Item 1.
Business
General
Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, referred to below as the “company” or as “we,” “us” or “our”) is a self-administered real estate investment trust, or REIT, that is headquartered in Richmond, Virginia, and that owns, acquires, develops and manages apartment communities located in the United States. The company is a Virginia corporation formed in August 1989. Initial capitalization occurred on August 18, 1992. Operations of rental properties commenced on June 1, 1993. As of December 31, 2003, the company owned 89 apartment communities, which comprised a total of 23,189 apartment homes. The company’s apartment communities are located in Georgia, North Carolina, South Carolina, Texas and Virginia. The company’s apartment communities are described in Item 2
Item 2.
Properties
As of December 31, 2003, the company owned 89 apartment communities, which comprised a total of 23,189 apartment homes. Those apartment communities were located in Georgia (11 communities), North Carolina (28 communities), South Carolina (9 communities), Texas (29 communities), and Virginia (12 communities).
The following table sets forth specific information regarding the company’s apartment communities and their respective apartment homes:
Notes to table of apartment communities:
(1)
“Total Investment” includes the purchase price of the apartment community plus real estate commissions, closing costs and improvements capitalized since the community’s date of acquisition.
(2)
Heatherwood Apartments is comprised of Heatherwood (completed in 1980) and Italian Village and Villa Marina Apartments (completed in 1980), acquired in September 1996 and August 1997, respectively, at a cost of $10.2 million and $7.4 million. They are adjoining properties and are operated as one apartment community.
(3)
Trolley Square Apartments is comprised of Trolley Square East Apartments (completed in 1965) and Trolley Square West Apartments (completed in 1964) acquired in June 1996 and December 1996, respectively, at a cost of $6.0 million and $4.2 million. They are adjacent properties and are operated as one apartment community.
(4)
Trophy Chase is comprised of Trophy Chase (completed in 1970) and Hunter’s Creek (completed in 1970) acquired in April 1996 and July 1999, respectively, at a cost of $3.7 million and $8.9 million.
(5)
The Meadows is comprised of The Meadows (completed in 1974), the Enclave (completed in 2000) and Phase II Enclave (completed in 2001) acquired in January 1996, March 2000 and May 2001, respectively, at a cost of $6.2 million, $8.8 million and $2.9 million.
(6)
Glen Eagles is comprised of Glen Eagles (completed in 1990) and Prestwick (completed in 2000) acquired in October 1995 and September 2000, respectively, at a cost of $7.3 million and $9.6 million.
(7)
St. Andrews is comprised of St. Andrews (completed in 1998) and St. Andrews II (completed in 2002) acquired in October 2001 and March 2002, respectively, at a cost of $17.1 million and $10.3 million.
(8)
Trinity Commons is comprised of Trinity Commons (completed in 2000) and Trinity Commons II (completed in 2002) acquired in October 2001 and July 2002, respectively, at a cost of $22.1 million and $15.7 million.
(9)
$73.5 million of secured debt secured by 10 properties which are individually noted.
(10)
$13.6 million of secured debt secured by 7 properties which are individually noted.
(11)
Includes fair value adjustments of $18.4 million.
The following table sets forth occupancy rates and average rental rates for the company’s apartment communities:
Notes to table of occupancy rates and average rental rates:
(1)
An open item denotes that the company did not own the property during the period indicated.
(2)
Economic occupancy percentage reflects scheduled rent divided by gross potential rent.
(3)
Average rent per month reflects December’s monthly gross potential rent divided by the property’s number of units.
(4)
This property was acquired in late December 2002, and therefore economic occupancy percentage was not available.
Item 3.
Item 3.
Legal Proceedings
Neither the company nor any of its apartment communities is presently subject to any material litigation nor, to the company’s knowledge, is any material litigation threatened against the company or any of its subsidiaries or apartment communities, other than ordinary routine actions incidental to the company’s business, some of which are expected to be covered by insurance and all of which collectively are not expected to have a material adverse effect on the business or financial condition or results of operations of the company.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2003.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters
Common Shares
The company’s common shares are traded on the New York Stock Exchange (“NYSE”) under the symbol “TCR.” The following table sets forth the quarterly high and low sale prices per common share on the NYSE for each quarter of the last two years and the cash distributions declared and paid for each quarterly period indicated.
On March 1, 2004, the closing sale price of our common stock was $9.20 per share on the NYSE, and there were 1,843 shareholders of record of the 55,651,702 outstanding shares of common stock.
Distributions of $45.3 million and $53.5 million were made to the shareholders during 2003 and 2002, respectively.
The timing and amounts of distributions to shareholders are within the discretion of the company’s board of directors. Future distributions will depend on the company’s results of operations, cash flow from operations, economic conditions and other factors, such as working capital, cash requirements to fund investing and financing activities, capital expenditure requirements, including improvements to and expansions of properties and the acquisition of additional properties, as well as the distribution requirements under federal income tax provisions for qualification as a REIT. The company’s distributions to its shareholders also may be limited by the agreements pertaining to the company’s secured lines of credit.
For federal income tax purposes, distributions paid to common shareholders may consist of ordinary income, capital gains distributions, non-taxable return of capital, or a combination thereof. Distributions
constitute ordinary income to the extent of the company’s current and accumulated earnings and profits. Distributions which exceed the company’s current and accumulated earnings and profits constitute a return of capital rather than a dividend to the extent of a shareholder’s basis in his common shares and reduce the shareholder’s basis in the common shares. To the extent that a distribution exceeds both the company’s current and accumulated earnings and profits and the shareholder’s basis in his common shares, it is generally treated as gain from the sale or exchange of that shareholder’s common shares. The company notifies shareholders annually as to the taxability of distributions paid during the preceding year. In 2003, approximately 92.6% of distributions on common shares represented a return of capital, 5.0% represented ordinary income and 2.4% represented long-term capital gain.
The company has a Dividend Reinvestment and Share Purchase Plan (as amended, the “Plan”) which allows any record holder to reinvest distributions without payment of any brokerage commissions or other fees. Of the total proceeds raised from common shares during the years ended December 31, 2003, 2002, and 2001, $5.4 million, $6.8 million, and $6.5 million, respectively, were provided through the reinvestment of distributions.
In addition, the Plan has a direct purchase feature in which investors may acquire common shares by making cash payments without payment of any brokerage commissions or other fees. During 2003 and 2002, direct purchases accounted for $0.7 million and $0.8 million, respectively, of the proceeds raised under the Plan.
In September 2000, the Board of Directors authorized the repurchase of up to an additional $50 million of the company’s common shares. Under this authorization, the company has, as of December 31, 2003, repurchased 2.0 million common shares at an average price of $10.80 per share for a total cost of $21.3 million. For the year ended December 31, 2003, the company repurchased 26,550 common shares at an average price of $7.17 per share for a total cost of $0.2 million.
Preferred Shares
The company declared and paid total distributions of $2.3752 per share on the Series A Convertible Preferred Shares during 2003 and 2002. At December 31, 2003 and 2002, a total of 127,380 preferred shares remained outstanding.
Item 6.
Item 6.
Selected Financial Data
The following table sets forth selected consolidated financial and other information as of and for each of the years in the five-year period ended December 31, 2003. The table should be read in conjunction with our consolidated financial statements and the notes thereto, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Report.
(a)
Funds from Operations (FFO) is defined as net income (computed in accordance with generally accepted accounting principles) excluding gains and (losses) from sales of depreciable property, minority interest of unit holders in operating partnerships, plus depreciation. This definition conforms with the National Association of Real Estate Investment Trust’s (NAREIT) definition issued in October 1999 which was effective beginning January 1, 2000. The company’s management believes that FFO provides investors with an understanding of the company’s ability to incur and service debt and make capital expenditures. The company considers FFO in evaluating property acquisitions and its operating performance and believes that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of the company’s activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. In addition, there can be no assurance that the company’s basis for computing FFO is comparable with that of other real estate investment trusts.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, the “company”) is a self-administered and self-managed REIT headquartered in Richmond, Virginia. The business of the company is to acquire, develop and manage existing residential apartment communities located in the southern United States. As of December 31, 2003, the company owned 89 apartment communities, which comprised a total of 23,189 apartment homes. The company’s apartment communities are located in Georgia, North Carolina, South Carolina, Texas and Virginia.
The company owns and operates multifamily apartment communities that generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The company separately evaluates the performance of each of its apartment communities. However, because each of the apartment communities has similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single apartment communities segment. All segment disclosure is included in or can be derived from the company’s consolidated financial statements.
The company’s operations are affected by the following factors: demand for apartment communities in the company’s markets and the effect on occupancy levels and rental rates, job growth, overbuilding of apartment communities, low mortgage interest rates and the availability of refinancing.
On May 28, 2003, the company completed the acquisition of Merry Land Properties, Inc. (“Merry Land”), which owned nine apartment communities containing 1,966 apartment homes located in South Carolina and Georgia, interests in two joint ventures, two parcels of undeveloped land that the company plans to develop into additional apartment homes and a third party property management business. The purchase price was $159.1 million, which includes the issuance of equity, assumption of debt and the fair value adjustment to debt.
In conjunction with the Merry Land merger, the company acquired a third party property management business which included six apartment communities. As of December 31, 2003, the company managed seven apartment communities with 1,828 apartment homes.
The company, as the general partner, also has approximately an 84% interest in the Cornerstone NC Operating Limited Partnership. This partnership holds certain apartment communities in North Carolina and was formed by the company and the prior owner, which is a minority limited partner and is not otherwise related to the company.
The company uses property operating income (rental income less property operating expenses as defined below) as a measure to evaluate performance of the apartment communities. Property operating income is not deemed to be an alternative to net income, as determined in accordance with generally accepted accounting principles. In addition, this measure, as calculated by the company, may not be comparable to similarly entitled measures reported by other companies. Property operating expenses include the following expense categories:
property and maintenance, taxes and insurance and property management. Property operating income increased 2.9% to $93.1 million in 2003 from $90.4 million in 2002. Overall rental revenues were down due to higher vacancies and a decline in the average rental rates. Operating property expenses were higher due to an increase in utility costs, real estate assessments and tax rates, insurance costs and turnover costs incurred due to higher vacancies. Interest expense increased to $45.9 million in 2003 from $41.7 million in 2002. Depreciation and amortization of real estate assets increased $7.6 million during 2003 over 2002. The company reported net loss available to common shareholders of $7.6 million due to the items mentioned above. Each of these items will be described in further detail later in our discussion.
The company operated in 18 markets overall. At December 31, 2003, the company’s three largest markets comprised 51% of its real estate owned, at cost. The following table summarizes the company’s apartment market information (dollars in thousands):
The following discussion is based on the financial statements of the company as of December 31, 2003, 2002, and 2001. This information should be read in conjunction with the selected financial data and the company’s consolidated financial statements included elsewhere in this annual report.
Results of Operations
Comparison of the year ended December 31, 2003 to the year ended December 31, 2002
Income and Occupancy
During 2003, the company was still experiencing weakness in occupancy rates and decreases in rental rates as a result of the slow recovery from the recession, new apartment construction, and the strength of the single family housing industry.
The company’s property operations for the year ended December 31, 2003 include the results of operations of 89 apartment communities acquired to date, including apartment communities acquired through the Merry Land merger on May 28, 2003. The operations of the two apartment communities sold during the first quarter of 2003 are reflected in “discontinued operations.” The increases in revenue are primarily due to the effect of the rental income generated from the apartment communities acquired through the Merry Land merger and the full effect in 2003 of the two apartment communities acquired and the two phases to existing apartment communities completed in 2002; however, the increase was offset by the increase in rental concessions and the decrease in economic occupancy levels, discussed below, which resulted from the continuing soft market conditions in the major markets in which the company operates.
The principle source of the company’s revenue is the rental operation of its apartment communities. Rental income increased 6.4% in 2003 to $163.1 million, up $9.8 million over 2002. Rental income from the Merry Land merger and the 2002 acquisitions accounted for the majority of the increase. In addition, the company recorded a charge in 2002 of approximately $1.1 million due to a change in the estimate of the collectibility of tenant receivables. The increase in rental income is offset in part by a reduction in average economic occupancy from 89% in 2002 to 87% in 2003, an increase in rental concessions and a decline in the average rental rate. Average rental rate per apartment home in 2003 was $678 and $686 in 2002, a decline of 2%.
Other property income increased $2.0 million in 2003 over 2002. Other property income included reimbursement for sub-metering of utilities and ancillary income. For the year ended December 31, 2003, other property income also included approximately $0.6 million in excess recoveries from casualty insurance over the cost of the damage. The majority of the increase related to the increase in sub-metering income of $1.4 million and the addition of the third party management business in the amount of $0.3 million.
The company will continue to add revenue-enhancing improvements in an effort to improve the apartment communities’ marketability, economic occupancies, and rental rates.
Expenses
Property operating expenses include the following expense categories: property and maintenance, taxes and insurance and property management. These categories primarily consist of property taxes and insurance, repairs and maintenance, utilities, payroll costs and advertising and marketing. Property operating expenses in 2003 were $78.6 million and $69.4 million in 2002. The increase is primarily due to the incremental effect of the Merry Land merger and the full effect in 2003 of the 2002 acquisitions. The increases in real estate assessments and tax rates, utilities costs, property insurance costs, and turnover costs due to the increase in vacancy also contributed to the increase in property operating expenses. The property operating expense ratio (the ratio of property operating expenses to rental income) was 48.2% and 45.3% for 2003 and 2002, respectively due to the increases mentioned above.
Depreciation and amortization of real estate assets increased to $52.8 million in 2003 from $45.2 million in 2002, and is directly attributable to a full year of depreciation of the 2002 acquisitions, depreciation on the 2003 acquisitions from their respective acquisition dates and the depreciation associated with capital improvements made during 2003 and 2002. In addition, in conjunction with the Merry Land merger, the company allocated a portion of the Merry Land purchase price to an intangible asset based on a valuation of in-place leases at the time of the merger in the amount of $1.1 million. None of the intangible asset value was attributable to above or below market rates, but rather attributable to foregone costs associated with having in-place leases. The company recorded $0.9 million of amortization of the net intangibles in 2003.
General and administrative expenses totaled 2.3% and 2.5% of rental income in 2003 and 2002, respectively. These expenses represent the administrative expenses of the company as distinguished from the property operating expenses of the company’s apartment communities. The decrease is due to increased capitalization of certain costs.
Interest Income
The company’s interest income increased $0.3 million for the year ended December 31, 2003 over 2002. The majority of the increase is due to the interest income earned on the notes receivables assumed in connection with the Merry Land merger.
Interest Expense
The company incurred $45.9 million and $41.7 million of interest expense in 2003 and 2002, respectively, associated with borrowings under its secured and unsecured lines of credit, existing and assumed mortgage notes,
amortization of deferred financing costs and interest associated with the company’s capital leases. The increase was principally a result of the following:
•
$3.6 million of the increase related to the interest on the existing and assumed fixed and variable mortgage notes. The increase was due to the interest expense associated with the mortgage notes assumed with the Merry Land merger, a full year of interest expense on the $53.6 million of secured debt placed or assumed in 2002, and the $101.8 million refinancing completed in 2003.
•
$0.5 million of the increase related to the amortization of the deferred financing cost associated with the $151.8 million financings. (See Note 5 to the consolidated financial statements.)
•
$0.2 million of the increase related to interest associated with the company’s capital leases.
The increase was partially offset by $0.1 million decrease related to the interest on the secured and unsecured lines of credit.
The overall weighted average interest rate for all borrowings was 5.9% and 6.5% during 2003 and 2002, respectively. Interest expense is reduced by the amortization of the fair value premium adjustment recorded in connection with the assumption of above market rate debt in connection with the acquisition of apartment communities. The premiums are amortized over the remaining term of the related indebtedness on the effective interest method. Average debt, secured and unsecured, increased from $630 million in 2002 to $753 million in 2003. The increase is due to the full effect of the fixed and variable rate borrowings obtained or assumed in 2002 and the incremental effect of the 2003 fixed and variable rate borrowing obtained or assumed in 2003.
Income from Discontinued Operations
During the first quarter of 2003, the company sold two apartment communities containing a total of 395 apartment homes for a total sales price of $15.9 million and recognized a gain of $1.9 million. As a result of the sales, the company’s financial statements presented have been prepared with these two apartment communities’ results of operations and the gain from sale isolated and shown as “discontinued operations.” Income from discontinued operations decreased from 2003 to 2002 due to the timing of the sale. All historical statements have been restated to conform to this presentation in accordance with SFAS No. 144.
Net Loss Available to Common Shareholders
Net loss available to common shareholders was $7.6 million ($0.14 per share) for the year ended December 31, 2003, compared to $0.1 million ($0.00 per share) for the prior year. The increase in net loss available to common shareholders resulted primarily from the increase in property operating expenses, interest expense and depreciation and amortization of real estate assets exceeding the increase in total revenues. The gain recognized on the sales of two apartment communities during 2003 offset this decrease which is included in the income from discontinued operations (see Note 2 to the consolidated financial statements).
Comparable Property Operations
Property operating income is a measure the company uses to evaluate performance and is not deemed to be an alternative to net income, as determined in accordance with generally accepted accounting principles. In addition, this measure, as calculated by the company, may not be comparable to similarly entitled measures reported by other companies. The company’s “same-community” portfolio consists of 74 stabilized apartment communities, containing 20,127 apartment homes, that the company has owned since January 1, 2002, representing approximately 87% of the company’s 23,189 apartment homes. The two apartment communities sold in the first quarter of 2003 have been eliminated from the calculation. Property management expenses are excluded from this evaluation. For 2003, “same-community” property operating income (rental income less property operating expenses) decreased 7%, rental income decreased 3% and property operating expenses increased 4% over 2002. The decrease in rental income is primarily due to the soft overall market conditions,
which resulted in increased rental concessions and lower average occupancies. The company’s property operating expenses increased primarily due to higher utility costs, real estate assessments and property insurance costs. Average monthly rental rates for the “same-community” portfolio decreased 4% to $661 per apartment home in 2003 from $685 per apartment home in 2002.
In order to make a meaningful comparison of property operating income for these apartment communities, the write-offs of tenant receivables and a one-time reduction to expenses were excluded. If this adjustment had been considered for the years ended December 31, 2003 and 2002, property operating income would have decreased 9%; total revenues would have decreased 3%; and property operating expenses would have increased 5%.
Property operating expenses primarily consist of property taxes and insurance, repairs and maintenance, utilities, payroll costs, and advertising and marketing. In addition, property operating expenses exclude depreciation, general and administrative, other expenses, interest income and expense and minority interest, as these are not considered in the operating performance of the apartment communities.
The following is a reconciliation of the “same community” property operating income to net (loss) income as determined in accordance with generally accepted accounting principles (in thousands):
Results of Operations
Comparison of the year ended December 31, 2002 to the year ended December 31, 2001
Income and Occupancy
The company’s property operations for the year ended December 31, 2002 included the results of operations for the entire year from 80 apartment communities acquired before 2002 and from the respective acquisition dates of the four apartment communities acquired in 2002. The company owned 82 apartment communities at December 31, 2002. Two of the four 2002 acquisitions included two new phases at two existing apartment communities owned by the company. The increases in rental revenues and property operating expenses for the year ended December 31, 2002 over the same period in 2001 are primarily due to the effect of a full year of operation in 2002 of the 2001 acquisitions as well as the incremental effect of the 2002 acquisitions. In addition,
the company in the third quarter of 2002 recorded a charge of approximately $1.1 million due to a change in the estimate of the collectibility of tenant receivables. The increase in rental revenues is offset in part by a reduction in average economic occupancy from 91% in 2001 to 89% in 2002 and an increase in rental concessions which are both attributable to softening in overall market conditions in the major markets in which the company operates.
Rental income increased 7.7% in 2002 to $153.3 million, up $10.9 million over 2001. The increase in rental income is primarily due to the factors described above.
Expenses
Property operating expenses in 2002 were $69.4 million and $59.6 million in 2001. The increase is primarily due to the full effect in 2002 of the 2001 acquisitions and the incremental effect of 2002 acquisitions. The increases in property insurance costs, real estate assessments and tax rates and turnover costs due to the increase in vacancy also contributed to the increases in property operating expenses. The property operating expense ratio (the ratio of property operating expenses to rental income) was 45.3% and 41.9% for 2002 and 2001, respectively.
Depreciation of real estate increased to $45.2 million in 2002 from $39.1 million in 2001, and is directly attributable to a full year of depreciation of the 2001 acquisitions, depreciation on the 2002 acquisitions from their respective acquisition dates and the depreciation associated with capital improvements made during 2002 and 2001.
General and administrative expenses totaled 2.5% and 2.3% of rental income in 2002 and 2001, respectively.
Interest Income
The company earned interest income of $30,988 in 2002 and $0.5 million in 2001 from the investment of its cash and cash reserves. The decrease in 2002 is due to a decrease in average invested funds coupled with lower interest rates. In 2001, the company had $46.7 million invested pending its tender offer on April 18, 2001 for the company’s outstanding Series A Convertible Preferred Shares.
Interest Expense
The company incurred $41.7 million and $30.9 million of interest expense in 2002 and 2001, respectively, associated with borrowings under its unsecured lines of credit, existing and assumed mortgage notes, amortization of deferred financing costs. The increase was principally a result of the following:
•
$11.4 million of the increase related to the interest on the existing and assumed fixed and variable mortgage notes. The increase is due to the full year of interest on the fixed and variable rate mortgage notes placed or assumed on 26 apartment communities during 2001 and the addition of $53.6 million of secured debt placed or assumed on four apartment communities in 2002.
•
$0.1 million of the increase related to the amortization of the deferred financing costs.
•
$0.7 million of the increase related to the interest on the unsecured lines of credit. During 2002, an additional $25 million was borrowed under this arrangement.
The overall weighted average interest rate for all borrowings was 6.5% and 6.8% during 2002 and 2001, respectively. Average debt, secured and unsecured, increased from $451 million in 2001 to $630 million in 2002. The increase is due to the full effect of the fixed and variable rate borrowings obtained or assumed in 2001 and the incremental effect of the 2002 fixed and variable rate borrowing obtained or assumed in 2002. This increase was offset in part by decreasing interest rates on the company’s unsecured lines of credit during 2002.
Net Loss Available to Common Shareholders
Net loss available to common shareholders was $0.1 million ($0.00 per share) for the year ended December 31, 2002, compared to $17.2 million ($0.40 per share) for the prior year. The decrease in net loss available to common shareholders resulted primarily from the excess consideration paid over the carrying value of the company’s Series A Convertible Preferred Shares in 2001. This decrease was offset by an increase in interest expense and depreciation expense.
Comparable Property Operations
The company’s “same-community” portfolio consists of 69 stabilized apartment communities, containing 17,254 apartment homes, that the company has owned since January 1, 2001, representing approximately 80% of the company’s 21,618 apartment homes. The two apartment communities sold in 2003 are included for this calculation. For 2002, “same-community” property operating income, excluding property management expense, decreased 9%, rental income decreased 3% and property operating expenses increased 5% over 2001. The decrease in rental income is primarily due to the softening in the overall market conditions, which resulted in increased rental concessions and lower average occupancies. The company also experienced an increase in property operating expenses as a result of increased costs to rent vacant apartments along with increases in property insurance costs and real estate taxes. Average monthly rental rates for the “same-community” portfolio decreased 1% to $677 per apartment home in 2002 from $681 per apartment home in 2001.
In order to make a meaningful comparison of property operating income for these apartment communities, a one-time charge to tenant receivable of $1.1 million as well as $0.3 million of other charges were excluded as these items occurred in 2002. If the adjustments had been considered for 2002 over 2001, property operating expenses increased 4%; property operating income decreased 10%; and rental income decreased 5%. In addition, property operating income excludes depreciation, amortization, general and administrative, other expenses, interest income and expenses and minority interest, as these are not considered in the operating performance of the apartment communities.
The following is a reconciliation of the adjusted “same community” property operating income to net income as determined in accordance with generally accepted accounting principles (in thousands):
Related-Party Transactions
During 2003, Mr. Glade M. Knight, the company’s Chairman and Chief Executive Officer, served as Chairman and Chief Executive Officer of three extended-stay hotel REITs, Apple Suites, Inc., Apple Hospitality Two, Inc., and Apple Hospitality Five, Inc., and also owned companies which provided services to these entities. Apple Hospitality Two, Inc. acquired Apple Suites, Inc. in a merger transaction during the first quarter of 2003. During 2003 and 2002, the company provided real estate acquisition and offering-related and other services to these entities and received payment of approximately $0.2 million and $0.6 million, respectively.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either through the sale of existing assets or by the acquisition of additional funds through working capital management. Both the coordination of asset and liability maturities and effective working capital management are important to the maintenance of liquidity. The company’s primary sources of liquidity are cash flows from operations as determined by rental rates, occupancy levels and property operating expenses; proceeds from its lines of credit; reinvestment of distributions; and proceeds from secured debt.
The company’s demands for liquidity include normal property operating activities, payment of principal and interest on outstanding debt, capital expenditures, acquisition of apartment communities, payment of distributions and development costs.
The company has met and expects to continue to meet short-term liquidity requirements, generally through the cash flow from operations, equity raised from its dividend reinvestment plan, and borrowings on its lines of credit. It is expected that these will be adequate to meet all normal property operating expenses, payment of distributions, budgeted capital improvements, and scheduled principal and interest payments on debt in 2004. At December 31, 2003, the company had $36 million available under its lines of credit and $1.4 million in cash and cash equivalents. In addition, the company had $9.9 million in reserves held by various lenders for capital expenditures, real estate taxes and insurance.
The company expects to meet certain long-term liquidity requirements, such as scheduled debt maturities, the repayment of financing on development activities, and possible property acquisitions, through secured borrowings, possible refinancing, disposition of certain assets that, in our evaluation, may no longer meet our investment requirements or issuance of operating partnership units.
Our long-term ability to pay distributions to our various stakeholders is dependent upon cash flows from our apartment communities. While we have substantial cash flow from our operations, on a short-term basis, our cash flow is less than our cash needs and we have had to seek alternative funding sources. During 2003, our cash flow from operating activities was $41.7 million. Cash required to fund capital improvements to our apartment communities was $13.7 million. Distributions to our preferred stockholders, operating partnership unit holders and common stockholders were approximately $47.3 million in 2003. We funded the excess of our distributions over our cash flow from ordinary course, short-term borrowings of $8.3 million. In addition, sales of two properties, executed as a part of our long-term business strategy, also provided approximately $15 million. The sales of these properties did not have a material impact upon our property operating income.
In the event that there continues to be an economic downturn or the national economy does not recover sufficiently and the cash flow from operations are no longer adequate, the company has additional means, such as its borrowing availability on its lines of credit, to help meet our short term liquidity demands.
The company considers on a regular basis what level of distributions to common shareholders is appropriate, and there is no assurance that the company’s distribution to common shareholders will continue at the current level.
Operating Activities
For the year ended December 31, 2003, our net cash provided by operating activities was $41.7 million, compared to $46.8 million for the same period in 2002. This decline is due primarily to the economic downturn in the national economy and the related decline in our operating activities.
Investing Activities
For the year ended December 31, 2003, our net cash used in investing activities was $7.9 million compared to $36.5 million for the same period in 2002. In 2003, our investing activities related to investments in acquisitions and in our existing apartment communities through capital expenditures and redevelopment, as well dispositions of apartment communities.
Acquisitions
On May 28, 2003, the company completed the acquisition of Merry Land, which owned nine apartment communities in South Carolina and Georgia containing 1,966 apartment homes, interests in two real estate joint ventures, two parcels of undeveloped land that the company plans to develop into additional apartment homes, and a third party property management business. The acquisition was structured as a merger of Merry Land into a wholly owned qualified REIT subsidiary of the company. The merger qualified as a tax-free reorganization and was accounted for under the purchase method of accounting. The company used various valuation methods to allocate the purchase price between land, buildings and improvements, equipment, identified intangible assets of in-place leases and debt assumed. The purchase price was $159.1 million, which includes the issuance of equity, assumption of debt and the fair value adjustment to debt, and direct costs of the acquisition. Under the terms of the merger agreement, each Merry Land shareholder received 1.818 of the company’s common shares and 0.220 of the company’s Series B convertible preferred shares. A total of 5.0 million common shares and 0.6 million of the company’s Series B convertible preferred shares were issued as a result of the merger. The Series B convertible preferred shares met the conversion conditions and were converted to common shares on October 1, 2003. In addition, the company assumed approximately $90.6 million of Merry Land’s debt with a fair value of $110.5 million at the date of assumption. No goodwill was recorded as a result of this transaction.
Real Estate under Development
The company has three development projects, two of which were assumed with the Merry Land merger mentioned above and are to be completed during 2005. The company’s share of estimated future cash expenditures to complete these projects will be funded through advances on future construction loans.
Disposal of Investments
During the first quarter of 2003, the company sold two apartment communities containing a total of 395 apartment homes for a total sales price of $15.9 million with net proceeds of $15.0 million and recognized a gain of $1.3 million. As a result of the sales, the company’s financial statements have been prepared with these two apartment communities’ results of operations and the gain from sale isolated and shown as “discontinued operations.”
Financing Activities
For the year ended December 31, 2003, our net cash used in financing activities was $33.8 million compared to $17.6 million for the same period in 2002. In 2003, our financing activities related to mortgage financings, payment of distributions and payment of our principal debt amortization.
The following is a summary of the company’s financing activities for the year ended December 31, 2003:
•
Entered into a $50 million secured revolving credit facility. The two-year secured credit facility is divided into two loans, a $40 million revolving credit facility and a $10 million “swingline” credit facility.
•
Financed $101.8 million in variable rate mortgage notes.
•
Paid $2.7 million in deferred financing costs associated with the above $151.8 million financings.
•
Repaid and terminated the $85 million unsecured line of credit using proceeds from the above financings.
•
Repaid $23.3 million in variable and fixed rate mortgage notes using proceeds from the above financings.
•
Paid scheduled debt maturities in the amount of $4.2 million.
•
Issued $5.4 million of shares through the dividend reinvestment plan.
•
Paid distributions in the amount of $47.3 million to common and preferred shareholders and operating partnership unit holders.
•
Repurchased $0.2 million in common shares.
In September 2000, the Board of Directors authorized the repurchase of up to an additional $50 million of the company’s common shares. Under this authorization, the company has, as of December 31, 2003, repurchased 2.0 million common shares at an average price of $10.80 per share for a total cost of $21.3 million. For the year ended December 31, 2003, the company repurchased 26,550 common shares at an average price of $7.17 per share for a total cost of $0.2 million.
At the request of various lenders, some of the company’s financings were provided to new wholly-owned subsidiaries of the company, which were formed for the special purpose of receiving the financing proceeds and holding the mortgaged apartment communities. The company continues to manage the apartment communities. All of these financings are reflected on the audited consolidated financial statements of the company.
Capital Requirements
The company has an ongoing capital expenditure plan to fund its renovation program for its apartment communities. Capital expenditures include capital replacements, initial capital expenditures, and redevelopment enhancements. The company anticipates funding these cash requirements as needed from a variety of sources including equity raised from its dividend reinvestment plan and debt provided by its lines of credit.
Capital resources are expected to grow with the future sale of the company’s shares and from cash flows from operations. Approximately 12.0% of all 2003 common stock distributions, or $5.4 million, was reinvested in additional common shares. In general, the company’s liquidity and capital resources are believed to be sufficient to meet its cash requirements during 2004.
The company is operated as, and annually elects to be taxed as, a real estate investment trust under the Internal Revenue Code. As a result, the company has no provision for federal income taxes, and thus there is no effect on the company’s liquidity from federal income taxes. The company created a C-corporation which elected the taxable REIT subsidiary (“TRS”) status for financing purposes for one apartment community. The TRS is subject to federal, state and local income taxes. For the year ended December 31, 2003, the impact of this TRS’s income taxes and related tax attributes were not material to the accompanying consolidated financial statements.
Contractual Obligations and Commitments
The table below sets forth a summary of our contractual obligations and commitments that will impact our future liquidity (in thousands):
The company anticipates two development projects to be completed during 2005 and the costs associated with the developments to be funded through advances on the project’s construction loans.
Operating Partnership
Effective October 1, 2001, State Street, LLC and State Street I, LLC, each a North Carolina limited liability company (collectively, the “Limited Partners”), and the company, as the sole general partner, formed Cornerstone NC Operating Limited Partnership, a Virginia limited partnership (the “Limited Partnership”). The company has approximately an 84% interest in the Limited Partnership. The Limited Partners are minority limited partners and are not otherwise related to the company. The Limited Partners contributed and agreed to contribute property to the Limited Partnership in exchange for preferred and non-preferred operating partnership units. Beginning October 1, 2002, the Limited Partners became able to elect to redeem a portion of the preferred operating partnership units. If the Limited Partners make the election, the company, at its option, will convert the preferred operating partnership units into either common shares of the company on a one-for-one basis or cash in an amount per unit equal to the closing price of a common share of the company on the exercise date (or other specified price if there is no closing price on that date), subject to anti-dilution adjustments.
During the first quarter of 2003, a total of 887,125 preferred operating partnership units were converted into common shares on a one-to-one basis. During 2003, the remaining 319,715 non-preferred operating partnership units converted to preferred operating partnership units as certain lease-up and stabilization criteria were met. As of December 31, 2003, there were 1,807,145 preferred operating partnership units eligible for conversion into common shares on a one-for-one basis or cash, at the company’s option.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with generally accepted accounting principles, which require us to make estimates and assumptions. We believe that the following critical accounting policies, among others, involve our more significant judgments and estimates used in the preparation of our financial statements.
Capital Expenditures
The company capitalized expenditures related to acquiring new assets, materially enhancing the value of an existing asset or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing asset in ordinary operating condition, such as repairs and maintenance, are expensed as incurred.
The company capitalizes interest, real estate taxes, insurance and certain internal development and related overhead costs directly to the apartment community under development. Interest is capitalized to development projects based upon the weighted average cumulative project costs for each period multiplied by the company’s borrowing costs on its line of credit, expressed as a percentage. The internal development and related overhead costs are capitalized to the development projects based upon the effort identifiable with such projects. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance sheet as real estate under development. The company ceases the capitalization of such costs as the apartment homes become substantially complete and available for occupancy.
The company capitalized $16.4 million of improvements to its various apartment communities during 2003. The asset preservation capital expenditures, including floor coverings, HVAC equipment, roofs, appliances, siding, exterior painting, parking lots, and other non-revenue enhancing capital expenditures totaled $9.7 million. Revenue enhancing capital expenditures, including interior upgrades, gating and access systems totaled $4.7 million for 2003. Redevelopment expenditures, including amenities that add a material new feature or revenue source at our acquired apartment communities, totaled $2.0 million. The company capitalized costs of $0.7 million in development costs for 2003. The company’s total non-real estate capital additions, such as computer software, computer equipment, furniture and fixtures and property improvements to the company’s management offices and its corporate offices, was approximately $1.3 million and is reflected on the balance sheet in the other asset category.
The company is also required by various lenders to fund a replacement reserve in advance for capital improvements.
The company’s capital improvement budget is reviewed continually and adjustments will be made if deemed necessary.
Real Estate Assets-Impairment Assessment
We periodically assess our real estate assets for possible permanent impairment when certain events or changes in circumstances indicate that the carrying amount of real estate may not be recoverable. Management considers current market conditions and tenant credit analysis in determining whether the recoverability of the carrying amount of an asset should be assessed. When an assessment is warranted, management determines if it is probable that the sum of the expected undiscounted future cash flows over the expected holding period is less than the carrying amount of the property being assessed. If the undiscounted future cash flows are less than the carrying amount, then an impairment loss would be recognized equal to the amount of the difference between the fair value of the property and its carrying amount. No impairment losses have been recorded to date.
Real Estate Assets-Allocation of Purchase Price
The company accounts for acquisitions utilizing the purchase method, and accordingly, the results of the acquisition properties are included in the company’s results of operations from the date of acquisition. The company allocates the purchase price to the acquired tangibles, consisting of land, building and improvements, and if material, identified intangible assets and liabilities of above/below market leases and at-market leases in place based on their fair values. Allocation of fair value to real estate assets were based on internal management estimates on a property by property basis using discounted cash flows using market capitalization rates. All liabilities with maturities in excess of one year assumed in connection with an acquisition is marked to market at the date of the acquisition using a market interest rate in effect at that date for similar debt agreements with similar maturities. The resulting premium or discount is amortized into interest expense over the life of the related debt agreement using the effective interest method. Determinations of fair values used in purchase price allocation are by their nature subjective and may have a significant impact on reported asset and liability balances in the consolidated balance sheets and in the reported amounts of depreciation expense and interest expense in the consolidated statements of operations.
Rental Revenue and Related Cost Recognition
Rental income and other income are recorded on an accrual basis. Rental concessions and direct lease costs associated with lease origination are amortized on a straight-line basis over the terms of the respective leases. The company’s apartment communities are leased under lease agreements that, typically, have terms that do not exceed one year. Deferred rental concessions and direct lease costs were $2.0 million and $2.2 million at December 31, 2003 and 2002, respectively.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation 46, “Consolidation of Variable Interest Entities.” (“FIN 46”) which was revised in December 2003, and is effective immediately for all transactions entered into with variable interest entities before February 2003. The provisions of FIN 46 must be applied to all remaining entities subject to the Interpretation from the beginning of the first quarter of 2004. This statement defines the identification process of variable interest entities and how an entity assesses its interest in a variable interest entity to decide whether to consolidate that entity. The company has formed wholly-owned subsidiaries for financing purposes and such financing is reflected in the consolidated financial statements. Currently, the company does not anticipate this Statement having a material impact on its consolidated financial statements.
At the July 31, 2003 Emerging Issues Task Force meeting, the SEC Observer clarified the application of Topic D-42 related to preferred stock issuance costs. According to the clarification, all preferred stock issuance costs, regardless of where in the stockholders’ equity section the costs were initially recorded, should be charged to income available to common shareholders for the purpose of calculating earnings per share at the time the
preferred stock is redeemed. The SEC Observer indicated that preferred stock issuance costs not previously charged to income available to common shareholders should be reflected retroactively in financial statements for reporting periods ending after September 15, 2003 by restating the financial statements of prior periods on an as filed basis. We have included these costs in determination of the excess of consideration paid over book value to preferred shareholders in our 2001 consolidated statement of operations, therefore, no adjustment was required.
Market Risk Disclosure
The company is subject to changes in the fair market value of its fixed rate secured debt amounting to $597.4 million at December 31, 2003. If market interest rates for fixed rate debt were 100 basis points higher at December 31, 2003, the fair value of fixed rate debt would decrease by $22.3 million to $575.1 million. If market interest rates for fixed rate debt were 100 basis points lower at December 31, 2003, the fair value of fixed rate debt would have increased from $597.4 million to $656.6 million.
The company has market risk exposure to short-term interest rates from variable rate borrowings under its existing secured line of credit and variable rate secured debt. The existing secured lines of credit bears interest at LIBOR plus 1.575%. The company may utilize variable rate debt up to specified limits to total market capitalization. The company has analyzed its interest rate risk exposure. If market interest rates for these types of credit facilities average 100 basis points more in 2004 than they did in 2003, and the company’s secured lines of credit were at the maximum of $50 million, and the variable rate secured debt remained at $172.4 million, the company’s interest expense would increase, and net income would decrease by $2.2 million. These amounts are determined by considering the impact of hypothetical interest rates on the company’s borrowing cost. These analyses do not consider the effects of the reduced overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the company’s financial structure.
Impact of Inflation
Substantially all of our leases are for a term of one year or less, which enables us to realize increased rents upon renewal of existing leases or the beginning of new leases. The short-term nature of these leases generally serves to reduce our risk of the adverse inflation. Short-term leases and relatively consistent demand allow rents, and therefore cash flow from the portfolio, to provide an attractive hedge again inflation.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is included in Item 7. See Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report, which is hereby incorporated into this item by reference.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The financial statements of the company and report of independent auditors required to be included in this item are set forth in Item 15 of this report and are hereby incorporated into this item by reference.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the company’s disclosure controls and procedures are effective and that there have been no changes in the company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting. Since that evaluation process was completed, there have been no significant changes in internal controls or in other factors that could significantly affect these controls.
PART III
Item 10.
Item 10.
Directors and Executive Officers of the Registrant
For information with respect to the company’s directors and director nominees see the information under “Ownership of Equity Securities” and “Election of Directors” in the company’s Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference. For information with respect to the company’s executive officers see “Executive Officers” in the company’s Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.
Item 11.
Item 11.
Executive Compensation
For information with respect to compensation of the company’s executive officers and directors, see the information under “Compensation of Executive Officers” and “Compensation of Directors” in the company’s Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
See the information under “Ownership of Equity Securities” in the company’s Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.
Item 13.
Item 13.
Certain Relationships and Related Transactions
For information on certain relationships and related transactions, see the information under “Certain Relationships and Agreements” in the company’s Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.
Item 14.
Item 14.
Principal Accountant Fees and Services
For information with respect to certain principal accountant fees and services, see the information under the caption “Independent Public Accountants” in the company’s Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.
For information with respect to the pre-approval policies for audit and non-audit services, see the information under the same caption in the company’s Proxy Statement for its 2004 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)
The following documents are filed as part of this Report
1.
Financial Statements.
See Index to Consolidated Financial Statements and Schedule on page 34 of this Report.
2.
Financial Statement Schedule.
See Index to Consolidated Financial Statements and Schedule on page 34 of this Report. All other schedules are omitted because they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto.
3.
Exhibits
Incorporated herein by reference are the exhibits listed under “Exhibit Index” on page 62 of this report.
(b)
Reports on Form 8-K
During the last quarter of 2003, the company filed the following current reports with the Securities and Exchange Commission:
Current Report on Form 8-K dated November 5, 2003, filed with the Securities and Exchange Commission on November 6, 2003, under Item 12.
Current Report on Form 8-K dated October 1, 2003, filed with the Securities and Exchange Commission on October 3, 2003, under Item 5.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
CORNERSTONE REALTY INCOME TRUST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
All other financial statement schedules have been omitted because they are not applicable or not required or because the required information is included elsewhere in the financial statements or notes thereto.
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Shareholders
Cornerstone Realty Income Trust, Inc.
We have audited the accompanying consolidated balance sheets of Cornerstone Realty Income Trust, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cornerstone Realty Income Trust, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
Richmond, Virginia
February 10, 2004
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 General Information and Summary of Significant Accounting Policies
Business
Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, the “company”), a Virginia corporation, is an owner-operator of one business segment consisting of residential apartment communities in the southern regions of the United States. As of December 31, 2003, the company, as a general partner, has approximately an 84% interest in Cornerstone NC Operating Limited Partnership.
All significant intercompany accounts and transactions have been eliminated in consolidation. The company’s common stock trades on the New York Stock Exchange under the ticker symbol “TCR.”
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value.
Investment in Rental Property
The investment in rental property is recorded at cost, net of depreciation. The company records impairment losses on rental property used in operations if indicators of impairment are present and the undiscounted cash flows estimated to be generated by the respective properties are less than their carrying amount. Impairment losses are measured as the difference between the asset’s fair value less cost to sell, and its carrying value. No impairment losses have been recorded to date.
Repairs and maintenance costs are expensed as incurred while significant improvements, renovations and replacements are capitalized. The company capitalizes expenditures related to acquiring new assets, materially enhancing the value of an existing asset or substantially extending the useful life of an existing asset. The company’s capital expenditures include floor coverings, HVAC equipment, roofs, appliances, siding, exterior painting, parking lots, interior upgrades, gating and access systems. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which are 27.5 years for buildings, range from 10 to 27.5 years for major improvements and range from three to seven years for furniture and fixtures.
Development
Development projects and related carrying costs are capitalized. The costs of development projects include interest, real estate taxes, insurance and certain internal development and related overhead costs directly related to the apartment community under development. Interest is capitalized to development projects based upon the weighted average cumulative project costs for each period multiplied by the company’s borrowing costs on its line of credit, expressed as a percentage. The internal development and related overhead costs are capitalized to the development projects based upon the effort identifiable with such projects. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance sheet as real estate under development. The company ceases the capitalization of such costs as the apartment homes become substantially complete and available for occupancy.
Income Recognition
Rental income, interest, and other income are recorded on an accrual basis. Rental concessions are recognized on a straight-line basis over the terms of the respective leases. The company’s apartment communities are leased under lease agreements that, typically, have terms that do not exceed one year. Deferred rental concessions were $1.0 million and $1.1 million at December 31, 2003 and 2002, respectively.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Deferred Financing and Lease Origination Costs
Deferred financing costs consist of loan fees and related expenses which are amortized on a straight-line basis that approximates the effective interest method over the terms of the related notes. Accumulated amortization of deferred financing costs totaled $2.2 million and $1.8 million in 2003 and 2002, respectively.
The company defers direct costs incurred to originate a lease and amortizes the costs over the life of the lease which on an average is one year. Deferred lease origination costs were $1.0 and $1.1 million at December 31, 2003 and 2002, respectively.
Stock Incentive Plans
The company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion 25, “Accounting for Stock Issued to Employees” (APB No. 25) and related Interpretations in accounting for its employee stock options. As discussed in Note 7, the alternative fair value accounting provided for under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) requires use of option valuation models that were not developed for use in valuing employee stock options.
Under APB No. 25, because the exercise price of the company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The company granted 69,550, 57,612 and 52,395 options to purchase shares during the years ended December 31, 2003, 2002 and 2001, respectively. The company’s options to purchase shares are exercisable after six months after the date of grant, therefore the compensation expense would occur in the period granted. The following information about stock-based employee compensation costs reconciles the difference of accounting for employee stock based compensation under the intrinsic value method of APB No. 25 and related interpretations and the fair value method prescribed under SFAS No. 123 (in thousands):
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method described in that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003, 2002, and 2001:
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Advertising Costs
Costs incurred for the production and distribution of advertising are expensed as incurred. Amounts expensed during 2003, 2002, and 2001 were $2.2 million, $2.0 million, and $1.8 million, respectively. These amounts are included in property and maintenance expenses in the consolidated statements of operations.
Earnings Per Common Share
Basic and diluted earnings per common share are calculated in accordance with FASB Statement No. 128 “Earnings Per Share.” Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the year. Diluted earnings per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. The Series A Convertible Preferred Shares and operating partnership units are not included in dilutive earnings per share calculations since the impact is not dilutive.
Minority Interest in Operating Partnership
Interest in the Cornerstone NC Operating Limited Partnership held by a limited partner is represented by operating partnership units (“OP Units”), as discussed in Note 6 below. The operating partnership’s income is allocated to holders of OP Units based upon net income available to common shareholders and the weighted average number of OP Units outstanding to weighted average common shares outstanding plus OP Units outstanding during the period. OP Units can be exchanged for cash or common shares on a one-for-one basis, at the company’s option. Capital contributions, distributions, and profits and losses are allocated to minority interests in accordance with the terms of the partnership agreement. OP Units as a percentage of total OP Units and shares outstanding were 3.2% and 4.7% at December 31, 2003 and 2002, respectively.
Income Taxes
The company is operated as, and annually elects to be taxed as, a real estate investment trust under the Internal Revenue Code of 1986, as amended (the “Code”). Generally, a real estate investment trust that complies with the provisions of the Code and distributes at least 90% of its taxable income to its shareholders does not pay federal income taxes on its distributed income. Accordingly, no provision has been made for federal income taxes. The company is subject to various state, local, excise and franchise taxes.
The company created a C-corporation which elected the taxable REIT subsidiary (“TRS”) status for financing purposes for one apartment community. The TRS is subject to federal, state and local income taxes. For the year ended December 31, 2003, the impact of this TRS’s income taxes and related tax attributes were not material to the accompanying consolidated financial statements.
The differences between net income available to common shareholders for financial reporting purposes and taxable income before dividend deductions, as well as differences between the tax basis and financial reporting basis of the company’s assets, relate primarily to temporary differences, principally real estate depreciation, tax deferral of certain gain on property sales and tax free mergers and acquisitions. The temporary differences in depreciation result from differences in the book and tax basis of certain real estate assets and the differences in the methods of depreciation and lives of the real estate assets.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For federal income tax purposes, distributions paid to common shareholders consist of ordinary income, capital gains, return of capital or a combination thereof. For the three years ended December 31, 2003, distributions paid per common share were classified as follows (unaudited):
In 2003, 2002 and 2001, of the total preferred distribution, 100% was taxable as ordinary income.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Comprehensive Income
On January 1, 1998, the company adopted SFAS No. 130, “Reporting Comprehensive Income.” The company does not currently have any items of comprehensive income requiring separate reporting and disclosure.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation 46, “Consolidation of Variable Interest Entities.” (“FIN 46”) which was revised in December 2003, and is effective immediately for all transactions entered into with variable interest entities before February 2003. The provisions of FIN 46 must be applied to all remaining entities subject to the Interpretation from the beginning of the first quarter of 2004. This statement defines the identification process of variable interest entities and how an entity assesses its interest in a variable interest entity to decide whether to consolidate that entity. The company has formed wholly-owned subsidiaries for financing purposes and such financing is reflected in the consolidated financial statements. Currently, the company does not anticipate this Statement having a material impact on its consolidated financial statements.
At the July 31, 2003 Emerging Issues Task Force meeting, the SEC Observer clarified the application of Topic D-42 related to preferred stock issuance costs. According to the clarification, all preferred stock issuance costs, regardless of where in the stockholders’ equity section the costs were initially recorded, should be charged to income available to common shareholders for the purpose of calculating earnings per share at the time the preferred stock is redeemed. The SEC Observer indicated that preferred stock issuance costs not previously charged to income available to common shareholders should be reflected retroactively in financial statements for reporting periods ending after September 15, 2003 by restating the financial statements of prior periods on an as filed basis. The company has included these costs in determination of the excess of consideration paid over book value to preferred shareholders in the 2001 consolidated statement of operations, and therefore, no adjustment was required.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 2 Acquisition, Disposition, and Development
Acquisitions
On May 28, 2003, the company completed the acquisition of Merry Land Properties, Inc. (“Merry Land”), which owned nine apartment communities containing 1,966 apartment homes, interests in two real estate joint ventures, two parcels of undeveloped land that the company plans to develop into additional apartment homes, and a third party property management business. The acquisition was structured as a merger of Merry Land into a wholly owned qualified REIT subsidiary of the company. The merger qualified as a tax-free reorganization and was accounted for under the purchase method of accounting. The company used various valuation methods to allocate the purchase price between land, buildings and improvements, equipment, identified intangible assets of in-place leases and debt assumed. The purchase price was $159.1 million, which includes the issuance of equity, assumption of debt and the fair value adjustment to debt, and direct costs of the acquisition. Under the terms of the merger agreement, each Merry Land shareholder received 1.818 of the company’s common shares and 0.220 of the company’s Series B convertible preferred shares. A total of 5.0 million common shares and 0.6 million of the company’s Series B convertible preferred shares were issued as a result of the merger. The Series B convertible preferred shares met the conversion conditions and were converted to common shares on October 1, 2003. In addition, the company assumed approximately $90.6 million of Merry Land’s debt with a fair value of $110.5 million at the date of assumption. No goodwill was recorded as a result of this transaction. The company allocated a portion of the Merry Land purchase price to an intangible asset based on a valuation of in-place leases at the time of the merger in the amount of $1.1 million. The company recorded $0.9 million of amortization of the net intangibles in 2003.
Development
The company has three development projects, two of which were assumed with the Merry Land merger in the amount of $2.2 million. Capitalized interest, real estate taxes, insurance and other costs aggregated approximately $0.1 million and $75,218 during 2003 and 2002, respectively. Land associated with construction in progress was $5.4 million and $1.6 million as of December 31, 2003 and 2002, respectively.
Disposition of Investments
During the first quarter of 2003, the company closed on the sale of two apartment communities containing a total of 395 apartment homes for a total of $15.9 million and recognized a gain of $1.9 million. As a result of the sales, the company’s financial statements have been prepared with these two apartment communities’ results of operations and the gain from sale isolated and shown as “discontinued operations.” All historical statements presented have been restated to conform to this presentation in accordance with SFAS No. 144.
The components of income from operations related to discontinued operations for the years ended December 31, 2003, 2002 and 2001 are shown below. These include the results of operations through the date of
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
sale for the year ended December 31, 2003 and a full period of operations for the year ended December 31, 2002 and 2001 (dollars in thousands):
The company had no assets that qualified as held for disposition as defined by SFAS No. 144 at December 31, 2003.
Note 3 Investment in Rental Property
At December 31, 2003, the company’s three largest markets comprised 51% of its real estate owned, at cost. The following is a summary of rental property owned at December 31, 2003 (in thousands):
*
Includes real estate commissions, closing costs, and improvements capitalized since the date of acquisition.
**
The total includes $87.1 million of debt secured by 17 apartment communities which is not allocated among the individual apartment communities.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following is a reconciliation of the carrying amount of real estate owned (in thousands):
The following is a reconciliation of accumulated depreciation (in thousands):
Note 4 Investment in Unconsolidated Real Estate Joint Ventures
In connection with the Merry Land merger, the company acquired interest in two joint ventures. The company assumed a 35% interest in Merritt at Godley Station, LLC, an apartment community under development. The company does not control this asset and has accounted for its investment under the equity method of accounting. The investment in this joint venture was recorded at cost and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The company also assumed a 10% interest in the Cypress Cove joint venture, which owns an apartment community. The company has accounted for its investment under the equity method. The company’s investment in joint ventures was $2.6 million at December 31, 2003.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 5 Notes Payable
Secured
Secured borrowings outstanding at December 31, 2003 and 2002 were as follows (dollars in thousands):
(a)
Includes fair value premium adjustments aggregating $18.4 million in 2003 and $0.6 million in 2002 that were recorded in connection with assumption of above market rate debt in connection with the acquisition of apartment communities. These premiums are amortized into interest expense (which reduces interest expense) over the remaining term of the related indebtedness on the effective interest method.
In connection with the Merry Land merger, the company assumed nine fixed or variable rate mortgage notes with an aggregate principal amount of $90.6 million. These mortgages were recorded at a fair value of $110.5 million at the date of assumption. The difference between the fair value and the principal amount is being amortized as an adjustment to interest expense over the term of the respective notes. The mortgage notes bear a weighted interest rate of 7.4% per annum and an effective weighted average interest rate of 3.2%, including the effect of the fair value adjustment. The fixed rate mortgage notes are payable in monthly installments, including principal and interest. The variable rate mortgage note requires payments of interest only. Prepayment penalties apply for early retirements on the fixed rate mortgage notes. Scheduled maturities are at various dates through September 2011 and one mortgage notes matures November 2041.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
During 2003, the company completed a plan of refinancing in which the company’s unsecured lines of credit were replaced with a combination of new secured lines of credit from a commercial bank and three additional secured financing transactions. The following summarizes the new financings:
•
On May 30, 2003, the company entered into a secured credit facility with a commercial bank. The credit facility provides up to a maximum of $50 million and replaced the $85 million unsecured line of credit. The secured credit facility is divided into two loans, a $40 million revolving credit facility and a $10 million “swingline” credit facility. This secured line of credit bears interest at LIBOR plus 1.575% and the maturity date is May 30, 2005. The credit facility requires quarterly payments of interest only and is secured by seven apartment communities. The company is obligated to pay lenders a quarterly commitment fee equal to .25% per annum of the unused portion of the credit facility. The secured credit facility agreement contains certain covenants which, among other things, require maintenance of certain financial ratios and includes restrictions on the company’s ability to make distributions to its shareholders over certain amounts. At December 31, 2003, the company was in compliance with this agreement. At December 31, 2003, the outstanding balance was $12.5 million on the credit facility and $1.1 million was outstanding on the “swingline” credit facility, which results in an unused credit facility capacity of $36 million at December 31, 2003.
•
On June 27, 2003, the company entered into a $50 million secured financing. The note bears interest at LIBOR plus 125 basis points (2.37% at December 31, 2003). The maturity date is July 9, 2005 with three one-year extension options. The note requires payments of interest only and is secured by five apartment communities. The note is prepayable after one year without penalty.
•
On July 17, 2003, the company entered into $38.5 million in secured financing which is represented by four promissory notes. The notes bear interest at the Discount Mortgage Backed Security index plus 82 basis points (1.94% at December 31, 2003), and the maturity date is August 1, 2008. These notes require payments of interest only and are secured by four apartment communities. The notes are prepayable after one year with 1% penalty.
•
On August 29, 2003, the company entered into $13.3 million in secured financing secured by one apartment community. The note bears interest at the Discount Mortgage Backed Security index plus 82 basis points (1.94% at December 31, 2003), and the maturity date is September 1, 2008. The notes requires payment of interest only. The note is prepayable after one year with 1% penalty.
Proceeds from these financings repaid the outstanding balance of the company’s $85 million unsecured line of credit, described below, and repaid outstanding secured loans totaling approximately $23.3 million. The remainder of the proceeds from these financings were used for excess borrowing capacity, working capital needs and other corporate purposes.
During 2002, the company entered into a $12.6 million fixed rate mortgage note which bears interest at 6.675% per annum. The mortgage note is payable in monthly installments, including principal and interest, and is secured by one apartment community. The company also entered into a $25 million variable rate mortgage note in conjunction with the acquisition of one apartment community. The note requires monthly payments of interest only. The company assumed $16 million in variable rate mortgage notes in conjunction with the acquisition of two apartment communities in 2002. The notes require monthly installments, including principal and interest, and are secured by the two apartment communities.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The aggregate maturities of principal, including monthly installments of principal previously described, for secured debt for the five years subsequent to December 31, 2003 are as follows (in thousands):
Estimated fair value is based on mortgage rates believed to be available to the company for the issuance of debt with similar terms and remaining lives. The fair value of the company’s fixed and variable rate secured debt at December 31, 2003 and 2002 was $886 million and $695 million, respectively.
Unsecured
Upon completion of the financings described above, the company’s $85 million unsecured line of credit was repaid and terminated. At December 31, 2002, borrowings on the unsecured line of credit were $75 million.
During May 2003, the company’s $7.5 million unsecured line of credit for general corporate purposes was replaced with a $10 million “swingline” secured revolving credit facility, described above. At December 31, 2002, borrowings on the $7.5 million line of credit were $2.9 million.
Capitalized Interest
During 2003 and 2002, the company capitalized interest of $95,590 and $62,222, respectively. Overall, weighted-average interest rate incurred for all borrowings was 5.9% in 2003 and 6.5% in 2002.
Note 6 Operating Partnership and Shareholders’ Equity
Operating Partnership
Effective October 1, 2001, State Street, LLC and State Street I, LLC, each a North Carolina limited liability company (collectively, the “Limited Partners”), and the company, as the sole general partner, formed Cornerstone NC Operating Limited Partnership, a Virginia limited partnership (the “Limited Partnership”). The company has approximately an 84% interest in the Limited Partnership. The Limited Partners are minority limited partners and are not otherwise related to the company. The Limited Partners contributed and agreed to contribute property to the Limited Partnership in exchange for preferred and non-preferred operating partnership units. Beginning October 1, 2002, the Limited Partners became able to elect to redeem a portion of the preferred operating partnership units. If the Limited Partners make the election, the company, at its option, will convert the preferred operating partnership units into either common shares of the company on a one-for-one basis or cash in an amount per unit equal to the closing price of a common share of the company on the exercise date (or other specified price if there is no closing price on that date), subject to anti-dilution adjustments.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
During the first quarter of 2003, a total of 887,125 preferred operating partnership units were converted into common shares on a one-to-one basis. During 2003, the remaining 319,715 non-preferred operating partnership units converted to preferred operating partnership units as certain lease-up and stabilization criteria were met. As of December 31, 2003, there were 1,807,145 preferred operating partnership units eligible for conversion into common shares on one-for-one basis or cash, at the company’s option.
Preferred Stock
The company issued Series A Convertible Preferred Shares in July 1999. The company declared and paid total distributions of $2.3752 per share on the Series A Convertible Preferred Shares during 2003 and 2002. At December 31, 2003 and 2002, 127,380 preferred shares remained outstanding.
Common Stock
During 2000, the company completed its $50 million common share repurchase program which was authorized by the Board of Directors in September 1999. The Board authorized the repurchase of up to an additional $50 million of the company’s common shares in September 2000. Pursuant to the additional authorization, the company has, as of December 31, 2003, repurchased 2.0 million common shares at an average price of $10.80 per share for a total cost of $21.3 million. For the year ended December 31, 2003, the company repurchased 26,550 common shares at an average price of $7.17 per share for a total cost of $0.2 million.
In 1997, the company adopted a Dividend Reinvestment and Share Purchase Plan (as amended from time to time, “Plan”) which allows any recordholder to reinvest distributions without payment of any brokerage commissions or other fees. Of the total proceeds raised from common shares during the years ended December 31, 2003, 2002, and 2001, $5.4 million, $6.8 million, and $6.5 million, respectively, were provided through the reinvestment of distributions.
Note 7 Benefits Plans
Stock Incentive Plan
Based on the outstanding shares, under the 1992 Incentive Plan, as amended, a maximum of 2.0 million options could be granted, at the discretion of the Board of Directors, to certain officers and key employees of the company. Under the Directors Plan, as amended, a maximum of 0.8 million options could be granted to the directors of the company. In 2003, the company granted 69,550 options to purchase shares under the Directors Plan.
Both of the plans provide, among other things, that options be granted at exercise prices not lower than the market value of the shares on the date of grant. Under the Incentive Plan, options become exercisable at the date of grant. Generally the optionee has up to 10 years from the date of grant to exercise the options. The exercise prices of these options range from $7.41 to $12.125 per option. Activity in the company’s share option plans
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
during the three years ended December 31, 2003 is summarized in the following table (in thousands, except per share data):
In 1999, Mr. Knight was granted options (“Award Options”) to purchase 348,771 of the company’s Common Shares at an exercise price of $10.125. If certain events occur, the exercise price will be $1.00 per common share for 180 days following the occurrence of those events. If such an event occurs, and Mr. Knight either elects not to, or otherwise fails to, exercise any exercisable Award Options, then the company must pay to Mr. Knight the difference between the exercise price and the value of the common shares that would be obtained upon exercise.
401(K) Savings Plan
Eligible employees of the company participate in a contributory employee savings plan. Under the plan, the company may match a percentage of contributions made by eligible employees, such percentage to apply to a maximum of 3% of their annual salary. Contribution expenses under this plan for 2003, 2002 and 2001 were $116,889, $82,427, and $73,894, respectively.
Note 8 Related-Party Transactions
During 2003, Mr. Glade M. Knight, the company’s Chairman and Chief Executive Officer, served as Chairman and Chief Executive Officer of three extended-stay hotel REITs, Apple Suites, Inc., Apple Hospitality Two, Inc., and Apple Hospitality Five, Inc., and also owned companies which provided services to these entities. Apple Hospitality Two, Inc. acquired Apple Suites, Inc. in a merger transaction during the first quarter of 2003. During 2003 and 2002, the company provided real estate acquisition and offering-related and other services to these entities and received payment of approximately $0.2 million and $0.6 million, respectively.
Other Relationships
Leslie A. Grandis, a director of the company, is also a partner in McGuireWoods LLP, which provides outside legal services to the company During 2003 and 2002, the company paid $1.6 million and $0.9 million, respectively for services provided by McGuire Woods LLP.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 9 Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Note 10 Commitments
The company has capital leases on certain equipment. The leases generally provide for the lessee to pay taxes, maintenance, insurance and certain other operating costs of the leased property which are expensed as incurred. The following is a summary of the future minimum payments subsequent to December 31, 2003 (in thousands):
The company intends to purchase an apartment community subject to certain conditions which are expected to be met during the first quarter of 2004 and will be combined with an existing apartment community. The expected purchase price is $11.0 million.
The company has three development projects, two of which were assumed with the Merry Land merger mentioned above and are to be completed during 2005. The company’s share of estimated future cash expenditures to complete these projects will be funded through advances on future construction loans.
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 11 Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations for the years ended December 31, 2003 and 2002 (in thousands):
Note 12 Industry Segments
The company owns and operates multifamily apartment communities throughout the southern regions of the United States that generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The company separately evaluates the performance of each of its apartment communities. However, because each of the apartment communities has similar economic characteristics, facilities, services, and tenants, the apartment communities have been aggregated into a single apartment communities segment. All segment disclosure is included in or can be derived from the company’s consolidated financial statements.
CORNERSTONE REALTY INCOME, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)
all oREAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)-(Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)-(Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)-(Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)-(Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)-(Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)-(Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2003)-(Continued)
(1)
The aggregate cost for Federal Income tax purposes was approximately $1.3 billion at December 31, 2003.
(2)
The total includes $87.1 million of debt secured by 17 apartment communities which is not allocated among the individual apartment communities.
EXHIBIT INDEX