-----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, VqQDizNKPDT5ZZX4Dynas1haWzv5QSKXm4lSMF47zV8vTOgyoW4Sb6ZJSKQ23qsV rc2zYSQfttHKr4OEVrcQqA== 0000950131-97-006724.txt : 19971114 0000950131-97-006724.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950131-97-006724 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 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: 97714642 BUSINESS ADDRESS: STREET 1: TWO N RIVERSIDE PLZ STREET 2: STE 400 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3124661300 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 SEPTEMBER 30, 1997 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 (I.R.S. Employer Incorporation or Organization) Identification 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 NOVEMBER 11, 1997, 77,546,116 OF THE REGISTRANT'S COMMON SHARES OF BENEFICIAL INTEREST WERE OUTSTANDING. RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ----------------- ---------------- ASSETS Investment in rental property Land $ 501,220 $ 284,879 Depreciable property 4,321,559 2,698,631 ----------------- ---------------- 4,822,779 2,983,510 Accumulated depreciation (400,550) (301,512) ----------------- ---------------- Investment in rental property, net of accumulated depreciation 4,422,229 2,681,998 Real estate held for disposition 3,948 - Cash and cash equivalents 277,997 147,271 Investment in mortgage notes, net 176,051 86,596 Rents receivable 2,614 1,450 Deposits - restricted 7,761 20,637 Escrow deposits - mortgage 31,702 15,434 Deferred financing costs, net 14,168 14,555 Other assets 97,544 18,186 ------------------ ---------------- TOTAL ASSETS $ 5,034,014 $ 2,986,127 ================= ================ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $ 963,819 $ 755,434 Notes, net 754,292 498,840 Accounts payable and accrued expenses 56,864 33,117 Accrued interest payable 20,493 12,737 Due to affiliates 783 628 Rents received in advance and other liabilities 28,928 15,838 Security deposits 21,196 14,128 Distributions payable 66,707 45,938 ----------------- ---------------- TOTAL LIABILITIES 1,913,082 1,376,660 ----------------- ---------------- Commitments and contingencies Minority Interests 181,884 150,637 ----------------- ----------------
See accompanying notes. 2 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ----------------- ---------------- 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 - Series E Cumulative Convertible Preferred Shares of Beneficial Interest, liquidation preference $25 per share, 3,999,800 shares issued and outstanding 99,995 - 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 - 7 1/4% Series G Convertible Cumulative Preferred Shares of Beneficial Interest, liquidation preference $250 per share, 1,100,000 shares issued and outstanding 275,000 - Common Shares of beneficial interest, $.01 par value, 200,000,000 shares authorized, 74,205,030 shares issued and outstanding as of September 30, 1997 and 51,154,836 shares issued and outstanding as of December 31, 1996 742 512 Paid in capital 2,066,973 1,147,214 Employee notes (5,173) (5,255) Distributions in excess of accumulated earnings (123,989) (76,641) ----------------- ---------------- Total shareholders' equity 2,939,048 1,458,830 ----------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,034,014 $ 2,986,127 ================= ================
3 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, QUARTERS ENDED SEPTEMBER 30, ---------------------------------- ------------------------------- 1997 1996 1997 1996 ---------------------------------- ------------------------------- REVENUES Rental income $ 482,980 $ 327,749 $ 192,181 $ 118,510 Fee and asset management 4,364 4,982 1,254 1,679 Interest income - investment in mortgage notes 14,821 9,084 6,810 3,218 Interest and other income 7,513 2,232 3,109 1,052 ------------- ------------- ------------ ------------ Total revenues 509,678 344,047 203,354 124,459 ------------- ------------- ------------ ------------ EXPENSES Property and maintenance 117,681 93,128 46,921 34,183 Real estate taxes and insurance 48,560 32,301 18,893 11,072 Property management 18,765 13,136 6,946 4,336 Fee and asset management 2,523 3,037 954 911 Depreciation 106,114 66,759 43,339 23,826 Interest: Expense incurred 82,775 58,632 31,851 21,608 Amortization of deferred financing costs 1,810 2,860 590 965 General and administrative 10,037 6,690 3,831 2,313 ------------- ------------- ------------ ------------ Total expenses 388,265 276,543 153,325 99,214 ------------- ------------- ------------ ------------ Income before gain on disposition of properties, extraordinary item and allocation to Minority Interests 121,413 67,504 50,029 25,245 Gain on disposition of properties 3,923 2,346 291 - ------------- ------------- ------------ ------------ Income before extraordinary item and allocation to Minority Interests 125,336 69,850 50,320 25,245 Write-off of unamortized costs on refinanced debt - (3,134) - (3,134) ------------- ------------- ------------ ------------ Income before allocation to Minority Interests 125,336 66,716 50,320 22,111 Income allocated to Minority Interests (9,431) (8,426) (3,086) (2,503) ------------- ------------- ------------ ------------ Net income 115,905 58,290 47,234 19,608 Preferred distributions (37,287) (19,953) (16,348) (7,079) ------------- ------------- ------------ ------------ Net income available to Common Shares $ 78,618 $ 38,337 $ 30,886 $ 12,529 ============= ============= ============ ============ Net income per weighted average Common Share outstanding $ 1.28 $ 0.94 $ 0.42 $ 0.29 ============= ============= ============ ============ Weighted average Common Shares outstanding 61,577 40,934 73,757 43,781 ============= ============= ============ ============ Distributions declared per Common Share outstanding $ 1.88 $ 1.77 $ 0.63 $ 0.59 ============= ============= ============ ============
See accompanying notes. 4 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------- 1997 1996 --------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 115,905 $ 58,290 Adjustments to reconcile net income to net cash provided by operating Activities: Income allocated to Minority Interests 9,431 8,426 Depreciation 106,114 66,759 Amortization of deferred financing costs (including discount on 1999 and 2002 Notes and premium on 2002-A Notes) 1,652 3,097 Amortization of discount on investment in mortgage notes (2,480) - Gain on disposition of properties (3,923) (2,346) Write-off of unamortized costs on refinanced debt - 3,134 Changes in assets and liabilities: (Increase) in rents receivable (862) (1,021) (Increase) decrease in deposits - restricted (736) 14,471 (Increase) in other assets (6,306) (2,801) Increase (decrease) in due to affiliates 77 (606) Increase in accounts payable and accrued expenses 20,813 12,847 Increase in accrued interest payable 7,756 6,328 Increase in rents received in advance and other liabilities 6,901 5,134 --------------- --------------- Net cash provided by operating activities 254,342 171,712 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in rental properties, net (630,419) (460,825) Improvements to rental property (23,725) (23,381) Additions to non-rental property (6,293) (1,672) Proceeds from disposition of rental property, net 5,477 10,183 Purchase of contract rights (5,000) - (Increase) decrease in mortgage deposits (14,704) 1,792 Deposits (made) on rental property acquisitions (2,850) (1,800) Deposits applied on rental property acquisitions 16,761 100 Investment in mortgage notes, net (86,975) 668 Merger costs and related activities (60,429) - Other investing activities, net (57,304) (629) --------------- --------------- Net cash (used for) investing activities (865,461) (475,564) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of Common Shares 515,465 304,787 Proceeds from sale of Preferred Shares 450,000 115,000 Proceeds from exercise of options 4,321 3,358 Proceeds from sale of 2026 Notes - 150,000 Redemption of Preference Units - (1,083) Payment of offering costs (18,840) (4,347) Distributions to Common Share and Preferred Share owners (144,220) (87,775) Distributions to Minority Interests (14,072) (15,297) Principal receipts on employee notes 240 57 Proceeds from restructuring of tax-exempt bond investments 9,350 112,980 Loan to title holding entities - (4,092) Proceeds from line of credit 185,000 250,000 Repayments on line of credit (185,000) (342,000) Principal payments on mortgage notes payable (62,993) (35,725) Loan and bond acquisition costs (1,697) (5,767) Increase in security deposits 3,843 2,873 Net cash provided by financing activities 741,397 442,969 --------------- --------------- Net increase in cash and cash equivalents 130,278 139,117 Cash and cash equivalents, beginning of period 147,271 13,428 --------------- --------------- Cash and cash equivalents, end of period $ 277,549 $ 152,545 =============== ===============
See accompanying notes 5 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------- 1997 1996 ----------------------------------------- Supplemental information: Cash paid during the period for interest $ 75,019 $ 52,304 ============= =================== Mortgage loans and unsecured notes assumed through Merger and acquisitions of rental properties $ 517,639 $ 99,912 ============= =================== Rental property assumed through foreclosure $ - $ 10,854 ============= ===================
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, 1996 ("Form 10-K"). 1. BUSINESS As used herein, the term "Company" includes Equity Residential Properties Trust and its subsidiaries as the survivor of the merger between Wellsford Residential Property Trust ("Wellsford") and Equity Residential Properties Trust ("EQR") (the "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 September 30, 1997, the Company controlled a portfolio of 336 multifamily properties (individually a "Property" and collectively the "Properties"). The Company's interest in six of the 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 and mortgage loans collateralized by five properties (collectively, the "Additional Properties"). 2. BASIS OF PRESENTATION The Merger was treated as a purchase in accordance with Accounting Principles Board Opinion No. 16. Purchase accounting for a merger is the same as the accounting treatment used for the acquisition of any group of assets. The fair market value of the consideration given by the Company in the Merger was used as the valuation basis of the combination. The assets acquired and the liabilities assumed of Wellsford were recorded at their relative fair market values as of May 30, 1997 (the "Closing Date"). The accompanying consolidated financial statements include the results of operations of Wellsford from the Closing Date. 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 and the LLCs, each such entity has been consolidated with the Company for financial reporting purposes. In regard to Management Corp. and Management Corp. II, 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 Company's Annual Report on 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 7 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to the prior period's financial statements in order to conform with the current period presentation. 3. BUSINESS COMBINATIONS On the Closing Date of the Merger, 72 Properties containing 19,004 units and other related assets were acquired for a total purchase price of approximately $1 billion. The purchase price consisted of 10.8 million common shares with a market value of $443.7 million, the liquidation value of $157.5 million for the Series E Preferred Shares and the Series F Preferred Shares, as defined in the paragraph below, the assumption of mortgage indebtedness and unsecured notes in the amount of $345 million, the assumption of other liabilities of approximately $33.5 million and other Merger related costs of approximately $23.4 million. In connection with the Merger, as of the Closing Date, each outstanding common share of beneficial interest of Wellsford was converted into .625 of a Common Share of the Company. In addition, Wellsford's Series A Cumulative Convertible Preferred Shares of Beneficial Interest were redesignated as the Company's 3,999,800 Series E Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series E Preferred Shares") and Wellsford's Series B Cumulative Redeemable Preferred Shares of Beneficial Interest were redesignated as the Company's 2,300,000 9.65% Series F Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series F Preferred Shares"). The Series E Preferred Shares are cumulative from the date of original issue and are payable quarterly on January 1, April 1, July 1 and October 1 in an amount equal to $1.75 per share per annum. Each Series E Preferred Share is convertible at the option of the holder thereof at any time into Common Shares at a conversion price of $44.93 per Common Share (equivalent to a conversion rate of approximately .5564 Common Share for each Series E Preferred Share). The Series E Preferred Shares are not redeemable prior to November 1, 1998. On and after November 1, 1998, the Series E Preferred Shares may be redeemed at the option of the Company, in whole or in part, initially at $25.875 per share and thereafter at prices declining to $25.00 per share on and after November 1, 2003, plus accrued and unpaid distributions, if any, thereon. The Series F Preferred Shares are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of January, April, July and October of each year at the rate of 9.65% of the liquidation preference of $25 per share. The Series F Preferred Shares are not redeemable prior to August 24, 2000. On or after August 24, 2000, the Series F Preferred Shares may be redeemed for cash at the option of the Company, in whole or in part, at a redemption price of $25.00 per share, plus accrued and unpaid distributions, if any, thereon. 8 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On August 27, 1997, the Company entered into an Agreement and Plan of Merger regarding the planned acquisition of the multifamily property business of Evans Withycombe Residential, Inc. ("EWR"), a Maryland corporation, by the Company through the tax free merger of the Company and EWR (the "EWR Merger"). The transaction is valued at approximately $1 billion and includes 52 multifamily properties containing approximately 16,000 units. In the EWR Merger, each outstanding share of common stock of Evans will be converted into .50 of a Common Share of the Company. The EWR Merger is subject to approval of the shareholders of the Company and EWR and, therefore, completion of the EWR Merger is conditioned upon such approval and certain other closing conditions. 4. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS During the nine months ended September 30, 1997, the Company issued 71,254 Common Shares pursuant to the Employee Share Purchase Plan and received net proceeds of approximately $2.7 million. In March 1997, the Company completed offerings in the aggregate of 1,921,000 publicly registered Common Shares, which were sold to the public at a price of $46 per share (the "March 1997 Common Share Offerings"). The Company received net proceeds of approximately $88.3 million therefrom. On May 14, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register $500 million of equity securities (the "June 1997 Equity Shelf Registration"). The SEC declared this Registration effective on June 5, 1997. In May 1997, the Company sold 7,000,000 depositary shares (the "Series D Depositary Shares") pursuant to the June 1997 Equity Shelf Registration. Each Series D Depositary Share represents a 1/10 fractional interest in a 8.60% Series D Cumulative Redeemable Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series D Preferred Shares"). The liquidation preference of each of the Series D Preferred shares is $250.00 (equivalent to $25 per Series D Depositary Share). The Company raised gross proceeds of approximately $175 million from this offering (the "Series D Preferred Share Offering"). The Company received net proceeds of approximately $169.5 million therefrom. In June 1997, the Company completed four separate public offerings in the aggregate of 8,992,023 Common Shares, which were sold at prices ranging from $44.06 to $45.88 per share (the "June 1997 Common Share Offerings"). The Company received net proceeds of approximately $398.9 million therefrom. The Third Amended and Restated Share Option and Share Award Plan ("Third Amended Option and Award Plan") was approved by the Board of Trustees on June 5, 1997 and approved by the shareholders on July 22, 1997. The Third Amended Option and Award Plan increased the number of Options and Awards which can be issued by the Company to 5,600,000 Common Shares. 9 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On July 28, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register $750 million of equity securities (the "August 1997 Equity Shelf Registration"). The SEC declared this Registration effective on August 4, 1997. In September 1997, the Company completed the sale of 498,000 publicly registered Common Shares which were sold at a price of $51.125 per share. The Company received net proceeds of approximately $24.2 million in connection with this offering (the "September 1997 Common Share Offering"). In September 1997, the Company sold 11,000,000 depositary shares (the "Series G Depositary Shares") pursuant to the August 1997 Equity Shelf Registration. Each Series G Depositary Share represents a 1/10 fractional interest in a 7 1/4% Series G Convertible Cumulative Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series G Preferred Shares"). Series G Depositary Shares representing Series G Preferred Shares are convertible at the option of the holder thereof at any time into Common Shares at a conversion price of $58.58 per Common Share (equivalent to a conversion rate of approximately .4268 Common Shares for each Series G Depositary Share). The liquidation preference of each of the Series G Preferred Shares is $250.00 per share (equivalent to $25 per Series G Depositary Share). The Company raised gross proceeds of approximately $275 million from this offering (the "Series G Preferred Share Offering"). The Company received net proceeds of approximately $264 million therefrom. In addition, in October 1997, the Company sold 1,650,000 additional Series G Depositary Shares pursuant to an over allotment option granted to the underwriters and raised gross proceeds of approximately $41.25 million therefrom. The Company received net proceeds of approximately $39.6 million therefrom. The following table presents the changes in the Company's issued and outstanding Common Shares for the nine months ended September 30, 1997: Balance at January 1, 1997 51,154,836 Common Shares issued through March 1997 Common Share Offerings 1,921,000 Common Shares issued through June 1997 Common Share Offerings 8,992,023 Common Shares issued through September 1997 Common Share Offering 498,000 Common Shares issued through Employee Share Purchase Plan 71,254 Common Shares issued through conversion of Wellsford common shares 10,823,016 Conversion of OP Units into Common Shares 546,214 Common Shares issued through restricted share awards 28,246 Common Shares issued through exercise of options 157,301 Common Shares issued through 401(k) Plan 13,140 ---------- Balance at September 30, 1997 74,205,030 ==========
Assuming conversion of all 7,424,241 OP Units into Common Shares, total Common Shares outstanding at September 30, 1997 would have been 81,629,271. 10 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 September 30, 1997, the Minority Interests held 7,424,241 OP Units which represented a 9.10% 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 $0.625 per Common Share distribution on October 10, 1997 for the quarter ended September 30, 1997 to Common Share holders of record as of September 26, 1997. On October 1, 1997, the Company paid, for the quarter ended September 30, 1997, a $0.4375 per share distribution to Series E Preferred Share holders of record as of September 15, 1997. On October 15, 1997, the Company paid, (i) a $0.585938 per share distribution to Series A Preferred Share holders of record as of September 26, 1997; (ii) a $0.570313 per share distribution to both Series B Depositary Share holders and Series C Depositary Share holders of record as of September 26, 1997; (iii) a $0.5375 per share distribution to Series D Depositary Share holders of record as of September 26, 1997; (iv) a $0.603125 per share distribution to Series F Preferred Share holders of record on September 26, 1997; and (v) a $0.1108 per share distribution to Series G Depositary Share holders of record as of October 1, 1997, representing the period from September 24, 1997 (the day of issuance) to October 15, 1997. 5. INVESTMENT IN RENTAL PROPERTY In addition to the Merger, during the nine months ended September 30, 1997, the Company acquired the 47 Properties listed below. Each Property was purchased from an unaffiliated third party, except for 12 of the Properties, which were purchased from affiliates of the Company, Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership ("Zell/Merrill I") and subsidiaries of Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership II ("Zell/Merrill II"). The total purchase price for the Properties acquired from Zell/Merrill I and Zell/Merrill II was approximately $162.6 million. The cash portion of these transactions was funded primarily from proceeds raised from the March 1997 Common Share Offerings, the Series D Preferred Share Offering, the June 1997 Common Share Offerings and the September 1997 Common Share Offering. 11 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
Total Acquisition Date Number Cost (in -- Acquired Property Location of Units thousands) -------- -------- -------- -------- ----------- 01/02/97 Town Center Kingwood, TX 258 $ 12,853 01/21/97 Harborview San Pedro, CA 160 19,089 01/31/97 The Cardinal Greensboro, NC 256 13,174 02/12/97 Trails at Dominion Houston, TX 843 38,420 02/25/97 Dartmouth Woods Lakewood, CO 201 12,473 02/28/97 Rincon Houston, TX 288 21,150 02/28/97 Waterford at the Lakes Kent, WA 344 19,388 03/17/97 Junipers at Yarmouth Yarmouth, ME 225 9,215 03/20/97 Lincoln Harbor Ft. Lauderdale, FL 324 22,262 03/24/97 Sedona Ridge Phoenix, AZ 250 15,242 03/28/97 Club at the Green Beaverton, OR 254 14,703 03/28/97 Boulder Creek (formerly Knight's Castle) Wilsonville, OR 296 15,146 04/04/97 Country Gables Beaverton, OR 288 17,175 04/04/97 Watermark Square Portland, OR 390 15,929 04/04/97 Indigo Springs Kent, WA 278 12,812 04/29/97 Summit Chase Coral Springs, FL 140 5,593 05/13/97 Willow Brook Durham, NC 176 8,544 05/15/97 The Willows Knoxville, TN 250 11,038 05/21/97 Cascade at Landmark Alexandria, VA 277 23,292 05/21/97 Sabal Palm Club Pompano Beach, FL 416 23,809 05/21/97 Tamarlane Portland, ME 115 5,853 05/22/97 Spinnaker Cove Hermitage, TN 278 14,658 05/29/97 Banyan Lake Boynton Beach, FL 288 13,985 05/30/97 Wyndridge III Memphis, TN 284 15,103 06/06/97 Wyndridge II Memphis, TN 284 15,178 06/13/97 Windemere Mesa, AZ 224 9,629 06/13/97 Preston Bend Dallas, TX 255 11,042 06/13/97 Highline Oaks Denver, CO 220 10,754 06/17/97 Hunter's Ridge/South Pointe St. Louis, MO 390 19,524 06/19/97 Club at Tanasbourne Hillsboro, OR 352 19,817 06/26/97 Wood Creek Pleasant Hill, CA 256 32,752 07/02/97 Ridgemont/Mountain Brook Chattanooga, TN 506 15,084 07/11/97 Foxchase Grand Prairie, TX 260 8,446 07/18/97 La Mirage San Diego, CA 1,070 128,773 07/31/97 Bay Ridge San Pedro, CA 60 4,566 08/07/97 Boynton Place Boynton Beach, FL 192 9,340 08/12/97 Cambridge Village Lewisville, TX 200 9,564 08/12/97 Crosswinds St. Petersburg, FL 208 7,328
12 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
Total Acquisition Date Number Cost (in -- Acquired Property Location of Units thousands) -------- -------- -------- -------- ---------- 08/12/97 Gates of Redmond I Redmond, WA 180 14,336 08/15/97 Gates of Redmond II Redmond, WA 100 8,012 08/27/97 Paces Station/Paces on the Green Atlanta, GA 610 37,370 09/05/97 North Hill Atlanta, GA 420 21,034 09/05/97 Pardee Casas San Diego, CA 196 13,312 09/29/97 The Classic Stamford, CT 144 22,760 09/30/97 Cambridge at Hickory Hollow Nashville, TN 360 21,149 ------ -------- 13,366 $820,676 ====== ========
6. DISPOSITIONS On March 28, 1997, the Company sold Plantation Apartments located in Monroe, Louisiana for a sales price of $4.8 million. The gain for financial reporting purposes was approximately $3.6 million. On August 25, 1997, the Company sold a parcel of vacant land located in Hollywood, Florida for a sales price of $0.7 million. The gain for financial reporting purposes was approximately $0.3 million. 7. COMMITMENTS TO ACQUIRE RENTAL PROPERTIES As of September 30, 1997, in addition to the properties which were subsequently acquired as discussed in Note 16 of the Notes to Consolidated Financial Statements but excluding the EWR Merger, the Company had entered into agreements to acquire 33 multifamily properties containing 7,745 units from various unaffiliated third parties. The expected combined purchase price is approximately $430 million, which includes the assumption of mortgage indebtedness of approximately $238.1 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. 8. INVESTMENT IN MORTGAGE NOTES, NET On April 28, 1997, the Company made an $88 million investment in six mortgage loans collateralized by five multifamily properties. These five multifamily properties are included in the Additional Properties. Investment in mortgage notes, net, represents the Company's investment in subordinated mortgages and mortgage loans collateralized by the Additional Properties. 13 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 9. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE COMMON SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute net income per weighted average Common Share and to restate all prior periods. The impact of Statement 128 on the calculation of net income per weighted average Common Share and net income per weighted average Common Share- assuming dilution for these quarters is not expected to be material. 10. MORTGAGE NOTES PAYABLE As of September 30, 1997, the Company had outstanding mortgage indebtedness of approximately $963.8 million encumbering 103 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $149.1 million) was approximately $1.4 billion. In connection with the Properties acquired during the nine months ended September 30, 1997, including the effects of the Merger, the Company assumed the outstanding mortgage balances on 24 Properties in the aggregate amount of $262 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 which is calculated based on the Public Securities Association Index for municipal bonds ("PSA Municipal Index"). As of September 30, 1997, the aggregate notional amount of these agreements was approximately $174.8 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 September 30, 1997, the aggregate notional amount of these agreements was approximately $174.8 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. Furthermore, any non-performance by the counterparty is offset by non-performance by the Company. 14 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) Scheduled maturities for the Company's outstanding mortgage indebtedness are at various dates through August 1, 2030. As of September 30, 1997, fixed interest rates on certain of these mortgage notes ranged from 4% to 10.27% and variable interest rates on certain of the mortgage notes ranged from 4.15% to 7.072%. During the nine months ended September 30, 1997, the Company repaid the outstanding mortgage balances on ten Properties in the aggregate amount of $58.4 million. Subsequent to September 30, 1997, the Company repaid the outstanding mortgage balance on 18 Properties in the amount of approximately $52.4 million. In February 1996, the Company entered into an interest rate protection agreement which hedged the interest rate risk of $50 million of mortgage loans scheduled to mature in September 1997 by locking the five year Treasury Rate, commencing October 1, 1997 through October 1, 2002. This agreement was cancelled in July 1997 in conjunction with the Company entering into another interest rate protection agreement to effectively fix the cost of the Company's anticipated issuance of unsecured notes in the fourth quarter of 1997. 11. LINE OF CREDIT The Company, through the Operating Partnership, had a $250 million unsecured line of credit with Morgan Guaranty Trust Company of New York and Bank of America Illinois. In September 1997, the Company increased the amount available on this line of credit from $250 million to $500 million. As of September 30, 1997, there were no amounts outstanding on this line of credit. 12. NOTES Included in the note balance are the 1999 Notes, the Floating Rate Notes, the 2002 Notes, the 2026 Notes and four unsecured note issuances assumed in connection with the Merger. These notes assumed are discussed in the following three paragraphs. As of September 30, 1997, the unamortized discount balances related to the 1999 Notes and the 2002 Notes were approximately $0.3 million and $0.6 million, respectively. In January 1995, $100 million of senior unsecured notes due February 1, 2002 (the "2002-A Notes") were issued. The 2002-A Notes bear interest at a rate of 9.375%, which is payable semiannually in arrears on August 1 and February 1. In connection with the 2002-A Notes, the Company recorded a premium in the amount of $5.6 million, which is being amortized over the remaining life of the notes on a straight-line basis. As of September 30, 1997, the unamortized premium balance relating to the 2002-A Notes was approximately $5.2 million. In August 1995, $125 million of senior unsecured notes were issued. Of the $125 million issued, $55 million of these notes are due August 15, 2000 (the "2000 Notes") and bear interest at a rate of 7.25%, which is payable semiannually in arrears on February 15 and August 15. The remaining $70 million of these notes are due August 15, 2005 (the "2005 Notes") and bear interest at a rate of 7.75%, which is payable semiannually in arrears on February 1 and August 1. 15 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) In November 1996, $25 million of medium term floating rate notes due November 24, 1999 (the "1999-A Notes") were issued. The 1999-A Notes bear interest at 90 day LIBOR plus 0.32%, which is payable quarterly in arrears on the 25th day of each February, May, August and November. 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 current cost to the Company for entering into this agreement. In connection with the Floating Rate Notes, the Operating Partnership has entered into interest rate protection agreements which fix the interest rate at an effective rate of 7.075% through the term of the Floating Rate Notes. Prior to the issuance of the 2002 Notes, the Operating Partnership entered into an interest rate protection agreement to effectively fix the interest rate cost of such issuance. The Operating Partnership 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 September 30, 1997, the unamortized balance of this cost was approximately $0.5 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. The Operating Partnership received a one time settlement payment of this transaction, which was approximately $0.6 million, which amount is being amortized over the term of the 2026 Notes. As of September 30, 1997, the unamortized balance was approximately $0.5 million. 13. DEPOSITS - RESTRICTED Deposits - restricted, as of September 30, 1997, primarily included deposits in the amount of approximately $2.85 million held in third party escrow accounts. These deposits are expected to be utilized for the acquisition of additional properties. Also included in the deposits - restricted amount were tenant security and utility deposits made for certain of the Company's Properties. 14. SUMMARIZED PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) The following Summarized Pro Forma Condensed Statement of Operations has been prepared as if the March 1997 Common Share Offerings, the Series D Preferred Share Offering, the June 1997 Common Share Offerings, the Merger, the September 1997 Common Share Offering, the acquisition of an additional 47 Properties, including the related assumption of $193.5 million of mortgage indebtedness, the repayment of $58.4 million of mortgage indebtedness and the disposition of one property had occurred on January 1, 1997. This would result in 74,205,030 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 16 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) above transactions occurred on January 1, 1997, or to project results for any future period. The amounts presented in the following statement are in thousands except for share amounts:
Summarized Pro Forma Condensed Statement of Operations For the Nine Months Ended September 30, 1997 (Amounts in thousands except per share amounts) ------------------------- Total Revenues $608,419 -------- Total Expenses 456,223 -------- Pro Forma income before allocation to Minority Interests 152,196 -------- Pro Forma net income 142,703 -------- Preferred distributions 47,882 -------- Pro Forma net income available for Common Shares $ 94,821 ======== Pro Forma net income per Common Share $1.28 ========
15. COMMITMENTS AND CONTINGENCIES On March 20, 1996, a legal proceeding (Nick J. Miletich, Administrator of the Estates of Dorothy Miletich and Madelyne Miletich, deceased, v. Equity Residential Properties Trust, Equity Residential Properties Management Corporation, Curt Vajgrt, Raymond Countryman and Darla Countryman) (Iowa District Court, Polk County, Iowa, Law Case No. CL 68908) was filed against the Company. This legal proceeding arises out of the Company's ownership and management of the apartment building known as 3000 Grand Ave. in Des Moines, Iowa and alleges that Raymond and Darla Countryman murdered Dorothy Miletich and Madelyne Miletich, who were residents of the apartment complex, on June 15, 1995. Raymond Countryman is a former employee of the Company. The plaintiff alleges, inter alia, that had the Company learned of the background of Mr. ----- ---- Countryman prior to his employment, the Company would not have hired him and the deaths of the Miletichs would have been avoided. During the quarter ended September 30, 1997, the Company settled this lawsuit with all payments in excess of $250,000 being borne by the Company's insurance coverage. 17 EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The Company does not believe there is any other litigation, except as mentioned in the previous paragraph, 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. 16. SUBSEQUENT EVENTS On October 3, 1997, the Company acquired Brookfield Apartments, a 128-unit multifamily property located in Salt Lake City, Utah, from an unaffiliated third party for a purchase price of approximately $6.8 million. On October 9, 1997, the Company acquired, from an unaffiliated third party, 21 multifamily properties containing 5,149 units for a total purchase price of approximately $277.5 million. On October 17, 1997, the Company acquired Deerwood Apartments, a 316-unit multifamily property located in Corona, California, from an unaffiliated third party for a purchase price of approximately $25 million. On October 21, 1997, the Company acquired 17 multifamily properties containing 5,015 units from an unaffiliated third party for a total purchase price of $292.4 million, which included the assumption of mortgage indebtedness of $136 million and the issuance of 3,315,500 Common Shares at a price of $45.25 per share. In October 1997, the Operating Partnership issued $150,000,000 of 7 1/8% unsecured fixed rate notes (the "2017 Notes") in connection with the 1996 Debt Shelf Registration in a public debt offering (the "Fourth Public Debt Offering"). The Operating Partnership received net proceeds of approximately $147.4 million in connection with this issuance. On November 3, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register 7,000,000 Common Shares pursuant to a Distribution Reinvestment and Share Purchase Plan. The SEC has not yet declared this Registration effective. 18 EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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, as amended by Form 10-K/A, for the year ended December 31, 1996. RESULTS OF OPERATIONS Since EQR's IPO and through September 30, 1997, the Company has acquired direct or indirect interests in 279 properties, including properties acquired through the Merger, (the "Acquired Properties"), containing 82,050 units in the aggregate for a total purchase price of approximately $4.2 billion, including the assumption of approximately $816.6 million of mortgage indebtedness. 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 ten of such Acquired Properties consisting of 2,694 units between the IPO and December 31, 1993 (the "1993 Acquired Properties"); 84 of such Acquired Properties consisting of 26,286 units in 1994 (the "1994 Acquired Properties"); 17 of such Acquired Properties consisting of 5,035 units in 1995 (the "1995 Acquired Properties"); 49 of such Acquired Properties consisting of 15,665 units in 1996 (the "1996 Acquired Properties"); and 119 of such Acquired Properties consisting of 32,370 units in 1997 (the "1997 Acquired Properties"). In addition, in August 1995, the Company made an investment in partnership interests and subordinated mortgages collateralized by 21 of the Additional Properties. Also, in April 1997, the Company made an $88 million investment in six mortgage loans collateralized by five of the Additional Properties. The Acquired Properties are presented in the Consolidated Financial Statements of the Company from the date of each acquisition. During the nine months ended September 30, 1997, the Company disposed of one property (the "1997 Disposed Property") for a sales price of $4.8 million and disposed of one parcel of vacant land for a sales price of $.7 million. The Company's overall results of operations for the quarter and nine months ended September 30, 1997 have been impacted by the Company's acquisition and disposition activity. The significant increases in rental revenues, property and maintenance expenses, real estate taxes and insurance, depreciation expense and property management can all primarily be attributed to the acquisition of the 1996 Acquired Properties and 1997 Acquired Properties. The impact of the 1996 Acquired Properties and 1997 Acquired Properties is discussed in greater detail in the following paragraphs. The Company's disposition activity partially offset the increases to these same accounts. 19 EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Properties that the Company owned for all of both nine month periods ended September 30, 1997 and September 30, 1996 (the "Nine-Month 1997 Same Store Properties") and Properties that the Company owned for all of both the quarters ended September 30, 1997 and September 30, 1996 (the "Third-Quarter 1997 Same Store Properties") also impacted the Company's results of operations and are discussed as well in the following paragraphs. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED SEPTEMBER 30, 1996 For the nine months ended September 30, 1997, income before gain on disposition of properties, extraordinary item and allocation to Minority Interests increased by $53.9 million when compared to the nine months ended September 30, 1996. 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 and interest expense. All of the increases in the various line item accounts mentioned above can be primarily attributed to the 1997 Acquired Properties and 1996 Acquired Properties. These increases were partially offset by the 1996 Disposed Properties and the 1997 Disposed Property. The increase in interest income of $5.7 million earned on the Company's mortgage note investments is primarily attributable to the $88 million investment in six mortgage loans made in April 1997. In regard to the Nine-Month 1997 Same Store Properties, rental revenues increased by approximately $8 million or 2.7% primarily as a result of higher rental rates charged to new tenants and tenant renewals. Overall property operating expenses which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses decreased approximately $1.5 million or 1.3%. This decrease was primarily the result of lower medical and health care insurance costs, building 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 $5.6 million primarily due to the continued expansion of the Company's property management business to facilitate the management of the Company's additional properties. The Company most recently opened new area offices in Houston, Texas; Ypsilanti, Michigan; Kansas City, Kansas; Irvine, California; Raleigh, North Carolina and assumed an area office in Tulsa, Oklahoma, related to the Merger. Fee and asset management revenues and fee and asset management expenses are associated with the management of properties not owned by the Company that are managed for affiliates. These expenses decreased by $0.5 million for the nine months ended September 30, 1997 when compared to the nine months ended September 30, 1996, due to the disposition of certain of these properties, resulting in the Company no longer providing fee and asset management services to such properties. 20 EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Interest expense, including amortization of deferred financing costs, increased by approximately $23.1 million. The increase was primarily the result of an increase in the Company's average indebtedness which increased by $465.8 million, primarily due to the Merger. However, the Company's effective interest costs decreased from 7.93% in 1996 to 7.53% in 1997. General and administrative expenses, which include corporate operating expenses, increased approximately $3.3 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. General and administrative expenses as a percentage of total revenues was 1.97% for the nine months ended September 30, 1997. COMPARISON OF QUARTER ENDED SEPTEMBER 30, 1997 TO QUARTER ENDED SEPTEMBER 30, 1996 For the quarter ended September 30, 1997, income before gain on disposition of properties, extraordinary item and allocation to Minority Interests increased by $24.8 million when compared to the quarter ended September 30, 1996. 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 1997 Acquired Properties and 1996 Acquired Properties. These increases were partially offset by the 1996 Disposed Properties and the 1997 Disposed Property. The increase in interest income of $3.6 million earned on the Company's mortgage note investments is primarily attributable to the $88 million investment in six mortgage loans made in April 1997. In regard to the Third Quarter 1997 Same Store Properties, rental revenues increased by approximately $3.5 million or 3.1% primarily as a result of higher rental rates charged to new tenants and tenant renewals. Overall property operating expenses which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses decreased approximately $0.4 million or .8%. This decrease was primarily the result of lower medical and health care insurance costs, maintenance costs and utilities. Property management represents expenses associated with the management of the Company's Properties. These expenses increased by approximately $2.6 million primarily due to the continued expansion of the Company's property management business to facilitate the management of the Company's additional properties. The Company most recently opened new area offices in Houston, Texas; Ypsilanti, Michigan; Kansas City, Kansas; Irvine, California; Raleigh, North Carolina and assumed an area office in Tulsa, Oklahoma, related to the Merger. Interest expense, including amortization of deferred financing costs, increased by approximately $9.9 million. This increase was primarily the result of an increase in the Company's average indebtedness outstanding which increased by $557.1 million, primarily due to the Merger. However, the Company's effective interest costs decreased from 7.77% in 1996 to 7.52% in 1997. 21 EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) General and administrative expenses, which include corporate operating expenses, increased approximately $1.5 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. General and administrative expenses as a percentage of total revenues was 1.9% for the quarter ended September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES As of January 1, 1997, the Company had approximately $147.3 million of cash and cash equivalents and $250 million available on its line of credit. After taking into effect the various transactions discussed in the following paragraphs, the Company's cash and cash equivalents balance at September 30, 1997 was approximately $278 million and the amount available on the Company's line of credit was $500 million. 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, which amounts for each period under comparison are presented in the Company's Statements of Cash Flows. During the nine months ended September 30, 1997, the Company issued 71,254 Common Shares pursuant to the Employee Share Purchase Plan and received net proceeds of approximately $2.7 million. The Company also completed the March 1997 Common Share Offerings, the Series D Preferred Share Offering, the June 1997 Common Share Offerings, the September 1997 Common Share Offering and the Series G Preferred Share Offering and received in the aggregate net proceeds of approximately $944.9 million, which proceeds have been or will be utilized to purchase additional properties. In October 1997, the Operating Partnership issued the 2017 Notes and received net proceeds of approximately $147.4 million in connection therewith. With respect to Property acquisitions during the first nine months of 1997, including the effects of the Merger, the Company purchased 119 Properties containing 32,370 units for a total purchase price of approximately $1.8 billion, including the issuance of 10.8 million Common Shares related to the Merger and the assumption of mortgage indebtedness and unsecured notes of approximately $517.6 million. The cash portion of these acquisitions was primarily funded from proceeds received from the March 1997 Common Share Offerings, the Series D Preferred Share Offering, the June 1997 Common Share Offerings and the September 1997 Common Share Offering. Subsequent to September 30, 1997, the Company acquired 40 additional properties containing 10,608 units for a total purchase price of approximately $601.7 million, including the assumption of mortgage indebtedness of approximately $136 million and the issuance of 3,315,500 Common Shares valued at approximately $150 million. These acquisitions were primarily funded with proceeds from the Series G Preferred Share Offering. 22 EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As of September 30, 1997, the Company had total indebtedness of approximately $1.7 billion, which included mortgage indebtedness of $963.8 million, of which $404.1 million represented tax-exempt bond indebtedness, and unsecured debt of $754.3 million (net of a $.9 million discount). During the nine months ended September 30, 1997, the Company repaid an aggregate of $58.4 million of mortgage indebtedness on ten of its Properties. The Company has, from time to time, entered into interest rate protection agreements to reduce the potential impact of increases in interest rates but 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. In February 1996, the Company entered into two interest rate protection agreements that will hedge the Company's interest rate risk at maturity of $175 million of indebtedness. The first agreement hedged the interest rate risk of $50 million of mortgage loans scheduled to mature in September 1997 by locking the five year Treasury Rate, commencing October 1, 1997. This agreement was canceled in July 1997 in conjunction with a new interest rate agreement discussed below. The second 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 current cost to the Company for entering into these agreements. In July 1997, the Company entered into two interest rate protection agreements to effectively fix the interest rate cost of the Company's anticipated issuance of unsecured notes in the fourth quarter of 1997. 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%. During the nine months ended September 30, 1997, total capital expenditures for the Company approximated $40.1 million. Of this amount, approximately $5.9 million related to capital improvements and major repairs for certain of the 1994, 1995, 1996 and 1997 Acquired Properties. Capital improvements and major repairs for all of the Company's pre-IPO properties and certain Acquired Properties approximated $10.3 million, or $125 per unit. Capital spent for replacement-type items approximated $14.7 million, or $177 per unit. In regard to capital spent for upgrades at certain properties and tenant improvements with respect to the retail and commercial office space at one Property, the amount was approximately $2.9 million. Also included in total capital expenditures was approximately $6.3 million expended for non-real estate additions such as computer software, computer equipment, furniture and fixtures and leasehold improvements for the Company's ROCs and its corporate headquarters. Such capital 23 EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) expenditures were primarily funded from working capital reserves and from net cash provided by operating activities. Total capital expenditures for the remaining portion of 1997 are budgeted to be approximately $7.9 million. Minority Interests as of September 30, 1997 increased by $31.2 million when compared to December 31, 1996. The primary factors that impacted this account during the nine month period were distributions declared to Minority Interests, which amounted to $14.1 million for the nine month period, the allocation of income from operations in the amount of $9.4 million and the conversion of OP Units into Common Shares and the issuance of Common Shares and OP Units during the nine months. In connection with the EWR Merger, the Company expects to assume liabilities for financial statement purposes of approximately $442.1 million and issue approximately 10.2 million Common Shares of the Company as well as 2.3 million Operating Partnership OP Units to consummate the EWR Merger. The Company has recently made a $70 million loan to EWR in order for EWR to repay its line of credit balance in advance of the closing of the EWR Merger. The Company also anticipates to fund approximately $17.6 million to pay for related EWR Merger costs. After the close of the EWR Merger, the Company expects to terminate EWR's line of credit facility. Total distributions paid in October, 1997 for the quarter ended September 30, 1997 amounted to approximately $66.7 million. The Company expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and EWR's stabilized communities, generally through its working capital and 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 related to EWR 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. In September, the Company increased the amount available on its line of credit from $250 million to $500 million. As of November 11, 1997, $10 million was outstanding under the Company's line of credit. 24 EQUITY RESIDENTIAL PROPERTIES TRUST PART 1 ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS AND FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED) 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 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 and extraordinary items 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 may differ as a result of differences between the Company's and other REITs' accounting policies for replacement type items and, accordingly, may not be comparable to such other REITs. The Company's accounting policy with respect to replacement type items is to capitalize such items as improvements and depreciate such improvements typically over a five year period. For the nine months ended September 30, 1997, FFO increased by $75.3 million representing a 66% increase when compared to the nine months ended September 30, 1996. For the quarter ended September 30, 1997, FFO increased by $34.5 million representing an 83% increase when compared to the quarter ended September 30, 1996. The following is a reconciliation of net income available to Common Shares to FFO available to Common Shares and OP Units for the nine months and quarters ended September 30, 1997 and 1996: 25 EQUITY RESIDENTIAL PROPERTIES TRUST PART 1 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
Nine Months Nine Months Quarter Quarter Ended Ended Ended Ended 9/30/97 9/30/96 9/30/97 9/30/96 ------- ------- ------- ------- Net income available to Common Shares $ 78,618 $ 38,337 $ 30,886 $ 12,529 Adjustments: Income allocated to Minority 9,431 8,426 3,086 2,503 Interests Depreciation on real estate assets 104,288 65,238 42,403 23,301 Amortization of deferred financing costs related to predecessor 157 463 41 147 business Write-off of unamortized costs on refinanced debt (0) 3,134 (0) 3,134 Gain on disposition of properties (3,923) (2,346) (291) (0) ------- ------- ------- ------- FFO available to Common Shares and 188,571 113,252 76,125 41,614 OP Units $ ======== $ ======== $ ======== $ ========
26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The discussion in Note 15 of "Notes to Consolidated Financial Statements" is incorporated herein by reference. 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 August 15, 1997. A report on Form 8-K, dated August 27, 1997. A report on Form 8-K, dated September 10, 1997. A report on Form 8-K, dated September 11, 1997. A report on Form 8-K, dated September 17, 1997. A report on Form 8-K, dated September 18, 1997. 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: November 11, 1997 By: /s/ Bruce C. Strohm ----------------- ---------------------------- Bruce C. Strohm Executive Vice President, General Counsel and Secretary Date: November 11, 1997 By: /s/ Michael J.McHugh ----------------- -------------------------------------- Michael J. McHugh Senior Vice President, Chief Accounting Officer and Treasurer 28 EX-12 2 RATIO OF EARNINGS EQUITY RESIDENTIAL PROPERTIES TRUST Consolidated and Combined Historical, Including Predecessor Business Earnings to Combined Fixed Charges and Preferred Distributions Ratio
Historical -------------------------------------------------------------------- 09/30/97 09/30/96 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 -------- -------- -------- -------- -------- -------- -------- (Amounts in thousands) REVENUES Rental income $482,980 $327,749 $454,412 $373,919 $220,727 $104,388 $86,597 Fee income - outside managed 4,364 4,982 6,749 7,030 4,739 4,651 4,215 Interest income - investment in mortgage notes 14,821 9,084 12,819 4,862 - - - Interest and other income 7,513 2,232 4,405 4,573 5,568 3,031 2,161 -------- -------- -------- -------- -------- -------- ------- Total revenues 509,678 344,047 478,385 390,384 231,034 112,070 92,973 -------- -------- -------- -------- -------- -------- ------- EXPENSES Property and maintenance 117,681 93,128 127,172 112,186 66,534 35,324 30,680 Real estate taxes and insurance 48,560 32,301 44,128 37,002 23,028 11,403 10,274 Property management 18,765 13,136 17,512 15,213 10,249 3,491 2,912 Property management - non-recurring - - - - 879 - - Fee and asset management 2,523 3,037 3,837 3,887 2,056 2,524 2,403 Depreciation 106,114 66,759 93,253 72,410 37,273 15,384 13,442 Interest: Expense incurred 82,775 58,632 81,351 78,375 37,044 26,042 31,926 Amortization of deferred financing costs 1,810 2,860 4,242 3,444 1,930 3,322 2,702 Refinancing costs - - - - - 3,284 - General and administrative 10,037 6,690 9,857 8,129 6,053 3,159 1,915 -------- -------- -------- -------- -------- -------- ------- Total expenses 388,265 276,543 381,352 330,646 185,046 103,933 96,254 -------- -------- -------- -------- -------- -------- ------- Income (loss) before extraordinary items $121,413 $ 67,504 $ 97,033 $ 59,738 $ 45,988 $ 8,137 $(3,281) ======== ======== ======== ======== ======== ======= ======= Combined Fixed Charges and Preferred Distributions: Interest and other financing costs $ 82,775 $ 58,632 $ 81,351 $ 78,375 $ 37,044 $ 26,042 $31,926 Refinancing costs - - - - - 3,284 - Amortization of deferred financing costs 1,810 2,860 4,242 3,444 1,930 3,322 2,702 Preferred distributions 37,287 19,953 29,015 10,109 - - - -------- -------- -------- -------- -------- -------- ------- Total Combined Fixed Charges and Preferred Distributions $121,872 $ 81,445 $114,608 $ 91,928 $ 38,974 $ 32,648 $34,628 ======== ======== ======== ======== ======== ======= ======= Earnings before combined fixed charges and preferred distributions $205,998 $128,996 $182,626 $141,557 $ 84,962 $ 40,785 $31,347 ======== ======== ======== ======== ======== ======= ======= Funds from operations before combined fixed charges and preferred distributions $312,112 $195,755 $275,879 $213,967 $122,235 $ 56,169 $44,789 ======== ======== ======== ======== ======== ======= ======= Ratio of earnings before combined fixed charges and preferred distributions to combined fixed charges and preferred distributions 1.69 1.58 1.59 1.54 2.18 1.25 0.91 ======== ======== ======== ======== ======== ======= ======= Ratio of funds from operations before combined fixed charges and preferred distributions to combined fixed charges and preferred distributions 2.56 2.40 2.41 2.33 3.14 1.72 1.29 ======== ======== ======== ======== ======== ======= ======= Earnings deficiency to cover fixed charges N/A N/A N/A N/A N/A N/A (3,281) ======== ======== ======== ======== ======== ======= =======
EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 277,997 0 2,614 0 0 424,025 4,822,779 (400,550) 5,034,014 194,971 1,718,111 0 1,000,495 742 1,937,811 5,034,014 502,165 509,678 0 185,006 10,037 0 84,585 121,413 0 121,413 3,923 0 0 78,618 1.28 1.28
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