10-Q 1 a2063427z10-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, 2001 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, 2001 2000 ---------------- ---------------- ASSETS Investment in real estate Land $ 1,827,926 $ 1,770,019 Depreciable property 10,990,785 10,782,311 Construction in progress 81,062 39,130 --------------- --------------- 12,899,773 12,591,460 Accumulated depreciation (1,621,752) (1,352,236) --------------- --------------- Investment in real estate, net of accumulated depreciation 11,278,021 11,239,224 Real estate held for disposition 4,102 51,637 Cash and cash equivalents 110,807 23,772 Investment in mortgage notes, net - 77,184 Investments in unconsolidated entities 351,947 316,540 Rents receivable 4,070 1,801 Deposits - restricted 157,299 231,639 Escrow deposits - mortgage 79,350 70,470 Deferred financing costs, net 31,588 29,706 Rental furniture, net 23,897 60,183 Property and equipment, net 3,419 7,620 Goodwill, net 48,218 67,589 Other assets 101,899 86,601 --------------- --------------- TOTAL ASSETS $ 12,194,617 $ 12,263,966 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $ 3,268,935 $ 3,230,611 Notes, net 2,419,245 2,120,079 Lines of credit - 355,462 Accounts payable and accrued expenses 135,153 107,818 Accrued interest payable 77,769 51,877 Rents received in advance and other liabilities 70,535 100,819 Security deposits 48,632 46,272 Distributions payable 144,535 18,863 --------------- --------------- TOTAL LIABILITIES 6,164,804 6,031,801 --------------- --------------- COMMITMENTS AND CONTINGENCIES Minority Interests - Partially Owned Properties 3,538 2,884 Partners' Capital Junior Convertible Preference Units 5,846 7,896 Cumulative Convertible Redeemable Preference Interests 234,500 186,000 Cumulative Convertible or Redeemable Preference Units 967,741 1,183,136 General Partner 4,452,701 4,436,411 Limited Partners 390,875 415,838 Accumulated other comprehensive income (25,388) - --------------- --------------- TOTAL PARTNERS' CAPITAL 6,026,275 6,229,281 --------------- --------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 12,194,617 $ 12,263,966 =============== ===============
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, ------------------------------- ---------------------------- 2001 2000 2001 2000 ------------------------------- ---------------------------- REVENUES Rental income $ 1,556,812 $ 1,454,019 $ 529,141 $ 501,279 Fee and asset management 5,805 4,711 1,665 1,876 Interest income - investment in mortgage notes 8,786 8,282 23 2,783 Interest and other income 18,240 19,009 6,529 10,624 Furniture income 45,051 15,167 15,024 15,167 ------------ ------------ ------------ ------------ Total revenues 1,634,694 1,501,188 552,382 531,729 ------------ ------------ ------------ ------------ EXPENSES Property and maintenance 420,365 369,452 143,715 141,607 Real estate taxes and insurance 143,015 141,420 46,240 46,419 Property management 56,302 56,204 19,760 18,444 Fee and asset management 5,358 3,647 1,888 1,545 Depreciation 341,014 334,840 115,908 110,328 Interest: Expense incurred 287,329 285,337 96,946 95,074 Amortization of deferred financing costs 4,338 4,063 1,528 1,360 General and administrative 23,604 19,354 9,525 6,138 Furniture expenses 45,390 10,361 14,891 10,361 Amortization of goodwill 2,852 767 928 767 Impairment on furniture rental business 60,000 - 60,000 - Impairment on technology investments 7,968 - 1,193 - ------------ ------------ ------------ ------------ Total expenses 1,397,535 1,225,445 512,522 432,043 ------------ ------------ ------------ ------------ Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle 237,159 275,743 39,860 99,686 Allocation to Minority Interests - Partially Owned Properties (1,523) 145 (1,285) (12) Income from investments in unconsolidated entities 20,252 14,589 8,029 5,525 Net gain on sales of real estate 100,132 165,025 53,567 77,373 ------------ ------------ ------------ ------------ Income before extraordinary items and cumulative effect of change in accounting principle 356,020 455,502 100,171 182,572 Extraordinary items (22) - (128) - Cumulative effect of change in accounting principle (1,270) - - - ------------ ------------ ------------ ------------ Net income $ 354,728 $ 455,502 $ 100,043 $ 182,572 ============ ============ ============ ============ ALLOCATION OF NET INCOME: Junior Convertible Preference Units $ 272 $ 327 $ 82 $ 109 ============ ============ ============ ============ Cumulative Convertible Redeemable Preference Interests $ 13,390 $ 6,900 $ 4,833 $ 3,233 ============ ============ ============ ============ Cumulative Convertible or Redeemable Preference Units $ 68,097 $ 76,370 $ 19,425 $ 24,601 ============ ============ ============ ============ General Partner $ 250,303 $ 339,517 $ 69,511 $ 141,373 Limited Partners 22,666 32,388 6,192 13,256 ------------ ------------ ------------ ------------ Net income available to OP Unit holders $ 272,969 $ 371,905 $ 75,703 $ 154,629 ============ ============ ============ ============ Net income per OP Unit - basic $ 0.94 $ 1.31 $ 0.26 $ 0.54 ============ ============ ============ ============ Net income per OP Unit - diluted $ 0.93 $ 1.30 $ 0.26 $ 0.53 ============ ============ ============ ============ Weighted average OP Units outstanding - basic 290,803 283,636 292,213 287,464 ============ ============ ============ ============ Weighted average OP Units outstanding - diluted 294,661 289,894 296,391 304,988 ============ ============ ============ ============ Distributions declared per OP Unit outstanding $ 1.2475 $ 1.1675 $ 0.4325 $ 0.4075 ============ ============ ============ ============
SEE ACCOMPANYING NOTES 3 ERP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 --------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 354,728 $ 455,502 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Allocation to Minority Interests - Partially Owned Properties 1,523 (145) Cumulative effect of change in accounting principle 1,270 - Depreciation 349,313 335,844 Amortization of deferred financing costs 4,338 4,063 Amortization of discount on investment in mortgage notes (2,256) - Amortization of goodwill 2,852 767 Amortization of discounts and premiums on debt (1,424) (1,725) Amortization of deferred settlements on interest rate protection agreements 533 290 Impairment on furniture rental business 60,000 - Impairment on technology investments 7,968 - Income from investments in unconsolidated entities (20,252) (14,589) Net gain on sales of real estate (100,132) (165,025) Extraordinary items 22 - Unrealized gain on interest rate protection agreements (161) - Book value of furniture sales and rental buy outs 8,703 4,802 Compensation paid with Company Common Shares 12,298 4,300 CHANGES IN ASSETS AND LIABILITIES: (Increase) decrease in rents receivable (2,069) 44 Decrease in deposits - restricted 4,538 3,660 Additions to rental furniture (17,827) (7,477) (Increase) in other assets (17,630) (7,285) Increase in accounts payable and accrued expenses 25,535 39,186 Increase in accrued interest payable 25,702 22,612 (Decrease) in rents received in advance and other liabilities (7,628) (9,755) Increase in security deposits 885 14 ---------- ---------- Net cash provided by operating activities 690,829 665,083 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in real estate (296,710) (238,055) Improvements to real estate (108,310) (100,347) Additions to non-real estate property (5,210) (3,919) Interest capitalized for real estate under construction (2,159) (827) Proceeds from disposition of real estate, net 452,060 416,603 Investment in property and equipment (2,185) (416) Principal receipts on investment in mortgage notes 61,419 5,287 Investments in unconsolidated entities (69,195) (122,535) Distributions from unconsolidated entities 26,311 15,077 Proceeds from refinancing of unconsolidated entities, net 5,691 1,695 Proceeds from disposition of unconsolidated entities, net 359 4,602 Decrease (increase) in deposits on real estate acquisitions, net 98,582 (154,711) (Increase) decrease in mortgage deposits (4,167) 2,283 Purchase of management contract rights - (779) Consolidation of previously Unconsolidated Properties 52,841 (163) Business combinations, net of cash acquired (8,231) (71,228) Other investing activities, net 989 (2,950) ---------- ---------- Net cash provided by (used for) investing activities 202,085 (250,383) ---------- ----------
SEE ACCOMPANYING NOTES 4 ERP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 2001 2000 ------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Loan and bond acquisition costs $ (4,383) $ (2,392) MORTGAGE NOTES PAYABLE: Proceeds, net 59,312 389,051 Lump sum payoffs (315,302) (119,412) Scheduled principal repayments (24,210) (19,930) Prepayment premiums (201) - NOTES, NET: Proceeds, net 299,316 - Lump sum payoffs - (208,000) Scheduled principal repayments (4,649) - LINES OF CREDIT: Proceeds 436,491 209,305 Repayments (791,953) (505,179) (Payments) proceeds from settlement of interest rate protection agreements (7,360) 7,055 Capital contributions from General Partner, net 62,068 21,228 Proceeds from sale of preference units/interests 48,500 137,000 Redemption of preference units/interests (210,500) - Distributions paid to partners (321,257) (296,448) Distributions to Minority Interests - Partially Owned Properties (31,970) (617) Principal receipts on employee notes, net 219 254 Principal receipts on other notes receivable, net - 510 ---------- ---------- Net cash (used for) financing activities (805,879) (387,575) ---------- ---------- Net increase in cash and cash equivalents 87,035 27,125 Cash and cash equivalents, beginning of period 23,772 29,117 ---------- ---------- Cash and cash equivalents, end of period $ 110,807 $ 56,242 ========== ========== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 270,849 $ 264,582 ========== ========== Mortgage loans assumed through real estate acquisitions $ 45,918 $ 38,442 ========== ========== Net real estate contributed in exchange for OP Units or preference units $ - $ 4,707 ========== ========== Mortgage loans (assumed) by purchaser in real estate dispositions $ (28,231) $ (220,000) ========== ========== Transfers to real estate held for disposition $ 4,102 $ 224,553 ========== ========== Mortgage loans recorded as a result of consolidation of previously Unconsolidated Properties $ 301,502 $ 65,095 ========== ========== Net (assets) liabilities recorded as a result of consolidation of previously Unconsolidated Properties $ (20,839) $ 792 ========== ==========
SEE ACCOMPANYING NOTES 5 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS ERP Operating Limited Partnership ("ERPOP"), 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 ERPOP. As used herein, the term "Operating Partnership" also includes its subsidiaries, including entities that own residential real property and other assets acquired by virtue of the mergers between EQR and each of Wellsford Residential Property Trust, Evans Withycombe Residential, Inc., Merry Land & Investment Company, Inc. and Lexford Residential Trust (collectively, the "Mergers"). The Operating Partnership also includes the businesses formally operated by Globe Business Resources, Inc., Temporary Quarters, Inc. and Grove Operating, L.P. As used herein, the term "Company" means EQR and the Operating Partnership. EQR has elected to be taxed as a REIT under Section 856(c) of the Internal Revenue Code 1986, as amended (the "Code"). The Operating Partnership is engaged in the acquisition, disposition, ownership, management and operation of multifamily properties. As of September 30, 2001, the Operating Partnership owned or had interests in a portfolio of 1,081 multifamily properties containing 225,590 apartment units (individually a "Property" and collectively the "Properties") consisting of the following:
Number of Number of Properties Units ---------------------------------------------------------------------- Wholly Owned Properties 961 201,089 Partially Owned Properties 36 6,963 Unconsolidated Properties 84 17,538 ----------------- ----------------- Total Properties 1,081 225,590 ================= =================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, including definitions for capitalized terms, refer to the consolidated financial statements and footnotes thereto included in the Operating Partnership's annual report on Form 10-K for the year ended December 31, 2000. 6 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In the normal course of business, the Operating Partnership is exposed to the effect of interest rate changes. The Operating Partnership limits these risks by following established risk management policies and procedures including the use of derivatives. The Operating Partnership has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Operating Partnership has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives. On January 1, 2001, the Operating Partnership adopted SFAS No. 133/138, which requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either partners' capital or net income depending on whether the derivative instruments qualify as a hedge for accounting purposes and, if so, the nature of the hedging activity. When the terms of an underlying transaction are modified, or when the underlying transaction is terminated or completed, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the instrument matures. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market each period. As of January 1, 2001, the adoption of the new standard resulted in derivative instruments reported on the balance sheet as liabilities of approximately $6.6 million; an adjustment of approximately $5.3 million to "Accumulated Other Comprehensive Income", which are gains and losses not affecting retained earnings in the Consolidated Statement of Partners' Capital; and a charge of approximately $1.3 million as a cumulative effect of change in accounting principle in the Consolidated Statement of Operations. The Operating Partnership employs derivative financial instruments to hedge qualifying anticipated transactions. Gains and losses are deferred and recognized in net income in the same period that the underlying transaction occurs, expires or is otherwise terminated. As of September 30, 2001, there were approximately $25.4 million in deferred losses, net, included in accumulated other comprehensive income. At September 30, 2001, the Operating Partnership had entered into swaps which have been designated as cash flow hedges with an aggregate notional amount of $626.4 million at interest rates ranging from 3.65125% to 6.15% maturing at various dates ranging from 2003 to 2007 with a net liability fair value of $27.1 million; and swaps which have been designated as fair value hedges with an aggregate notional amount of $296.4 million at interest rates ranging from 4.458% to 7.25% maturing at various dates ranging from 2003 to 2005 with a net asset fair value of $13.1 million. On September 30, 2001, the net derivative instruments were reported at their fair value as other liabilities of approximately $14.0 million. Within the next twelve months the Operating Partnership expects to recognize an estimated $7.6 million of accumulated other comprehensive income as additional interest expense. OTHER In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS Nos. 141 and 142 require companies to account for all business combinations using the purchase method of accounting and to eliminate the amortization of goodwill in favor of a periodic impairment based approach. SFAS Nos. 141 and 142 will be effective for fiscal years beginning after December 15, 2001. The Operating Partnership will adopt the standards effective January 1, 2002, and does not anticipate that the adoptions will have a material impact on the Operating Partnership's financial condition and results of operations. 7 In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which is effective for fiscal years beginning after December 15, 2001. The Operating Partnership will adopt the standard effective January 1, 2002, and does not anticipate that the adoption will have a material impact on the Operating Partnership's financial condition and results of operations. 3. PARTNERS' CAPITAL On October 11, 2001, the Operating Partnership effected a two-for-one split of its OP Units to unit holders of record as of September 21, 2001. All OP Units presented have been retroactively adjusted to reflect the OP Unit split. The following table presents the changes in the Operating Partnership's issued and outstanding OP Units for the nine months ended September 30, 2001:
---------------------------------------------------------------------------------------- 2001 ---------------------------------------------------------------------------------------- Operating Partnership's OP Units outstanding at January 1, 290,090,252 ISSUED TO GENERAL PARTNER: Conversion of Series E Preferred Shares 212,444 Conversion of Series H Preferred Shares 6,972 Employee Share Purchase Plan 266,694 Dividend Reinvestment - DRIP Plan 28,462 Share Purchase - DRIP Plan 21,752 Exercise of EQR options 2,712,714 Restricted EQR share grants, net 756,598 ISSUED TO LIMITED PARTNERS: Conversion of Series A Junior Convertible Preference Units 83,698 Issuance pursuant to acquisition of remaining minority interest in Globe 69,432 Issuance pursuant to an earnout agreement with one property 2,782 ---------------------------------------------------------------------------------------- Operating Partnership's OP Units outstanding at September 30, 294,251,800 ----------------------------------------------------------------------------------------
As of September 30, 2001, EQR (as the general partner) had an approximate 91.89% interest and the Limited Partners had an approximate 8.11% interest in the Operating Partnership. The limited partners of the Operating Partnership as of September 30, 2001 include various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units (the "Limited Partners") and are represented by 23,876,662 OP Units. EQR contributes all net proceeds from the various equity offerings (including proceeds from exercise of options for EQR Common Shares) 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 (on a one-for-one common share per OP Unit basis), 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 following table presents the Operating Partnership's issued and outstanding Junior Convertible Preference Units as of September 30, 2001 and December 31, 2000: 8
ANNUAL AMOUNTS IN THOUSANDS DIVIDEND -------------------------- RATE PER SEPTEMBER DECEMBER UNIT 30, 2001 31, 2000 ---------------------------------------------------------------------------------------------------- Junior Convertible Preference Units: Series A Junior Convertible Preference Units; liquidation $ 5.469344 $ 5,662 $ 7,712 value $100 per unit; 56,616 and 77,123 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively Series B Junior Convertible Preference Units; liquidation $ 2.000000 184 184 value $25 per unit; 7,367 units issued and outstanding at September 30, 2001 and December 31, 2000 ---------------------------------------------------------------------------------------------------- $ 5,846 $ 7,896 ----------------------------------------------------------------------------------------------------
During the nine months ended September 30, 2001, a subsidiary of the Operating Partnership issued preference units with an equity value of $48.5 million, receiving net proceeds of $47.3 million: - 510,000 7.875% Series G Cumulative Redeemable Preference Units (known as "Preference Interests") with an equity value of $25.5 million. The liquidation value of these units is $50 per unit. The 510,000 units are exchangeable into 510,000 shares of 7.875% Series M-4 Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company. Dividends for the Series G Preference Interests or the Series M-4 Preferred Shares are payable quarterly at the rate of $3.9375 per unit/share per year. - 190,000 7.625% Series H Cumulative Convertible Redeemable Preference Units with an equity value of $9.5 million. The liquidation value of these units is $50 per unit. The 190,000 units are exchangeable into 190,000 shares of 7.625% Series M-5 Convertible Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company or 287,052 Common Shares beginning March 2011. Dividends for the Series H Preference Interests or the Series M-5 Preferred Shares are payable quarterly at the rate of $3.8125 per unit/share per year. - 270,000 7.625% Series I Cumulative Convertible Redeemable Preference Units with an equity value of $13.5 million. The liquidation value of these units is $50 per unit. The 270,000 units are exchangeable into 270,000 shares of 7.625% Series M-6 Convertible Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company or 392,634 Common Shares beginning June 2011. Dividends for the Series I Preference Interests or the Series M-6 Preferred Shares are payable quarterly at the rate of $3.8125 per unit/share per year. The Series M-4 Preferred Shares are not convertible into EQR Common Shares. The Series H Preference Interests and the Series M-5 Preferred Shares are convertible into EQR Common Shares at a conversion price ratio of 1.5108 common shares (equal to a conversion price of $33.095 per share) beginning in March 2011. The Series I Preference Interests and the Series M-6 Preferred Shares are convertible into EQR Common Shares at a conversion price ratio of 1.4542 common shares (equal to a conversion price of $34.38 per share) beginning in June 2011. 9 The following table presents the Operating Partnership's issued and outstanding Preference Interests as of September 30, 2001 and December 31, 2000:
------------------------------------------------------------------------------------------------------ ANNUAL AMOUNTS IN THOUSANDS DIVIDEND -------------------- RATE PERT SEPTEMBER DECEMBER UNIT 30, 2001 31, 2000 ------------------------------------------------------------------------------------------------------ Preference Interests: 8.00% Series A Cumulative Redeemable Preference $4.0000 $40,000 $ 40,000 Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at September 30, 2001 and December 31, 2000 8.50% Series B Cumulative Redeemable Preference $4.2500 55,000 55,000 Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at September 30, 2001 and December 31, 2000 8.50% Series C Cumulative Redeemable Preference $4.2500 11,000 11,000 Units; liquidation value $50 per unit; 220,000 units issued and outstanding at September 30, 2001 and December 31, 2000 8.375% Series D Cumulative Redeemable Preference $4.1875 21,000 21,000 Units; liquidation value $50 per unit; 420,000 units issued and outstanding at September 30, 2001 and December 31, 2000 8.50% Series E Cumulative Redeemable Preference $4.2500 50,000 50,000 Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at September 30, 2001 and December 31, 2000 8.375% Series F Cumulative Redeemable Preference $4.1875 9,000 9,000 Units; liquidation value $50 per unit; 180,000 units issued and outstanding at September 30, 2001 and December 31, 2000 7.875% Series G Cumulative Redeemable Preference $3.9375 25,500 - Units; liquidation value $50 per unit; 510,000 units issued and outstanding at September 30, 2001 7.625% Series H Cumulative Convertible Redeemable $3.8125 9,500 - Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at September 30, 2001 7.625% Series I Cumulative Convertible Redeemable $3.8125 13,500 - Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at September 30, 2001 ------------------------------------------------------------------------------------------------------ $234,500 $186,000 ------------------------------------------------------------------------------------------------------
10 The following table presents the Operating Partnership's issued and outstanding Cumulative Convertible or Redeemable Preference Units as of September 30, 2001 and December 31, 2000:
------------------------------------------------------------------------------------------------------------------------ AMOUNTS IN THOUSANDS ANNUAL ---------------------------------- DIVIDEND RATEPER SEPTEMBER DECEMBER 31, UNIT(1) 30, 2001 2000 ------------------------------------------------------------------------------------------------------------------------ Cumulative Convertible or Redeemable Preference Units: 9 3/8% Series A Cumulative Redeemable Preference Units; liquidation (2) $ - $ 153,000 value $25 per unit; 0 and 6,120,000 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively 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, 2001 and December 31, 2000 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, 2001 and December 31, 2000 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, 2001 and December 31, 2000 Series E Cumulative Convertible Preference Units; liquidation value $ 1.75000 85,215 89,990 $25 per unit; 3,408,618 and 3,599,615 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively 9.65% Series F Cumulative Redeemable Preference Units; liquidation (2) - 57,500 value $25 per unit; 0 and 2,300,000 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively 7 1/4% Series G Convertible Cumulative Preference Units; $18.12500 316,175 316,175 liquidation value $250 per unit; 1,264,700 units issued and outstanding at September 30, 2001 and December 31, 2000 7.00% Series H Cumulative Convertible Preference Units; liquidation $ 1.75000 1,351 1,471 value $25 per unit; 54,027 and 58,851 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively 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, 2001 and December 31, 2000 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, 2001 and December 31, 2000 ------------------------------------------------------------------------------------------------------------------------ $967,741 $1,183,136 ------------------------------------------------------------------------------------------------------------------------
(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. (2) On June 25, 2001, the Operating Partnership redeemed all of its remaining issued and outstanding Series A and F Cumulative Redeemable Preference Units at their liquidation values for total cash consideration of $210.5 million. 11 4. REAL ESTATE ACQUISITIONS During the nine months ended September 30, 2001, the Operating Partnership acquired the eleven properties and one parcel of land listed below from unaffiliated parties for a total purchase price of $287.8 million.
--------------------------------------------------------------------------------------------------------------- ACQUISITION DATE NUMBER PRICE ACQUIRED PROPERTY LOCATION OF UNITS (IN THOUSANDS) --------------------------------------------------------------------------------------------------------------- 01/04/01 Suerte San Diego, CA 272 $ 37,500 02/08/01 Westside Villas VI Los Angeles, CA 18 4,550 02/15/01 Riverview Norwalk, CT 92 9,600 03/15/01 Grand Reserve at Eagle Valley Woodbury, MN 394 54,250 03/22/01 Legends at Preston Morrisville, NC 382 30,200 03/30/01 Mission Hills Oceanside, CA 282 26,750 03/30/01 River Oaks Oceanside, CA 280 26,250 05/18/01 Promenade at Aventura Aventura, FL 296 43,000 08/13/01 Vacant Land Westwood, MA 0 600 08/22/01 Shadetree West Palm Beach, FL 76 1,948 08/22/01 Suntree West Palm Beach, FL 67 1,944 09/26/01 Palladia Hillsboro, OR 497 51,250 --------------------------------------------------------------------------------------------------------------- 2,656 $287,842 ---------------------------------------------------------------------------------------------------------------
On July 2, 2001, the Operating Partnership acquired an additional ownership interest in 21 previously Unconsolidated Properties containing 3,896 units. Prior to July 2, 2001, the Operating Partnership accounted for this portfolio as in investment in mortgage notes. 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 $258.9 million in connection with this transaction. 5. REAL ESTATE DISPOSITIONS During the nine months ended September 30, 2001, the Operating Partnership disposed of the thirty-seven properties and two vacant parcels of land listed below to unaffiliated parties. When combined with gains from the joint venture and unconsolidated property sale discussed below, the Operating Partnership recognized a net gain of approximately $100.1 million on these sales. 12
------------------------------------------------------------------------------------------------------------ DISPOSITION DATE NUMBER PRICE DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS) ------------------------------------------------------------------------------------------------------------ 01/17/01 Meadowood II Indianapolis, IN 74 $ 1,300 01/31/01 Concorde Bridge Overland Park, KS 248 15,600 02/01/01 Springs of Country Woods Salt Lake City, UT 590 31,000 02/22/01 Riverview Estates Napoleon, OH 90 1,750 02/26/01 Chelsea Court Sandusky, OH 62 1,600 02/27/01 Concord Square Lawrenceburg, IN 48 1,200 02/28/01 Canyon Creek Tucson, AZ 242 9,220 03/06/01 Gentian Oaks Columbus, GA 62 1,620 03/06/01 Holly Park Columbus, GA 66 1,730 03/06/01 Stratford Lane I Columbus, GA 67 1,750 03/07/01 Estate on Quarry Lake Austin, TX 302 25,232 03/08/01 Meadowood Crawfordsville, IN 64 1,300 03/14/01 Mill Run Statesboro, GA 88 2,350 03/15/01 Laurel Court Fremont, OH 69 1,450 03/15/01 Regency Woods West Des Moines, IA 200 9,350 03/22/01 Vacant Land Richmond, VA 0 11,200 04/16/01 Rosewood Tampa, FL 66 1,650 04/25/01 Parkcrest Southfield, MI 210 12,950 04/27/01 Westwood Newark, OH 14 222 04/30/01 Desert Park Las Vegas, NV 368 9,900 05/15/01 Carleton Court Erie, PA 60 1,461 05/16/01 River Oak Louisville, KY 268 14,650 06/07/01 Willowood Milledgeville, GA 61 1,550 06/14/01 Quail Cove Salt Lake City, UT 420 20,000 06/15/01 Beckford Place Wapakoneta, OH 40 830 06/27/01 The Birches Lima, OH 58 1,120 06/28/01 Pelican Pointe I and II Jacksonville, FL 160 4,150 06/28/01 Vacant Land Jacksonville, FL 0 217 06/28/01 Camden Way I and II Kingsland, GA 118 2,000 07/11/01 Plantation Houston, TX 232 12,875 07/12/01 Wood Crest Villas Westland, MI 458 20,450 07/17/01 Hampshire Court Bluffton, IN 45 1,064 07/17/01 Meadowood Logansport, IN 42 993 07/17/01 Westwood Rochester, IN 42 993 07/19/01 Vista Pointe Irving, TX 231 17,200 07/31/01 Cedarwood Sabina, OH 31 385 08/09/01 Olentangy Commons Columbus, OH 827 53,000 08/31/01 Greenglen II Lima, OH 54 1,095 09/28/01 Glenview Huntsville, AL 90 1,687 ------------------------------------------------------------------------------------------------------------ 6,167 $298,094 ------------------------------------------------------------------------------------------------------------
On February 23, 2001, the Operating Partnership entered into a joint venture with an unaffiliated joint venture partner ("JVP"). At closing, the Operating Partnership sold and/or contributed eleven wholly owned properties containing 3,011 units valued at $202.5 million to the joint venture encumbered with $20.2 million in mortgage loans obtained on February 16, 2001. An additional $123.6 million of mortgage loans was obtained by the joint venture. The JVP contributed cash in an amount equal to 75% of the equity in the joint venture, which was then distributed to the Operating Partnership. The Operating Partnership retained a 25% interest in the joint venture along with the right to manage the properties. In accordance with the respective joint venture organization documents, the Operating Partnership and the JVP both shall have the right, but not the obligation, to infuse additional cash into the joint venture. There are no other agreements that require the Operating Partnership or the JVP to infuse cash into each 13 joint venture. In addition, the Operating Partnership and the JVP have not guaranteed the mortgage indebtedness of the joint venture. As a result, the Operating Partnership recognized 75% of the gain on the sales and/or contributions of property to the joint venture, which totaled approximately $36.4 million. The Operating Partnership has classified its initial $3.4 million 25% interest in the joint venture (at carryover basis) as investments in unconsolidated entities and accounted for it under the equity method of accounting. On May 17, 2001, the Operating Partnership sold its entire interest in one Unconsolidated Property containing 74 units for approximately $0.4 million. 6. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE At September 30, 2001, in addition to the Property that was subsequently acquired as discussed in Note 16 below, the Operating Partnership had entered into separate agreements to acquire two multifamily properties containing 469 units from unaffiliated parties. The Company expects a combined purchase price of approximately $76.5 million, including the assumption of mortgage indebtedness of approximately $45.8 million. At September 30, 2001, in addition to the Properties that were subsequently disposed of as discussed in Note 16 below, the Operating Partnership had entered into separate agreements to dispose of seven multifamily properties containing 1,460 units, one vacant land parcel and retail space at a consolidated property to unaffiliated parties. The Company expects a combined disposition price of approximately $65.6 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 paragraphs. 7. INVESTMENTS IN UNCONSOLIDATED ENTITIES The Operating Partnership has entered into two separate joint venture agreements with third party development companies whereby the Operating Partnership contributes 25% to 30% of the development cost to the joint venture in return for preferential returns of 9.0% per annum. The basis of the Operating Partnership's equity investments in these two joint ventures was $298.5 million and $235.9 million as of September 30, 2001 and December 31, 2000, respectively. The Operating Partnership also has various other investments in unconsolidated entities with ownership interests ranging from 1.5% to 50.0%. The basis of these equity investments was $53.4 million and $80.6 million as of September 30, 2001 and December 31, 2000, respectively. These investments are accounted for under the equity method of accounting. 8. DEPOSITS - RESTRICTED Deposits-restricted as of September 30, 2001 primarily included the following: - deposits in the amount of $55.5 million held in third party escrow accounts to provide collateral for third party construction financing in connection with joint venture agreements; - approximately $39.2 million in tax-deferred (1031) exchange proceeds; and - approximately $62.6 million for tenant security, utility, and other deposits. 14 9. MORTGAGE NOTES PAYABLE As of September 30, 2001, the Operating Partnership had outstanding mortgage indebtedness of approximately $3.3 billion. During the nine months ended September 30, 2001 the Operating Partnership: - repaid $315.3 million of mortgages due at or prior to maturity and/or at the disposition date of the respective Property; - assumed $45.9 million of mortgage debt on four properties in connection with their acquisitions; - disposed of $28.2 million of mortgage debt assumed by the purchaser in connection with the disposition of certain properties; - obtained $26.0 million of new mortgage debt on previously unencumbered properties; - obtained $301.5 million of new mortgage debt on previously Unconsolidated Properties; and - received $33.3 million in construction loan draw proceeds on two properties. As of September 30, 2001, scheduled maturities for the Operating Partnership's outstanding mortgage indebtedness are at various dates through October 1, 2033. The interest rate range on the Operating Partnership's mortgage debt was 2.15% to 12.465% at September 30, 2001. During the nine months ended September 30, 2001, the weighted average interest rate on the Operating Partnership's mortgage debt was 6.59%. 10. NOTES As of September 30, 2001, the Operating Partnership had outstanding unsecured notes of approximately $2.4 billion. During the nine months ended September 30, 2001, the Operating Partnership issued $300.0 million of ten-year 6.95% fixed-rate public unsecured notes and received net proceeds of $297.4 million. As of September 30, 2001, scheduled maturities for the Operating Partnership's outstanding notes are at various dates through 2029. The interest rate range on the Operating Partnership's notes was 4.75% to 9.375% at September 30, 2001. During the nine months ended September 30, 2001, the weighted average interest rate on the Operating Partnership's notes was 6.88%. 11. LINES OF CREDIT The Operating Partnership has a revolving credit facility to provide the Operating Partnership with potential borrowings of up to $700.0 million. As of September 30, 2001, no amounts were outstanding under this facility and $60.0 million was restricted on the line of credit. In connection with the Globe acquisition, the Operating Partnership assumed a revolving credit facility with potential borrowings of up to $55.0 million. This credit facility was terminated on May 31, 2001. 15 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, ----------------------------------------------------------- 2001 2000 2001 2000 ----------------------------------------------------------- (Amounts in thousands except per OP Unit amounts) NUMERATOR: Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of real estate, extraordinary items, cumulative effect of change in accounting principle and allocation to preference unit/interest distributions $237,159 $275,743 $ 39,860 $ 99,686 Allocation to Minority Interests - Partially Owned Properties (1,523) 145 (1,285) (12) Income from investments in unconsolidated entities 20,252 14,589 8,029 5,525 Allocation to Junior Convertible Preference Units (272) (327) (82) (109) Allocation to Cumulative Convertible Redeemable Preference Interests (13,390) (6,900) (4,833) (3,233) Allocation to Redeemable Preference Units (68,097) (76,370) (19,425) (24,601) ----------------------------------------------------------- Income before net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle 174,129 206,880 22,264 77,256 Net gain on sales of real estate 100,132 165,025 53,567 77,373 Extraordinary items (22) - (128) - Cumulative effect of change in accounting principle (1,270) - - - ----------------------------------------------------------- Numerator for net income per OP Unit - basic 272,969 371,905 75,703 154,629 Effect of dilutive securities: Distributions on convertible preference units/interests 74 5,601 - 7,576 ----------------------------------------------------------- Numerator for net income per OP Unit - diluted $273,043 $377,506 $ 75,703 $162,205 =========================================================== DENOMINATOR: Denominator for net income per OP Unit - basic 290,803 283,636 292,213 287,464 Effect of dilutive securities: Convertible preference units/interests 82 4,816 - 15,554 Dilution for OP Units issuable upon assumed exercise/vesting of the Company's share options/restricted shares 3,776 1,442 4,178 1,970 ----------------------------------------------------------- Denominator for net income per OP Unit - diluted 294,661 289,894 296,391 304,988 =========================================================== Net income per OP Unit - basic $ 0.94 $ 1.31 $ 0.26 $ 0.54 =========================================================== Net income per OP Unit - diluted $ 0.93 $ 1.30 $ 0.26 $ 0.53 ===========================================================
16
NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------------------------------- 2001 2000 2001 2000 ----------------------------------------------------------- (AMOUNTS IN THOUSANDS EXCEPT PER OP UNIT AMOUNTS) NET INCOME PER OP UNIT - BASIC: Income before net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle per OP Unit - basic $ 0.60 $ 0.73 $ 0.08 $ 0.27 Net gain on sales of real estate 0.34 0.58 0.18 0.27 Extraordinary items - - - - Cumulative effect of change in accounting principle - - - - ----------------------------------------------------------- Net income per OP Unit - basic $ 0.94 $ 1.31 $ 0.26 $ .54 =========================================================== Net income per OP Unit - diluted: Income before net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle per OP Unit - diluted $ 0.59 $ 0.73 $ 0.08 $ 0.28 Net gain on sales of real estate 0.34 0.57 0.18 0.25 Extraordinary items - - - - Cumulative effect of change in accounting principle - - - - ----------------------------------------------------------- Net income per OP Unit - diluted $ 0.93 $ 1.30 $ 0.26 $ 0.53 ===========================================================
CONVERTIBLE PREFERENCE UNITS THAT COULD BE CONVERTED INTO 15,322,607 AND 13,922,972 WEIGHTED AVERAGE COMMON SHARES (WHICH WOULD BE CONTRIBUTED TO THE OPERATING PARTNERSHIP IN EXCHANGE FOR OP UNITS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000, RESPECTIVELY, AND 15,626,902 AND 0 WEIGHTED AVERAGE COMMON SHARES FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000, RESPECTIVELY, WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS PER OP UNIT BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE. ON OCTOBER 11, 2001, THE OPERATING PARTNERSHIP EFFECTED A TWO-FOR-ONE SPLIT OF ITS OP UNITS TO UNIT HOLDERS OF RECORD AS OF SEPTEMBER 21, 2001. ALL PER OP UNIT DATA AND NUMBERS OF OP UNITS HAVE BEEN RETROACTIVELY ADJUSTED TO REFLECT THE OP UNIT SPLIT. 13. Commitments and Contingencies The Operating Partnership, as an owner of real estate, is subject to various environmental laws of Federal and local governments. 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 threatened against the Operating Partnership other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by liability insurance, none of which is expected to have a material adverse effect on the consolidated financial statements of the 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 net total of $109.5 million during the nine months ended September 30, 2001. During the fourth quarter of 2001, the Operating Partnership expects to fund approximately $23.5 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 $6.5 million to guarantee third party construction financing. As of September 30, 2001, the Operating Partnership has 19 projects under 17 development with estimated completion dates ranging from December 31, 2001 through June 30, 2003. At any time following the completion of construction of any development property, the Operating Partnership's joint venture partners have the right to cause the Operating Partnership to acquire their respective interests in the completed projects at a mutually agreeable price. If the Operating Partnership and the joint venture partner are unable to agree on a price, appraisals will be obtained by both parties. If the appraised values vary by more than 10%, both the Operating Partnership and the joint venture partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value. In connection with the Wellsford Merger, the Operating Partnership provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of September 30, 2001, this enhancement was still in effect at a commitment amount of $12.7 million. 14 . ASSET IMPAIRMENT As of September 30, 2001, the Operating Partnership recorded $60.0 million of asset impairment charges related to its furniture rental business. These charges were the result of review of the existing intangible and tangible assets reflected on the consolidated balance sheet as of September 30, 2001. The Operating Partnership reviewed the current net book value taking into consideration existing business and economic conditions as well as projected operating cash flows. The impairment loss is reflected on the income statement in total expenses and includes the write-down of the following assets: a) goodwill of approximately $26.0 million; b) rental furniture, net of approximately $28.6 million; c) property and equipment, net of approximately $4.5 million; and d) other assets of approximately $0.9 million. For the nine months ended September 30, 2001, the Operating Partnership recorded approximately $8.0 million of asset impairment charges related to its technology investments. These charges were the result of review of the existing investments reflected on the consolidated balance sheet. The Operating Partnership reviewed the current relative value of each investment based on existing economic conditions and current events. These impairment losses are reflected on the income statement in total expenses and includes the write-down of assets classified as investments in unconsolidated entities. 15. REPORTABLE SEGMENTS Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management. Senior management decides how resources are allocated and assesses performance on a monthly basis. The Operating Partnership's primary business 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. Senior management evaluates the performance of each of our apartment communities on an individual basis, however, each of our apartment communities has similar economic characteristics, residents and products and services so they have been aggregated into one reportable segment. The Operating Partnership's rental real estate segment comprises approximately 95.2% and 96.9% of total revenues for the nine months ended September 30, 2001 and 2000, respectively, and approximately 95.8% and 94.3% of total revenues for the quarters ended September 30, 2001 and 2000, respectively. The primary financial measure for the Operating Partnership's rental real estate segment is net operating income ("NOI"), which represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense (all as reflected in the accompanying statements of operations). Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance. NOI from our rental real estate totaled approximately 18 $937.1 million and $886.9 million for the nine months ended September 30, 2001 and 2000, respectively, and approximately $319.4 million and $294.8 million for the quarters ended September 30, 2001 and 2000, respectively. During the acquisition, development and/or disposition of real estate, the NOI return on total capitalized costs is the primary measure of financial performance (capitalization rate) the Operating Partnership considers. The Operating Partnership's fee and asset management activity and furniture rental/sales activities are immaterial and do not meet the threshold requirements of a reportable segment as provided for in SFAS No. 131. 16. SUBSEQUENT EVENTS Subsequent to September 30, 2001 and through November 7, 2001, the Operating Partnership: - acquired one Property consisting of 296 units for approximately $23.7 million; - disposed of five Properties consisting of 636 units for approximately $22.1 million; - repaid $25.1 million of mortgage debt at or prior to maturity on five Properties; and - relinquished $1.1 million of mortgage debt assumed by the purchaser in connection with the disposition of two Properties. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW For further information, including definitions for capitalized terms, refer to the consolidated financial statements and footnotes thereto included in the Operating Partnership's annual report on Form 10-K for the year ended December 31, 2000. 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: - alternative sources of capital to the Operating Partnership are more expensive than anticipated; - occupancy levels and market rents may be adversely affected by national and 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 assumes no obligation to update or correct any of these forward-looking statements, in light of events or circumstances arising or existing after the date hereof. RESULTS OF OPERATIONS The following table summarizes the number of Properties and related units for the periods presented:
---------------------------------------------------------------------------------------- PORTFOLIO SUMMARY ---------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------- 2001 2000 -------------------------------------------------------- PROPERTIES UNITS PROPERTIES UNITS Beginning of period 1,104 227,704 1,064 226,317 Acquisitions 11 2,657 19 3,002 Dispositions (38) (6,241) (30) (7,354) Completed Developments 4 1,470 3 734 ---------------------------------------------------------------------------------------- End of period 1,081 225,590 1,056 222,699 -------------------------------=========================================================
In addition, the Operating Partnership sold and/or contributed eleven wholly owned Properties containing 3,011 units to a joint venture entity during the nine months ended September 30, 2001. The Operating Partnership sold and/or contributed 21 wholly owned properties containing 5,211 units to two joint venture entities during the nine months ended September 30, 2000. The Operating Partnership retained a 25% interest along with the rights to manage these joint venture Properties. 20 The Operating Partnership's acquisition and disposition activity has impacted overall results of operations for the nine months and quarters ended September 30, 2001 and 2000. Significant changes in revenues and expenses have resulted primarily from the consolidation of previously Unconsolidated Properties and the acquisition of Globe, as well as the 2001 and the 2000 Acquired Properties, which have been partially offset by the disposition of the 2001 and the 2000 Disposed Properties. Significant change in expense has also resulted from impairment charges (furniture rental and unconsolidated technology investments) recorded in 2001. This impact is discussed in greater detail in the following paragraphs. Properties that the Operating Partnership owned for all of both the nine month periods ended September 30, 2001 and September 30, 2000 (the "Nine-Month 2001 Same Store Properties"), which represented 184,391 units and Properties that the Operating Partnership owned for all of both the quarters ended September 30, 2001 and September 30, 2000 (the "Third-Quarter 2001 Same Store Properties"), which represented 185,759 units, also impacted the Operating Partnership's results of operations. Both the Nine-Month 2001 Same Store Properties and Third-Quarter 2001 Same Store Properties are discussed in the following paragraphs. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 TO NINE MONTHS ENDED SEPTEMBER 30, 2000 For the nine months ended September 30, 2001, income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle decreased by approximately $38.6 million when compared to the nine months ended September 30, 2000. Rental income from the Nine-Month 2001 Same Store Properties increased by approximately $58.9 million to $1.3 billion, or 4.7% 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. For the remainder of 2001, the Operating Partnership expects to achieve rental income increases of 3.75% to 4.0% from Same Store Properties. For 2002, the Operating Partnership expects to see rental income within a range of being slightly lower by 0.05% to slightly higher by as much as 1.0%. These estimated increases are subject to certain risks and uncertainties including, but not limited to, maintaining an overall average occupancy rate of 93.5% to 94.0%. Property operating expenses from the Nine-Month 2001 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, increased approximately $20.5 million or 4.5%. The increase in "same store" expenses is primarily attributable to a $4.8 million, or 6.5%, increase in utilities and an $8.3 million, or 7.3%, increase in payroll costs. For the remainder of 2001, the Operating Partnership expects to maintain expense growth at no more than 3.75% to 4.0% for the Same Store Properties. For 2002, the Operating Partnership expects to maintain expense growth between a range of 1.5% to 2.25%. Rental income from properties other than Nine-Month 2001 Same Store Properties increased by approximately $43.9 million primarily as a result of revenue from the Operating Partnership's corporate housing business and the acquisition of Properties during 2001, including the consolidation of previously Unconsolidated Properties. Interest income-investment in mortgage notes increased by approximately $0.5 million as a result of receiving deferred interest income on certain of the mortgage notes. The Operating Partnership anticipates no additional interest income will be recognized on these mortgage notes in future quarters as the Operating Partnership now consolidates the results related to these previously Unconsolidated Properties. Interest and other income decreased by approximately $0.8 million, primarily as a result of lower balances and related interest rates being earned on these investments. 21 Property management expenses included off-site expenses associated with the self-management of the Operating Partnership's Properties. These expenses increased by approximately $0.1 million. The Operating Partnership continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets where the Operating Partnership does not have a significant management presence. As a result, the Operating Partnership is able to achieve economies of scale by not increasing off-site management expenses as it acquires additional properties. Fee and asset management revenues and fee and asset management expenses increased as a result of the Operating Partnership continuing to manage Properties that were sold and/or contributed to various unconsolidated joint venture entities. As of September 30, 2001, the Operating Partnership managed 15,948 units for third parties and the unconsolidated joint venture entities. Furniture income and furniture expenses are associated with the operation of the furniture rental business assumed in connection with the Globe acquisition, which occurred in July 2000. Furniture expenses include a depreciation charge on furniture held in inventory and property and equipment directly related to the furniture business. The Operating Partnership recorded impairment charges totaling approximately $68.0 million, of which $60.0 million is related to the furniture rental business and approximately $8.0 million is related to certain investments in technology entities. See Footnote 14 in the Notes to the Consolidated Financial Statements for further discussion. Interest expense, including amortization of deferred financing costs, increased approximately $2.3 million. The effective interest cost on all of the Operating Partnership's indebtedness for the nine months ended September 30, 2001 was 6.99% as compared to 7.25% for the nine months ended September 30, 2000. For the remainder of 2001, the Operating Partnership expects interest rates to decrease slightly due to lower variable interest rates. In connection with the scheduled maturity of $150 million of indebtedness due in November 2001, the Operating Partnership anticipates to initially borrow under its line of credit to repay this indebtedness. The Operating Partnership also expects to replace this indebtedness in the first quarter of 2002 for a similar amount and to incur interest costs approximating 6.5% to 7.0% per annum. General and administrative expenses, which include corporate operating expenses, increased approximately $4.3 million between the periods under comparison. This increase was primarily due to the addition of corporate personnel and higher overall compensation expenses including a current year expense associated with the vesting of restricted shares/awards to key employees in the past three years. Net gain on sales of real estate decreased approximately $64.9 million between the periods under comparison. This decrease is primarily the result of a fewer number of units sold during the nine months ended September 30, 2001 (9,252 units including the joint venture properties) as compared to the nine months ended September 30, 2000 (12,565 units including the joint venture properties). In addition, the Operating Partnership sold older and more fully depreciated properties during the nine months ended September 30, 2000 as compared to the nine months ended September 30, 2001. COMPARISON OF QUARTER ENDED SEPTEMBER 30, 2001 TO QUARTER ENDED , SEPTEMBER 30, 2000 For the quarter ended September 30, 2001, income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle decreased by approximately $59.8 million when compared to the quarter ended September 30, 2000. Rental income from the Third-Quarter 2001 Same Store Properties increased by approximately $14.8 million to $444.6 million, or 3.4%, 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. For the remainder of 2001, the Operating Partnership expects to achieve rental income increases of 3.75% to 4.0% from Same Store Properties. 22 For 2002, the Operating Partnership expects to see rental income within a range of being slightly lower by 0.05% to slightly higher by as much as 1.0%. These estimated increases are subject to certain risks and uncertainties including, but not limited to, maintaining an overall average occupancy rate of 93.5% to 94.0%. Property operating expenses from the Third-Quarter 2001 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, increased approximately $4.6 million or 2.9%. The increase in "same store" expenses is primarily attributable to a $1.3 million, or 3.4%, increase in real estate taxes and a $2.4 million, or 6.0%, increase in payroll costs. For the remainder of 2001, the Operating Partnership expects to maintain expense growth at no more than 3.75% to 4.0% for the Same Store Properties. For 2002, the Operating Partnership expects to maintain expense growth between a range of 1.5% to 2.25%. Rental income from properties other than Third-Quarter 2001 Same Store Properties increased by approximately $13.1 million, primarily as a result of revenue from the Operating Partnership's corporate housing business and the acquisition of properties during the third quarter of 2001. Interest income-investment in mortgage notes decreased by approximately $2.8 million as a result of the Operating Partnership receiving the final payment related to these notes prior to consolidation of these previously Unconsolidated Properties. Interest and other income decreased by approximately $4.1 million, primarily as a result of lower balances and related interest rates being earned on the Operating Partnership's short-term investment accounts. Property management expenses included off-site expenses associated with the self-management of the Operating Partnership's Properties. These expenses increased by approximately $1.3 million, primarily related to higher payroll costs and increased health costs for employees. Fee and asset management revenues and fee and asset management expenses increased slightly as a result of the Operating Partnership continuing to manage Properties that were sold and/or contributed to various unconsolidated joint venture entities. Furniture income and furniture expenses are associated with the operation of the furniture rental business assumed in connection with the Globe acquisition, which occurred in July 2000. Furniture expenses include a depreciation charge on furniture held in inventory and property and equipment directly related to the furniture business. The Company recorded impairment charges totaling approximately $61.2 million, of which $60.0 million is related to the furniture rental business and approximately $1.2 million is related to certain investments in technology entities. See Footnote 14 in the Notes to the Consolidated Financial Statements for further discussion. Interest expense, including amortization of deferred financing costs, increased approximately $2.0 million. The effective interest cost on all of the Operating Partnership's indebtedness for the quarter ended September 30, 2001 was 6.82% as compared to 7.28% for the quarter ended September 30, 2000. For the remainder of 2001, the Operating Partnership expects its overall interest cost to decrease slightly due to lower variable interest rates. General and administrative expenses, which include corporate operating expenses, increased approximately $3.4 million between the periods under comparison. This increase was primarily due to the addition of corporate personnel and higher overall compensation expenses including a current year expense associated with the awarding of restricted shares to key employees in the past three years. Net gain on sales of real estate decreased approximately $23.8 million between the periods under 23 comparison. This decrease is primarily the result of fewer units sold during the quarter ended September 30, 2001, which included 2,052 wholly owned units as compared to 3,959 wholly owned units sold in the quarter ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES As of January 1, 2001, the Operating Partnership had approximately $23.8 million of cash and cash equivalents and the amounts available on the Operating Partnership's lines of credit were $399.5 million, of which $53.5 million was restricted. After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Operating Partnership's cash and cash equivalents balance at September 30, 2001 was approximately $110.8 million and the amount available on the Operating Partnership's line of credit was $700.0 million, of which $60.0 million was restricted. 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, reinvestment of retained cash flows or the issuance of additional equity or debt securities. Continuing to utilize this strategy during the first nine months of 2001, the Operating Partnership: - disposed of thirty-eight properties (including one Unconsolidated Property) and two vacant parcels of land and received net proceeds of $284.8 million; - issued $300.0 million of unsecured debt receiving net proceeds of $297.4 million; - sold and/or contributed eleven properties to a joint venture and received net proceeds of $167.6 million; - issued $48.5 million of three new series of Preference Interests and received net proceeds of $47.3 million; - obtained $59.3 million in new mortgage financing; and - received a $61.4 million pay-down of second and third mortgages on previously Unconsolidated Properties. During the nine months ended September 30, 2001, the Operating Partnership: - reduced its line of credit borrowings by approximately $355.5 million; - funded $210.5 million to redeem all of its Series A and F Cumulative Redeemable Preference Units; - repaid approximately $315.3 million of mortgages due at or prior to maturity and/or at the disposition date of respective properties; - funded a net of $109.5 million related to the development, earnout and joint venture agreements; and - acquired eleven properties and vacant land for $288.9 million ($45.9 million of mortgage assumptions and $243.0 million of cash). 24 The Operating Partnership's total debt summary, as of September 30, 2001, included:
----------------------------------------------------------------------- DEBT SUMMARY AS OF 9/30/01 ----------------------------------------------------------------------- Weighted $ Millions Average Rate --------------------------------- Secured 3,269 6.73% Unsecured 2,419 6.88% --------------------------------- Total 5,688 6.79% Fixed Rate 5,123 6.98% Floating Rate 565 5.02% --------------------------------- Total 5,688 6.79% ABOVE TOTALS INCLUDE: Total Tax Exempt 945 5.00% Unsecured Revolving Credit Facility - - -----------------------------------------------------------------------
Subsequent to September 30, 2001 and through November 7, 2001, the Operating Partnership: - acquired one Property consisting of 296 units for approximately $23.7 million; - disposed of five Properties consisting of 636 units for approximately $22.1 million; - repaid $25.1 million of mortgage debt at or prior to maturity on five Properties; and - relinquished $1.1 million in mortgage debt assumed by the purchaser in connection with the disposition of two Properties. During the fourth quarter of 2001, the Operating Partnership expects to fund approximately $23.5 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 $6.5 million to guarantee third party construction financing. As of September 30, 2001, the Operating Partnership has 19 projects under development with estimated completion dates ranging from December 31, 2001 through June 30, 2003. At any time following the completion of construction of any development property, the Operating Partnership's joint venture partners have the right to cause the Operating Partnership to acquire their respective interests in the completed projects at a mutually agreeable price. If the Operating Partnership and the joint venture partner are unable to agree on a price, appraisals will be obtained by both parties. If the appraised values vary by more than 10%, both the Operating Partnership and the joint venture partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value. During the nine months ended September 30, 2001, the Operating Partnership's total improvements to real estate approximated $108.3 million. Replacements, which includes new carpeting, appliances, mechanical equipment, fixtures, vinyl floors and blinds inside the unit approximated $42.8 million, or $210 per unit. Building improvements for the 1999, 2000 and 2001 Acquired Properties approximated $19.4 million, or $375 per unit. Building improvements for all of the Operating Partnership's pre-1999 Acquired Properties approximated $38.9 million or $257 per unit. In addition, approximately $3.6 million was spent on six specific assets related to major renovations and repositioning of these assets. Also included in total improvements to real estate was approximately $3.6 million on commercial/other assets and Partially Owned Properties. Such improvements to real estate were primarily funded from net cash provided by operating activities. Total improvements to real estate budgeted for the remainder of 2001 are estimated to be approximately $25.0 million. During the nine months ended September 30, 2001, the Operating Partnership's total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Operating Partnership's property management offices and its corporate offices, was approximately $5.2 million. Such additions to non-real estate property were funded from net 25 cash provided by operating activities. Total additions to non-real estate property budgeted for the remainder of 2001 are estimated to be approximately $0.9 million. The Operating Partnership, through its Globe subsidiary, has a policy of capitalizing expenditures made for rental furniture and property and equipment. 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 also capitalized. Expenditures for ordinary maintenance and repairs related to property and equipment are expensed as incurred. For the nine months ended September 30, 2001, total additions to rental furniture approximated $17.8 million and property and equipment approximated $2.2 million. Total additions to rental furniture and property and equipment budgeted for the remainder of 2001 are estimated to be approximately $1.0 million. Total distributions paid in October 2001 amounted to approximately $146.4 million, which included distributions declared for the quarter ended September 30, 2001. 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 line 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 the issuance of unsecured notes and equity securities including additional OP Units and proceeds received from the disposition of certain Properties. In addition, the Operating Partnership has certain uncollateralized Properties available to secure 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 9, 2001, $35.0 million was outstanding under this facility. In connection with the Globe acquisition, the Operating Partnership assumed a revolving credit facility with Fifth Third Bank with potential borrowings of up to $55.0 million. This credit facility was terminated on May 31, 2001. In connection with the Wellsford Merger, the Operating Partnership provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of November 7, 2001, this enhancement was still in effect at a commitment amount of $12.7 million. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no new or significant developments related to the legal proceedings that were discussed in Part I, Item III of the Operating Partnership's Form 10-K for the year ended December 31, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: 12 Computation of Ratio of Earnings to Fixed Charges (B) Reports on Form 8-K: None 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ERP OPERATING LIMITED PARTNERSHIP BY: EQUITY RESIDENTIAL PROPERTIES TRUST, ITS GENERAL PARTNER Date: NOVEMBER 14, 2001 By: /s/ Bruce C. Strohm ----------------- --------------------------- Bruce C. Strohm Executive Vice President, General Counsel and Secretary Date: NOVEMBER 14, 2001 By: /s/ Michael J. McHugh ----------------- --------------------------- Michael J. McHugh Executive Vice President, Chief Accounting Officer and Treasurer 28