2000 CONVERSION We have recognized the need to ensure that our computer equipment and software ("computer systems"), other equipment and operations will not be adversely impacted by the change to the calendar Year 2000. As such, we have taken steps to identify and resolve potential areas of risk by implementing a comprehensive Year 2000 action plan. The plan is divided into four phases: identification, assessment, notification/certification, and testing/contingency plan development; and includes three major elements: computer systems, other equipment and third parties. We are on the fourth phase for our computer systems, other equipment and third party services. We believe that the Year 2000 issue will not pose significant operating problems for our computer systems, since the majority of computer equipment and software products we utilize are already compliant or were converted or modified as part of system upgrades unrelated to the Year 2000 issue. We are in the
22 process of completing a contingency plan which will permit our primary computer systems operations to continue if the on-going testing of such conversions and modifications reveals any Year 2000 issues presently unknown to us. Our estimated total cost of addressing the Year 2000 issues with respect to our own computer systems, other equipment and operations is expected to be minimal since the cost of any computer systems upgrades and conversions to specifically address the Year 2000 issues have been and are expected to be minimal. Additionally, the majority of Year 2000 issues are being addressed by use of internal resources and such future internal costs are expected to be minimal as well. We do not separately track internal cost, which primarily consist of payroll and related costs, incurred on Year 2000 issues. We have not estimated any time or other internal costs that may be incurred by us as a result of the failure of any third parties to become Year 2000 ready or costs to implement any contingency plans. We are communicating with our key third party service providers and vendors, including those who have previously sold equipment to us, to obtain information and compliance certificates, if possible, regarding their state of readiness with respect to the Year 2000 issue. As of November 10, 1999, 99% of key third party service providers have responded with compliance certificates. Failure of certain third parties to remediate Year 2000 issues affecting their respective businesses on a timely basis, or to implement contingency plans sufficient to permit uninterrupted continuation of their businesses in the event of a failure of their systems, could have a material adverse impact on our business and results of operations. Final determination of third party Year 2000 readiness is substantially complete. None of the responses received from third party service providers as of November 10, 1999 have indicated any problem with bringing their services into Year 2000 compliance. We intend to continue to monitor the progress made by third parties, test critical system interfaces and formulate appropriate contingency and business continuation plans to address third party issues identified through our evaluations and assessments. We presently believe that the worst case scenario with respect to the Year 2000 issues is the failure of third party service providers, including utility suppliers and banks, to become Year 2000 compliant. This could result in interruptions in services to our apartment communities for a period of time and could adversely affect our access to credit and money markets which, in turn, could result in loss of normal operating capacity. If our computer systems completely fail, we would be able to continue affected functions either manually or through non-Year 2000 compliant systems. We do not believe that the increased costs associated with such interruptions from both third party service failure and computer system failure could exceed $1 million. 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, 1998.
23 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) 10.1 Form of Credit Agreement dated August 18, 1999 between Bank of America, N.A. and the registrant 11.1 Statement regarding Computation of Earnings Per Common Share 27.1 Financial Data Schedule (filed only electronically with the Commission) (b) Reports on Form 8-K No reports on Form 8-K have been filed by the registrant during the quarter for which this report is filed.
24 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 12, 1999 - -------------------------------- -------------------------- G. Steven Dawson Date Sr. Vice President of Finance, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial and Accounting Officer) /s/ Dennis M. Steen November 12, 1999 - -------------------------------- -------------------------- Dennis M. Steen Date Vice President - Controller and Chief Accounting Officer