10-Q 1 a2030676z10-q.txt 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-24920 ERP OPERATING LIMITED PARTNERSHIP (Exact Name of Registrant as Specified in Its Charter) ILLINOIS 36-3894853 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 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 ___ ERP OPERATING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS) (UNAUDITED)
September 30, December 31, 2000 1999 ----------------- ----------------- ASSETS Investment in real estate Land $ 1,543,454 $ 1,550,378 Depreciable property 10,296,305 10,670,550 Construction in progress 30,093 18,035 ----------------- ----------------- 11,869,852 12,238,963 Accumulated depreciation (1,273,394) (1,070,487) ----------------- ----------------- Investment in real estate, net of accumulated depreciation 10,596,458 11,168,476 Real estate held for disposition 224,553 12,868 Cash and cash equivalents 56,242 29,117 Investment in mortgage notes, net 79,690 84,977 Investments in unconsolidated joint ventures 270,391 140,284 Rents receivable 1,611 1,731 Deposits - restricted 263,661 111,270 Escrow deposits - mortgage 73,186 75,328 Deferred financing costs, net 30,343 33,968 Rental furniture, net 59,069 - Property and equipment, net 7,664 - Goodwill and other intangibles, net 70,844 - Other assets 87,150 57,670 ----------------- ----------------- TOTAL ASSETS $ 11,820,862 $ 11,715,689 ================= ================= LIABILITIES AND PARTNERS' CAPITAL Liabilities: Mortgage notes payable, net $ 3,017,449 $ 2,883,583 Notes, net 2,121,118 2,290,285 Lines of credit 33,631 300,000 Accounts payable and accrued expenses 149,892 102,955 Accrued interest payable 69,995 44,257 Rents received in advance and other liabilities 77,126 74,196 Security deposits 40,946 39,687 Distributions payable 138,821 18,813 ----------------- ----------------- TOTAL LIABILITIES 5,648,978 5,753,776 ----------------- ----------------- COMMITMENTS AND CONTINGENCIES Minority Interests - Partially Owned Properties 2,903 - ----------------- ----------------- Partners' capital: Junior Convertible Preference Units 7,896 7,896 ----------------- ----------------- Cumulative Convertible Redeemable Preference Interests 177,000 40,000 ----------------- ----------------- Cumulative Convertible or Redeemable Preference Units 1,189,959 1,310,266 ----------------- ----------------- General Partner 4,389,402 4,194,668 Limited Partners 404,724 409,083 ----------------- ----------------- Total General Partner and Limited Partners capital 4,794,126 4,603,751 ----------------- ----------------- TOTAL PARTNERS' CAPITAL 6,168,981 5,961,913 ----------------- ----------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 11,820,862 $ 11,715,689 ================= =================
SEE ACCOMPANYING NOTES 2 ERP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER OP UNIT DATA) (UNAUDITED)
NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------------------------- ---------------------------- REVENUES Rental income $ 1,454,958 $ 1,243,958 $ 502,218 $ 424,780 Fee and asset management 4,711 3,432 1,876 1,018 Interest income-investment in mortgage notes 8,282 8,502 2,783 2,858 Income from investments in unconsolidated joint ventures 14,589 7,042 5,525 2,691 Interest and other income 19,009 10,613 10,624 3,841 Furniture income 14,228 - 14,228 - ------------ ------------ ------------- ------------ Total revenues 1,515,777 1,273,547 537,254 435,188 ------------ ------------ ------------- ------------ EXPENSES Property and maintenance 368,291 300,798 140,446 103,933 Real estate taxes and insurance 141,830 126,304 46,829 41,789 Property management 56,204 42,817 18,444 14,844 Fee and asset management 3,647 2,301 1,545 677 Depreciation 335,844 297,505 111,332 100,371 Interest: Expense incurred 285,337 241,516 95,074 83,017 Amortization of deferred financing costs 4,063 2,773 1,360 1,112 General and administrative 19,439 15,736 6,223 5,022 Furniture operating costs 9,505 - 9,505 - Amortization of goodwill and other intangibles 767 - 767 - ------------ ------------ ------------- ------------ Total expenses 1,224,927 1,029,750 431,525 350,765 ------------ ------------ ------------- ------------ Income before gain on disposition of properties, net, extraordinary item, allocation to Minority Interests, and provision for income taxes 290,850 243,797 105,729 84,423 Gain on disposition of properties, net 205,121 64,315 117,469 18,508 Loss on early extinguishment of debt - (451) - - Allocation to Minority Interests - Partially Owned Properties 145 - (12) - Provision for income taxes (518) - (518) - ------------ ------------ ------------- ------------ Net income $ 495,598 $ 307,661 $ 222,668 $ 102,931 ============ ============ ============= ============ ALLOCATION OF NET INCOME: Junior Convertible Preference Units $ 327 $ 240 $ 109 $ 240 ============ ============ ============= ============ Cumulative Convertible Redeemable Preference Interests $ 6,900 $ 36 $ 3,233 $ 36 ============ ============ ============= ============ Cumulative Convertible or Redeemable Preference Units $ 76,370 $ 84,842 $ 24,601 $ 27,731 ============ ============ ============= ============ General Partner $ 376,176 $ 200,989 $ 178,032 $ 67,884 Limited Partners 35,825 21,554 16,693 7,040 ------------ ------------ ------------- ------------ Net income available to OP Unit holders $ 412,001 $ 222,543 $ 194,725 $ 74,924 ============ ============ ============= ============ Net income per OP Unit - basic $ 2.91 $ 1.67 $ 1.35 $ 0.56 ============ ============ ============= ============ Net income per OP Unit - diluted $ 2.88 $ 1.66 $ 1.33 $ 0.55 ============ ============ ============= ============ Weighted average OP Units outstanding - basic 141,818 133,490 143,732 134,993 ============ ============ ============= ============
SEE ACCOMPANYING NOTES 3 ERP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 2000 1999 ---------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 495,598 $ 307,661 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Allocation to Minority Interests - Partially Owned Properties (145) - Depreciation 335,844 297,505 Amortization of deferred financing costs 4,063 2,773 Amortization of goodwill and other intangibles 767 - Amortization of discounts and premiums on debt (1,725) (1,746) Amortization of deferred settlements on interest rate protection agreements 290 768 Equity from earnings of investments in unconsolidated joint ventures (459) (3,092) Gain on disposition of properties, net (205,121) (64,315) Compensation paid with Company Common Shares 4,300 - Provision for income taxes 518 - Book value of furniture sales and rental buyouts 4,802 - CHANGES IN ASSETS AND LIABILITIES: Decrease in rents receivable 44 2,480 Decrease (increase) in deposits - restricted 3,660 (4,344) (Increase) decrease in other assets (7,285) 41,030 Increase in accounts payable and accrued expenses 39,186 32,010 Increase in accrued interest payable 22,612 16,439 (Decrease) increase in rents received in advance and other liabilities (10,273) 7,727 Increase (decrease) in security deposits 14 (1,735) --------------- --------------- Net cash provided by operating activities 686,690 633,161 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in real estate, net (238,218) (469,585) Improvements to real estate (100,347) (93,456) Additions to non-real estate property (3,919) (5,922) Additions to rental furniture (7,477) - Investment in property and equipment (416) - Interest capitalized for real estate under construction (827) (1,157) Proceeds from disposition of real estate, net 416,603 197,125 Principal receipts on investment in mortgage notes 5,287 2,746 Investment in unconsolidated joint ventures, net (119,893) (77,641) Proceeds from disposition of unconsolidated joint ventures, net 4,602 54,060 (Increase) in deposits on real estate acquisitions, net (154,711) (55,201) Decrease (increase) in mortgage deposits 2,283 (4,750) Decrease in mortgage receivables - 7,150 Purchase of management contract rights (779) (285) Business combinations, net of cash acquired (61,754) - Merger costs paid after initial business combinations (9,474) (4,598) Other investing activities, net (2,950) (15,075) --------------- --------------- Net cash (used for) investing activities (271,990) (466,589) --------------- ---------------
SEE ACCOMPANYING NOTES 4 ERP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 2000 1999 ----------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Loan and bond acquisition costs $ (2,392) $ (8,423) MORTGAGE NOTES PAYABLE: Proceeds, net 389,051 188,569 Lump sum payoffs (119,412) (54,231) Scheduled principal payments (19,930) (13,041) NOTES, NET: Proceeds - 298,014 Payoffs (208,000) (125,000) LINES OF CREDIT: Proceeds 209,305 959,000 Repayments (505,179) (1,159,000) Proceeds from settlement of interest rate protection agreements 7,055 - Capital contributions from General Partner, net 24,653 34,215 Proceeds from the sale of preference units/interests, net 133,575 39,000 DISTRIBUTIONS: General and Limited Partners (216,036) (189,931) Preference units/interests (80,412) (84,979) Minority Interests - Partially Owned Properties (617) - Principal receipts on employee notes, net 254 144 Principal receipts on other notes receivable, net 510 7,931 --------------- --------------- Net cash (used for) financing activities (387,575) (107,732) --------------- --------------- Net increase in cash and cash equivalents 27,125 58,840 Cash and cash equivalents, beginning of period 29,117 3,965 --------------- --------------- Cash and cash equivalents, end of period $ 56,242 $ 62,805 =============== =============== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 264,582 $ 226,234 =============== =============== Mortgage loans assumed and/or entered into through acquisitions of real estate $ 38,442 $ 69,885 =============== =============== Net real estate contributed in exchange for OP Units or Junior Convertible Preference Units $ 4,707 $ 28,232 =============== =============== Mortgage loans assumed by purchaser in real estate dispositions $ (220,000) $ - =============== =============== Transfers to real estate held for disposition $ 224,553 $ 13,457 --------------- --------------- Refinancing of mortgage notes payable in favor of notes, net $ - $ 75,790 --------------- --------------- Mortgage loans assumed through consolidation of Partially Owned Properties $ 65,095 $ - =============== =============== Net liabilities assumed through consolidation of Partially Owned Properties $ 792 $ - =============== ===============
SEE ACCOMPANYING NOTES 5 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) DEFINITION OF SPECIAL TERMS: Capitalized terms used but not defined in this Quarterly Report on Form 10-Q are as defined in the Operating Partnership's Annual Report on Form 10-K for the year ended December 31, 1999 ("Form 10-K"). 1. BUSINESS ERP Operating Limited Partnership (the "Operating Partnership"), an Illinois limited partnership, was formed to conduct the multifamily residential property business of Equity Residential Properties Trust ("EQR"). EQR is a Maryland real estate investment trust ("REIT") formed on March 31, 1993 and is the general partner of the Operating Partnership. As used herein, the term "Company" means EQR, and its subsidiaries, as the survivor of the mergers between EQR and each of Wellsford Residential Property Trust ("Wellsford") (the "Wellsford Merger"), Evans Withycombe Residential, Inc. ("EWR") (the "EWR Merger"), Merry Land & Investment Company, Inc ("MRY") (the "MRY Merger"), and Lexford Residential Trust ("LFT") ("the LFT Merger"). The term "Company" also includes Globe Business Resources, Inc. ("Globe") (the "Globe Merger") and Temporary Quarters, Inc. ("TQ") (the "TQ" Merger). The Operating Partnership is engaged in the acquisition, disposition, ownership, management and operation of multifamily properties. As of September 30, 2000, the Operating Partnership owned or had interests in a portfolio of 1,056 multifamily properties containing 222,699 apartment units (individually a "Property" and collectively the "Properties") consisting of the following:
Number of Number of Properties Units ---------------------------------- ---------------- ----------------- Wholly Owned Properties 953 204,610 Partially Owned Properties 14 2,995 Unconsolidated Properties 89 15,094 ---------------- ----------------- Total Properties 1,056 222,699 ================ =================
The "Partially Owned Properties" are controlled and partially owned by the Operating Partnership but have partners with minority interests (see further discussion in Notes 4 and 5). The "Unconsolidated Properties" are partially owned but not controlled by the Operating Partnership and consist of investments in partnership interests and/or subordinated mortgages that are accounted for under the equity method of accounting. The Properties are located in 35 states throughout the United States. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("Statement No. 133"). Statement No. 133 requires recording all derivative instruments as assets or liabilities, measured at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The standard's effective date was deferred by FASB Statement No. 137 to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Operating Partnership will adopt the standard effective January 1, 2001, and does not anticipate that the adoption will have a material impact on the Operating Partnership's financial condition and results of operations. 6 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 2. BASIS OF PRESENTATION The balance sheet and statements of operations and cash flows as of and for the nine months and quarter ended September 30, 2000 represent the consolidated financial information of the Operating Partnership and its subsidiaries. Due to the Operating Partnership's ability to control either through ownership or by contract a series of management limited partnerships and companies (collectively, the "Management Partnerships" or the "Management Companies"), the Financing Partnerships, the LLC's, Globe and certain other entities, each such entity has been consolidated with the Operating Partnership for financial reporting purposes. In regard to the Management Companies, the Operating Partnership does not have legal control; however, these entities are consolidated for financial reporting purposes, the effects of which are immaterial. Certain reclassifications have been made to the prior year's financial statements in order to conform to the current year presentation. Minority interests represented by EQR's indirect 1% interest in various Financing Partnerships and LLCs are immaterial and have not been accounted for in the Consolidated Financial Statements. In addition, certain amounts due from EQR for its 1% interest in the Financing Partnerships has not been reflected in the Consolidated Balance Sheets since such amounts are immaterial to the Consolidated Balance Sheets. These unaudited Consolidated Financial Statements of the Operating Partnership 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 Operating Partnership'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 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. BUSINESS COMBINATIONS On July 11, 2000, the Company acquired Globe in an all cash and debt transaction. Globe provides fully furnished short-term housing through an inventory of leased housing units to transferring or temporarily assigned corporate personnel, new hires, trainees, consultants and individual customers throughout the United States. Additionally, Globe rents and sells furniture to a diversified base of commercial and residential customers throughout the United States. Shareholders of Globe received $13.00 per share, which approximated $58.7 million in cash based on the 4.5 million Globe shares outstanding. In addition, the Company: - Acquired $94.8 million in other Globe assets and assumed $29.2 million in other Globe liabilities; - Allocated $68.0 million to goodwill and $0.4 million to intangible assets, representing the estimated fair value of existing covenants not to compete at the merger date; - Recorded merger costs of $4.5 million; and - Assumed $70.8 million in debt, which included $1.4 million in mortgage debt, $39.9 million in unsecured notes, and Globe's line of credit totaling $29.5 million. On July 21, 2000, the Company, through its Globe subsidiary, acquired TQ, the leading corporate housing provider in Atlanta, Georgia, in a $3.3 million all cash transaction. 7 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The Company accounted for both the Globe Merger and the TQ Merger as purchases in accordance with Accounting Principals Board Opinion No. 16. Significant accounting policies relating to corporate housing and furniture rental/sales are as follows: RENTAL FURNITURE Rental furniture is stated at cost and depreciated on a straight-line basis at a rate of 1% per month, which is designed to approximate an estimated useful life of four years with provision for a 50% residual value. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation expense is provided on a straight-line basis over estimated useful lives of three to ten years. GOODWILL AND OTHER INTANGIBLES Goodwill is amortized on a straight-line basis over a period of 20 years. Other intangibles are amortized on a straight-line basis over periods ranging from 3 to 5 years. The Company periodically reviews goodwill and other intangibles for impairment. If a permanent decline in value has occurred, such impairment would be calculated based on discounted cash flows. Accumulated amortization of goodwill and other intangibles was $0.8 million at September 30, 2000. REVENUE RECOGNITION Leased housing unit rentals vary in terms from a few days to several months. Leases of furniture generally have an initial term of three to six months in duration and can be extended by the customer on a month-to-month basis. Leased housing unit rentals and furniture rentals are accounted for as operating leases, and revenue is recorded in the month earned. For sales of furniture, as well as rental buyouts, revenue and related cost of sales are recorded when the furniture is delivered or taken off lease. Revenues from both furniture rentals and sales are included in furniture income while the associated costs of those rentals and sales are included in furniture operating costs in the consolidated statements of operations. INCOME TAXES In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", deferred taxes are provided for all differences between the financial statement basis and the tax basis of assets and liabilities using the enacted tax rate. A valuation allowance is provided for deferred tax assets, which are more likely than not unrealizable. 4. PARTNERS' CAPITAL The following table presents the changes in the Operating Partnership's issued and outstanding OP Units for the nine months ended September 30, 2000: 8 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
----------------------------------------------------------------------- --------------- 2000 ----------------------------------------------------------------------- --------------- Operating Partnership's OP Units outstanding at January 1, 139,934,540 Issued to General Partner: -------------------------- Conversion of Series E Preferred Shares 69,011 Conversion of Series G Preferred Shares 1,280 Conversion of Series H Preferred Shares 62,278 Conversion of Series J Preferred Shares 2,822,012 Employee Share Purchase Plan 130,305 Dividend Reinvestment - DRIP Plan 18,099 Share Purchase - DRIP Plan 10,358 Exercise of options 497,681 Restricted share grants, net 232,161 Issued to Limited Partners: --------------------------- Issuance through acquisitions 100,170 ----------------------------------------------------------------------- --------------- Operating Partnership's OP Units outstanding at September 30, 143,877,895 ----------------------------------------------------------------------- ===============
As of September 30, 2000, OP Units outstanding totaled 143,877,895. The limited partners of the Operating Partnership as of September 30, 2000 include various individuals and entities that contributed their properties to the Operating Partnership in exchange for a partnership interest (the "Limited Partners") and are represented by 12,302,698 OP Units. As of September 30, 2000, EQR (as the "General Partner") had an approximate 91.45% interest and the Limited Partners had an approximate 8.55% interest in the Operating Partnership. In regards to the general partner, net proceeds from the various equity offerings of EQR have been contributed by EQR to the Operating Partnership in return for an increased ownership percentage. Due to the Limited Partners' ability to convert their interest into an ownership interest in the general partner, the net offering proceeds are allocated between EQR (as general partner) and the Limited Partners (to the extent represented by OP Units) to account for the change in their respective percentage ownership of the equity of the Operating Partnership. The Guilford portfolio properties (see further discussion in Note 5) are controlled and partially owned by the Operating Partnership but have partners with minority interests. Effective January 1, 2000, the Operating Partnership has included 100% of the assets, liabilities, revenues and expenses of these Partially Owned Properties in the Consolidated Financial Statements due to an increased ownership interest in these properties. The equity interests of the unaffiliated partners are reflected as Minority Interests - Partially Owned Properties. The following table presents the Operating Partnership's issued and outstanding Junior Convertible Preference Units as of September 30, 2000 and December 31, 1999: 9 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
-------------------------------------------------------------- ------------------ --------------------------- AMOUNTS IN THOUSANDS ---------------------- ANNUAL DIVIDEND SEPTEMBER DECEMBER RATE PER UNIT (1) 30, 2000 31, 1999 -------------------------------------------------------------- ------------------ ------------- ------------- Junior Convertible Preference Units: Series A Junior Convertible Preference Units; liquidation $5.469344 $ 7,712 $ 7,712 value $100 per unit; 77,123 units issued and outstanding at September 30, 2000 and December 31, 1999 Series B Junior Convertible Preference Units; liquidation $2.000000 184 184 value $25 per unit; 7,367 units issued and outstanding at September 30, 2000 and December 31, 1999 -------------------------------------------------------------- ------------------ ------------- ------------- $ 7,896 $ 7,896 -------------------------------------------------------------- ------------------ ------------- -------------
(1) Dividends on both series of Junior Convertible Preference Units are payable quarterly at various pay dates. On March 3, 2000, Lexford Properties, L.P., a subsidiary of the Operating Partnership, issued 1.1 million units of 8.50% Series B Cumulative Convertible Redeemable Preference Units (collectively known as "Preference Interests") with an equity value of $55.0 million. Lexford Properties, L.P. received $53.6 million in net proceeds from this transaction. The liquidation value of these units is $50 per unit. The 1.1 million units are exchangeable into 1.1 million shares of 8.50% Series M-1 Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company. The Series M-1 Preferred Shares are not convertible into EQR Common Shares. Dividends for the Series B Preference Interests or the Series M-1 Preferred Shares are payable quarterly at the rate of $4.25 per unit/share per year. On March 23, 2000, Lexford Properties, L.P., a subsidiary of the Operating Partnership, issued 220,000 units of 8.50% Series C Cumulative Convertible Redeemable Preference Units with an equity value of $11.0 million. Lexford Properties, L.P. received $10.7 million in net proceeds from this transaction. The liquidation value of these units is $50 per unit. The 220,000 units are exchangeable into 220,000 shares of 8.50% Series M-1 Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company. The Series M-1 Preferred Shares are not convertible into EQR Common Shares. Dividends for the Series C Preference Interests or the Series M-1 Preferred Shares are payable quarterly at the rate of $4.25 per unit/share per year. On May 1, 2000, Lexford Properties, L.P., a subsidiary of the Operating Partnership, issued 420,000 units of 8.375% Series D Cumulative Convertible Redeemable Preference Units with an equity value of $21.0 million. Lexford Properties, L.P. received $20.5 million in net proceeds from this transaction. The liquidation value of these units is $50 per unit. The 420,000 units are exchangeable into 420,000 shares of 8.375% Series M-2 Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company. The Series M-2 Preferred Shares are not convertible into EQR Common Shares. Dividends for the Series D Preference Interests or the Series M-2 Preferred Shares are payable quarterly at the rate of $4.1875 per unit/share per year. On August 11, 2000, Lexford Properties, L.P., a subsidiary of the Operating Partnership, issued 1,000,000 units of 8.50% Series E Cumulative Convertible Redeemable Preference Units with an equity value of $50.0 million. Lexford Properties, L.P. received $48.8 million in net proceeds from this transaction. The liquidation value of these units is $50 per unit. The 1,000,000 units are exchangeable into 1,000,000 shares of 8.50% Series M-3 Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company. Dividends for the Series E Preference Interests or the Series M-3 Preferred 10 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Shares are payable quarterly at the rate of $4.25 per unit/share per year. The following table presents Lexford Properties, L.P.'s issued and outstanding Preference Interests as of September 30, 2000 and December 31, 1999:
--------------------------------------------------------------------- ----------------- --------------------------- AMOUNTS IN THOUSANDS --------------------------- ANNUAL DIVIDEND RATE PER SEPTEMBER DECEMBER UNIT (1) 30, 2000 31, 1999 --------------------------------------------------------------------- ----------------- ------------- ------------- Preference Interests: 8.00% Series A Cumulative Convertible Redeemable Preference $ 4.0000 $ 40,000 $ 40,000 Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at September 30, 2000 and December 31, 1999 8.50% Series B Cumulative Convertible Redeemable Preference $ 4.2500 55,000 - Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at September 30, 2000 8.50% Series C Cumulative Convertible Redeemable Preference $ 4.2500 11,000 - Units; liquidation value $50 per unit; 220,000 units issued and outstanding at September 30, 2000 8.375% Series D Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at September 30, 2000 $ 4.1875 21,000 - 8.50% Series E Cumulative Convertible Redeemable Preference Units, liquidation value $50 per unit, 1,000,000 units issued and outstanding at September 30, 2000 $ 4.2500 50,000 - --------------------------------------------------------------------- ----------------- ------------- ------------- $177,000 $ 40,000 --------------------------------------------------------------------- ----------------- ------------- -------------
(1) Dividends on all series of Preference Interests are payable quarterly at various pay dates. 11 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following table presents the Operating Partnership's issued and outstanding Cumulative Convertible or Redeemable Preference Units as of September 30, 2000 and December 31, 1999:
----------------------------------------------------------------------- ------------------ ------------------------- AMOUNTS IN THOUSANDS ------------------------- ANNUAL DIVIDEND SEPTEMBER DECEMBER RATE PER UNIT (1) 30, 2000 31, 1999 ----------------------------------------------------------------------- ------------------ ------------ ------------ Cumulative Convertible or Redeemable Preference Units: 9 3/8% Series A Cumulative Redeemable Preference Units; liquidation $ 2.34375 $ 153,000 $ 153,000 value $25 per unit; 6,120,000 units issued and outstanding at September 30, 2000 and December 31, 1999 9 1/8% Series B Cumulative Redeemable Preference Units; liquidation $22.81252 125,000 125,000 value $250 per unit; 500,000 units issued and outstanding at September 30, 2000 and December 31, 1999 9 1/8% Series C Cumulative Redeemable Preference Units; liquidation $22.81252 115,000 115,000 value $250 per unit; 460,000 units issued and outstanding at September 30, 2000 and December 31, 1999 8.60% Series D Cumulative Redeemable Preference Units; liquidation $21.50000 175,000 175,000 value $250 per unit; 700,000 units issued and outstanding at September 30, 2000 and December 31, 1999 Series E Cumulative Convertible Preference Units; liquidation value $ 1.75000 96,748 99,850 $25 per unit; 3,869,940 and 3,994,000 units issued and outstanding at September 30, 2000 and December 31, 1999, respectively 9.65% Series F Cumulative Redeemable Preference Units; liquidation $ 2.41250 57,500 57,500 value $25 per unit; 2,300,000 units issued and outstanding at September 30, 2000 and December 31, 1999 7 1/4% Series G Convertible Cumulative Preference Units; liquidation $18.12500 316,175 316,250 value $250 per unit; 1,264,700 and 1,265,000 units issued and outstanding at September 30, 2000 and December 31, 1999, respectively 7.00% Series H Cumulative Convertible Preference Units; liquidation $ 1.75000 1,536 3,686 value $25 per unit; 61,424 and 147,452 units issued and outstanding at September 30, 2000 and December 31, 1999, respectively 8.60% Series J Cumulative Convertible Preference Units; liquidation $ 2.15000 - 114,980 value $25 per unit; 0 and 4,599,200 units issued and outstanding at September 30, 2000 and December 31, 1999, respectively (2) 8.29% Series K Cumulative Redeemable Preference Units; liquidation $ 4.14500 50,000 50,000 value $50 per unit; 1,000,000 units issued and outstanding at September 30, 2000 and December 31, 1999 7.625% Series L Cumulative Redeemable Preference Units; liquidation $ 1.90625 100,000 100,000 value $25 per unit; 4,000,000 units issued and outstanding at September 30, 2000 and December 31, 1999 ----------------------------------------------------------------------- ------------------ ------------ ------------ $1,189,959 $1,310,266 ----------------------------------------------------------------------- ------------------ ------------ ------------
(1) Dividends on all series of preference units are payable quarterly at various pay dates. Dividend rates listed for Series B, C, D and G are preference unit rates and the equivalent depositary unit annual dividend rates are $2.281252, $2.281252, $2.15 and $1.8125, respectively. 12 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) On June 2, 2000, the Operating Partnership redeemed all of its remaining issued and outstanding Series J Cumulative Convertible Preference Units in conjunction with the conversion of the Series J Preferred Shares of EQR. The following table presents the Operating Partnership's allocation of net income among Cumulative Convertible or Redeemable Preference Units for the nine months and quarters ended September 30, 2000 and 1999 (AMOUNTS IN THOUSANDS):
NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- 2000 1999 2000 1999 -------------------------- --------------------------- ALLOCATION OF NET INCOME: 9 3/8% Series A Cumulative Redeemable Preference Units $10,758 $10,758 $ 3,586 $ 3,586 9 1/8% Series B Cumulative Redeemable Preference Units 8,555 8,555 2,852 2,852 9 1/8% Series C Cumulative Redeemable Preference Units 7,870 7,870 2,623 2,623 8.60% Series D Cumulative Redeemable Preference Units 11,288 11,288 3,762 3,762 Series E Cumulative Convertible Preference Units 5,184 5,245 1,693 1,748 9.65% Series F Cumulative Redeemable Preference Units 4,161 4,161 1,387 1,387 7 1/4% Series G Convertible Cumulative Preference Units 17,194 17,196 5,730 5,732 7.00% Series H Cumulative Convertible Preference Units 81 196 26 65 8.82% Series I Cumulative Convertible Preference Units - 3,329 - 562 8.60% Series J Cumulative Convertible Preference Units 2,451 7,416 - 2,472 8.29% Series K Cumulative Redeemable Preference Units 3,109 3,109 1,036 1,036 7.625% Series L Cumulative Redeemable Preference Units 5,719 5,719 1,906 1,906 ------- ------- ------- ------- Cumulative Convertible or Redeemable Preference Units $76,370 $84,842 $24,601 $27,731 ======= ======= ======= =======
5. REAL ESTATE ACQUISITIONS During the nine months ended September 30, 2000 the Operating Partnership acquired the eighteen Properties listed below from unaffiliated parties. In connection with certain of the acquisitions listed below, the Operating Partnership assumed and/or entered into new mortgage indebtedness of approximately $38.4 million and issued OP Units having a value of approximately $4.1 million. The cash portion of these transactions was funded from proceeds received from the disposition of properties and working capital. 13 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
--------------- --------------------------------- --------------------------- ------------- ------------------ DATE NUMBER OF PURCHASE PRICE ACQUIRED PROPERTY LOCATION UNITS (IN THOUSANDS) --------------- --------------------------------- --------------------------- ------------- ------------------ 01/19/00 Windmont Atlanta, GA 178 $ 10,310 04/05/00 Alborada Fremont, CA 442 83,500 06/30/00 Jefferson at Wyndham Lakes Coral Springs, FL 332 33,340 07/12/00 Ambergate West Palm Beach, FL 72 2,362 07/12/00 Greengate West Palm Beach, FL 120 4,019 07/12/00 Jupiter Cove II Juno Beach, FL 61 1,663 07/12/00 Oakland Hills Margate, FL 189 7,800 07/12/00 Summit Center West Palm Beach, FL 87 2,347 07/12/00 Whispering Pines Fort Pierce, FL 64 978 07/25/00 Harbour Town Boca Raton, FL 392 31,940 09/13/00 Madison at Wells Branch Austin, TX 300 18,750 09/13/00 Madison at Scofield Farms Austin, TX 260 16,510 09/14/00 Westside Villas I-V Los Angeles, CA 176 42,000 09/27/00 Millburn Court I Dayton, OH 65 1,500 ------------- ------------------------------- ----------------------------- --------- ---------- 2,738 $257,109 ------------- -------------------------------- ----------------------------- --------- ----------
On January 19, 2000, the Operating Partnership paid $1.25 million to acquire an additional ownership interest in LFT's Guilford portfolio (14 properties containing 2,995 units located in four states). The transaction was effective on January 1, 2000. Prior to January 1, 2000, the Operating Partnership accounted for this portfolio under the equity method of accounting. As a result of this additional ownership acquisition, the Operating Partnership acquired a controlling interest, and as such, now consolidates these properties for financial reporting purposes. The Operating Partnership recorded additional investments in real estate totaling $69.4 million in connection with this transaction. On August 7, 2000, the Operating Partnership funded approximately $30.9 million for an ownership interest in Laguna Clara Apartments, a 264-unit property located in Santa Clara, California. As the Operating Partnership cannot exercise unilateral control over major decisions, this property has been classified as an investment in unconsolidated joint venture and accounted for under the equity method. 6. REAL ESTATE DISPOSITIONS During the nine months ended September 30, 2000, the Operating Partnership disposed of the twenty-seven properties listed below to unaffiliated parties. The Operating Partnership recognized a net gain for financial reporting purposes of approximately $155.8 million. 14 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
---------------- ---------------------------------- ------------------------- ------------- ----------------- DISPOSITION DATE NUMBER PRICE DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS) ---------------- ---------------------------------- ------------------------- ------------- ----------------- 02/04/00 Lakeridge at the Moors Miami, FL 175 $ 10,000 02/09/00 Sonnet Cove I & II Lexington, KY 331 12,300 02/25/00 Yuma Court Colorado Springs, CO 40 2,350 02/25/00 Indigo Plantation Daytona Beach, FL 304 14,200 02/25/00 The Oaks of Lakebridge Ormond Beach, FL 170 7,800 03/23/00 Tanglewood Lake Oswego, OR 158 10,750 03/30/00 Preston Lake Tucker, GA 320 17,325 03/31/00 Cypress Cove Melbourne, FL 326 18,800 04/20/00 Village of Sycamore Ridge Memphis, TN 114 5,200 04/28/00 Towne Centre III & IV Laurel, MD 562 29,244 05/11/00 3000 Grand Des Moines, IA 186 9,625 06/14/00 Villa Madeira Scottsdale, AZ 332 17,500 07/06/00 Idlewood Indianapolis, IN 320 15,600 07/25/00 Sabal Palm Pompano Beach, FL 416 27,200 07/27/00 Lake in the Woods Ypsilanti, MI 1,028 57,000 07/28/00 Windmill Colorado Springs, CO 304 12,358 07/28/00 Cheyenne Crest Colorado Springs, CO 208 12,286 07/28/00 Lamplight Court London, OH 53 738 08/24/00 Huntington Hollow Tulsa, OK 288 7,100 08/24/00 Hunter Glen Springfield, IL 64 1,750 08/29/00 Glenridge Colorado Springs, CO 220 13,127 09/18/00 Greenwich Woods/Hollyview Silver Springs, MD 606 37,500 09/26/00 The Hollows Columbia, SC 212 8,000 09/26/00 Tamarind at Stoneridge Columbia, SC 240 8,030 ---------------- ---------------------------------- ------------------------- ------------- ----------------- 6,977 $355,783 ---------------- ---------------------------------- ------------------------- ------------- -----------------
On June 30, 2000, the Operating Partnership entered into two separate joint ventures with an unaffiliated party. At closing, the Operating Partnership sold and/or contributed twenty-one wholly owned properties containing 5,211 units valued at $303.4 million to the joint ventures encumbered with $220.0 million in mortgage loans obtained on June 26, 2000 (see further discussion in Note 9). The unaffiliated party acquired a 75% interest in the joint ventures while the Operating Partnership retained a 25% interest along with the right to manage the properties. The Operating Partnership has classified its 25% interest in the joint ventures as investments in unconsolidated joint ventures and accounted for them under the equity method of accounting. The Operating Partnership recognized a net gain for financial reporting purposes of approximately $49.3 million. In addition, during the nine months ended September 30, 2000, the Operating Partnership sold its entire interest in three Unconsolidated Properties containing 377 units for approximately $4.6 million. 7. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE As of September 30, 2000, in addition to the Properties that were subsequently acquired as discussed in Note 15 of the Notes to Consolidated Financial Statements, the Operating Partnership entered into separate agreements to acquire eight multifamily properties containing 1,698 units from unaffiliated parties. The Operating Partnership expects a combined purchase price of approximately $283.5 million, including the assumption of mortgage indebtedness of approximately $24.7 million. 15 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) As of September 30, 2000, in addition to the Properties that were subsequently disposed of as discussed in Note 15 of the Notes to Consolidated Financial Statements, the Operating Partnership entered into separate agreements to dispose of seven multifamily properties containing 1,117 units to unaffiliated parties. The Operating Partnership expects a combined disposition price of approximately $53.3 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. DEPOSITS - RESTRICTED Deposits-restricted as of September 30, 2000 included the following: - deposits in the amount of $29.5 million held in third party escrow accounts to provide collateral for third party construction financing in connection with two separate joint venture agreements; - approximately $195.3 million held in third party escrow accounts, representing proceeds received in connection with the Operating Partnership's disposition of twenty-two properties and earnest money deposits made for eight additional acquisitions; - approximately $33.4 million for tenant security, utility deposits, and other deposits for certain of the Operating Partnership's Properties; and - approximately $5.5 million of other deposits. 9. MORTGAGE NOTES PAYABLE As of September 30, 2000, the Operating Partnership had outstanding mortgage indebtedness of approximately $3.0 billion encumbering 510 of the Properties and one warehouse acquired in the Globe Merger. The carrying value of such Properties (net of accumulated depreciation of $555.0 million) was approximately $4.8 billion. The mortgage notes payables are generally due in monthly installments of principal and interest. During the nine months ended September 30, 2000 the Operating Partnership: - recorded additional third-party mortgage debt totaling $65.1 million in connection with the consolidation of the Guilford portfolio on January 1, 2000 (see Note 5); - repaid the outstanding mortgage balances on sixty-one Properties in the aggregate amount of $119.4 million; - obtained new mortgage financing on eleven previously unencumbered properties in the amount of $148.3 million on March 20, 2000; - settled on a $100 million forward starting swap and received $7.1 million. This amount is being amortized over the life of the financing for the eleven previously unencumbered Properties that occurred on March 20, 2000; - obtained new mortgage financings on twenty-one previously unencumbered properties in the amount of $220 million on June 26, 2000. These mortgage loans were assumed by the joint ventures that closed on June 30, 2000 (see Note 6); - assumed mortgage debt on six properties in the amount of $38.4 million in connection with their acquisitions; and - obtained approximately $88.3 million in construction loan commitments on two properties, of which $20.7 million was currently outstanding. As of September 30, 2000, scheduled maturities for the Operating Partnership's outstanding mortgage indebtedness are at various dates through October 1, 2033. The interest rate range on the 16 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Operating Partnership's mortgage debt was 4.00% to 10.67% at September 30, 2000. During the nine months ended September 30, 2000, the weighted average interest rate on the Operating Partnership's mortgage debt was 6.85%. 10. NOTES The following tables summarize the Operating Partnership's unsecured note balances and certain interest rate and maturity date information as of and for the nine months ended September 30, 2000:
Weighted September 30, 2000 Net Principal Interest Rate Average Maturity Date (AMOUNTS IN THOUSANDS) Balance Ranges Interest Rate Ranges ------------------------------------------------------------------------------------------------------------------ Fixed Rate Public Notes $ 1,893,538 6.150% - 9.375% 7.07% 2000 - 2026 Floating Rate Public Notes 99,800 (1) 7.26% 2003 Fixed Rate Tax-Exempt Bonds 127,780 4.750% - 5.200% 5.08% 2024 - 2029 ------------------- --------------- Totals $ 2,121,118 6.96% =================== ===============
(1) As of September 30, 2000, floating rate public notes consisted of one note. The interest rate on this note was LIBOR (reset quarterly) plus a spread (reset annually in August) equal to 0.65% at September 30, 2000. During the nine months ended September 30, 2000 the Operating Partnership: - assumed $39.9 million of fixed rate public notes in the Globe Merger; - paid off at maturity fixed rate 7.25% public notes of $55.0 million; - paid off at maturity fixed rate 6.15% public notes of $145.0 million; and - paid off $8.0 million in fixed rate public notes assumed in the Globe Merger. As of September 30, 2000, the Operating Partnership had outstanding unsecured notes of approximately $2.1 billion net of a $3.9 million discount and including a $5.5 million premium. As of September 30, 2000, the remaining unamortized balance of deferred settlement receipts and payments from treasury locks and interest rate protection agreements was $9.0 million and $2.5 million, respectively. 11. LINES OF CREDIT The Operating Partnership has a revolving credit facility with Bank of America Securities LLC and Chase Securities Inc. acting as joint lead arrangers to provide the Operating Partnership with potential borrowings of up to $700.0 million. As of September 30, 2000, no amounts were outstanding under this facility and $51.3 million was restricted on this line of credit. During the nine months ended September 30, 2000, the weighted average interest rate on this revolving credit facility was 6.58%. In connection with the Globe Merger, the Company assumed a second line of credit facility with Fifth Third Bank to provide the Company with potential borrowings of up to $55.0 million. As of September 30, 2000, $33.6 million was outstanding under this facility. From the period July 11, 2000 (Globe Merger date) through September 30, 2000, the weighted average interest rate on this revolving credit facility was 8.78%. 17 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 12. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE OP UNIT The following tables set forth the computation of net income per OP Unit - basic and net income per OP Unit - diluted.
NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------- -------------------------------- 2000 1999 2000 1999 --------------------------------- -------------------------------- (AMOUNTS IN THOUSANDS EXCEPT PER OP UNIT AMOUNTS) NUMERATOR: Income before gain on disposition of properties, net, extraordinary item, allocation to Minority Interests, provision for income taxes and allocation to preference unit/interest distributions $ 290,850 $ 243,797 $ 105,729 $ 84,423 Allocation to Minority Interests - Partially Owned Properties 145 - (12) - Provision for income taxes (518) - (518) - Allocation to Junior Convertible Preference Units (327) (240) (109) (240) Allocation to Cumulative Convertible Redeemable Preference Interests (6,900) (36) (3,233) (36) Allocation to Redeemable Preference Units (76,370) (84,842) (24,601) (27,731) ---------------------------- --------------------------- Income before gain on disposition of properties, net and extraordinary item 206,880 158,679 77,256 56,416 Gain on disposition of properties, net 205,121 64,315 117,469 18,508 Loss on early extinguishment of debt - (451) - - ---------------------------- --------------------------- Numerator for net income per OP Unit - basic 412,001 222,543 194,725 74,924 Effect of dilutive securities: Distributions to convertible preference units/interests 9,713 - 7,576 - ---------------------------- --------------------------- Numerator for net income per OP Unit - diluted $ 421,714 $ 222,543 $ 202,301 $ 74,924 ============================ ============================ DENOMINATOR: Denominator for net income per OP Unit - basic 141,818 133,490 143,732 134,993 Effect of dilutive securities: Dilution for OP Units issuable upon assumed exercise of the Company's stock options 721 714 985 660 Convertible preference units/interests 3,967 - 7,777 - --------------------------- --------------------------- Denominator for net income per OP Unit - diluted 146,506 134,204 152,494 135,653 ============================ ============================ Net income per OP Unit - basic $ 2.91 $ 1.67 $ 1.35 $ 0.56 ============================ ============================ Net income per OP Unit - diluted $ 2.88 $ 1.66 $ 1.33 $ 0.55 ============================ ============================
18 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ -------------------------------- 2000 1999 2000 1999 ------------------------------ -------------------------------- (AMOUNTS IN THOUSANDS EXCEPT PER OP UNIT AMOUNTS) NET INCOME PER OP UNIT - BASIC: Income before gain on disposition of properties, net and extraordinary item per OP Unit - basic $ 1.46 $ 1.19 $ 0.53 $ 0.42 Gain on disposition of properties, net 1.45 0.48 0.82 0.14 Loss on early extinguishment of debt - - - - ------------- ------------- -------------- -------------- Net income per OP Unit - basic $ 2.91 $ 1.67 $ 1.35 $ 0.56 ============= ============= ============== ============== NET INCOME PER OP UNIT - DILUTED: Income before gain on disposition of properties, net and extraordinary item per OP Unit - diluted $ 1.48 $ 1.18 $ 0.56 $ 0.42 Gain on disposition of properties, net 1.40 0.48 0.77 0.13 Loss on early extinguishment of debt - - - - ------------- ------------- -------------- -------------- Net income per OP Unit - diluted $ 2.88 $ 1.66 $ 1.33 $ 0.55 ============= ============= ============== ==============
CONVERTIBLE PREFERENCE UNITS THAT COULD BE CONVERTED INTO 5,402,699 AND 12,357,124 WEIGHTED AVERAGE COMMON SHARES (WHICH WOULD BE CONTRIBUTED TO THE OPERATING PARTNERSHIP IN EXCHANGE FOR OP UNITS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999, RESPECTIVELY, AND 0 AND 11,365,744 WEIGHTED AVERAGE COMMON SHARES FOR THE QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999, RESPECTIVELY, WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS PER OP UNIT BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE. 12. COMMITMENTS AND CONTINGENCIES The Operating Partnership, as an owner of real estate, is subject to various Federal, state and local environmental laws and regulations. Compliance by the Operating Partnership with existing laws has not had a material adverse effect on the Operating Partnership's financial condition and results of operations. However, the Operating Partnership 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 Operating Partnership does not believe there is any litigation pending or threatened against the Operating Partnership other than routine litigation arising out of the ordinary course of business, the costs and expenses of most 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 Operating Partnership. In regards to the funding of Properties in the development and/or earnout stage and the joint venture agreements with two multifamily residential real estate developers, the Operating Partnership funded a total of $103.3 million during the nine months ended September 30, 2000. During the remainder of 2000, the Operating Partnership expects to fund approximately $55.4 million in connection with these Properties. In connection with one joint venture agreement, the Operating Partnership has an obligation to fund up to an additional $17.5 million to guarantee third party construction financing. 19 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real Properties, Inc. ("WRP Newco"), the Operating Partnership had agreed to purchase up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per share on a standby basis over a three-year period ending on May 30, 2000. This agreement was terminated on May 5, 2000, and, as such, the Operating Partnership has no further obligations under this agreement. In connection with the Wellsford Merger, the Operating Partnership provided a $14.8 million credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of September 30, 2000, this enhancement was still in effect. Pursuant to the terms of a capital investment in Constellation Real Technologies, LLC ("Constellation"), the Operating Partnership has a funding commitment of $12.3 million as of September 30, 2000. Constellation's primary objectives will be to serve as an incubator for real estate technology companies and to provide a platform for pooling of its investor's purchasing power. The Operating Partnership's current equity ownership interest in Constellation is 9.999% as of September 30, 2000. 14. REPORTABLE SEGMENTS The following tables set forth the reconciliation of net income and total assets for the Operating Partnership's reportable segments for the nine months and quarter ended September 30, 2000 and net income for the nine months and quarter ended September 30, 1999. 20 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED --------------------------------------------------------------------------------------------------------------------- Rental income $ 1,454,958 $ - $ 1,454,958 Fee and asset management income - 4,711 4,711 Furniture income - 14,228 14,228 Property and maintenance expense (368,291) - (368,291) Real estate tax and insurance expense (141,830) - (141,830) Property management expense (56,204) - (56,204) Fee and asset management expense - (3,647) (3,647) Furniture operating costs - (9,505) (9,505) ------------------------------------------------------ Net operating income 888,633 5,787 894,420 Interest income - investment in mortgage notes - 8,282 8,282 Income from investments in unconsolidated joint ventures - 14,589 14,589 Interest and other income - 19,009 19,009 Depreciation expense on non-real estate assets - (5,830) (5,830) Interest expense: Expense incurred - (285,337) (285,337) Amortization of deferred financing costs - (4,063) (4,063) General and administrative expense - (19,439) (19,439) Amortization of goodwill and other intangibles - (767) (767) Allocation to Minority Interests - Partially Owned Properties - 145 145 Provision for income taxes - (518) (518) Allocation to preference unit/interest holders - (83,597) (83,597) Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties - (193) (193) ------------------------------------------------------ Funds from operations available to OP Units 888,633 (351,932) 536,701 Depreciation expense on real estate assets (330,014) - (330,014) Gain on disposition of properties, net 205,121 - 205,121 Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties - 193 193 ------------------------------------------------------ Net income available to OP Unit holders $ 763,740 $ (351,739) $ 412,001 ====================================================== Investment in real estate, net of accumulated depreciation $ 10,580,070 $ 16,388 $ 10,596,458 ====================================================== Total assets $ 10,804,623 $ 1,016,239 $ 11,820,862 ======================================================
21 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED ---------------------------------------------------------------------------------------------------------------------- Rental income $ 1,243,958 $ - $ 1,243,958 Fee and asset management income - 3,432 3,432 Property and maintenance expense (300,798) - (300,798) Real estate tax and insurance expense (126,304) - (126,304) Property management expense (42,817) - (42,817) Fee and asset management expense - (2,301) (2,301) ------------------------------------------------------ Net operating income 774,039 1,131 775,170 Interest income - investment in mortgage notes - 8,502 8,502 Income from investments in unconsolidated joint ventures - 7,042 7,042 Interest and other income - 10,613 10,613 Depreciation expense on non-real estate assets - (5,125) (5,125) Interest expense: Expense incurred - (241,516) (241,516) Amortization of deferred financing costs - (2,773) (2,773) General and administrative expense - (15,736) (15,736) Allocation to preference unit/interest holders - (85,118) (85,118) Adjustment for depreciation expense related to Unconsolidated Properties - 710 710 ------------------------------------------------------ Funds from operations available to OP Units 774,039 (322,270) 451,769 Depreciation expense on real estate assets (292,380) - (292,380) Gain on disposition of properties, net 64,315 - 64,315 Loss on early extinguishment of debt - (451) (451) Adjustment for depreciation expense related to Unconsolidated Properties - (710) (710) ------------------------------------------------------ Net income available to OP Unit holders $ 545,974 $ (323,431) $ 222,543 =========== =========== ===========
22 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
QUARTER ENDED SEPTEMBER 30, 2000 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED ----------------------------------------------------------------------------------------------------------------------- Rental income $ 502,218 $ - $ 502,218 Fee and asset management income - 1,876 1,876 Furniture income - 14,228 14,228 Property and maintenance expense (140,446) - (140,446) Real estate tax and insurance expense (46,829) - (46,829) Property management expense (18,444) - (18,444) Fee and asset management expense - (1,545) (1,545) Furniture operating costs - (9,505) (9,505) ------------------------------------------------------ Net operating income 296,499 5,054 301,553 Interest income - investment in mortgage notes - 2,783 2,783 Income from investments in unconsolidated joint ventures - 5,525 5,525 Interest and other income - 10,624 10,624 Depreciation expense on non-real estate assets - (2,673) (2,673) Interest expense: Expense incurred - (95,074) (95,074) Amortization of deferred financing costs - (1,360) (1,360) General and administrative expense - (6,223) (6,223) Amortization of goodwill and other intangibles - (767) (767) Allocation to Minority Interests - Partially Owned Properties - (12) (12) Provision for income taxes - (518) (518) Allocation to preference unit/interest holders - (27,943) (27,943) Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties - 298 298 ------------------------------------------------------ Funds from operations available to OP Units 296,499 (110,286) 186,213 Depreciation expense on real estate assets (108,659) - (108,659) Gain on disposition of properties, net 117,469 - 117,469 Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties - (298) (298) ------------------------------------------------------ Net income available to OP Unit holders $ 305,309 $(110,584) $ 194,725 =====================================================
23 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
QUARTER ENDED SEPTEMBER 30, 1999 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED ------------------------------------------------------------------------------------------------------------------ Rental income $ 424,780 $ - $ 424,780 Fee and asset management income - 1,018 1,018 Property and maintenance expense (103,933) - (103,933) Real estate tax and insurance expense (41,789) - (41,789) Property management expense (14,844) - (14,844) Fee and asset management expense - (677) (677) ---------------------------------------------- Net operating income 264,214 341 264,555 Interest income - investment in mortgage notes - 2,858 2,858 Income from investments in unconsolidated joint ventures - 2,691 2,691 Interest and other income - 3,841 3,841 Depreciation expense on non-real estate assets - (1,702) (1,702) Interest expense: Expense incurred - (83,017) (83,017) Amortization of deferred financing costs - (1,112) (1,112) General and administrative expense - (5,022) (5,022) Allocation to preference unit/interest holders - (28,007) (28,007) Adjustment for depreciation expense related to Unconsolidated Properties - 159 159 ---------------------------------------------- Funds from operations available to OP Units 264,214 (108,970) 155,244 Depreciation expense on real estate assets (98,669) - (98,669) Gain on disposition of properties, net 18,508 - 18,508 Adjustment for depreciation expense related to Unconsolidated Properties - (159) (159) ---------------------------------------------- Net income available to OP Unit holders $ 184,053 $(109,129) $ 74,924 ==============================================
(1) The Operating Partnership's primary reportable business segment is owning, managing, and operating multifamily residential properties which includes the generation of rental and other related income through the leasing of apartment units to tenants. (2) The Operating Partnership has a segment for corporate level activity including such items as fee and asset management activity, furniture rental/sales activity, interest income earned on short-term investments and investment in mortgage notes, income earned from investments in unconsolidated joint ventures, general and administrative expenses, and interest expense on mortgage notes payable, unsecured notes and lines of credit. The Operating Partnership's fee and asset management and furniture rental/sales activities are immaterial and do not meet the threshold requirements of reportable segments as provided for in Statement No. 131. Interest expense on debt is not allocated to individual Properties, even if the Properties secure such debt. 24 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 15. SUBSEQUENT EVENTS Subsequent to September 30, 2000 and through November 3, 2000, the Operating Partnership disposed of the seventeen properties listed below to unaffiliated parties. A portion of these proceeds were used to pay off mortgage debt on one property approximating $9.1 million. The purchaser assumed the mortgage debt on two of these properties totaling $1.6 million.
--------------- ------------------------------ ------------------------- ------------ ----------------- DISPOSITION DATE NUMBER PRICE DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS) --------------- ------------------------------ ------------------------- ------------ ----------------- 10/02/00 Villa Serenas Tucson, AZ 611 $ 20,850 10/03/00 Camellia Court Carrollton, KY 55 1,550 10/03/00 Millston I, II & III Aberdeen, OH 93 1,194 10/03/00 Springwood Maysville, KY 54 1,026 10/03/00 Willowood Owensboro, KY 55 1,200 10/17/00 Mission Palms Tucson, AZ 360 20,700 10/19/00 Del Coronado Mesa, AZ 419 23,575 10/19/00 Rancho Murietta Tempe, AZ 292 17,075 10/20/00 Crossings at Green Valley Las Vegas, NV 384 20,738 10/20/00 Reflections at the Lake Las Vegas, NV 326 19,665 10/20/00 The Trails Las Vegas, NV 440 29,410 10/23/00 Augustine Club Tallahassee, FL 222 9,925 10/23/00 Plantations at Killearn Tallahassee, FL 184 9,150 10/23/00 Woodlake at Killearn Tallahassee, FL 352 14,475 10/25/00 La Valencia Mesa, AZ 361 19,925 10/25/00 Towne Square Chandler, AZ 584 33,300 10/31/00 Willow Run Willard, OH 61 1,250 --------------- ------------------------------ ------------------------- ------------ ----------------- 4,853 $245,008 --------------- ------------------------------ ------------------------- ------------ -----------------
On October 11, 2000, the Operating Partnership acquired Waterford at Manderin II, a vacant land parcel located adjacent to Waterford at Manderin Phase I in Jacksonville, FL, from an unaffiliated party for a total purchase price of approximately $0.5 million. On October 31, 2000, the Company closed on its acquisition of Grove Property Trust ("Grove"). Grove's portfolio of 60 properties contains 7,308 units located in three New England states. As provided in the Company's merger agreement with Grove, each Grove common share was exchanged for $17.00 (cash) and each Grove operating partnership unit was exchanged for cash in the same amount or 0.3696 units in the Operating Partnership at the option of the holder. As a result, the Company and the Operating Partnership paid approximately $174.0 million in cash and issued approximately 0.3 million OP Units. In addition, the Operating Partnership assumed approximately $241.4 million in Grove debt, of which $45.8 million was paid off immediately following the close of the merger. On November 1, 2000, the Operating Partnership acquired Centre Club Apartments, a 312-unit multifamily property located in Ontario, CA, from an unaffiliated party for a total purchase price of approximately $31.1 million. 25 ERP OPERATING LIMITED PARTNERSHIP 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 Operating Partnership should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Due to the Operating Partnership's ability to control the Management Partnerships and Management Companies, the Financing Partnerships, the LLC's, Globe, and certain other entities, each entity has been consolidated with the Operating Partnership for financial reporting purposes. Capitalized terms used herein and not defined are as defined in the Operating Partnership's Annual Report on Form 10-K for the year ended December 31, 1999. Forward-looking statements in this report are intended to be 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 Operating Partnership 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: - costs to obtain alternative sources of capital to the Operating Partnership are higher than anticipated; - occupancy levels and market rents may be adversely affected by local economic and market conditions, which are beyond the Operating Partnership's control; and - additional factors as discussed in Part I of the Annual Report 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 Operating Partnership 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 The acquired properties are presented in the Consolidated Financial Statements of the Operating Partnership from the date of each acquisition or the closing dates of the Mergers. The following table summarizes the number of Wholly Owned Acquired and Disposed Properties and related units for the periods presented:
ACQUISITIONS DISPOSITIONS ---------------------------------- ------------------------------- Number of Number of Number of Number of PERIOD Properties Units Properties Units --------------------------- ---------------- ----------------- --------------- --------------- 1999 366 35,450 36 7,886 YTD 9/30/00 18 2,738 27 6,977
26 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Operating Partnership's overall results of operations for the nine months ended September 30, 2000 and 1999 have been significantly impacted by the Operating Partnership's acquisition and disposition activity, including the Globe Merger. The significant changes in rental revenues, property and maintenance expenses, real estate taxes and insurance, depreciation expense, property management and interest expense can primarily be attributed to the acquisition of the 1999 Acquired Properties, the 2000 Acquired Properties and the Globe Merger, partially offset by the disposition of the 1999 Disposed Properties and the 2000 Disposed Properties. Properties that the Operating Partnership owned for all of both the nine-month periods ended September 30, 2000 and September 30, 1999 (the "Nine-Month 2000 Same Store Properties"), which represented 163,368 units, also impacted the Operating Partnership's results of operations. Properties that the Operating Partnership owned for all of both the quarters ended September 30, 2000 and September 30, 1999 (the "Third-Quarter 2000 Same Store Properties"), which represented 167,740 units, also impacted the Operating Partnership's results of operations. Both the Nine-Month 2000 Same Store Properties and Third-Quarter 2000 Same Store Properties are discussed in the following paragraphs. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 TO NINE MONTHS ENDED SEPTEMBER 30, 1999 For the nine months ended September 30, 2000, income before gain on disposition of properties, net, extraordinary item, allocation to Minority Interests and provision for income taxes increased by approximately $47.1 million when compared to the nine months ended September 30, 1999. This increase was primarily due to the acquisition of the 1999 Acquired Properties, the 2000 Acquired Properties and the Globe Merger, as well as 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. In regard to the Nine-Month 2000 Same Store Properties, total revenues increased by approximately $47.5 million to $1.1 billion or 4.34% primarily as a result of higher rental rates charged to new tenants and tenant renewals and an increase in income from billing tenants for their share of utility costs as well as other ancillary services provided to tenants. Overall, property-operating expenses, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, increased approximately $9.0 million or 2.22%. This increase was primarily the result of higher expenses for on-site compensation costs and an increase in real estate taxes on certain properties, but was partially offset by lower leasing and advertising, administrative, maintenance, building and insurance costs. Property management represents expenses associated with the self-management of the Operating Partnership's Properties. These expenses increased by approximately $13.4 million primarily due to the operations of the property management business obtained through the LFT Merger and a current year compensation charge associated with the issuance of restricted shares to our property management personnel. Fee and asset management revenues and fee and asset management expenses are associated with the management of Unconsolidated Properties. These revenues increased by approximately $1.3 million, but were offset by an increase in expenses of approximately $1.3 million when compared to the nine months ended September 30, 1999. 27 ERP OPERATING LIMITED PARTNERSHIP 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 $45.1 million. This increase was primarily the result of a $661.7 million increase in the Operating Partnership's average indebtedness outstanding. The effective interest cost on all of the Operating Partnership's indebtedness for the nine months ended September 30, 2000 was 7.23% as compared to 6.97% for the nine months ended September 30, 1999. General and administrative expenses, which include corporate operating expenses, increased approximately $3.7 million between the periods under comparison. This increase was primarily due to recording higher compensation expense associated with the issuance of restricted shares. These expenses as a percentage of total revenues were 1.28% for the nine months ended September 30, 2000 compared to 1.24% of total revenues for the nine months ended September 30, 1999. COMPARISON OF QUARTER ENDED SEPTEMBER 30, 2000 TO QUARTER ENDED SEPTEMBER 30, 1999 For the quarter ended September 30, 2000, income before gain on disposition of properties, net, extraordinary item, allocation to Minority Interests and provision for income taxes increased by approximately $21.3 million when compared to the quarter ended September 30, 1999. This increase was primarily due to the acquisition of the 1999 Acquired Properties, the 2000 Acquired Properties and the Globe Merger, as well as 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. In regard to the Third-Quarter 2000 Same Store Properties, total revenues increased by approximately $19.4 million or 5.12% primarily as a result of higher rental rates charged to new tenants and tenant renewals and an increase in income from billing tenants for their share of utility costs as well as other ancillary services provided to tenants. Overall, property-operating expenses, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, increased approximately $4.5 million or 3.12%. This increase was primarily the result of higher expenses for on-site compensation costs and an increase in real estate taxes on certain properties, but was partially offset by lower leasing and advertising, administrative, maintenance and insurance costs. Property management represents expenses associated with the self-management of the Operating Partnership's Properties. These expenses increased by approximately $3.6 million primarily due to the operations of the property management business obtained through the LFT Merger and a current year compensation charge associated with the issuance of restricted shares to our property management personnel. Fee and asset management revenues and fee and asset management expenses are associated with the management of Unconsolidated Properties. These revenues increased by approximately $0.9 million, but were offset by an increase in expenses of approximately $0.9 million when compared to the quarter ended September 30, 1999. Interest expense, including amortization of deferred financing costs, increased by approximately $12.3 million. This increase was primarily the result of a $491.4 million increase in the Operating Partnership's average indebtedness outstanding. The effective interest cost on all of the Operating Partnership's indebtedness for the quarter ended September 30, 2000 was 7.25% as compared to 6.95% for the quarter 28 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ended September 30, 1999. General and administrative expenses, which include corporate operating expenses, increased approximately $1.2 million between the periods under comparison. This increase was primarily due to recording higher compensation expense associated with the issuance of restricted shares. These expenses as a percentage of total revenues were 1.16% for the quarter ended September 30, 2000 compared to 1.15% of total revenues for the quarter ended September 30, 1999. LIQUIDITY AND CAPITAL RESOURCES As of January 1, 2000, the Operating Partnership had approximately $29.1 million of cash and cash equivalents and the amount available on the Operating Partnership's line of credit was $400 million, of which $65.8 million was restricted. After taking into effect the various transactions discussed in the following paragraphs, the Operating Partnership's cash and cash equivalents balance at September 30, 2000 was approximately $56.2 million and the amount available on the Operating Partnership's lines of credit was $721.4 million, of which $51.3 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 (used for) financing activities, all of which are presented in the Operating Partnership's Statements of Cash Flows. Part of the Operating Partnership's strategy in funding the purchase of multifamily properties, funding its Properties in the development and/or earnout stage and the funding of the Operating Partnership's investment in two joint ventures with multifamily real estate developers is to utilize its lines of credit and to subsequently repay the lines of credit from the disposition of Properties or the issuance of additional equity or debt securities. Utilizing this strategy during the first nine months of 2000, the Operating Partnership: - obtained new mortgage financing on eleven previously unencumbered properties and received net proceeds of $147.7 million; - disposed of thirty properties (including the sale of the Operating Partnership's entire interest in three Unconsolidated Properties) and received net proceeds of $360.4 million; - sold and/or contributed twenty-one properties to two separate joint ventures and received net proceeds of $60.5 million; - issued approximately 0.9 million OP Units and received net proceeds of $24.9 million; - issued the Series B, C, D and E Cumulative Convertible Redeemable Preference Units and received net proceeds of $133.6 million; and - obtained new mortgage financing on twenty-one previously unencumbered properties and received net proceeds of $217.2 million. All of these proceeds were utilized to either: - repay the lines of credit; - repay mortgage indebtedness on certain Properties and/or repay unsecured notes; - provide funding for properties in the development and/or earnout stage including properties subject to the joint venture agreements; and/or - purchase additional properties. 29 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During the nine months ended September 30, 2000, the Operating Partnership: - repaid four unsecured notes totaling $208.0 million; - repaid approximately $119.4 million of mortgage indebtedness on sixty-one Properties; - settled on a $100 million interest rate protection agreement and received approximately $7.1 million in connection therewith. This amount is being amortized over the life of the financing for the eleven previously unencumbered Properties that occurred on March 20, 2000; - funded $103.3 million related to the development, earnout and joint venture agreements; - purchased eighteen Properties for a total purchase price of approximately $257.0 million; - funded $1.25 million to acquire an additional ownership interest in LFT's Guilford portfolio; and - acquired $25.0 million of 8.25% preferred securities of WRP Convertible Trust I, an affiliate of WRP Newco. As of September 30, 2000, the Operating Partnership had total indebtedness of approximately $5.2 billion, which included mortgage indebtedness of $3.0 billion (including premiums of $2.6 million), of which $836.6 million represented tax-exempt bond indebtedness, and unsecured debt of $2.1 billion (including net discounts and premiums in the amount of $1.6 million), of which $127.8 million represented tax-exempt bond indebtedness. Subsequent to September 30, 2000 and through November 6, 2000, the Company and the Operating Partnership: - repaid and/or the purchaser assumed the outstanding mortgage balance on three Properties totaling approximately $10.6 million; - disposed of seventeen properties for a total sales price of $245.0 million; - acquired one property containing 312 units and a vacant land parcel for a total purchase price of approximately $31.6 million; and - acquired Grove for cash of approximately $174.0 million and assumed approximately $241.4 million in Grove debt, of which $45.8 million was paid off immediately following the close of the merger. During the remainder of 2000, the Operating Partnership expects to fund $55.4 million related to the development, earnout and joint venture agreements. In connection with one joint venture agreement, the Operating Partnership has an obligation to fund up to an additional $17.5 million to guarantee third party construction financing. The Operating Partnership has a policy of capitalizing expenditures made for new real estate assets, including newly acquired properties and the costs associated with placing these assets into service. Expenditures for improvements and renovations to real estate that significantly enhance the value of existing assets or substantially extend the useful life of an asset are also capitalized. Expenditures for in-the-unit replacement-type items such as appliances, draperies, carpeting and floor coverings, mechanical equipment and certain furniture and fixtures are also capitalized. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. With respect to acquired properties, the Operating Partnership has determined that it generally spends $1,000 per unit during its first three years of ownership 30 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) to fully improve and enhance these properties to meet the Operating Partnership's standards. In regard to replacement-type items described above, the Operating Partnership generally expects to spend $250 per unit on an annual recurring basis. During the nine months ended September 30, 2000, the Operating Partnership's total improvements to real estate approximated $100.3 million. Of this amount, approximately $24.8 million, or $254 per unit, related to capital improvements and major repairs for the 1998, 1999 and 2000 Acquired Properties. Capital improvements and major repairs for all of the Operating Partnership's pre-EQR IPO properties and 1993, 1994, 1995, 1996 and 1997 Acquired Properties approximated $25.5 million, or $227 per unit. Capital spent for replacement-type items approximated $42.5 million, or $202 per unit. In addition, approximately $5.3 million was spent on eight specific assets related to major renovations and repositioning of these assets. Also included in total improvements to real estate was approximately $0.7 million spent on commercial/other assets, $1.4 million spent on the Partially Owned Properties and $0.1 million spent on properties that were sold prior to 2000. Such capital expenditures were primarily funded from working capital reserves and from net cash provided by operating activities. Total improvements to real estate for the remaining portion of 2000 are estimated to be approximately $16.4 million. The Company, through its Globe subsidiary, has a policy for capitalizing expenditures made for rental furniture and property and equipment, including new acquisitions and the costs associated with placing these assets into service. Globe purchases furniture to replace furniture that has been sold and to maintain adequate levels of rental furniture to meet existing and new customer needs. Expenditures for property and equipment that significantly enhance the value of existing assets or substantially extend the useful life of an asset are capitalized. Expenditures for ordinary maintenance and repairs related to property and equipment are expensed as incurred. For the period July 11, 2000 through September 30, 2000, total additions to rental furniture and property and equipment approximated $7.5 million and $0.4 million, respectively. Such additions to rental furniture and property and equipment were primarily funded from working capital reserves and from net cash provided by operating activities. Total additions to rental furniture and property and equipment for the remaining portion of 2000 are estimated to be approximately $6.4 million. Also included in total capital expenditures was approximately $3.9 million expended for non-real estate additions such as computer software, computer equipment, and furniture and fixtures and leasehold improvements for the Company's property management offices and its corporate headquarters. Such additions to non-real estate property were primarily funded from working capital reserves and from net cash provided by operating activities. Total additions to non-real estate property for the remaining portion of 2000 are estimated to be approximately $1.3 million. Total distributions paid in October 2000 amounted to approximately $141.5 million, which included distributions declared for the quarter ended September 30, 2000. The Operating Partnership expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing Properties and certain scheduled unsecured note and mortgage note repayments, generally through its working capital, net cash provided by operating activities and borrowings under its lines of credit. The Operating Partnership considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The Operating Partnership also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements, through undistributed FFO and proceeds received from the disposition of certain Properties and/or through the issuance of unsecured notes and equity securities including additional OP Units. In addition, the Operating Partnership has certain uncollateralized Properties available for additional mortgage borrowings in the event that the public capital markets are unavailable to the Operating Partnership or the cost of alternative sources of capital to the Operating Partnership is too high. The Operating Partnership has a revolving credit facility with Bank of America Securities LLC and Chase Securities Inc. acting as joint lead arrangers to provide the Operating Partnership with potential borrowings of up to $700 million. As of November 6, 2000, $250 million was outstanding under this facility at a weighted average interest rate of 7.06%. In connection with the Globe Merger, the Company assumed a revolving credit facility with Fifth Third Bank with potential borrowings of up to $55.0 million. This line of credit matures on May 31, 2003. As of November 6, 2000, $42.2 million was outstanding under this facility at a weighted average interest rate of 8.92%. 31 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In connection with the Wellsford Merger, the Operating Partnership provided a $14.8 million credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of November 6, 2000, this enhancement was still in effect. Pursuant to the terms of a capital investment in Constellation Real Technologies, LLC ("Constellation"), the Operating Partnership has a funding commitment of $12.3 million as of September 30, 2000. Constellation's primary objectives will be to serve as an incubator for real estate technology companies and to provide a platform for pooling of its investor's purchasing power. The Operating Partnership's current equity ownership interest in Constellation is 9.999% as of November 6, 2000. Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real Properties, Inc. ("WRP Newco"), the Operating Partnership had agreed to purchase up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per share on a standby basis over a three-year period ending on May 30, 2000. This agreement was terminated on May 5, 2000, and, as such, the Operating Partnership has no further obligations under this agreement. On May 5, 2000, the Operating Partnership acquired $25.0 million of 8.25% preferred securities of WRP Convertible Trust I, an affiliate of WRP Newco. These preferred securities are indirectly convertible into WRP Newco common shares under certain circumstances. FUNDS FROM OPERATIONS Funds from Operations ("FFO") represents net income (loss) (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), excluding gains or losses from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. This definition of FFO is in accordance with the National Association of Real Estate Investment Trust's ("NAREIT") recommended definition. NAREIT modified this definition effective January 1, 2000. However, as a result of this modification, no changes were required to the Operating Partnership's calculation of FFO for either the current or prior periods presented. The Operating Partnership believes that FFO is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Operating Partnership 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 Operating Partnership'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 Operating Partnership's calculation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies and may differ as a result of differences between the Operating Partnership's and other real estate company's accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies. FFO per OP Unit is presented giving affect to the Statement of Financial Accounting Standards No. 128 "Earnings Per Share". 32 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the nine months ended September 30, 2000, FFO available to OP Units increased by $84.9 million, or 18.8%, and FFO per OP Unit - diluted increased by $0.39, or 11.7%, when compared to the nine months ended September 30, 1999. For the quarter ended September 30, 2000, FFO available to OP Units increased by $31.0 million, or 19.9%, and FFO per OP Unit - diluted increased by $0.14, or 12.4%, when compared to the quarter ended September 30, 1999. The following is a reconciliation of net income to FFO available to OP Units for the nine months and quarters ended September 30, 2000 and 1999:
NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ---------------------------- 2000 1999 2000 1999 ---------------------------------------------------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER OP UNIT AMOUNTS) STATEMENTS OF FUNDS FROM OPERATIONS Net income $ 495,598 $ 307,661 $ 222,668 $ 102,931 Adjustments: Depreciation on real estate assets* 329,821 293,090 108,957 98,828 Loss on early extinguishment of debt - 451 - - Gain on disposition of properties, net (205,121) (64,315) (117,469) (18,508) --------- --------- --------- --------- FFO 620,298 536,887 214,156 183,251 Allocation to preference unit/interest holders (83,597) (85,118) (27,943) (28,007) --------- --------- --------- --------- FFO available to OP Units $ 536,701 $ 451,769 $ 186,213 $ 155,244 ========= ========= ========= ========= FFO per OP Unit - basic $ 3.78 $ 3.38 $ 1.30 $ 1.15 ========= ========= ========= ========= FFO per OP Unit - diluted $ 3.71 $ 3.32 $ 1.27 $ 1.13 ========= ========= ========= ========= Weighted average OP Units outstanding - basic 141,817 133,490 143,732 134,993 ========= ========= ========= =========
* INCLUDES $890 AND $710 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999, RESPECTIVELY, AND $680 AND $159 FOR THE QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999, RESPECTIVELY, RELATED TO THE OPERATING PARTNERSHIP'S SHARE OF DEPRECIATION FROM UNCONSOLIDATED PROPERTIES. EXCLUDES $1,083 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND $382 FOR THE QUARTER ENDED SEPTEMBER 30, 2000 RELATED TO THE MINORITY INTERESTS' SHARE OF DEPRECIATION FROM PARTIALLY OWNED PROPERTIES. 33 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 Operating Partnership's Form 10-K for the year ended December 31, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule (B) Reports on Form 8-K: None. 34 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. ERP OPERATING LIMITED PARTNERSHIP BY: EQUITY RESIDENTIAL PROPERTIES TRUST, ITS GENERAL PARTNER Date: November 13, 2000 By: /s/ Bruce C. Strohm ----------------- -------------------------------------- Bruce C. Strohm Executive Vice President, General Counsel and Secretary Date: November 13, 2000 By: /s/ Michael J. McHugh ------------------ -------------------------------------- Michael J. McHugh Executive Vice President, Chief Accounting Officer and Treasurer 35