Results of Operations
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,
Washington, D.C. 20549/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
SEPTEMBER 30, 2001MARCH 31, 2002OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o 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
(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)
Illinois
(State or Other Jurisdiction of Incorporation or Organization)36-3894853
(I.R.S. Employer Identification No.)
Two North Riverside Plaza, Chicago, Illinois
(Address of Principal Executive Offices)60606
(Zip Code)(312) 474-1300
(Registrant's
(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
Xý No---o
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
(Amounts in thousands)
(Unaudited)
March 31,
2002December 31,
2001ASSETS Investment in real estate Land $ 1,844,098 $ 1,840,170 Depreciable property 11,135,057 11,096,847 Construction in progress 104,158 79,166 13,083,313 13,016,183 Accumulated depreciation (1,831,277 ) (1,718,845 ) Investment in real estate, net of accumulated depreciation 11,252,036 11,297,338 Real estate held for disposition 3,505 3,371 Cash and cash equivalents 249,762 51,603 Investments in unconsolidated entities 396,733 397,237 Rents receivable 1,355 2,400 Deposits — restricted 210,496 218,557 Escrow deposits — mortgage 72,595 76,700 Deferred financing costs, net 28,563 27,011 Rental furniture, net — 20,168 Property and equipment, net — 3,063 Goodwill, net 47,122 47,291 Other assets 66,086 90,886 Total assets $ 12,328,253 $ 12,235,625 LIABILITIES AND PARTNERS' CAPITAL Liabilities: Mortgage notes payable $ 3,279,105 $ 3,286,814 Notes, net 2,556,358 2,260,944 Line of credit — 195,000 Accounts payable and accrued expenses 99,669 108,254 Accrued interest payable 72,323 62,360 Rents received in advance and other liabilities 87,219 83,005 Security deposits 47,574 47,644 Distributions payable 145,433 141,832 Total liabilities 6,287,681 6,185,853 Commitments and contingencies Minority Interests — Partially Owned Properties 13,953 4,078 Partners' capital: Preference Units 965,738 966,671 Preference Interests 246,000 246,000 Junior Preference Units 5,846 5,846 General Partner 4,503,191 4,506,097 Limited Partners 368,372 379,898 Deferred compensation (36,865 ) (25,778 ) Accumulated other comprehensive loss (25,663 ) (33,040 ) Total partners' capital 6,026,619 6,045,694 Total liabilities and partners' capital $ 12,328,253 $ 12,235,625 See accompanying notes
2
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS(AMOUNTS IN THOUSANDS EXCEPT PER
(Amounts in thousands except per OPUNIT 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 NOTESUnit data)
(Unaudited)
Quarter Ended March 31, 2002 2001 REVENUES Rental income $ 510,376 $ 510,675 Fee and asset management 1,718 1,972 Interest and other income 4,107 6,502 Interest income — investment in mortgage notes — 2,744 Total revenues 516,201 521,893 EXPENSES Property and maintenance 129,679 135,985 Real estate taxes and insurance 52,560 47,937 Property management 19,033 18,687 Fee and asset management 1,819 1,875 Depreciation 116,587 111,845 Interest: Expense incurred, net 84,795 89,898 Amortization of deferred financing costs 1,391 1,397 General and administrative 10,800 6,754 Impairment on technology investments 291 3,003 Amortization of goodwill — 643 Total expenses 416,955 418,024 Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle 99,246 103,869 Allocation to Minority Interests — Partially Owned Properties (806 ) (105 ) Income from investments in unconsolidated entities 226 350 Net gain on sales of unconsolidated entities 5,657 — Income before discontinued operations, extraordinary items and cumulative effect of change in accounting principle 104,323 104,114 Net gain on sales of discontinued operations 2,816 41,778 Discontinued operations, net 277 143 Income before extraordinary items and cumulative effect of change in accounting principle 107,416 146,035 Extraordinary items (97 ) 311 Cumulative effect of change in accounting principle — (1,270 ) Net income $ 107,319 $ 145,076 ALLOCATION OF NET INCOME: Preference Units $ 19,391 $ 24,459 Preference Interests $ 5,053 $ 3,958 Junior Preference Units $ 81 $ 109 General Partner $ 76,353 $ 106,754 Limited Partners 6,441 9,796 Net income available to OP Units $ 82,794 $ 116,550 Net income per OP Unit — basic $ 0.28 $ 0.40 Net income per OP Unit — diluted $ 0.28 $ 0.40 Weighted average OP Units outstanding — basic 294,106 289,659 Weighted average OP Units outstanding — diluted 297,229 297,184 Distributions declared per OP Unit outstanding $ 0.4325 $ 0.4075 Comprehensive income: Net income $ 107,319 $ 145,076 Other comprehensive income (loss) — derivative instruments: Cumulative effect of change in accounting principle — (5,334 ) Unrealized holding gains (losses) arising during the period 7,209 (11,754 ) Losses reclassified into earnings from other comprehensive income 168 55 Comprehensive income $ 114,696 $ 128,043 See accompanying notes
3
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Quarter Ended March 31, 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 107,319 $ 145,076 Adjustments to reconcile net income to net cash provided by operating activities: Allocation to Minority Interests — Partially Owned Properties 806 105 Cumulative effect of change in accounting principle — 1,270 Depreciation 116,767 115,029 Amortization of deferred financing costs 1,391 1,397 Amortization of discount on investment in mortgage notes — (161 ) Amortization of goodwill — 933 Amortization of discounts and premiums on debt (327 ) (590 ) Amortization of deferred settlements on interest rate protection agreements (101 ) 101 Impairment on technology investments 291 3,003 Income from investments in unconsolidated entities (226 ) (350 ) Net gain on sales of discontinued operations (2,816 ) (41,778 ) Net gain on sales of unconsolidated entities (5,657 ) — Extraordinary items 97 (311 ) Unrealized gain on interest rate protection agreements (62 ) (71 ) Book value of furniture sales and rental buyouts — 2,851 Compensation paid with Company Common Shares 4,964 2,867 Changes in assets and liabilities: Decrease (increase) in rents receivable 1,045 (188 ) Decrease in deposits — restricted 14,133 5,343 Additions to rental furniture — (6,272 ) Decrease (increase) in other assets 18,446 (3,002 ) (Decrease) in accounts payable and accrued expenses (7,498 ) (9,153 ) Increase in accrued interest payable 9,963 19,752 Increase in rents received in advance and other liabilities 2,852 219 Increase in security deposits 287 343 Net cash provided by operating activities 261,674 236,413 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in real estate — acquisitions (26,100 ) (143,399 ) Investment in real estate — development (24,338 ) (13,758 ) Improvements to real estate (27,697 ) (28,166 ) Additions to non-real estate property (3,004 ) (1,830 ) Interest capitalized for real estate under development (5,884 ) (5,987 ) Proceeds from disposition of real estate, net 31,722 280,448 Proceeds from disposition of partial interest in real estate 1,715 — Proceeds from disposition of furniture rental business 28,741 — Investment in property and equipment — (673 ) Principal receipts on investment in mortgage notes — 2,998 Investments in unconsolidated entities (12,099 ) (16,613 ) Distributions from unconsolidated entities 14,765 8,364 Proceeds from disposition of unconsolidated entities 11,317 — (Increase) in deposits on real estate acquisitions, net (6,288 ) (28,506 ) Decrease in mortgage deposits 4,105 870 Business combinations, net of cash acquired (207 ) (5,538 ) Other investing activities, net 193 (48 ) Net cash (used for) provided by investing activities (13,059 ) 48,162 See accompanying notes
4
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(Continued)
(Amounts in thousands)
(Unaudited)
Quarter Ended March 31, 2002 2001 CASH FLOWS FROM FINANCING ACTIVITIES: Loan and bond acquisition costs $ (3,040 ) $ (3,390 ) Mortgage notes payable: Proceeds, net 20,772 29,052 Lump sum payoffs (18,267 ) (176,746 ) Scheduled principal repayments (8,469 ) (8,451 ) Prepayment premiums/fees (97 ) — Notes, net: Proceeds 397,064 299,316 Lump sum payoffs (100,000 ) — Scheduled principal repayments — (119 ) Lines of credit: Proceeds 245,000 176,686 Repayments (440,000 ) (532,148 ) Proceeds (payments) from settlement of interest rate protection agreements 835 (7,360 ) Proceeds from sale of OP Units 4,236 3,266 Proceeds from sale of Preference Interests — 35,000 Proceeds from exercise of EQR options 9,777 8,210 Payment of offering costs (141 ) (938 ) Distributions: OP Units — General Partner (117,338 ) (416 ) Preference Units (16,441 ) (21,516 ) Preference Interests (5,080 ) (3,916 ) Junior Preference Units (81 ) — OP Units — Limited Partners (10,151 ) (9 ) Minority Interests — Partially Owned Properties (9,120 ) (108 ) Principal receipts on employee notes, net 85 71 Net cash (used for) financing activities (50,456 ) (203,516 ) Net increase in cash and cash equivalents 198,159 81,059 Cash and cash equivalents, beginning of period 51,603 23,772 Cash and cash equivalents, end of period $ 249,762 $ 104,831 SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 81,566 $ 76,777 Mortgage loans assumed through real estate acquisitions $ — $ 45,918 Mortgage loans (assumed) by purchaser in real estate and furniture rental business dispositions $ (1,680 ) $ (22,815 ) Transfers to real estate held for disposition $ 3,505 $ 21,886 5
ERP OPERATING LIMITED PARTNERSHIPCONSOLIDATED 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 5ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
(Unaudited)1.
BUSINESSBusinessERP Operating Limited Partnership ("ERPOP"), an Illinois limited partnership, was formed in May 1993 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 engaged in the
general partneracquisition, ownership, management and operation ofERPOP.multifamily properties. As used herein, the term "Operating Partnership"alsoincludesits subsidiaries, includingERPOP and those entitiesthat own residential real property and other assets acquiredowned or controlled byvirtue 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.it. As used herein, the term "Company" means EQR and the Operating Partnership.EQR
has electedis the general partner of, and as of March 31, 2002, owned an approximate 92.3% ownership interest in ERPOP. The Company conducts substantially all of its business and owns substantially all of its assets through ERPOP. ERPOP is, in turn, directly or indirectly, a partner, member or shareholder of numerous partnerships, limited liability companies and corporations which have been established primarily tobe taxed as a REIT under Section 856(c) ofown fee simple title to multifamily properties or to conduct property management activities and other businesses related to theInternal Revenue Code 1986, as amended (the "Code"). The Operating Partnership is engaged in the acquisition, disposition,ownershipmanagementand operation of multifamilyproperties.residential real estate.As of
September 30, 2001,March 31, 2002, the Operating Partnership owned or had interests in a portfolio of1,0811,073 multifamily properties containing225,590225,000 apartment units(individually a "Property" and collectively the "Properties")located in 36 states 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 ================= =================
Number of
PropertiesNumber of
UnitsWholly Owned Properties 951 199,305 Partially Owned Properties 37 7,231 Unconsolidated Properties 85 18,464 Total Properties 1,073 225,000 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATIONSummary 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
ninethree months endedSeptember 30, 2001March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31,2001.2002.The balance sheet at December 31,
20002001 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 fordefinition of capitalized terms not defined herein, 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. 6DERIVATIVE 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 policies2001.
Derivative Instruments 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.Hedging ActivitiesAt
September 30, 2001,March 31, 2002, the Operating Partnership had entered into swaps which have been designated as cash flow hedges withana current aggregate notional amount of $614.7 million (notional amounts range from $610.4 million to $626.4 million over the terms of the swaps) at interest rates ranging from3.65125%3.65% to 6.15% maturing at various dates ranging from 2003 to 2007 with a net liability fair value of$27.1$19.0 million; and swaps which have been designated as fair value hedges withana current aggregate notional amount of$296.4$384.7 million6
(notional amounts range from $380.4 million to $396.4 million over the terms of the swaps) at interest rates ranging from
4.458%4.46% to 7.25% maturing at various dates ranging from 2003 to20052011 with a net asset fair value of$13.1$2.0 million.At March 31, 2002, certain joint venture development partnerships in which the Company invested had entered into swaps to hedge the interest rate risk exposure on unconsolidated floating rate construction mortgage loans. The Operating Partnership has recorded its proportionate share of these qualifying hedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges with a current aggregate notional amount of $329.4 million (notional amounts range from $120.0 million to $538.1 million over the terms of the swaps) at interest rates ranging from 2.28% to 6.94% maturing at various dates ranging from 2002 to 2005 with a net liability fair value of $7.3 million.
As of March 31, 2002, there were approximately $25.5 million in deferred losses, net, included in accumulated other comprehensive loss. On
September 30, 2001,March 31, 2002, the net derivative instruments were reported at their fair value as other liabilities of approximately$14.0$17.0 million and as a reduction to investment in unconsolidated entities of approximately $7.3 million.Within the next twelve months theThe Operating Partnership expects to recognize an estimated$7.6$12.1 million of accumulated other comprehensiveincomeloss as additional interestexpense. OTHERexpense during the twelve months ending March 31, 2003, of which $4.6 million is related to the development joint venture swaps.
Other
In June 2001, the
Financial Accounting Standards Board ("FASB")FASB issued SFAS No. 141,BUSINESS COMBINATIONS, andBusiness Combinations. SFAS No.142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS Nos.141and 142 requirerequires companies to account for all business combinations using the purchase method ofaccountingaccounting. SFAS No. 141 is effective for fiscal years beginning after December 15, 2001. The Operating Partnership adopted the standard effective January 1, 2002, but it has not had any impact on the Operating Partnership's financial condition and results of operations.In June 2001, the FASB issued SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to eliminate the amortization of goodwill in favor of a periodic impairment based approach. SFAS
Nos. 141 andNo. 142will beis effective for the fiscal years beginning after December 15, 2001. The Operating Partnershipwill adoptadopted thestandardsstandard effective January 1, 2002,and doesbut it has notanticipate that the adoptions will havehad a material impact on the Operating Partnership's financial condition and results of operations.7In
August 2001,April 2002, the FASB issued SFAS No.144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which145,Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other items, rescinds the automatic classification of costs incurred on debt extinguishment as extraordinary charges. Instead, gains and losses from debt extinguishment should only be classified as extraordinary if they meet the "unusual and infrequently occurring" criteria outlined in APB No. 30. SFAS No. 145 is effective for fiscal years beginning afterDecemberMay 15,2001.2002. The Operating Partnership will adopt the standard effective January 1,2002, and2003, but does notanticipate that the adoption willexpect it to have a material impact onthe Operating Partnership'sits 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.Partners' CapitalThe following table presents the changes in the Operating Partnership's issued and outstanding OP Units for the
nine monthsquarter endedSeptember 30, 2001:March 31, 2002:
---------------------------------------------------------------------------------------- 2001 ----------------------------------------------------------------------------------------2002 Operating Partnership's OP Units outstanding at January 1, 290,090,252 ISSUED TO GENERAL PARTNER:294,818,566 Issued to General Partner: Conversion of Series E Preferred Shares 212,444Preference Units40,710 Conversion of Series H Preferred Shares 6,972Preference Units1,036 Employee Share Purchase Plan 266,694153,825 Dividend Reinvestment -— DRIP Plan28,46214,069 Share Purchase -— DRIP Plan21,75211,691 Exercise of EQR options 2,712,714595,081 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 ----------------------------------------------------------------------------------------922,280 Operating Partnership's OP Units outstanding at September 30, 294,251,800 ----------------------------------------------------------------------------------------March 31,296,557,258 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.7
The limited partners of the Operating Partnership as of
September 30, 2001March 31, 2002 include various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units (the "Limited Partners") andare represented by 23,876,662 OP Units.own an approximate 7.7% ownership interest in ERPOP.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"Preference Units" as ofSeptember 30, 2001March 31, 2002 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. 9The 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 - ------------------------------------------------------------------------------------------------------10The following table presents the Operating Partnership's issued and outstanding Cumulative Convertible or Redeemable Preference Units as of September 30, 2001 and December 31, 2000:2001:
- ------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------
Amounts in thousands Annual
Dividend
Rate per
Unit (1)March 31,
2002December 31,
2001Preference Units:
91/8% Series B Cumulative Redeemable Preference Units; liquidation value $250 per unit; 500,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
22.81252
$
125,000
$
125,000
91/8% Series C Cumulative Redeemable Preference Units; liquidation value $250 per unit; 460,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
22.81252
115,000
115,000
8.60% Series D Cumulative Redeemable Preference Units; liquidation value $250 per unit; 700,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
21.50000
175,000
175,000
Series E Cumulative Convertible Preference Units; liquidation value $25 per unit; 3,329,198 and 3,365,794 units issued and outstanding at March 31, 2002 and December 31, 2001, respectively
$
1.75000
83,230
84,145
71/4% Series G Convertible Cumulative Preference Units; liquidation value $250 per unit; 1,264,700 units issued and outstanding at March 31, 2002 and December 31, 2001
$
18.12500
316,175
316,175
7.00% Series H Cumulative Convertible Preference Units, liquidation value $25 per unit; 53,311 and 54,027 units issued and outstanding at March 31, 2002 and December 31, 2001, respectively
$
1.75000
1,333
1,351
8.29% Series K Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
4.14500
50,000
50,000
7.625% Series L Cumulative Redeemable Preference Units; liquidation value $25 per unit; 4,000,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
1.90625
100,000
100,000
$
965,738
$
966,671
- (1)
- Dividends on all series of preference units are payable quarterly at various
paydates. 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, 2001,8
The following table presents the
Operating Partnership redeemed all of its remainingissued and outstandingSeries APreference Interests as of March 31, 2002 andF Cumulative RedeemableDecember 31, 2001:
Amounts in thousands Annual
Dividend
Rate per
Unit (1)March 31,
2002December 31,
2001Preference Interests:
8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
4.0000
$
40,000
$
40,000
8.50% Series B Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
4.2500
55,000
55,000
8.50% Series C Cumulative Redeemable Preference Units; liquidation value $50 per unit; 220,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
4.2500
11,000
11,000
8.375% Series D Cumulative Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
4.1875
21,000
21,000
8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
4.2500
50,000
50,000
8.375% Series F Cumulative Redeemable Preference Units; liquidation value $50 per unit; 180,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
4.1875
9,000
9,000
7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
3.9375
25,500
25,500
7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
3.8125
9,500
9,500
7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
3.8125
13,500
13,500
7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at March 31, 2002 and December 31, 2001
$
3.8125
11,500
11,500
$
246,000
$
246,000
- (1)
- Dividends on all series of Preference Interests are payable quarterly on March 25th, June 25th, September 25th, and December 25th of each year.
9
The following table presents the Operating Partnership's issued and outstanding Junior Convertible Preference Units (the "Junior Preference Units") as of March 31, 2002 and December 31, 2001:
Amounts in thousands Annual
Dividend
Rate per
Unit (1)March 31,
2002December 31,
2001Junior Preference Units:
Series A Junior Convertible Preference Units; liquidation value $100 per unit; 56,616 units issued and outstanding at March 31, 2002 and December 31, 2001
$
5.46934
$
5,662
$
5,662
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at March 31, 2002 and December 31, 2001
$
2.00000
184
184
$
5,846
$
5,846
- (1)
- Dividends on both series of Junior Preference Units are payable quarterly at
their liquidation values for total cash consideration of $210.5 million. 11various dates. 4.
REAL ESTATE ACQUISITIONSReal Estate AcquisitionsDuring the
nine monthsquarter endedSeptember 30, 2001,March 31, 2002, the Operating Partnership acquiredthe eleven properties andoneparcelproperty located in Sunrise, Florida from an unaffiliated party, consisting ofland listed below from unaffiliated parties368 units for atotalpurchase price of$287.8approximately $26.0 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 DISPOSITIONSReal Estate DispositionsDuring the
nine monthsquarter endedSeptember 30, 2001,March 31, 2002, the Operating Partnership disposed of thethirty-sevenfour propertiesand two vacant parcels of landlisted below to unaffiliatedparties. When combined with gains from the joint ventureparties andunconsolidated property sale discussed below, the Operating Partnershiprecognized a net gain on sales of discontinued operations of approximately$100.1$2.8 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,
Date Disposed Property Location Number
Of UnitsDisposition
Price
(in thousands)01/17/02 Ravenwood Mauldin, SC 82 $ 2,425 01/24/02 Larkspur I & II Moraine, OH 45 899 01/31/02 Springwood II Austintown, OH 43 900 02/21/02 Scottsdale Courtyards Scottsdale, AZ 274 26,500 444 $ 30,724 In addition, during the quarter ended March 31, 2002, 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 13joint 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 PartnershipPartnership:
- •
- sold its entire interest in one Unconsolidated Property containing
74296 units for approximately$0.4$11.3 million and recognized a gain on sale of $5.7 million.6.
COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE At September 30, 2001,Commitments to Acquire/Dispose of Real EstateAs of March 31, 2002, in addition to the
Propertyproperty that was subsequently acquired as discussed in Note16 below,17, the Operating Partnership had entered into separate agreements to acquire two multifamily properties containing469736 units from unaffiliated parties. TheCompanyOperating Partnership expects a combined purchase price of approximately$76.5$55.3 million, including the assumption of mortgage indebtedness of approximately$45.8$14.0 million.At September 30, 2001,As of March 31, 2002, in addition to the
Propertiesproperties that were subsequently disposed of as discussed in Note16 below,17, the Operating Partnershiphadentered into separate agreements to dispose ofseventwenty-four multifamily properties containing1,4604,564 unitsone vacant land parcel and retail space at a consolidated propertyto unaffiliated parties. TheCompanyOperating Partnership expects a combined disposition price of approximately$65.6$244.0 million.The closings of these pending transactions are subject to certain contingencies and
conditions;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 ENTITIESInvestments in Unconsolidated EntitiesThe Operating Partnership has entered into
two separatevarious joint venture agreements with third partydevelopment companies wherebycompanies. The following table summarizes the OperatingPartnership 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 OperatingPartnership'sequity 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 otherinvestments in unconsolidated entitieswithas of March 31, 2002 (amounts in thousands except for project and unit amounts):
Institutional
Joint
VenturesStabilized
Development
Joint Ventures
(1)Joint Venture
Projects Under
DevelopmentLexford /
OtherTotals Total projects 45 10 16(2 ) 27 98 Total units 10,846 3,038 5,179(2 ) 3,348 22,411 ERPOP's percentage ownership of mortgage notes payable 25.0 % 85.4 % 100.0 % 15.6 % ERPOP's share of mortgage notes payable (4) $ 121,200 $ 214,615 $ 285,655(3 ) $ 10,509 $ 631,979
- (1)
- The Operating Partnership determines a project to be stabilized once it has maintained an average physical occupancy of 90% or more for a three-month period.
- (2)
- Includes three projects consisting of 1,232 units, which are completed and not yet stabilized, but are included in the Operating Partnership's property/unit counts at March 31, 2002. The remaining 13 properties containing 3,947 units are not included in the Operating Partnership's property/unit counts at March 31, 2002.
- (3)
- A total of $658,602 is available for funding under these construction loans, of which $285,655 was funded and outstanding as of March 31, 2002.
- (4)
- As of April 30, 2002, the Operating Partnership has funded $54.5 million as additional collateral for certain of these loans (see Note 8). All remaining debt is non-recourse to EQR and the Operating Partnership.
Investments in unconsolidated entities includes the Unconsolidated Properties as well as various uncompleted development joint venture properties. The Operating Partnership does not consolidate these entities, as it does not have sole control of major decisions (such as sale and/or financing/refinancing). The Operating Partnership's common equity ownership interests
rangingin these entities range from 1.5% to50.0%. The basis of these equity investments was $53.4 million and $80.6 million as of September 30, 2001 and December57.0% at March 31,2000, respectively.2002.These investments are accounted for
underutilizing the equity method of accounting. Under the equity method of accounting, the net equity investment of the Operating Partnership is reflected on the consolidated balance sheets and, after the project is completed, the consolidated statements of operations include the Operating Partnership's share of net income or loss from the unconsolidated entity. Prior to the project being completed, the Operating Partnership capitalized interest on its equity contribution in accordance with the provisions of SFAS No. 58,Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method. During the quarters ended March 31, 2002 and 2001, the Operating Partnership capitalized $3.8 million and $4.3 million, respectively, in interest cost related to its unconsolidated joint venture development projects (which reduced interest expense incurred in the consolidated statements of operations).The Operating Partnership generally contributes between 25% and 30% of the project cost of the joint ventures under development, with the remaining cost financed through third-party construction mortgages.
11
8.
DEPOSITS - RESTRICTED Deposits-restricted asDeposits—RestrictedAs of
September 30, 2001March 31, 2002, deposits-restricted totaled $210.5 million and primarily included the following:-
- •
- deposits in the amount of
$55.5$57.5 million held in third party escrow accounts to provide collateral for third party construction financing in connection with unconsolidated development joint ventureagreements; -agreements ($3.0 million was returned to the Operating Partnership in April 2002);- •
- approximately
$39.2$92.0 million in tax-deferred (1031) exchange proceeds; and-- •
- approximately
$62.6$61.0 million fortenantresident security, utility, and other deposits.149.
MORTGAGE NOTES PAYABLEMortgage Notes PayableAs of
September 30, 2001,March 31, 2002, the Operating Partnership had outstanding mortgage indebtedness of approximately $3.3 billion.During the
nine monthsquarter endedSeptember 30, 2001March 31, 2002, 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$26.7 million of mortgagedebt on four properties in connection with their acquisitions; -loans;- •
- disposed of
$28.2$1.7 million of mortgage debt assumed by the purchaser in connection with the disposition of certainproperties; - obtained $26.0 million of new mortgage debt on previously unencumbered properties; - obtained $301.5 million of new mortgage debt on previously Unconsolidated Properties;properties and-the furniture rental business; and- •
- received
$33.3$20.8 million in construction loan draw proceeds ontwocertain properties.As of
September 30, 2001,March 31, 2002, scheduled maturities for the Operating Partnership's outstanding mortgage indebtednessarewere at various dates through October 1, 2033. The interest rate range on the Operating Partnership's mortgage debt was2.15%1.30% to 12.465% atSeptember 30, 2001.March 31, 2002. During thenine monthsquarter endedSeptember 30, 2001,March 31, 2002, the weighted average interest rateon the Operating Partnership's mortgage debtwas6.59%6.42%.10.
NOTESNotesAs of
September 30, 2001,March 31, 2002, the Operating Partnership had outstanding unsecured notes of approximately$2.4$2.6 billion.During the
nine monthsquarter endedSeptember 30, 2001,March 31, 2002, the OperatingPartnershipPartnership:
- •
- issued
$300.0$400.0 million of ten-year6.95%6.625% fixed-rate publicunsecurednotes,and receivedreceiving net proceeds of$297.4 million.$394.5 million; and- •
- repaid $100.0 million of 9.375% fixed rate public notes at maturity.
As of
September 30, 2001,March 31, 2002, 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% to9.375%7.95% atSeptember 30, 2001.March 31, 2002. During thenine monthsquarter endedSeptember 30, 2001,March 31, 2002, the weighted average interest rateon the Operating Partnership's noteswas6.88%6.39%.11.
LINES OF CREDITLine of CreditThe Operating Partnership has a revolving credit facility
to provide the Operating Partnershipwith potential borrowings of up to $700.0 million. As ofSeptember 30, 2001,March 31, 2002, no amounts were outstandingunder this facilityand$60.0$57.4 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit.In connection withDuring theGlobe acquisition,quarter ended March 31, 2002, theOperating Partnership assumed a revolving credit facility with potential borrowingsweighted average interest rate was 2.50%.12
12. Calculation of
up to $55.0 million. This credit facility was terminated on May 31, 2001. 1512. CALCULATION OF NET INCOME PER WEIGHTED AVERAGENet Income Per Weighted Average OPUNITUnitThe following tables set forth the computation of net income per OP
Unit -Unit—basic and net income per OP Unit—diluted:
Quarter Ended March 31, 2002 2001 (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 unconsolidated entities, discontinued operations, extraordinary items, cumulative effect of change in accounting principle and allocation to preference unit/interest distributions $ 99,246 $ 103,869 Allocation to Minority Interests — Partially Owned Properties (806 ) (105 ) Income from investments in unconsolidated entities 226 350 Allocation to Preference Units (19,391 ) (24,459 ) Allocation to Preference Interests (5,053 ) (3,958 ) Allocation to Junior Preference Units (81 ) (109 ) Income before net gain on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle 74,141 75,588 Net gain on sales of unconsolidated entities 5,657 — Net gain on sales of discontinued operations 2,816 41,778 Discontinued operations, net 277 143 Extraordinary items (97 ) 311 Cumulative effect of change in accounting principle — (1,270 ) Numerator for net income per OP Unit — basic 82,794 116,550 Effect of dilutive securities: Distributions on convertible preference units/interests — 1,692 Numerator for net income per OP Unit — diluted $ 82,794 $ 118,242 Denominator: Denominator for net income per OP Unit — basic 294,106 289,659 Effect of dilutive securities: Convertible preference units/interests — 4,370 Dilution for OP Units issuable upon assumed exercise/vesting of the Company's share options/restricted shares 3,123 3,155 Denominator for net income per OP Unit — diluted 297,229 297,184 Net income per OP Unit — basic $ 0.28 $ 0.40 Net income per OP Unit — diluted $ 0.28 $ 0.40 13
Quarter Ended March 31, 2002 2001 (Amounts in thousands except per OP
Unit amounts)Net income per OP Unit — basic: Income before net gain on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per OP Unit — basic $ 0.25 $ 0.26 Net gain on sales of unconsolidated entities 0.02 — Net gain on sales of discontinued operations 0.01 0.14 Discontinued operations, net — — Extraordinary items — — Cumulative effect of change in accounting principle — — Net income per OP Unit — basic $ 0.28 $ 0.40 Net income per OP Unit — diluted: Income before net gain on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per OP Unit — diluted $ 0.25 $ 0.26 Net gain on sales of unconsolidated entities 0.02 — Net gain on sales of discontinued operations 0.01 0.14 Discontinued operations, net — — Extraordinary items — — Cumulative effect of change in accounting principle — — Net income per OP Unit — diluted $ 0.28 $ 0.40
Convertible preference units/interests that could be converted into 15,853,687 and 10,831,704 weighted average Common Shares (which would be contributed to the Operating Partnership in exchange for OP Units) for the quarters ended March 31, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings 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 OCTOBERbecause the effects would be anti-dilutive.On October 11, 2001,
THE OPERATING PARTNERSHIP EFFECTED A TWO-FOR-ONE SPLIT OF ITSthe Operating Partnership effected a two-for-one split of its OPUNITS TO UNIT HOLDERS OF RECORD AS OF SEPTEMBERUnits to unitholders of record as of September 21, 2001.ALL PERAll per OPUNIT DATA AND NUMBERS OFUnit data and numbers of OPUNITS HAVE BEEN RETROACTIVELY ADJUSTED TO REFLECT THEUnits have been retroactively adjusted to reflect the OPUNIT SPLIT.Unit split.13. Discontinued Operations
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 adopted the standard effective January 1, 2002, which did not have a material effect on the Operating Partnership's financial condition and results of operations.
Under the provisions of SFAS No. 144, for long-lived assets to be held and used, the Operating Partnership first determines whether any indicators of impairment exist. If indicators exist, the Operating Partnership compares the expected future undiscounted cash flows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recorded for the difference between the estimated fair value and the carrying amount of the asset.
For long-lived assets to be disposed of, an impairment loss is recognized when the estimated fair value of the asset, less the estimated cost to sell, is less than the carrying amount of the asset measured at the time that the Operating Partnership has determined it will sell the asset. Long-lived assets held for disposition are reported at the lower of their carrying amounts or their estimated fair values, less their costs to sell.
Goodwill and investments in unconsolidated entities accounted for under the equity method of accounting are specifically excluded from the scope of SFAS No. 144.
On January 11, 2002, the Operating Partnership disposed of its furniture rental business for $30.0 million and received net proceeds of $28.7 million. No gain/loss on sale was recognized as the net book value at the sale date after giving effect to a previously recorded impairment loss approximated the sales price.
14
The components of discontinued operations for the quarters ended March 31, 2002 and 2001 are outlined below and include the results of operations through the date of each respective sale for the quarter ended March 31, 2002 and a full quarter of operations for the quarter ended March 31, 2001, for the following:
- •
- the sale of the furniture rental business;
- •
- the four properties sold (see Note 5); and
- •
- the three properties held for sale at March 31, 2002.
Quarter Ended March 31, 2002 2001 (Amounts in thousands) REVENUES Rental income $ 666 $ 1,136 Interest and other income 3 — Furniture income 1,365 14,872 Total revenues 2,034 16,008 EXPENSES Property and maintenance 208 301 Real estate taxes and insurance 60 84 Depreciation 181 303 Interest expense incurred, net 5 58 Furniture expenses 1,303 14,829 Amortization of goodwill — 290 Total expenses 1,757 15,865 Discontinued operations, net $ 277 $ 143 14. 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
Propertiesproperties 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
Propertiesproperties in the development and/or earnout stage and the joint venture agreements withtwomultifamily residential real estate developers, the Operating Partnership funded a net total of$109.5$5.6 million during thenine monthsquarter endedSeptember 30, 2001. During the fourth quarter of 2001, theMarch 31, 2002. The Operating Partnership expects to fund approximately$23.5$22.7 million in connection with theseProperties.properties for the remainder of 2002. 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 ofSeptember 30, 2001,March 31, 2002, the Operating Partnership has1920 projects under17development with estimated completion dates ranging from December 31, 2001 throughJune 30,2003. At any time following the completion of construction of any2002 through March 31, 2004.For one development
property,joint venture agreement, the Operating Partnership's joint venturepartners havepartner has the right, at any time following completion of a project, tocausestipulate a value for such project and offer to sell its interest in the project to the Operating Partnership based on such value. If the Operating Partnership chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Operating Partnership's joint venture partner must exercise this right as to all projects within five years after the receipt of the final certificate of occupancy on the last developed property.Under a second development joint venture agreement, the Operating Partnership's joint venture partner has the right, at any time following completion of a project, to require the Operating Partnership to
acquire their respective interestspurchase the joint15
venture partners' interest in
the completed projectsthat project at a mutually agreeable price. If the Operating Partnership and the joint venture partner are unable to agree on a price,appraisalsboth parties willbe obtained by both parties.obtain appraisals. 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 withThe Operating Partnership may elect at that time not to purchase theWellsford Merger,property and instead, authorize the joint venture partner to sell the project at or above the agreed-upon value to an unrelated third party. Five years following the receipt of the final certificate of occupancy on the last developed property, any projects remaining unsold must be purchased by the Operating Partnership at the agreed-upon price.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,March 31, 2002, 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.15. Asset Impairment
For the
nine monthsquarters endedSeptember 30,March 31, 2002 and 2001, the Operating Partnership recorded approximately$8.0$0.3 million and $3.0 million, respectively, 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 theincomestatement of operations in total expenses andincludesinclude the write-down of assets classified as other assets and investments in unconsolidated entities.15. REPORTABLE SEGMENTS16. 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.residents. 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 approximately95.2%98.9% and96.9% of total revenues for the nine months ended September 30, 2001 and 2000, respectively, and approximately 95.8% and 94.3%97.9% of total revenues for the quarters endedSeptember 30,March 31, 2002, and 2001, respectively. The Operating Partnership's rental real estate segment comprises approximately 99.6% and2000,99.4% of total assets at March 31, 2002 and December 31, 2001, 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$309.1 million and$886.9 million for the nine months ended September 30, 2001 and 2000, respectively, and approximately $319.4 million and $294.8$308.1 million for the quarters endedSeptember 30,March 31, 2002 and 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 activitiesare immaterial and do not meet the threshold requirements of a reportable segment as provided for in SFAS No. 131.16. SUBSEQUENT EVENTS17. Subsequent Events
Subsequent to
September 30, 2001March 31, 2002 and throughNovember 7, 2001,April 26, 2002, the Operating Partnership:-
- •
- entered into a joint venture with the U.S. Army with an initial cash equity investment of $10.0 million and assumed management of 3,637 multifamily units at Fort Lewis, Washington;
- •
- acquired one
Propertyproperty consisting of296264 units for approximately$23.7$19.1 million;-- •
- disposed of
five Propertiesfour properties (including one Unconsolidated Property) consisting of636188 units for approximately$22.1$3.5 million;-- •
- repaid
$25.1$65.2 million of mortgagedebt at or prior to maturity on five Properties; and - relinquished $1.1loans;- •
- repaid $125.0 million of
mortgage debt assumed by7.95% fixed rate public notes at maturity; and- •
- funded $1.7 million related to the
purchaser in connection with the dispositiondevelopment, earnout and joint venture agreements.16
Item 2. Management's Discussion and Analysis oftwo Properties. 19ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEWFinancial Condition and Results of OperationsOverview
For further information including definitions for capitalized terms not defined herein, 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,
2000.2001.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
whichthat 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.10-K, particularly those under "Risk Factors".Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Operating Partnership
assumesundertakes no obligation toupdate or correctpublicly release anyofrevisions to these forward-looking statements,in light ofwhich may be made to reflect events or circumstancesarising or existingafter the datehereof. RESULTS OF OPERATIONShereof or to reflect the occurrence of unanticipated events.Results of Operations
The following table summarizes the number of
Propertiesproperties and related units for the year-to-date periods presented:
---------------------------------------------------------------------------------------- PORTFOLIO SUMMARY ---------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------- 2001 2000 -------------------------------------------------------- PROPERTIES UNITS PROPERTIES UNITSBeginning 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
Properties Units Purchase / Sale
Price
$ MillionsAt December 31, 2000 1,104 227,704 Q1 2001 Acquisitions 7 1,721 $ 189.2 Q1 2001 Dispositions (15 ) (2,272 ) $ 117.7 At March 31, 2001 1,096 227,153 Q2/Q3/Q4 2001 Acquisitions 7 1,702 $ 198.9 Q2/Q3/Q4 2001 Dispositions (34 ) (6,535 ) $ 299.2 Q2/Q3/Q4 2001 Completed Developments 7 2,505 Q4 2001 Unit Configuration Changes — (24 ) At December 31, 2001 1,076 224,801 Q1 2002 Acquisitions 1 368 $ 26.0 Q1 2002 Dispositions (5 ) (757 ) $ 43.7 Q1 2002 Completed Developments 1 588 At March 31, 2002 1,073 225,000 The Operating Partnership's acquisition and disposition activity has impacted overall results of operations for the
nine months andquarters endedSeptember 30, 2001March 31, 2002 and2000.2001. Significant changes in revenues and expenses have resulted primarily from the consolidation of previously Unconsolidated Propertiesandin July 2001, theacquisitiondisposition of the Globe furniture rental business on January 11, 2002, as well as the 2001 Acquisitions andthe 2000 Acquired Properties,Completed Development properties, which have been partially offset by the disposition of the20012002 and the20002001 DisposedProperties.properties. Significant change inexpenseexpenses has also resulted from an increase in insurance costs and general and administrative costs and reductions in variable interest rates, impairment charges(furniture rentalandunconsolidated technology investments) recorded in 2001.goodwill amortization. This impact is discussed in greater detail in the following paragraphs.17
Properties that the Operating Partnership owned for all of
boththenine month periodsquarters endedSeptember 30,March 31, 2002 and March 31, 2001and September 30, 2000(the"Nine-Month 2001"First Quarter 2002 Same Store Properties"), which represented184,391 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 185,759197,305 units, also impacted the Operating Partnership's results ofoperations. Both the Nine-Month 2001 Same Store Propertiesoperations andThird-Quarter 2001 Same Store Propertiesare discussed as well in the following paragraphs.COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30,Comparison of the quarter ended March 31, 2002 to the quarter ended March 31, 2001
TO NINE MONTHS ENDED SEPTEMBER 30, 2000For the
nine monthsquarter endedSeptember 30, 2001,March 31, 2002, income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales ofreal estate,unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle decreased by approximately$38.6$4.6 million when compared to thenine monthsquarter endedSeptember 30, 2000. Rental incomeMarch 31, 2001.Revenues from the
Nine-Month 2001First Quarter 2002 Same Store Propertiesincreased by approximately $58.9 million to $1.3 billion, or 4.7%decreased primarily as a result ofhigherlower rental rates chargedtonewtenantsresidents, increased concessions andtenant 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 slightlylowerby 0.05% to slightly higher by as much as 1.0%. These estimated increases are subject tooccupancy at certainrisks and uncertainties including, but not limited to, maintaining an overall average occupancy rate of 93.5% to 94.0%.properties. Property operating expenses from theNine-Month 2001First Quarter 2002 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%.remained relatively stable with increases in real estate taxes and insurance costs offset by decreases in utility costs. Theincrease in "same store"following tables provide comparative revenue, expenses,is primarily attributable to a $4.8 million, or 6.5%, increase in utilitiesnet operating income andan $8.3 million, or 7.3%, increase in payroll costs.weighted average occupancy for the First Quarter 2002 Same Store Properties:
Same Store Net Operating Income ("NOI") $ in Millions — 197,305 Same Store Units Description Revenues Expenses NOI Q1 2002 $ 466.0 $ 168.7 $ 297.3 Q1 2001 $ 467.7 $ 168.9 $ 298.8 Change $ (1.7 ) $ (0.2 ) $ (1.5 ) % Change (0.4 %) (0.1 %) (0.5 %)
Same Store Occupancy Rates Q1 2002 94.24 % Q1 2001 94.60 % Change (0.36 %) For
the remainder of 2001,2002 properties that the Operating Partnershipexpectsacquired prior tomaintain expense growth at no more than 3.75%December 31, 2000 and will continue to4.0% for the Same Store Properties. Forown through December 31, 2002, the Operating Partnershipexpectsanticipates for the year ended December 31, 2002 tomaintain expense growth between a range of 1.5% to 2.25%.see the following operating assumptions:
2002 Operating Assumptions Physical Occupancy 93.0% Revenue Growth (1.25%) to 0.1% Expense Growth 1.0% to 1.5% NOI Growth (2.9%) to (0.7%) Dispositions $500 million Refinancing $200 million at 7.0% These 2002 operating assumptions are based on current expectations and are forward-looking.
Rental income from properties other than
Nine-Month 2001First Quarter 2002 Same Store Properties increased by approximately$43.9$1.4 million primarily as a result of revenue from the Operating Partnership'scorporate housing business2001 Acquired Properties and additional 2001 Partially Owned Properties.Interest and other income decreased by approximately $2.4 million, primarily as a result of lower balances available for investment and related interest rates being earned on the
acquisition of Properties during 2001, including the consolidation of previously Unconsolidated Properties.Operating Partnership's short-term investment accounts.Interest
income-investmentincome—investment in mortgage notesincreaseddecreased byapproximately $0.5$2.7 million as a result ofreceiving deferred interest income on certain ofthemortgage notes. TheOperating Partnershipanticipates noconsolidating these previously Unconsolidated Properties in July 2001. No additional interest income will be recognized onthesethe mortgage notes in futurequartersyears 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. 2118
Property management expenses
includedinclude off-site expenses associated with the self-management of the Operating Partnership'sProperties.properties. These expenses increased by approximately$0.1 million.$0.3 million or less than 2%. 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 Partnershipiswas able toachieve economies of scale by not increasingmaintain off-site management expensesas it acquires additional properties.at a constant level between the two reporting periods.Fee and asset management revenues and fee and asset management expenses
increaseddecreased as a result of the Operating Partnershipcontinuing to manage Properties that were sold and/or contributed to variousmanaging fewer units quarter over quarter for outside owners and unconsolidatedjoint ventureentities. As ofSeptember 30,March 31, 2002 and 2001, the Operating Partnership managed15,94816,539 units and 20,300 units, respectively, 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 in 2002 totaling approximately
$68.0$0.3 million,ofwhich$60.0 millionis related tothe furniture rental business and approximately $8.0 million is related to certain investmentsone investment in technologyentities.entity. SeeFootnote 14Note 15 in the Notes to the Consolidated Financial Statements for further discussion.Interest expense, including amortization of deferred financing costs,
increaseddecreased approximately$2.3 million.$5.1 million primarily due to lower variable interest rates. During the quarter ended March 31, 2002, the Operating Partnership capitalized interest costs of approximately $5.9 million as compared to $6.0 million for the quarter ended March 31, 2001. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities. The effective interest cost on all of the Operating Partnership's indebtedness for thenine monthsquarter endedSeptember 30, 2001March 31, 2002 was6.99%6.51% as compared to7.25%7.07% for thenine monthsquarter endedSeptember 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.March 31, 2001.General and administrative expenses, which include corporate operating expenses, increased approximately
$4.3$4.0 million between theperiodsquarters under comparison. This increase was primarily due to the addition ofcorporate personnelincome taxes from previously Unconsolidated Properties, retirement plan expenses for certain key executives, and higher overall compensation expenses including a currentyearexpense associated withthe vesting ofEQR restricted shares/awards granted to keyemployees in the past three years.employees.Net gain on sales of
real estateunconsolidated entities increased by $5.7 million as a result of the sale of one stabilized development joint venture property (296 units).Net gain on sales of discontinued operations decreased approximately
$64.9$39.0 million between the periods under comparison. This decrease is primarily the result of a fewer number of units sold during thenine 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 thequarter endedSeptember 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 whenMarch 31, 2002 (461 units) as compared to the quarter endedSeptember 30, 2000. Rental income from the Third-QuarterMarch 31, 2001Same 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(5,283 units including interests in properties sold into institutional joint ventures).Liquidity 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. 22For 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 23comparison. 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 RESOURCESCapital ResourcesAs of January 1,
2001,2002, the Operating Partnership had approximately$23.8$51.6 million of cash and cash equivalents andthe amounts$505.0 million availableon the Operating Partnership's linesunder its line of credit,were $399.5 million,of which$53.5$59 million wasrestricted.restricted (not available for borrowings). 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 atSeptember 30, 2001March 31, 2002 was approximately$110.8$249.8 million and the amount available on the Operating Partnership's line of credit was $700.0 million, of which$60.0$57.4 million wasrestricted.restricted (not available for borrowings).Part of the Operating Partnership's
strategy inacquisition and development fundingthe purchase of multifamily properties, funding its Properties in the development and/or earnout stagestrategies and the funding of the Operating Partnership's investment intwovarious joint ventureswith multifamily real estate developersis to utilize itslinesline of credit and to subsequently repay thelinesline of credit from the disposition of Properties,reinvestment ofretained cash flows or the issuance of additional equity or debt securities. Continuing to utilize this strategy during thefirst nine months of 2001,quarter ended March 31, 2002, EQR and/or the Operating Partnership:-
- •
- disposed of
thirty-eight propertiesfive Properties (including one Unconsolidated Property) andtwo vacant parcelsreceived net proceeds ofland$43.0 million;- •
- sold a partial interest in one property and received net proceeds of
$284.8approximately $1.7 million;-- •
- disposed of the furniture rental business on January 11, 2002 and received net proceeds of approximately $28.7 million;
- •
- issued
$300.0$400.0 million of unsecured debt receiving net proceeds of$297.4$394.5 million;- sold and/or contributed eleven properties to a joint venture19
- •
- issued approximately 0.8 million OP Units and received net proceeds of
$167.6$14.0 million;- issued $48.5 million of three new series of Preference Interestsandreceived net proceeds of $47.3 million; -- •
- obtained
$59.3$20.8 million in new mortgagefinancing;financing.All of these proceeds were utilized to:
- •
- repay the line of credit;
- •
- repay mortgage indebtedness on selected properties;
- •
- repay public unsecured debt;
- •
- invest in unconsolidated entities; and
- received a $61.4 million pay-down of second and third mortgages on previously Unconsolidated Properties.- •
- purchase additional properties.
During the
nine monthsquarter endedSeptember 30, 2001,March 31, 2002, the Operating Partnership:- reduced
- •
- repaid $195.0 million on 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; -credit;- •
- repaid
approximately $315.3$26.7 million ofmortgages duemortgage loans;- •
- repaid $100.0 million of 9.375% fixed rate public notes at
or prior to maturity and/or at the disposition date of respective properties; -maturity;- •
- funded a net of
$109.5$5.6 million in accordance with its development and joint venture agreements; and- •
- acquired one property utilizing cash of $26.1 million.
The Operating Partnership's total debt summary and debt maturity schedule, as of March 31, 2002, are as follows:
Debt Summary as of March 31, 2002 $ Millions Weighted
Average RateSecured $ 3,279 6.29 % Unsecured 2,556 6.62 % Total $ 5,835 6.44 % Fixed Rate $ 5,130 6.94 % Floating Rate 705 2.79 % Total $ 5,835 6.44 % Above Totals Include: Total Tax Exempt $ 974 3.82 % Unsecured Revolving Credit Facility $ — —
Debt Maturity Schedule as of March 31, 2002 Year $ Millions % of Total 2002* $ 387 6.6 % 2003 306 5.2 % 2004 596 10.2 % 2005 717 12.3 % 2006 440 7.5 % 2007 277 4.7 % 2008 496 8.5 % 2009 411 7.0 % 2010 262 4.5 % 2011+ 1,943 33.3 % Total $ 5,835 100.0 %
- *
- for the period April 1, 2002 through December 31, 2002.
The Operating Partnership's "Consolidated Debt-to-Total Market Capitalization Ratio" as of March 31, 2002 is presented in the following table. The Operating Partnership calculates the equity component of its market
20
capitalization as the sum of (i) the total outstanding OP Units at the equivalent market value of the closing price of EQR's Common Shares on the New York Stock Exchange; (ii) the "OP Unit Equivalent" of all convertible preference interests/units; and (iii) the liquidation value of all perpetual preference interests/units outstanding.
Capitalization as of March 31, 2002 Total Debt $ 5,835,463,307 OP Units 296,557,258 OP Unit Equivalents (see below) 15,820,176 Total Outstanding at quarter-end 312,377,434 Price of EQR Common Shares at March 28, 2002 $ 28.74 8,977,727,453 Perpetual Preference Units Liquidation Value 565,000,000 Perpetual Preference Interests Liquidation Value 211,500,000 Total Market Capitalization $ 15,589,690,760 Debt/Total Market Capitalization 37.43 %
Convertible Preference Units, Preference Interests
and Junior Preference Units
As of March 31, 2002Units Conversion
RatioOP Unit
EquivalentsPreference Units: Series E 3,329,198 1.1128 3,704,732 Series G 1,264,700 8.5360 10,795,479 Series H 53,311 1.4480 77,194 Preference Interests: Series H 190,000 1.5108 287,052 Series I 270,000 1.4542 392,634 Series J 230,000 1.4108 324,484 Junior Preference Units: Series A 56,616 4.081600 231,084 Series B 7,367 1.020408 7,517 Total Convertible 5,401,192 15,820,176 The Operating Partnership's policy is to maintain a ratio of consolidated debt-to-total market capitalization of less than 50%.
From April 1, 2002 through April 26, 2002, the Operating Partnership:
- •
- entered into a joint venture with the U.S. Army with an initial cash equity investment of $10.0 million and assumed management of 3,637 multifamily units at Fort Lewis, Washington;
- •
- acquired one property consisting of 264 units for approximately $19.1 million;
- •
- disposed of four properties (including one Unconsolidated Property) consisting of 188 units for approximately $3.5 million;
- •
- repaid $65.2 million of mortgage loans;
- •
- repaid $125.0 million of 7.95% fixed rate public notes at maturity;
- •
- funded $1.7 million related to the development, earnout and joint venture agreements; and
- acquired eleven properties and vacant land for $288.9- •
- received $3.0 million
($45.9 million of mortgage assumptions and $243.0 million of cash). 24The 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 - - -----------------------------------------------------------------------Subsequentrelated toSeptember 30, 2001 and through November 7, 2001,theOperating Partnership: - acquiredcollateral on oneProperty 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.joint venture agreement (see Note 8).During the
fourth quarterremainder of2001,2002, the Operating Partnership expects to fund approximately$23.5$22.7 million related tothe development, earnoutwholly owned developments and joint ventureagreements.projects under development. 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 ofSeptember 30, 2001,March 31, 2002, the Operating Partnership has1920 projects under development with estimated completion dates ranging fromDecember 31, 2001 throughJune 30,2003. At any time following the completion of construction of any2002 through March 31, 2004.21
For one development
property,joint venture agreement, the Operating Partnership's joint venturepartners havepartner has the right, at any time following completion of a project, tocausestipulate a value for such project and offer to sell its interest in the project to the Operating Partnership based on such value. If the Operating Partnership chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Operating Partnership's joint venture partner must exercise this right as to all projects within five years after the receipt of the final certificate of occupancy on the last developed property.Under a second development joint venture agreement, the Operating Partnership's joint venture partner has the right, at any time following completion of a project, to require the Operating Partnership to
acquire their respective interestspurchase the joint venture partners' interest inthe completed projectsthat project at a mutually agreeable price. If the Operating Partnership and the joint venture partner are unable to agree on a price,appraisalsboth parties willbe obtained by both parties.obtain appraisals. 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. The Operating Partnership may elect at that time not to purchase the property and instead, authorize the joint venture partner to sell the project at or above the agreed-upon value to an unrelated third party. Five years following the receipt of the final certificate of occupancy on the last developed property, any projects remaining unsold must be purchased by the Operating Partnership at the agreed-upon price.During the
nine monthsquarter endedSeptember 30, 2001,March 31, 2002, the Operating Partnership's total improvements to real estate approximated$108.3$27.7 million. Replacements, whichincludesinclude new carpeting, appliances, mechanical equipment, fixtures, vinyl floors and blinds inside the unit approximated$42.8$10.9 million, or$210$55 per unit. Building improvements for the1999,2000, 2001 and20012002 Acquired Properties approximated$19.4$1.5 million, or$375$89 per unit. Building improvements for all of the Operating Partnership'spre-1999pre-2000 Acquired Properties approximated$38.9$12.5 million or$257$69 per unit. In addition, approximately$3.6$1.1 million was spent onsixone specificassetsasset related to major renovations and repositioning ofthese assets.this asset. Also included in total improvements to real estate was approximately$3.6$1.7 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 estatebudgetedfor the remainder of20012002 are estimatedto be approximately $25.0at $100.0 million.During the
nine monthsquarter endedSeptember 30, 2001,March 31, 2002, 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$3.0 million. Such additions to non-real estate property were funded from net25cash provided by operating activities. Total additions to non-real estate property budgetedfor the remainder of20012002 are estimatedto be approximately $0.9at $3.8 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 2001April 2002 amounted toapproximately $146.4$147.3 million (excluding distributions on Partially Owned Properties), which included certain distributions declaredforin the quarter endedSeptember 30, 2001.March 31, 2002.The Operating Partnership expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing
Propertiesproperties 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 certainProperties.properties. In addition, the Operating Partnership has certainuncollateralized Propertiesunencumbered 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. These unencumbered properties are in excess of the value of unencumbered properties the Operating Partnership must maintain in order to comply with covenants under its unsecured notes and line of credit.The Operating Partnership has a revolving credit facility with
Bank of America Securities LLC and Chase Securities Inc. acting as joint lead arrangers to provide the Operating Partnership withpotential borrowings of up to$700$700.0 million. As ofNovember 9, 2001, $35.0 million wasMay 7, 2002, no amounts were outstanding under this facility.In connection with the Globe acquisition,This credit facility is scheduled to expire in August 2002 and the Operating Partnershipassumedhas begun the process of replacing its line of credit with arevolvingnew line of credit,facility with Fifth Third Bank with potential borrowings of up to $55.0 million. This credit facility was terminatedwhich it believes will be onMay 31, 2001. In connection with the Wellsford Merger, theat least as favorable terms.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,May 1, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.2622
Critical Accounting Policies and Estimates
The Operating Partnership's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Operating Partnership to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosures. The Operating Partnership believes that the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Impairment of Long-Lived Assets, Including Goodwill
The Operating Partnership periodically evaluates its long-lived assets, including its investments in real estate and goodwill, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal factors. Future events could occur which would cause the Operating Partnership to conclude that impairment indicators exist and an impairment loss is warranted.
Depreciation of Investment in Real Estate
The Operating Partnership depreciates the building component of its investment in real estate over a 30-year estimated useful life, building improvements over a 5-year to 10-year estimated useful life and both the furniture, fixtures and equipment and replacements components over a 5-year estimated useful life, all of which are judgmental determinations.
Fair Value of Financial Instruments, Including Derivative Instruments
The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 requires the Operating Partnership to make estimates and judgments that affect the fair value of the instruments. The Operating Partnership, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Operating Partnership bases its estimates on other factors relevant to the financial instruments.
Stock Option Compensation
The Company has chosen to account for its stock option compensation in accordance with APB No. 25, which results in no compensation expense for options issued with an exercise price equal to or exceeding market value of the Company's Common Shares on the date of grant, instead of Statement No. 123, which would result in compensation expense being recorded based on the fair value of the stock option compensation issued. Any Common Shares issued pursuant to EQR's share option plan will result in the Operating Partnership issuing OP Units to EQR on a one-for-one basis.
Adjusted Net Income
For the quarter ended March 31, 2002, Adjusted Net Income ("ANI") available to OP units decreased $10.6 million as compared to the quarter ended March 31, 2001.
23
The following is a reconciliation of net income available to OP Units to ANI available to OP Units for the quarters ended March 31, 2002 and 2001:
Adjusted Net Income
(Amounts in thousands)
(Unaudited)Quarter Ended March 31, 2002 2001 Net income available to OP Units $ 82,794 $ 116,550 Adjustments: Acquisition cost depreciation* 96,158 93,473 Amortization of goodwill — 933 Acquisition cost depreciation accumulated on sold properties (3,944 ) (26,199 ) Extraordinary items 97 (311 ) Cumulative effect of change in accounting principle — 1,270 ANI available to OP Units — basic** $ 175,105 $ 185,716 Depreciation for replacements and capital improvements $ 21,252 $ 19,068
* Acquisition cost depreciation represents depreciation for the initial cost of the property, including buildings and furniture, fixtures and equipment and depreciation on capital improvements identified in the acquisition underwriting and incurred in the first twenty-four months of ownership when the total cost exceeds $2,000 per unit.
** ANI represents net income (loss) (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), including gains or losses from sales of real estate, plus acquisition cost depreciation, plus amortization of goodwill, minus the accumulated acquisition cost depreciation on sold properties, plus/minus extraordinary items and plus the cumulative effect of change in accounting principle. Depreciation associated with replacements and capital improvements is deducted in calculating ANI.
The Operating Partnership believes that ANI is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Operating Partnership to incur and service debt and to make capital expenditures. ANI 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 ANI may differ from the methodology for calculating ANI utilized by other real estate companies and may differ, for example, due to variations among the Operating Partnership's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.
Funds From Operations
For the quarter ended March 31, 2002, Funds From Operations ("FFO") available to OP Units decreased $0.1 million as compared to the quarter ended March 31, 2001.
24
The following is a reconciliation of net income available to OP Units to FFO available to OP Units for the quarters ended March 31, 2002 and 2001:
Funds from Operations
(Amounts in thousands)
(Unaudited)Quarter Ended March 31, 2002 2001 Net income available to OP Units $ 82,794 $ 116,550 Adjustments: Depreciation/amortization 117,410 113,474 Net gain on sales of discontinued operations (2,816 ) (41,778 ) Net gain on sales of unconsolidated entities (5,657 ) — Extraordinary items 97 (311 ) Cumulative effect of change in accounting principle — 1,270 Impairment on technology investments 291 3,003 FFO available to OP Units — basic* $ 192,119 $ 192,208
*FFO represents net income (loss) (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), excluding gains or losses from sales of property, plus depreciation and amortization (after adjustments for Partially Owned Properties and Unconsolidated Properties), plus/minus extraordinary items, and plus the cumulative effect of change in accounting principle and impairment charges. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
The Operating Partnership believes that FFO is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Operating Partnership to incur and service debt and to make capital expenditures. FFO in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Operating Partnership's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Operating Partnership's calculation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies and may differ, for example, due to variations among the Operating Partnership's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.
25
PART II. OTHER INFORMATION
ITEMItem 1.
LEGAL PROCEEDINGSLegal ProceedingsThere 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. ITEM2001.
Item 6.EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: 12 Computation of Ratio of Earnings to Fixed Charges (B)Exhibits and Reports on Form 8-K
- (A)
- Exhibits:
10.1* Compensation agreement between Bruce Duncan and the Company dated March 14, 2002.
10.2*
Compensation agreement between Douglas Crocker II and the Company dated April 10, 2002, but effective as of January 16, 2002.
12
Computation of Ratio of Earnings to Combined Fixed Charges
- *
- Included as an exhibit to Equity Residential Properties Trust's Form 10-Q for the quarterly period ended March 31, 2002 and incorporated herein by reference.
- (B)
- Reports on Form 8-K:
None 27
A report on Form 8-K dated March 14, 2002 containing additional information on the prospectus supplement for the Operating Partnership's $400.0 million unsecured note offering.
26
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
itsbehalf 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
ERP OPERATING LIMITED PARTNERSHIP
BY: EQUITY RESIDENTIAL PROPERTIES TRUST,
ITS GENERAL PARTNER
Date: May 14, 2002
By:
/s/ BRUCE C. STROHM
Bruce C. Strohm
Executive Vice President, General Counsel
and Secretary
Date: May 14, 2002
By:
/s/ MICHAEL J. MCHUGH
Michael J. McHugh
Executive Vice President, Chief Accounting
Officer and TreasurerCONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSItem 2. Management's Discussion and
Secretary Date: NOVEMBER 14, 2001 By: /s/ Michael J. McHugh ----------------- --------------------------- Michael J. McHugh Executive Vice President, Chief Accounting OfficerAnalysis of Financial Condition andTreasurer 28