FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24920
ERP OPERATING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
ILLINOIS 36-3894853
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 474-1300
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-------- ---------
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30,
MARCH 31, DECEMBER 31,
2000 1999 1998
----------------
----------------- ---------------- -----------------
ASSETS
Investment in real estate
Land $ 1,457,2131,547,929 $ 1,326,1481,550,378
Depreciable property 9,951,666 9,519,57910,677,391 10,670,550
Construction in progress 32,563 96,336
================ =================
11,441,442 10,942,06323,507 18,035
----------------- ----------------
12,248,827 12,238,963
Accumulated depreciation (989,049) (718,491)
================ =================(1,166,702) (1,070,487)
----------------- ----------------
Investment in real estate, net of accumulated depreciation 10,452,393 10,223,57211,082,125 11,168,476
Real estate held for disposition 13,457 29,88629,183 12,868
Cash and cash equivalents 62,805 3,96572,510 29,117
Investment in mortgage notes, net 85,295 88,04183,290 84,977
Rents receivable 1,602 4,7581,226 1,731
Deposits - restricted 128,808 69,339165,952 111,270
Escrow deposits - mortgage 73,236 68,72572,210 75,328
Deferred financing costs, net 34,549 27,56933,437 33,968
Other assets 196,965 184,405
================ =================244,233 197,954
----------------- ----------------
TOTAL ASSETS $ 11,049,11011,784,166 $ 10,700,26011,715,689
================= ================ =================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgage notes payable $ 2,456,3493,076,211 $ 2,341,0112,883,583
Notes, net 2,299,197 2,049,516
Lines2,289,982 2,290,285
Line of credit 90,000 290,000- 300,000
Accounts payable and accrued expenses 129,600 100,926104,995 102,955
Accrued interest payable 62,615 46,17662,701 44,257
Rents received in advance and other liabilities 59,795 54,61674,860 74,196
Security deposits 35,715 37,43940,037 39,687
Distributions payable 121,145 18,755125,275 18,813
----------------- ---------------------------------
TOTAL LIABILITIES 5,254,416 4,938,4395,774,061 5,753,776
----------------- ----------------
COMMITMENTS AND CONTINGENCIES
Minority Interests - Partially Owned Properties 1,073 -
----------------- Commitments and contingencies----------------
Partners' capital:
Junior Convertible Preference Units 7,896 4,8337,896
----------------- ---------------- -----------------
Cumulative Convertible Redeemable Preference Interests 106,000 40,000
------------------ ---------------- -----------------
Cumulative Convertible or Redeemable Preference Units 1,335,791 1,410,574
----------------1,307,041 1,310,266
----------------- ----------------
-----------------
General Partner 3,998,440 3,919,8734,186,291 4,194,668
Limited Partners 412,567 426,541401,804 409,083
----------------- ---------------- -----------------
Total General Partner and Limited Partners capital 4,411,007 4,346,4144,588,095 4,603,751
----------------- ---------------- -----------------
TOTAL PARTNERS' CAPITAL 5,794,694 5,761,8216,009,032 5,961,913
----------------- ---------------- -----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 11,049,11011,784,166 $ 10,700,26011,715,689
================= ================ =================
SEE ACCOMPANYING NOTES
2
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER OP UNIT DATA)
(UNAUDITED)
NINE MONTHS ENDED
QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- -------------------------------MARCH 31,
------------------------------
2000 1999
1998 1999 1998
---------------------------------- -------------------------------------------------------------
REVENUES
Rental income $ 1,243,958473,547 $ 901,087 $ 424,780 $ 329,717406,062
Fee and asset management 3,432 4,204 1,018 1,4141,298 1,234
Interest income - investment in mortgage notes 8,502 14,405 2,858 4,1842,762 2,895
Interest and other income 17,655 12,803 6,532 3,934
----------- ----------- ----------- -----------7,803 5,946
------------- ------------
Total revenues 1,273,547 932,499 435,188 339,249
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------485,410 416,137
------------- ------------
EXPENSES
Property and maintenance 300,798 225,053 103,933 86,750113,868 97,047
Real estate taxes and insurance 126,304 88,552 41,789 32,06848,334 42,048
Property management 42,817 38,546 14,844 13,53918,914 14,201
Fee and asset management 2,301 3,344 677 1,0971,066 867
Depreciation 297,505 208,394 100,371 76,484111,886 96,901
Interest:
Expense incurred 241,516 170,143 83,017 64,49295,111 79,197
Amortization of deferred financing costs 2,773 1,962 1,112 6871,341 845
General and administrative 15,736 14,488 5,022 4,655
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------6,698 5,767
------------- ------------
Total expenses 1,029,750 750,482 350,765 279,772
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------397,218 336,873
------------- ------------
Income before gain on disposition of 243,797 182,017 84,423 59,477
properties, net and
extraordinary itemallocation to Minority Interests 88,192 79,264
Gain on disposition of properties, net 64,315 12,717 18,508 1,625
----------- ----------- ----------- -----------
Income before extraordinary item 308,112 194,734 102,931 61,102
Loss on early extinguishment of debt (451)19,998 21,416
Allocation to Minority Interests - Partially Owned
Properties 45 -
-
=========== =========== =========== ===========------------- ------------
Net income $ 307,661108,235 $ 194,734 $ 102,931 $ 61,102
=========== =========== =========== ===========
=========== =========== =========== ===========100,680
============= ============
ALLOCATION OF NET INCOME:
Junior Convertible Preference Units $ 240108 $ -
$ 240 $ -
=========== =========== =========== ======================== ============
Cumulative Convertible Redeemable Preference Interests $ 361,169 $ -
$ 36 $ -
=========== =========== =========== ======================== ============
Cumulative Convertible or Redeemable Preference Units $ 84,84227,111 $ 65,075 $ 27,731 $ 21,691
=========== =========== =========== ===========29,377
============= ============
General Partner $ 200,98972,751 $ 116,819 $ 67,884 $ 34,88164,177
Limited Partners 21,554 12,840 7,040 4,530
----------- ----------- ----------- -----------7,096 7,126
------------- ------------
Net income available to OP Unit holders $ 222,54379,847 $ 129,659 $ 74,924 $ 39,411
=========== =========== =========== ===========71,303
============= ============
Weighted average OP Units outstanding 133,490 106,630 134,993 109,688
=========== =========== =========== ===========140,264 132,165
============== =============
Net income per weighted average OP Unit outstanding- basic $ 1.670.57 $ 1.22 $ 0.56 $ 0.36
=========== =========== =========== ===========0.54
============== =============
Net income per weighted average OP Unit outstanding - assuming dilutiondiluted $ 1.660.57 $ 1.21 $ 0.55 $ 0.36
=========== =========== =========== ===========0.54
============== =============
SEE ACCOMPANYING NOTES
3
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
QUARTER ENDED SEPTEMBER 30,
---------------------------------MARCH 31,
----------------------------------
2000 1999
1998
-------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 307,661108,235 $ 194,734100,680
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Allocation to Minority Interests - Partially Owned Properties (45) -
Depreciation 297,505 208,394111,886 96,901
Amortization of deferred financing costs 2,773 1,9621,341 845
Amortization of discounts and premiums on debt (1,746) (1,505)(576) (608)
Amortization of treasury locks and optionsdeferred settlements on debt 768 1,543
Amortization of discount on investment in mortgage notes - (1,900)interest rate
protection agreements 201 257
Gain on disposition of properties, net (64,315) (12,717)(19,998) (21,416)
Compensation paid with Company Common Shares 1,422 -
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in rents receivable 2,480 (676)723 2,661
(Increase) in deposits - restricted (4,344) (7,033)
Decrease (increase)(2,802) (3,465)
(Increase) decrease in other assets 41,030 (24)(2,025) 4,362
Increase (decrease) in accounts payable and accrued expenses 32,010 29,6261,944 (12,627)
Increase in accrued interest payable 16,439 20,436
Increase16,683 14,509
(Decrease) increase in rents received in advance and other liabilities 7,727 8,334
(Decrease) increase(2,652) 12,687
Increase (decrease) in security deposits (1,735) 8,365
----------- -----------80 (531)
--------------- ---------------
Net cash provided by operating activities 636,253 449,539
----------- -----------214,417 194,255
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate, net (469,585) (945,960)(18,307) (107,058)
Improvements to real estate (93,456) (60,614)(27,193) (24,922)
Additions to non-real estate property (5,922) (7,928)(1,038) (2,450)
Interest capitalized tofor real estate developments (1,157) (1,058)under construction (236) (609)
Proceeds from disposition of real estate, net 197,125 75,97692,241 75,997
Decrease in investment in mortgage notes 2,746 1,842
Increase1,687 1,128
(Increase) decrease in deposits on real estate acquisitions, net (55,201) (7,433)
Increase(51,948) 24,527
Decrease in mortgage deposits (4,750) (19,014)4,596 1,864
Investment in joint ventures, net (46,149) (15,847)
Investment in limited partnerships (26,673) (21,708)
Decrease in mortgage receivables 7,150and other, net (588) -
Proceeds from disposition of Unconsolidated Properties, net 4,400 -
Purchase of management contract rights (779) (285) (119)
Costs related to Mergers (4,598) (4,528)(3,472) (2,612)
Other investing activities (15,075) (18,975)
----------- -----------(772) (355)
--------------- ---------------
Net cash used by(used for) investing activities (469,681) (1,009,519)
----------- -----------(47,558) (50,622)
--------------- ---------------
SEE ACCOMPANYING NOTES
4
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
QUARTER ENDED SEPTEMBER 30,
--------------------------------MARCH 31,
-----------------------------------
2000 1999
1998
-------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan and bond acquisition costs (8,423) (3,428)$ (574) $ (52)
MORTGAGE NOTES PAYABLE:
Proceeds, 188,569net 147,683 -
Lump sum payoffs (54,231) (46,901)
Monthly(12,801) -
Scheduled principal payments (13,041) (8,810)
NOTES, NET:
Proceeds 298,014 550,357
Payoffs (125,000) -(7,509) (4,161)
LINES OF CREDIT:
Proceeds 959,000 445,000
Payments (1,159,000) (370,000)48,000 298,000
Repayments (348,000) (423,000)
Proceeds from settlement of interest rate protection agreements 7,055 -
Capital contributions from General Partner, net 34,215 323,8846,868 17,389
Proceeds from sale of preference units/interests, net 39,00064,350 -
Distributions paid to partners (274,910) (209,638)(28,597) (29,764)
Principal receipts on employee notes, 144 234net 59 47
Principal receipts on pledgedother notes receivable, 7,931net - ----------- -----------4,681
--------------- ---------------
Net cash (used by) provided byfor) financing activities (107,732) 680,698
----------- -----------(123,466) (136,860)
--------------- ---------------
Net increase in cash and cash equivalents 58,840 120,71843,393 6,773
Cash and cash equivalents, beginning of period 29,117 3,965
33,295
----------- -------------------------- ---------------
Cash and cash equivalents, end of period $ 62,80572,510 $ 154,013
=========== ===========10,738
=============== ===============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 226,23478,961 $ 149,707
=========== ===========65,648
=============== ===============
Transfers to real estate held for disposition $ 29,183 $ -
=============== ===============
Net real estate contributed in exchange for OP Units
or Junior Convertible Preference Units $ 636 $ 8,929
=============== ===============
Mortgage loans assumed and/or entered into
through acquisitions of real estate $ 69,885- $ 433,492
=========== ===========
Real estate contributed in exchange for OP Units or
Junior Convertible Preference Units16,903
=============== ===============
Mortgage loans assumed through consolidation of Partially Owned
Properties $ 28,232 $ 164,149
=========== ===========
Transfers to real estate held for disposition $ 13,45765,095 $ -
=========== ===========
Refinancing=============== ===============
Net (assets acquired) liabilities assumed through consolidation of
mortgage notes payable in favor of notes, netPartially Owned Properties $ 75,790792 $ -
=========== ========================== ===============
SEE ACCOMPANYING NOTES
5
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DEFINITION OF SPECIAL TERMS:
Capitalized terms used but not defined in this Quarterly Report on Form 10-Q are
as defined in the Operating Partnership's Annual Report on Form 10-K for the
year ended December 31, 19981999 ("Form 10-K").
1. BUSINESS
ERP Operating Limited Partnership (the "Operating Partnership"), an
Illinois limited partnership, was formed to conduct the multifamily residential
property business of Equity Residential Properties Trust ("EQR"). EQR is a
Maryland real estate investment trust ("REIT") formed on March 31, 1993 and is
the general partner of the Operating Partnership. As used herein, the term
"Company" means EQR, and its subsidiaries, as the survivor of the mergers
between EQR and each of Wellsford Residential Property Trust ("Wellsford") (the
"Wellsford Merger"), Evans Withycombe Residential, Inc. ("EWR") (the "EWR
Merger") and, Merry Land & Investment Company, Inc.Inc ("MRY") (the "MRY Merger") and
Lexford Residential Trust ("LFT") ("the LFT Merger").
The Company conducts
substantially allOperating Partnership is engaged in the acquisition, disposition,
ownership, management and operation of its operations through the Operating Partnership.multifamily properties. As of September 30, 1999,March 31,
2000, the Operating Partnership controlledowned or had interests in a portfolio of 6521,052
multifamily properties containing 223,724 apartment units (individually a
"Property" and collectively the "Properties") consisting of the following:
Number of
Properties Number of Units
---------------------------------- ---------------- -----------------
Wholly Owned Properties 975 212,414
Partially Owned Properties 14 2,995
Unconsolidated Properties 63 8,315
---------------- -----------------
Total Properties 1,052 223,724
================ =================
The "Partially Owned Properties" are controlled and partially owned by
the Operating Partnership but have partners with minority interests (see further
discussion in Notes 3 and 4). The Operating Partnership's interest in six of these Properties
consists solely of ownership of debt collateralized"Unconsolidated Properties" are partially
owned but not controlled by such Properties. Thethe Operating Partnership also has an investmentand consist of investments
in partnership interests andand/or subordinated mortgages collateralized by 21 properties (the "Additional
Properties").mortgages. The Properties are
located in 35 states throughout the United States.
2. BASIS OF PRESENTATION
The balance sheet as of September 30, 1999, theand statements of operations and cash flows as of and
for the nine months and the quarter ended September 30, 1999 and cash
flows for the nine months ended September 30, 1999March 31, 2000 represent the consolidated financial
information of the Operating Partnership and its subsidiaries.
Due to the Operating Partnership's ability to control either through
ownership or by contract a series of management limited partnerships and
companies (collectively, the Management Partnerships,"Management Partnerships" or the "Management
Companies"), the Financing Partnerships, the LLCs, Merry Land DownREIT I LPLLC's, and EQR-Mosaic LLC,certain other entities,
each such entity has been consolidated with the Operating Partnership for
financial reporting purposes. In regard to the Management Corp., Management Corp. II, Evans
Withycombe Management, Inc. and ML Services, Inc.,Companies, the
Operating Partnership does not have legal control; however, these entities are
consolidated for financial reporting purposes, the effects of which are
immaterial. Certain reclassifications have been made to the prior year's
financial statements in order to conform to the current year presentation.
6
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Minority interests represented by EQR's indirect 1% interest in various
Financing Partnerships and LLCs are immaterial and have not been accounted for
in the Consolidated Financial Statements. In addition, certain amounts due from
EQR for its 1% interest in the Financing Partnerships has not been reflected in
the Consolidated Balance Sheets since such amounts are immaterial to the
Consolidated Balance Sheets.
These unaudited Consolidated Financial Statements of the Operating
Partnership have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the Financial Statements and Notes thereto included in the Operating
Partnership's Annual Report on Form 10-K. The following Notes to Consolidated
Financial Statements highlight significant changes to the notes included in the
Form 10-K and present interim disclosures as required by the SEC. The
accompanying Consolidated Financial Statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
6
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PARTNERS' CAPITAL
The following table presents the changes in the Operating Partnership's
issued and outstanding OP Units for the quarter ended March 31, 2000:
- --------------------------------------------------------------------- --------------
2000
- --------------------------------------------------------------------- --------------
Operating Partnership's OP Units outstanding at January 1, 139,934,540
ISSUED TO GENERAL PARTNER:
Conversion of Series E Preferred Shares 778
Conversion of Series H Preferred Shares 60,958
Conversion of Series J Preferred Shares 26,628
Employee Share Purchase Plan 79,720
Dividend Reinvestment - DRIP Plan 193
Share Purchase - DRIP Plan 4,303
Exercise of options 52,779
Restricted share grants, net 235,002
ISSUED TO LIMITED PARTNERS:
Issuance through acquisitions 17,088
- --------------------------------------------------------------------- --------------
OPERATING PARTNERSHIP'S OP UNITS OUTSTANDING AT MARCH 31, 140,411,989
- --------------------------------------------------------------------- --------------
As of March 31, 2000, OP Units outstanding totaled 140,411,989. The
limited partners of the Operating Partnership as of September 30,
1999March 31, 2000 include
various individuals and entities that contributed their properties to the
Operating Partnership in exchange for a partnership interest (the "Limited
Partners") and are represented by 12,754,82012,465,971 OP Units. As of September
30, 1999, the CompanyMarch 31, 2000, EQR
(as the general partner) had an approximate 90.56%91.12% interest and the Limited
Partners had an approximate 9.44% interest.
In connection with certain acquisitions during the nine months ended
September 30, 1999,8.88% interest in the Operating Partnership issued 28,795 Series A Junior
Convertible Preference Units and 7,367 Series B Junior Convertible Preference
Units having a combined value of approximately $3.0 million. These units
ultimately will convert to OP Units in accordance with the respective term sheet
agreements.
On September 27, 1999, the Operating Partnership, through a
wholly-owned entity called EQR-Mosaic LLC, issued 800,000 units of 8.00%
Series A Cumulative Convertible Redeemable Preference Interests with an
equity value of $40 million. EQR-Mosaic LLC received $39 million in net
proceeds from this transaction. The liquidation value of these units is $50
per unit. The 800,000 units are convertible into 800,000 shares of 8.00%
Series M Cumulative Redeemable Preferred Shares of Beneficial Interest of the
Company. The Series M Preferred Shares are not convertible into EQR Common
Shares. Dividends for the Series A Preference Interests or the Series M
Preferred Shares are payable quarterly at the rate of $4.00 per unit per year.Partnership.
In regards to the General Partner,general partner, net proceeds from the various equity
offerings of the CompanyEQR have been contributed by the CompanyEQR 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,general
partner, the net offering proceeds are allocated between the CompanyEQR (as General Partner)general
partner) and the Limited Partners (to the extent represented by OP Units) to
account for the change in their respective percentage ownership of the equity of
the Operating Partnership.
7
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Guilford portfolio properties (see further discussion in Note 4)
are controlled and partially owned by the Operating Partnership but have
partners with minority interests. Effective January 1, 2000, the Operating
Partnership has included 100% of the financial condition and results of
operations of these Partially Owned Properties in the Consolidated Financial
Statements due to an increased ownership interest in these properties. The
equity interests of the unaffiliated partners are reflected as Minority
Interests Partially Owned Properties.
The following table presents the Operating Partnership's issued and
outstanding Junior Convertible Preference Units as of March 31, 2000 and
December 31, 1999:
- ---------------------------------------------------------------------------------------------------
AMOUNTS ARE IN THOUSANDS
-------------------------
ANNUAL
DIVIDEND
RATE PER MARCH DECEMBER
UNIT (1) 31, 2000 31, 1999
- ---------------------------------------------------------------------------------------------------
Junior Convertible Preference Units:
Series A Junior Convertible Preference Units; liquidation $5.469344 $ 7,712 $ 7,712
value $100 per unit; 77,123 units issued and outstanding
at March 31, 2000 and December 31, 1999
Series B Junior Convertible Preference Units; liquidation $2.000000 184 184
value $25 per unit; 7,367 units issued and outstanding
at March 31, 2000 and December 31, 1999
- ---------------------------------------------------------------------------------------------------
$ 7,896 $ 7,896
- ---------------------------------------------------------------------------------------------------
(1) Dividends on both series of Junior Convertible Preference Units
are payable quarterly at various pay dates.
On March 3, 2000, Lexford Properties, L.P., a subsidiary of the
Operating Partnership, issued 1.1 million units of 8.50% Series B Cumulative
Convertible Redeemable Preference Units (also known as "Preference Interests")
with an equity value of $55.0 million. Lexford Properties, L.P. received $53.6
million in net proceeds from this transaction. The liquidation value of these
units is $50 per unit. The 1.1 million units are exchangeable into 1.1 million
shares of 8.50% Series M-1 Cumulative Redeemable Preferred Shares of Beneficial
Interest of the Company. The Series M-1 Preferred Shares are not convertible
into EQR Common Shares. Dividends for the Series B Preference Interests or the
Series M-1 Preferred Shares are payable quarterly at the rate of $4.25 per
unit/share per year.
On March 23, 2000, Lexford Properties, L.P., a subsidiary of the
Operating Partnership, issued 220,000 units of 8.50% Series C Cumulative
Convertible Redeemable Preference Units (also known as "Preference Interests")
with an equity value of $11.0 million. Lexford Properties, L.P. received $10.7
million in net proceeds from this transaction. The liquidation value of these
units is $50 per unit. The 220,000 units are exchangeable into 220,000 shares of
8.50% Series M-1 Cumulative Redeemable Preferred Shares of Beneficial Interest
of the Company. The Series M-1 Preferred Shares are not convertible into EQR
Common Shares. Dividends for the Series C Preference Interests or the Series M-1
Preferred Shares are payable quarterly at the rate of $4.25 per unit/share per
year.
The following table presents Lexford Properties, L.P.'s issued and
outstanding Preference Interests as of March 31, 2000 and December 31, 1999:
8
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------
AMOUNTS ARE IN THOUSANDS
-------------------------
ANNUAL
DIVIDEND
RATE PER MARCH 31, DECEMBER 31,
UNIT (1) 2000 1999
- -------------------------------------------------------------------------------------------------------
Preference Interests:
8.00% Series A Cumulative Convertible Redeemable Preference $4.00 $ 40,000 $ 40,000
Interests; liquidation value $50 per unit; 800,000 units
issued and outstanding at March 31, 2000 and December 31, 1999
8.50% Series B Cumulative Convertible Redeemable Preference $4.25 55,000 -
Units; liquidation value $50 per unit; 1,100,000 units issued
and outstanding at March 31, 2000
8.50% Series C Cumulative Convertible Redeemable Preference $4.25 11,000 -
Units; liquidation value $50 per unit; 220,000 units issued
and outstanding at March 31, 2000
- -------------------------------------------------------------------------------------------------------
$106,000 $ 40,000
- -------------------------------------------------------------------------------------------------------
(1) Dividends on all series of Preference Interests are payable quarterly at
various pay dates.
The following table presents the Operating Partnership's issued and
outstanding Cumulative Convertible or Redeemable Preference Units as of March
31, 2000 and December 31, 1999:
9
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
AMOUNTS ARE IN THOUSANDS
-------------------------
ANNUAL
DIVIDEND
RATE PER MARCH DECEMBER
UNIT (1) 31, 2000 31, 1999
- ------------------------------------------------------------------------------------------------------------
Cumulative Convertible or Redeemable Preference Units:
9 3/8% Series A Cumulative Redeemable Preference Units; liquidation $2.34375 $ 153,000 $ 153,000
value $25 per unit; 6,120,000 units issued and outstanding at
March 31, 2000 and December 31, 1999
9 1/8% Series B Cumulative Redeemable Preference Units; liquidation $22.81252 125,000 125,000
value $250 per unit; 500,000 units issued and outstanding at
March 31, 2000 and December 31, 1999
9 1/8% Series C Cumulative Redeemable Preference Units; liquidation $22.81252 115,000 115,000
value $250 per unit; 460,000 units issued and outstanding
at March 31, 2000 and December 31, 1999
8.60% Series D Cumulative Redeemable Preference Units; liquidation $21.50000 175,000 175,000
value $250 per unit; 700,000 units issued and outstanding
at March 31, 2000 and December 31, 1999
Series E Cumulative Convertible Preference Units; liquidation value $1.75000 99,815 99,850
$25 per unit; 3,992,600 and 3,994,000 units issued and
outstanding at March 31, 2000 and December 31,1999,
respectively
9.65% Series F Cumulative Redeemable Preference Units; liquidation $2.41250 57,500 57,500
value $25 per unit; 2,300,000 units issued and outstanding at
March 31, 2000 and December 31, 1999
7 1/4% Series G Convertible Cumulative Preference Units; liquidation $18.12500 316,250 316,250
value $250 per unit; 1,265,000 units issued and outstanding at
March 31, 2000 and December 31, 1999
7.00% Series H Cumulative Convertible Preference Units; liquidation $1.75000 1,581 3,686
value $25 per unit; 63,252 and 147,452 units issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively
8.60% Series J Cumulative Convertible Preference Units; liquidation $2.15000 113,895 114,980
value $25 per unit; 4,555,800 and 4,599,200 units issued and
outstanding at March 31, 2000 and December 31, 1999,
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
March 31, 2000 and December 31, 1999
7.625% Series L Cumulative Redeemable Preference Units; liquidation $1.90625 100,000 100,000
value $25 per unit; 4,000,000 units issued and outstanding at
March 31, 2000 and December 31, 1999
- ------------------------------------------------------------------------------------------------------------
$1,307,041 $1,310,266
- ------------------------------------------------------------------------------------------------------------
(1) Dividends on all series of preference units are payable quarterly at
various pay dates. Dividend rates listed for Series B, C, D and G are
preference unit rates and the equivalent depositary unit annual dividend
rates are $2.281252, $2.281252, $2.15 and $1.8125, respectively.
10
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table presents the Operating Partnership's allocation
of net income among Cumulative Convertible or Redeemable Preference Units for
the nine months and quarters ended September 30,March 31, 2000 and 1999 and September 30, 1998
(amounts are in thousands)(AMOUNTS ARE IN THOUSANDS):
NINE MONTHS ENDED
QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------MARCH 31,
-------------------------------
2000 1999
1998 1999 1998
----------------------- ----------------------------------------------------------
ALLOCATION OF NET INCOME:
9 3/8% Series A Cumulative Redeemable
Preference Units $10,758 $10,758 $ 3,586 $ 3,586
9 1/8% Series B Cumulative Redeemable
Preference Units 8,555 8,555 2,852 2,8512,852
9 1/8% Series C Cumulative Redeemable
Preference Units 7,870 7,870 2,623 2,623
8.60% Series D Cumulative Redeemable
Preference Units 11,288 11,288 3,7623,763 3,763
Series E Cumulative Convertible Preference Units 5,245 5,246 1,7481,747 1,749
9.65% Series F Cumulative Redeemable
Preference Units 4,161 4,162 1,387 1,387
7 1/4% Series G Convertible Cumulative
Preference Units 17,196 17,196 5,732 5,732
7.00% Series H Cumulative Convertible
Preference Units 196 - 65 -28 66
8.82% Series I Cumulative Convertible
Preference Units 3,329 - 562 -2,205
8.60% Series J Cumulative Convertible
Preference Units 7,416 -2,451 2,472 -
8.29% Series K Cumulative Redeemable
Preference Units 3,109 - 1,036 -1,036
7.625% Series L Cumulative Redeemable
Preference Units 5,719 - 1,906 -
------- ------- ------- -------1,906
============= ==============
Cumulative Convertible or Redeemable Preference Units $84,842 $65,075 $27,731 $21,691
======= ======= ======= =======$ 27,111 $ 29,377
============= ==============
8
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table summarizes the distributions paid to OP Unit and
Junior Convertible Preference Unit holders and the Company as holder of the
various Preference Units listed below related to the nine months ended September
30, 1999:
FOR THE
QUARTER OR RECORD DATE
DIVIDEND AMOUNT DATE PAID PERIOD ENDED
- --------------------------------------------------- ----------------- ------------- --------------- ------------
Series A Cumulative Redeemable Preference Units $0.5859380 04/15/99 03/31/99 03/19/99
$0.5859370 07/15/99 06/30/99 06/18/99
$0.5859380 10/15/99 09/30/99 09/20/99
Series B Cumulative Redeemable Preference Units $0.5703130 04/15/99 03/31/99 03/19/99
$0.5703120 07/15/99 06/30/99 06/18/99
$0.5703130 10/15/99 09/30/99 09/20/99
Series C Cumulative Redeemable Preference Units $0.5703130 04/15/99 03/31/99 03/19/99
$0.5703120 07/15/99 06/30/99 06/18/99
$0.5703130 10/15/99 09/30/99 09/20/99
Series D Cumulative Redeemable Preference Units $0.5375000 04/15/99 03/31/99 03/19/99
$0.5375000 07/15/99 06/30/99 06/18/99
$0.5375000 10/15/99 09/30/99 09/20/99
Series E Cumulative Convertible Preference Units $0.4375000 04/01/99 03/31/99 03/19/99
$0.4375000 07/01/99 06/30/99 06/18/99
$0.4375000 10/01/99 09/30/99 09/20/99
Series F Cumulative Redeemable Preference Units $0.6031250 04/15/99 03/31/99 03/19/99
$0.6031250 07/15/99 06/30/99 06/18/99
$0.6031250 10/15/99 09/30/99 09/20/99
Series G Convertible Cumulative Preference Units $0.4531250 04/15/99 03/31/99 03/19/99
$0.4531250 07/15/99 06/30/99 06/18/99
$0.4531250 10/15/99 09/30/99 09/20/99
Series H Cumulative Convertible Preference Units $0.4375000 03/31/99 03/31/99 03/19/99
$0.4375000 06/30/99 06/30/99 06/18/99
$0.4375000 09/30/99 09/30/99 09/20/99
Series I Cumulative Convertible Preference Units $0.5512500 03/31/99 03/31/99 03/19/99
$0.5512500 06/30/99 06/30/99 06/18/99
$0.5512500 09/30/99 09/30/99 09/20/99
Series J Cumulative Convertible Preference Units $0.5375000 03/31/99 03/31/99 03/19/99
$0.5375000 06/30/99 06/30/99 06/18/99
$0.5375000 09/30/99 09/30/99 09/20/99
Series K Cumulative Redeemable Preference Units $1.0362500 03/31/99 03/31/99 03/19/99
$1.0362500 06/30/99 06/30/99 06/18/99
$1.0362500 09/30/99 09/30/99 09/20/99
Series L Cumulative Redeemable Preference Units $0.4765625 03/31/99 03/31/99 03/19/99
$0.4765625 06/30/99 06/30/99 06/18/99
$0.4765625 09/30/99 09/30/99 09/20/99
OP Units $0.71 04/09/99 03/31/99 03/19/99
$0.71 07/09/99 06/30/99 06/18/99
$0.76 10/08/99 09/30/99 09/20/99
Series A Junior Convertible Preference
Unit holders $1.367336 04/09/99 03/31/99 03/19/99
$1.367336 07/09/99 06/30/99 06/18/99
$1.367336 10/08/99 09/30/99 09/20/99
Series B Junior Convertible Preference Unit holders $0.50 10/08/99 09/30/99 09/20/99
9
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Minority Interests represented by the Company's indirect 1% interest in
various Financing Partnerships and LLCs are immaterial and have not been
accounted for in the Consolidated Financial Statements. In addition, certain
amounts due from the Company for its 1% interest in the Financing Partnerships
has not been reflected in the Consolidated Balance Sheets since such amounts are
immaterial to the Consolidated Balance Sheets.
4. REAL ESTATE ACQUISITIONS
During the nine months ended September 30, 1999,On January 19, 2000, the Operating Partnership acquired the nineteen Properties listed below, of which eleven were
acquired from unaffiliated third parties and eight were acquiredWindmont
Apartments, a 178-unit multifamily property located in Atlanta, GA, from an
affiliated party. In connection with certain of the acquisitions listed below,
the Operating Partnership assumed and/or entered into new mortgage indebtednessunaffiliated party for a purchase price of approximately $196.3 million, issued OP Units having a value of approximately
$25.2 million and issued Junior Convertible Preference Units having a value of
approximately $3.0$10.3 million. The cash
portion of these transactionsthis transaction was partially funded
primarily from proceeds received from the
disposition of certain Propertiesone property and the remainder from working capital.
- --------------- ------------------------------- --------------------------------- ------------- ------------------
PURCHASE PRICE
DATE NUMBER (IN THOUSANDS)
ACQUIRED PROPERTY LOCATION OF UNITS
- --------------- ------------------------------- --------------------------------- ------------- ------------------
01/22/99 Fireside Park Rockville, MD 236 $14,279
01/22/99 Mill Pond Glen Burnie, MD 240 11,745
01/28/99 Aspen Crossing Wheaton, MD 192 11,386
02/24/99 Copper Canyon Highlands Ranch, CO 222 16,200
03/04/99 Siena Terrace Lake Forest, CA 356 33,000
03/23/99 Greenbriar Kirkwood, MO 218 12,033
03/24/99 Fairland Gardens Silver Spring, MD 400 25,897
04/28/99 Pine Tree Club Wildwood, MO 150 7,988
04/28/99 Westbrooke Village I & II Manchester, MO 252 12,642
04/29/99 Brookside Frederick, MD 228 10,809
04/30/99 Skyview Rancho Santa Margarita, CA 260 21,800
05/20/99 Lincoln at Defoors Atlanta, GA 300 25,500
05/25/99 Rosecliff Quincy, MA 156 18,263
05/25/99 Canyon Crest Santa Clarita, CA 158 12,500
06/29/99 Greentree I Glen Burnie, MD 350 15,625
06/29/99 Greentree III Glen Burnie, MD 207 9,598
07/14/99 Brookdale Village Naperville, IL 252 19,600
07/29/99 Longfellow Place* Boston, MA 710 237,000
07/30/99 Greentree II Glen Burnie, MD 239 10,907
- --------------- ------------------------------- --------------------------------- ------------- ------------------
5,126 $526,772
- --------------- ------------------------------- --------------------------------- ------------- ------------------
* ThisOn January 19, 2000, the Operating Partnership paid $1.25 million to
acquire an additional ownership interest in LFT's Guilford portfolio (14
properties containing 2,995 units located in four states). The transaction was
effective on January 1, 2000. Prior to January 1, 2000, the Operating
Partnership accounted for this portfolio under the equity method of accounting.
As a result of this additional ownership acquisition, also included approximately 264,000 square feet of officethe Operating Partnership
acquired a controlling interest, and retail space and two parking garages.as such, now consolidates these properties
for financial reporting purposes. The Operating Partnership recorded additional
investments in real estate totaling $69.4 million in connection with this
transaction.
5. REAL ESTATE DISPOSITIONS
During the nine monthsquarter ended September 30, 1999,March 31, 2000, the Operating Partnership
disposed of the twenty-one Propertiesnine properties listed below to unaffiliated
third parties. The
Operating Partnership recognized a net gain for financial reporting purposes of
approximately $64.3$20 million.
1011
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
- --------------- --------------------------------- ----------------------- -------------- -----------------
-------------------------------------------------------------------------------------------------------
DISPOSITION
DATE NUMBER PRICE
DATE DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS)
- --------------- --------------------------------- ----------------------- -------------- ------------------------------------------------------------------------------------------------------------------------
01/06/99 Fox Run Little Rock, AR 337 $10,623
01/06/99 Greenwood Forest Little Rock, AR 239 7,533
01/06/99 Walnut Ridge Little Rock, AR 252 7,943
01/06/99 Williamsburg Little Rock, AR 211 6,651
01/27/99 The Hawthorne Phoenix, AZ 276 20,500
03/02/99 The Atrium Durham, NC 208 10,750
03/24/99 Greenbriar Kirkwood, MO 218 12,525
05/06/99 Sandstone04/00 Lakeridge at Bear Creek Euless, TXthe Moors Miami, FL 175 $10,000
02/09/00 Sonnet Cove I & II Lexington, KY 331 12,300
02/25/00 Yuma Court Colorado Springs, CO 40 2,075
05/12/99 La Costa Brava/Cedar Cove Jacksonville, FL 464 17,650
05/18/99 Lands End Pacifica , CA 260 30,100
07/01/99 The Willows Knoxville, TN 250 11,950
07/26/99 Tivoli Lakes Club Deerfield2,350
02/25/00 Indigo Plantation Daytona Beach, FL 278 17,000
07/29/99304 14,200
02/25/00 The Seasons Boise, ID 120 6,026
08/19/99 Kingswood Manor San Antonio, TX 129 3,800
08/19/99 Hampton Green San Antonio, TX 293 8,000
08/19/99 Trails End San Antonio, TX 308 9,100
08/19/99 Waterford San Antonio, TX 133 4,500
09/Oaks of Lakebridge Ormond Beach, FL 170 7,800
03/23/99 Southbank Mesa, AZ 113 4,550
09/00 Tanglewood Lake Oswego, OR 158 10,750
03/30/99 Governor's Place Augusta,00 Preston Lake Tucker, GA 190 5,500
09/30/99 Maxwell House Augusta, GA 216 3,500
- --------------- --------------------------------- ----------------------- -------------- -----------------
4,535 $200,276
- --------------- --------------------------------- ----------------------- -------------- -----------------320 17,325
03/31/00 Cypress Cove Melbourne, FL 326 18,800
-------------------------------------------------------------------------------------------------------
1,824 $93,525
-------------------------------------------------------------------------------------------------------
In addition, during the quarter ended March 31, 2000, the Operating
Partnership sold its entire interest in two Unconsolidated Properties containing
338 units for approximately $4.4 million.
6. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE
As of September 30, 1999,March 31, 2000, in addition to the PropertiesProperty that werewas subsequently
acquired as discussed in Note 14 of the Notes to Consolidated Financial
Statements, the Operating Partnership entered into ana separate agreement to
acquire one multifamily property containing 288332 units from an unaffiliated
third
party. The expectedOperating Partnership expects a purchase price isof approximately $15.5$33.5
million.
As of September 30, 1999,March 31, 2000, in addition to the Properties that were
subsequently disposed of as discussed in Note 14 of the Notes to Consolidated
Financial Statements, the Operating Partnership entered into separate agreements
to dispose of sixteenthirteen multifamily properties containing 4,9924,141 units to
unaffiliated third parties. The expectedOperating Partnership expects a combined disposition
price isof approximately $253.6$207.4 million.
The closings of these pending transactions are subject to certain
contingencies and conditions; therefore, there can be no assurance that these
transactions will be consummated or that the final terms thereof will not differ
in material respects from those summarized in the preceding paragraph.
7. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE OP UNIT
The following tables set forth the computation of net income per
weighted average OP Unit outstanding and net income per weighted average OP Unit
outstanding - assuming dilution.
11
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------------------------- -------------------------------
(Amounts in thousands except per OP Unit amounts)
NUMERATOR:
Income before gain on disposition of properties, net,
extraordinary item and allocation of income to
Junior Convertible Preference Units, Cumulative
Convertible Redeemable Preference Interests and
Cumulative Convertible or Redeemable Preference Units $ 243,797 $ 182,017 $ 84,423 $ 59,477
Income allocated to Junior Convertible Preference Units (240) - (240) -
Income allocated to Cumulative Convertible Redeemable
Preference Interests (36) (36)
Income allocated to Cumulative Convertible or Redeemable
Preference Units (84,842) (65,075) (27,731) (21,691)
--------- --------- --------- ---------
Income before gain on disposition of properties, net
and extraordinary item 158,679 116,942 56,416 37,786
Gain on disposition of properties, net 64,315 12,717 18,508 1,625
Loss on early extinguishment of debt (451) - - -
--------- --------- --------- ---------
Numerator for net income per weighted average
OP Unit outstanding 222,543 129,659 74,924 39,411
Effect of dilutive securities - - - -
--------- --------- --------- ---------
Numerator for net income per weighted average
OP Unit outstanding - assuming dilution $ 222,543 $ 129,659 $ 74,924 $ 39,411
========= ========= ========= =========
DENOMINATOR:
Denominator for net income per weighted average OP
Unit outstanding 133,490 106,630 134,993 109,688
Effect of dilutive securities:
OP Units issuable upon exercise of the Company's
share options 714 922 660 628
--------- --------- --------- ---------
Denominator for net income per weighted average
OP Unit outstanding - assuming dilution 134,204 107,552 135,653 110,316
========= ========= ========= =========
Net income per weighted average OP Unit outstanding $ 1.67 $ 1.22 $ 0.56 $ 0.36
========= ========= ========= =========
Net income per weighted average OP Unit outstanding -
assuming dilution $ 1.66 $ 1.21 $ 0.55 $ 0.36
========= ========= ========= =========
12
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
1999 1998 1999 1998
----------------------------- ------------------------------
(Amounts in thousands except per OP Unit amounts)
NET INCOME PER WEIGHTED AVERAGE OP UNIT OUTSTANDING:
Income before gain on disposition of properties, net and
extraordinary item per weighted average OP $1.19 $1.10 $0.42 $0.34
Unit outstanding
Gain on disposition of properties, net 0.48 0.12 0.14 0.02
Loss on early extinguishment of debt - - - -
-------------- ------------- -------------- -------------
Net income per weighted average OP Unit outstanding $1.67 $1.22 $0.56 $0.36
============== ============= ============== =============
NET INCOME PER WEIGHTED AVERAGE OP UNIT OUTSTANDING - ASSUMING DILUTION:
Income before gain on disposition of properties, net and
extraordinary item per weighted average OP Unit
outstanding - assuming dilution $1.18 $1.09 $0.42 $0.34
Gain on disposition of properties, net 0.48 0.12 0.13 0.02
Loss on early extinguishment of debt - - - -
-------------- ------------- -------------- -------------
Net income per weighted average OP Unit
outstanding - assuming dilution $1.66 $1.21 $0.55 $0.36
============== ============= ============== =============
CONVERTIBLE PREFERENCE UNITS AND JUNIOR CONVERTIBLE PREFERENCE UNITS THAT COULD
BE CONVERTED INTO 12,357,124 AND 7,623,525 WEIGHTED COMMON SHARES (WHICH WOULD
BE CONTRIBUTED TO THE OPERATING PARTNERSHIP IN EXCHANGE FOR OP UNITS) FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998, RESPECTIVELY, AND 11,365,744 AND
7,623,326 WEIGHTED COMMON SHARES FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND
1998, RESPECTIVELY, WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF
DILUTED EARNINGS PER OP UNIT BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE.
13
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. MORTGAGE NOTES PAYABLE
On June 1, 1999, the Operating Partnership refinanced the debt on four
existing properties with a net increase in mortgage indebtedness of
approximately $18.0 million.
On July 29, 1999, the Operating Partnership obtained new mortgage
financing on eleven previously unencumbered properties in the amount of $126.5
million.
On August 31, 1999, the Operating Partnership refinanced the debt
totaling $120.8 million on ten existing properties. In addition, five previously
unencumbered properties cross-collateralize each of the new mortgage notes.
During the nine months ended September 30, 1999, the Operating
Partnership repaid the outstanding mortgage balances on two Properties in the
aggregate amount of $9.3 million. In connection with the above transactions, the
Operating Partnership incurred prepayment penalties of $0.5 million, which have
been classified as losses on early extinguishment of debt.
As of September 30, 1999, the Operating Partnership had outstanding
mortgage indebtedness of approximately $2.5 billion encumbering 234 of the
Properties. The carrying value of such Properties (net of accumulated
depreciation of $376 million) was approximately $4.0 billion. The mortgage notes
payables are generally due in monthly installments of principal and interest. In
connection with the Properties acquired during the nine months ended September
30, 1999, the Operating Partnership assumed the outstanding mortgage balances on
eight Properties in the aggregate amount of $69.9 million.
As of September 30, 1999, scheduled maturities for the Operating
Partnership's outstanding mortgage indebtedness are at various dates through
October 1, 2030. During the nine months ended September 30, 1999, the effective
interest cost calculated for all of the Operating Partnership's debt was 7.00%.
9. NOTES
On May 15, 1999, the Operating Partnership repaid the 1999 Notes.
On June 17, 1999, the Operating Partnership refinanced the bond
indebtedness collateralized by four existing properties. The bond indebtedness
on all four properties totaling $75.8 million is now unsecured.
In June 1999, the Operating Partnership issued $300 million of
redeemable unsecured fixed rate notes (the "June 2004 Notes") in connection with
the Debt Shelf Registration in a public debt offering (the "Seventh Public Debt
Offering"). The June 2004 Notes were issued at a discount, which is being
amortized over the life of the June 2004 Notes on a straight-line basis. The
June 2004 Notes are due June 23, 2004. The annual interest rate on the June 2004
Notes is 7.10%, which is payable semiannually in arrears on December 23 and June
23, commencing
14
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
December 23, 1999. The Operating Partnership received net proceeds of
approximately $298 million in connection with this issuance.
As of September 30, 1999, the Operating Partnership had outstanding
unsecured notes of approximately $2.3 billion, net of a $4.8 million discount
and including a $7.6 million premium.
10. LINES OF CREDIT
On August 12, 1999 the Operating Partnership obtained a new three year
$700 million unsecured revolving credit facility, with Bank of America
Securities LLC and Chase Securities Inc. acting as joint lead arrangers,
maturing August 11, 2002. The new line of credit replaced the Operating
Partnership's $500 million unsecured revolving credit facility, as well as the
$120 million unsecured revolving credit facility, which the Operating
Partnership assumed in the MRY Merger. The prior existing revolving credit
facilities were repaid in full and terminated upon the closing of the new
facility. As of September 30, 1999, $90 million was outstanding under this new
facility, bearing interest at a weighted average rate of 5.86%.
11. DEPOSITS - RESTRICTED
Deposits-restricted as of September 30, 1999March 31, 2000 primarily included the
following:
- a deposit in the amount of $25 million held in a third party
escrow account to provide collateral for third party
construction financing in connection with two separate joint
venture agreements. Also,agreements;
- approximately $78.5$96.3 million was held in third party escrow
accounts, representing proceeds received in connection with
the Operating Partnership's disposition of thirteennine properties and
earnest money deposits made for onefour additional acquisition. In addition,acquisitions;
- a good faith deposit in the amount of $4.5 million held in a
third party escrow account for a mortgage financing
transaction that closed during the quarter. These funds were
refunded in April 2000;
- approximately $25.3$34 million was for tenant security, utility
deposits, and other deposits for certain of the Operating
Partnership's Properties; and
- approximately $6.1 million of other deposits.
12
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. MORTGAGE NOTES PAYABLE
As of March 31, 2000, the Operating Partnership had outstanding
mortgage indebtedness of approximately $3.1 billion encumbering 567 of the
Properties. The carrying value of such Properties (net of accumulated
depreciation of $486.5 million) was approximately $4.9 billion. The mortgage
notes payables are generally due in monthly installments of principal and
interest.
During the quarter ended March 31, 2000 the Operating Partnership:
- recorded additional third-party mortgage debt totaling $65.1
million in connection with the consolidation of the Guilford
portfolio on January 1, 2000 (see Note 4);
- repaid the outstanding mortgage balances on three Properties
in the aggregate amount of $12.8 million;
- obtained new mortgage financing on eleven previously
unencumbered properties in the amount of $148.3 million on
March 20, 2000; and
- settled on a $100 million forward starting swap and received
$7.1 million. This amount is being amortized over the life of
the financing for the eleven previously unencumbered
Properties that occurred in March 2000.
As of March 31, 2000, scheduled maturities for the Operating
Partnership's outstanding mortgage indebtedness are at various dates through
October 1, 2033. The interest rate range on the Operating Partnership's mortgage
debt was 3.15% to 10.13% at March 31, 2000. During the quarter ended March 31,
2000, the weighted average interest rate on the Operating Partnership's mortgage
debt was 6.77%.
9. NOTES
The following tables summarize the Operating Partnership's unsecured
note balances and certain interest rate and maturity date information as of and
for the quarter ended March 31, 2000:
Weighted
March 31, 2000 Net Principal Average Maturity Date
(AMOUNTS ARE IN THOUSANDS) Balance Interest Rate Ranges Interest Rate Ranges
- ------------------------------------------------------------------------------------------------------------------
Fixed Rate Public Notes $ 2,062,438 6.150% - 9.375% 7.07% 2000 - 2026
Floating Rate Public Notes 99,764 (1) 7.00% 2003
Fixed Rate Tax-Exempt Bonds 127,780 4.750% - 5.200% 5.11% 2024 - 2029
----------------
Totals $ 2,289,982
===============
(1) As of March 31, 2000, floating rate public notes consisted of one
note. The interest rate on this note was LIBOR (reset quarterly)
plus a spread equal to 0.75% at March 31, 2000 (reset annually in
August).
As of March 31, 2000, the Operating Partnership had outstanding
unsecured notes of approximately $2.3 billion net of a $4.3 million discount and
including a $6.5 million premium.
As of March 31, 2000, the remaining unamortized balance of deferred
settlement receipts and payments from treasury locks and interest rate
protection agreements was $9.3 million and $3.3 million, respectively.
13
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. 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 with potential borrowings of up to $700
million. As of March 31, 2000 no amounts were outstanding under this facility
and $51.3 million was restricted on the line of credit. During the quarter ended
March 31, 2000, the weighted average interest rate on the Operating
Partnership's line of credit was 6.56%.
11. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE OP UNIT
The following tables set forth the computation of net income per OP
Unit - basic and net income per OP Unit - diluted.
14
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
QUARTER ENDED MARCH 31,
----------------------------------
2000 1999
----------------------------------
(Amounts in thousands except per
OP Unit amounts)
NUMERATOR:
Income before gain on disposition of properties, net
and allocation to Minority Interests and $ 88,192 $ 79,264
preference unit/interest distributions
Allocation to Minority Interests - Partially Owned Properties 45 -
Allocation to Junior Convertible Preference Units (108) -
Allocation to Cumulative Convertible Redeemable
Preference Interests (1,169) -
Allocation to Redeemable Preference Units (27,111) (29,377)
----------------------------------
Income before gain on disposition of properties, net 59,849 49,887
Gain on disposition of properties, net 19,998 21,416
----------------------------------
Numerator for net income per OP Unit - basic 79,847 71,303
Effect of dilutive securities - -
----------------------------------
Numerator for net income per OP Unit - diluted $ 79,847 $ 71,303
==================================
DENOMINATOR:
Denominator for net income per OP Unit - basic 140,264 132,165
Effect of dilutive securities:
Dilution for OP Units issuable upon assumed exercise
of the Company's stock options 422 568
----------------------------------
Denominator for net income per OP Unit - diluted 140,686 132,733
==================================
Net income per OP Unit - basic $ 0.57 $ 0.54
==================================
Net income per OP Unit - diluted $ 0.57 $ 0.54
==================================
15
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
QUARTER ENDED MARCH 31,
-----------------------------------
2000 1999
-----------------------------------
(Amounts in thousands except per
OP Unit amounts)
NET INCOME PER OP UNIT - BASIC:
Income before gain on disposition of properties, net
per OP Unit - basic $ 0.43 $ 0.38
Gain on disposition of properties, net 0.14 0.16
-----------------------------------
Net income per OP Unit - basic $ 0.57 $ 0.54
===================================
NET INCOME PER OP UNIT - DILUTED:
Income before gain on disposition of properties, net
per OP Unit - diluted $ 0.43 $ 0.38
Gain on disposition of properties, net 0.14 0.16
-----------------------------------
Net income per OP Unit - diluted $ 0.57 $ 0.54
===================================
CONVERTIBLE PREFERENCE UNITS THAT COULD BE CONVERTED INTO 10,643,083
AND 13,123,062 WEIGHTED COMMON SHARES (WHICH WOULD BE CONTRIBUTED TO
THE OPERATING PARTNERSHIP IN EXCHANGE FOR OP UNITS) FOR THE QUARTERS
ENDED MARCH 31, 2000 AND 1999, RESPECTIVELY, WERE OUTSTANDING BUT WERE
NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS PER OP UNIT BECAUSE
THE EFFECTS WOULD BE ANTI-DILUTIVE.
12. COMMITMENTS AND CONTINGENCIES
The Operating Partnership, as an owner of real estate, is subject to
various environmental laws of Federal and local governments. Compliance by the
Operating Partnership with existing laws has not had a material adverse effect
on the Operating Partnership's financial condition and results of operations.
However, the Operating Partnership cannot predict the impact of new or changed
laws or regulations on its current Properties or on properties that it may
acquire in the future.
The Operating Partnership does not believe there is any other
litigation except as mentioned in the previous paragraph,
threatened against the Operating Partnership other than routine litigation
arising out of the ordinary course of business, some of which is expected to be
covered by liability insurance, none of which is expected to have a material
adverse effect on the consolidated financial statements of the Operating
Partnership.
In regardregards to the funding of Properties in the development and/or
earnout stage and the joint venture agreements with two multifamily residential
real estate developers, during the nine months ended September 30,
1999, the Operating Partnership funded a total of $81$48.4
million and during the fourth quarter ended March 31, 2000. During the remainder of 19992000,
the Operating
Partnership expects to fund approximately
$24.6 million in connection with these agreements. Also in connection with these
1516
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
two agreements,Partnership expects to fund approximately $71.9 million in connection with these
Properties. In connection with one joint venture agreement, the Operating
Partnership has an obligation to fund up to an additional $55$20 million to
guarantee third party construction financing.
In regard to certain other properties that were under development
and/or expansion during the nine months ended September 30, 1999, the Operating
Partnership funded $32.2 million. During the fourth quarter of 1999, the
Operating Partnership expects to fund $19.8 million related to the continued
development and/or expansion of as many as five Properties.
In regard to certain properties that are under earnout/development
agreements, during the nine months ended September 30, 1999, the Operating
Partnership funded the following:
- - $17.2 million relating to the acquisition of Copper Canyon Apartments,
which included a $1.0 million earnout payment to the developer;
- - $24.9 million relating to the acquisition of Skyview Apartments, which
included a $3.1 million earnout payment to the developer; and
- - $18.3 million relating to the acquisition of Rosecliff Apartments.
In connection with the Wellsford Merger, the Operating Partnership
has
provided a $14.8 million credit enhancement with respect to certain tax-exempt
bonds issued to finance certain public improvements at a multifamily development
project. Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real
Properties, Inc. ("WRP Newco"), the Operating Partnership has agreed to purchase
up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per share on a
standby basis over a three-year period ending on May 30, 2000. As of September
30, 1999, no shares of WRP Newco Series A Preferred had been acquired by the
Operating Partnership.
In connection with the MRY Merger, the Operating Partnership extended a
$25 million, one year, non-revolving Senior Debt Agreement to MRYP Spinco. On
June 24, 1999, MRYP Spinco repaid the Senior Note outstanding balance of $18.3
million and there is no further obligation by either partyMarch 31, 2000, this enhancement was still in connection with
this agreement.
Also, in connection with the MRY Merger, the Operating Partnership
entered into six joint venture agreements with MRYP Spinco, the entity spun-off
in the MRY Merger. The Operating Partnership contributed six properties with an
initial value of $52.7 million in return for a 50% ownership interest in each
joint venture. On August 23, 1999, the Operating Partnership sold its interest
in these six properties to MRYP Spinco and there is no further obligation by
either party in connection with these agreements.effect.
13. REPORTABLE SEGMENTS
The following tables set forth the reconciliation of net income and
total assets for the Operating Partnership's reportable segments for the
nine
monthsquarters ended March 31, 2000 and quarter ended September 30, 1999 and net income for the nine months
and quarter ended September 30, 1998.
16
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999
RENTAL REAL CORPORATE/
MARCH 31, 2000 (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------
Rental income $ 1,243,958473,547 $ - $ 1,243,958473,547
Property and maintenance expense (300,798)(113,868) - (300,798)(113,868)
Real estate tax and insurance expense (126,304)(48,334) - (126,304)(48,334)
Property management expense (42,817)(18,914) - (42,817)
------------ ------------ ------------(18,914)
-------------------------------------------------
Net operating income 774,039292,431 - 774,039292,431
Fee and asset management income - 3,432 3,4321,298 1,298
Interest income - investment in mortgage notes - 8,502 8,5022,762 2,762
Interest and other income - 17,655 17,6557,803 7,803
Fee and asset management expense - (2,301) (2,301)(1,066) (1,066)
Depreciation expense on non-real estate assets - (5,125) (5,125)(1,567) (1,567)
Interest expense:
Expense incurred - (241,516) (241,516)(95,111) (95,111)
Amortization of deferred financing costs - (2,773) (2,773)(1,341) (1,341)
General and administrative expense - (15,736) (15,736)(6,698) (6,698)
Allocation of net income to Preference Unit and Interestpreference unit/interest holders - (85,118) (85,118)(28,388) (28,388)
Allocation to Minority Interests - Partially Owned
Properties - 45 45
Adjustment for depreciation expense related
to equity in unconsolidated joint ventureUnconsolidated and Partially Owned
Properties - 710 710
------------ ------------ ------------(238) (238)
------------------------------------------------
Funds from operations available to OP Units 774,039 (322,270) 451,769292,431 (122,501) 169,930
Depreciation expense on real estate assets (292,380)(110,319) - (292,380)(110,319)
Gain on disposition of properties, net 64,31519,998 - 64,315
Loss on early extinguishment of debt - (451) (451)19,998
Adjustment for depreciation expense related
to Unconsolidated and Partially Owned
Properties - (710) (710)
equity in unconsolidated joint ventures
------------ ------------ ------------238 238
-------------------------------------------------
Net income available to OP Unit holders $ 545,974202,110 $(122,263) $ (323,431) $ 222,543
============ ============ ============79,847
=================================================
Investment in real estate, net of
accumulated depreciation as of September 30, 1999 $ 10,434,27411,065,344 $ 18,11916,781 $ 10,452,393
============ ============ ============11,082,125
=================================================
Total assets as of September 30, 1999 $ 10,447,73111,094,527 $ 601,379689,639 $ 11,049,110
============ ============ ============11,784,166
=================================================
17
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
RENTAL REAL CORPORATE/
(AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------
Rental income $ 901,087 $ - $ 901,087
Property and maintenance expense (225,053) - (225,053)
Real estate tax and insurance expense (88,552) - (88,552)
Property management expense (38,546) - (38,546)
-------------------------------------------
Net operating income 548,936 - 548,936
Fee and asset management income - 4,204 4,204
Interest income - investment in mortgage notes - 14,405 14,405
Interest and other income - 12,803 12,803
Fee and asset management expense - (3,344) (3,344)
Depreciation expense on non-real estate assets - (3,993) (3,993)
Interest expense:
Expense incurred - (170,143) (170,143)
Amortization of deferred financing costs - (1,962) (1,962)
General and administrative expense - (14,488) (14,488)
Allocation of net income to Preference Unit and Interest holders - (65,075) (65,075)
Adjustment for amortization of deferred financing costs
related to predecessor business - 35 35
-------------------------------------------
Funds from operations available to OP Units 548,936 (227,558) 321,378
Depreciation expense on real estate assets (204,401) - (204,401)
Gain on disposition of properties, net 12,717 - 12,717
Adjustment for amortization of deferred financing costs
related to predecessor business - (35) (35)
-------------------------------------------
Net income available to OP Unit holders $ 357,252 $(227,593) $ 129,659
===========================================
18
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
QUARTER ENDED SEPTEMBER 30,MARCH 31, 1999 RENTAL REAL CORPORATE/
(AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
----------------------------------------------------------------------------------------------------------------------------
Rental income $ 424,780 $ - $ 424,780
Property and maintenance expense (103,933) - (103,933)
Real estate tax and insurance expense (41,789) - (41,789)
Property management expense (14,844) - (14,844)
------------------------------------------------------
Net operating income 264,214 - 264,214
Fee and asset management income - 1,018 1,018
Interest income - investment in mortgage notes - 2,858 2,858
Interest and other income - 6,532 6,532
Fee and asset management expense - (677) (677)
Depreciation expense on non-real estate assets - (1,702) (1,702)
Interest expense:
Expense incurred - (83,017) (83,017)
Amortization of deferred financing costs - (1,112) (1,112)
General and administrative expense - (5,022) (5,022)
Allocation of net income to Preference Unit and Interest holders - (28,007) (28,007)
Adjustment for depreciation expense related to
equity in unconsolidated joint ventures - 159 159
------------------------------------------------------
Funds from operations available to OP Units 264,214 (108,970) 155,244
Depreciation expense on real estate assets (98,669) - (98,669)
Gain on disposition of properties, net 18,508 - 18,508
Loss on early extinguishment of debt - - -
Adjustment for depreciation expense related to
equity in unconsolidated joint ventures - (159) (159)
------------------------------------------------------
Net income available to OP Unit holders $ 184,053 $ (109,129) $ 74,924
======================================================
Investment in real estate, net of accumulated depreciation
as of September 30, 1999 $ 10,434,274 $ 18,119 $ 10,452,393
======================================================
Total assets as of September 30, 1999 $ 10,447,731 $ 601,379 $ 11,049,110
======================================================
19
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
QUARTER ENDED SEPTEMBER 30, 1998 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Rental income $ 329,717406,062 $ - $ 329,717406,062
Property and maintenance expense (86,750)(97,047) - (86,750)(97,047)
Real estate tax and insurance expense (32,068)(42,048) - (32,068)(42,048)
Property management expense (13,539)(14,201) - (13,539)
---------------------------------------------(14,201)
-----------------------------------------------------
Net operating income 197,360252,766 - 197,360252,766
Fee and asset management income - 1,414 1,4141,234 1,234
Interest income - investment in mortgage notes - 4,184 4,1842,895 2,895
Interest and other income - 3,934 3,9345,946 5,946
Fee and asset management expense - (1,097) (1,097)(867) (867)
Depreciation expense on non-real estate assets - (1,470) (1,470)(1,705) (1,705)
Interest expense:
Expense incurred - (64,492) (64,492)(79,197) (79,197)
Amortization of deferred financing costs - (687) (687)(845) (845)
General and administrative expense - (4,655) (4,655)(5,767) (5,767)
Allocation of net income to Preference Unit and Interestpreference unit/interest holders - (21,691) (21,691)
---------------------------------------------(29,377) (29,377)
Adjustment for depreciation expense related
to Unconsolidated Properties - 276 276
-----------------------------------------------------
Funds from operations available to OP Units 197,360 (84,560) 112,800252,766 (107,407) 145,359
Depreciation expense on real estate assets (75,014)(95,196) - (75,014)(95,196)
Gain on disposition of properties, net 1,62521,416 - 1,625
---------------------------------------------21,416
Adjustment for depreciation expense related
to Unconsolidated Properties - (276) (276)
-----------------------------------------------------
Net income available to OP Unit holders $ 123,971178,986 $(107,683) $ (84,560) $ 39,411
=============================================71,303
=====================================================
(1) The Operating Partnership has one primary reportable business segment,
which consists of investment in rental real estate. The Operating
Partnership's primary business is owning, managing, and operating
multifamily residential properties which includes the generation of rental
and other related income through the leasing of apartment units to tenants.
(2) The Operating Partnership has a segment for corporate level activity
including such items as interest income earned on short-term investments,
interest income earned on investment in mortgage notes, general and
administrative expenses, and interest expense on mortgage notes payable and
unsecured note issuances. In addition, the Operating Partnership has a
segment for third party management activity that is immaterial and does not
meet the threshold requirements of a reportable segment as provided for in
Statement No. 131. Interest expense on debt is not allocated to individual
Properties, even if the Properties secure such debt.
2014. SUBSEQUENT EVENTS
On April 5, 2000, the Operating Partnership acquired Alborada
Apartments, a 442-unit multifamily property located in Fremont, CA, from an
unaffiliated party for a total purchase price of $83.5 million.
18
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
14. SUBSEQUENT EVENTS
On October 1, 1999, the Company merged with Lexford Residential Trust
("Lexford"). The Lexford portfolio of 402 properties consists of 36,609 units in
sixteen states. In the merger, each outstanding common share of beneficial
interest of Lexford was converted into .463 of a Common Share of the Company.
Pursuant to the tax-free merger, the Company issued approximately 3.9 million
new Common Shares with a value of $181 million and assumed approximately $530
million of debt. Upon the contribution of substantially all of Lexford's assets
by the Company to the Operating Partnership, the Operating Partnership issued
approximately 3.9 million OP Units to the Company. As of November 11, 1999,
Lexford's line of credit totaling $26.5 million, a term loan totaling $2.3
million and 22 separate Lexford mortgages totaling $22.8 million have been fully
repaid.
On October 14, 1999,April 20, 2000, the Operating Partnership disposed of Burn BraeVillage of
Sycamore Ridge Apartments, a 282-unit114-unit multifamily property located in Irving, TX, fromMemphis,
TN, to an unaffiliated third party for a total sales price of $10.8$5.2 million.
On October 15, 1999,April 28, 2000, the Operating Partnership disposed of Casa CordobaTowne Centre
III & IV Apartments, a 168-unit220-unit and 342-unit multifamily property and Casa Cortez, a 66-unit
multifamily property, bothproperties, respectively,
located in Tallahassee, FL,Laurel, MD, to an unaffiliated third party for a total sales price of $7.9$29.2
million. Mortgage debt on these two properties totaling $15.2 million ($5.9
million on Towne Centre III and $9.3 million on Towne Centre IV) was fully paid
off using a portion of the proceeds from the disposition of both properties.
On May 1, 2000, Lexford Properties, L.P., a subsidiary of the Operating
Partnership, issued 420,000 units of 8.375% Series D Cumulative Convertible
Redeemable Preference Units (also known as "Preference Interests") with an
equity value of $21.0 million. Lexford Properties, L.P. received $20.5 million
in net proceeds from this transaction. The liquidation value of these units is
$50 per unit. The 420,000 units are exchangeable into 420,000 shares of 8.375%
Series M-2 Cumulative Redeemable Preferred Shares of Beneficial Interest of EQR.
The Series M-2 Preferred Shares are not convertible into EQR Common Shares.
Dividends for the Series D Preference Interests or the Series M-2 Preferred
Shares are payable quarterly at the rate of $4.1875 per unit/share per year.
On May 1, 2000, the Operating Partnership repaid the outstanding
mortgage balances on 51 separate Properties totaling $76.4 million.
On October 15, 1999, the CompanyMay 2, 2000, EQR announced that it will redeem all of its issued and
outstanding Series IJ Cumulative Convertible Preferred Shares of Beneficial
Interest on November 15, 1999.June 2, 2000. At that time, the preferred shares will be redeemed
for such number of Common Sharescommon shares as are issuable at a conversion rate of 0.64170.6136
of a Common Sharecommon share of EQR for each Series IJ Preferred Share. At the same time,
the Series J Preference Units will be redeemed for OP Units.
Pursuant to the terms of a Stock Purchase Agreement with Wellsford
Real Properties, Inc. ("WRP Newco"), the Operating Partnership had agreed to
purchase up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per
share on a standby basis over a three-year period ending on May 30, 2000.
This agreement was terminated on May 5, 2000, and, as such, the Operating
Partnership has no further obligations under this agreement.
On October 27, 1999,May 5, 2000, the Operating Partnership acquired Granada
Highlands Apartments, a 919-unit multifamily property locatedan aggregate
principal amount of $25.0 million of 8.25% preferred securities of WRP
Convertible Trust I, an affiliate of WRP Newco. These preferred securities are
indirectly convertible into WRP Newco common shares under certain circumstances.
During the second quarter of 2000, the Company expects to close on its
acquisition, in Malden, MA,
from an unaffiliated third party for a purchase priceall cash and debt transaction, of Globe Business Resources,
Inc. ("Globe"), one of the nation's largest providers of temporary corporate
housing and furniture rental. Shareholders of Globe will receive $13.00 per
share upon closing, which would approximate $62.4 million in cash based on the
4.8 million Globe shares currently outstanding. In addition, the Operating
Partnership will assume approximately $128
million.
21$66.4 million in debt. The acquisition
does not require approval of the Company's shareholders but does require Globe
shareholder approval.
19
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis of the results of operations and
financial condition of the Operating Partnership should be read in connectionconjunction
with the Consolidated Financial Statements and Notes thereto. Due to the
Operating Partnership's ability to control the Management Partnerships and
Management Companies, the Financing Partnerships, the LLCs, Merry Land DownREIT I LPLLC's, and EQR-Mosaic, LLC,certain other
entities, each entity has been consolidated with the Operating Partnership for
financial reporting purposes. Capitalized terms used herein and not defined are
as defined in the Operating Partnership's Annual Report on Form 10-K for the
year ended December 31, 1998.1999.
Forward-looking statements in this report are intended to be made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The words "believes", "expects" and "anticipates" and other
similar expressions which are predictions of or indicate future events and
trends and which do not relate solely to historical matters identify
forward-looking statements. Such forward-looking statements are subject to risks
and uncertainties, which could cause actual results, performance, or
achievements of the Operating Partnership to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the following:
- the alternative sources of capital to the Operating Partnership are too high;higher
than anticipated;
- occupancy levels and market rents may be adversely affected by local
economic and market conditions, which are beyond the Operating
Partnership's control; and
- additional factors as discussed in Part I of the Annual Report
as filed on Form
10-K.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Operating Partnership undertakes no obligation to publicly release any revisions
to these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
The acquired properties are presented in the Consolidated Financial
Statements of the Operating Partnership from the date of each acquisition or the
closing dates of the Mergers. DuringThe following table summarizes the year ended 1998,number of
Acquired and Disposed Properties and related units for the Operating
Partnership acquired 207 properties containing 55,143 units and four
properties under development representing 1,378 units (the "1998 Acquired
Properties").periods presented:
ACQUISITIONS DISPOSITIONS
---------------------------------- -------------------------------
Number of Number of Number of Number of
YEAR Properties Units Properties Units
--------------------------- ---------------------------------- -------------------------------
1999 366 35,450 36 7,886
2000 1 178 9 1,824
In addition, during the nine monthsquarter ended September 30, 1999,
the Operating Partnership acquired nineteen properties containing 5,126 units
(the "1999 Acquired Properties").
The Operating Partnership also disposed of twenty properties containing
4,719 units during 1998 (the "1998 Disposed Properties"); and twenty-one
properties containing 4,535 units during the nine months ended September 30,
1999 (the "1999 Disposed Properties"). Also,March 31, 2000, the Operating
Partnership sold its entire interest in the six MRY joint venture propertiestwo Unconsolidated Properties containing
1,297 units.
22338 units for approximately $4.4 million.
20
ERP OPERATING LIMITED PARTNERSHIP
PART I1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Operating Partnership's overall results of operations for the
nine
monthsquarters ended September 30,March 31, 2000 and 1999 and 1998 have been significantly impacted by the
Operating Partnership's acquisition and disposition activity. The significant
changes in rental revenues, property and maintenance expenses, real estate taxes
and insurance, depreciation expense, property management and interest expense
can all primarily be attributed to the acquisition of the 1998 Acquired
Properties and the 1999 Acquired
Properties, partially offset by the disposition of the 19981999 Disposed Properties
and the 19992000 Disposed Properties. The impact of the 19981999 Acquired Properties,
the 1999 Acquired Properties, the 1998 Disposed Properties and the 19992000 Disposed Properties isare discussed in
greater detail in the following paragraphs.
Properties that the Operating Partnership owned for all of both nine
month periodsthe quarter
ended September 30,March 31, 2000 and March 31, 1999 and September 30, 1998 (the "Nine-Month
1999"First Quarter 2000 Same Store
Properties"), which represented 125,165 units, impacted the
Operating Partnership's results of operations. Properties that the Operating
Partnership owned for all of both the quarters ended September 30, 1999 and
September 30, 1998 (the "Third-Quarter 1999 Same Store Properties"), which
represented 135,753174,261 units, also impacted the Operating
Partnership's results of operations. Both the Nine-Month 1999 Same Store Propertiesoperations and Third-Quarter
1999 Same Store Properties are discussed as well in the following
paragraphs.
COMPARISON OF NINE MONTHSQUARTER ENDED SEPTEMBER 30,MARCH 31, 2000 TO QUARTER ENDED MARCH 31, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
For the nine monthsquarter ended September 30, 1999,March 31, 2000, income before gain on disposition
of properties, net and extraordinary itemallocation to Minority Interests increased by $61.8$8.9
million when compared to the nine monthsquarter ended September 30, 1998.March 31, 1999. This increase was
primarily due to the acquisition of the 1998 Acquired Properties and the 1999 Acquired Properties as well as
increases in rental revenues net of increases in property and maintenance
expenses, real estate taxes and insurance, property management expenses,
depreciation expense, interest expense and general and administrative expenses.
In regard to the Nine-Month 1999First Quarter 2000 Same Store Properties, total
revenues increased by approximately $27.8$14.4 million to $812.5$398.0 million or 3.54%3.75%
primarily as a result of higher rental rates charged to new tenants and tenant
renewals and an increase in income from billing tenants for their share of
utility costs as well as other ancillary services provided to tenants. Overall,
property operating expenses, which include property and maintenance, real estate
taxes and insurance and an allocation of property management expenses, decreasedincreased
approximately $0.8$2.6 million or 0.28%1.83%. This decreaseincrease was primarily the result of
lowerhigher expenses for leasing and advertising, administrative and maintenance
costs, but was partially offset by higher on-site compensation costs and an increase in real estate
taxes on certain properties.properties, but was partially offset by lower leasing and
advertising, administrative, maintenance, building and insurance costs.
Property management represents expenses associated with the
self-management of the Operating Partnership's Properties. These expenses
increased by approximately $4.3$4.7 million primarily due to the continued expansion
of the Operating Partnership's property management
business.
23
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)business obtained through the LFT Merger.
Fee and asset management revenues and fee and asset management expenses
are associated with the management of properties not owned by the Operating
Partnership that are managed for affiliates. These revenues and expenses
decreased due to the Operating Partnership acquiring certain of these properties
that were formerly only fee-managed.increased slightly.
Interest expense, including amortization of deferred financing costs,
increased by approximately $72.2$16.4 million. This increase was primarily the result
of an $813.5 million increase in the Operating Partnership's average
indebtedness outstanding
which increased by $1.5 billion. However,outstanding. The effective interest cost on all of the Operating
Partnership's effective
interest costs decreased from 7.17%indebtedness for the nine months ended September 30, 1998quarter ending March 31, 2000 was 7.15% as
compared to 7.00%7.04% for the nine monthsquarter ended September 30,March 31, 1999.
21
ERP OPERATING LIMITED PARTNERSHIP
PART 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
General and administrative expenses, which include corporate operating
expenses, increased approximately $1.2$0.9 million between the periods under
comparison. This increase was primarily due to recording higher compensation
expense related to the additionissuance of corporate
personnel.the Company's restricted shares. However, by
gaining certain economies of scale with a much larger operation, these expenses
as a percentage of total revenues were 1.24% for the
nine months ended September 30, 1999 compared to 1.55% of total revenues for the
nine months ended September 30, 1998.
COMPARISON OF QUARTER ENDED SEPTEMBER 30, 1999 TO QUARTER ENDED SEPTEMBER
30, 1998
For the quarter ended September 30, 1999, income before gain on
disposition of properties, net and extraordinary item increased by approximately
$24.9 million when compared to the quarter ended September 30, 1998. This
increase was primarily due to the acquisition of the 1998 Acquired Properties
and the 1999 Acquired Properties as well as increases in rental revenues net of
increases in property and maintenance expenses, real estate taxes and insurance,
property management expenses, depreciation expense, and interest expense.
In regard to the Third-Quarter 1999 Same Store Properties, total
revenues increased by approximately $9.6 million or 3.27% primarily as a result
of higher rental rates charged to new tenants and tenant renewals and an
increase in income from billing tenants for their share of utility costs as well
as other ancillary services provided to tenants. Overall, property operating
expenses, which include property and maintenance, real estate taxes and
insurance and an allocation of property management expenses, decreased
approximately $0.7 million or 0.58%. This decrease was primarily the result of
lower expenses for leasing and advertising, administrative and maintenance
costs, but was partially offset by higher on-site compensation costs and an
increase in real estate taxes on certain properties.
Property management represents expenses associated with the
self-management of the Operating Partnership's Properties. These expenses
increased by approximately $1.3 million primarily due to the continued expansion
of the Operating Partnership's property management business.
24
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Fee and asset management revenues and fee and asset management expenses
are associated with the management of properties not owned by the Operating
Partnership that are managed for affiliates. These revenues and expenses
decreased due to the Operating Partnership acquiring certain of these properties
that were formerly only fee-managed.
Interest expense, including amortization of deferred financing costs,
increased by approximately $18.9 million. This increase was primarily the result
of an increase in the Operating Partnership's average indebtedness outstanding
which increased by $1.1 billion. However, the Operating Partnership's effective
interest costs decreased from 6.99%1.38% for the quarter ended September 30, 1998 to
6.97% for the quarter ended September 30, 1999.
General and administrative expenses, which include corporate operating
expenses, increased approximately $0.4 million between the periods under
comparison. These expenses as a percentage of total revenues were 1.15% for the
quarter ended September 30, 1999March 31,
2000 compared to 1.37%1.39% of total revenues for the quarter ended September 30, 1998.March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of January 1, 1999,2000, the Operating Partnership had approximately
$4$29.1 million of cash and cash equivalents and $330$400 million available on its
linesline of credit, of which $12$65.8 million was restricted. After taking into effect
the various transactions discussed in the following paragraphs, the Operating
Partnership's cash and cash equivalents balance at September 30, 1999March 31, 2000 was
approximately $62.8$72.5 million and the amount available on the Operating
Partnership's line of credit was $610$700 million, of which $41.3$51.3 million was
restricted. The following discussion also explains the changes in net cash
provided by operating activities, net cash used by(used for) investing activities and
net cash provided by (used by)for) financing activities, all of which are presented in the
Operating Partnership's Statements of Cash Flows.
Part of the Operating Partnership's strategy in funding the purchase of
multifamily properties, funding its Properties in the development and/or earnout
stage and the funding of the Operating Partnership's investment in two joint
ventures with multifamily real estate developers is to utilize its linesline of
credit and to subsequently repay the linesline of credit from the disposition of
Properties or the issuance of additional equity or debt securities or the disposition of Properties.securities. Utilizing
this strategy during the first ninethree months of 1999,2000, the Operating Partnership:
- - issued the June 2004 Notes and received net proceeds of $298 million;
- - refinanced four Properties and received additional net proceeds of $18
million;
-
- obtained new mortgage financing on eleven previously unencumbered
properties and received net proceeds of $126.5$147.7 million;
25- disposed of eleven properties (including the sale of the Operating
Partnership's entire interest in two Unconsolidated Properties) and
received net proceeds of $96.6 million;
- issued approximately 0.1 million Common Shares and received net
proceeds of $6.9 million; and
- issued the 8.50% Series B and C Cumulative Convertible Redeemable
Preference Units and received net proceeds of $64.3 million.
All of these proceeds were utilized to either:
- repay the line of credit;
- repay mortgage indebtedness on certain Properties;
- provide funding for properties in the development and/or earnout stage
including the joint venture agreements; and/or
- purchase one additional property.
During the quarter ended March 31, 2000, the Operating Partnership:
- repaid approximately $12.8 million of mortgage indebtedness on three
Properties;
- settled on a $100 million interest rate protection agreement and
received approximately $7.1 million in connection therewith. This
amount is being amortized over the life of the financing
22
ERP OPERATING LIMITED PARTNERSHIP
PART I1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
for the eleven previously unencumbered Properties that occurred in
March 2000;
- - disposed of twenty-seven properties (includingfunded $48.4 million related to the sale of the Operating
Partnership's interest in six MRYdevelopment, earnout and joint
venture properties) and received
net proceeds of $197.1 million;agreements;
- - issued approximately 1.0 million OP Units and received net proceeds of
$34.2 million; and
- - issued the 8.00% Series A Cumulative Convertible Redeemable Preference
Interests and received net proceeds of $39 million.
All of these proceeds were utilized to either:
- - purchase additional properties;
- - provide funding for properties in the development stage; and/or
- - repay the lines of credit and mortgage indebtedness on certain Properties.
With respect to the 1999 Acquired Properties, the Operating Partnership
assumed and/or entered into new mortgage indebtedness of approximately $196.3
million, issued OP Units with a value of $25.2 million and issued Junior
Convertible Preference Units with a value of $3.0 million. The total purchase
price of the 1999 Acquired Properties was approximately $526.8 million.
Subsequent to September 30, 1999, the Company closed its merger with
Lexford and through this merger acquired 402 multifamily properties containing
36,609 units. In the merger, each outstanding common share of beneficial
interest of Lexford was converted into .463 of a Common Share of the Company.
Pursuant to the merger, the Company issued approximately 3.9 million new Common
Shares with a value of $181 million and assumed approximately $530 million of
debt. Upon the contribution of substantially all of Lexford's assets by the
Company to the Operating Partnership, the Operating Partnership issued
approximately 3.9 million OP Units to the Company. As of November 11, 1999,
Lexford's line of credit totaling $26.5 million, a term loan totaling $2.3
million and 22 separate Lexford mortgages totaling $22.8 million have been fully
repaid.
Subsequent to September 30, 1999 and through November 11, 1999, the
Operating Partnership acquiredpurchased one additional property containing 919 unitsProperty for a total purchase price of approximately
$128 million.
Subsequent$10.3 million; and
- funded $1.25 million to September 30, 1999 and through November 11, 1999, the
Operating Partnership disposed of three properties for a total sales price of
$18.7 million. These proceeds will be utilized to purchase additional
properties. The Operating Partnership anticipates that it will continue to sell
certain Properties in the portfolio.
In regard to the joint venture agreements with two multifamily
residential real estate developers during the nine months ended September 30,
1999, the Operating Partnership funded a total of $81 million and during the
remainder of 1999 the Operating Partnership expects to fund approximately $24.6
million in connection with these agreements. Also in connection with these two
agreements, the Operating Partnership has an obligation to fund up toacquire an additional $55 million
26
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
to guarantee third party construction financing.
In regard to certain other properties that were under development
and/or expansion during the nine months ended September 30, 1999, the Operating
Partnership funded $32.2 million. During the remainder of 1999, the Operating
Partnership expects to fund $18.1 million related to the continued development
and/or expansion of as many as five Properties.
In regard to certain properties that were under
earnout/development agreements, during the nine months ended September 30, 1999,
the Operating Partnership funded the following:
- - $17.2 million relating to the acquisition of Copper Canyon Apartments,
which included a $1.0 million earnout payment to the developer;
- - $24.9 million relating to the acquisition of Skyview Apartments, which
included a $3.1 million earnout payment to the developer; and
- - $18.3 million relating to the acquisition of Rosecliff Apartments.
In May 1999, the Operating Partnership repaid its 1999 Notes that
matured on May 15, 1999. The $125 million repayment was funded from borrowings
under the Operating Partnership's lines of credit. In addition, during the first
nine months of 1999, the Operating Partnership repaid $9.3 million of mortgage
indebtedness on two of its Properties. These repayments were funded from the
Operating Partnership's lines of credit and/or from disposition proceeds.
In November 1999, the Operating Partnership expects to repay the 1999-A
Notes that mature on November 24, 1999. The $25 million repayment will be
initially funded from borrowings under the Operating Partnership's line of
credit. In addition, during the remainder of 1999, the Operating Partnership
anticipates repaying approximately $30 million of mortgage notes assumedownership interest in
connection with the Lexford merger. In April 2000, the Operating Partnership
anticipates repaying mortgage indebtedness of approximately $85 million assumed
in connection with the Lexford merger. These repayments will also be primarily
funded from additional borrowings under the line of credit.LFT's Guilford portfolio.
As of September 30, 1999,March 31, 2000, the Operating Partnership had total indebtedness
of approximately $4.8$5.4 billion, which included mortgage indebtedness of $2.5$3.1
billion (including premiums of $3.7$3.1 million), of which $851.6$837.4 million
represented tax-exempt bond indebtedness, and unsecured debt of $2.3 billion
(including net discounts and premiums in the amount of $2.8$2.2 million), of which
$111.4$127.8 million represented tax-exempt bond indebtedness.
Subsequent to September 30, 1999,March 31, 2000 and through May 10, 2000, the Operating
Partnership:
- repaid the outstanding mortgage balances on 53 Properties totaling
approximately $91.6 million;
- disposed of three properties for a total sales price of $34.4 million;
- acquired one property containing 442 units for a total purchase price
of approximately $83.5 million; and
- issued the 8.375% Series D Cumulative Convertible Redeemable Preference
Units and received net proceeds of $20.5 million.
During the remainder of 2000, the Operating Partnership settled on
a $50expects to fund
$71.9 million interest rate protectionrelated to the development, earnout and joint venture agreements.
In connection with one joint venture agreement, and received approximately $1.4the Operating Partnership has an
obligation to fund up to an additional $20 million in connection therewith.to guarantee third party
construction financing.
The Operating Partnership has a policy of capitalizing expenditures
made for new assets, including newly acquired properties and the costs
associated with placing these assets into 27
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
service. Expenditures for improvements
and renovations that significantly enhance the value of existing assets or
substantially extend the useful life of an asset are also capitalized.
Capital spentExpenditures for in-the-unit replacement-type items such as appliances,
draperies, carpeting and floor coverings, mechanical equipment and certain
furniture and fixtures isare also capitalized. Expenditures for ordinary
maintenance and repairs are expensed to operations as incurred. With respect to
acquired properties, the Operating Partnership has determined that it generally
spends $1,000 per unit during its first three years of ownership to fully
improve and enhance these properties to meet the Operating Partnership's
standards. In regard to replacement-type items described above, the Operating
Partnership generally expects to spend $250 per unit on an annual recurring
basis.
During the nine monthsquarter ended September 30, 1999,March 31, 2000, total capital expenditures for
the Operating Partnership approximated $99.4$28.2 million. Of this amount,
approximately $36$5.2 million, or $298$58 per unit, related to capital improvements and
major repairs for the 1997, 1998, 1999 and 19992000 Acquired Properties. Capital
improvements and major repairs for all of the Operating Partnership's pre-EQR
IPO properties and 1993, 1994, 1995, 1996 and 19961997 Acquired Properties
approximated $19.7$6.6 million, or $308$53 per unit. Capital spent for replacement-type
items approximated $37.8$12.1 million, or $204$57 per unit. In addition, approximately
$2.7 million was spent on nine specific assets related to major renovations and
repositioning of these assets. Also included in total capital expenditures was
approximately $5.9$1.0 million expended for non-real estate additions such as
computer software, computer equipment, and furniture
23
ERP OPERATING LIMITED PARTNERSHIP
PART 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
and fixtures and leasehold improvements for the Operating Partnership's property
management offices and its corporate headquarters.headquarters, $0.3 million spent on
commercial/other assets and $0.3 million spent on the Partially Owned
Properties. Such capital expenditures were primarily funded from working capital
reserves and from net cash provided by operating activities. Total capital
expenditures for the remaining portion of 19992000 are estimated to be approximately
$20$90.0 million.
Total distributions paid in October 1999April 2000 amounted to approximately $124.4$128.0
million, which included distributions declared for the quarter ended September 30, 1999.March 31,
2000.
The Operating Partnership expects to meet its short-term liquidity
requirements, including capital expenditures relatingrelated to maintaining its existing
Properties and certain scheduled unsecured note and mortgage note repayments,
generally through its working capital, net cash provided by operating activities
and borrowings under its linesline of credit. The Operating Partnership considers its
cash provided by operating activities to be adequate to meet operating
requirements and payments of distributions. The Operating Partnership also
expects to meet its long-term liquidity requirements, such as scheduled
unsecured note and mortgage debt maturities, reduction of outstanding
amounts under its lines of credit, property acquisitions, financing of
construction and development activities and capital improvements through the
issuance of unsecured notes and equity securities including additional OP Units
as well as from undistributed FFO and proceeds received from the disposition of
certain properties.Properties. In addition, the Operating Partnership has certain
uncollateralized Properties available for additional mortgage borrowings in the
event that the public capital markets are unavailable to the Operating
Partnership or the cost of alternative sources of capital to the Operating
Partnership is too high.
28
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
On August 12, 1999 theThe Operating Partnership obtainedhas a new three year
$700 million unsecured revolving credit facility with Bank of
America Securities LLC and Chase Securities Inc. acting as joint lead arrangers. The new
line of credit replaced the Operating Partnership's $500 million unsecured
revolving credit facility, as well as the $120 million unsecured revolving
credit facility, whicharrangers
to provide the Operating Partnership assumed in the MRY Merger. The
prior existing revolving credit facilities were repaid in full and terminated
upon the closingwith potential borrowings of the new facility. This new credit facility matures in August
2002 and will be usedup to fund property acquisitions, costs for certain
Properties under development and short term liquidity requirements.$700
million. As of November 11, 1999, $147May 10, 2000, $50.0 million was outstanding under this new facility.facility
bearing interest at a weighted average interest rate of 6.42%.
In connection with the Wellsford Merger, the Operating Partnership
provided a $14.8 million credit enhancement with respect to certain tax-exempt
bonds issued to finance certain public improvements at a multifamily development
project. As of May 10, 2000, this enhancement was still in effect.
Pursuant to the terms of a Stock Purchase Agreement with Wellsford
Real Properties, Inc. ("WRP Newco"), the Operating Partnership hashad agreed to
purchase up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per
share on a standby basis over a three-year period ending on May 30, 2000.
As of November
11, 1999, no shares of WRP Newco Series A Preferred had been acquired by the
Operating Partnership.
In conjunction with the MRY Merger in October 1998, in return for the
spin-off of certain assetsThis agreement was terminated on May 5, 2000, and, liabilities to MRYP Spinco,as such, the Operating
Partnership received (from MRYP Spinco) a Subordinated Note receivable totaling
$20 million, a preferred stock investment with an initial value of $5 million
and a $25 million, one year, non-revolving Senior Note receivable with an
initial value of $18.3 million. On June 24, 1999, the Subordinated Note
receivable, the preferred stock investment and the Senior Note receivable were
all repaid by MRYP Spinco for a total amount of $41 million, which represented a
discount of $2.3 million on the combined outstanding balance of these
instruments. There ishas no further obligation by either party in connection
therewith.
Also, in connection with the MRY Merger,obligations under this agreement.
On May 5, 2000, the Operating Partnership enteredacquired an aggregate
principal amount of $25.0 million of 8.25% preferred securities of WRP
Convertible Trust I, an affiliate of WRP Newco. These preferred securities are
indirectly convertible into six joint venture agreements with MRYP Spinco, the entity spun-off
in the MRY Merger. The Operating Partnership contributed six properties with an
initial value of $52.7 million in return for a 50% ownership interest in each
joint venture. On August 23, 1999, the Operating Partnership sold its interest
in these six properties to MRYP Spinco and there is no further obligation by
either party in connection with these agreements.
YEAR 2000 ISSUE
The year 2000 issue ("Year 2000") is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Operating Partnership's computer programs that have time-sensitive
hardware and software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
29WRP Newco common shares under certain circumstances.
24
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
inability to process transactions, collect rents, or engage in similar normal
business activities.
The Operating Partnership believes that it has identified all of its
information technology ("IT") and non-IT systems to assess their Year 2000
readiness. Critical systems include, but are not limited to: accounts receivable
and rent collections, accounts payable and general ledger, human resources and
payroll (both property and corporate levels), cash management, fixed assets, all
IT hardware (such as desktop/laptop computers, data networking equipment,
telephone systems, fax machines, copy machines, etc.) and software, and property
environmental, health safety and security systems (such as elevators and alarm
systems).
The Operating Partnership anticipates that previously scheduled system
upgrades to many of its IT systems will remediate any existing Year 2000
problems. The Operating Partnership has completed testing and is currently in
the process of implementing the remaining Year 2000 IT and non-IT system
projects with completion anticipated during the fourth quarter of 1999. The
Operating Partnership has estimated that the total Year 2000 project cost will
approximate $1 million, of which approximately 90% has been incurred as of
September 30, 1999. During the first nine months of 1999, the primary focus of
the Year 2000 remediation efforts has been on implementing and testing the
previously scheduled upgrades and Year 2000 compliant versions of existing IT
systems as well as continuing the assessment of the Operating Partnership's
exposure regarding non-IT systems at property sites. Of the remaining $100,000
budgeted to complete the Operating Partnership's Year 2000 remediation project,
approximately $50,000 has been allocated to engage Year 2000 consultants to help
the Operating Partnership monitor its IT compliance progress and to complete
final IT testing and implementation. The remaining $50,000 has been allocated to
remediate non-IT systems at various property sites. The estimates are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, and there can be no guarantees that these estimates will be
achieved.
In some cases, various third party vendors have been queried on their
Year 2000 readiness. The Operating Partnership continues to query its
significant suppliers and vendors to determine the extent to which the Operating
Partnership's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 issues. To date, the Operating Partnership is
not aware of any significant suppliers or vendors with a Year 2000 issue that
would materially impact the Operating Partnership's results of operations,
liquidity, or capital resources. However, the Operating Partnership cannot
assure you that the systems of other companies, on which the Operating
Partnership's systems rely, will be timely converted and would not have an
adverse effect on the Operating Partnership's systems.
Management of the Operating Partnership believes it has an effective
program in place to resolve the Year 2000 issue in a timely manner. In addition,
the Operating Partnership is developing its contingency plans for critical
operational areas that might be affected by the Year 2000 issue if compliance by
the Operating Partnership is delayed. Aside from catastrophic failure of utility
companies, banks or governmental agencies, the Operating Partnership believes
that it could continue its normal business operations if compliance by the
Operating Partnership is delayed. The Operating Partnership does not believe
that the Year 2000 issue will materially impact its results of operations,
liquidity or capital resources.
30
ERP OPERATING LIMITED PARTNERSHIP
PART I1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FUNDS FROM OPERATIONS
The Operating Partnership generally considers Funds Fromfrom Operations ("FFO") to be one measure of the performance of real estate companies. The
resolution adopted by the Board of Governors of NAREIT defines FFO asrepresents net income (loss) (computed in
accordance with GAAP)generally accepted accounting principles ("GAAP")), excluding
gains (or losses)or losses from debt
restructuring and sales of property, plus depreciation on real estate assets,and amortization, and
after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures arewill be
calculated to reflect FFOfunds from operations on the same basis. This definition
of FFO is in accordance with the National Association of Real Estate Investment
Trust's ("NAREIT") recommended definition. NAREIT modified this definition
effective January 1, 2000. However, as a result of this modification, no changes
were required to the Operating Partnership's calculation of FFO for either the
current or prior periods presented.
The Operating Partnership believes that FFO is helpful to investors as
a supplemental measure of the operating performance of a real estate Operating
Partnershipcompany
because, along with cash flows from operating activities, financing activities
and investing activities, it provides investors with an understanding of the ability
of the Operating Partnership to incur and service debt and to make capital
expenditures. FFO in and of itself does not represent cash generated from
operating activities in accordance with GAAP and therefore should not be
considered an alternative to net income as an indication of the Operating
Partnership's performance or to net cash flows from operating activities as
determined by GAAP as a measure of liquidity and is not necessarily indicative
of cash available to fund cash needs. The Operating Partnership's calculation of
FFO represents net income, excluding gains on dispositions of properties and
extraordinary items, plus depreciation on real estate assets, amortization of
deferred financing costs related to the Predecessor Business and the allocation
of net income to Cumulative Redeemable Preference Units. The Operating
Partnership's calculation of FFO may differ from the methodology for calculating FFO utilized by other real
estate companies and may differ as a result of differences between the Operating
Partnership's and other real estate company's accounting policies for
replacement type items and, accordingly, may not be comparable to such other
real estate companies.
For the nine months ended September 30, 1999,Net income per OP Unit and FFO increased by $130.4
million, representing a 40.6% increase when comparedper OP Unit are presented giving affect
to the nine months ended
September 30, 1998.Statement of Financial Accounting Standards No. 128 "Earnings Per Share".
For the quarter ended September 30, 1999,March 31, 2000, FFO available to OP Units
increased by $42.4$24.6 million, representing a 37.6% increaseor 16.9%, and FFO per OP Unit - diluted increased by
$0.11, or 10.2%, when compared to the quarter ended September 30, 1998.March 31,
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)1999.
The following is a reconciliation of net income to FFO available to OP
Units for the nine months and quarters ended September 30, 1999March 31, 2000 and 1998
(amounts are in thousands):1999:
25
ERP OPERATING LIMITED PARTNERSHIP
PART 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------
Nine Nine
Months Months Quarter Quarter
Ended Ended Ended Ended
9/30/99 9/30/98 9/30/99 9/30/98
- -------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
MARCH 31,
------------------------------
2000 1999
------------------------------
STATEMENTS OF FUNDS FROM OPERATIONS
Net income $ 307,661108,235 $ 194,734 $ 102,931 $ 61,102100,680
Adjustments:
Depreciation on real estate assets* 293,090 204,401 98,828 75,014
Amortization of deferred financing
costs related to predecessor business - 35 - -
Allocation of net income to
Preference Unit and Interest holders (85,118) (65,075) (28,007) (21,691)
Loss on early extinguishment of debt 451 - - -110,081 95,472
Gain on disposition of properties, net (64,315) (12,717) (18,508) (1,625)
- -------------------------------------------------------------------------------------------------------------------(19,998) (21,416)
------------ -----------
FFO 198,318 174,736
Allocation to preference unit/interest holders (28,388) (29,377)
------------ -----------
FFO available to OP Units $ 451,769169,930 $ 321,378145,359
============ ===========
Weighted average OP Units outstanding - basic 140,264 132,165
============ ===========
FFO per OP Unit - basic $ 155,2441.21 $ 112,8001.10
============ ===========
FFO per OP Unit - -------------------------------------------------------------------------------------------------------------------diluted $ 1.19 $ 1.08
============ ===========
* Includes $710$105,000 and $159$276,000 related to the Operating Partnership's share of
depreciation from unconsolidated joint venturesUnconsolidated Properties for the nine monthsquarters ended March 31,
2000 and 1999, respectively. Excludes $343,000 related to the minority
interests' share of depreciation from Partially Owned Properties for the quarter
ended September 30, 1999, respectively.
32March 31, 2000.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no new or significant developments related to the legal
proceedings that were discussed in Part I, Item III of the Operating
Partnership's Form 10-K for the year ended December 31, 1998.1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
Worksheet
(B) Reports on Form 8-K:
A Report on Form 8-K dated June 30, 1999 and filed on July 14, 1999, disclosing
certain historical financial information of Lexford.
33None.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ERP OPERATING LIMITED PARTNERSHIP
BY: EQUITY RESIDENTIAL PROPERTIES TRUST,
ITS GENERAL PARTNER
Date: NovemberMay 12, 19992000 By: /s/ Bruce C. Strohm
----------------- -------------------------------------------------- ---------------------------------------
Bruce C. Strohm
Executive Vice President, General Counsel
and Secretary
Date: NovemberMay 12, 19992000 By: /s/ Michael J. McHugh
----------------- --------------------------------------------------- ---------------------------------------
Michael J. McHugh
Executive Vice President, Chief Accounting
Officer and Treasurer
28