-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NAF9kTqLlgbFuaB2s3ba9WrNdHOfJj8M8GKRbp90Y6wKgb3+KUtakCDKDcv82sBf aXGFoHVvXgQMElY7X38ehA== 0000950131-98-004717.txt : 19980812 0000950131-98-004717.hdr.sgml : 19980812 ACCESSION NUMBER: 0000950131-98-004717 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980811 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITY RESIDENTIAL PROPERTIES TRUST CENTRAL INDEX KEY: 0000906107 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 363877868 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12252 FILM NUMBER: 98682518 BUSINESS ADDRESS: STREET 1: TWO N RIVERSIDE PLZ STREET 2: STE 400 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3124741300 MAIL ADDRESS: STREET 1: TWO N RIVERSIDE PLAZA STREET 2: SUITE 450 CITY: CHICAGO STATE: IL ZIP: 60606 10-Q 1 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-12252 EQUITY RESIDENTIAL PROPERTIES TRUST (Exact Name of Registrant as Specified in Its Charter) Maryland 13-3675988 (State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification or Organization) No.) Two North Riverside Plaza, Chicago, Illinois 60606 (Address of Principal Executive Offices) (Zip Code) (312) 474-1300 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE USERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At August 5, 1998, 97,904,611 of the Registrant's Common Shares of Beneficial Interest were outstanding. EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (Amounts in thousands except for share amounts) (Unaudited)
June 30, December 31, 1998 1997 ------------ ------------- ASSETS Investment in real estate Land $ 935,628 $ 791,980 Depreciable property 6,990,511 6,293,415 Construction in progress 41,982 36,040 ------------ ----------- 7,968,121 7,121,435 Accumulated depreciation (573,359) (444,762) ------------ ----------- Investment in real estate, net of accumulated depreciation 7,394,762 6,676,673 Cash and cash equivalents 265,915 33,295 Investment in mortgage notes, net 87,916 176,063 Rents receivable 5,127 3,302 Deposits - restricted 48,692 36,374 Escrow deposits - mortgage 57,655 44,864 Deferred financing costs, net 23,299 23,092 Other assets 116,673 100,968 ------------ ----------- Total assets $ 8,000,039 $ 7,094,631 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $ 1,775,556 $ 1,582,559 Notes, net 1,428,304 1,130,764 Line of credit 175,000 235,000 Accounts payable and accrued expenses 78,362 67,699 Accrued interest payable 34,952 28,048 Rents received in advance and other liabilities 41,822 38,750 Security deposits 33,800 28,193 Distributions payable 90,471 20,223 ------------ ----------- Total liabilities 3,658,267 3,131,236 ------------ ----------- Commitments and contingencies Minority Interests 290,770 273,404 ------------ -----------
See accompanying notes. 2 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (continued) (Amounts in thousands except for share amounts) (Unaudited)
June 30, December 31, 1998 1997 ---------- -------------- Shareholders' equity: Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized: 9 3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25 per share, 6,120,000 shares issued and outstanding $ 153,000 $ 153,000 9 1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $250 per share, 500,000 shares issued and outstanding 125,000 125,000 9 1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $250 per share, 460,000 shares issued and outstanding 115,000 115,000 8.60% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $250 per share, 700,000 shares issued and outstanding 175,000 175,000 Series E Cumulative Convertible Preferred Shares of Beneficial Interest, liquidation preference $25 per share, 3,998,000 shares issued and outstanding 99,950 99,963 9.65% Series F Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25 per share, 2,300,000 shares issued and outstanding 57,500 57,500 7 1/4% Series G Convertible Cumulative Preferred Shares of Beneficial Interest, liquidation preference $250 per share, 1,265,000 shares issued and outstanding 316,250 316,250 Common Shares of beneficial interest, $.01 par value, 200,000,000 shares authorized, 97,870,504 shares issued and outstanding as of June 30, 1998 and 89,085,265 shares issued and outstanding as of December 31, 1997 979 891 Paid in capital 3,194,261 2,785,661 Employee notes (4,949) (5,145) Distributions in excess of accumulated earnings (180,989) (133,129) ---------- ---------- Total shareholders' equity 4,051,002 3,689,991 ---------- ---------- Total liabilities and shareholders' equity $8,000,039 $7,094,631 ========== ==========
See accompanying notes. 3 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except for per share data) (Unaudited)
Six Months Ended June 30, Quarter Ended June 30, 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES Rental income $571,370 $290,799 $294,144 $156,564 Fee and asset management 2,790 3,110 1,430 1,532 Interest income - investment in mortgage notes 10,221 8,011 5,290 4,328 Interest and other income 9,010 4,404 6,186 2,513 -------- -------- -------- -------- Total revenues 593,391 306,324 307,050 164,937 -------- -------- -------- -------- EXPENSES Property and maintenance 137,910 70,760 71,197 38,426 Real estate taxes and insurance 56,484 29,667 29,041 15,756 Property management 25,110 11,819 13,531 6,148 Fee and asset management 2,240 1,569 1,188 602 Depreciation 131,910 62,775 67,520 33,898 Interest: Expense incurred 105,651 50,924 55,397 27,631 Amortization of deferred financing costs 1,275 1,220 651 617 General and administrative 10,271 6,206 5,391 3,231 -------- -------- -------- -------- Total expenses 470,851 234,940 243,916 126,309 -------- -------- -------- -------- Income before gain on disposition of properties and allocation to Minority Interests 122,540 71,384 63,134 38,628 Gain on disposition of properties 11,092 3,632 9,223 -- -------- -------- ------- -------- Income before allocation to Minority Interests 133,632 75,016 72,357 38,628 Income allocated to Minority Interests (8,310) (6,345) (4,622) (2,919) -------- -------- -------- -------- Net income 125,322 68,671 67,735 35,709 Preferred distributions (43,384) (20,939) (21,692) (11,878) -------- -------- ------- -------- Net income available to Common Shares $ 81,938 $ 47,732 46,043 $ 23,831 ======== ======== ======== ========= Weighted average Common Shares outstanding 95,394 55,385 97,405 58,940 ======== ======== ======== ======== Distributions declared per Common Share outstanding $ 1.34 $ 1.25 $ 0.67 $ 0.62 ======== ======== ======== ======== Net income per weighted average Common Share outstanding $ 0.86 $ 0.86 $ 0.47 $ 0.40 ======== ======== ======== ======== Net income per weighted average Common Share outstanding - assuming dilution $ 0.85 $ 0.85 $ 0.47 $ 0.40 ======== ======== ======== ========
See accompanying notes. 4 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Six Months Ended June 30, ------------------------- 1998 1997 ------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 125,322 $ 68,671 Adjustments to reconcile net income to net cash provided by operating activities: Income allocated to Minority Interests 8,310 6,345 Depreciation 131,910 62,775 Amortization of deferred financing costs (including discounts and premiums on debt) 249 1,279 Amortization of discount on investment in mortgage notes (1,000) (750) Gain on disposition of properties (11,092) (3,632) Changes in assets and liabilities: (Increase) in rents receivable (1,825) (326) (Increase) in deposits - restricted (4,537) (237) Decrease (increase) in other assets 3,000 (4,246) Increase in accounts payable and accrued expenses 11,466 5,093 Increase in accrued interest payable 6,904 3,548 (Decrease) increase in rents received in advance and other liabilities (3,186) 7,280 --------- --------- Net cash provided by operating activities 265,521 145,800 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in real estate, net (499,463) (333,770) Improvements to real estate (32,021) (14,709) Additions to non-real estate property (4,445) (2,730) Proceeds from disposition of real estate 40,488 4,771 Purchase of management contract rights (119) (3,500) (Increase) in mortgage deposits (12,791) (11,700) Deposits (made) on real estate acquisitions (16,321) (1,700) Deposits applied on real estate acquisitions 8,540 16,761 Investment in mortgage notes, net - (87,418) Investment in partnerships - development (13,042) - Costs related to Mergers (1,851) (51,639) Other investing activities (10,583) (34,953) --------- --------- Net cash (used for) investing activities (541,608) (520,587) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of Common Shares 419,619 488,889 Proceeds from sale of Preferred Shares - 175,000 Proceeds from exercise of options 4,459 3,250 Proceeds from sale of 2015 Notes, net of discount 298,125 - Proceeds from option to remarket the 2015 Notes 8,130 - Payment of offering costs (10,314) (6,082) Distributions to Common Share and Preferred Share owners (109,152) (83,662) Distributions to Minority Interests (6,733) (9,497) Principal receipts on employee notes 196 211 Proceeds from restructuring of tax-exempt bond investments - 9,350 Repayments on line of credit (235,000) (185,000) Proceeds from line of credit 175,000 185,000 Principal payments on mortgage notes payable (39,804) (39,437) Loan and bond acquisition costs (1,426) (1,026) Increase in security deposits 5,607 1,878 --------- --------- Net cash provided by financing activities 508,707 538,874 --------- --------- Net increase in cash and cash equivalents 232,620 164,087 Cash and cash equivalents, beginning of period 33,295 147,271 --------- --------- Cash and cash equivalents, end of period $ 265,915 $ 311,358 ========= =========
See accompanying notes. 5 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Amounts in thousands) (Unaudited)
Six Months Ended June 30, ------------------------- 1998 1997 ------------------------- Supplemental information: Cash paid during the period for interest $ 98,747 $ 41,451 ======== ======== Mortgage loans and unsecured notes assumed and or entered into through Mergers and acquisitions of real estate $232,801 $491,143 ======== ======== Net real estate contributed in exchange for OP units $ 16,270 $ - ======== ========
See accompanying notes. 6 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Definition of special terms: Capitalized terms used but not defined herein are as defined in the Company's Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 1997 ("Form 10-K"). 1. Business As used herein, the term "Company" means Equity Residential Properties Trust ("EQR") and its subsidiaries as the survivor of the mergers between EQR and each of Wellsford Residential Property Trust ("Wellsford") (the "Wellsford Merger") and Evans Withycombe Residential, Inc. ("EWR") (the "EWR Merger"). The Company is engaged in the acquisition, ownership and operation of multifamily properties and is a self-administered and self-managed equity real estate investment trust ("REIT"). As of June 30, 1998, the Company controlled a portfolio of 499 multifamily properties (individually a "Property" and collectively the "Properties"). The Company's interest in six of these Properties at the time of acquisition thereof consisted solely of ownership of debt collateralized by such Properties. The Company also has an investment in partnership interests and subordinated mortgages collateralized by 21 properties (the "Additional Properties"). 2. Basis of Presentation The balance sheet as of June 30, 1998, the statements of operations for the six months and the three months ended June 30, 1998 and cash flows for the six months ended June 30, 1998 represent the consolidated financial information of the Company and its subsidiaries. Due to the Company's ability as general partner to control either through ownership or by contract the Operating Partnership, the Management Partnerships, the Financing Partnerships, the LLCs and the EWR Operating Partnership, each such entity has been consolidated with the Company for financial reporting purposes. In regard to Management Corp., Management Corp. II and Evans Withycombe Management, Inc., the Company does not have legal control; however, these entities are consolidated for financial reporting purposes, the effects of which are immaterial. These unaudited Consolidated Financial Statements of the Company have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the Financial Statements and Notes thereto included in the Form 10-K. The following Notes to Consolidated Financial Statements highlight significant changes to the notes included in the Form 10-K and present interim disclosures as required by the SEC. The accompanying Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. 3. Shareholders' Equity and Minority Interests During the first six months of 1998, the Company issued 51,136 Common Shares pursuant to the Employee Share Purchase Plan and received net proceeds of approximately $2.2 million. 7 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) During the first six months of 1998, the Company issued 1,003,212 Common Shares pursuant to the Direct Share Purchase Plan and received net proceeds of approximately $49.8 million. On January 27, 1998, the Company completed an offering of 4,000,000 publicly registered Common Shares, which were sold to the public at a price of $50.4375 per share (the "January 1998 Common Share Offering"). The Company received net proceeds of approximately $195.3 million in connection therewith. On February 18, 1998, the Company completed offerings of 988,340 publicly registered Common Shares, which were sold to the public at a price of $50.625 per share. On February 23, 1998, the Company completed an offering of 1,000,000 publicly registered Common Shares, which were sold to the public at a price of $48 per share. The Company received net proceeds from these offerings (collectively, the "February 1998 Common Share Offerings") of approximately $95 million. On March 30, 1998, the Company completed an offering of 495,663 publicly registered Common Shares, which were sold at a price of $47.9156 per share (the "March 1998 Common Share Offering"). The Company received net proceeds of approximately $23.7 million in connection therewith. On April 29, 1998, the Company completed an offering of 946,565 publicly registered Common Shares, which were sold at a price of $46.5459 per share (the "April 1998 Common Share Offering"). The Company received net proceeds of approximately $44.1 million in connection therewith. The following table presents the changes in the Company's issued and outstanding Common Shares for the six months ended June 30, 1998:
=============================================================================================== Balance at January 1, 1998 89,085,265 - ----------------------------------------------------------------------------------------------- Common Shares issued through January 1998 Common Share Offering 4,000,000 Common Shares issued through February 1998 Common Share Offerings 1,988,340 Common Shares issued through March 1998 Common Share Offering 495,663 Common Shares issued through April 1998 Common Share Offering 946,565 Common Shares issued through Direct Share Purchase Plan 1,003,212 Common Shares issued through DRIP Plan 429 Common Shares issued through conversion of Series E Preferred Shares 278 Conversion of OP Units into Common Shares 76,478 Common Shares issued through Employee Share Purchase Plan 51,136 Common Shares issued through restricted share awards 54,505 Common Shares issued through exercise of options 152,653 Common Shares issued through 401(k) Plan 15,980 ---------- Balance at June 30, 1998 97,870,504 ===============================================================================================
Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding at June 30, 1998 would have been 107,711,816. 8 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for a partnership interest are collectively referred to as the "Minority Interests". As of June 30, 1998, the Minority Interests held 9,841,312 OP Units, which represented a 9.14% interest in the Operating Partnership. Net proceeds from the Company's Common Share offerings are contributed by the Company to the Operating Partnership in return for an increased ownership percentage and are treated as capital transactions in the Company's Consolidated Financial Statements. As a result, the net offering proceeds are allocated between shareholders' equity and Minority Interests to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership. The Company paid a $0.67 per Common Share distribution on July 10, 1998 for the quarter ended June 30, 1998 to Common Shareholders of record as of June 26, 1998. The following table summarizes the distributions paid to Preferred Share and Depositary Share holders related to the quarter ended June 30, 1998:
Distribution For the ------------ ------- Amount Date Paid Quarter ended Record Date ------ --------- ------------- ----------- Series A Preferred Share holders $0.585937 07/15/98 06/30/98 06/26/98 Series B Depositary Share holders $0.570312 07/15/98 06/30/98 06/26/98 Series C Depositary Share holders $0.570312 07/15/98 06/30/98 06/26/98 Series D Depositary Share holders $0.537500 07/15/98 06/30/98 06/26/98 Series E Preferred Share holders $0.437500 07/01/98 06/30/98 06/15/98 Series F Preferred Share holders $0.603125 07/15/98 06/30/98 06/26/98 Series G Depositary Share holders $0.453125 07/15/98 06/30/98 06/26/98
4. Real Estate During the six months ended June 30, 1998, the Company acquired the 41 Properties listed below from unaffiliated third parties. In connection with certain of the acquisitions listed below, the Company assumed and or entered into mortgage indebtedness of approximately $232.8 million and issued OP Units having a value of approximately $16.3 million. The cash portion of these transactions was funded primarily from proceeds raised from the January 1998 Common Share 9 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Offering, the February 1998 Common Share Offerings, the March 1998 Common Share Offering, the April 1998 Common Share Offering, the Company's line of credit, the Direct Share Purchase Plan and working capital.
Total Acquisition Date Number Cost Acquired Property Location of Units (in thousands) -------- -------- -------- -------- -------------- 01/07/98 Cityscape St. Louis Park, MN 156 $ 12,367 01/09/98 740 River Drive St. Paul, MN 162 12,965 01/13/98 Prospect Towers Hackensack, NJ 157 36,336 01/16/98 Park Place Houston, TX 229 13,578 01/16/98 Park Westend Richmond, VA 312 13,423 01/29/98 Emerald Bay at Winter Park Winter Park, FL 432 15,774 02/05/98 Farnham Park Houston, TX 216 15,777 02/25/98 Plantation Houston, TX 232 10,091 02/27/98 Balcones Club Austin, TX 312 12,365 03/02/98 Coach Lantern Scarborough, ME 90 4,856 03/02/98 Foxcroft Scarborough, ME 104 5,044 03/02/98 Yarmouth Woods Yarmouth, ME 138 6,788 03/20/98 Rolido Parque Houston, TX 369 10,911 03/26/98 The Fairfield Stamford, CT 263 45,959 03/26/98 Trails of Valley Ranch Irving, TX 216 10,753 04/01/98 Sonterra at Foothill Ranch Foothill Ranch, CA 300 31,551 04/01/98 Harbor Pointe Milwaukee, WI 595 25,088 04/01/98 Gates at Carlson Center Minnetonka, MN 435 28,099 04/01/98 GlenGarry Club Bloomingdale, IL 250 18,909 04/01/98 Plum Tree I II III Hales Corners, WI 332 22,266 04/01/98 Ravinia Greenfield, WI 206 13,273 04/01/98 The Woodlands of Brookfield Brookfield, WI 148 15,495 04/07/98 Vista Pointe at the Valley Irving, TX 231 19,099 04/23/98 Emerson Place Boston, MA 462 72,389 05/13/98 Sierra Canyon Santa Clarita, CA 232 15,998 05/14/98 Northridge Pleasant Hill, CA 221 20,205 05/22/98 The Arboretum Canton, MA 156 15,640 05/28/98 Woodridge Eagan, MN 200 12,009 05/28/98 Townhomes of Meadowbrook Auburn Hills, MI 230 13,724 06/01/98 Brookside Boulder, CO 144 13,803 06/10/98 The Greystone Atlanta, GA 150 7,439 06/11/98 Coconut Palm Club Coconut Creek, FL 300 20,651 06/11/98 Portside Towers Jersey City, NJ 527 119,118 06/16/98 Defoor Village Atlanta, GA 156 13,513 06/16/98 Plantation Ridge Marietta, GA 454 23,264 06/18/98 Wynbrook Norcross, GA 318 13,536 06/24/98 Cross Creek Matthews, NC 420 23,436 06/26/98 Copper Hill Bedford, TX 204 7,006
10 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
Total Acquisition Date Number Cost Acquired Property Location of Units (in thousands) -------- -------- -------- -------- -------------- 06/26/98 Walker's Mark Dallas, TX 164 7,006 06/26/98 Royal Crest Estates Waterbury, CT 156 7,324 06/26/98 Tyrone Gardens Randolph, MA 165 10,724 ------- -------- 10,544 $817,552 ======= ========
5. Commitments to Acquire Rental Properties As of June 30, 1998, in addition to the properties that were subsequently acquired as discussed in Note 14 of the Notes to Consolidated Financial Statements, the Company entered into separate agreements to acquire 16 multifamily properties containing 4,804 units from unaffiliated third parties. The expected combined purchase price is approximately $295.8 million, which includes the assumption of mortgage indebtedness of approximately $114.4 million. The closings of these pending transactions are subject to certain contingencies and conditions; therefore, there can be no assurance that these transactions will be consummated or that the final terms thereof will not differ in material respects from those summarized in the preceding paragraph. 6. Disposition of Rental Properties On March 12, 1998, the Company sold Mountain Brook Apartments and Ridgemont Apartments, both located in Chattanooga, Tennessee for a sales price of $16.7 million. The gain for financial reporting purposes was approximately $1.9 million. On May 1, 1998, the Company sold The Place Apartments located in Ft. Myers, Florida for a sales price of $8.5 million. The gain for financial reporting purposes was approximately $1.4 million. On May 15, 1998, the Company sold Terraces at Peachtree Apartments located in Atlanta, Georgia for a sales price of $7.2 million. The gain for financial reporting purposes was approximately $1.5 million. On June 2, 1998, the Company sold Stonelake Club Apartments located in Ocala, Florida for a sales price of $8.7 million. The gain for financial reporting purposes was approximately $6.3 million. 7. Calculation of Net Income Per Weighted Average Common Share The following tables set forth the computation of net income per weighted average Common Share outstanding and net income per weighted average Common Share outstanding assuming dilution. 11 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
------------------------- ---------------------- Six Months Ended June 30, Quarter Ended June 30, 1998 1997 1998 1997 ------------------------- ---------------------- (Amounts in thousands except per share amounts) Numerator: Income before allocation of income to Minority Interests, preferred distributions and gain on disposition of properties $122,540 $ 71,384 $ 63,134 $ 38,628 Allocation of income to Minority Interests (8,310) (6,345) (4,622) (2,919) Distributions to preferred shareholders (43,384) (20,939) (21,692) (11,878) -------- -------- -------- -------- Income before gain on disposition of properties 70,846 44,100 36,820 23,831 Gain on disposition of properties 11,092 3,632 9,223 - -------- -------- -------- -------- Numerator for net income per weighted average Common Share outstanding 81,938 47,732 46,043 23,831 Effect of dilutive securities: Allocation of income to Minority Interests 8,310 6,345 4,622 2,919 -------- -------- -------- -------- Numerator for net income per weighted average Common Share outstanding - assuming dilution $ 90,248 $ 54,077 $ 50,665 $ 26,750 ======== ======== ======== ======== Denominator: Denominator for net income per weighted average Common Share outstanding 95,394 55,385 97,405 58,940 Effect of dilutive securities: Contingent incremental employee share options 1,118 922 1,047 920 Weighted Average OP Units outstanding 9,683 7,401 9,777 7,326 -------- -------- -------- -------- Denominator for net income per weighted average Common Share outstanding - assuming dilution 106,195 63,708 108,229 67,186 ======== ======== ======== ======== Net income per weighted average Common Share outstanding $ 0.86 $ 0.86 $ 0.47 $ 0.40 ======== ======== ======== ======== Net income per weighted average Common Share outstanding - assuming dilution $ 0.85 $ 0.85 $ 0.47 $ 0.40 ======== ======== ======== ========
12 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
Six Months Ended June 30, Quarter Ended June 30, ------------------------- ---------------------- 1998 1997 1998 1997 ------------------------- ---------------------- Net income per weighted average Common Share outstanding: Income before gain on disposition of properties per weighted average Common Share outstanding $ 0.74 $ 0.79 $ 0.38 $ 0.40 Gain on disposition of properties 0.12 0.07 0.09 - ------ ------ ------ ------ Net income per weighted average Common Share outstanding $ 0.86 $ 0.86 $ 0.47 $ 0.40 ====== ====== ====== ====== Net income per weighted average Common Share outstanding - assuming dilution: Income before gain on disposition of properties per weighted average Common Share outstanding - assuming dilution $ 0.75 $ 0.79 $ 0.38 $ 0.40 Gain on disposition of properties 0.10 0.06 0.09 - ------ ------ ------ ------ Net income per weighted average Common Share outstanding - assuming dilution $ 0.85 $ 0.85 $ 0.47 $ 0.40 ====== ====== ====== ======
Convertible Preferred Shares that could be converted into 7,623,507 shares of common shares were outstanding at June 30, 1998 but were not included in the computation of diluted earnings per share because it would be anti-dilutive. 13 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 8. Mortgage Notes Payable As of June 30, 1998, the Company had mortgage indebtedness of approximately $1.8 billion encumbering 163 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $180.9 million) was approximately $2.9 billion. The mortgage notes payables are generally due in monthly installments of interest only. In connection with the Properties acquired during the six months ended June 30, 1998, the Company assumed and or entered into mortgage indebtedness on sixteen Properties in the aggregate amount of $232.8 million. Concurrent with the refinancing of certain tax-exempt bonds and as a requirement of the credit provider of the bonds, the Financing Partnership, which owns certain of the Properties, entered into interest rate protection agreements, which were assigned to the credit provider as additional security. The Financing Partnership pays interest based on a fixed interest rate and the counterparty of the agreement pays interest to the Company at a floating rate that is calculated based on the Public Securities Association Index for municipal bonds ("PSA Municipal Index"). As of June 30, 1998, the aggregate notional amount of these agreements was approximately $173.1 million. The fixed interest rates for these agreements were 4.81%, 4.528% and 4.90%. The termination dates are October 1, 2003, January 1, 2004 and April 1, 2004. The Company simultaneously entered into substantially identical reverse interest rate protection agreements. Under these agreements the Company pays interest monthly at a floating rate based on the PSA Municipal Index and the counterparty pays interest to the Company based on a fixed interest rate. As of June 30, 1998, the aggregate notional amount of these agreements was approximately $173.1 million. The fixed interest rates received by the Company in exchange for paying interest based on the PSA Municipal Index for these agreements were 4.74%, 4.458% and 4.83%. The termination dates are October 1, 2003, January 1, 2004 and April 1, 2004. Collectively, these agreements effectively cost the Company 0.07% per annum on the current outstanding aggregate notional amount. The Company believes that it has limited exposure to the extent of non-performance by the counterparties of the agreements since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance. The Company also has an interest rate cap agreement for a notional amount of $228 million, for which it will receive payments if the PSA index exceeds 5.75%, that terminates on December 1, 1999. Any payments by the counterparty under this agreement have been collaterally assigned to the provider of certain sureties related to the tax-exempt bonds secured by certain of its Properties. The Company has no payment obligations to the counterparty with respect to this agreement. As of June 30, 1998, scheduled maturities for the Company's outstanding mortgage indebtedness are at various dates through February 1, 2032. During the six months ended June 30, 1998, the Company repaid the outstanding mortgage balance on five Properties in the amount of $34.1 million. 9. Line of Credit During the six months ended June 30, 1998, the Company repaid $235 million outstanding 14 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) on its line of credit with proceeds raised from the January 1998 Common Share Offering and the February 1998 Common Share Offerings. As of June 30, 1998, there was $175 million outstanding on this line of credit. 10. Notes As of June 30, 1998, the Company had outstanding unsecured notes of approximately $1.4 billion (net of a $4.1 million discount and including a $7.4 million premium). In February 1996, the Company entered into an interest rate protection agreement that hedged the interest rate risk of the 1999 Notes by locking the effective four-year Treasury Rate, commencing May 15, 1999 through May 2003. There was no cost to the Company for entering into this agreement. Prior to the issuance of the 2002 Notes, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of such issuance. The Company made a one-time settlement payment of this protection transaction, which was approximately $0.8 million and is being amortized over the term of the 2002 Notes. As of June 30, 1998, the unamortized balance of this cost was approximately $0.4 million. Prior to the issuance of the 2026 Notes, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of this issuance to 7.5%. The Company received a one-time settlement payment of this transaction, which was approximately $0.6 million and is being amortized over ten years. As of June 30, 1998, the unamortized balance was approximately $0.5 million. Prior to the issuance of the 2001 and 2003 Notes, the Company entered into two interest rate protection agreements to effectively fix the interest rate costs of such issuance's. The Company made a one time settlement payment of each protection transaction, which was approximately $5 million and $1.7 million, respectively, and are being amortized over the term of the Notes on a straight- line basis. As of June 30, 1998 the unamortized balance of these costs were approximately $4.2 million and $1.5 million, respectively. In April 1998, the Operating Partnership issued $300 million of unsecured fixed rate notes (the "2015 Notes") in connection with the Debt Shelf Registration in a public debt offering (the "Sixth Public Debt Offering"). The 2015 Notes were issued at a discount, which is being amortized over the life of the 2015 Notes on a straight-line basis. The 2015 Notes are due April 13, 2015, Putable/Callable April 13, 2005 by the Operating Partnership. The annual interest rate on the 2015 Notes to April 13, 2005 (the "Remarketing Date") is 6.63%, which is payable semiannually in arrears on October 13 and April 13, commencing October 13, 1998. The 2015 Notes are subject to mandatory tender on the Remarketing Date. The Operating Partnership received net proceeds of approximately $298.1 million in connection with this issuance. The Operating Partnership also received approximately $8.1 million from the sale of the option to remarket the 2015 Notes in April 2005, which is being amortized over the term of the 2015 Notes. As of June 30, 1998 the unamortized balance was approximately $8 million. Prior to the issuance of the 2015 Notes, the Operating Partnership entered into an interest rate protection agreement to effectively fix the 15 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) interest rate cost of such issuance until the Remarketing Date. The Operating Partnership received a one-time settlement payment from this transaction, which was approximately $0.6 million and is being amortized over seven years. As of June 30, 1998 the unamortized balance was approximately $0.6 million. In regard to all of the interest rate protection agreements mentioned in the previous paragraphs, the Company believes that it has limited exposure to the extent of non-performance by the counterparties of each agreement since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance. 11. Deposits - restricted Deposits-restricted as of June 30, 1998 primarily included a deposit in the amount of $20 million held in a third party escrow account to provide collateral for third party construction financing in connection with the Joint Venture Agreement. Also, approximately $16.3 million was held in third party escrow accounts, representing proceeds received in connection with the Company's disposition of two properties and earnest money deposits made for additional acquisitions. In addition, approximately $12.4 million was for tenant security and utility deposits for certain of the Company's Properties. 12. Summarized Pro Forma Condensed Statement of Operations (unaudited) The following Summarized Pro Forma Condensed Statement of Operations has been prepared as if the January 1998 Common Share Offering, the February 1998 Common Share Offerings, the March 1998 Common Share Offering, the April 1998 Common Share Offering, the Sixth Public Debt Offering, the acquisition of an additional 41 Properties, including the related assumption of $232.8 million of mortgage indebtedness, the repayment of $34.1 million of mortgage indebtedness and the disposition of five properties (as described in Note 3, Note 4, Note 6, Note 8 and Note 10 of Notes to Consolidated Financial Statements) had occurred on January 1, 1998. This would result in 97,870,504 Common Shares outstanding. In management's opinion, the Summarized Pro Forma Condensed Statement of Operations does not purport to present what actual results would have been had the above transactions occurred on January 1, 1998, or to project results for any future period. The amounts presented in the following statement are in thousands except for share amounts: 16 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
Summarized Pro Forma Condensed Statement of Operations For the Six Months Ended June 30, 1998 (Amounts in thousands except per share amounts) --------------------------- Total Revenues $620,734 -------- Total Expenses 498,755 -------- Pro Forma income before allocation to Minority Interests 133,071 -------- Pro Forma net income 125,197 Preferred distributions 43,384 -------- Pro Forma net income available for Common Shares $ 81,813 ======== Pro Forma net income per Common Share $ 0.84 ========
13. Commitments and Contingencies The Company, as an owner of real estate, is subject to various environmental laws of Federal and local governments. Compliance by the Company with existing laws has not had a material adverse effect on the Company's financial condition and results of operations. However, the Company cannot predict the impact of new or changed laws or regulations on its current Properties or on properties that it may acquire in the future. The Company does not believe there is any litigation threatened against the Company other than routine litigation arising out of the ordinary course of business. Some of which is expected to be covered by liability insurance, none of which is expected to have a material adverse effect on the consolidated financial statements of the Company. In connection with the Joint Venture Agreement, the Company is obligated to fund an additional $20 million in connection with the third party construction financing. In connection with the Wellsford Merger, the Company has provided a standby obligation in the amount of $30 million pursuant to an agreement entered into with Wellsford Real Properties, Inc., a Maryland corporation ("WRP"), for the construction financing for a multifamily development project located in Denver, Colorado. In addition, the Company has provided a $14.8 million credit enhancement with respect to bonds issued to finance certain public improvements at the multifamily development project. 14. Subsequent Events On July 1, 1998, the Company acquired Trowbridge Apartments, a 210-unit multifamily property located in Atlanta, Georgia, from an unaffiliated third party for a purchase price of 17 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) approximately $12 million. On July 1, 1998, the Company acquired seventeen multifamily properties, consisting of 3,775 units, from an unaffiliated third party for a purchase price of approximately $318.3 million, which included the issuance of OP Units having a value of approximately $88.3 million. The properties are located in the states of Washington, Arizona, Nevada and Colorado. On July 8, 1998, the Company acquired Parkcrest Apartments, a 210-unit multifamily property located in Southfield, Michigan from an unaffiliated third party for a purchase price of approximately $11.6 million, which included the assumption of mortgage indebtedness of approximately $7.3 million. On July 8, 1998, the Company acquired ten multifamily properties, consisting of 1,911 units, all of which are located in Texas, from an unaffiliated third party for a purchase price of approximately $82.3 million, which included the assumption of mortgage indebtedness of approximately $60 million and the issuance of OP Units having a value of approximately $21 million. On July 8, 1998, the Company entered into a definitive agreement and plan of merger with a publicly held unaffiliated REIT to acquire 118 multifamily properties containing 34,990 units for a total purchase price of $2.1 billion, which may include the issuance of $1.1 billion of common stock, $370 million of preferred stock and the assumption of mortgage indebtedness of up to $655 million. The closing of this pending transaction is subject to entering into a binding agreement, shareholder approval and certain other contingencies and conditions; therefore, there can be no assurance that this transaction will be consummated or that the final terms thereof will not differ in material respects from those summarized above. On July 9, 1998, the Company acquired four multifamily properties, consisting of 683 units, from an unaffiliated third party for a purchase price of approximately $45.3 million, which included the issuance of OP Units having a value of approximately $11.2 million. The properties are located in the states of Colorado and California. On July 10, 1998, the Company acquired Martins Landing Apartments, a 300- unit multifamily property located in Roswell, Georgia from an unaffiliated third party for a purchase price of approximately $17.7 million, which included the assumption of mortgage indebtedness of approximately $13 million. On July 10, 1998, the Company acquired The Lakes at Vinings Apartments, a 464-unit multifamily property located in Atlanta, Georgia from an unaffiliated third party for a purchase price of approximately $28.3 million, which included the assumption of mortgage indebtedness of approximately $22.5 million. On July 14, 1998, the Company acquired Summer Creek Apartments, a 72-unit multifamily property located in Plymouth, Minnesota from an unaffiliated third party for a purchase price of approximately $4.3 million, which included the issuance of OP Units having a value of approximately $0.9 million and the assumption of mortgage indebtedness of approximately $2.4 million. 18 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) On July 15, 1998, the Company acquired Patchen Oaks Apartments, a 192-unit multifamily property located in Lexington, Kentucky from an unaffiliated third party for a purchase price of approximately $9.4 million. On July 15, 1998, the Company acquired Lexington Village Apartments, a 352- unit multifamily property located in Alpharetta, Georgia from an unaffiliated third party for a purchase price of approximately $24.5 million, which included the assumption of mortgage indebtedness of approximately $18.8 million and the issuance of OP Units having a value of approximately $0.4 million. On July 15, 1998, the Company acquired four multifamily properties, consisting of 558 units, all of which are located in Frederick, Maryland, from an unaffiliated third party for a purchase price of approximately $26.9 million, which included the assumption of mortgage indebtedness of approximately $5.9 million. On July 16, 1998, the Company acquired Coachman Trails Apartments, a 154- unit multifamily property located in Plymouth, Minnesota from an unaffiliated third party for a purchase price of approximately $10.6 million, which included the assumption of mortgage indebtedness of approximately $6.6 million. On July 21, 1998, the Company acquired Colony Woods Apartments, a 414-unit multifamily property located in Birmingham, Alabama from an unaffiliated third party for a purchase price of approximately $23.4 million. On July 22, 1998, the Company acquired Arbors at Century Center Apartments, a 420-unit multifamily property located in Memphis, Tennessee from an unaffiliated third party for a purchase price of approximately $17.7 million. On July 29, 1998, the Company acquired a vacant parcel of land, containing .910 acres located in Raleigh, North Carolina from an unaffiliated third party for a purchase price of approximately $22,000. On July 31, 1998, the Company acquired four multifamily properties, consisting of 804 units, from an unaffiliated third party for a purchase price of approximately $83.2 million, which included the issuance of OP Units having a value of approximately $15.2 million and the assumption of mortgage indebtedness of $41.3 million. The properties are located in the states of California and Washington. On July 31, 1998, the Company sold Country Club I & II Apartments located in Silver Springs, Maryland for a sales price of $20.8 million and received net proceeds of $7.5 million. On August 5, 1998, the Company acquired Fernbrook Townhomes Apartments, a 72-unit multifamily property located in Plymouth, Minnesota from an unaffiliated third party for a purchase price of approximately $7 million, which included the assumption of mortgage indebtedness of approximately $5.2 million. 19 EQUITY RESIDENTIAL PROPERTIES TRUST PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview The following discussion and analysis of the results of operations and financial condition of the Company should be read in connection with the Consolidated Financial Statements and Notes thereto. Due to the Company's ability to control the Operating Partnership, the EWR Operating Partnership, the Management Partnerships, the Financing Partnerships and the LLCs, each entity has been consolidated with the Company for financial reporting purposes. Capitalized terms used herein and not defined, are as defined in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "believes", "expects" and "anticipates" and other similar expressions which are predictions of or indicate future events and trends and which do not relate solely to historical matters, identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, the following: the alternative sources of capital to the Company are too high; occupancy levels and market rents may be adversely affected by local economic and market conditions, which are beyond the Company's control; and additional factors as discussed in Part I of the Annual Report as filed on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Results of Operations Since EQR's IPO and through June 30, 1998, the Company has acquired direct or indirect interests in 453 properties (the "Acquired Properties"), containing 129,054 units in the aggregate for a total purchase price of approximately $7.4 billion, including the assumption of or new mortgage indebtedness of approximately $2.2 billion and $0.4 billion of unsecured notes. The Company's interest in six of the Acquired Properties at the time of acquisition thereof consisted solely of ownership of the debt collateralized by such Acquired Properties. The Company purchased its interests in 41 of such Acquired Properties consisting of 10,544 units in 1998 (the "1998 Acquired Properties"). During the six months ended June 30, 1998, the Company disposed of five properties (the "1998 Disposed Properties") for a total sales price of $41.1 million. The Company's overall results of operations for the six months ended June 30, 1998 and 1997 have been significantly impacted by the Company's acquisition activity. The significant changes in rental revenues, property and maintenance expenses, real estate taxes and insurance, 20 EQUITY RESIDENTIAL PROPERTIES TRUST PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) depreciation expense, property management and interest expense can all primarily be attributed to the acquisition of the 1997 Acquired Properties and the 1998 Acquired Properties. The impact of the 1997 Acquired Properties and the 1998 Acquired Properties is discussed in greater detail in the following paragraphs. Properties that the Company owned, which equaled 64,086 units, for all of both six month periods ended June 30, 1998 and June 30, 1997 (the "Six-Month 1998 Same Store Properties") impacted the Company's results of operations. Properties that the Company owned, which equaled 68,198 units, for all of both the quarters ended June 30, 1998 and June 30, 1997 (the "Second-Quarter 1998 Same Store Properties") also impacted the Company's results of operations. Both the Six-Month 1998 Same Store Properties and Second-Quarter 1998 Same Store Properties are discussed in the following paragraphs. Comparison of six months ended June 30, 1998 to six months ended June 30, 1997 For the six months ended June 30, 1998, income before gain on disposition of properties and allocation to Minority Interests increased by $51.2 million when compared to the six months ended June 30, 1997. This increase was primarily due to increases in rental revenues net of increases in property and maintenance expenses, real estate taxes and insurance, property management expenses depreciation expense, interest expense and general and administrative expenses. All of the increases in the various line item accounts mentioned above can be primarily attributed to the 1998 Acquired Properties and 1997 Acquired Properties. These increases were partially offset by the 1997 Disposed Properties and the 1998 Disposed Properties. The increase in interest income of $2.2 million earned on the Company's mortgage note investments is primarily attributable to its $88 Million Note Investment, which includes three months of basic interest and contingent interest in 1998 compared to two months of basic interest in the 1997 period. In regard to the Six-Month 1998 Same Store Properties, rental revenues increased by approximately $12.6 million to $264.1 million or 5.01% primarily as a result of higher rental rates charged to new tenants and tenant renewals, as well as a 1.51% increase in average economic occupancy levels. Overall, property operating expenses which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses increased approximately $2.5 million or 2.5%. This increase was primarily the result of higher compensation costs, utilities and maintenance costs and leasing and advertising costs. Property management represents expenses associated with the management of the Company's Properties. These expenses increased by approximately $13.3 million primarily due to the continued expansion of the Company's property management business to facilitate the management of the Company's additional properties. Interest expense, including amortization of deferred financing costs, increased by approximately $54.8 million. This increase was primarily the result of an increase in the Company's average indebtedness outstanding which increased by $1.6 billion. However, the Company's effective interest costs decreased from 7.54% for the six months ended June 30, 1997 to 7.23% for the six months ended June 30, 1998. General and administrative expenses, which include corporate operating expenses, increased 21 EQUITY RESIDENTIAL PROPERTIES TRUST PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) approximately $4.1 million between the periods under comparison. This increase was primarily due to the addition of corporate personnel, higher compensation costs and shareholder reporting costs as well as an increase in professional fees. However, by gaining certain economies of scale with a much larger operation these expenses as a percentage of total revenues were 1.73% for the six months ended June 30, 1998 compared to 2.03% of total revenues for the six months ended June 30, 1997. Comparison of quarter ended June 30, 1998 to quarter ended June 30, 1997 For the quarter ended June 30, 1998, income before gain on disposition of properties and allocation to Minority Interests increased by $24.5 million when compared to the quarter ended June 30, 1997. This increase was primarily due to increases in rental revenues net of increases in property and maintenance expenses, real estate taxes and insurance, property management expenses, depreciation, interest expense and general and administrative expenses. All of the increases in the various line item accounts mentioned above can be primarily attributed to the continued purchase of multifamily properties, specifically the 1998 Acquired Properties and 1997 Acquired Properties. These increases were partially offset by the 1997 Disposed Properties and the 1998 Disposed Properties. In regard to the Second Quarter 1998 Same Store Properties, rental revenues increased by approximately $6.8 million to $142.3 million or 4.99% primarily as a result of higher rental rates charged to new tenants and tenant renewals, as well as a 1.39% increase in average economic occupancy levels. Overall, property operating expenses which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses increased approximately $1.1 million or 2.1%. This increase was primarily the result of higher compensation costs, utilities and maintenance costs and leasing and advertising costs. Property management represents expenses associated with the management of the Company's Properties. These expenses increased by approximately $7.4 million primarily due to the continued expansion of the Company's property management business to facilitate the management of the Company's additional properties. Interest expense, including amortization of deferred financing costs, increased by approximately $27.8 million. This increase was primarily the result of an increase in the Company's average indebtedness outstanding which increased by $1.6 billion. However, the Company's effective interest costs decreased from 7.63% for the quarter ended June 30, 1997 to 7.20% for the quarter ended June 30, 1998. General and administrative expenses, which include corporate operating expenses, increased approximately $2.2 million between the periods under comparison. This increase was primarily due to adding corporate personnel, higher compensation costs and shareholder reporting costs as well as an increase in professional fees. However, by gaining certain economies of scale with a much larger operation these expenses as a percentage of total revenues were 1.76% for the quarter ended June 30, 1998, which was a decrease from 1.96% for the quarter ended June 30, 1997. 22 EQUITY RESIDENTIAL PROPERTIES TRUST PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources As of January 1, 1998, the Company had approximately $33.3 million of cash and cash equivalents and $265 million available on its line of credit of which $24.7 million was restricted. After taking into effect the various transactions discussed in the following paragraphs, the Company's cash and cash equivalents balance at June 30, 1998 was approximately $265.9 million and the amount available on the Company's line of credit was $325 million of which $24.7 million was restricted. The following discussion also explains the changes in net cash provided by operating activities, net cash (used for) investing activities and net cash provided by financing activities, all of which are presented in the Company's Statements of Cash Flows. With respect to Property acquisitions during the six months, the Company purchased 41 Properties containing 10,544 units for a total acquisition cost of approximately $817.6 million, including the assumption of and or new mortgage indebtedness of approximately $232.8 million. These acquisitions were primarily funded from proceeds received from the January 1998 Common Share Offering, the February 1998 Common Share Offerings, the March 1998 Common Share Offering, the April 1998 Common Share Offering, the Direct Share Purchase Plan, the Company's line of credit and working capital. Subsequent to June 30, 1998 and through August 10, 1998, the Company acquired 50 additional properties containing 10,591 units for a total purchase price of approximately $722.5 million, including mortgage indebtedness of $182.8 million and the issuance of OP Units having a value of approximately $137.1 million. These acquisitions were primarily funded with proceeds from the sale of the 2015 Notes, the Company's line of credit and working capital. During the six months ended June 30, 1998, the Company disposed of five properties that generated net proceeds of $40.5 million. Subsequently, these proceeds will be ultimately applied to purchase additional Properties. As of June 30, 1998, the Company had total indebtedness of approximately $3.4 billion, which included mortgage indebtedness of $1.78 billion (including premiums of $3.4 million), of which $730 million represented tax-exempt bond indebtedness, unsecured debt of $1.4 billion (including net discounts and premiums in the amount of $3.3 million) and $175 million outstanding on the Company's line of credit. During the first six months, the Company repaid $34.1 million of mortgage indebtedness on five of its Properties. These repayments were funded from the Company's line of credit or from proceeds received from the various capital transactions as discussed in Note 3 of the Notes to Consolidated Financial Statements. The Company has, from time to time, entered into interest rate protection agreements (financial instruments) to reduce the potential impact of increases in interest rates but believes it has limited exposure to the extent of non- performance by the counterparties of each protection agreement since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance. No such financial instrument has been used for trading purposes. 23 EQUITY RESIDENTIAL PROPERTIES TRUST PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) In February 1996, the Company entered into an interest rate protection agreement that will hedge the Company's interest rate risk at maturity of $125 million of indebtedness. This agreement hedged the interest rate risk of the Operating Partnership's 1999 Notes by locking the effective four-year Treasury Rate commencing May 15, 1999. There was no cost to the Company for entering into this agreement. In July 1997, the Company entered into two interest rate protection agreements to effectively fix the interest rate cost of the Company's 2001 Notes and 2003 Notes. One agreement was for a notional amount of $100 million with a locked in treasury rate at 6.134%. The second agreement was for a notional amount of $75 million with a locked in treasury rate of 6.287%. In April 1998, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of the Company's 2015 Notes. The agreement was for a notional amount of $300 million with a locked in treasury rate of 6.63%. The fair value of these instruments as of June 30, 1998 approximates their carrying or contract values. The Company has a policy of capitalizing expenditures made for new assets, including newly acquired properties and the costs associated with placing these assets into service. Expenditures for improvements and renovations that significantly enhance the value of existing assets or substantially extend the useful life of an asset are also capitalized. Capital spent for replacement-type items such as appliances, draperies, carpeting and floor coverings, mechanical equipment and certain furniture and fixtures is also capitalized. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. With respect to acquired properties, the Company has determined that it generally spends $1,000 per unit during its first three years of ownership to fully improve and enhance these properties to meet the Company's standards. In regard to replacement-type items described above, the Company generally expects to spend $300 per unit on an annual recurring basis. During the six months ended June 30, 1998, total capital expenditures for the Company approximated $36.5 million. Of this amount, approximately $8.0 million related to capital improvements and major repairs for certain of the 1995, 1996, 1997 and 1998 Acquired Properties. Capital improvements and major repairs for all of the Company's pre-IPO properties and certain Acquired Properties approximated $8.8 million, or $63 per unit. Capital spent for replacement-type items approximated $15.3 million, or $109 per unit. Also included in total capital expenditures was approximately $4.4 million expended for non-real estate additions such as computer software, computer equipment, furniture and fixtures and leasehold improvements for the Company's property management offices and its corporate headquarters. Such capital expenditures were primarily funded from working capital reserves and from net cash provided by operating activities. Total capital expenditures for the remaining portion of 1998 are budgeted to be approximately $60 million. 24 EQUITY RESIDENTIAL PROPERTIES TRUST PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Minority Interests as of June 30, 1998 increased by $17.5 million when compared to December 31, 1997. The primary factors that impacted this account during the six month period were distributions declared to Minority Interests, which amounted to $12.9 million for the six month period, the allocation of income from operations in the amount of $8.3 million and the conversion of OP Units into Common Shares and the issuance of Common Shares during the first six months. Total distributions paid in July 1998 amounted to approximately $93.8 million, which included distributions declared for the quarter ended June 30, 1998. The Company expects to meet its short-term liquidity requirements, including capital expenditures relating to maintaining its existing Properties, generally through its working capital, net cash provided by operating activities and borrowings under its line of credit. The Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The Company also expects to meet its long-term liquidity requirements, such as scheduled mortgage debt maturities, reduction of outstanding amounts under its line of credit, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities including additional OP Units as well as from undistributed FFO and proceeds received from the disposition of certain Properties. In addition, the Company has certain uncollateralized Properties available for additional mortgage borrowings in the event that the public capital markets are unavailable to the Company or the cost of alternative sources of capital to the Company is too high. The Company currently has a $500 million line of credit that is scheduled to mature in November 1999. As of August 10, 1998, $340 million was outstanding under the Company's line of credit. The Company has conducted a review of its computer operating systems and has identified those areas that could be affected by the "Year 2000" issue and has developed a plan to resolve this issue. The Company believes that by modifying certain existing hardware and software and, in other cases, converting to new application systems, the Year 2000 problem can be resolved without significant operational difficulties. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company has estimated the Year 2000 project cost to be approximately $300,000. Funds From Operations The Company generally considers FFO to be one measure of the performance of real estate companies including an equity REIT. The resolution adopted by the Board of Governors of NAREIT defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation on real estate 25 EQUITY RESIDENTIAL PROPERTIES TRUST PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. The Company believes that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of the ability of the Company to incur and service debt and to make capital expenditures. FFO in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Company's calculation of FFO represents net income available to Common Shares, excluding gains on dispositions of properties, plus depreciation on real estate assets, income allocated to Minority Interests and amortization of deferred financing costs related to the Predecessor Business. The Company's calculation of FFO may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs. For the six months ended June 30, 1998, FFO increased by $96.1 million representing a 85.5% increase when compared to the six months ended June 30, 1997. For the quarter ended June 30, 1998, FFO increased by $47.4 million representing a 78.6% increase when compared to the quarter ended June 30, 1997. The following is a reconciliation of net income available to Common Shares to FFO available to Common Shares and OP Units for the six months and quarters ended June 30, 1998 and 1997:
Six Six Months Months Quarter Quarter Ended Ended Ended Ended 6/30/98 6/30/97 6/30/98 6/30/97 ------- ------- -------- -------- Net income available to Common Shares $ 81,938 $ 47,732 $ 46,043 $23,831 Adjustments: Income allocated to Minority Interests 8,310 6,345 4,622 2,919 Depreciation on real estate assets 129,387 61,885 66,162 33,453 Amortization of deferred financing costs related to predecessor business 35 116 23 58 Gain on disposition of properties (11,092) (3,632) (9,223) (0) -------- -------- -------- ------- FFO available to Common Shares and OP Units $208,578 $112,446 $107,627 $60,261 ======== ======== ======== =======
26 PART II. OTHER INFORMATION Item 1. Legal Proceedings There have been no new or significant developments related to the legal proceedings that were discussed in Part I, Item III of the Company's Form 10-K for the year ended December 31, 1997. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits: 12 Computation of Ratio of Earnings to Fixed Charges. (B) Reports on Form 8-K: A Report on Form 8-K dated April 23, 1998, reporting information on the April 1998 Common Share Offering. A Report on Form 8-K dated June 25, 1998, reporting information on the acquisition of assets. A Report on Form 8-K dated July 8, 1998, reporting information on the proposed Merger with Merry Land and Investment Company. A Report on Form 8-K dated July 23, 1998, reporting financial information of Merry Land and Investment Company. 27 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. EQUITY RESIDENTIAL PROPERTIES TRUST Date: August 11, 1998 By: /s/ Bruce C. Strohm --------------- ------------------------------------------ Bruce C. Strohm Executive Vice President, General Counsel and Secretary Date: August 11, 1998 By: /s/ Michael J. McHugh --------------- ------------------------------------------ Michael J. McHugh Executive Vice President, Chief Accounting Officer and Treasurer 28 EQUITY RESIDENTIAL PROPERTIES TRUST Consolidated and Combined Historical, Including Predecessor Business Earnings to Combined Fixed Charges and Preferred Distributions Ratio
Historical -------------------------------------------------------------------- 06/30/98 06/30/97 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 -------- ---------- --------- --------- --------- --------- -------- (Amounts in thousands) REVENUES Rental income $571,370 $290,799 $707,733 $454,412 $373,919 $220,727 $104,388 Fee income - outside managed 2,790 3,110 5,697 6,749 7,030 4,739 4,651 Interest income - investment in mortgage notes 10,221 8,011 20,366 12,819 4,862 -- -- Interest and other income 9,010 4,404 13,525 4,405 4,573 5,568 3,031 -------- -------- -------- -------- -------- -------- -------- Total revenues 593,391 306,324 747,321 478,385 390,384 231,034 112,070 -------- -------- -------- -------- -------- -------- -------- EXPENSES Property and maintenance 137,910 70,760 176,075 127,172 112,186 66,534 35,324 Real estate taxes and insurance 56,484 29,667 69,520 44,128 37,002 23,028 11,403 Property management 25,110 11,819 26,793 17,512 15,213 10,249 3,491 Property management - non-recurring -- -- -- -- -- 879 -- Fee and asset management 2,240 1,569 3,364 3,837 3,887 2,056 2,524 Depreciation 131,910 62,775 156,644 93,253 72,410 37,273 15,384 Interest: Expense incurred 105,651 50,924 121,324 81,351 78,375 37,044 26,042 Amortization of deferred financing costs 1,275 1,220 2,523 4,242 3,444 1,930 3,322 Refinancing costs -- -- -- -- -- -- 3,284 General and administrative 10,271 6,206 15,064 9,857 8,129 6,053 3,159 -------- -------- -------- -------- -------- -------- -------- Total expenses 470,851 234,940 571,307 381,352 330,646 185,046 103,933 -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item $122,540 $ 71,384 $176,014 $ 97,033 $ 59,738 $ 45,988 $ 8,137 ======== ======== ======== ======== ======== ======== -------- Combined Fixed Charges and Preferred Distributions: Interest and other financing costs $105,651 $ 50,924 $121,324 $ 81,351 $ 78,375 $ 37,044 $ 26,042 Refinancing costs -- -- -- -- -- -- 3,284 Amortization of deferred financing costs 1,275 1,220 2,523 4,242 3,444 1,930 3,322 Preferred distributions 43,384 20,939 59,012 29,015 10,109 -- -- -------- -------- -------- -------- -------- -------- -------- Total Combined Fixed Charges and Preferred Distributions $150,310 $ 73,083 $182,859 $114,608 $ 91,928 $ 38,974 $ 32,648 ======== ======== ======== ======== ======== ======== ======== Earnings before combined fixed charges and preferred distributions $229,466 $123,528 $299,861 $182,626 $141,557 $ 84,962 $ 40,785 ======== ======== ======== ======== ======== ======== ======== Funds from operations before combined fixed charges and preferred distributions $361,376 $186,303 $456,505 $275,879 $213,967 $122,235 $ 56,169 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings before combined fixed charges and preferred distributions to combined fixed charges and preferred distributions 1.53 1.69 1.64 1.59 1.54 2.18 1.25 ======== ======== ======== ======== ======== ======== ======== Ratio of funds from operations before combined fixed charges and preferred distributions to combined fixed charges and preferred distributions 2.40 2.55 2.50 2.41 2.33 3.14 1.72 ======== ======== ======== ======== ======== ======== ========
EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Consolidated Balance Sheet and Statement of Operations and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 265,915 0 5,127 0 0 468,669 7,968,121 (573,359) 8,000,039 279,407 3,378,860 0 1,041,700 979 3,008,323 8,000,039 584,381 593,391 0 219,504 10,271 0 106,926 122,540 0 122,540 11,092 0 0 81,938 .86 .85
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