ITEM 1. BUSINESS
Oasis Residential, Inc. (the "Company") is a fully integrated Real Estate Investment Trust (a "REIT"), with in-house acquisition, development, property management and finance expertise. The Company is strategically focused on the development and operation of apartment communities in Las Vegas and Reno, Nevada, Denver, Colorado and Southern California. The Company is the largest active developer and owner of predominantly upscale apartment communities in the greater Las Vegas metropolitan area based on the number of apartment units developed and owned. The Company is active in the development of apartment communities in Las Vegas and Reno, Nevada and Denver, Colorado, and has entered into an agreement to purchase a parcel of land in Mission Viejo, California on which it intends to develop an apartment community. Oasis commenced operations as a public company in October 1993 with an initial portfolio of 23 apartment communities containing 5,215 units and a 30,000 square foot commercial center in Henderson, Nevada in which the Company's headquarters is located (the "Commercial Center"). As of January 31, 1997, the Company owned and operated 49 apartment communities comprising a total of 13,428 apartment units (the "Properties") with an average age of less than seven years, as well as the Commercial Center. Forty-five of the Properties are located in the greater Las Vegas area. The Company's weighted average occupancy was 94%, 95% and 95% for the years ended December 31, 1996, 1995 and 1994, respectively. During these periods, average monthly rental income per unit was $606, $570 and $549, respectively. As of the end of January 1997, the weighted average occupancy rate of the Properties (excluding one community in lease-up) was 95.7% and the Commercial Center was 100% occupied. The Company currently has five communities comprising 1,897 units under construction, consisting of 675 units in Las Vegas, 772 units in Denver and 450 units in Reno. As of January 31, 1997, Oasis employed approximately 570 people.
The Company has adhered to a strategy of concentrating on the acquisition, development and management of primarily upscale apartment communities. The Company believes it has certain competitive advantages in operating its business, including the following:
- with more than a 10% share of the total Las Vegas apartment market, Oasis has benefited from significant economies of scale in operations, which reduce on-site and administrative expenses;
- the Oasis brand name operating strategy has increased consumer recognition of the Company's high operating standards and has improved resident retention;
- extensive development experience in multiple markets enables the Company to identify locations for its apartment communities which provide residents with a feeling of quality, community, security and accessibility;
- experience in obtaining necessary zoning, governmental permits and authorizations for multifamily construction which in recent years have become increasingly costly and complex to obtain;
- the ability to provide high quality living areas and attractive amenities, common areas and landscaping;
- a consistent policy of regularly scheduled maintenance, which results in lower overall operating costs and a higher quality living environment for the Company's residents;
- a responsive management team that is service-oriented and attentive to its residents' needs; and
- ongoing training programs that enhance the performance of on-site personnel.
The Company's executive offices are located at 4041 East Sunset Road, Henderson, Nevada 89014. Its telephone number is (702) 435-9800.
RECENT DEVELOPMENTS
1996 Development Activities:
- The Company completed construction on seven apartment communities and one community expansion in the Las Vegas and Denver metropolitan areas comprising an aggregate of 1,889 units with a total investment of $132.1 million as follows: Oasis Pointe (252 units), Oasis Meadows (383 units), Oasis Tiara (400 units), Oasis Deerwood (342 units in Denver), Oasis Crossings (72 units), Oasis Villas (84 units), Oasis Harbor I (336 units) and Oasis Cove II (20 units). As of January 31, 1997, all of the Las Vegas completions had achieved stabilization (93% occupancy).
- As of January 31, 1997, the Company had five apartment communities under construction comprising 1,897 units with an estimated investment at completion of $149.8 million, consisting of 675 units in Las Vegas, 772 units in Denver and 450 units in Reno, all of which are projected to be completed in 1997.
1996 Financing Activities:
- In July 1996, the Company was the recipient of senior unsecured debt ratings from Moody's (Baa3), Standard and Poor's (BBB-) and Duff and Phelps (BBB-).
- In August 1996, the Company increased the funding capacity on its unsecured credit facility from $150.0 million to $200.0 million.
- In November 1996, the Company completed a $150.0 million senior unsecured note offering in three equal $50.0 million tranches with maturities of five years, seven years and ten years each. The notes were priced with coupon rates of 6.75% for the five year notes, 7.00% for the seven year notes and 7.25% for the ten year notes. The Company utilized approximately $53.6 million of the proceeds of the offering to pay off certain mortgage debt which enabled the Company to generate 64% of its EBITDA (earnings before interest, tax, depreciation and amortization ["EBITDA"]) from unencumbered properties in the fourth quarter of 1996.
- In December 1996, the Company sold two of its Las Vegas communities, Oasis Star I (44 units) and Oasis Reef (60 units), for approximately $6.6 million and realized a book gain in excess of $2.4 million.
- During 1996, the Company lowered the London Interbank Offered Rate ("LIBOR") based borrowing rate on its unsecured credit facility to LIBOR + 1.25% from LIBOR + 1.75%.
- As of December 31, 1996, the Company had a debt to total market capitalization ratio and EBITDA to interest expense ratio of 45% and 4.0x, respectively.
STRATEGIES FOR GROWTH
The Company's primary business strategy is to generate increasing cash flow and enhanced portfolio value by focusing on the upscale apartment market. The Company has implemented this strategy principally by (i) realizing internal growth in income from its existing portfolio of apartment communities and (ii) pursuing external growth through the selective development and acquisition of new apartment communities.
The Company believes its strong local market presence, brand name identity and resident-oriented approach reduce turnover and encourages resident referrals, resulting in higher occupancies, higher effective rents and reduced expenses as compared to its competitors.
Brand name Operating Strategy
In order to take advantage of the Company's significant presence and market leadership position in Las Vegas, the Company implemented a customer focused brand name operating strategy in 1995. The brand name program is designed to build customer recognition of the Company and its apartment communities and to impart an image of distinction, quality and consistency. All of the Company's Properties incorporate the Oasis brand name and all Company on-site associates wear uniforms advertising the Oasis brand name and logo. The Company believes the Oasis brand name enhances its ability to attract new residents, retain existing residents, gain additional resident referrals, and retain more residents transferring from one Oasis community to another. The Company has incorporated the same brand name operating strategy in Denver and Reno to develop market identity as it establishes its presence in those markets.
Internal Growth Strategy
The Company is committed to increasing cash flow and Funds from Operations "FFO" (as defined below under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Calculation of Funds from Operations and Funds Available for Distribution")from its existing portfolio of Properties by utilizing the experience and quality of the Company's senior management, which has developed, leased and managed in excess of 16,500 apartment units in the greater Las Vegas metropolitan area and 8,000 apartment units in other states. The Company's operating priorities are: (i) to provide the residents with the highest quality lifestyle possible in an apartment community; (ii) to emphasize a clean, pleasant living environment by maintaining all buildings, grounds and landscaping in excellent condition; and (iii) to attract the caliber of residents who desire to live in a high-quality, clean apartment community with premium service at a reasonable cost.
External Growth Strategy
The Company pursues external growth by selectively developing new apartment communities in areas where it has first-hand knowledge of growth patterns and local economic conditions and believes that it has or can create a competitive advantage due to its brand name identity, extensive experience and reputation as a developer and access to lower cost of capital than that available to many of its local competitors. The Company also intends to continue its strategy of selectively acquiring apartment communities to supplement its program of developing new properties.
In evaluating whether to develop a new property, the Company analyzes salient geographic, demographic, economic and financial data, including the following factors: (i) prevailing rental and occupancy rates in the area; (ii) prospective resident income levels and the ability of those income levels to service the property's requisite rents; (iii) the site's location and aesthetic appeal; and (iv) the size and growth rate of the employment base in the area. In order to provide its residents with a feeling of quality, community, security and accessibility, the Company is extremely selective in seeking development sites which are located in quality single-family neighborhoods having convenient access to employment centers and plentiful amenities.
In certain circumstances, the Company also may expand its portfolio of properties through the selective acquisition of existing apartment properties. The Company seeks to acquire properties which are: (i) strategically located in the Company's existing or target markets; (ii) capable of increased operating cash flow after benefiting from the Company's renovation and management expertise; (iii) priced below replacement cost, thereby enabling the Company to operate the properties profitably at lower rents than those realized from new properties; and (iv) able to generate returns comfortably in excess of the Company's weighted average cost of capital.
The Company may from time to time dispose of properties in order to enhance shareholder value.
It is also the Company's strategy to expand through acquisition and development beyond the greater Las Vegas metropolitan area to certain target markets located in Nevada, Colorado and California. Pursuant to the strategy, the Company has commenced operations and construction of multifamily apartment communi-
ties in the greater Denver, Colorado metropolitan area and Reno, Nevada. The Company believes these target markets share many of the favorable investment characteristics found in the Las Vegas area and are in sufficient proximity to allow the Company to continue to benefit from its successful "hands-on" property management philosophy. Furthermore, the Company has entered into an agreement to purchase a 19.8 acre parcel in Mission Viejo, California, subject to the satisfaction of certain entitlement conditions. If the conditions are satisfied and the purchase is completed, the Company intends to build a 380 unit apartment community slated to begin construction in late 1997.
Financing Strategy
In conducting its operations and pursuing its external growth strategy, the Company intends to maintain a conservative balance sheet to provide the Company with the financial flexibility to choose the optimal source of capital (whether debt or equity) with which to finance external growth. It is the Company's policy to maintain a debt to total market capitalization ratio (i.e., total consolidated debt of the Company as a percentage of market value of its capital stock plus total consolidated debt) of less than 50%. For purposes of this calculation, the Company's $2.25 Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") is valued at the greater of its liquidation preference or its market value.
INVESTMENT POLICIES
The Company intends to continue to develop and acquire apartment communities for long term investment. The investment policies of the Company may be unilaterally changed by the Company's Board of Directors. Any change would be made by the Board only after a review and analysis of the change, in light of then existing business and other circumstances, and then only if, in the exercise of its business judgment, it believes the change is in the best interests of the Company's shareholders. At all times, the Company intends to make investments in a manner consistent with requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for the Company to qualify as a REIT unless, because of changing circumstances or changes in the law, the Board of Directors of the Company, with the consent of a majority of the stockholders approving the Board's determination, determines that it is no longer in the best interest of the Company to qualify as a REIT.
The Company pursues its investment objectives through the development and ownership of apartment communities. While the Company intends to diversify in terms of property location, size and market, the Company does not intend to invest in properties other than communities (with the exception of the Commercial Center). The Company currently intends selectively to purchase existing apartment properties. The Company may also purchase undeveloped land and construct apartment communities.
While the Company will emphasize equity real estate investments, the Company may, in its discretion, invest in mortgages and other real estate interests consistent with its qualification as a REIT. The Company does not presently intend to invest in mortgages or deeds of trust, but may invest in participating or convertible mortgages if the Company concludes that it may benefit from the cash flow or any appreciation in the value of a property.
Subject to the percentage of ownership limitations and gross income and asset tests necessary for REIT qualification, the Company also may invest in securities of other entities engaged in real estate activities or securities of their issuers. The Company may in the future acquire all or substantially all of the economic interest in a real estate-related operating business; however, the Company does not currently intend to invest in the securities of any other issuer.
While the Company will actively manage its capital structure, it intends to maintain a conservative balance sheet to provide the Company with the financial flexibility to choose the optimal source of capital (whether debt or equity) with which to finance external growth. It is the Company's policy to maintain a debt to total market capitalization ratio (i.e., total consolidated debt of the Company as a percentage of market value of the Common Stock and Preferred Stock plus total consolidated debt) of less than 50%. It is the intent of the Board of Directors, however, to retain the ability to raise additional capital, including additional debt, to pursue attractive opportunities that may arise and to otherwise act in a manner that it believes to be in the best
interests of the Company and its stockholders. The Company, therefore, may from time to time re-evaluate its borrowing policies in light of then current economic conditions, relative costs of debt and equity capital, market value of properties, growth and acquisition opportunities and other factors and, in light of such information, the Company may modify its borrowing policy and may increase or decrease its ratio of debt to total market capitalization.
The Company has not established any limit on the number or amount of mortgages that may be placed on any single property or on its portfolio as a whole.
Capital for new acquisitions or developments will be raised either as debt or equity depending on the then current leverage of the Company and market conditions. The Company also may determine to issue securities senior to the shares of common stock, including preferred stock and debt securities (either of which may be convertible into common stock or be accompanied by warrants to purchase common stock). The Board of Directors may determine to issue shares of Common Stock or other securities of the Company in exchange for property. The Company also may determine to finance acquisitions through the exchange of properties or issuance of additional shares of Common Stock or other securities.
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into certain agreements designed to reduce potential conflicts of interest. The Company's employment agreements with Robert V. Jones, Scott S. Ingraham, Allan O. Hunter Jr., and Walter B. Eeds prohibit each of them, during his employment by the Company, from engaging, without the Company's consent, in any business competitive with that of the Company. Each agreement also provides that during the one year period following termination of employment, so long as employment has not been terminated without cause (as defined in the agreement), the individual will not engage in the development, acquisition, construction or management of multifamily apartment properties, other than through the Company, in the states of Nevada, California, Arizona, Utah, New Mexico and Colorado.
Mr. Jones has entered into a noncompetition agreement with the Company which provides that he will not engage in the development, acquisition, construction or management of multifamily apartment properties in the states of Nevada, California, Arizona, Utah, New Mexico and Colorado for such time as Mr. Jones is an executive officer, Director or greater than 5% stockholder of the Company.
REGULATION
General
Multifamily apartment properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, activity centers and other common areas. The Company believes that its properties have the necessary permits and approvals to operate its business.
Restrictions Imposed by Laws Benefiting Disabled Persons
Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requires removal of structural barriers to handicapped access in certain public areas of the Company's properties, where removal is "readily achievable." The ADA does not, however, consider residential properties, such as apartment communities, to be public accommodations or commercial facilities, except to the extent portions of the facilities, such as a leasing office, are open to the public. A number of additional federal, state and local laws exist which also may require modifications to the Properties and the Commercial Center or restrict certain further renovations for the purpose of providing access for disabled persons. For example, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment communities first occupied after March 13, 1991 to be accessible to the handicapped. Noncompliance with the ADA, the FHAA or other federal, state or local laws governing access by the disabled could result in the imposition of fines or an award of damages to private litigants. Management
of the Company believes that the Properties and the Commercial Center are substantially in compliance with present requirements of the ADA and that the Properties and the Commercial Center that are subject to the FHAA are substantially in compliance with that law.
Additional legislation may impose further burdens or restrictions on owners with respect to access by disabled persons. Although costs of compliance with the ADA and such additional legislation are not currently ascertainable, such costs could be substantial. Limitations or restrictions on the completion of certain renovations as a result of the ADA or such other legislation may limit application of the Company's investment strategy in certain instances or reduce overall returns on the Company's investments.
Rent Control Legislation
State and local rent control laws in certain jurisdictions limit a property owners' ability to increase rents and to recover increases in operating expenses and the costs of capital improvements. No rent control laws are currently applicable to the Properties or the Commercial Center, and management is not aware of any intention on the part of applicable governing bodies to enact any rent control legislation. The Company does not presently intend to develop or acquire multifamily apartment communities in markets that are either subject to rent control or in which rent limiting legislation exists. Tax-exempt financing on the Company's two Denver properties, however, may impair the Company's ability to achieve increased rental rates on portions of these properties (see "Item 2.

ITEM 2. PROPERTIES
General
As of January 31, 1997, the Company owned and operated 49 apartment communities containing 13,428 apartment units, as well as the Commercial Center in which the Company's headquarters is located and had under development an additional 1,897 units. The Properties typically consist of one- and two-story buildings in a landscaped setting. Forty of the Properties (comprising approximately 74% of the total units) were completed less than 10 years ago. The Properties are predominantly upscale garden apartment complexes consisting of one, two and three bedroom apartments. Forty-four of the Properties have in excess of 100 apartment units, with the largest having 720 apartment units. As of the end of January 1997, the weighted average occupancy rate of the Properties (excluding one community in lease-up) was 95.7%.
The Properties generally provide residents with a variety of attractive amenities, such as in-unit laundry facilities, oversized luxury bath tubs, monitored security systems, swimming pools, spas and saunas, extensive landscaping and, in certain cases, tennis courts, racquetball courts, and weight and exercise facilities. The Properties generally are located in or adjacent to attractive and desirable single-family residential neighborhoods and are easily accessible to significant areas of employment.
The 30,000 square foot Commercial Center was constructed in 1989. The Company occupies 15,100 square feet of the building as its headquarters, and the remainder is leased to third parties, consisting predominantly of banking, professional and service businesses. As of January 31, 1997, the Commercial Center was 100% leased, with third party tenants paying an average annualized rent per square foot of $19.26. Aside from the Company, one tenant, a bank, occupies more than 10% of the Commercial Center. The bank's lease expires in May 2008 and has two five-year renewal options priced at fair market value. None of the Company's properties account for 10% or more of the book value of the Company's assets.
PROPERTY INFORMATION
The following table presents certain information concerning the Properties:
- --------------- (1) Reflects gross acreage for each community.
(2) Reflects a weighted average of current contract rents for occupied units and market rents for unoccupied units for each community.
(3) Under development and/or in lease-up during Period. Accordingly, its occupancy is not included in the subtotal or total.
(4) Average occupancy for the 104 unit phase I; phase II was completed and stabilized in 1996.
(5) Estimated year of completion.
In order to maintain favorable tax-exempt financing on two of the Properties in the Denver market (Oasis Park and Oasis Wexford), the Company is required to comply with affordable housing restrictions that require a certain percentage of the units at these communities to be leased to persons with incomes below a certain percentage of the local median income. This obligation may impair the Company's ability to achieve increased rental rates on portions of these communities.
Development Information
The following table presents certain information concerning the Company's development activities:
- --------------- (1) Reflects gross acreage for each community.
(2) Includes cost of land.
(3) Owned 50% by the Company through its member interest in Denver West Apartments, L.L.C. Accordingly, the Company's share of the estimated total investment will be $13.6 million.
(4) In preliminary planning stage; no construction schedule has been established. Commencement of construction is contingent upon a number of factors, including suitable financing, and there can be no assurances as to when or if such financing will be obtained. See "Risk Factors -- Development and Acquisition Risks."
The time required to complete the lease-up phase of development varies from project to project. The Company typically develops its properties in phases, opening a portion of the total units to occupancy at one time. The Company begins leasing activities approximately 60 days before the first phase is opened for occupancy, setting up a temporary leasing office at the property.
The Company has entered into an agreement to purchase a 19.8 acre parcel in Mission Viejo, California, subject to the satisfaction of certain entitlement conditions. If the conditions are satisfied and the purchase is completed the Company intends to build a 380 unit apartment community slated to begin construction in late 1997. The Company has also entered into an agreement to purchase a 19.5 acre parcel in the Interlaken High-Technology Business Park, along Highway 36 which connects Denver and Boulder, Colorado, subject to the satisfaction of certain development conditions. If the conditions are satisfied and the purchase is completed the Company intends to build a 340 unit apartment community slated to begin construction in late 1997.
The following table sets forth information regarding stabilization dates of the Company's completed developments since the Company's initial public offering:
- --------------- (1) Date on which the community achieved an occupancy rate of 93%.
(2) Estimated date on which community will achieve an occupancy rate of 93%.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Neither the Company, the Properties, the development properties, nor the Commercial Center are subject to any material litigation nor, to the Company's knowledge, is any material litigation threatened against the Company, the Properties, the development properties or the Commercial Center, other than routine litigation and administrative proceedings arising in the ordinary course of business.
ITEM 4.

ITEM 5. MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange (the "NYSE"). As of March 24, 1997, there were approximately 355 stockholders of record and in excess of 9,000 beneficial stockholders of the Company's common stock. The Company's common stock first traded on October 22, 1993. Set forth below are the high and low sales prices as reported on the NYSE of the Company's common stock for the periods indicated, as well as the dividends declared by the Company per share of common stock for each period:
The closing price of the Company's common stock at December 31, 1996 and 1995 was $22.75.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information for the Company and for the multifamily apartment communities and Commercial Center owned by the Company's predecessors prior to the Company's initial public offering (the "Original Properties and Commercial Center"). The historical information for the Company reflects the actual operations of the Company from the date of the initial public offering and the operating data for the Original Properties and Commercial Center prior to the date of the Company's initial public offering.
- --------------- (1) Defined below under "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations -- Calculation of Funds from Operations and Funds Available for Distribution." (2) The common stock dividend payout ratio was computed by dividing common stock dividends by primary Funds from Operations. (3) The fixed charge coverage ratio was computed by dividing earnings to fixed charges. For this purpose, earnings consists of pre-tax income from continuing operations plus interest expense and amortization of debt issuance costs. Fixed charges consist of interest expense, capitalized interest amortization of debt issuance costs. (4) Earnings for the years ended December 1993 and 1992 were inadequate to cover fixed charges. For those years, fixed charges exceeded earnings by $1,328 and $5,021, respectively. (5) The EBITDA to interest expense ratio is computed by dividing the Company's earnings before interest, income taxes, depreciation and amortization ("EBITDA") by interest expense. (6) Excludes communities under development. (7) Excludes rental income from commercial properties.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL BACKGROUND
The following discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. Oasis Residential, Inc. (the "Company") became an operating entity on October 22, 1993, when it completed an initial public offering of common stock (the "Initial Offering"). In connection with the Initial Offering, the Company acquired 17 properties from the Robert V. Jones, Corp. and other affiliates (the "Original Properties and Commercial Center") and acquired 2,023 apartment units.
In July 1994, the Company completed a second public offering of 5,750,000 shares of common stock. The net proceeds of the offering (approximately $132,000,000) were used to acquire five multifamily communities containing 2,441 units for approximately $98,811,000 including the assumption of $38,880,000 of mortgage indebtedness, to effectively repay $16,067,000 of construction loan indebtedness and to reduce the amounts drawn on the Company's credit facilities by approximately $51,000,000. The balance of the net proceeds was used for general corporate purposes, including other acquisitions and development activities.
In April 1995, the Company completed a public offering of 4,165,000 shares of $2.25 Series A Cumulative Convertible Preferred Stock at $25.00 per share. The net proceeds of the offering were approximately $99,200,000 of which $63,000,000 was used to repay credit facility debt, $6,100,000 was used to repay short-term debt and $23,214,000 was used to repay construction debt. The balance of the net proceeds was used for working capital purposes.
RESULTS OF OPERATIONS
Increases in the operating results for the periods discussed below are primarily the result of increases in the number of properties owned and operated, as well as a result of increased rental rates. Where applicable, comparisons have been made on a weighted average per unit basis in order to adjust for such changes in the number of units owned. In computing the weighted average per unit amounts, income and expenses of the commercial properties have been eliminated.
Comparison of year ended December 31, 1996 to year ended December 31, 1995
The weighted average number of apartment units increased by 2,061, or 19%, from 10,610 units in 1995 to 12,671 units in 1996. This increase is primarily the result of the development of 1,889 units during 1996, as well as the acquisition and development of 276 and 856 units, respectively, during the second half of 1995. This increase was partially offset by the sale of two apartment communities comprising 104 apartment units during December 1996. Total apartment units owned at the end of each period were 13,428 and 11,643, respectively.
For the year ended December 31, 1996, net income increased by $3,919,000 as compared to the year ended December 31, 1995. For the year ended December 31, 1996, net income included an extraordinary charge of $1,403,000 and a gain on sale of real estate assets of $2,444,000. The extraordinary charge for the year ended December 31, 1996 related to the unamortized loan fees and prepayment penalty fees associated with the mortgage notes payable which were repaid with the proceeds from the issuance of $150,000,000 in notes payable in the fourth quarter of 1996. The gain on sale of real estate assets related to the sale of Oasis Star I (44 units) and Oasis Reef (60 units) in the fourth quarter of 1996. For the year ended December 31, 1995, net income included an extraordinary charge of $1,952,000 for unamortized loan fees and costs associated with the credit facility debt that was retired during the third quarter of 1995. When examining income on an income before gain on sale of real estate assets and extraordinary charge basis, income for the year ended December 31, 1996 increased by $926,000 as compared to the year ended December 31, 1995. This increase was due to increased rental and other income of $19,594,000 and $76,000, respectively, as well as a decrease in interest expense (non-cash), which represents amortization of loan fees and costs, of $214,000. Offsetting these factors were increases in property operating and maintenance expenses of $5,741,000, general and administrative expenses of $585,000, real estate taxes of $1,151,000, interest expense
of $7,906,000, and depreciation and amortization of $3,575,000. The increases in revenue and expenses were primarily the result of operating a greater number of apartment units in 1996 as compared to 1995.
Multifamily Communities
The following table presents the operations of the Company's multifamily apartment communities (excluding the commercial properties and corporate general and administrative expenses) for the year ended December 31, 1996 with comparative amounts for 1995:
Rental income increased by $19,601,000, or 27%, from $72,595,000 in 1995 to $92,196,000 in 1996. Of the increase, $16,533,000 was attributable to development communities, $1,412,000 was attributable to Oasis Centennial, which was acquired in the third quarter of 1995, and the balance was attributable to increased rents at communities owned during both periods. The weighted average monthly rental income per apartment unit was approximately $606 in 1996 compared to $570 in 1995.
Other income (consisting primarily of nonrefundable security deposits, application and cleaning fees, laundry and vending income) increased by $470,000, or 20%, from $2,388,000 in 1995 to $2,858,000 in 1996, primarily due to the operation of additional apartment communities in 1996 as compared to 1995.
Property operating and maintenance expenses increased by $5,729,000, or 27%. On a weighted average per unit, per month basis, these expenses increased by $10, or 6%, from $168 in 1995 to $178 in 1996. These increases are primarily attributable to general increases in utility rates during 1996, as well as to additional costs associated with the Company's implementation of its brand name operating strategy.
Real estate taxes increased by $1,151,000, or 29%, primarily due to the acquisition and development of additional apartment communities in 1996 and during the second half of 1995. On a weighted average per unit, per month basis, real estate taxes increased by $2, or 6%, from $32 in 1995 to $34 in 1996. This increase is primarily due to the periodic re-assessment of the value of the Company's communities. Nevada law requires the taxing authorities to re-assess approximately twenty percent of all properties each year. Accordingly, each of the Company's properties will be re-assessed for tax purposes approximately once every five years.
"Same Store" Portfolio
The operating performance of the 40 communities and the first phase of one community containing an aggregate of 9,819 apartment units which the Company owned and operated (excluding communities under development) as of January 1, 1995, are summarized as follows:
The increase in rental income of $1,656,000, or 3%, was primarily due to an increase in the average rental rates.
Other income decreased by $152,000, or 7%, primarily due to a decrease in fees unrelated to rent such as nonrefundable security deposits, application and cleaning fees, and late fees. This decrease is directly correlated to the reduction in turnover experienced by the Company during 1996 resulting from the implementation of its brand name operating strategy.
The increase in property operating and maintenance expenses of $794,000, or 4%, was due to increased utility costs of $383,000, increased payroll costs of $247,000, increased marketing costs of $92,000 and increased administrative costs of $80,000, which were partially offset by decreases in other operating expenses of $8,000.
Real estate taxes increased by $165,000, or 4%, from $3,769,000 in 1995 to $3,934,000 in 1996, primarily due to the re-assessment of certain communities by the taxing authorities.
Comparison of year ended December 31, 1995 to year ended December 31, 1994
The weighted average number of apartment units increased by 3,194, or 43%, from 7,416 units in 1994 to 10,610 units in 1995. This increase is primarily the result of the development of 1,548 units and the acquisition of 276 units during 1995, as well as the acquisition of 3,136 units during the second half of 1994. Total apartment units owned at the end of each period were 11,643 and 9,819, respectively.
For the year ended December 31, 1995, income before extraordinary item increased by $11,396,000 as compared to the year ended December 31, 1994. This increase was due to increased rental and other income of $23,933,000 and $499,000, respectively. Offsetting these factors were increases in property operating and maintenance expenses of $6,507,000, general and administrative expenses of $293,000, real estate taxes of $1,265,000, interest expense of $939,000, interest expense (non-cash), which represents amortization of loan fees and costs, of $659,000, and depreciation and amortization of $3,373,000. These increases were primarily the result of operating a greater number of apartment units in 1995 as compared to 1994.
In September 1995, the Company executed a new two year revolving line of credit and retired two lines of credit that were previously outstanding. In connection with the retirement of these lines of credit, the Company wrote-off $1,952,000 of loan fees and costs that remained unamortized as of the date of retirement.
Multifamily Communities
The following table presents the operations of the Company's multifamily apartment communities (excluding the commercial properties and corporate general and administrative expenses) for the year ended December 31, 1995 with comparative amounts for 1994:
Rental income increased by $23,714,000, or 49%, from $48,881,000 in 1994 to $72,595,000 in 1995. Of the increase, $14,081,000 was attributable to acquisition communities, $8,730,000 was attributable to development communities and the balance was attributable to increased rents at communities owned during both periods. The weighted average monthly rental income per apartment unit was approximately $570 in 1995 compared to $549 in 1994.
Other income (consisting primarily of nonrefundable security deposits, laundry and vending income) increased by $594,000, or 33%, from $1,794,000 to $2,388,000, primarily due to the operation of additional apartment communities in 1995 as compared to 1994.
Property operating and maintenance expenses increased by $6,458,000, or 43%. On a weighted average per unit basis, these expenses increased by $4, or less than 1%, from $2,009 in 1994 to $2,013 in 1995. Of the $6,458,000 increase, $4,217,000 was attributable to acquired communities, $2,083,000 was attributable to developed communities and the balance was attributable to communities owned during both periods.
Real estate taxes increased by $1,257,000, or 45%, primarily due to the acquisition and development of additional apartment communities in 1995 and during the second half of 1994. On a weighted average per unit basis, real estate taxes increased by $6, or 2%, from $375 in 1994 to $381 in 1995. This increase is primarily due to the periodic re-assessment of the value of the Company's communities.
"Same Store" Portfolio
The following summarized financial information presents a comparison of 24 operating apartment communities, containing 5,317 apartment units which the Company owned and operated (excluding communities under development) as of January 1, 1994:
The increase in rental income of $1,539,000, or 4%, was primarily due to increases in average rental rates.
Other income decreased by $42,000, or 4%, primarily due to a decrease in fees unrelated to rent such as late fees and other miscellaneous charges.
The increase in property operating and maintenance expenses of $158,000, or 2%, was due to increased payroll costs of $92,000, increased repairs and maintenance of $116,000 which were partially offset by decreases in marketing expenses of $43,000, utilities of $5,000 and other operating expenses of $2,000.
Real estate taxes increased by $72,000, or 4%, from $2,031,000 in 1994 to $2,103,000 in 1995, primarily due to the re-assessment of certain communities by the taxing authorities.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased by $2,136,000 from $41,392,000 in 1995 to $39,256,000 in 1996. This decrease is primarily due to a reduction in accounts payable and accrued expenses, as well as a result of the payment of prepayment penalty fees in the amount of $689,000. This decrease was partially offset by increased rental income resulting from an increase in the number of properties owned and operated, and as a result of a reduction in the increase of deferred assets and other costs.
Net cash used in investing activities decreased by $7,854,000, from $155,023,000 in 1995 to $147,169,000 in 1996. During 1995, the Company had 18 communities under construction comprising 5,314 apartment units, of which six communities comprised of 1,548 apartment units were substantially completed at December 31, 1995. During the year ended December 31, 1996, the Company had 15 communities under construction (including a 321 unit apartment community being developed as part of a joint venture agreement), comprising 4,448 apartment units, of which eight communities comprising 1,889 apartment units were completed during the period. The estimated total investment upon completion of the 1,897 apartment units scheduled to be completed in 1997 is $149,800,000. The estimated total investment for the remaining 662 apartment units will be finalized prior to the commencement of construction.
In December 1996, the Company sold Oasis Star I, a 44 unit apartment community, and Oasis Reef, a 60 unit apartment community, both located in Las Vegas, for $2,700,000 and $3,900,000, respectively, resulting in a combined gain of $2,444,000. The cash proceeds to the Company were $5,302,000. Additionally, in connection with the sale of Oasis Reef, the sale agreement provided for a $1,100,000 note receivable which was issued in favor of the Company. The note bears interest at a fixed rate of 9%, requires interest-only payments beginning in December 1997 with the entire balance to be paid in full by December 1999.
The Company funds its development activities through a combination of working capital, construction loans and credit facility. In September 1996, the Company increased the borrowing capacity on the credit facility from $150,000,000 to $200,000,000. Advances under the credit facility bear interest, at the Company's election, of either London Interbank Offered Rate ("LIBOR") plus 1.25% or the prime lending rate, which reflects the interest rate reductions obtained by the Company during 1996. In July 1996, the LIBOR-based rate on the credit facility was reduced to LIBOR plus 1.50% from LIBOR plus 1.75%, and then in December 1996, the rate was once again reduced to LIBOR plus 1.25%. At December 31, 1996, the Company had available borrowing capacity under the credit facility of $114,264,000.
Net cash provided by financing activities declined by $7,204,000 from $112,544,000 in 1995 to $105,340,000 in 1996. This decrease is primarily because, unlike 1995, there was no issuance of stock (net proceeds in 1995 from the issuance of convertible preferred stock was $99,197,000), as well as due to an increase in dividends paid during 1996 as compared to 1995 primarily resulting from the preferred stock issuance. Partially offsetting these factors is an increase in proceeds from debt as a result of the issuance in November 1996 of $150,000,000 in notes payable.
In March 1996, the Company refinanced a $16,000,000 loan with Allstate Insurance Company, collateralized by the 368 unit Oasis Paradise I apartment community. The new interest rate is 7.10%, a reduction of 1.93% from the previous rate of 9.03%. The loan maturity was also extended from April 1996 to April 2008.
In November 1996, the Company completed the issuance of $150,000,000 in notes payable which priced in three tranches. The Company borrowed $50,000,000 in notes payable due November 15, 2001 at a coupon rate of 6.75% discounted to yield 6.76%, $50,000,000 in notes payable due November 15, 2003 at a coupon rate of 7.00% discounted to yield 7.03% and $50,000,000 in notes payable due November 15, 2006 at a coupon rate of 7.25% discounted to yield 7.28%.
The net proceeds from the offering were used to retire five mortgage notes payable in the amount of approximately $53,087,000 and to reduce the outstanding balance on the credit facility. The Company recorded an extraordinary charge in the amount of $1,403,000 for the remaining unamortized deferred financing costs and prepayment penalties associated with these mortgage notes payable.
At December 31, 1996, the Company had total indebtedness of approximately $394,274,000, which includes $149,786,000 (net of a discount of $214,000) of unsecured fixed rate debt, $135,062,000 of fixed rate mortgage debt, $85,736,000 of credit facility debt and $23,690,000 of fixed rate tax-exempt debt.
The Company anticipates meeting its short-term liquidity requirements through a combination of cash flow from operations retained for investment purposes, cash available from its credit facility and construction loans plus additional long-term borrowings. The Company believes that net cash provided by operations will be adequate to meet its operating requirements and to pay dividends in accordance with real estate investment trust ("REIT") requirements.
The Company expects to meet its long-term liquidity requirements, such as funds for acquisition and development activity and the repayment of debt, through new long-term borrowings and the issuance of additional debt securities or equity securities. In March 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission which covers up to an aggregate of $250,000,000 of debt securities, preferred stock, depositary stock, common stock and warrants to purchase common stock and preferred stock which the Company may issue from time to time.
The following table presents certain information concerning the development and expansion activities of the Company during 1996:
- ---------------
(1) Includes cost of land.
(2) Owned 50% by the Company through its member interest in Denver West Apartments, L.L.C. As of December 31, 1996, costs expended include the Company's and the co-owner's equity contributions, as well as a loan from the Company to the joint venture.
(3) Estimated total investment for these projects will be finalized prior to the commencement of construction.
(4) Represents cost of land and infrastructure.
The following table sets forth certain information with respect to debt at December 31, 1996. As of that date, 8,632 of the Company's operating apartment units and the commercial properties were unencumbered:
- ---------------
(1) The Company has the option to extend the maturity of the credit facility for one additional year.
(2) During 1996, the LIBOR-based rate on the credit facility was reduced to LIBOR + 1.25% from LIBOR + 1.75%.
(3) $149,786 net after discount.
(4) Communities collateralized are Oasis Bel Air, Oasis Canyon, Oasis Rose, and Oasis Trails.
(5) $1,090 of the outstanding balance is taxable.
The following table sets forth certain information with respect to unencumbered properties at December 31, 1996:
CAPITAL EXPENDITURES
The Company capitalizes the direct and indirect costs of expenditures for the acquisition or development of apartment communities and replacements and improvements. Non-revenue generating capital expenditures are those replacements which recur on a regular basis, but which have estimated useful lives of more than one year, such as roofing, heating, ventilation and air conditioning and exterior repainting. Revenue generating expenditures are those improvements which enhance the community's net operating income generating capability either through increased rental rates or reduced operating expenses.
During 1995, the Company implemented its customer focused brand name operating strategy. The process required many on-site improvements, including the changing of property signage (which includes the Oasis name and logo) and was completed in 1996. These costs are considered revenue generating capital expenditures in that the Company believes that the Oasis brand name enhances the Company's ability to attract new residents, retain existing residents, gain additional resident referrals and retain more residents transferring from one Oasis community to another.
At newly acquired communities, the Company often finds it necessary to upgrade the physical appearance of the properties and to complete maintenance and repair work which had been deferred by the prior owners. These activities often result in heavier capital expenditures in the early years of Company ownership. Some of these expenditures which would normally be considered non-revenue generating capital expenditures or expense items are classified as revenue generating expenditures when carpets and appliances are replaced and the community is substantially upgraded to meet the image and quality standards represented by the Oasis brand name. Upon completion of the rehabilitation process, normal recurring capital expenditures such as carpet and appliances are expensed as incurred.
Interest, real estate taxes and other carrying costs incurred during the development period of communities under construction are capitalized and, upon completion of the project, depreciated over the lives of the project.
INFLATION
The Company leases apartments to its residents under lease terms generally ranging from six to 12 months. Management believes that the short-term lease contracts lessen the impact of inflation by giving the Company the ability to adjust rental rates to market levels as leases expire. The impact of recent low rates of inflation has not been significant to the Company's operations, except for the positive effect that low inflation has had on reducing the Company's interest cost. Inflation and inflationary expectations and their effect on interest rates may affect the Company in the future by changing the underlying value of the Company's real estate assets or by affecting the Company's costs of financing its operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
None.
CALCULATION OF FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
The Company considers Funds from Operations ("FFO") to be an appropriate measure of performance of an equity REIT. FFO, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), is defined as income before gains (losses) on investments and extraordinary items (computed in accordance with generally accepted accounting principles) plus real estate depreciation and after adjustments for significant non-recurring items, if any. Funds Available for Distribution ("FAD") is defined as FFO less non-revenue producing capital expenditures and includes an "add back" to net income for the amortization of deferred financing costs and depreciation of non-real estate assets and other amortization. The Company believes that to facilitate a clear understanding of the Company's operating results, FFO and FAD should be examined in conjunction with net income and should not be considered as alternatives to net income as an indication of the Company's operating performance or as alternatives to cash flow as a measure of liquidity.
The following table presents the calculations of FFO and FAD:
- --------------- NOTES TO CALCULATIONS OF FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
1. The Company generally expenses most recurring non-revenue generating property expenditures, including carpet and appliance replacements, except for certain expenditures on acquisition communities where major improvements are required to bring the community up to the operating standards of the Oasis portfolio.
2. Non-revenue generating expenditures at the communities consist of replacements and equipment additions that do not enhance the revenue generating capabilities of the communities.
3. Non-revenue generating expenditures at the corporate office consist primarily of computer and office equipment acquisitions.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of the independent accountants and consolidated financial statements and schedule listed in the accompanying index are filed as part of this report. See "Index to Financial Statements" on page.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated herein by reference the information appearing under the caption "Proposal 1: Election of Directors" and under the caption "Board of Directors and Officers" of the registrant's definitive Proxy Statement for its 1997 Annual Meeting filed with the Securities and Exchange Commission.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated herein by reference the information appearing under the caption "Executive Compensation" of the registrant's definitive Proxy Statement for its 1997 Annual Meeting filed with the Securities and Exchange Commission.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated herein by reference the information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" of the registrant's definitive Proxy Statement for its 1997 Annual Meeting filed with the Securities and Exchange Commission.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated herein by reference the information appearing under the caption "Executive Compensation -- Employment and Other Contracts" of the registrant's definitive Proxy Statement for its 1997 Annual Meeting filed with the Securities and Exchange Commission.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The financial statements listed in the accompanying Index to Financial Statements, including the Report of Independent Accountants, are filed as part of this Report.
2. The financial statement schedule listed in the accompanying Index to Financial Statements is filed as part of this Report.
3. Exhibits: The exhibits listed in the accompanying Index to Exhibits are filed as part of this Report.
(b) Reports on Form 8-K.
1. Company filed Form 8-K dated November 18, 1996 setting forth under Item 5 fixed charge coverage ratios.
2. Company filed Form 8-K dated November 18, 1996 setting forth under Item 5 certain earnings before interest, income taxes, depreciation and amortization ("EBITDA") to fixed charge ratios and EBITDA to interest expense ratios.
3. Company filed Form 8-K dated November 20, 1996 setting forth under Item 7 and filing as exhibits an Underwriting Agreement dated November 20, 1996, a Form of Indenture dated November 25, 1996 and a Form of Supplemental Indenture dated November 25, 1996.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant and has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
OASIS RESIDENTIAL, INC.
By: /s/ ROBERT V. JONES ------------------------------------ Robert V. Jones Chief Executive Officer and Chairman of the Board
Date: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
OASIS RESIDENTIAL, INC.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted or the information is presented in the consolidated financial statements or related notes.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders Oasis Residential, Inc.
We have audited the accompanying consolidated financial statements and the financial statement schedule of Oasis Residential, Inc. and its subsidiaries (the "Company") as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 as listed on page of this Form 10-K. These consolidated financial statements and the financial statement schedule are the responsibility of the management of the Company. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Francisco, California January 24, 1997, except for Note 13 as to which the date is March 6, 1997.
OASIS RESIDENTIAL, INC.
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements
OASIS RESIDENTIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements
OASIS RESIDENTIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements
OASIS RESIDENTIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Oasis Residential, Inc. (the "Company"), which was incorporated in the State of Nevada on March 23, 1993, is a self-administered and self-managed real estate investment trust ("REIT"), engaged in the development, acquisition and operation of predominantly upscale apartment communities in the greater Las Vegas, Reno and Denver metropolitan areas. The Company commenced operations as a public company on October 22, 1993 with an initial portfolio of 23 apartment communities comprising 5,215 units and a 30,000 square foot commercial center in Henderson, Nevada in which the Company's headquarters is located. At December 31, 1996, the Company owned and operated 49 apartment communities containing 13,428 apartment units.
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, (the "Code") commencing with the taxable year ended December 31, 1993. In order for the Company to qualify as a REIT, it must distribute annually at least 95% of its REIT taxable income, as defined in the Code, to its stockholders and comply with certain other requirements. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Financial Statement Presentation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company's investment in the joint venture is accounted for using the equity method.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Real Estate Assets and Depreciation:
Rental property is stated at the lower of cost or fair value. Expenditures which increase the revenue potential of a property or which extend the useful life of the asset are generally capitalized. Maintenance and repair expenditures necessary to maintain a property in operating condition are charged to expense when incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the depreciable real estate assets, which range from 18 to 40 years for buildings and improvements and 5 to 12 years for furniture and fixtures.
Costs are capitalized during the development of constructed assets (including interest, property taxes and other direct and indirect costs) beginning when active development commences and ending when construction is substantially complete and the property is ready for occupancy.
Losses in carrying values of investment assets are provided by management when the losses become apparent and the investment asset is considered impaired. Management evaluates its investment properties, at least quarterly, to assess whether any impairment indications are present. If an asset is considered to be impaired, a loss is provided to reduce the carrying value of the property to its estimated fair value. No such losses have been required or provided in the accompanying financial statements.
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash and Cash Equivalents:
The Company considers highly liquid short-term investments with initial maturities of three months or less to be cash equivalents.
Cash and cash equivalents are primarily held in a single financial institution, and at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limit.
Restricted Cash:
Restricted cash balances at December 31, 1996 and 1995 are required under certain debt agreements for property tax and insurance expenses and to secure the payment of certain replacement and capital improvement costs.
Deferred Financing Costs:
Included in deferred costs and other assets are costs associated with obtaining debt financing and credit enhancements. Such costs are being amortized over the term of the associated debt or credit enhancement.
Accounting for Stock-Based Compensation:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its stock-based compensation plans.
Per Share Data:
Earnings per share for the years ended December 31, 1996, 1995 and 1994 is computed based upon the weighted average number of shares outstanding during the period plus (in periods where they have a dilutive effect) the net additional number of shares which would be issuable upon the exercise of stock options assuming that the Company used the proceeds received to repurchase outstanding shares at market prices.
Additionally, other potentially dilutive securities, which may not qualify as common stock equivalents, are considered when calculating earnings per share on a primary and fully diluted basis. No such securities were outstanding during 1994 and the assumed conversion of such securities in 1996 and 1995 results in an anti-dilutive effect; therefore, earnings per share presentation on a primary and fully diluted basis is unnecessary.
Interest Rate Protection Agreements:
Premiums paid to purchase interest rate protection agreements are capitalized and amortized over the terms of those agreements using the straight-line method which approximates the effective interest method. Unamortized premiums are included in deferred costs and other assets.
3. INTEREST CAPITALIZED
Interest costs associated with projects under development aggregating $9,350, $8,499 and $3,510 for the years ended December 31, 1996, 1995 and 1994, respectively, were capitalized.
4. INVESTMENT IN AND ADVANCES TO JOINT VENTURE
In April 1995, the Company and Stevinson Partnership, Ltd. ("Stevinson") entered into an operating agreement to form Denver West Apartments, L.L.C., a limited liability company (the "Joint Venture"). Under the terms of the agreement, the Company and Stevinson each have a 50% interest in Oasis Denver
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
West, a 321 unit apartment community located in Denver, Colorado. In November 1996, the Joint Venture finalized the loan agreement with Northwestern Mutual Life Company for the construction and permanent financing of the community in the amount of $15,430 which the Company has guaranteed. The loan bears interest at a rate of 8.30% and matures on August 1, 2007.
At December 31, 1996, the Company had contributed capital of $3,955 and had advanced to the Joint Venture a loan of approximately $4,400. The loan bears interest at the prime lending rate plus 2% (prime rate at December 31, 1996 was 8.25%) and will be repaid from operations once construction is completed. Additionally, the Company has incurred $1,219 of additional costs that are not accounted for at the joint-venture level. At December 31, 1996, the underlying asset of the Joint Venture was under construction and had no operating activity.
5. DEFERRED COSTS AND OTHER ASSETS
Deferred financing costs which are included in deferred costs and other assets aggregated to $7,006 and $6,871 at December 31, 1996 and 1995, respectively. Accumulated amortization which related to deferred financing costs aggregated to $1,766 and $912 at December 31, 1996 and 1995, respectively.
6. DEBT
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Scheduled principal payments on debt, assuming that the Company exercises its option to extend the maturity date on the Credit Facility, are as follows:
At December 31, 1996 and 1995, management estimates that the carrying amount of debt approximates fair value; however, current estimates of fair value could differ significantly from amounts realized in market exchanges.
7. STOCKHOLDERS' EQUITY
In October 1993, the Company completed a public offering of 8,970,000 shares of common stock at a price per share of $21.75. The net proceeds from this offering were approximately $180,000 and were used for
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
the acquisition of communities, the repayment of first and second lien preexisting mortgage indebtedness and for working capital purposes.
In July 1994, the Company completed a second public offering of 5,750,000 shares of common stock at a price per share of $24.50. The net proceeds from this offering were approximately $132,000 and were used for the acquisition of five multifamily communities containing 2,441 units for approximately $98,800, including the assumption of $38,800 of mortgage indebtedness, the repayment of certain adjustable rate debt, the reduction of the balance owing on the Company's credit facility and for working capital purposes.
In April 1995, the Company issued 4,165,000 shares of Series A Cumulative Convertible Preferred Stock ("Preferred Stock") at $25.00 per share. The net proceeds from the offering were approximately $99,200 and were used for the repayment of certain short-term and construction debt, the reduction of the balance owing on the credit facility and for working capital purposes. The shares pay a cumulative dividend quarterly in arrears in an amount per share equal to the greater of $2.25 per annum or the cash dividends paid or payable on a number of shares of common stock equal to the number of shares of common stock into which a share of Preferred Stock is convertible. The shares generally have no voting rights and have a liquidation preference of $25.00 per share plus accrued and unpaid distributions. The Preferred Stock is convertible at the option of the holder at any time into shares of common stock, at a conversion price of $24.64 per share of common stock (equivalent to a conversion rate of 1.0146 shares of common stock per share of Preferred Stock), subject to adjustment in certain circumstances. The Preferred Stock is not redeemable by the Company prior to April 30, 2001.
In 1995, the Company adopted a Dividend Reinvestment and Share Purchase Plan (the "Plan"). The Company has reserved 1,000,000 shares for issuance under the Plan. The Plan allows stockholders to acquire additional shares of the Company by automatically reinvesting dividends and making voluntary cash payments. For the year ended December 31, 1996, the Company issued no new common shares to stockholders who elected to participate in this Plan; all shares were purchased in the open market.
As described in Note 1, the Company has elected to be treated, for federal income tax purposes, as a REIT. As such, the Company is required to distribute annually, in the form of dividends to its common stockholders, at least 95% of its taxable income. In reporting periods where taxable income exceeds net income, stockholders' equity will be reduced by the distributions in excess of net income and will be increased by the excess of net income over distributions in periods where net income exceeds taxable income. For tax reporting purposes, a portion of the common dividends declared during the years ended December 31, 1996 and 1995 represents a return of capital.
For federal income tax purposes, the following tables, on a per share basis, summarize the taxability of dividends paid in 1996 and 1995:
Year ended December 31, 1996
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31, 1995
8. RELATED PARTY TRANSACTIONS
An affiliated company leased space in one of the commercial properties through May 1995. Related party rental revenue was $0, $30 and $72 for the years ended December 31, 1996, 1995 and 1994, respectively.
9. OPERATING LEASES
The Company owns two commercial properties, one of which also partially serves as its headquarters building. The portion of the commercial properties not used by the Company is leased to tenants under net operating leases with initial terms extending to the year 2008. Future minimum rentals under noncancellable operating leases at both commercial properties, excluding tenant reimbursements of expenses, as of December 31, 1996, are as follows:
10. STOCK-BASED COMPENSATION PLANS
In May 1995, the Company adopted the 1995 Equity Participation Plan (the "1995 Plan") to supplement the Company's 1993 Stock Option Plan (the "1993 Plan"). The Company also has a Stock Option Plan for Outside Directors (the "Outside Directors Plan").
The 1995 Plan provides incentives for officers, key employees and consultants through the grant or issuance of options, restricted stock performance awards, dividend equivalents, deferred stock, stock payments and stock appreciation rights ("SARs"). The aggregate number of shares that may be issued under the 1995 Plan may not exceed 1,135,000, less the number of shares covered by options outstanding under the 1993 Plan and the Outside Directors Plan. The 1995 Plan limits the number of shares that any individual may receive in any year under the plan to 150,000 and limits the dollar value of awards, other than options and SARs that may be paid to any employee for any year to $100.
The 1993 Plan provides for the issuance of incentive and non-qualified stock options under the Code and grants of the Company's common stock contingent upon the attainment of certain performance goals or subject to other restrictions. A total of 700,000 shares of the Company's common stock have been reserved for issuance under the 1993 Plan and the Outside Directors Plan.
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Options awarded under both the 1993 and 1995 Plans provide for the options to be granted at a price equal to the market value of the Company's common stock at the date of grant, to vest ratably over a four year period and to expire ten years from the date the options were granted.
Under the Outside Directors Plan, each of the Company's non-employee directors is granted an option to purchase 3,000 shares of common stock at the time of appointment/election to the Board of Directors. In addition, following each annual meeting of stockholders, each of the Company's non-employee directors, who have served as a member for one year or more, will receive an option to purchase up to 3,000 shares of common stock at the market price of the shares on the date of grant. All options granted under the Outside Directors Plan will vest one year after the date of grant. The Outside Directors Plan is administered by the Board of Directors.
The following table shows the activity and balances for each stock option plan:
The number of shares available for grant as of December 31, 1996, in connection with all the plans was 150,000 shares. None of the options granted are contingent upon the attainment of performance goals or subject to other restrictions. As of December 31, 1996, outstanding options to purchase 405,750 shares of common stock were exercisable.
The Company applies APB 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced by approximately $634 or $0.04 per share for the year ended December 31, 1996, and approximately $123 or $0.01 per share for the year ended December 31, 1995. The estimated fair value of the options granted during 1996 ranged from $1.43 to $1.45 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 7.26%, volatility of 16.82%, risk free rates of 4.19% to 5.60% and an expected life of four years. The estimated fair value of the options granted during 1995 ranged from $1.63 to $1.78 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 7.26%, volatility of 16.82%, risk free rates of 4.72% to 5.60% and an expected life of four years.
11. EMPLOYEE BENEFITS
Effective February 1995, the Company adopted an employee investment plan (the "Plan"), under Section 401(k) of the Internal Revenue Code. Employees who are at least 21 years old and who have
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
completed one year of eligibility service may become participants in the Plan. Each participant may make contributions to the Plan through salary deferrals in amounts of at least 1% to a maximum of 15% of the participant's compensation, subject to certain limitations imposed by the Internal Revenue Code. The Company contributes an amount equal to 50% of the first 6% of the participant's compensation contributed. A participant's contribution to the Plan is 100% vested and nonforfeitable. A participant will become vested in 20% of the Company's contributions after one year of service while enrolled in the Plan and increasing by 20% for each additional year of service while enrolled in the Plan.
12. GAIN ON SALE OF REAL ESTATE ASSETS
In December 1996, the Company sold, in separate transactions, Oasis Star I, a 44 unit apartment community, and Oasis Reef, a 60 unit apartment community, both located in Las Vegas, for an aggregate consideration of $6,600 including a $1,100 note receivable, resulting in a combined gain of $2,444. The note receivable bears interest at 9.00% and requires interest-only payments beginning in December 1997 until maturity in December 1999. At December 31, 1996, this note receivable was included in deferred costs and other assets.
13. SUBSEQUENT EVENTS
On January 27, 1997, the Company declared a quarterly dividend of $0.4525 per common share to stockholders of record on February 6, 1997, payable on February 19, 1997. In addition, the Company declared a quarterly dividend for its Series A Cumulative Convertible Preferred Stock of $0.5625 per share payable on February 17, 1997 to stockholders of record on February 3, 1997.
In the first quarter of 1997, the Company entered into an agreement to purchase a 19.5 acre parcel in the Interlaken High-Technology Business Park in the Denver metro area, subject to the satisfaction of certain development conditions. If the conditions are satisfied and the purchase is completed, the Company intends to build a 340 unit apartment community slated to begin construction in late 1997. In connection with this agreement, the Company has delivered to the seller a deposit in the amount of $493, which is nonrefundable except in the event of the seller's default, or the failure of any condition to closing.
In March 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission which covers up to an aggregate of $250,000 of debt securities, preferred stock, depositary stock, common stock and warrants to purchase common stock and preferred stock which the Company may issue from time to time.
14. COMMITMENTS AND CONTINGENCIES
The Company is presently under construction or grading on seven additional communities totaling 2,559 units in its three markets, Las Vegas, Reno and Denver. The Company anticipates completing 1,897 of these units in 1997. The estimated total investment upon completion of the 1,897 units scheduled to be completed in 1997 is $149,800. The estimated total investment for the remaining 662 units will be finalized prior to the commencement of construction.
In 1994, the Company entered into an agreement with an executive officer that provided for the Company's acquisition from the executive officer of certain contractual rights to acquire two properties for development in Colorado. The agreement provides that when development of the two Colorado properties is completed and stabilized, and subject to the properties meeting certain performance criteria, the executive officer will have the right to receive up to $1,000 in the Company's common stock. In the event that the executive officer's employment is terminated for cause, the executive officer's rights under the agreement will be forfeited. At December 31, 1996, such criteria had not yet been satisfied.
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In November 1996, the Company entered into an agreement to purchase a 19.8 acre parcel in Mission Viejo, California, subject to the satisfaction of certain entitlement conditions. If the conditions are satisfied and the purchase is completed, the Company intends to build a 380 unit apartment community slated to begin construction in late 1997. In accordance with the terms of the agreement, the Company made a deposit in the amount of $2,000 into an escrow account. The payment is fully refundable until the seller completes certain obligations under the agreement and thereafter, is considered nonrefundable but may be applied to reduce the amounts due to the seller at the close of escrow.
The Company is party to various legal actions which are incidental to its business. Management believes that these actions will not have a material adverse affect on the financial position or the results of operations of the Company.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended 1996 and 1995 are as follows:
OASIS RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SCHEDULE III OASIS RESIDENTIAL, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
- --------------- (A) The aggregate cost for federal income tax purposes at December 31, 1996 is $706,050.
(B) Initial cost includes the expansion of Oasis Cove totaling 20 units.
(C) Encumbrance represents a portion of the $39,980 Teachers Insurance and Annuity Association loan allocated to the property based upon relative size.
(D) Initial cost was reduced to reflect the sale of 44 units at Oasis Star I.
OASIS RESIDENTIAL, INC.
NOTE TO SCHEDULE III DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
1. RECONCILIATION OF REAL ESTATE AND ACCUMULATED DEPRECIATION:
INDEX TO EXHIBITS
- --------------- (1) Incorporated by reference from the Company's Registration Statement on Form S-11, Registration No. 33-67564
(2) Incorporated by reference from the Company's Registration Statement on Form S-11, Registration No. 33-79564
(3) Incorporated by reference from the Company's 1994 Form 10-K
(4) Incorporated by reference from the Company's 1995 Form 10-K
(5) Incorporated by reference from the Company's Form 10-Q dated September 30,