UNITED STATES
FORM 10-Q
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended September 30, 2004 | ||
OR | ||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to . |
Commission File Number 1-16755
Archstone-Smith Trust
Maryland | 84-1592064 | |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. employer identification no.) |
9200 E Panorama Circle, Suite 400
(303) 708-5959
(Former name, former address and former fiscal year,
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o
At November 3, 2004, there were approximately 197,364,000 of the Registrants Common Shares outstanding.
Table of Contents
2
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
ARCHSTONE-SMITH TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||||
2004 | 2003 | |||||||||
(Unaudited) | ||||||||||
(In thousands, | ||||||||||
except share data) | ||||||||||
ASSETS | ||||||||||
Real estate
|
$ | 8,885,846 | $ | 8,638,954 | ||||||
Real estate held for sale
|
428,804 | 360,226 | ||||||||
Less accumulated depreciation
|
744,898 | 648,982 | ||||||||
8,569,752 | 8,350,198 | |||||||||
Investments in and advances to unconsolidated
entities
|
95,811 | 86,367 | ||||||||
Net investments
|
8,665,563 | 8,436,565 | ||||||||
Cash and cash equivalents
|
179,642 | 5,230 | ||||||||
Restricted cash in tax-deferred exchange escrow
|
83,357 | 180,920 | ||||||||
Other assets
|
149,215 | 298,980 | ||||||||
Total assets
|
$ | 9,077,777 | $ | 8,921,695 | ||||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||||
Liabilities:
|
||||||||||
Unsecured credit facilities
|
$ | | $ | 103,790 | ||||||
Long-Term Unsecured Debt
|
2,119,913 | 1,871,965 | ||||||||
Mortgages payable
|
1,931,363 | 1,866,252 | ||||||||
Mortgages payable held for sale
|
60,810 | 61,373 | ||||||||
Accounts payable, accrued expenses and other
liabilities
|
313,203 | 281,212 | ||||||||
Total liabilities
|
4,425,289 | 4,184,592 | ||||||||
Minority interest
|
522,908 | 592,416 | ||||||||
Shareholders equity:
|
||||||||||
Convertible Preferred Shares
|
25,000 | 50,000 | ||||||||
Perpetual Preferred Shares
|
50,000 | 98,940 | ||||||||
Common Shares (197,224,705 shares in 2004
and 194,762,263 shares in 2003)
|
1,972 | 1,948 | ||||||||
Additional paid-in capital
|
3,975,548 | 3,952,404 | ||||||||
Accumulated other comprehensive (loss)/income
|
(7,591 | ) | 14,235 | |||||||
Retained earnings
|
84,651 | 27,160 | ||||||||
Total shareholders equity
|
4,129,580 | 4,144,687 | ||||||||
Total liabilities and shareholders equity
|
$ | 9,077,777 | $ | 8,921,695 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ARCHSTONE-SMITH TRUST
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||
(Unaudited) | |||||||||||||||||
Revenues:
|
|||||||||||||||||
Rental revenues
|
$ | 224,497 | $ | 198,894 | $ | 649,193 | $ | 586,454 | |||||||||
Other income
|
4,930 | 3,833 | 13,836 | 14,690 | |||||||||||||
229,427 | 202,727 | 663,029 | 601,144 | ||||||||||||||
Expenses:
|
|||||||||||||||||
Rental expenses
|
60,864 | 51,072 | 168,699 | 146,897 | |||||||||||||
Real estate taxes
|
20,900 | 17,459 | 63,388 | 52,851 | |||||||||||||
Depreciation on real estate investments
|
54,119 | 42,729 | 154,834 | 123,480 | |||||||||||||
Interest expense
|
46,692 | 36,800 | 129,476 | 111,728 | |||||||||||||
General and administrative expenses
|
12,898 | 12,558 | 37,423 | 38,200 | |||||||||||||
Other expenses
|
2,809 | 2,380 | 6,107 | 28,978 | |||||||||||||
198,282 | 162,998 | 559,927 | 502,134 | ||||||||||||||
Earnings from operations
|
31,145 | 39,729 | 103,102 | 99,010 | |||||||||||||
Minority interest
|
(6,115 | ) | (5,440 | ) | (19,484 | ) | (13,315 | ) | |||||||||
Income from unconsolidated entities
|
5,485 | 1,714 | 18,115 | 1,008 | |||||||||||||
Other non-operating income
|
7,701 | | 28,162 | | |||||||||||||
Earnings before discontinued operations
|
38,216 | 36,003 | 129,895 | 86,703 | |||||||||||||
Earnings from discontinued apartment communities
|
102,894 | 120,425 | 191,464 | 220,098 | |||||||||||||
Net earnings
|
141,110 | 156,428 | 321,359 | 306,801 | |||||||||||||
Preferred Share dividends
|
(3,661 | ) | (4,812 | ) | (9,935 | ) | (17,789 | ) | |||||||||
Net earnings attributable to Common
Shares Basic
|
$ | 137,449 | $ | 151,616 | $ | 311,424 | $ | 289,012 | |||||||||
Weighted average Common Shares
outstanding Basic
|
195,777 | 189,276 | 195,298 | 185,286 | |||||||||||||
Weighted average Common Shares
outstanding Diluted
|
199,334 | 196,600 | 198,751 | 194,823 | |||||||||||||
Earnings per Common Share Basic:
|
|||||||||||||||||
Earnings before discontinued operations
|
$ | 0.18 | $ | 0.16 | $ | 0.61 | $ | 0.37 | |||||||||
Discontinued operations, net
|
0.52 | 0.64 | 0.98 | 1.19 | |||||||||||||
Net earnings
|
$ | 0.70 | $ | 0.80 | $ | 1.59 | $ | 1.56 | |||||||||
Earnings per Common Share Diluted:
|
|||||||||||||||||
Earnings before discontinued operations
|
$ | 0.18 | $ | 0.16 | $ | 0.61 | $ | 0.37 | |||||||||
Discontinued operations, net
|
0.52 | 0.63 | 0.97 | 1.18 | |||||||||||||
Net earnings
|
$ | 0.70 | $ | 0.79 | $ | 1.58 | $ | 1.55 | |||||||||
Dividends paid per Common Share
|
$ | 0.43 | $ | 0.4275 | $ | 1.29 | $ | 1.2825 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ARCHSTONE-SMITH TRUST
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
Convertible | Perpetual | ||||||||||||||||||||||||||||
Preferred | Preferred | ||||||||||||||||||||||||||||
Shares at | Shares at | Accumulated | |||||||||||||||||||||||||||
Aggregate | Aggregate | Common | Additional | Other | |||||||||||||||||||||||||
Liquidation | Liquidation | Shares at | Paid-In | Comprehensive | Retained | ||||||||||||||||||||||||
Preference | Preference | Par Value | Capital | Income/(Loss) | Earnings | Total | |||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||||||||
Balances at December 31, 2003
|
$ | 50,000 | $ | 98,940 | $ | 1,948 | $ | 3,952,404 | $ | 14,235 | $ | 27,160 | $ | 4,144,687 | |||||||||||||||
Comprehensive income:
|
|||||||||||||||||||||||||||||
Net earnings
|
| | | | | 321,359 | 321,359 | ||||||||||||||||||||||
Change in fair value of cash flow hedges
|
| | | | 1,970 | | 1,970 | ||||||||||||||||||||||
Change in fair value of marketable securities
|
| | | | (23,796 | ) | | (23,796 | ) | ||||||||||||||||||||
Comprehensive income attributable to Common Shares
|
299,533 | ||||||||||||||||||||||||||||
Preferred Share dividends
|
| | | | | (9,935 | ) | (9,935 | ) | ||||||||||||||||||||
Common Share dividends
|
| | | | | (253,933 | ) | (253,933 | ) | ||||||||||||||||||||
A-1 Common Units converted into Common Shares
|
| | 23 | 46,897 | | | 46,920 | ||||||||||||||||||||||
Conversion of Preferred Shares into Common Shares
|
(25,000 | ) | | 13 | 24,987 | | | | |||||||||||||||||||||
Common Share repurchases
|
| | (32 | ) | (88,470 | ) | | | (88,502 | ) | |||||||||||||||||||
Preferred Share repurchases
|
| (48,940 | ) | | 1,727 | | | (47,213 | ) | ||||||||||||||||||||
Exercise of options
|
| | 18 | 35,777 | | | 35,795 | ||||||||||||||||||||||
Issuance of Common Shares in exchange for real
estate
|
| | 2 | 4,500 | | | 4,502 | ||||||||||||||||||||||
Other, net
|
| | | (2,274 | ) | | | (2,274 | ) | ||||||||||||||||||||
Balances at September 30, 2004
|
$ | 25,000 | $ | 50,000 | $ | 1,972 | $ | 3,975,548 | $ | (7,591 | ) | $ | 84,651 | $ | 4,129,580 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ARCHSTONE-SMITH TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||||
September 30, | ||||||||||
2004 | 2003 | |||||||||
(In thousands) | ||||||||||
(Unaudited) | ||||||||||
Operating activities:
|
||||||||||
Net earnings
|
$ | 321,359 | $ | 306,801 | ||||||
Adjustments to reconcile net earnings to net cash
flow provided by operating activities:
|
||||||||||
Depreciation and amortization
|
172,172 | 148,162 | ||||||||
Gains on dispositions of depreciated real estate,
net
|
(226,296 | ) | (243,718 | ) | ||||||
Gains on sale of marketable equity securities and
property management business
|
(28,162 | ) | | |||||||
Provision for possible loss on real estate
investments
|
| 3,714 | ||||||||
Minority interest
|
42,837 | 43,187 | ||||||||
Equity in earnings/loss from unconsolidated
entities
|
(18,115 | ) | (1,008 | ) | ||||||
Change in other assets
|
(586 | ) | 7,972 | |||||||
Change in accounts payable, accrued expenses and
other liabilities
|
13,133 | (19,413 | ) | |||||||
Other, net
|
(6,087 | ) | 4,030 | |||||||
Net cash flow provided by operating activities
|
270,255 | 249,727 | ||||||||
Investing activities:
|
||||||||||
Real estate investments, net
|
(1,164,522 | ) | (623,713 | ) | ||||||
Change in investments in unconsolidated entities,
net
|
16,508 | 20,548 | ||||||||
Proceeds from dispositions, net of closing costs
|
1,163,277 | 1,217,461 | ||||||||
Change in tax-deferred exchange escrow
|
97,563 | (84,232 | ) | |||||||
Other, net
|
125,449 | (47,061 | ) | |||||||
Net cash flow provided by investing activities
|
238,275 | 483,003 | ||||||||
Financing activities:
|
||||||||||
Payments on Long-Term Unsecured Debt
|
(52,950 | ) | (151,250 | ) | ||||||
Proceeds from Long-Term Unsecured Debt, net
|
297,052 | 247,225 | ||||||||
Principal prepayment of mortgages payable,
including prepayment penalties
|
(78,285 | ) | (263,442 | ) | ||||||
Regularly scheduled principal payments on
mortgages payable
|
(9,003 | ) | (8,993 | ) | ||||||
Proceeds from mortgage notes payable
|
44,241 | 52,299 | ||||||||
Repayments of borrowings from unsecured credit
facilities, net
|
(103,790 | ) | (363,578 | ) | ||||||
Proceeds from Common Shares issued under DRIP and
employee stock options
|
35,795 | 87,885 | ||||||||
Repurchase of Common Shares and Preferred Shares
|
(137,442 | ) | (13,624 | ) | ||||||
Repurchase of Series E and F Perpetual
Preferred Units
|
(32,090 | ) | | |||||||
Cash dividends paid on Common Shares
|
(253,933 | ) | (239,553 | ) | ||||||
Cash dividends paid on Preferred Shares
|
(8,208 | ) | (20,007 | ) | ||||||
Cash distributions paid to minority interests
|
(36,055 | ) | (35,523 | ) | ||||||
Other, net
|
550 | (1,819 | ) | |||||||
Net cash flow (used in) financing activities
|
(334,118 | ) | (710,380 | ) | ||||||
Net change in cash and cash equivalents
|
174,412 | 22,350 | ||||||||
Cash and cash equivalents at beginning of period
|
5,230 | 12,846 | ||||||||
Cash and cash equivalents at end of period
|
$ | 179,642 | $ | 35,196 | ||||||
Significant non-cash investing and financing
activities:
|
||||||||||
A-1 Common Units issued in exchange for real
estate
|
$ | 10,788 | $ | 33,355 | ||||||
Common Shares issued in exchange for real estate
|
4,502 | | ||||||||
A-1 Common Units converted to Common Shares
|
46,920 | 22,913 | ||||||||
Assumption of mortgages payable upon purchase of
apartment communities
|
113,585 | | ||||||||
Conversion of Series K Preferred Shares into
Common Shares
|
25,000 | | ||||||||
Conversion of Series H Preferred Shares into
Common Shares
|
| 71,500 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
ARCHSTONE-SMITH TRUST
(1) | Description of the Business and Summary of Significant Accounting Policies |
Business |
Our business is conducted primarily through our majority owned subsidiary, Archstone-Smith Operating Trust (the Operating Trust). We are structured as an UPREIT under which substantially all property ownership and business operations are conducted through the Operating Trust. We are the sole trustee and own approximately 89.4% of the Operating Trusts outstanding common units and the remaining 10.6% were owned by minority interest holders. As used herein, we, our and the company refers to the Operating Trust and Archstone-Smith, collectively, except where the context otherwise requires. Archstone-Smith is an equity REIT organized under the laws of the State of Maryland. We focus on creating value for our shareholders by acquiring, developing and operating apartments in markets characterized by: (i) protected locations with limited land on which to build new housing; (ii) expensive single-family home prices; and (iii) a strong, diversified economic base and job growth potential.
Interim Financial Reporting |
The accompanying condensed consolidated financial statements of Archstone-Smith are unaudited and certain information and footnote disclosures normally included in financial statements have been omitted. While management believes that the disclosures presented are adequate for interim reporting, these interim financial statements should be read in conjunction with the financial statements and notes included in Archstone-Smiths 2003 Form 10-K. See the glossary in our 2003 Form 10-K for all defined terms not defined herein.
In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary for a fair presentation of Archstone-Smiths financial statements for the interim periods presented. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the entire year.
Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and the related notes. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary.
Moisture Infiltration and Resulting Mold Remediation Costs |
We estimate and accrue costs related to the correction of moisture infiltration and related mold remediation when we anticipate incurring such remediation costs because of the assertion of a legal claim or threatened litigation. When we incur remediation costs at our own discretion, the cost is recognized as incurred. Costs of addressing moisture infiltration and resulting mold remediation issues are only capitalized, subject to recoverability, when it is determined by management that such costs also extend the life, increase the capacity, or improve the safety or efficiency of the property relative to when the community was originally constructed or acquired, if later. All other related costs are expensed.
Loss Contingencies |
We accrue for loss contingencies when it is probable that a loss will be incurred and that loss can by reasonably estimated consistent with the criteria established in SFAS No. 5 Accounting for Contingencies.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We also record insurance recoveries up to the amount of the actual loss contingency when the insurance recovery is both probable and can be reasonably estimated.
Legal Fees |
We generally recognize legal expenses as incurred; however, if such fees are related to the accrual for an estimated legal settlement, we accrue for the related incurred and anticipated legal fees at the same time we accrue the cost of settlement.
Real Estate Depreciation |
We allocate the cost of newly acquired properties between net tangible and identifiable intangible assets. The primary intangible asset associated with an apartment community acquisition is the value of the existing lease agreements. When allocating cost to an acquired property, we estimate the value of land, building and fixtures assuming the property is vacant, and then allocate costs to the intangible value of the existing lease agreements. We depreciate the building and fixtures based on the expected useful life of the asset and amortize the intangible value of the lease agreements over the average remaining life of the existing leases.
Income Taxes |
We primarily incur income taxes through our consolidated taxable REIT subsidiary Ameriton. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
Stock-Based Compensation |
As of September 30, 2004, the company has one stock-based employee compensation plan. Effective January 1, 2003, the company adopted the fair value recognition provision of FASB Statement No. 123, Accounting for Stock-Based Compensation, prospectively to all employee awards granted, modified or settled after January 1, 2003, which results in expensing of options. During the nine months ended September 30, 2004, we granted approximately 300,000 Restricted Share Units and 648,000 stock options. Restricted Share Units are valued using the current share price at the date of grant and this amount is amortized over the vesting period. For employee option awards granted prior to January 1, 2003, the company accounted for this plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. With respect to options granted under the plan prior to January 1, 2003, no stock-based employee compensation expense is reflected in the accompanying condensed consolidated statements of earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the fair value based method had been
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
applied to all outstanding and unvested awards in each period (dollar amounts in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||||
Net earnings attributable to Common
Shares Basic
|
$ | 137,449 | $ | 151,616 | $ | 311,424 | $ | 289,012 | |||||||||
Add: Stock-based employee compensation expense
included in reported net earnings
|
65 | | 194 | | |||||||||||||
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all awards
|
(477 | ) | (379 | ) | (1,427 | ) | (1,228 | ) | |||||||||
Pro forma net earnings attributable to Common
Shares Basic
|
$ | 137,037 | $ | 151,237 | $ | 310,191 | $ | 287,784 | |||||||||
Net earnings per Common Share:
|
|||||||||||||||||
Basic as reported
|
$ | 0.70 | $ | 0.80 | $ | 1.59 | $ | 1.56 | |||||||||
Basic pro forma
|
$ | 0.70 | $ | 0.80 | $ | 1.59 | $ | 1.55 | |||||||||
Diluted as reported
|
$ | 0.70 | $ | 0.79 | $ | 1.58 | $ | 1.55 | |||||||||
Diluted pro forma
|
$ | 0.69 | $ | 0.79 | $ | 1.58 | $ | 1.54 | |||||||||
Weighted average risk-free interest rate
|
3.48 | % | 3.54 | % | 3.48 | % | 3.54 | % | |||||||||
Weighted average dividend yield
|
6.92 | % | 6.74 | % | 6.92 | % | 6.74 | % | |||||||||
Weighted average volatility
|
15.33 | % | 19.58 | % | 15.33 | % | 19.58 | % | |||||||||
Weighted average expected option life
|
5.0 years | 5.0 years | 5.0 years | 5.0 years |
Reclassifications |
Certain 2003 amounts have been reclassified to conform to the 2004 presentation.
Comprehensive Income |
Comprehensive income, which is defined as net earnings and all other non-owner changes in equity, is displayed in the accompanying Statements of Shareholders Equity and Comprehensive Income. Other comprehensive income reflects unrealized holding gains and losses on the available-for-sale investments and changes in the fair value of effective cash flow hedges.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our accumulated other comprehensive income for the nine months ended September 30, 2004 was as follows (in thousands):
Net | ||||||||||||
Unrealized | Accumulated | |||||||||||
Gains on | Other | |||||||||||
Marketable | Cash Flow | Comprehensive | ||||||||||
Securities | Hedges | Income/(Loss) | ||||||||||
Balance at December 31, 2003
|
$ | 23,808 | $ | (9,573 | ) | $ | 14,235 | |||||
Change in fair value of cash flow hedges
|
| 4,379 | 4,379 | |||||||||
Fair value of long-term debt hedge
|
| (2,409 | ) | (2,409 | ) | |||||||
Less: reclassification adjustments for realized
net gains
|
(23,796 | ) | | (23,796 | ) | |||||||
Balance at September 30, 2004
|
$ | 12 | $ | (7,603 | ) | $ | (7,591 | ) | ||||
Per Share Data |
Following is a reconciliation of basic EPS to diluted EPS for the periods indicated (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||||
Reconciliation of numerator between basic and
diluted net earnings per Common Share(1):
|
|||||||||||||||||
Net earnings attributable to Common
Shares Basic
|
$ | 137,449 | $ | 151,616 | $ | 311,424 | $ | 289,012 | |||||||||
Dividends on Convertible Preferred Shares
|
1,061 | 2,782 | 3,269 | 11,692 | |||||||||||||
Minority interest convertible
operating partnership units
|
150 | 347 | 242 | 364 | |||||||||||||
Net earnings attributable to Common
Shares Diluted
|
$ | 138,660 | $ | 154,745 | $ | 314,935 | $ | 301,068 | |||||||||
Reconciliation of denominator between basic and
diluted net earnings per Common Share(1):
|
|||||||||||||||||
Weighted average number of Common Shares
outstanding Basic
|
195,777 | 189,276 | 195,298 | 185,286 | |||||||||||||
Assumed conversion of Convertible Preferred
Shares into Common Shares
|
2,439 | 6,517 | 2,535 | 9,155 | |||||||||||||
Assumed exercise of options
|
1,118 | 807 | 918 | 382 | |||||||||||||
Weighted average number of Common Shares
outstanding Diluted
|
199,334 | 196,600 | 198,751 | 194,823 | |||||||||||||
(1) | Excludes the impact of potentially dilutive equity securities during periods in which they are anti-dilutive. |
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) | Real Estate |
Investments in Real Estate |
Investments in real estate, at cost, were as follows (dollar amounts in thousands):
September 30, 2004 | December 31, 2003 | |||||||||||||||||||
Investment | Units(1) | Investment | Units(1) | |||||||||||||||||
REIT Apartment Communities:
|
||||||||||||||||||||
Operating communities(2)
|
$ | 8,307,247 | 61,088 | $ | 8,067,075 | 63,848 | ||||||||||||||
Communities under construction
|
344,722 | 2,757 | 301,634 | 2,607 | ||||||||||||||||
Development communities In Planning:
|
||||||||||||||||||||
Owned(3)
|
40,039 | 1,011 | 95,911 | 2,633 | ||||||||||||||||
Under control(4)
|
| 133 | | 112 | ||||||||||||||||
Total development communities In Planning
|
40,039 | 1,144 | 95,911 | 2,745 | ||||||||||||||||
Total REIT apartment communities
|
8,692,008 | 64,989 | 8,464,620 | 69,200 | ||||||||||||||||
Ameriton apartment communities
|
530,053 | 6,186 | 494,338 | 5,646 | ||||||||||||||||
Land
|
44,758 | | 9,648 | | ||||||||||||||||
Other
|
47,831 | | 30,574 | | ||||||||||||||||
Total real estate
|
$ | 9,314,650 | 71,175 | $ | 8,999,180 | 74,846 | ||||||||||||||
(1) | Unit information is based on managements estimates and has not been audited or reviewed by our independent auditors. |
(2) | Excludes 350 units associated with an unconsolidated development project. |
(3) | Excludes 432 units associated with an unconsolidated development project. |
(4) | Archstone-Smith had $1.0 million in developments Under Control as of September 30, 2004 and $1.1 million as of December 31, 2003, as is reflected on the Other assets caption of our Balance Sheets. |
The change in investments in real estate, at cost, consisted of the following (in thousands):
Balance at December 31, 2003
|
$ | 8,999,180 | ||||
Acquisition-related expenditures
|
1,015,512 | |||||
Redevelopment expenditures
|
26,680 | |||||
Recurring capital expenditures
|
34,230 | |||||
Development expenditures, excluding land
acquisitions
|
245,135 | |||||
Dispositions
|
(990,789 | ) | ||||
Net apartment community activity
|
9,329,948 | |||||
Change in other real estate assets
|
(15,298 | ) | ||||
Balance at September 30, 2004
|
$ | 9,314,650 | ||||
At September 30, 2004, we had unfunded contractual commitments related to real estate investment activities aggregating approximately $400.3 million, of which $367.2 million related to communities under construction.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) | Discontinued Operations |
The results of operations for properties sold during the period or designated as held for sale at the end of the period are required to be classified as discontinued operations. The property specific components of net earnings that are classified as discontinued operations include rental revenues, rental expenses, real estate taxes, income taxes from taxable REIT subsidiary sales, depreciation expense, minority interest and interest expense (actual interest expense for encumbered properties and a pro-rata allocation of interest expense for any unencumbered property up to our weighted average leverage ratio), as well as the net gain or loss on the disposition of properties.
Consistent with our capital recycling program, we had 12 operating apartment communities, representing 3,380 units, classified as held for sale under the provisions of SFAS 144, at September 30, 2004. Accordingly, we have classified the operating earnings from these 12 properties within discontinued operations for the three and nine months ended September 30, 2004 and 2003. During the nine months ended September 30, 2004, we sold 23 REIT and Ameriton operating communities. The operating results of these 23 communities and the related gain/ loss on sale are also included in discontinued operations for both 2004 and 2003. During the twelve months ended December 31, 2003 we sold 48 operating communities. The operating results of these 48 operating communities and the related gain/loss on the sale are also included in discontinued operations for the three and nine months ended September 30, 2003. The following is a summary of net earnings from discontinued operations (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Rental revenues
|
$ | 20,284 | $ | 48,686 | $ | 80,900 | $ | 185,450 | ||||||||
Rental expenses
|
(8,314 | ) | (18,200 | ) | (29,215 | ) | (64,301 | ) | ||||||||
Real estate taxes
|
(2,079 | ) | (6,395 | ) | (9,656 | ) | (19,901 | ) | ||||||||
Depreciation on real estate investments
|
(1,579 | ) | (6,652 | ) | (9,173 | ) | (27,886 | ) | ||||||||
Interest expense(1)
|
(6,873 | ) | (14,731 | ) | (25,042 | ) | (49,595 | ) | ||||||||
Income taxes from taxable REIT subsidiary sales
|
(19,068 | ) | (8,063 | ) | (18,172 | ) | (11,005 | ) | ||||||||
Provision for possible loss on real estate
investments
|
| | | (3,714 | ) | |||||||||||
Debt extinguishment costs related to dispositions
|
| (905 | ) | (1,120 | ) | (2,796 | ) | |||||||||
Allocation of minority interest
|
(12,290 | ) | (15,849 | ) | (23,353 | ) | (29,872 | ) | ||||||||
Gains on disposition of taxable REIT subsidiary
real estate investments, net
|
55,417 | 23,641 | 69,930 | 31,260 | ||||||||||||
Gains on dispositions of REIT real estate
investments, net
|
77,396 | 118,893 | 156,365 | 212,458 | ||||||||||||
Earnings from discontinued apartment communities
|
$ | 102,894 | $ | 120,425 | $ | 191,464 | $ | 220,098 | ||||||||
(1) | The portion of interest expense included in discontinued operations that is allocated to properties based on the companys leverage ratio was $4.6 million and $11.5 million for the three months ended September 30, 2004 and 2003, and $17.0 million and all of $35.4 million for the nine months ended September 30, 2004 and 2003, respectively. |
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) | Investments in and Advances to Unconsolidated Entities |
Real Estate Joint Ventures |
We have investments in entities that we account for using the equity method. At September 30, 2004, the investment balance consisted of $64.4 million in Archstone-Smith joint ventures and $31.4 million in Ameriton joint ventures. At December 31, 2003, the investment balance consisted of $42.9 million in Archstone-Smith joint ventures and $43.5 million in Ameriton joint ventures.
(5) | Borrowings |
Unsecured Credit Facilities |
The following table summarizes our $600 million unsecured revolving credit facility borrowings (in thousands, except for percentages):
As of and for the | ||||||||
Nine Months | As of and for the | |||||||
Ended | Year Ended | |||||||
September 30, | December 31, | |||||||
2004 | 2003 | |||||||
Total unsecured revolving credit facility
|
$ | 600,000 | $ | 600,000 | ||||
Borrowings outstanding at end of period
|
| 97,000 | ||||||
Outstanding letters of credit under this facility
|
4,329 | 1,050 | ||||||
Weighted average daily borrowings
|
107,372 | 231,354 | ||||||
Maximum borrowings outstanding during the period
|
375,000 | 511,500 | ||||||
Weighted average daily nominal interest rate
|
1.56 | % | 1.95 | % | ||||
Weighted average daily effective interest rate
|
2.20 | % | 2.55 | % |
We also have a short-term unsecured borrowing agreement with JPMorgan Chase Bank, which provides for maximum borrowings of $100 million. The agreement bears interest at an overnight rate that ranged from 1.60% to 2.40% during the nine months ended September 30, 2004. There were no borrowings outstanding under the agreement at September 30, 2004 and $6.8 million outstanding at December 31, 2003.
Long-Term Unsecured Debt |
Following is a summary of our Long-Term Unsecured Debt (dollar amounts in thousands):
Effective | Balance at | Balance at | Average | ||||||||||||||||||
Coupon | Interest | September 30, | December 31, | Remaining | |||||||||||||||||
Type of Debt | Rate(1) | Rate(2) | 2004 | 2003 | Life (Years) | ||||||||||||||||
Long-term unsecured senior notes
|
6.22% | 6.40% | $ | 2,039,685 | $ | 1,771,167 | 5.5 | ||||||||||||||
Unsecured tax-exempt bonds
|
1.69% | 1.95% | 80,228 | 100,798 | 18.9 | ||||||||||||||||
Total/average
|
6.05% | 6.23% | $ | 2,119,913 | $ | 1,871,965 | 6.0 | ||||||||||||||
(1) | Represents a fixed rate for the long-term unsecured notes and a variable rate for the unsecured tax-exempt bonds. |
(2) | Represents the effective interest rate, including interest rate hedges, loan cost amortization and other ongoing fees and expenses, where applicable. |
During August 2004, the Operating Trust issued $300 million in long-term unsecured ten-year senior notes with a coupon rate of 5.6% and an effective interest rate of 5.8% from its shelf registration statement. The notes were issued pursuant to a supplemental indenture with modified debt covenants, which are specific
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to these notes. The primary change pertains to the leverage covenant, which limits total debt to 65% of the market value of total assets as defined, using a capitalization rate of 7.5% to value stabilized operating assets.
Mortgages payable |
Our mortgages payable generally feature either monthly interest and principal payments or monthly interest-only payments with balloon payments due at maturity. Following is a summary of our mortgages payable (dollar amounts in thousands):
Principal Balance(2) at | |||||||||||||||||
Effective | Average | ||||||||||||||||
Interest | September 30, | December 31, | Remaining | ||||||||||||||
Type of Mortgage | Rate(1) | 2004 | 2003 | Life (Years) | |||||||||||||
Conventional fixed rate(3)
|
6.45% | $ | 1,508,687 | $ | 1,511,277 | 5.3 | |||||||||||
Tax-exempt floating rate
|
2.02% | 391,467 | 317,351 | 19.5 | |||||||||||||
Conventional floating rate
|
2.91% | 21,705 | 21,705 | 4.1 | |||||||||||||
Construction loans
|
4.14% | 49,874 | 56,129 | 0.6 | |||||||||||||
Other
|
5.08% | 20,440 | 21,163 | 18.8 | |||||||||||||
Total/average mortgage debt
|
5.45% | $ | 1,992,173 | $ | 1,927,625 | 8.1 | |||||||||||
(1) | Includes the effect of fair value hedges, credit enhancement fees, the amortization of fair market value purchase adjustment, and other related costs, where applicable as of September 30, 2004. |
(2) | Includes net fair market value adjustment recorded in connection with the Smith Merger of $52.1 million and $58.5 million at September 30, 2004 and December 31, 2003, respectively. |
(3) | Includes a long-term secured debt agreement with Fannie Mae. The Fannie Mae secured debt matures on dates ranging from January 2006 to July 2009, although we have the option to extend the term of any portion of the debt for up to an additional 30-year period at any time, subject to Fannie Maes approval. |
The change in mortgages payable, including properties classified as held for sale, during the nine months ended September 30, 2004 consisted of the following (in thousands):
Balance at December 31, 2003
|
$ | 1,927,625 | |||
Regularly scheduled principal amortization
|
(9,003 | ) | |||
Prepayments, final maturities and other
|
(84,276 | ) | |||
Mortgage assumptions related to property
acquisitions
|
113,585 | ||||
Proceeds from mortgage notes payable
|
44,242 | ||||
Balance at September 30, 2004
|
$ | 1,992,173 | |||
Other |
The book value of total assets pledged as collateral for mortgage loans and other obligations at September 30, 2004 and December 31, 2003 was $3.8 billion. Our debt instruments generally contain certain covenants common to the type of facility or borrowing, including financial covenants establishing minimum debt service coverage ratios and maximum leverage ratios. We were in compliance with all financial covenants pertaining to our debt instruments during the three and nine months ended September 30, 2004.
For the nine months ended September 30, 2004 and 2003, the total interest paid on all outstanding debt was $189.7 and $175.3 million, respectively. We capitalize interest incurred during the construction period as part of the cost of apartment communities under development. Interest capitalized during the nine months ended September 30, 2004 and 2003 was $17.1 and $17.8 million, respectively.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) | Minority Interest |
Minority interest consisted of the following at September 30, 2004 (in thousands):
September 30, | ||||
2004 | ||||
A-1 Common Units
|
$ | 491,767 | ||
Perpetual Preferred Units
|
29,091 | |||
Other minority interests
|
2,050 | |||
$ | 522,908 | |||
The changes in minority interest were as follows:
Balance at December 31, 2003
|
$ | 592,416 | |||
A-1 Common Unit conversions
|
(46,920 | ) | |||
Unitholders share of net earnings
|
42,837 | ||||
Common Units issued for real estate
|
10,788 | ||||
Minority interest distributions
|
(36,055 | ) | |||
Series E & F Redemptions(1)
|
(32,090 | ) | |||
Other
|
(8,068 | ) | |||
Balance at September 30, 2004
|
$ | 522,908 | |||
(1) | 520,000 of the Series E Preferred Units were redeemed in August 2004 and the Series F Preferred Units were redeemed in September 2004. |
Operating Trust Units |
We owned 89.4% and 88.5% of the Operating Trusts outstanding Common Units at September 30, 2004 and December 31, 2003, respectively. During the nine months ended September 30, 2004, approximately 2.3 million A-1 Common Units were converted into Common Shares.
(7) | Distributions to Shareholders |
The following table summarizes the quarterly cash dividends paid per share on Common and Preferred Shares during the three months ended March 31, June 30 and September 30, 2004 and the annualized dividend we expect to pay for 2004:
Quarterly | Annualized | |||||||
Cash Dividend | Cash Dividend | |||||||
Per Share | Per Share | |||||||
Common Shares
|
$ | 0.4300 | $ | 1.72 | ||||
Series D Perpetual Preferred Shares(1)
|
0.5475 | 1.31 | ||||||
Series I Perpetual Preferred Shares(2)
|
1,915 | 7,660 | ||||||
Series K Convertible Preferred Shares(3)
|
0.8500 | 1.70 | ||||||
Series L Convertible Preferred Shares
|
0.8500 | 3.40 |
(1) | We redeemed the Series D Preferred Shares in August 2004. |
(2) | Series I Preferred Shares have a par value of $100,000 per share. |
(3) | We converted the series K Preferred Shares to Common Shares in September 2004. |
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) | Segment Data |
We define our garden communities and high-rise properties each as individual operating segments. We have determined that each of our garden communities and each of our high-rise properties have similar economic characteristics and also meet the other GAAP criteria, which permit the garden communities and high-rise properties to be aggregated into two reportable segments. Net Operating Income (NOI) is defined as rental revenues less rental expenses and real estate taxes. We rely on NOI for purposes of making decisions about resource allocations and assessing segment performance. We also believe NOI is a valuable means of comparing year-to-year property performance.
Following are reconciliations, which exclude the amounts classified as discontinued operations, of each reportable segments (i) revenues to consolidated revenues; (ii) NOI to consolidated earnings from operations; and (iii) assets to consolidated assets, for the periods indicated (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||
Reportable apartment communities segment revenues:
|
||||||||||||||||||
Same-Store:
|
||||||||||||||||||
Garden communities
|
$ | 113,281 | $ | 112,806 | $ | 336,949 | $ | 344,991 | ||||||||||
High-rise properties
|
72,084 | 71,187 | 213,376 | 213,070 | ||||||||||||||
Non Same-Store:
|
||||||||||||||||||
Garden communities
|
27,123 | 8,601 | 65,851 | 11,565 | ||||||||||||||
High-rise properties
|
10,968 | 5,324 | 30,441 | 14,380 | ||||||||||||||
Other non-reportable operating segment revenues
|
1,041 | 976 | 2,576 | 2,448 | ||||||||||||||
Total segment and consolidated revenues
|
$ | 224,497 | $ | 198,894 | $ | 649,193 | $ | 586,454 | ||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||
Reportable apartment communities segment NOI:
|
||||||||||||||||||
Garden communities
|
$ | 89,901 | $ | 81,525 | $ | 260,386 | $ | 240,611 | ||||||||||
High-rise properties
|
51,919 | 48,011 | 154,487 | 144,062 | ||||||||||||||
Other non-reportable operating segment NOI
|
913 | 827 | 2,233 | 2,033 | ||||||||||||||
Total segment and consolidated NOI
|
142,733 | 130,363 | 417,106 | 386,706 | ||||||||||||||
Reconciling items:
|
||||||||||||||||||
Other income
|
4,930 | 3,833 | 13,836 | 14,690 | ||||||||||||||
Depreciation on real estate investments
|
(54,119 | ) | (42,729 | ) | (154,834 | ) | (123,480 | ) | ||||||||||
Interest expense
|
(46,692 | ) | (36,800 | ) | (129,476 | ) | (111,728 | ) | ||||||||||
General and administrative expenses
|
(12,898 | ) | (12,558 | ) | (37,423 | ) | (38,200 | ) | ||||||||||
Other expenses
|
(2,809 | ) | (2,380 | ) | (6,107 | ) | (28,978 | ) | ||||||||||
Consolidated earnings from operations
|
$ | 31,145 | $ | 39,729 | $ | 103,102 | $ | 99,010 | ||||||||||
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, | December 31, | ||||||||||
2004 | 2003 | ||||||||||
Reportable operating communities segment assets,
net:
|
|||||||||||
Same-Store:
|
|||||||||||
Garden communities
|
$ | 3,058,377 | $ | 3,104,977 | |||||||
High-rise properties
|
2,571,871 | 2,597,810 | |||||||||
Non Same-Store:
|
|||||||||||
Garden communities
|
1,867,830 | 1,415,434 | |||||||||
High-rise properties
|
550,246 | 842,180 | |||||||||
Other non-reportable operating segment assets
|
92,624 | 29,571 | |||||||||
Total segment assets
|
8,140,948 | 7,989,972 | |||||||||
Real estate held for sale
|
428,804 | 360,226 | |||||||||
Total real estate assets
|
8,569,752 | 8,350,198 | |||||||||
Reconciling items:
|
|||||||||||
Investment in and advances to unconsolidated
entities
|
95,811 | 86,367 | |||||||||
Cash and cash equivalents
|
179,642 | 5,230 | |||||||||
Restricted cash in tax deferred exchange escrow
|
83,357 | 180,920 | |||||||||
Other assets
|
149,215 | 298,980 | |||||||||
Consolidated total assets
|
$ | 9,077,777 | $ | 8,921,695 | |||||||
Total capital expenditures for garden communities were $13.8 million and $27.0 million for the three and nine months ended September 30, 2004, and $8.7 million and $19.5 million for the same periods of 2003, respectively. Total capital expenditures for high-rise properties, were $8.9 million and $16.0 million for the three and nine months ended September 30, 2004 and $7.7 million and $21.9 million for the same periods of 2003, respectively.
(9) | Litigation and Contingencies |
We are party to alleged moisture infiltration and resulting mold lawsuits at various apartment properties. We have negotiated a settlement with the plaintiffs in certain of these lawsuits and have recorded accruals related to these claims based on estimated legal fees associated with known and anticipated costs for our counsel and plaintiffs counsel. Additionally, we have estimated costs related to the negotiated settlements, additional resident property repair and replacement costs and temporary resident relocation expenses. It is possible that these estimates could increase or decrease as better information becomes available. Our accruals represent managements best estimate of the probable and reasonably estimable costs and are based, in part, on the status of settlement discussions, estimates obtained from third-party contractors and actual costs incurred to date. Not all plaintiffs have accepted the negotiated settlement, and further court proceedings and additional legal fees and damages may be required to fully resolve these claims.
We are aggressively pursuing recovery of a significant portion of these costs from our insurance carriers. During the nine months ended September 30, 2004, we received $5.1 million in insurance recoveries pertaining to ongoing moisture infiltration and resulting mold litigation. Of this amount, approximately $1.3 million was recorded to other income as it pertains to legal and professional fees previously expensed; the remaining $3.8 million was a reduction of previously capitalized costs. We are in litigation with our insurance providers, and therefore we have not recorded an estimate for future insurance recoveries. In addition, we will continue to pursue potential recoveries from third parties whom we believe bear responsibility for a considerable portion of the costs we have incurred. We cannot make assurances that we will obtain these
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recoveries or that our ultimate liability associated with these claims will not be material to our results of operations.
During the three months ended September 30, 2004, we incurred estimated losses associated with multiple hurricanes in Florida. As a result of this damage, we recorded a loss contingency in other expense of approximately $4.9 million associated with both wholly owned and unconsolidated apartment communities. We are currently in the process of determining what amounts associated with these losses will be recovered by insurance. Given the unique nature of these losses, we were unable to reasonably estimate the amount of any insurance recoveries as of September 30, 2004. Accordingly, the $4.9 million does not include any of the insurance recoveries we expect to receive as the outstanding claims are resolved over the next several quarters.
We are a party to various other claims and routine litigation arising in the ordinary course of business. We do not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position or results of operations.
(10) | Derivatives and Hedging Activities |
We are exposed to the impact of interest rate changes and will occasionally utilize interest rate swaps and interest rate caps as hedges with the objective of lowering our overall borrowing costs. These derivatives are designated as either cash flow or fair value hedges. We are also exposed to price risk associated with changes in the fair value of certain equity securities. We have entered into forward sale agreements to protect against a reduction in the fair value of these securities, the last of which settled in July 2004. We have designated these forward sales as fair value hedges. We do not use these derivatives for trading or other speculative purposes. Further, as a matter of policy, we only enter into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not, nor do we expect to sustain a material loss from the use of these hedging instruments.
We formally assess, both at inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. We measure hedge effectiveness by comparing the changes in the fair value or cash flows of the derivative instrument with the changes in the fair value or cash flows of the hedged item. We exclude the hedging instruments time value component when assessing hedge effectiveness. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, we will discontinue hedge accounting prospectively.
To determine the fair values of derivative and other financial instruments, we use a variety of methods and assumptions that are based on market value conditions and risks existing at each balance sheet date. These methods and assumptions include standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost. All methods of assessing fair value result in a general approximation of value, and therefore are not necessarily indicative of the actual amounts that we could realize upon disposition. During 2003, Archstone-Smith entered into forward sale agreements with an aggregate notional amount, which represents the fair value of the underlying marketable securities, of approximately $128.5 million and an aggregate fair value of the forward sale agreements of approximately $486,000. During the nine months ended September 30, 2004, we settled all of the forward sales agreements for approximately 2.8 million shares and sold 308,200 shares of marketable securities, which were not subject to forward sales agreements, resulting in an aggregate gain of approximately $24.9 million. The total net proceeds from the sale were $143.0 million, with the marketable securities basis determined using the average costs of the securities.
During June 2004, we entered into swap transactions to mitigate the risk of changes in the interest-related cash outflows on a forecasted issuance of long-term unsecured debt. At inception, these swap transactions had
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
an aggregate notional amount of $144 million and a fair value of zero. The long-term unsecured debt these swap transactions related to was issued in August 2004. At the time of the debt issuance, the fair value of the cash flow hedge was a liability of approximately $2.5 million. The termination fees associated with these cash flow hedges are included in comprehensive income and are being amortized over the term of the underlying debt as additional interest expense.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders
We have reviewed the accompanying condensed consolidated balance sheet of Archstone-Smith Trust and subsidiaries as of September 30, 2004, and the related condensed consolidated statements of earnings for the three and nine month periods ended September 30, 2004 and 2003, the condensed consolidated statement of shareholders equity and comprehensive income for the nine month period ended September 30, 2004 and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2004 and 2003. These condensed consolidated financial statements are the responsibility of Archstone-Smith Trusts management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Archstone-Smith Trust as of December 31, 2003, and the related consolidated statements of earnings, shareholders equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 9, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
KPMG LLP |
Denver, Colorado
20
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following information should be read in conjunction with Archstone-Smiths 2003 Form 10-K as well as the financial statements and notes included in Item 1 of this report.
Forward-Looking Statements
Certain statements in this Form 10-Q that are not historical facts are forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations, beliefs, assumptions, estimates and projections about the industry and markets in which we operate. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and variations of such words and similar expressions are intended to identify such forward-looking statements. Information concerning expected investment balances, expected funding sources, planned investments, forecasted dates and revenue and expense growth assumptions are examples of forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from what is expressed, forecasted or implied in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
Our operating results depend primarily on income from apartment communities, which is substantially influenced by supply and demand for apartment units, operating expense levels, property level operations and the pace and price at which we can develop, acquire or dispose of apartment communities. Capital and credit market conditions, which affect our cost of capital, also influence operating results. See Archstone-Smiths 2003 Form 10-K Item 1. Business for a more complete discussion of risk factors that could impact our future financial performance.
The Company
Archstone-Smith is a public equity REIT that is engaged primarily in the operation, development, redevelopment, acquisition, management and long-term ownership of apartment communities throughout the United States. The company is structured as an UPREIT, under which all property ownership and business operations are conducted through the Operating Trust and their subsidiaries and affiliates. We are the sole trustee and own 89.4% of the Operating Trusts common units at September 30, 2004.
Results of Operations
Overview |
In conjunction with our capital recycling strategy, rental revenues and rental expenses, including real estate taxes, will fluctuate based upon the timing and volume of dispositions, acquisitions and development lease-ups. Accordingly, our results are not only driven by the performance of our operating portfolio, but also by gains/losses from the disposition of real estate, the corresponding loss of ongoing income from assets sold, and increased income generated from acquisitions and developments. These factors all contribute to the overall financial performance of the company.
Quarter-to-Date Net Earnings Analysis |
Basic net earnings attributable to Common Shares decreased $14.2 million, or 9.3%, for the three months ended September 30, 2004 as compared to the same period in 2003. This decrease is primarily attributable to:
| A $9.7 million decrease in gains from the sale of depreciable real estate during the three months ended September 30, 2004; |
21
| The loss of rental revenues and a corresponding decrease in rental expenses due to $990.8 million and $1.6 billion in total dispositions, including Ameriton, in the nine months ended September 30, 2004 and the twelve months ended December 31, 2003, respectively; | |
| A 3.7% increase in expenses from our Same-Store portfolio for the three months ended September 30, 2004, primarily due to higher personnel and utility costs; | |
| An $8.8 million increase in Ameriton taxes consistent with increased gains during the quarter; and | |
| A $4.9 million expense associated with damage from hurricanes in Florida. |
These decreases were partially offset by:
| Increased revenues partially offset by a corresponding increase in operating expenses associated with $1.0 billion and $508.9 million in asset acquisitions that occurred during the nine months ended September 30, 2004 and the twelve months ended December 31, 2003, respectively; | |
| Increased income from the continued lease-up of new development projects; | |
| A 0.6% increase in revenues from our Same-Store portfolio for the three months ended September 30, 2004, primarily due to increases in revenues in the high rise division; | |
| A $3.8 million increase in income from unconsolidated entities, primarily related to increased gains from the sale of joint venture operating assets during the three months ended September 30, 2004; | |
| Non-operating income from the settlement of a forward contract on marketable equity securities resulting in a gain of $7.7 million; and, | |
| A $1.2 million reduction in Preferred Share dividends due to the conversion of Series A and H Preferred Shares during 2003, the conversion of Series K Preferred Shares in September 2004 and the redemption of Series D Preferred Shares in August 2004. These conversions and the redemption also eliminated the impact of the related preferred share dividends on our fixed charge coverage ratio. |
Year-to-Date Net Earnings Analysis |
Basic net earnings attributable to Common Shares increased $22.4 million, or 7.8%, during the nine months ended September 30, 2004 as compared to the same period in 2003. This increase is primarily attributable to:
| Increased revenues partially offset by a corresponding increase in operating expenses associated with $1.0 billion and $508.9 million in asset acquisitions that occurred during the nine months ended September 30, 2004 and the twelve months ended December 31, 2003, respectively; | |
| Increased income from the continued lease-up of new development projects; | |
| A $17.1 million increase in income from unconsolidated entities, primarily related to the recognition of contingent proceeds associated with the expiration of certain indemnifications related to the sale of CES, which was sold in 2002, and increased gains from the sale of joint venture operating assets during the nine months ended September 30, 2004; | |
| Non-operating income of $28.2 million, from the sale and settlement of forward contracts on marketable equity securities resulting in a gain of $24.9 million, and the disposition of our property management business, resulting in a $3.3 million gain, during the nine months ended September 30, 2004; | |
| The collection and recognition of $3.1 million related to the settlement of an ongoing CES lawsuit during 2004; | |
| A $14.6 million decrease in other expenses primarily due to moisture infiltration and resulting mold- related expenses recognized during 2003; and, |
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| A $7.9 million reduction in Preferred Share dividends due to the conversion of Series A and H Preferred Shares during 2003, the conversion of Series K Preferred Shares in September 2004 and the redemption of Series D Preferred Shares in August 2004. These conversions and the redemption also eliminated the impact of the related preferred share dividends on our fixed charge coverage ratio. |
These increases were partially offset by:
| A 0.2% decrease in Same-Store rental revenues during the nine months ended September 30, 2004 primarily due to revenue declines in non-core markets in addition to the San Francisco Bay area and Chicago; | |
| A 4.0% increase in expenses from our Same-Store portfolio for the nine months ended September 30, 2004, primarily due to increases in personnel costs and real estate taxes; | |
| The loss of rental revenues and a corresponding decrease in rental expenses due to $990.8 million and $1.6 billion in total dispositions, including Ameriton, in the nine months ended September 30, 2004 and the twelve months ended December 31, 2003, respectively; | |
| A $17.4 million decrease in gains from the sale of depreciable real estate during the nine months ended September 30, 2004; | |
| A $6.6 million increase in Ameriton taxes consistent with increased gains during the year; and | |
| A $4.9 million expense associated with damage from hurricanes in Florida. |
Apartment Community Operations |
We utilize net operating income (NOI) as the primary measure to evaluate the performance of our operating communities. NOI is defined as rental revenues less rental expenses and real estate taxes for each of our operating properties. We rely on NOI for purposes of making decisions about resource allocations and assessing segment performance. We also believe NOI is a valuable means of comparing period-to-period property performance. The following is a reconciliation of NOI to earnings from operations (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||||
Net operating income
|
$ | 142,733 | $ | 130,363 | $ | 417,106 | $ | 386,706 | |||||||||
Other income
|
4,930 | 3,833 | 13,836 | 14,690 | |||||||||||||
Depreciation on real estate investments
|
(54,119 | ) | (42,729 | ) | (154,834 | ) | (123,480 | ) | |||||||||
Interest expense
|
(46,692 | ) | (36,800 | ) | (129,476 | ) | (111,728 | ) | |||||||||
General and administrative expenses
|
(12,898 | ) | (12,558 | ) | (37,423 | ) | (38,200 | ) | |||||||||
Other expense
|
(2,809 | ) | (2,380 | ) | (6,107 | ) | (28,978 | ) | |||||||||
Earnings from operations
|
$ | 31,145 | $ | 39,729 | $ | 103,102 | $ | 99,010 | |||||||||
At September 30, 2004, investments in operating apartment communities comprised over 99% of our total real estate portfolio, based on NOI. The following table summarizes the performance of our operating portfolio (in thousands, except for percentages):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
2004 | 2003 | Variance | 2004 | 2003 | Variance | ||||||||||||||||||||
Rental revenues:
|
|||||||||||||||||||||||||
Garden communities
|
$ | 140,404 | $ | 121,407 | $ | 18,997 | $ | 402,800 | $ | 356,557 | $ | 46,243 | |||||||||||||
High-rise properties
|
83,052 | 76,510 | 6,542 | 243,816 | 227,449 | 16,367 | |||||||||||||||||||
Non-multifamily
|
1,041 | 977 | 64 | 2,577 | 2,448 | 129 | |||||||||||||||||||
Total revenues
|
224,497 | 198,894 | 25,603 | 649,193 | 586,454 | 62,739 | |||||||||||||||||||
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Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
2004 | 2003 | Variance | 2004 | 2003 | Variance | ||||||||||||||||||||
Operating expenses:
|
|||||||||||||||||||||||||
Garden communities
|
50,503 | 39,882 | 10,621 | 142,414 | 115,945 | 26,469 | |||||||||||||||||||
High-rise properties
|
31,133 | 28,499 | 2,634 | 89,329 | 83,387 | 5,942 | |||||||||||||||||||
Non-multifamily
|
128 | 150 | (22 | ) | 344 | 416 | (72 | ) | |||||||||||||||||
Total operating expenses
|
81,764 | 68,531 | 13,233 | 232,087 | 199,748 | 32,339 | |||||||||||||||||||
Net operating income:
|
|||||||||||||||||||||||||
Garden communities
|
89,901 | 81,525 | 8,376 | 260,386 | 240,612 | 19,774 | |||||||||||||||||||
High-rise properties
|
51,919 | 48,011 | 3,908 | 154,487 | 144,062 | 10,425 | |||||||||||||||||||
Non-multifamily
|
913 | 827 | 86 | 2,233 | 2,032 | 201 | |||||||||||||||||||
Total net operating income
|
142,733 | 130,363 | 12,370 | 417,106 | 386,706 | 30,400 | |||||||||||||||||||
NOI classified as discontinued operations
|
9,891 | 24,091 | (14,200 | ) | 42,029 | 101,248 | (59,219 | ) | |||||||||||||||||
NOI including discontinued operations
|
$ | 152,624 | $ | 154,454 | $ | (1,830 | ) | $ | 459,135 | $ | 487,954 | $ | (28,819 | ) | |||||||||||
Operating margin (NOI/rental revenues):
|
|||||||||||||||||||||||||
Garden communities
|
64.0 | % | 67.2 | % | (3.2 | )% | 64.6 | % | 67.5 | % | (2.9 | )% | |||||||||||||
High-rise properties
|
62.5 | % | 62.8 | % | (0.3 | )% | 63.4 | % | 63.3 | % | 0.1 | % | |||||||||||||
Average occupancy during period:
|
|||||||||||||||||||||||||
Garden communities
|
94.5 | % | 95.6 | % | (1.1 | )% | 94.9 | % | 95.0 | % | (0.1 | )% | |||||||||||||
High-rise properties
|
95.1 | % | 93.2 | % | 1.9 | % | 95.2 | % | 92.8 | % | 2.4 | % |
The following table reflects revenue, expense and NOI growth/(decline) for Same-Store communities that were fully operating during the three and nine months ended September 30 for each respective comparison period (our Same-Store population excludes Ameriton properties, as they are acquired or developed to achieve short-term opportunistic gains and therefore, the average holding period is typically much shorter than the holding period of assets operated by the REIT):
Same-Store | Same-Store | |||||||||||
Revenue | Expense | Same-Store NOI | ||||||||||
Growth/(Decline) | Growth/(Decline) | Growth/(Decline) | ||||||||||
Q3 2004 vs. Q3 2003
|
0.6 | % | 3.7 | % | (1.0 | )% | ||||||
YTD 2004 vs. YTD 2003
|
(0.2 | )% | 4.0 | % | (2.4 | )% |
Quarter-to-Date NOI Analysis |
NOI increased by $12.4 million, or 9.5%, during the three months ended September 30, 2004 as compared to the same period during 2003. Of this increase, $8.4 million was derived from our garden communities and $3.9 million resulted from our high-rise portfolio.
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The $8.4 million increase in garden NOI during the three months ended September 30, 2004 as compared to September 30, 2003 was primarily attributable to:
| The acquisition of 20 garden communities for approximately $1.3 billion since the third quarter of 2003; | |
| The ongoing lease-up and stabilization of development communities. |
This increase was partially offset by a 1.5% decline in our garden Same-Store NOI on a quarter-to-date basis primarily due to:
| Continued weakness primarily in non-core markets in addition to the San Francisco Bay area and Chicago; and | |
| A decline in garden operating margins, resulting from a 4.0% increase in Same-Store operating expenses. This expense increase resulted principally from higher personnel and utility costs, offset by lower insurance costs. |
The $3.9 million increase in high-rise NOI during the three months ended September 30, 2004 as compared to September 30, 2003 was caused by:
| The acquisition of four high-rise properties for approximately $380 million since the third quarter of 2003; | |
| The continued lease-up and stabilization of a new Chicago high-rise development property in the prior year; and |
This increase was partially offset by a 0.2% decline in high-rise Same-Store NOI on a quarter-to-date basis primarily due to:
| Lower effective rent per unit resulting from ongoing market weakness in Chicago; and | |
| A decline in high-rise operating margins resulting from a 3.4% increase in Same-Store operating expenses primarily due to higher personnel and utility costs partially offset by lower insurance costs. |
Year-to-Date NOI Analysis |
NOI increased by $30.4 million, or 7.9%, during the nine months ended September 30, 2004 as compared to the same period during 2003. Of this increase, $19.8 million was derived from our garden communities and $10.4 million resulted from our high-rise portfolio.
The $19.8 million increase in garden NOI during the nine months ended September 30, 2004 as compared to September 30, 2003 was primarily attributable to the garden acquisitions and lease-ups described above, partially offset by a 3.0% decline in garden Same-Store NOI. This decline in Same-Store NOI was due to:
| Lower effective rent per unit resulting from continued weakness in non-core markets and the San Francisco Bay area; and | |
| A 4.8% increase in Same-Store operating expenses primarily due to higher personnel costs and real estate taxes. |
The $10.4 million increase in high-rise NOI during the nine months ended September 30, 2004 as compared to September 30, 2003 was attributable to the high-rise acquisitions and lease-ups described above, partially offset by a 1.2% decline in high-rise Same-Store NOI. This decline in Same-Store NOI was due to:
| Lower effective rent per unit resulting from continued weakness primarily in Chicago; and | |
| A 2.8% increase in Same-Store operating expenses primarily due to higher personnel costs and real estate taxes partially offset by lower ground lease expense resulting from the favorable outcome on a lease interpretation. |
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NOI including Discontinued Operations |
NOI for our entire portfolio, including properties classified within discontinued operations, decreased by $1.8 million and $28.8 million during the three and nine months ended September 30, 2004 as compared to the same periods during 2003, respectively. This net decrease in NOI was primarily attributable to:
| The loss of NOI from the disposition of $990.8 million in operating assets, including Ameriton, during the nine months ended September 30, 2004; | |
| The loss of NOI from the disposition of $1.6 billion of operating assets, including Ameriton, during the twelve months ended December 31, 2003; and | |
| A decline in Same-Store NOI of 1.0% and 2.4% for the three and nine months ended September 30, 2004 compared to the same periods in prior year, respectively. |
This decrease was partially offset by increased NOI from the acquisitions, lease-ups and redevelopments described above, as well as an increase in NOI associated with assets classified as held-for-sale, as certain of these assets were either under redevelopment or in lease-up during the prior year.
Other Income |
Other income increased $1.1 million, or 28.6%, for the three months ended September 30, 2004 as compared to the same period in 2003, principally due to a $2.4 million gain on sale of land. This was partially offset by a decrease in the collection of indemnified CES accounts receivable over 120 days during 2004 as compared to 2003, and the loss of dividend income on stock investments recognized during the three months ended September 30, 2003.
The $0.9 million, or 5.8% decrease during the nine months ended September 30, 2004 as compared to the same period in 2003 is principally attributable to a decrease in the collection of indemnified CES accounts receivable over 120 days during 2004 as compared to 2003, and the loss of dividend income on stock investments recognized during the nine months ended September 30, 2003. This was partially offset by the collection and recognition of $3.1 million from the settlement of an ongoing CES lawsuit, recognition of $1.3 million in insurance recoveries and a $2.4 million gain on sale of land during the nine months ended September 30, 2004.
Depreciation Expense |
Depreciation expense increased $11.4 million, or 26.7% and $31.4 million, or 25.4%, during the three and nine months ended September 30, 2004 as compared to the same periods in 2003, respectively. These increases are primarily due to a greater number of operating assets classified within discontinued operations during the prior year resulting in a greater depreciation allocation of $5.1 million and $18.7 million during the three and nine months ended September 30, 2003, respectively, as compared to the same periods in 2004.
Including depreciation expense on properties classified within discontinued operations, depreciation expense increased $6.3 million, or 12.8%, and $12.6 million, or 8.4%, during the three and nine months ended September 30, 2004 as compared to the same periods in 2003, respectively. These increases are principally attributable to the amortization of the intangible value of lease agreements obtained in connection with apartment community acquisitions, which are amortized over the average life of the underlying lease. During the three and nine months ended September 30, 2004, amortization of these intangible assets were $4.2 million and $12.4 million, respectively. Depreciation expense also increased due to our overall depreciable basis associated with the disposition of real estate assets with lower depreciable basis and the reinvestment of these proceeds into assets with a higher depreciable basis.
Interest Expense |
Interest expense increased $9.9 million, or 26.9%, and $17.7 million, or 15.9%, for the three and nine months ended September 30, 2004 as compared to the same period in 2003, respectively. These increases are principally attributable to a greater number of operating assets classified within discontinued operations during
26
Including interest expense on properties reflected in discontinued operations, interest expense increased $2.0 million, or 3.9% and decreased $6.8 million, or 4.2%, during the three and nine months ended September 30, 2004, as compared to the same period in 2003, respectively. The increase for the three months ended September 30, 2004 is consistent with an increase in the average debt outstanding during the three months ended September 30, 2004 as compared to the same period in 2003. The decrease for the nine months ended September 30, 2004 is primarily the result of a reduction in the weighted average debt rates during the nine months ended September 30, 2004 and a reduction in our average debt balances during 2004 as compared to 2003 consistent with an overall reduction in our leverage levels.
Other Expenses |
Other expense increased $0.4 million, or 18.0%, for the three months ended September 30, 2004, as compared to the same period in 2003 due to a $3.8 million expense associated with damage from hurricanes in Florida. These increases were partially offset by moisture infiltration costs of $1.3 million during 2003.
Other expense decreased $22.9 million, or 78.9%, for the nine months ended September 30, 2004 as compared to the same period in 2003 primarily due to a $27.8 million moisture infiltration charges in 2003 compared to $1.0 million in 2004. This increase was partially offset by a $3.8 million loss contingency associated with damage from hurricanes in Florida.
Income from Unconsolidated Entities |
Income from unconsolidated entities increased $3.8 million and $17.1 million during the three and nine months ended September 30, 2004 as compared to the same periods during 2003, respectively, primarily due to gains from the sale of joint venture operating communities recognized during the three and nine months ended September 30, 2004 and the recognition of contingent proceeds from the expiration of certain indemnifications related to the sale of CES during the second quarter of 2004. This was partially offset by $1.1 million in hurricane losses from damage to unconsolidated communities.
Other Non-Operating Income |
Other non-operating income increased by $7.7 million and $28.2 million during the three and nine months ended September 30, 2004 as compared to the same periods in 2003 due to the recognition of $7.7 million and $24.9 million in gains from the sale and settlement of marketable securities during the three and nine months ended September 30, 2004, respectively. The nine months ended September 30, 2004 also include a $3.3 million gain from the sale of our property management business. We had no non-operating income during the three or nine months ended September 30, 2003.
Preferred Share Dividends |
The $1.2 million and $7.9 million decrease in Preferred Share dividends for the three and nine months ended September 30, 2004, respectively, is primarily due to the conversion of Series H Preferred Shares into Common Shares in May 2003, the conversion of Series A Preferred Shares into Common Shares in December 2003, the conversion of Series K Preferred Shares into Common Shares in September 2004 and the redemption of our Series D Preferred Shares in August 2004. These savings were partially offset by the recognition of $1.7 million of issuance costs related to the Series D Preferred Shares.
Discontinued Operations |
The results of operations for properties sold during the period or designated as held for sale at the end of the period are required to be classified as discontinued operations. The property specific components of net earnings that are classified as discontinued operations include rental revenues, rental expenses, real estate taxes, depreciation expense, minority interest, income taxes and interest expense (actual interest expense for
27
Consistent with our capital recycling program, we had 12 operating apartment communities, representing 3,380 units, classified as held for sale under the provisions of SFAS 144, as of September 30, 2004. Accordingly, we have classified the operating earnings from these 12 properties within discontinued operations for the three and nine months ended September 30, 2004 and 2003. During the nine months ended September 30, 2004, we sold 23 REIT and Ameriton operating communities. The operating results of these 23 communities and the related gain/ loss on sale are also included in discontinued operations for both 2004 and 2003. During the twelve months ended December 31, 2003, we sold 48 operating communities. The operating results of these 48 operating communities and the related gain/ loss on the sale are also included in discontinued operations for the three and nine months ended September 30, 2003. The following is a summary of earnings from discontinued operations (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Rental revenues
|
$ | 20,284 | $ | 48,686 | $ | 80,900 | $ | 185,450 | ||||||||
Rental expenses
|
(8,314 | ) | (18,200 | ) | (29,215 | ) | (64,301 | ) | ||||||||
Real estate taxes
|
(2,079 | ) | (6,395 | ) | (9,656 | ) | (19,901 | ) | ||||||||
Depreciation on real estate investments
|
(1,579 | ) | (6,652 | ) | (9,173 | ) | (27,886 | ) | ||||||||
Interest expense(1)
|
(6,873 | ) | (14,731 | ) | (25,042 | ) | (49,595 | ) | ||||||||
Income taxes from taxable REIT subsidiary sales
|
(19,068 | ) | (8,063 | ) | (18,172 | ) | (11,005 | ) | ||||||||
Provision for possible loss on real estate
investment
|
| | | (3,714 | ) | |||||||||||
Debt extinguishment costs related to dispositions
|
| (905 | ) | (1,120 | ) | (2,796 | ) | |||||||||
Allocation of minority interest
|
(12,290 | ) | (15,849 | ) | (23,353 | ) | (29,872 | ) | ||||||||
Gains on disposition of taxable REIT subsidiary
real estate investments, net
|
55,417 | 23,641 | 69,930 | 31,260 | ||||||||||||
Gain on dispositions of REIT real estate
investments, net
|
77,396 | 118,893 | 156,365 | 212,458 | ||||||||||||
Earnings from discontinued apartment communities
|
$ | 102,894 | $ | 120,425 | $ | 191,464 | $ | 220,098 | ||||||||
(1) | The portion of interest expense included in discontinued operations that is allocated to properties based on the companys leverage ratio was $4.6 million and $11.5 million for the three months ended September 30, 2004 and 2003, and $17.0 million and $35.4 million for the nine months ended September 30, 2004 and 2003, respectively. |
Liquidity and Capital Resources
We are committed to maintaining a strong balance sheet and preserving our financial flexibility, which we believe enhances our ability to capitalize on attractive investment opportunities as they become available. As a result of the significant cash flow generated by our operations, current cash positions, the available capacity under our unsecured credit facilities, gains from the disposition of real estate, and proceeds from the July 2004 settlement of marketable equity securities, we believe our liquidity and financial condition are sufficient to meet all of our reasonably anticipated cash flow needs during 2004.
Operating Activities |
Net cash flow provided by operating activities increased $20.5 million, or 8.2%, for the nine months ended September 30, 2004 as compared to the same period of 2003. This increase was principally due to: (i) lower moisture infiltration and resulting mold-related expenses during the nine months ended September 30, 2004,
28
Investing and Financing Activities |
For the nine months ended September 30, 2004, cash flows from investing activities decreased by $244.7 million, or 50.7%, as compared to the same period in 2003. This was due to a $280.6 million decrease in net proceeds from the disposition of real estate assets during 2004 as compared to the same period of 2003. Additionally, we spent an additional $132.6 million for acquisitions and development activity during 2004 as compared to 2003. The disposition, acquisition and development amounts are net of tax-deferred exchange proceeds. The decrease is partially offset by proceeds from the sale of marketable securities during the nine months ended September 30, 2004, which is included in Other, net in the accompanying Condensed Consolidated Statement of Cash Flows.
Cash flows used in financing activities decreased by $376.3 million, or 53.0%, as compared to the same period in 2003. This decrease is primarily due to increased borrowings to finance a net increase in real estate investments during the nine months ended September 30, 2004 as compared to the prior year, partially offset by an increase in cash used to repurchase Common and Preferred Shares.
Our most significant non-cash investing and financing activities during the nine months ended September 30, 2004 and 2003 included: (i) the issuance of A-1 Common Units and Common Shares in exchange for real estate in 2004, (ii) the conversion of A-1 Common Units to Common Shares in both 2004 and 2003, (iii) the assumption of mortgages payable upon the purchase of apartment communities in 2004 and 2003, and (vi) the conversion of the Series K Preferred Shares to Common Shares in 2004.
Scheduled Debt Maturities and Interest Payment Requirements |
We have structured the repayments of our long-term debt to create a relatively level principal maturity schedule to avoid significant repayment obligations in any year, which would impact our financial flexibility. As of September 30, 2004, we have approximately $25.4 million of long-term debt maturing during the remainder of 2004, $323.3 million maturing during 2005 and $359.7 million maturing during 2006.
At November 3, 2004, we had $910.0 million of liquidity, including cash, restricted cash in tax-deferred escrows and capacity on our unsecured credit facilities. Our unsecured credit facilities, Long-Term Unsecured Debt and mortgages payable had effective average interest rates of 2.11%, 6.23% and 5.45%, respectively, during the three months ended September 30, 2004. These rates give effect to the impact of interest rate swaps and caps, as applicable.
We were in compliance with all financial covenants pertaining to our debt instruments during the period ended September 30, 2004.
Shareholder Dividend Requirements |
Based on anticipated distribution levels for 2004 and the number of shares and units outstanding as of September 30, 2004, we anticipate that we will pay distributions and dividends of $393.3 million in the aggregate during 2004, which includes the effect of the redemption of our Series D Preferred Shares, Series F Preferred Units, and a portion of our Series E Preferred Units, during the third and fourth quarter of 2004. This amount represents distributions and dividends on our Common Shares, all preferred shares and all minority interests, including Class A-1 and B Common Units.
Planned Investments |
Following is a summary of unfunded planned investments as of September 30, 2004, including amounts for Ameriton (dollar amounts in thousands). The amounts labeled Discretionary represent future invest-
29
Planned Investments | |||||||||||||
Units | Discretionary | Committed | |||||||||||
Communities under redevelopment
|
2,201 | $ | 6,238 | $ | 33,131 | ||||||||
Communities under construction(1)
|
4,064 | | 367,202 | ||||||||||
Communities In Planning and owned(2)
|
2,713 | 410,486 | | ||||||||||
Communities In Planning and Under Control
|
133 | 69,054 | | ||||||||||
Community acquisitions under contract
|
1,343 | 253,352 | | ||||||||||
Total
|
10,454 | $ | 739,130 | $ | 400,333 | ||||||||
In addition to the planned investments noted above, we expect to make additional investments relating to planned expenditures on recently acquired communities, as well as recurring expenditures to improve and maintain our established operating communities.
We anticipate completion of most of the communities that are currently under construction and the planned operating community improvements during the remainder of 2004 and 2005. We expect to start construction on approximately $73 million, based on Total Expected Investment, of REIT communities that are currently classified as In Planning during the remainder of 2004. We expect to fund the costs of these development projects over a two-to-three year period following the date construction commences. No assurances can be given that communities we do not currently own will be acquired or that planned developments will actually occur. In addition, actual costs incurred could be greater or less than our current estimates.
Funding Sources |
We anticipate financing our planned investment and operating needs primarily with cash flow from operating activities, disposition proceeds from our capital redeployment program and borrowings under our unsecured credit facilities, prior to arranging long-term financing. We anticipate that net cash flow from operating activities and gains on dispositions during 2004 will be sufficient to fund anticipated distribution requirements and debt principal amortization payments. To fund planned investment activities, we had $695.0 million in available capacity on our unsecured credit facilities, $20.0 million of cash in tax-deferred exchange escrow and $195.0 million of cash on hand at November 3, 2004. In addition, we expect to complete the disposition of $1.1 - $1.4 billion of REIT operating communities during 2004.
In April 2004, the Operating Trust filed a shelf registration statement on Form S-3 to register an additional $450 million in unsecured debt securities. This registration statement was declared effective in April 2004. At November 3, 2004, Archstone-Smith and the Operating Trust had $900 million available in shelf registered debt and equity securities which can be issued subject to our ability to affect offerings on satisfactory terms based on prevailing market conditions.
Other Contingencies and Hedging Activities |
We are party to alleged moisture infiltration and resulting mold lawsuits at various apartment properties. We have negotiated a settlement with the plaintiffs in certain of these lawsuits and have recorded accruals related to these claims based on estimated legal fees associated with known and anticipated costs for our counsel and plaintiffs counsel. Additionally, we have estimated costs related to the negotiated settlements, additional resident property repair and replacement costs and temporary resident relocation expenses. It is possible that these estimates could increase or decrease as better information becomes available. Our accruals represent managements best estimate of the probable and reasonably estimable costs and are based, in part, on the status of settlement discussions, estimates obtained from third-party contractors and actual costs
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We are aggressively pursuing recovery of a significant portion of these costs from our insurance carriers. During the nine months ended September 30, 2004, we received $5.1 million in insurance recoveries pertaining to ongoing moisture infiltration and resulting mold litigation. Of this amount, approximately $1.3 million was recorded to other income as it pertains to legal and professional fees previously expensed; the remaining $3.8 million was a reduction of previously capitalized costs. We are in litigation with our insurance providers, and therefore we have not recorded an estimate for future insurance recoveries. In addition, we will continue to pursue potential recoveries from third parties whom we believe bear responsibility for a considerable portion of the costs we have incurred. We cannot make assurances that we will obtain these recoveries or that our ultimate liability associated with these claims will not be material to our results of operations.
During the three months ended September 30, 2004, we incurred estimated losses associated with multiple hurricanes in Florida. As a result of this damage, we recorded a loss contingency in other expense of approximately $4.9 million associated with both wholly owned and unconsolidated apartment communities. We are currently in the process of determining what amounts associated with these losses will be recovered by insurance. Given the unique nature of these losses, we were unable to reasonably estimate the amount of any insurance recoveries as of September 30, 2004. Accordingly, the $4.9 million does not include any of the insurance recoveries we expect to receive as the outstanding claims are resolved over the next several quarters.
We are a party to various other claims and routine litigation arising in the ordinary course of business. We do not believe that the results of any such claims or litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position or results of operations.
As a general matter, concern about indoor exposure to mold has been increasing, as such exposure has been alleged to have a variety of adverse effects on health. There has been an increasing number of lawsuits in our industry against owners and managers of apartment communities relating to moisture infiltration and resulting mold. Whenever we receive a resident complaint concerning moisture infiltration, condensation or mold problems and/or become aware that an air quality concern exists, we implement corrective measures in accordance with guidelines and protocols we have developed with the assistance of indoor air quality experts. We are working proactively with all of our residents to resolve all moisture infiltration and mold-related issues. However, we can make no assurance that additional material legal claims relating to moisture infiltration and the presence of, or exposure to, mold will not arise in the future.
The terms of our property and general liability policies after June 30, 2002, may exclude certain mold-related claims. Should an uninsured loss arise against the company, we may be required to use our own funds to resolve the issue, including litigation costs.
We are exposed to the impact of interest rate changes and will occasionally utilize interest rate swaps and interest rate caps as hedges with the objective of lowering our overall borrowing costs. These derivatives are designated as either cash flow or fair value hedges. We are also exposed to price risk associated with changes in the fair value of certain equity securities. We have entered into forward sale agreements to protect against a reduction in the fair value of these securities, the last of which settled in July 2004. We have designated these forward sales as fair value hedges. We do not use these derivatives for trading or other speculative purposes. Further, as a matter of policy, we only enter into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not, nor do we expect to sustain a material loss from the use of these hedging instruments.
We formally assess, both at inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. We measure hedge effectiveness by comparing the changes in the fair value or cash flows of the derivative instrument with the changes in the fair value or cash flows of the hedged item. We exclude the hedging instruments time value component when assessing hedge effectiveness. If it is determined that a derivative is not highly effective as a
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To determine the fair values of derivative and other financial instruments, we use a variety of methods and assumptions that are based on market value conditions and risks existing at each balance sheet date. These methods and assumptions include standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost. All methods of assessing fair value result in a general approximation of value, and therefore are not necessarily indicative of the actual amounts that we could realize upon disposition. During 2003, Archstone-Smith entered into forward sale agreements with an aggregate notional amount, which represents the fair value of the underlying marketable securities, of approximately $128.5 million and an aggregate fair value of the forward sale agreements of approximately $486,000. During the nine months ended September 30, 2004, we settled all of the forward sales agreements for approximately 2.8 million shares and sold 308,200 shares of marketable securities, which were not subject to forward sales agreements, resulting in an aggregate gain of approximately $24.9 million. The total net proceeds from the sale were $143.0 million, with the marketable securities basis determined using the average costs of the securities.
During June 2004, we entered into swap transactions to mitigate the risk of changes in the interest-related cash outflows on a forecasted issuance of long-term unsecured debt. At inception, these swap transactions had an aggregate notional amount of $144 million and a fair value of zero. The long-term unsecured debt these swap transactions related to was issued in August 2004. At the time of the debt issuance, the fair value of the cash flow hedge was a liability of approximately $2.5 million. The termination fees associated with these cash flow hedges are included in comprehensive income and are being amortized over the term of the underlying debt as additional interest expense.
Critical Accounting Policies
We define critical accounting policies as those accounting policies that require our management to exercise their most difficult, subjective and complex judgments. Our management has discussed the development and selection of all of these critical accounting policies with our audit committee, and the audit committee has reviewed the disclosure relating to these policies. Our critical accounting policies relate principally to the following key areas:
Internal Cost Capitalization |
We have an investment organization that is responsible for development and redevelopment of apartment communities. Consistent with GAAP, all direct and certain indirect costs, including interest and real estate taxes, incurred during development and redevelopment activities are capitalized. Interest is capitalized on real estate assets that require a period of time to prepare them for their intended use. The amount of interest capitalized is based upon the average amount of accumulated development expenditures and indirect project costs associated with our development and redevelopment activities. Indirect project costs consist primarily of personnel costs associated with construction administration and development accounting, legal fees, and various office costs that clearly relate to projects under development. Because the estimation of capitalizable internal costs requires managements judgment, we believe internal cost capitalization is a critical accounting estimate.
Valuation of Real Estate |
Long-lived assets to be held and used are carried at cost and evaluated for impairment when events or changes in circumstances indicate such an evaluation is warranted. We also evaluate assets for potential impairment when we deem them to be held for sale. Valuation of real estate is considered a critical accounting estimate because the evaluation of impairment and the determination of fair values involve a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate value, and therefore, the carrying amounts of our real estate.
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When determining if there is an indication of impairment, we estimate the assets NOI over the anticipated holding period on an undiscounted cash flow basis and compare this amount to its carrying value. Estimating the expected NOI and holding period requires significant management judgment. If it is determined that there is an indication of impairment for assets to be held and used, or if an asset is deemed to be held for sale, we then determine the assets fair value.
The apartment industry uses capitalization rates as the primary measure of fair value. Specifically, annual NOI for a community is divided by an estimated capitalization rate to determine the fair value of the community. Determining the appropriate capitalization rate requires significant judgment and is typically based on many factors including the prevailing rate for the market or submarket as well as the asset type, age, and quality. Further, capitalization rates can fluctuate up or down due to a variety of factors in the overall economy or within local markets. If the actual capitalization rate for a community is significantly different from our estimated rate, the impairment evaluation for an individual asset could be materially affected. Historically we have had limited and infrequent impairment charges, and the majority of our apartment community sales have produced gains. We evaluate a real estate asset for potential impairment when events or changes in circumstances indicate that its carrying amount may not be recoverable.
Capital Expenditures and Depreciable Lives |
We incur costs relating to redevelopment initiatives, revenue enhancing and expense reducing capital expenditures, and recurring capital expenditures that are capitalized as part of our real estate. These amounts are capitalized and depreciated over estimated useful lives determined by management. We allocate the cost of newly acquired properties between net tangible and identifiable intangible assets. The primary intangible asset associated with an apartment community acquisition is the value of the existing lease agreements. When allocating cost to an acquired property, we estimate value of the land, building and fixtures assuming the property is vacant and then allocate costs to the intangible value of the existing lease agreements. We depreciate the building and fixtures based on the expected useful life of the asset and amortize the intangible value of the lease agreements over the average remaining life of the existing leases.
Determining whether expenditures meet the criteria for capitalization, the assignment of depreciable lives and determining the appropriate amounts to allocate between tangible and intangible assets for property acquisitions requires our management to exercise significant judgment and is therefore considered a significant accounting estimate.
Pursuit Costs |
We incur costs relating to the potential acquisition of real estate, which we refer to as pursuit costs. To the extent that these costs are identifiable with a specific property and would be capitalized if the property were already acquired, the costs are accumulated by project and capitalized in the Other Asset section of the balance sheet. If these conditions are not met, the costs are expensed as incurred. Capitalized costs include but are not limited to earnest money, option fees, environmental reports, traffic reports, surveys, photos, blueprints, direct and incremental personnel costs and legal costs. Upon acquisition, the costs are included in the basis of the acquired property. When it becomes probable that a prospective acquisition will not be acquired, the accumulated costs for the property are charged to other expense on the statement of earnings in the period such a determination is made. Because of the inherent judgment involved in evaluating whether a prospective property will ultimately be acquired, we believe capitalizable pursuit costs are a critical accounting estimate.
Moisture Infiltration and Resulting Mold Remediation Costs |
Accounting for correction of moisture infiltration and mold remediation costs is considered a critical accounting estimate because significant judgment is required by management to determine when to record a liability, how much should be accrued as a liability, and whether such costs meet the criteria for capitalization.
We estimate and accrue costs related to correcting the moisture infiltration and remediating resulting mold when we anticipate incurring costs because of the threat of litigation or the assertion of a legal claim. When we incur costs at our own discretion, the cost is recognized as incurred. Moisture infiltration and
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There are considerable uncertainties that affect our ability to estimate the ultimate cost of correction and remediation efforts. These uncertainties include, but are not limited to, assessing the exact nature and extent of the issues, the extent of required remediation efforts and the varying costs of alternative strategies for addressing the issues. Any accrual represents managements best estimate of the probable and reasonably estimable costs and is based, in part, on estimates obtained from third-party environmental contractors and actual costs incurred to date. It is possible that these estimates could increase or decrease as better information becomes available.
We accrue for litigation settlement costs when a loss contingency is both probable and the amount of loss can be reasonably estimated. Estimating the likelihood and amount of a loss contingency requires significant judgment by management and is therefore considered a critical accounting estimate. We base these estimates on the best information available as of the end of the period, which includes, but is not limited to, estimates obtained from third-party contractors as well as actual costs incurred to date. It is possible that these estimates could increase or decrease as better information becomes available. We generally recognize legal expenses as incurred; however, if such fees are related to the accrual for a known legal settlement, we accrue for the related incurred and anticipated legal fees at the same time we accrue the cost of settlement.
Off Balance Sheet Arrangements
Investments in entities that are not controlled through majority economic interest are not consolidated and are reported as investments in unconsolidated entities. Our investments in unconsolidated entities at September 30, 2004, consisted of $95.8 million in real estate joint ventures, which generally consist of our percentage ownership in the equity of the joint ventures.
Consolidated Engineering Services is a service business that we acquired during the Smith Merger in 2001, which prior to its sale had been reported as an unconsolidated entity in our financial statements. CES provides engineering services for commercial and residential real estate across the country. On December 19, 2002, CES was sold to a third party for $178 million in cash, and we recorded a $35.4 million net gain on the sale of the business or $0.16 per share on a fully diluted basis. Excluded from the gain was approximately $6.7 million in contingent proceeds related to indemnification of accounts receivable over 120 days. Also excluded from the gain were liabilities for certain indemnifications that expired during June 2004. During the nine months ended September 30, 2004 and 2003, we recognized $923,000 and $5.1 million related to the collection of accounts receivable over 120 days, respectively. During the nine months ended September 30, 2004, we also recognized $3.2 million related to the expiration of certain indemnified liabilities recorded as part of the CES sale.
Smith Management Construction is a service business that we acquired in the Smith Merger during 2001. We sold SMC during February 2003 to former members of SMCs senior management. Prior to the sale, we reported SMC as an unconsolidated entity in our financial statements. We received two notes receivable totaling $5.8 million and bearing an interest rate of 7.0% as consideration for the sale. The first note for $3.5 million has principal payments beginning in August 2003 with payment in full by February 2008. The second note for $2.3 million was fully repaid along with all accrued interest due during May 2003. During the second quarter of 2004, we recognized the divestiture since our responsibilities under the majority of outstanding performance guarantees, which pertain to ongoing construction projects at the time of sale, expired.
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Contractual Commitments
The following table summarizes information contained in Managements Discussion and Analysis of Financial Condition and Results of Operations and in our financial statements in this Form 10-Q regarding contractual commitments (amounts in millions):
2005 | 2007 | 2009 | |||||||||||||||||||
2004 | and 2006 | and 2008 | thru 2095 | Total | |||||||||||||||||
Scheduled long-term debt maturities
|
$ | 25.4 | $ | 683.0 | $ | 999.3 | $ | 2,404.4 | $ | 4,112.1 | |||||||||||
Unsecured credit facilities(1)
|
| | | | | ||||||||||||||||
Development and redevelopment expenditures
|
80.4 | 319.9 | | | 400.3 | ||||||||||||||||
Performance bond guarantees(2)
|
18.6 | 19.7 | | 1.2 | 39.5 | ||||||||||||||||
Lease commitments and other(3)
|
7.3 | 15.1 | 13.5 | 352.6 | 388.5 | ||||||||||||||||
Total
|
$ | 131.7 | $ | 1,037.7 | $ | 1,012.8 | $ | 2,758.2 | $ | 4,940.4 | |||||||||||
(1) | The $600 million unsecured facility matures on October 30, 2006, with a one-year extension option available at our discretion. |
(2) | Archstone-Smith, our subsidiaries and investees have not been required to perform on these guarantees, nor do we anticipate being required to perform on such guarantees. Since we believe that our risk of loss under these contingencies is remote, no accrual for potential loss has been made in the accompanying financial statements. We are still obligated for performance bond guarantees for CES and SMC subsequent to their sale, but there are recourse provisions available to us to recover any potential future payments from the new owners of CES and SMC. |
(3) | Lease commitments relate principally to ground lease payments as of September 30, 2004. |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Our capital structure includes the use of both fixed and floating rate debt and we are exposed to the impact of changes in interest rates. We also use interest rate swap and interest rate cap derivative financial instruments in order to modify interest rate characteristics of our debt in an effort to minimize our overall borrowing costs. We do not utilize these derivative financial instruments for speculative purposes. To assist us in evaluating our interest rate risk and counter-party credit risk, we use the services of third party consultants.
As a result of our balance sheet management philosophy, we have managed our debt maturities to create a relatively level principal maturity schedule, without significant repayment obligations in any year. If current market conditions do not permit us to replace maturing debt at comparable interest rates, we are not exposed to significant portfolio level interest rate volatility due to the management of our maturity schedules. There have been no material changes to our market risk profile since December 31, 2003. See Item 7a in our 2003 Form 10-K for detailed information about the qualitative and quantitative disclosures about our market risk.
Item 4. | Controls and Procedures |
An evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were, to the best of their knowledge, effective as of September 30, 2004, to ensure that information required to be disclosed in reports that are filed or submitted under the Securities Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to September 30, 2004, there were no significant changes in the Operating Trusts disclosure controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
We are subject to the following claims in connection with moisture infiltration and resulting mold issues at high-rise properties in Southeast Florida.
Henriques, et al. v. Archstone-Smith Operating Trust, et al., filed on August 27, 2002 (the Henriques Claim), in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, on behalf of a class of residents at Harbour House. We have reached a court-approved settlement with the plaintiffs in this matter. The case alleged that water infiltration and resulting mold contamination at the property had been caused by faulty air-conditioning and had resulted in both personal injuries to the plaintiffs and damage to their property. Based on the settlement, we have recorded a liability for estimated legal fees associated with known and anticipated costs for our counsel and plaintiffs counsel, as well as estimated settlement costs. Not all plaintiffs have accepted the court-approved settlement, and some of these individuals have filed separate lawsuits. We are in the process of determining the merits of their claims and therefore, potential legal fees and damages associated with these claims are not contemplated in our current accrual. See Managements Discussion and Analysis of Financial Conditions and Results of Operations in this Quarterly Report for further discussion regarding this accrual.
Santos, et al. v. Archstone-Smith Operating Trust, et al., filed on February 13, 2003, in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, on behalf of a class of residents at Harbour House. The plaintiffs in this case make substantially the same allegations as those made in the Henriques claim and seek both injunctive relief and unspecified monetary and punitive damages. We believe this case to be without merit, and given our evaluation of the claims with the individuals actually represented by opposing counsel, we have recorded a liability for estimated legal fees associated with known and anticipated costs for our counsel and plaintiffs counsel, as well as estimated settlement costs. See Managements Discussion and Analysis of Financial Conditions and Results of Operations in this Quarterly Report for further discussion regarding this accrual.
Michel, et al., v. Archstone-Smith Operating Trust, et al., was filed on May 9, 2003, in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, on behalf of the class of residents at the property. The plaintiffs in this case make substantially the same allegations as those made in the Henriques claim and seek both injunctive relief and unspecified monetary and punitive damages. In connection with the sale of this asset on August 31, 2004, the purchaser assumed any liabilities arising from this action and ASN and its affiliates have been dismissed with prejudice from this action.
Semidey, et al., v. Archstone-Smith Operating Trust, et al., was filed on June 9, 2003, in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, on behalf of the class of residents at the property. The plaintiffs in this case made substantially the same allegations as those made in the Henriques claim and sought both injunctive relief and unspecified monetary and punitive damages. Although we were never served with this complaint, we have reached a settlement with a majority of the represented residents and therefore this complaint was dismissed without prejudice. We have recorded a liability consistent with the settlement reached in this claim.
Although we continued discussions with the remaining represented residents in the Semidey case, plaintiffs counsel elected to re-file a class action suit on behalf of these individuals (Sullivan, et al., v. Archstone-Smith Operating Trust, et al.) on July 6, 2004 in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. This is based upon the same allegation as the Semidey action and seeks the same relief, with the exception of damages for bodily injury, which are excluded. Plaintiffs counsel advised us that they intended to seek recovery for any bodily injury claims through individual lawsuits. We have since settled the claims of all of the named plaintiffs in this action as well as with all but eleven of the individuals represented by opposing counsel. On October 27, 2004, Plaintiffs counsel amended the Semidey complaint to name new class representatives in Bercovits et al., v. Archstone-Smith Operating Trust, et al.
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We are party to various other claims and routine litigation arising in the ordinary course of business. We do not believe that the results of any such claims and litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position or results of operations.
Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
The following table summarizes repurchases of our Common Shares (amounts in thousands):
Total Number | |||||||||||||||||
of Shares | Maximum Approximate | ||||||||||||||||
Number of | Average | Purchased as | Dollar Value That | ||||||||||||||
Shares | Price Paid | Part of Publicly | May Yet Be Purchased | ||||||||||||||
Period | Purchased | Per Share | Announced Plan | Under the Plan | |||||||||||||
7/1/04 - 7/31/04
|
| | | $ | 202,452 | (1) | |||||||||||
8/1/04 - 8/31/04
|
112 | $ | 29.51 | (2) | 112 | 199,141 | |||||||||||
9/1/04 - 9/30/04
|
21 | 31.27 | 21 | 198,497 | |||||||||||||
Total
|
133 | 133 | |||||||||||||||
(1) | On April 22, 2004, the Board increased the total authorized for share repurchases to $255 million. |
(2) | Represents a per share price of $29.78, plus commissions |
Item 4. | Submission of Matters to a Vote of Security Holders |
None
Item 6. | Exhibits |
(a) Exhibits:
10 | .1 | Form of Non-Qualified Share Option Agreement for Archstone-Smith Trust 2001 Long-Term Incentive Plan | ||
10 | .2 | Form of Restricted Share Unit Agreement for Archstone-Smith Trust 2001 Long-Term Incentive Plan | ||
10 | .3 | Form of Restricted Share Unit Agreement for Archstone-Smith Trust Equity Plan for Outside Trustees | ||
12 | .1 | Computation of Ratio of Earnings to Fixed Charges | ||
12 | .2 | Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends | ||
15 | .1 | Consent of Independent Public Accounting Firm | ||
31 | .1 | Certification of Chief Executive Officer | ||
31 | .2 | Certification of Chief Financial Officer | ||
32 | .1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32 | .2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements 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.
ARCHSTONE-SMITH TRUST |
BY: | /s/ R. SCOT SELLERS |
|
|
R. Scot Sellers | |
Chairman and Chief Executive Officer |
By: | /s/ CHARLES E. MUELLER, JR. |
|
|
Charles E. Mueller, Jr. | |
Chief Financial Officer | |
(Principal Financial Officer) |
By: | /s/ MARK A. SCHUMACHER |
|
|
Mark A. Schumacher | |
Controller and Senior Vice-President | |
(Principal Accounting Officer) |
Date: November 8, 2004
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INDEX TO EXHIBITS
Exhibit | ||||
No. | Description | |||
10 | .1 | Form of Non-Qualified Share Option Agreement for Archstone-Smith Trust 2001 Long-Term Incentive Plan | ||
10 | .2 | Form of Restricted Share Unit Agreement for Archstone-Smith Trust 2001 Long-Term Incentive Plan | ||
10 | .3 | Form of Restricted Share Unit Agreement for Archstone-Smith Trust Equity Plan for Outside Trustees | ||
12 | .1 | Computation of Ratio of Earnings to Fixed Charges | ||
12 | .2 | Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends | ||
15 | .1 | Consent of Independent Public Accounting Firm | ||
31 | .1 | Certification of Chief Executive Officer | ||
31 | .2 | Certification of Chief Financial Officer | ||
32 | .1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32 | .2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |