-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kg4UL4auqP3x+0zN4aP2nWyIz/0/X1lmIa40ayLN/v0KPLGg6IrZTEqvoBkkCUpj PBtPXf29LfpCl1hCyKpDMw== 0000912057-99-005836.txt : 19991117 0000912057-99-005836.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005836 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ERP OPERATING LTD PARTNERSHIP CENTRAL INDEX KEY: 0000931182 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 363894853 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24920 FILM NUMBER: 99753252 BUSINESS ADDRESS: STREET 1: TWO N RIVERSIDE PLZ STREET 2: STE 400 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3124741300 MAIL ADDRESS: STREET 1: TWO N RIVERSIDE PLAZA STREET 2: SUITE 450 CITY: CHICAGO STATE: IL ZIP: 60606 10-Q 1 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, 1999 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, 1999 1998 ---------------- ----------------- ---------------- ----------------- ASSETS Investment in real estate Land $ 1,457,213 $ 1,326,148 Depreciable property 9,951,666 9,519,579 Construction in progress 32,563 96,336 ================ ================= 11,441,442 10,942,063 Accumulated depreciation (989,049) (718,491) ================ ================= Investment in real estate, net of accumulated depreciation 10,452,393 10,223,572 Real estate held for disposition 13,457 29,886 Cash and cash equivalents 62,805 3,965 Investment in mortgage notes, net 85,295 88,041 Rents receivable 1,602 4,758 Deposits - restricted 128,808 69,339 Escrow deposits - mortgage 73,236 68,725 Deferred financing costs, net 34,549 27,569 Other assets 196,965 184,405 ================ ================= TOTAL ASSETS $ 11,049,110 $ 10,700,260 ================ ================= LIABILITIES AND PARTNERS' CAPITAL Liabilities: Mortgage notes payable $ 2,456,349 $ 2,341,011 Notes, net 2,299,197 2,049,516 Lines of credit 90,000 290,000 Accounts payable and accrued expenses 129,600 100,926 Accrued interest payable 62,615 46,176 Rents received in advance and other liabilities 59,795 54,616 Security deposits 35,715 37,439 Distributions payable 121,145 18,755 ----------------- ----------------- TOTAL LIABILITIES 5,254,416 4,938,439 ---------------- ----------------- Commitments and contingencies Partners' capital: Junior Convertible Preference Units 7,896 4,833 ---------------- ----------------- Cumulative Convertible Redeemable Preference Interests 40,000 - ---------------- ----------------- Cumulative Convertible or Redeemable Preference Units 1,335,791 1,410,574 ---------------- ----------------- ---------------- ----------------- General Partner 3,998,440 3,919,873 Limited Partners 412,567 426,541 ---------------- ----------------- Total General Partner and Limited Partners capital 4,411,007 4,346,414 ---------------- ----------------- TOTAL PARTNERS' CAPITAL 5,794,694 5,761,821 ---------------- ----------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 11,049,110 $ 10,700,260 ================ =================
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, ---------------------------------- ------------------------------- 1999 1998 1999 1998 ---------------------------------- ------------------------------- REVENUES Rental income $ 1,243,958 $ 901,087 $ 424,780 $ 329,717 Fee and asset management 3,432 4,204 1,018 1,414 Interest income - investment in mortgage notes 8,502 14,405 2,858 4,184 Interest and other income 17,655 12,803 6,532 3,934 ----------- ----------- ----------- ----------- Total revenues 1,273,547 932,499 435,188 339,249 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- EXPENSES Property and maintenance 300,798 225,053 103,933 86,750 Real estate taxes and insurance 126,304 88,552 41,789 32,068 Property management 42,817 38,546 14,844 13,539 Fee and asset management 2,301 3,344 677 1,097 Depreciation 297,505 208,394 100,371 76,484 Interest: Expense incurred 241,516 170,143 83,017 64,492 Amortization of deferred financing costs 2,773 1,962 1,112 687 General and administrative 15,736 14,488 5,022 4,655 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total expenses 1,029,750 750,482 350,765 279,772 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income before gain on disposition of 243,797 182,017 84,423 59,477 properties, net and extraordinary item Gain on disposition of properties, net 64,315 12,717 18,508 1,625 ----------- ----------- ----------- ----------- Income before extraordinary item 308,112 194,734 102,931 61,102 Loss on early extinguishment of debt (451) - - - =========== =========== =========== =========== Net income $ 307,661 $ 194,734 $ 102,931 $ 61,102 =========== =========== =========== =========== =========== =========== =========== =========== ALLOCATION OF NET INCOME: Junior Convertible Preference Units $ 240 $ - $ 240 $ - =========== =========== =========== =========== Cumulative Convertible Redeemable Preference Interests $ 36 $ - $ 36 $ - =========== =========== =========== =========== Cumulative Convertible or Redeemable Preference Units $ 84,842 $ 65,075 $ 27,731 $ 21,691 =========== =========== =========== =========== General Partner $ 200,989 $ 116,819 $ 67,884 $ 34,881 Limited Partners 21,554 12,840 7,040 4,530 ----------- ----------- ----------- ----------- Net income available to OP Unit holders $ 222,543 $ 129,659 $ 74,924 $ 39,411 =========== =========== =========== =========== Weighted average OP Units outstanding 133,490 106,630 134,993 109,688 =========== =========== =========== =========== Net income per weighted average OP Unit outstanding $ 1.67 $ 1.22 $ 0.56 $ 0.36 =========== =========== =========== =========== Net income per weighted average OP Unit outstanding - assuming dilution $ 1.66 $ 1.21 $ 0.55 $ 0.36 =========== =========== =========== ===========
SEE ACCOMPANYING NOTES 3 ERP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 1999 1998 --------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 307,661 $ 194,734 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation 297,505 208,394 Amortization of deferred financing costs 2,773 1,962 Amortization of discounts and premiums on debt (1,746) (1,505) Amortization of treasury locks and options on debt 768 1,543 Amortization of discount on investment in mortgage notes - (1,900) Gain on disposition of properties, net (64,315) (12,717) CHANGES IN ASSETS AND LIABILITIES: Decrease (increase) in rents receivable 2,480 (676) (Increase) in deposits - restricted (4,344) (7,033) Decrease (increase) in other assets 41,030 (24) Increase in accounts payable and accrued expenses 32,010 29,626 Increase in accrued interest payable 16,439 20,436 Increase in rents received in advance and other liabilities 7,727 8,334 (Decrease) increase in security deposits (1,735) 8,365 ----------- ----------- Net cash provided by operating activities 636,253 449,539 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in real estate, net (469,585) (945,960) Improvements to real estate (93,456) (60,614) Additions to non-real estate property (5,922) (7,928) Interest capitalized to real estate developments (1,157) (1,058) Proceeds from disposition of real estate, net 197,125 75,976 Decrease in investment in mortgage notes 2,746 1,842 Increase in deposits on real estate acquisitions, net (55,201) (7,433) Increase in mortgage deposits (4,750) (19,014) Investment in limited partnerships (26,673) (21,708) Decrease in mortgage receivables 7,150 - Purchase of management contract rights (285) (119) Costs related to Mergers (4,598) (4,528) Other investing activities (15,075) (18,975) ----------- ----------- Net cash used by investing activities (469,681) (1,009,519) ----------- -----------
SEE ACCOMPANYING NOTES 4 ERP OPERATING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1999 1998 -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Loan and bond acquisition costs (8,423) (3,428) MORTGAGE NOTES PAYABLE: Proceeds 188,569 - Lump sum payoffs (54,231) (46,901) Monthly principal payments (13,041) (8,810) NOTES, NET: Proceeds 298,014 550,357 Payoffs (125,000) - LINES OF CREDIT: Proceeds 959,000 445,000 Payments (1,159,000) (370,000) Capital contributions from General Partner, net 34,215 323,884 Proceeds from sale of preference interests, net 39,000 - Distributions paid to partners (274,910) (209,638) Principal receipts on employee notes 144 234 Principal receipts on pledged notes receivable 7,931 - ----------- ----------- Net cash (used by) provided by financing activities (107,732) 680,698 ----------- ----------- Net increase in cash and cash equivalents 58,840 120,718 Cash and cash equivalents, beginning of period 3,965 33,295 ----------- ----------- Cash and cash equivalents, end of period $ 62,805 $ 154,013 =========== =========== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 226,234 $ 149,707 =========== =========== Mortgage loans assumed and/or entered into through acquisitions of real estate $ 69,885 $ 433,492 =========== =========== Real estate contributed in exchange for OP Units or Junior Convertible Preference Units $ 28,232 $ 164,149 =========== =========== Transfers to real estate held for disposition $ 13,457 $ - =========== =========== Refinancing of mortgage notes payable in favor of notes, net $ 75,790 $ - =========== ===========
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, 1998 ("Form 10-K"). 1. BUSINESS ERP Operating Limited Partnership (the "Operating Partnership"), an Illinois limited partnership, was formed to conduct the multifamily property business of Equity Residential Properties Trust ("EQR"). EQR is a Maryland real estate investment trust 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") and Merry Land & Investment Company, Inc. ("MRY") (the "MRY Merger"). The Company conducts substantially all of its operations through the Operating Partnership. As of September 30, 1999, the Operating Partnership controlled a portfolio of 652 multifamily properties (individually a "Property" and collectively the "Properties"). The Operating Partnership's interest in six of these Properties consists solely of ownership of debt collateralized by such Properties. The Operating Partnership also has an investment in partnership interests and subordinated mortgages collateralized by 21 properties (the "Additional Properties"). 2. BASIS OF PRESENTATION The balance sheet as of September 30, 1999, the statements of operations for the nine months and the quarter ended September 30, 1999 and cash flows for the nine months ended September 30, 1999 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, the Management Partnerships, the Financing Partnerships, the LLCs, Merry Land DownREIT I LP and EQR-Mosaic LLC, each such entity has been consolidated with the Operating Partnership for financial reporting purposes. In regard to Management Corp., Management Corp. II, Evans Withycombe Management, Inc. and ML Services, Inc., 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. 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. 6 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. PARTNERS' CAPITAL The limited partners of the Operating Partnership as of September 30, 1999 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 12,754,820 OP Units. As of September 30, 1999, the Company (as the general partner) had an approximate 90.56% interest and the Limited Partners had an approximate 9.44% interest. In connection with certain acquisitions during the nine months ended September 30, 1999, the Operating Partnership issued 28,795 Series A Junior Convertible Preference Units and 7,367 Series B Junior Convertible Preference Units having a combined value of approximately $3.0 million. These units ultimately will convert to OP Units in accordance with the respective term sheet agreements. On September 27, 1999, the Operating Partnership, through a wholly-owned entity called EQR-Mosaic LLC, issued 800,000 units of 8.00% Series A Cumulative Convertible Redeemable Preference Interests with an equity value of $40 million. EQR-Mosaic LLC received $39 million in net proceeds from this transaction. The liquidation value of these units is $50 per unit. The 800,000 units are convertible into 800,000 shares of 8.00% Series M Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company. The Series M Preferred Shares are not convertible into EQR Common Shares. Dividends for the Series A Preference Interests or the Series M Preferred Shares are payable quarterly at the rate of $4.00 per unit per year. In regards to the General Partner, net proceeds from the various equity offerings of the Company have been contributed by the Company 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 the Company (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. 7 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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, 1999 and September 30, 1998 (amounts are in thousands): NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- --------------------------- 1999 1998 1999 1998 ----------------------- --------------------------- 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 2,851 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 3,763 Series E Cumulative Convertible Preference Units 5,245 5,246 1,748 1,749 9.65% Series F Cumulative Redeemable Preference Units 4,161 4,162 1,387 1,387 7 1/4% Series G Convertible Cumulative Preference Units 17,196 17,196 5,732 5,732 7.00% Series H Cumulative Convertible Preference Units 196 - 65 - 8.82% Series I Cumulative Convertible Preference Units 3,329 - 562 - 8.60% Series J Cumulative Convertible Preference Units 7,416 - 2,472 - 8.29% Series K Cumulative Redeemable Preference Units 3,109 - 1,036 - 7.625% Series L Cumulative Redeemable Preference Units 5,719 - 1,906 - ------- ------- ------- ------- Cumulative Convertible or Redeemable Preference Units $84,842 $65,075 $27,731 $21,691 ======= ======= ======= =======
8 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following table summarizes the distributions paid to OP Unit and Junior Convertible Preference Unit holders and the Company as holder of the various Preference Units listed below related to the nine months ended September 30, 1999: FOR THE QUARTER OR RECORD DATE DIVIDEND AMOUNT DATE PAID PERIOD ENDED - --------------------------------------------------- ----------------- ------------- --------------- ------------ Series A Cumulative Redeemable Preference Units $0.5859380 04/15/99 03/31/99 03/19/99 $0.5859370 07/15/99 06/30/99 06/18/99 $0.5859380 10/15/99 09/30/99 09/20/99 Series B Cumulative Redeemable Preference Units $0.5703130 04/15/99 03/31/99 03/19/99 $0.5703120 07/15/99 06/30/99 06/18/99 $0.5703130 10/15/99 09/30/99 09/20/99 Series C Cumulative Redeemable Preference Units $0.5703130 04/15/99 03/31/99 03/19/99 $0.5703120 07/15/99 06/30/99 06/18/99 $0.5703130 10/15/99 09/30/99 09/20/99 Series D Cumulative Redeemable Preference Units $0.5375000 04/15/99 03/31/99 03/19/99 $0.5375000 07/15/99 06/30/99 06/18/99 $0.5375000 10/15/99 09/30/99 09/20/99 Series E Cumulative Convertible Preference Units $0.4375000 04/01/99 03/31/99 03/19/99 $0.4375000 07/01/99 06/30/99 06/18/99 $0.4375000 10/01/99 09/30/99 09/20/99 Series F Cumulative Redeemable Preference Units $0.6031250 04/15/99 03/31/99 03/19/99 $0.6031250 07/15/99 06/30/99 06/18/99 $0.6031250 10/15/99 09/30/99 09/20/99 Series G Convertible Cumulative Preference Units $0.4531250 04/15/99 03/31/99 03/19/99 $0.4531250 07/15/99 06/30/99 06/18/99 $0.4531250 10/15/99 09/30/99 09/20/99 Series H Cumulative Convertible Preference Units $0.4375000 03/31/99 03/31/99 03/19/99 $0.4375000 06/30/99 06/30/99 06/18/99 $0.4375000 09/30/99 09/30/99 09/20/99 Series I Cumulative Convertible Preference Units $0.5512500 03/31/99 03/31/99 03/19/99 $0.5512500 06/30/99 06/30/99 06/18/99 $0.5512500 09/30/99 09/30/99 09/20/99 Series J Cumulative Convertible Preference Units $0.5375000 03/31/99 03/31/99 03/19/99 $0.5375000 06/30/99 06/30/99 06/18/99 $0.5375000 09/30/99 09/30/99 09/20/99 Series K Cumulative Redeemable Preference Units $1.0362500 03/31/99 03/31/99 03/19/99 $1.0362500 06/30/99 06/30/99 06/18/99 $1.0362500 09/30/99 09/30/99 09/20/99 Series L Cumulative Redeemable Preference Units $0.4765625 03/31/99 03/31/99 03/19/99 $0.4765625 06/30/99 06/30/99 06/18/99 $0.4765625 09/30/99 09/30/99 09/20/99 OP Units $0.71 04/09/99 03/31/99 03/19/99 $0.71 07/09/99 06/30/99 06/18/99 $0.76 10/08/99 09/30/99 09/20/99 Series A Junior Convertible Preference Unit holders $1.367336 04/09/99 03/31/99 03/19/99 $1.367336 07/09/99 06/30/99 06/18/99 $1.367336 10/08/99 09/30/99 09/20/99 Series B Junior Convertible Preference Unit holders $0.50 10/08/99 09/30/99 09/20/99
9 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Minority Interests represented by the Company'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 the Company 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. 4. REAL ESTATE ACQUISITIONS During the nine months ended September 30, 1999, the Operating Partnership acquired the nineteen Properties listed below, of which eleven were acquired from unaffiliated third parties and eight were acquired from an affiliated party. In connection with certain of the acquisitions listed below, the Operating Partnership assumed and/or entered into new mortgage indebtedness of approximately $196.3 million, issued OP Units having a value of approximately $25.2 million and issued Junior Convertible Preference Units having a value of approximately $3.0 million. The cash portion of these transactions was funded primarily from proceeds received from the disposition of certain Properties and working capital. - --------------- ------------------------------- --------------------------------- ------------- ------------------ PURCHASE PRICE DATE NUMBER (IN THOUSANDS) ACQUIRED PROPERTY LOCATION OF UNITS - --------------- ------------------------------- --------------------------------- ------------- ------------------ 01/22/99 Fireside Park Rockville, MD 236 $14,279 01/22/99 Mill Pond Glen Burnie, MD 240 11,745 01/28/99 Aspen Crossing Wheaton, MD 192 11,386 02/24/99 Copper Canyon Highlands Ranch, CO 222 16,200 03/04/99 Siena Terrace Lake Forest, CA 356 33,000 03/23/99 Greenbriar Kirkwood, MO 218 12,033 03/24/99 Fairland Gardens Silver Spring, MD 400 25,897 04/28/99 Pine Tree Club Wildwood, MO 150 7,988 04/28/99 Westbrooke Village I & II Manchester, MO 252 12,642 04/29/99 Brookside Frederick, MD 228 10,809 04/30/99 Skyview Rancho Santa Margarita, CA 260 21,800 05/20/99 Lincoln at Defoors Atlanta, GA 300 25,500 05/25/99 Rosecliff Quincy, MA 156 18,263 05/25/99 Canyon Crest Santa Clarita, CA 158 12,500 06/29/99 Greentree I Glen Burnie, MD 350 15,625 06/29/99 Greentree III Glen Burnie, MD 207 9,598 07/14/99 Brookdale Village Naperville, IL 252 19,600 07/29/99 Longfellow Place* Boston, MA 710 237,000 07/30/99 Greentree II Glen Burnie, MD 239 10,907 - --------------- ------------------------------- --------------------------------- ------------- ------------------ 5,126 $526,772 - --------------- ------------------------------- --------------------------------- ------------- ------------------
* This acquisition also included approximately 264,000 square feet of office and retail space and two parking garages. 5. REAL ESTATE DISPOSITIONS During the nine months ended September 30, 1999, the Operating Partnership disposed of the twenty-one Properties listed below to unaffiliated third parties. The Operating Partnership recognized a net gain for financial reporting purposes of approximately $64.3 million. 10 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) - --------------- --------------------------------- ----------------------- -------------- ----------------- DISPOSITION DATE NUMBER PRICE DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS) - --------------- --------------------------------- ----------------------- -------------- ----------------- 01/06/99 Fox Run Little Rock, AR 337 $10,623 01/06/99 Greenwood Forest Little Rock, AR 239 7,533 01/06/99 Walnut Ridge Little Rock, AR 252 7,943 01/06/99 Williamsburg Little Rock, AR 211 6,651 01/27/99 The Hawthorne Phoenix, AZ 276 20,500 03/02/99 The Atrium Durham, NC 208 10,750 03/24/99 Greenbriar Kirkwood, MO 218 12,525 05/06/99 Sandstone at Bear Creek Euless, TX 40 2,075 05/12/99 La Costa Brava/Cedar Cove Jacksonville, FL 464 17,650 05/18/99 Lands End Pacifica , CA 260 30,100 07/01/99 The Willows Knoxville, TN 250 11,950 07/26/99 Tivoli Lakes Club Deerfield Beach, FL 278 17,000 07/29/99 The Seasons Boise, ID 120 6,026 08/19/99 Kingswood Manor San Antonio, TX 129 3,800 08/19/99 Hampton Green San Antonio, TX 293 8,000 08/19/99 Trails End San Antonio, TX 308 9,100 08/19/99 Waterford San Antonio, TX 133 4,500 09/23/99 Southbank Mesa, AZ 113 4,550 09/30/99 Governor's Place Augusta, GA 190 5,500 09/30/99 Maxwell House Augusta, GA 216 3,500 - --------------- --------------------------------- ----------------------- -------------- ----------------- 4,535 $200,276 - --------------- --------------------------------- ----------------------- -------------- -----------------
6. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE As of September 30, 1999, in addition to the Properties that were subsequently acquired as discussed in Note 14 of the Notes to Consolidated Financial Statements, the Operating Partnership entered into an agreement to acquire one multifamily property containing 288 units from an unaffiliated third party. The expected purchase price is approximately $15.5 million. As of September 30, 1999, in addition to the Properties that were subsequently disposed of as discussed in Note 14 of the Notes to Consolidated Financial Statements, the Operating Partnership entered into separate agreements to dispose of sixteen multifamily properties containing 4,992 units to unaffiliated third parties. The expected combined disposition price is approximately $253.6 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 paragraph. 7. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE OP UNIT The following tables set forth the computation of net income per weighted average OP Unit outstanding and net income per weighted average OP Unit outstanding - assuming dilution. 11 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 ------------------------------- ------------------------------- (Amounts in thousands except per OP Unit amounts) NUMERATOR: Income before gain on disposition of properties, net, extraordinary item and allocation of income to Junior Convertible Preference Units, Cumulative Convertible Redeemable Preference Interests and Cumulative Convertible or Redeemable Preference Units $ 243,797 $ 182,017 $ 84,423 $ 59,477 Income allocated to Junior Convertible Preference Units (240) - (240) - Income allocated to Cumulative Convertible Redeemable Preference Interests (36) (36) Income allocated to Cumulative Convertible or Redeemable Preference Units (84,842) (65,075) (27,731) (21,691) --------- --------- --------- --------- Income before gain on disposition of properties, net and extraordinary item 158,679 116,942 56,416 37,786 Gain on disposition of properties, net 64,315 12,717 18,508 1,625 Loss on early extinguishment of debt (451) - - - --------- --------- --------- --------- Numerator for net income per weighted average OP Unit outstanding 222,543 129,659 74,924 39,411 Effect of dilutive securities - - - - --------- --------- --------- --------- Numerator for net income per weighted average OP Unit outstanding - assuming dilution $ 222,543 $ 129,659 $ 74,924 $ 39,411 ========= ========= ========= ========= DENOMINATOR: Denominator for net income per weighted average OP Unit outstanding 133,490 106,630 134,993 109,688 Effect of dilutive securities: OP Units issuable upon exercise of the Company's share options 714 922 660 628 --------- --------- --------- --------- Denominator for net income per weighted average OP Unit outstanding - assuming dilution 134,204 107,552 135,653 110,316 ========= ========= ========= ========= Net income per weighted average OP Unit outstanding $ 1.67 $ 1.22 $ 0.56 $ 0.36 ========= ========= ========= ========= Net income per weighted average OP Unit outstanding - assuming dilution $ 1.66 $ 1.21 $ 0.55 $ 0.36 ========= ========= ========= =========
12 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------ 1999 1998 1999 1998 ----------------------------- ------------------------------ (Amounts in thousands except per OP Unit amounts) NET INCOME PER WEIGHTED AVERAGE OP UNIT OUTSTANDING: Income before gain on disposition of properties, net and extraordinary item per weighted average OP $1.19 $1.10 $0.42 $0.34 Unit outstanding Gain on disposition of properties, net 0.48 0.12 0.14 0.02 Loss on early extinguishment of debt - - - - -------------- ------------- -------------- ------------- Net income per weighted average OP Unit outstanding $1.67 $1.22 $0.56 $0.36 ============== ============= ============== ============= NET INCOME PER WEIGHTED AVERAGE OP UNIT OUTSTANDING - ASSUMING DILUTION: Income before gain on disposition of properties, net and extraordinary item per weighted average OP Unit outstanding - assuming dilution $1.18 $1.09 $0.42 $0.34 Gain on disposition of properties, net 0.48 0.12 0.13 0.02 Loss on early extinguishment of debt - - - - -------------- ------------- -------------- ------------- Net income per weighted average OP Unit outstanding - assuming dilution $1.66 $1.21 $0.55 $0.36 ============== ============= ============== =============
CONVERTIBLE PREFERENCE UNITS AND JUNIOR CONVERTIBLE PREFERENCE UNITS THAT COULD BE CONVERTED INTO 12,357,124 AND 7,623,525 WEIGHTED COMMON SHARES (WHICH WOULD BE CONTRIBUTED TO THE OPERATING PARTNERSHIP IN EXCHANGE FOR OP UNITS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998, RESPECTIVELY, AND 11,365,744 AND 7,623,326 WEIGHTED COMMON SHARES FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND 1998, RESPECTIVELY, WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS PER OP UNIT BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE. 13 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 8. MORTGAGE NOTES PAYABLE On June 1, 1999, the Operating Partnership refinanced the debt on four existing properties with a net increase in mortgage indebtedness of approximately $18.0 million. On July 29, 1999, the Operating Partnership obtained new mortgage financing on eleven previously unencumbered properties in the amount of $126.5 million. On August 31, 1999, the Operating Partnership refinanced the debt totaling $120.8 million on ten existing properties. In addition, five previously unencumbered properties cross-collateralize each of the new mortgage notes. During the nine months ended September 30, 1999, the Operating Partnership repaid the outstanding mortgage balances on two Properties in the aggregate amount of $9.3 million. In connection with the above transactions, the Operating Partnership incurred prepayment penalties of $0.5 million, which have been classified as losses on early extinguishment of debt. As of September 30, 1999, the Operating Partnership had outstanding mortgage indebtedness of approximately $2.5 billion encumbering 234 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $376 million) was approximately $4.0 billion. The mortgage notes payables are generally due in monthly installments of principal and interest. In connection with the Properties acquired during the nine months ended September 30, 1999, the Operating Partnership assumed the outstanding mortgage balances on eight Properties in the aggregate amount of $69.9 million. As of September 30, 1999, scheduled maturities for the Operating Partnership's outstanding mortgage indebtedness are at various dates through October 1, 2030. During the nine months ended September 30, 1999, the effective interest cost calculated for all of the Operating Partnership's debt was 7.00%. 9. NOTES On May 15, 1999, the Operating Partnership repaid the 1999 Notes. On June 17, 1999, the Operating Partnership refinanced the bond indebtedness collateralized by four existing properties. The bond indebtedness on all four properties totaling $75.8 million is now unsecured. In June 1999, the Operating Partnership issued $300 million of redeemable unsecured fixed rate notes (the "June 2004 Notes") in connection with the Debt Shelf Registration in a public debt offering (the "Seventh Public Debt Offering"). The June 2004 Notes were issued at a discount, which is being amortized over the life of the June 2004 Notes on a straight-line basis. The June 2004 Notes are due June 23, 2004. The annual interest rate on the June 2004 Notes is 7.10%, which is payable semiannually in arrears on December 23 and June 23, commencing 14 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) December 23, 1999. The Operating Partnership received net proceeds of approximately $298 million in connection with this issuance. As of September 30, 1999, the Operating Partnership had outstanding unsecured notes of approximately $2.3 billion, net of a $4.8 million discount and including a $7.6 million premium. 10. LINES OF CREDIT On August 12, 1999 the Operating Partnership obtained a new three year $700 million unsecured revolving credit facility, with Bank of America Securities LLC and Chase Securities Inc. acting as joint lead arrangers, maturing August 11, 2002. The new line of credit replaced the Operating Partnership's $500 million unsecured revolving credit facility, as well as the $120 million unsecured revolving credit facility, which the Operating Partnership assumed in the MRY Merger. The prior existing revolving credit facilities were repaid in full and terminated upon the closing of the new facility. As of September 30, 1999, $90 million was outstanding under this new facility, bearing interest at a weighted average rate of 5.86%. 11. DEPOSITS - RESTRICTED Deposits-restricted as of September 30, 1999 primarily included a deposit in the amount of $25 million held in a third party escrow account to provide collateral for third party construction financing in connection with two separate joint venture agreements. Also, approximately $78.5 million was held in third party escrow accounts, representing proceeds received in connection with the Operating Partnership's disposition of thirteen properties and earnest money deposits made for one additional acquisition. In addition, approximately $25.3 million was for tenant security, utility deposits, and other deposits for certain of the Operating Partnership's Properties. 12. 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 other litigation, except as mentioned in the previous paragraph, 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 regard to the joint venture agreements with two multifamily residential real estate developers during the nine months ended September 30, 1999, the Operating Partnership funded a total of $81 million and during the fourth quarter of 1999 the Operating Partnership expects to fund approximately $24.6 million in connection with these agreements. Also in connection with these 15 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) two agreements, the Operating Partnership has an obligation to fund up to an additional $55 million to guarantee third party construction financing. In regard to certain other properties that were under development and/or expansion during the nine months ended September 30, 1999, the Operating Partnership funded $32.2 million. During the fourth quarter of 1999, the Operating Partnership expects to fund $19.8 million related to the continued development and/or expansion of as many as five Properties. In regard to certain properties that are under earnout/development agreements, during the nine months ended September 30, 1999, the Operating Partnership funded the following: - - $17.2 million relating to the acquisition of Copper Canyon Apartments, which included a $1.0 million earnout payment to the developer; - - $24.9 million relating to the acquisition of Skyview Apartments, which included a $3.1 million earnout payment to the developer; and - - $18.3 million relating to the acquisition of Rosecliff Apartments. In connection with the Wellsford Merger, the Operating Partnership has provided a $14.8 million credit enhancement with respect to bonds issued to finance certain public improvements at a multifamily development project. Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real Properties, Inc. ("WRP Newco"), the Operating Partnership has 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. As of September 30, 1999, no shares of WRP Newco Series A Preferred had been acquired by the Operating Partnership. In connection with the MRY Merger, the Operating Partnership extended a $25 million, one year, non-revolving Senior Debt Agreement to MRYP Spinco. On June 24, 1999, MRYP Spinco repaid the Senior Note outstanding balance of $18.3 million and there is no further obligation by either party in connection with this agreement. Also, in connection with the MRY Merger, the Operating Partnership entered into six joint venture agreements with MRYP Spinco, the entity spun-off in the MRY Merger. The Operating Partnership contributed six properties with an initial value of $52.7 million in return for a 50% ownership interest in each joint venture. On August 23, 1999, the Operating Partnership sold its interest in these six properties to MRYP Spinco and there is no further obligation by either party in connection with these agreements. 13. 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, 1999 and net income for the nine months and quarter ended September 30, 1998. 16 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 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) ------------ ------------ ------------ Net operating income 774,039 - 774,039 Fee and asset management income - 3,432 3,432 Interest income - investment in mortgage notes - 8,502 8,502 Interest and other income - 17,655 17,655 Fee and asset management expense - (2,301) (2,301) 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 of net income to Preference Unit and Interest holders - (85,118) (85,118) Adjustment for depreciation expense related to equity in unconsolidated joint venture - 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 - (710) (710) equity in unconsolidated joint ventures ------------ ------------ ------------ Net income available to OP Unit holders $ 545,974 $ (323,431) $ 222,543 ============ ============ ============ Investment in real estate, net of accumulated depreciation as of September 30, 1999 $ 10,434,274 $ 18,119 $ 10,452,393 ============ ============ ============ Total assets as of September 30, 1999 $ 10,447,731 $ 601,379 $ 11,049,110 ============ ============ ============
17 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1998 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED ----------------------------------------------------------------------------------------------------------------- Rental income $ 901,087 $ - $ 901,087 Property and maintenance expense (225,053) - (225,053) Real estate tax and insurance expense (88,552) - (88,552) Property management expense (38,546) - (38,546) ------------------------------------------- Net operating income 548,936 - 548,936 Fee and asset management income - 4,204 4,204 Interest income - investment in mortgage notes - 14,405 14,405 Interest and other income - 12,803 12,803 Fee and asset management expense - (3,344) (3,344) Depreciation expense on non-real estate assets - (3,993) (3,993) Interest expense: Expense incurred - (170,143) (170,143) Amortization of deferred financing costs - (1,962) (1,962) General and administrative expense - (14,488) (14,488) Allocation of net income to Preference Unit and Interest holders - (65,075) (65,075) Adjustment for amortization of deferred financing costs related to predecessor business - 35 35 ------------------------------------------- Funds from operations available to OP Units 548,936 (227,558) 321,378 Depreciation expense on real estate assets (204,401) - (204,401) Gain on disposition of properties, net 12,717 - 12,717 Adjustment for amortization of deferred financing costs related to predecessor business - (35) (35) ------------------------------------------- Net income available to OP Unit holders $ 357,252 $(227,593) $ 129,659 ===========================================
18 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 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) ------------------------------------------------------ Net operating income 264,214 - 264,214 Fee and asset management income - 1,018 1,018 Interest income - investment in mortgage notes - 2,858 2,858 Interest and other income - 6,532 6,532 Fee and asset management expense - (677) (677) 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 of net income to Preference Unit and Interest holders - (28,007) (28,007) Adjustment for depreciation expense related to equity in unconsolidated joint ventures - 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 Loss on early extinguishment of debt - - - Adjustment for depreciation expense related to equity in unconsolidated joint ventures - (159) (159) ------------------------------------------------------ Net income available to OP Unit holders $ 184,053 $ (109,129) $ 74,924 ====================================================== Investment in real estate, net of accumulated depreciation as of September 30, 1999 $ 10,434,274 $ 18,119 $ 10,452,393 ====================================================== Total assets as of September 30, 1999 $ 10,447,731 $ 601,379 $ 11,049,110 ======================================================
19 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) QUARTER ENDED SEPTEMBER 30, 1998 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED - --------------------------------------------------------------------------------------------------------------------- Rental income $ 329,717 $ - $ 329,717 Property and maintenance expense (86,750) - (86,750) Real estate tax and insurance expense (32,068) - (32,068) Property management expense (13,539) - (13,539) --------------------------------------------- Net operating income 197,360 - 197,360 Fee and asset management income - 1,414 1,414 Interest income - investment in mortgage notes - 4,184 4,184 Interest and other income - 3,934 3,934 Fee and asset management expense - (1,097) (1,097) Depreciation expense on non-real estate assets - (1,470) (1,470) Interest expense: Expense incurred - (64,492) (64,492) Amortization of deferred financing costs - (687) (687) General and administrative expense - (4,655) (4,655) Allocation of net income to Preference Unit and Interest holders - (21,691) (21,691) --------------------------------------------- Funds from operations available to OP Units 197,360 (84,560) 112,800 Depreciation expense on real estate assets (75,014) - (75,014) Gain on disposition of properties, net 1,625 - 1,625 --------------------------------------------- Net income available to OP Unit holders $ 123,971 $ (84,560) $ 39,411 =============================================
(1) The Operating Partnership has one primary reportable business segment, which consists of investment in rental real estate. 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. (2) The Operating Partnership has a segment for corporate level activity including such items as interest income earned on short-term investments, interest income earned on investment in mortgage notes, general and administrative expenses, and interest expense on mortgage notes payable and unsecured note issuances. In addition, the Operating Partnership has a segment for third party management activity that is immaterial and does not meet the threshold requirements of a reportable segment as provided for in Statement No. 131. Interest expense on debt is not allocated to individual Properties, even if the Properties secure such debt. 20 ERP OPERATING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 14. SUBSEQUENT EVENTS On October 1, 1999, the Company merged with Lexford Residential Trust ("Lexford"). The Lexford portfolio of 402 properties consists of 36,609 units in sixteen states. In the merger, each outstanding common share of beneficial interest of Lexford was converted into .463 of a Common Share of the Company. Pursuant to the tax-free merger, the Company issued approximately 3.9 million new Common Shares with a value of $181 million and assumed approximately $530 million of debt. Upon the contribution of substantially all of Lexford's assets by the Company to the Operating Partnership, the Operating Partnership issued approximately 3.9 million OP Units to the Company. As of November 11, 1999, Lexford's line of credit totaling $26.5 million, a term loan totaling $2.3 million and 22 separate Lexford mortgages totaling $22.8 million have been fully repaid. On October 14, 1999, the Operating Partnership disposed of Burn Brae Apartments, a 282-unit multifamily property located in Irving, TX, from an unaffiliated third party for a total sales price of $10.8 million. On October 15, 1999, the Operating Partnership disposed of Casa Cordoba Apartments, a 168-unit multifamily property and Casa Cortez, a 66-unit multifamily property, both located in Tallahassee, FL, to an unaffiliated third party for a total sales price of $7.9 million. On October 15, 1999, the Company announced that it will redeem all of its issued and outstanding Series I Cumulative Convertible Preferred Shares of Beneficial Interest on November 15, 1999. At that time, the preferred shares will be redeemed for such number of Common Shares as are issuable at a conversion rate of 0.6417 of a Common Share of EQR for each Series I Preferred Share. On October 27, 1999, the Operating Partnership acquired Granada Highlands Apartments, a 919-unit multifamily property located in Malden, MA, from an unaffiliated third party for a purchase price of approximately $128 million. 21 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 connection with the Consolidated Financial Statements and Notes thereto. Due to the Operating Partnership's ability to control the Management Partnerships, the Financing Partnerships, the LLCs, Merry Land DownREIT I LP and EQR-Mosaic, LLC, 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, 1998. Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "believes", "expects" and "anticipates" and other similar expressions which are predictions of or indicate future events and trends and which do not relate solely to historical matters, identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements of the 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: - the alternative sources of capital to the Operating Partnership are too high; - 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 as filed on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The 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. During the year ended 1998, the Operating Partnership acquired 207 properties containing 55,143 units and four properties under development representing 1,378 units (the "1998 Acquired Properties"). In addition, during the nine months ended September 30, 1999, the Operating Partnership acquired nineteen properties containing 5,126 units (the "1999 Acquired Properties"). The Operating Partnership also disposed of twenty properties containing 4,719 units during 1998 (the "1998 Disposed Properties"); and twenty-one properties containing 4,535 units during the nine months ended September 30, 1999 (the "1999 Disposed Properties"). Also, the Operating Partnership sold its interest in the six MRY joint venture properties containing 1,297 units. 22 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, 1999 and 1998 have been significantly impacted by the Operating Partnership's acquisition and disposition activity. The significant changes in rental revenues, property and maintenance expenses, real estate taxes and insurance, depreciation expense, property management and interest expense can all primarily be attributed to the acquisition of the 1998 Acquired Properties and the 1999 Acquired Properties, partially offset by the disposition of the 1998 Disposed Properties and the 1999 Disposed Properties. The impact of the 1998 Acquired Properties, the 1999 Acquired Properties, the 1998 Disposed Properties and the 1999 Disposed Properties is discussed in greater detail in the following paragraphs. Properties that the Operating Partnership owned for all of both nine month periods ended September 30, 1999 and September 30, 1998 (the "Nine-Month 1999 Same Store Properties"), which represented 125,165 units, impacted the Operating Partnership's results of operations. Properties that the Operating Partnership owned for all of both the quarters ended September 30, 1999 and September 30, 1998 (the "Third-Quarter 1999 Same Store Properties"), which represented 135,753 units, also impacted the Operating Partnership's results of operations. Both the Nine-Month 1999 Same Store Properties and Third-Quarter 1999 Same Store Properties are discussed in the following paragraphs. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED SEPTEMBER 30, 1998 For the nine months ended September 30, 1999, income before gain on disposition of properties, net and extraordinary item increased by $61.8 million when compared to the nine months ended September 30, 1998. This increase was primarily due to the acquisition of the 1998 Acquired Properties and the 1999 Acquired Properties 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 1999 Same Store Properties, total revenues increased by approximately $27.8 million to $812.5 million or 3.54% 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, decreased approximately $0.8 million or 0.28%. This decrease was primarily the result of lower expenses for leasing and advertising, administrative and maintenance costs, but was partially offset by higher on-site compensation costs and an increase in real estate taxes on certain properties. Property management represents expenses associated with the self-management of the Operating Partnership's Properties. These expenses increased by approximately $4.3 million primarily due to the continued expansion of the Operating Partnership's property management business. 23 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Fee and asset management revenues and fee and asset management expenses are associated with the management of properties not owned by the Operating Partnership that are managed for affiliates. These revenues and expenses decreased due to the Operating Partnership acquiring certain of these properties that were formerly only fee-managed. Interest expense, including amortization of deferred financing costs, increased by approximately $72.2 million. This increase was primarily the result of an increase in the Operating Partnership's average indebtedness outstanding which increased by $1.5 billion. However, the Operating Partnership's effective interest costs decreased from 7.17% for the nine months ended September 30, 1998 to 7.00% for the nine months 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 the addition of corporate personnel. However, by gaining certain economies of scale with a much larger operation these expenses as a percentage of total revenues were 1.24% for the nine months ended September 30, 1999 compared to 1.55% of total revenues for the nine months ended September 30, 1998. COMPARISON OF QUARTER ENDED SEPTEMBER 30, 1999 TO QUARTER ENDED SEPTEMBER 30, 1998 For the quarter ended September 30, 1999, income before gain on disposition of properties, net and extraordinary item increased by approximately $24.9 million when compared to the quarter ended September 30, 1998. This increase was primarily due to the acquisition of the 1998 Acquired Properties and the 1999 Acquired Properties 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, and interest expense. In regard to the Third-Quarter 1999 Same Store Properties, total revenues increased by approximately $9.6 million or 3.27% 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, decreased approximately $0.7 million or 0.58%. This decrease was primarily the result of lower expenses for leasing and advertising, administrative and maintenance costs, but was partially offset by higher on-site compensation costs and an increase in real estate taxes on certain properties. Property management represents expenses associated with the self-management of the Operating Partnership's Properties. These expenses increased by approximately $1.3 million primarily due to the continued expansion of the Operating Partnership's property management business. 24 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Fee and asset management revenues and fee and asset management expenses are associated with the management of properties not owned by the Operating Partnership that are managed for affiliates. These revenues and expenses decreased due to the Operating Partnership acquiring certain of these properties that were formerly only fee-managed. Interest expense, including amortization of deferred financing costs, increased by approximately $18.9 million. This increase was primarily the result of an increase in the Operating Partnership's average indebtedness outstanding which increased by $1.1 billion. However, the Operating Partnership's effective interest costs decreased from 6.99% for the quarter ended September 30, 1998 to 6.97% for the quarter ended September 30, 1999. General and administrative expenses, which include corporate operating expenses, increased approximately $0.4 million between the periods under comparison. These expenses as a percentage of total revenues were 1.15% for the quarter ended September 30, 1999 compared to 1.37% of total revenues for the quarter ended September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES As of January 1, 1999, the Operating Partnership had approximately $4 million of cash and cash equivalents and $330 million available on its lines of credit, of which $12 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, 1999 was approximately $62.8 million and the amount available on the Operating Partnership's line of credit was $610 million, of which $41.3 million was restricted. The following discussion also explains the changes in net cash provided by operating activities, net cash used by investing activities and net cash provided by (used by) 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 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 issuance of additional equity or debt securities or the disposition of Properties. Utilizing this strategy during the first nine months of 1999, the Operating Partnership: - - issued the June 2004 Notes and received net proceeds of $298 million; - - refinanced four Properties and received additional net proceeds of $18 million; - - obtained new mortgage financing on eleven previously unencumbered properties and received net proceeds of $126.5 million; 25 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - - disposed of twenty-seven properties (including the sale of the Operating Partnership's interest in six MRY joint venture properties) and received net proceeds of $197.1 million; - - issued approximately 1.0 million OP Units and received net proceeds of $34.2 million; and - - issued the 8.00% Series A Cumulative Convertible Redeemable Preference Interests and received net proceeds of $39 million. All of these proceeds were utilized to either: - - purchase additional properties; - - provide funding for properties in the development stage; and/or - - repay the lines of credit and mortgage indebtedness on certain Properties. With respect to the 1999 Acquired Properties, the Operating Partnership assumed and/or entered into new mortgage indebtedness of approximately $196.3 million, issued OP Units with a value of $25.2 million and issued Junior Convertible Preference Units with a value of $3.0 million. The total purchase price of the 1999 Acquired Properties was approximately $526.8 million. Subsequent to September 30, 1999, the Company closed its merger with Lexford and through this merger acquired 402 multifamily properties containing 36,609 units. In the merger, each outstanding common share of beneficial interest of Lexford was converted into .463 of a Common Share of the Company. Pursuant to the merger, the Company issued approximately 3.9 million new Common Shares with a value of $181 million and assumed approximately $530 million of debt. Upon the contribution of substantially all of Lexford's assets by the Company to the Operating Partnership, the Operating Partnership issued approximately 3.9 million OP Units to the Company. As of November 11, 1999, Lexford's line of credit totaling $26.5 million, a term loan totaling $2.3 million and 22 separate Lexford mortgages totaling $22.8 million have been fully repaid. Subsequent to September 30, 1999 and through November 11, 1999, the Operating Partnership acquired one additional property containing 919 units for a total purchase price of approximately $128 million. Subsequent to September 30, 1999 and through November 11, 1999, the Operating Partnership disposed of three properties for a total sales price of $18.7 million. These proceeds will be utilized to purchase additional properties. The Operating Partnership anticipates that it will continue to sell certain Properties in the portfolio. In regard to the joint venture agreements with two multifamily residential real estate developers during the nine months ended September 30, 1999, the Operating Partnership funded a total of $81 million and during the remainder of 1999 the Operating Partnership expects to fund approximately $24.6 million in connection with these agreements. Also in connection with these two agreements, the Operating Partnership has an obligation to fund up to an additional $55 million 26 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) to guarantee third party construction financing. In regard to certain other properties that were under development and/or expansion during the nine months ended September 30, 1999, the Operating Partnership funded $32.2 million. During the remainder of 1999, the Operating Partnership expects to fund $18.1 million related to the continued development and/or expansion of as many as five Properties. In regard to certain properties that were under earnout/development agreements, during the nine months ended September 30, 1999, the Operating Partnership funded the following: - - $17.2 million relating to the acquisition of Copper Canyon Apartments, which included a $1.0 million earnout payment to the developer; - - $24.9 million relating to the acquisition of Skyview Apartments, which included a $3.1 million earnout payment to the developer; and - - $18.3 million relating to the acquisition of Rosecliff Apartments. In May 1999, the Operating Partnership repaid its 1999 Notes that matured on May 15, 1999. The $125 million repayment was funded from borrowings under the Operating Partnership's lines of credit. In addition, during the first nine months of 1999, the Operating Partnership repaid $9.3 million of mortgage indebtedness on two of its Properties. These repayments were funded from the Operating Partnership's lines of credit and/or from disposition proceeds. In November 1999, the Operating Partnership expects to repay the 1999-A Notes that mature on November 24, 1999. The $25 million repayment will be initially funded from borrowings under the Operating Partnership's line of credit. In addition, during the remainder of 1999, the Operating Partnership anticipates repaying approximately $30 million of mortgage notes assumed in connection with the Lexford merger. In April 2000, the Operating Partnership anticipates repaying mortgage indebtedness of approximately $85 million assumed in connection with the Lexford merger. These repayments will also be primarily funded from additional borrowings under the line of credit. As of September 30, 1999, the Operating Partnership had total indebtedness of approximately $4.8 billion, which included mortgage indebtedness of $2.5 billion (including premiums of $3.7 million), of which $851.6 million represented tax-exempt bond indebtedness, and unsecured debt of $2.3 billion (including net discounts and premiums in the amount of $2.8 million), of which $111.4 million represented tax-exempt bond indebtedness. Subsequent to September 30, 1999, the Operating Partnership settled on a $50 million interest rate protection agreement and received approximately $1.4 million in connection therewith. The Operating Partnership has a policy of capitalizing expenditures made for new assets, including newly acquired properties and the costs associated with placing these assets into 27 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) service. Expenditures for improvements and renovations that significantly enhance the value of existing assets or substantially extend the useful life of an asset are also capitalized. Capital spent for replacement-type items such as appliances, draperies, carpeting and floor coverings, mechanical equipment and certain furniture and fixtures is also capitalized. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. With respect to acquired properties, the Operating Partnership has determined that it generally spends $1,000 per unit during its first three years of ownership to fully improve and enhance these properties to meet the 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, 1999, total capital expenditures for the Operating Partnership approximated $99.4 million. Of this amount, approximately $36 million, or $298 per unit, related to capital improvements and major repairs for the 1997, 1998 and 1999 Acquired Properties. Capital improvements and major repairs for all of the Operating Partnership's pre-EQR IPO properties and 1993, 1994, 1995 and 1996 Acquired Properties approximated $19.7 million, or $308 per unit. Capital spent for replacement-type items approximated $37.8 million, or $204 per unit. Also included in total capital expenditures was approximately $5.9 million expended for non-real estate additions such as computer software, computer equipment, furniture and fixtures and leasehold improvements for the Operating Partnership's management offices and its corporate headquarters. Such capital expenditures were primarily funded from working capital reserves and from net cash provided by operating activities. Total capital expenditures for the remaining portion of 1999 are estimated to be approximately $20 million. Total distributions paid in October 1999 amounted to approximately $124.4 million, which included distributions declared for the quarter ended September 30, 1999. The Operating Partnership expects to meet its short-term liquidity requirements, including capital expenditures relating 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, reduction of outstanding amounts under its lines of credit, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities including additional OP Units as well as from undistributed FFO and proceeds received from the disposition of certain properties. In addition, the 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. 28 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) On August 12, 1999 the Operating Partnership obtained a new three year $700 million unsecured revolving credit facility, with Bank of America Securities LLC and Chase Securities Inc. acting as joint lead arrangers. The new line of credit replaced the Operating Partnership's $500 million unsecured revolving credit facility, as well as the $120 million unsecured revolving credit facility, which the Operating Partnership assumed in the MRY Merger. The prior existing revolving credit facilities were repaid in full and terminated upon the closing of the new facility. This new credit facility matures in August 2002 and will be used to fund property acquisitions, costs for certain Properties under development and short term liquidity requirements. As of November 11, 1999, $147 million was outstanding under this new facility. In connection with the Wellsford Merger, the Operating Partnership provided a $14.8 million credit enhancement with respect to bonds issued to finance certain public improvements at a multifamily development project. Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real Properties, Inc. ("WRP Newco"), the Operating Partnership has 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. As of November 11, 1999, no shares of WRP Newco Series A Preferred had been acquired by the Operating Partnership. In conjunction with the MRY Merger in October 1998, in return for the spin-off of certain assets and liabilities to MRYP Spinco, the Operating Partnership received (from MRYP Spinco) a Subordinated Note receivable totaling $20 million, a preferred stock investment with an initial value of $5 million and a $25 million, one year, non-revolving Senior Note receivable with an initial value of $18.3 million. On June 24, 1999, the Subordinated Note receivable, the preferred stock investment and the Senior Note receivable were all repaid by MRYP Spinco for a total amount of $41 million, which represented a discount of $2.3 million on the combined outstanding balance of these instruments. There is no further obligation by either party in connection therewith. Also, in connection with the MRY Merger, the Operating Partnership entered into six joint venture agreements with MRYP Spinco, the entity spun-off in the MRY Merger. The Operating Partnership contributed six properties with an initial value of $52.7 million in return for a 50% ownership interest in each joint venture. On August 23, 1999, the Operating Partnership sold its interest in these six properties to MRYP Spinco and there is no further obligation by either party in connection with these agreements. YEAR 2000 ISSUE The year 2000 issue ("Year 2000") is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Operating Partnership's computer programs that have time-sensitive hardware and software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary 29 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) inability to process transactions, collect rents, or engage in similar normal business activities. The Operating Partnership believes that it has identified all of its information technology ("IT") and non-IT systems to assess their Year 2000 readiness. Critical systems include, but are not limited to: accounts receivable and rent collections, accounts payable and general ledger, human resources and payroll (both property and corporate levels), cash management, fixed assets, all IT hardware (such as desktop/laptop computers, data networking equipment, telephone systems, fax machines, copy machines, etc.) and software, and property environmental, health safety and security systems (such as elevators and alarm systems). The Operating Partnership anticipates that previously scheduled system upgrades to many of its IT systems will remediate any existing Year 2000 problems. The Operating Partnership has completed testing and is currently in the process of implementing the remaining Year 2000 IT and non-IT system projects with completion anticipated during the fourth quarter of 1999. The Operating Partnership has estimated that the total Year 2000 project cost will approximate $1 million, of which approximately 90% has been incurred as of September 30, 1999. During the first nine months of 1999, the primary focus of the Year 2000 remediation efforts has been on implementing and testing the previously scheduled upgrades and Year 2000 compliant versions of existing IT systems as well as continuing the assessment of the Operating Partnership's exposure regarding non-IT systems at property sites. Of the remaining $100,000 budgeted to complete the Operating Partnership's Year 2000 remediation project, approximately $50,000 has been allocated to engage Year 2000 consultants to help the Operating Partnership monitor its IT compliance progress and to complete final IT testing and implementation. The remaining $50,000 has been allocated to remediate non-IT systems at various property sites. The estimates are based on management's best estimates, which were derived utilizing numerous assumptions of future events, and there can be no guarantees that these estimates will be achieved. In some cases, various third party vendors have been queried on their Year 2000 readiness. The Operating Partnership continues to query its significant suppliers and vendors to determine the extent to which the Operating Partnership's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. To date, the Operating Partnership is not aware of any significant suppliers or vendors with a Year 2000 issue that would materially impact the Operating Partnership's results of operations, liquidity, or capital resources. However, the Operating Partnership cannot assure you that the systems of other companies, on which the Operating Partnership's systems rely, will be timely converted and would not have an adverse effect on the Operating Partnership's systems. Management of the Operating Partnership believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. In addition, the Operating Partnership is developing its contingency plans for critical operational areas that might be affected by the Year 2000 issue if compliance by the Operating Partnership is delayed. Aside from catastrophic failure of utility companies, banks or governmental agencies, the Operating Partnership believes that it could continue its normal business operations if compliance by the Operating Partnership is delayed. The Operating Partnership does not believe that the Year 2000 issue will materially impact its results of operations, liquidity or capital resources. 30 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FUNDS FROM OPERATIONS The Operating Partnership generally considers Funds From Operations ("FFO") to be one measure of the performance of real estate companies. The resolution adopted by the Board of Governors of NAREIT defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. The Operating Partnership believes that FFO is helpful to investors as a measure of the performance of a real estate Operating Partnership because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with 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 represents net income, excluding gains on dispositions of properties and extraordinary items, plus depreciation on real estate assets, amortization of deferred financing costs related to the Predecessor Business and the allocation of net income to Cumulative Redeemable Preference Units. The Operating Partnership's calculation of FFO may differ from the methodology for calculating FFO utilized by other companies and, accordingly, may not be comparable to such other companies. For the nine months ended September 30, 1999, FFO increased by $130.4 million, representing a 40.6% increase when compared to the nine months ended September 30, 1998. For the quarter ended September 30, 1999, FFO increased by $42.4 million representing a 37.6% increase when compared to the quarter ended September 30, 1998. 31 ERP OPERATING LIMITED PARTNERSHIP PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following is a reconciliation of net income to FFO available to OP Units for the nine months and quarters ended September 30, 1999 and 1998 (amounts are in thousands): - ------------------------------------------------------------------------------------------------------------------- Nine Nine Months Months Quarter Quarter Ended Ended Ended Ended 9/30/99 9/30/98 9/30/99 9/30/98 - ------------------------------------------------------------------------------------------------------------------- Net income $ 307,661 $ 194,734 $ 102,931 $ 61,102 Adjustments: Depreciation on real estate assets* 293,090 204,401 98,828 75,014 Amortization of deferred financing costs related to predecessor business - 35 - - Allocation of net income to Preference Unit and Interest holders (85,118) (65,075) (28,007) (21,691) Loss on early extinguishment of debt 451 - - - Gain on disposition of properties, net (64,315) (12,717) (18,508) (1,625) - ------------------------------------------------------------------------------------------------------------------- FFO available to OP Units $ 451,769 $ 321,378 $ 155,244 $ 112,800 - -------------------------------------------------------------------------------------------------------------------
* Includes $710 and $159 related to the Operating Partnership's share of depreciation from unconsolidated joint ventures for the nine months and quarter ended September 30, 1999, respectively. 32 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, 1998. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule Worksheet (B) Reports on Form 8-K: A Report on Form 8-K dated June 30, 1999 and filed on July 14, 1999, disclosing certain historical financial information of Lexford. 33 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 12, 1999 By: /s/ Bruce C. Strohm ----------------- -------------------------------------- Bruce C. Strohm Executive Vice President, General Counsel and Secretary Date: November 12, 1999 By: /s/ Michael J. McHugh ----------------- -------------------------------------- Michael J. McHugh Executive Vice President, Chief Accounting Officer and Treasurer EX-12 2 EXHIBIT 12 ERP OPERATING LIMITED PARTNERSHIP CONSOLIDATED HISTORICAL EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS RATIO HISTORICAL ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- 9/30/99 9/30/98 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- (Amounts in thousands) REVENUES Rental income $1,243,958 $ 901,087 $1,293,560 $ 707,733 $ 454,412 $ 373,919 $ 220,727 Fee income - outside managed 3,432 4,204 5,622 5,697 6,749 7,030 4,739 Interest income - investment in mortgage notes 8,502 14,405 18,564 20,366 12,819 4,862 - Interest and other income 17,655 12,803 19,703 13,525 4,405 4,573 5,568 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total revenues 1,273,547 932,499 1,337,449 747,321 478,385 390,384 231,034 ---------- ---------- ---------- ---------- ---------- ---------- ---------- EXPENSES Property and maintenance 300,798 225,053 326,567 176,075 127,172 112,186 66,534 Real estate taxes and insurance 126,304 88,552 126,009 69,520 44,128 37,002 23,028 Property management 42,817 38,546 52,705 26,793 17,512 15,213 10,249 Property management - non-recurring - - - - - - 879 Fee and asset management 2,301 3,344 4,207 3,364 3,837 3,887 2,056 Depreciation 297,505 208,394 301,869 156,644 93,253 72,410 37,273 Interest: Expense incurred 241,516 170,143 246,585 121,324 81,351 78,375 37,044 Amortization of deferred financing costs 2,773 1,962 2,757 2,523 4,242 3,444 1,930 General and administrative 15,736 14,488 21,718 15,064 9,857 8,129 6,053 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total expenses 1,029,750 750,482 1,082,417 571,307 381,352 330,646 185,046 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before extraordinary items $ 243,797 $ 182,017 $ 255,032 $ 176,014 $ 97,033 $ 59,738 $ 45,988 ========== ========== ========== ========== ========== ========== ========== Combined Fixed Charges and Preferred Distributions: Interest and other financing costs $ 241,516 $ 170,143 $ 246,585 $ 121,324 $ 81,351 $ 78,375 $ 37,044 Amortization of deferred financing costs 2,773 1,962 2,757 2,523 4,242 3,444 1,930 Preferred distributions 85,118 65,075 92,917 59,012 29,015 10,109 - ---------- ---------- ---------- ---------- ---------- ---------- ---------- TOTAL COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS $ 329,407 $ 237,180 $ 342,259 $ 182,859 $ 114,608 $ 91,928 $ 38,974 ========== ========== ========== ========== ========== ========== ========== EARNINGS BEFORE COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS $ 488,086 $ 354,122 $ 504,374 $ 299,861 $ 182,626 $ 141,557 $ 84,962 ========== ========== ========== ========== ========== ========== ========== FUNDS FROM OPERATIONS BEFORE COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS $ 785,591 $ 562,516 $ 806,243 $ 456,505 $ 275,879 $ 213,967 $ 123,114 ========== ========== ========== ========== ========== ========== ========== RATIO OF EARNINGS BEFORE COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS 1.48 1.49 1.47 1.64 1.59 1.54 2.18 ========== ========== ========== ========== ========== ========== ========== RATIO OF FUNDS FROM OPERATIONS BEFORE COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS 2.38 2.37 2.36 2.50 2.41 2.33 3.16 ========== ========== ========== ========== ========== ========== ==========
EX-27 3 EXHIBIT 27
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 62,805 0 1,602 0 0 369,157 11,441,442 989,049 11,049,110 408,870 4,845,546 0 1,335,791 0 47,896 11,049,110 1,255,892 1,273,547 0 472,220 15,736 0 244,289 243,797 0 243,797 64,315 (451) 0 222,543 1.67 1.66
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