FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31,JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)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)
MARCH 31,JUNE 30, DECEMBER 31,
1999 1998
----------------- ---------------- ---------------
ASSETS
Investment in real estate
Land $ 1,351,3601,373,812 $ 1,326,148
Depreciable property 9,647,8119,730,434 9,519,579
Construction in progress 83,11159,744 96,336
----------------- ---------------- 11,082,282---------------
11,163,990 10,942,063
Accumulated depreciation (814,330)(902,351) (718,491)
----------------- ---------------- ---------------
Investment in real estate, net of accumulated depreciation 10,267,95210,261,639 10,223,572
Real estate held for disposition -32,844 29,886
Cash and cash equivalents 10,73895,496 3,965
Investment in mortgage notes, net 86,91385,882 88,041
Rents receivable 1,765957 4,758
Deposits - restricted 48,27670,701 69,339
Escrow deposits - mortgage 66,73768,416 68,725
Deferred financing costs, net 26,36328,932 27,569
Other assets 193,217196,942 184,405
----------------- ---------------- ---------------
TOTAL ASSETS $ 10,701,96110,841,809 $ 10,700,260
================= ================ ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgage notes payable $ 2,353,4792,323,247 $ 2,341,011
Notes, net 2,049,1832,299,497 2,049,516
Lines of credit 165,00085,000 290,000
Accounts payable and accrued expenses 88,299107,763 100,926
Accrued interest payable 60,68545,000 46,176
Rents received in advance and other liabilities 64,24057,943 54,616
Security deposits 37,01335,967 37,439
Distributions payable 112,306114,103 18,755
----------------- ---------------- ---------------
TOTAL LIABILITIES 4,930,2055,068,520 4,938,439
----------------- ---------------- ---------------
Commitments and contingencies
Partners' capital:
RedeemableJunior Convertible Preference InterestsUnits 7,712 4,833
4,833
----------------- ---------------- ---------------
Cumulative Convertible or Redeemable Preference Units 1,410,4141,335,884 1,410,574
----------------- ---------------- ---------------
General Partner 3,926,9434,018,089 3,919,873
Limited Partners 429,566411,604 426,541
----------------- ---------------- ---------------
Total General Partner and Limited Partners capital 4,356,5094,429,693 4,346,414
----------------- ---------------- ---------------
TOTAL PARTNERS' CAPITAL 5,771,7565,773,289 5,761,821
----------------- ---------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 10,701,76110,841,809 $ 10,700,260
================= ================ ===============
SEE ACCOMPANYING NOTES
2
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER OP UNIT DATA)
(UNAUDITED)
SIX MONTHS ENDED QUARTER ENDED
MARCH 31,
--------------------------------------JUNE 30, JUNE 30,
---------------------------- ---------------------------
1999 1998 --------------------------------------1999 1998
---------------------------- ---------------------------
REVENUES
Rental income $ 406,062819,178 $ 277,226571,370 $ 413,116 $ 294,144
Fee and asset management 1,234 1,3602,414 2,790 1,180 1,430
Interest income - investment
in mortgage notes 2,895 4,9315,644 10,221 2,749 5,290
Interest and other income 6,046 2,824
--------------- --------------11,323 9,010 5,277 6,186
------------ ------------ ----------- ------------
Total revenues 416,237 286,341
--------------- --------------838,559 593,391 422,322 307,050
------------ ------------ ----------- ------------
EXPENSES
Property and maintenance 97,047 66,713196,865 138,303 99,818 71,391
Real estate taxes and insurance 42,048 27,44384,515 56,484 42,467 29,041
Property management 14,201 11,57927,973 25,007 13,772 13,516
Fee and asset management 867 1,0521,624 2,247 757 1,197
Depreciation 96,901 64,390197,134 131,910 100,233 67,520
Interest:
Expense incurred 79,197 50,254158,499 105,651 79,302 55,397
Amortization of deferred financing costs 845 6241,661 1,275 816 651
General and administrative 5,867 4,880
--------------- --------------10,914 9,974 5,047 5,203
------------ ------------ ----------- ------------
Total expenses 336,973 226,935
--------------- --------------679,185 470,851 342,212 243,916
------------ ------------ ----------- ------------
Income before gain on disposition
of properties, net 79,264 59,406and extraordinary item 159,374 122,540 80,110 63,134
Gain on disposition of properties, net 21,416 1,869
--------------- --------------45,807 11,092 24,391 9,223
------------ ------------ ----------- ------------
Income before extraordinary item 205,181 133,632 104,501 72,357
Loss on early extinguishment of debt (451) - (451) -
------------ ------------ ----------- ------------
Net income $ 100,680204,730 $ 61,275
=============== ==============133,632 $ 104,050 $ 72,357
============ ============ =========== ============
ALLOCATION OF NET INCOME:
RedeemableJunior Convertible Preference InterestsUnits $ 132 $ - $ 66 $ -
=============== ==============
9 3/8% Series A============ ============ =========== ============
Cumulative Convertible or
Redeemable Preference Units $ 3,58657,111 $ 3,586
=============== ==============
9 1/8% Series B Cumulative Redeemable Preference Units43,384 $ 2,85227,734 $ 2,852
=============== ==============
9 1/8% Series C Cumulative Redeemable Preference Units $ 2,623 $ 2,623
=============== ==============
8.60% Series D Cumulative Redeemable Preference Units $ 3,763 $ 3,763
=============== ==============
Series E Cumulative Convertible Preference Units $ 1,749 $ 1,749
=============== ==============
9.65% Series F Cumulative Redeemable Preference Units $ 1,387 $ 1,387
=============== ==============
7 1/4% Series G Convertible Cumulative Preference Units $ 5,732 $ 5,732
=============== ==============
7.00% Series H Cumulative Convertible Preference Units $ 66 $ -
=============== ==============
8.82% Series I Cumulative Convertible Preference Units $ 2,205 $ -
=============== ==============
8.60% Series J Cumulative Convertible Preference Units $ 2,472 $ -
=============== ==============
8.29% Series K Cumulative Redeemable Preference Units $ 1,036 $ -
=============== ==============
7.625% Series L Cumulative Redeemable Preference Units $ 1,906 $ -
=============== ==============21,692
============ ============ =========== ============
General Partner 64,177 35,895$ 133,105 $ 81,938 $ 68,928 $ 46,043
Limited Partners 7,060 3,688
--------------- --------------14,382 8,310 7,322 4,622
------------ ------------ ----------- ------------
Net income available to OP Unit holders $ 71,237147,487 $ 39,583
=============== ==============90,248 $ 76,250 $ 50,665
============ ============ =========== ============
Weighted average OP Units outstanding 132,066 102,948
=============== ==============132,726 105,077 133,378 107,182
============ ============ =========== ============
Net income per weighted average OP Unit
outstanding $ 0.541.11 $ 0.38
=============== ==============0.86 $ 0.57 $ 0.47
============ ============ =========== ============
Net income per weighted average OP Unit
outstanding - assuming dilution $ 0.541.11 $ 0.38
=============== ==============0.85 $ 0.57 $ 0.47
============ ============ =========== ============
SEE ACCOMPANYING NOTES
3
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
QUARTERSIX MONTHS ENDED
MARCH 31,
---------------------------JUNE 30,
----------------------------------
1999 1998
-------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 100,680204,730 $ 61,275133,632
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation 96,901 64,390197,134 131,910
Amortization of deferred financing costs 845 6241,661 1,275
Amortization of discounts and premiums on debt (608) (524)(1,172) (1,026)
Amortization of treasury locks and options on debt 257 398
Interest capitalized to real estate developments (609)513 976
Amortization of discount on investment in mortgage notes - (1,000)
Gain on disposition of properties, net (21,416) (1,869)(45,807) (11,092)
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in rents receivable 2,661 (496)3,428 (1,825)
(Increase) decrease in deposits - restricted (3,465) 357(4,342) (4,537)
Decrease (increase) in other assets 4,362 (2,093)
(Decrease)51,052 3,000
Increase in accounts payable and accrued expenses (12,627) (912)
Increase6,936 11,466
(Decrease) increase in accrued interest payable 14,509 7,466(1,176) 6,904
(Decrease) increase in security deposits (531) 1,518(1,577) 5,607
Increase (decrease) in rents received in advance and
other liabilities 12,687 3,600
------------ ------------6,411 (3,337)
--------------- ---------------
Net cash provided by operating activities 193,646 133,734
------------ ------------417,791 271,953
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate, net (107,058) (142,203)(200,613) (499,239)
Improvements to real estate (24,922) (14,091)(55,783) (32,397)
Additions to non-real estate property (2,450) (2,385)(3,640) (4,445)
Interest capitalized to real estate developments (943) (811)
Proceeds from disposition of real estate, net 75,997 16,665125,150 40,488
Purchase of management contract rights (285) (119)
Decrease (increase) in mortgage deposits 1,864 (450)131 (12,791)
Decrease (increase) in deposits on real estate acquisitions, net 24,527 (3,628)2,961 (7,781)
Decrease in investment in mortgage notes 1,128 5312,159 963
Investment in limited partnerships (15,847) (11,094)(44,314) (13,042)
Costs related to Mergers (2,612) (987)(4,002) (1,851)
Other investing activities (355) 20
------------ ------------603 (10,583)
--------------- ---------------
Net cash (used for)used by investing activities (50,013) (157,741)
------------ ------------(178,576) (541,608)
=============== ===============
SEE ACCOMPANYING NOTES
4
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS)THOUSANDS, EXCEPT PER OP UNIT DATA)
(UNAUDITED)
QUARTERSIX MONTHS ENDED
MARCH 31,
------------------------------------JUNE 30,
-----------------------------------
1999 1998
-----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from General Partner 17,389 348,384
Distributions paid to partners (29,764) (23,547)29,619 413,764
Principal receipts on employee notes 47 15895 196
Principal receipts on pledged notes receivable 4,6817,375 -
Distributions paid to partners (151,437) (115,885)
MORTGAGE NOTES PAYABLE:
Proceeds from lines62,885 -
Payoffs (54,231) (34,141)
Monthly principal payments (8,400) (5,663)
NOTES, NET:
Proceeds 298,014 306,255
Payoffs (125,000) -
LINES OF CREDIT:
Proceeds 689,000 175,000
Payments (894,000) (235,000)
Loss on early extinguishment of credit 298,000debt 451 -
Repayments on lines of credit (423,000) (235,000)
Principal payments on mortgage notes payable (4,161) (20,542)
Loan and bond acquisition costs (52) (1,166)
------------- ------------(2,055) (2,251)
--------------- ---------------
Net cash (used for)by) provided by financing activities (136,860) 68,287
------------- ------------(147,684) 502,275
--------------- ---------------
Net increase in cash and cash equivalents 6,773 44,28091,531 232,620
Cash and cash equivalents, beginning of period 3,965 147,271
------------- ------------33,295
--------------- ---------------
Cash and cash equivalents, end of period $ 10,73895,496 $ 191,551
============= ============265,915
=============== ===============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 65,297160,618 $ 42,788
============= ============98,747
=============== ===============
Mortgage loans assumed and/or entered into through
acquisitions of real estate $ 16,90358,320 $ 93,617
============= ============232,801
=============== ===============
Real estate contributed in exchange for OP Units or
Junior Convertible Preference Interests,Units $ 14,183 $ 16,270
=============== ===============
Transfers to real estate held for disposition $ 32,844 $ -
=============== ===============
Refinancing of mortgage notes payable in favor of notes, net $ 8,92975,790 $ 50
============= ============-
=============== ===============
SEE ACCOMPANYING NOTES
5
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DEFINITION OF SPECIAL TERMS:
Capitalized terms used but not defined in this Quarterly Report on Form 10-Q
are as defined in the Operating Partnership's Annual Report on Form 10-K for
the year ended December 31, 1998 ("Form 10-K").
1. BUSINESS
ERP Operating Limited Partnership (the "Operating Partnership"), an
Illinois limited partnership, was formed to conduct the multifamily property
business of Equity Residential Properties Trust ("EQR"). EQR is a Maryland
real estate investment trust formed on March 31, 1993 and is the general
partner of the Operating Partnership. As used herein, the term "Company"
means EQR, and its subsidiaries, as the survivor of the mergers between EQR
and each of Wellsford Residential Property Trust ("Wellsford") (the
"Wellsford Merger") and, Evans Withycombe Residential, Inc. ("EWR") (the "EWR
Merger") and Merry Land & Investment Company, Inc. ("MRY") (the "MRY
Merger"). The Company conducts substantially all of its operations through
the Operating Partnership. As of March 31,June 30, 1999, the Operating Partnership
controlled a portfolio of 654659 multifamily properties (individually a
"Property" and collectively the "Properties"). The Operating Partnership's
interest in six of thethese Properties at the time of acquisition thereof
consistedconsists solely of ownership of the debt
collateralized by such Properties. The Operating Partnership also has an
investment in partnership interests and subordinated mortgages collateralized
by 21 properties and an investment in six joint ventures consisting of six
properties (collectively, the "Additional Properties").
2. BASIS OF PRESENTATION
The balance sheet and statements of operations and cash flows as of
and for the six months and quarter ended March 31,June 30, 1999 represent the
consolidated financial information of the Operating Partnership and its
subsidiaries.
Due to the Operating Partnership's ability to control, either
through ownership or by contract, the Management Partnerships, the Financing
Partnerships, the LLCs and Merry Land DownREIT I LP, each such entity has
been consolidated with the Operating Partnership for financial reporting
purposes. In regard to Management Corp., Management Corp. II and Evans
Withycombe Management, Inc. and ML Services, Inc., the Operating Partnership does not have legal
control; however, these entities are consolidated for financial reporting
purposes, the effects of which are immaterial. Certain reclassifications have
been made to the prior year's financial statements in order to conform to the
current year presentation.
These unaudited Consolidated Financial Statements of the Operating
Partnership have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction
with the Financial Statements and Notes thereto included in the Operating
Partnership's Annual Report on Form 10-K. The following Notes to Consolidated
Financial Statements highlight significant changes to the notes included in
the Form 10-K and present interim disclosures as required by the SEC. The
accompanying Consolidated Financial Statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation 6
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
of the interim
financial statements. All such adjustments are of a normal and recurring
nature.
6
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PARTNERS' CAPITAL
The limited partners of the Operating Partnership as of March 31,June 30,
1999 include various individuals and entities that contributed their
properties to the Operating Partnership in exchange for a partnership
interest (the "Limited Partners") and are represented by 13,234,97912,644,403 OP Units
(including Junior Convertible Preference Units, which are convertible into
157,382 OP Units) which are exchangeable, subject to certain restrictions, on
a one-for-one basis into the Company's Common Shares (which amount includes Junior
Convertible Preference Units, which are convertible into 98,626 OP Units).Shares. As of March 31,June 30, 1999,
the Company (as the general partner) had an approximate 90.01%90.63% interest and
the Limited Partners had an approximate 9.99%9.37% interest.
In regards to the General Partner, net proceeds from the various equity
offerings of the Company have been contributed by the Company to the Operating
Partnership in return for an increased ownership percentage. Due to the Limited
Partners' ability to convert their interest into an ownership interest in the
General Partner, the net offering proceeds are allocated between the Company (as
General Partner) and the Limited Partners (to the extent represented by OP Units
or Junior Convertible Preference Units) to account for the change in their
respective percentage ownership of the equity of the Operating Partnership.
The following table presents the Operating Partnership's allocation of
net income among Cumulative Convertible or Redeemable Preference Units for the
six months and quarters ended June 30, 1999 and June 30, 1998 (amounts are in
thousands):
SIX MONTHS ENDED QUARTER ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
-------------------------- --------------------------
ALLOCATION OF NET INCOME:
9 3/8% Series A Cumulative Redeemable
Preference Units $ 7,172 $ 7,172 $ 3,586 $ 3,586
9 1/8% Series B Cumulative Redeemable
Preference Units 5,703 5,703 2,852 2,852
9 1/8% Series C Cumulative Redeemable
Preference Units 5,247 5,247 2,623 2,623
8.60% Series D Cumulative Redeemable
Preference Units 7,526 7,526 3,763 3,763
Series E Cumulative Convertible Preference Units 3,497 3,498 1,749 1,749
9.65% Series F Cumulative Redeemable
Preference Units 2,774 2,774 1,387 1,387
7 1/4% Series G Convertible Cumulative
Preference Units 11,464 11,464 5,732 5,732
7.00% Series H Cumulative Convertible
Preference Units 131 - 66 -
8.82% Series I Cumulative Convertible
Preference Units 2,767 - 562 -
8.60% Series J Cumulative Convertible
Preference Units 4,944 - 2,472 -
8.29% Series K Cumulative Redeemable
Preference Units 2,073 - 1,036 -
7.625% Series L Cumulative Redeemable
Preference Units 3,813 - 1,906 -
----------- ----------- ----------- -----------
Cumulative Convertible or
Redeemable Preference Units $ 57,111 $ 43,384 $ 27,734 $ 21,692
=========== =========== =========== ===========
7
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 as of the record date of March 19, 1999
related to the quartersix months ended March 31,June 30,
1999:
7
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
DISTRIBUTIONFOR THE
DIVIDEND QUARTER OR PERIOD RECORD
AMOUNT DATE PAID ENDED DATE
- --------------------------------------- ---------------- ----------------------------------------------------------------------------------------------------------------------
Series A Preferred $0.5859380 04/15/99 03/31/99 03/19/99
$0.5859370 07/15/99 06/30/99 06/18/99
Series B Depositary $0.5703130 04/15/99 03/31/99 03/19/99
$0.5703120 07/15/99 06/30/99 06/18/99
Series C Depositary $0.5703130 04/15/99 03/31/99 03/19/99
$0.5703120 07/15/99 06/30/99 06/18/99
Series D Depositary $0.5375000 04/15/99 03/31/99 03/19/99
$0.5375000 07/15/99 06/30/99 06/18/99
Series E Preferred $0.4375000 04/01/99 03/31/99 03/19/99
$0.4375000 07/01/99 06/30/99 06/18/99
Series F Preferred $0.6031250 04/15/99 03/31/99 03/19/99
$0.6031250 07/15/99 06/30/99 06/18/99
Series G Depositary $0.4531250 04/15/99 03/31/99 03/19/99
$0.4531250 07/15/99 06/30/99 06/18/99
Series H DepositaryPreferred $0.4375000 03/31/99 03/31/99 03/19/99
$0.4375000 06/30/99 06/30/99 06/18/99
Series I DepositaryPreferred $0.5512500 03/31/99 03/31/99 03/19/99
$0.5512500 06/30/99 06/30/99 06/18/99
Series J DepositaryPreferred $0.5375000 03/31/99 03/31/99 03/19/99
$0.5375000 06/30/99 06/30/99 06/18/99
Series K DepositaryPreferred $1.0362500 03/31/99 03/31/99 03/19/99
$1.0362500 06/30/99 06/30/99 06/18/99
Series L DepositaryPreferred $0.4765625 03/31/99 03/31/99 03/19/99
$0.4765625 06/30/99 06/30/99 06/18/99
OP Units $ 0.71 04/09/99 03/31/99 03/19/99
$ 0.71 07/09/99 06/30/99 06/18/99
Junior Convertible Preference Units $ 0.67 04/09/99 03/31/99 03/19/99
$ 0.67 07/09/99 06/30/99 06/18/99
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
8
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 quartersix months ended March 31,June 30, 1999, the Operating Partnership
acquired the sevensixteen Properties listed below, of which threenine were acquired from
unaffiliated third parties and fourseven were acquired from an affiliated party. In
connection with certain of the acquisitions listed below, the Operating
Partnership assumed mortgage indebtedness of approximately $16.9$58.3 million, and issued
OP Units having a value of approximately $8.9$11.3 million and issued Junior
Convertible Preference Units having a value of approximately $2.9 million. The
cash portion of these transactions was funded primarily from proceeds received
from the disposition of certain Properties and working capital.
8
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
=============== ===================== =========================== ============= =================- ----------------------------------------------------------------------------------------------------------------
PURCHASE
DATE NUMBER PRICE
ACQUIRED PROPERTY LOCATION OF UNITS (IN THOUSANDS)
- --------------- --------------------- --------------------------- ------------- ---------------------------------------------------------------------------------------------------------------------------------
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
- --------------- --------------------- --------------------------- ------------- -----------------
1,864 $124,540
=============== ===================== =========================== ============= =================----------------------------------------------------------------------------------------------------------------
3,925 $259,265
- ----------------------------------------------------------------------------------------------------------------
5. REAL ESTATE DISPOSITIONS
During the quartersix months ended March 31,June 30, 1999, the Operating Partnership
disposed of the propertieseleven Properties listed below. Each property was soldbelow to an unaffiliated third party.parties.
The Operating Partnership recognized a net gain for financial reporting purposes
of approximately $21.4 million on the
disposition of these seven Properties.$45.8 million.
9
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
=============== ============================= ======================= =============== =================- ----------------------------------------------------------------------------------------------------------
DISPOSITION
DATE NUMBER PRICE
DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS)
--------------- ----------------------------- ----------------------- --------------- ------------------ ----------------------------------------------------------------------------------------------------------
01/06/99 Fox Run Little Rock, AR 337 $10,623
01/06/99 Greenwood Forest Little Rock, AR 239 7,533
01/06/99 Walnut Ridge Little Rock, AR 252 7,943
01/06/99 Williamsburg Little Rock, AR 211 6,651
01/27/99 The Hawthorne Phoenix, AZ 276 20,500
03/02/99 The Atrium Durham, NC 208 10,750
03/24/99 Greenbriar Kirkwood, MO 218 12,525
--------------- ----------------------------- ----------------------- --------------- -----------------
1,741 $76,525
=============== ============================= ======================= =============== =================05/06/99 Sandstone at Bear Creek Euless, TX 40 2,075
05/12/99 La Costa Brava/Cedar Cove Jacksonville, FL 464 17,650
05/18/99 Lands End Pacifica , CA 260 30,100
- ---------------------------------------------------------------------------------------------------------
2,505 $126,350
- ---------------------------------------------------------------------------------------------------------
6. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE
As of March 31,June 30, 1999, in addition to the propertiesProperties that were
subsequently acquired as discussed in Note 14 of the Notes to Consolidated
Financial Statements, the Operating Partnership entered into separate
agreementsan agreement to
acquire fiveone multifamily propertiesproperty containing 1,254919 units from an unaffiliated third
parties.party. The expected combined purchase price is approximately $75.9 million, which includes the assumption of mortgage
indebtedness of approximately $19.6$128 million.
As of March 31,June 30, 1999, in addition to the PropertyProperties that waswere
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 nineeleven multifamily properties containing 2,6882,522 units to
unaffiliated third parties. The expected combined disposition price is
approximately $148.3$88.4 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 9
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
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.
10
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, QUARTER ENDED MARCH 31,
----------------------------------JUNE 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 RedeemableJunior Convertible Preference InterestsUnits
and Redeemable Preference Units $ 79,264159,374 $ 59,406122,540 $ 80,110 $ 63,134
Income allocated to RedeemableJunior Convertible Preference InterestsUnits (132) - (66) -
Income allocated to Redeemable Preference Units (29,377)(57,111) (43,384) (27,734) (21,692)
-------------------------------------------- --------- --------- ---------
Income before gain on disposition of properties, net
49,821 37,714and extraordinary item 102,131 79,156 52,310 41,442
Gain on disposition of properties, net 21,416 1,869
----------------------------------45,807 11,092 24,391 9,223
Loss on early extinguishment of debt (451) - (451) -
---------- --------- --------- ---------
Numerator for net income per weighted average
OP Unit outstanding 71,237 39,583147,487 90,248 76,250 50,665
Effect of dilutive securities:
CumulativeIncome allocated to Junior Convertible
Preference Units 132 - 66 -
-------------------------------------------- --------- --------- ---------
Numerator for net income per weighted average
OP Unit outstanding - assuming dilution $ 71,237147,619 $ 39,583
==================================90,248 $ 76,316 $ 50,665
========== ========= ========= =========
DENOMINATOR:
Denominator for net income per weighted average OP
Unit outstanding 132,066 102,948132,726 105,077 133,378 107,182
Effect of dilutive securities (1):securities:
OP Units issuable upon exercise of the Company's
share options 568 1,152
----------------------------------742 1,118 908 1,047
Junior Convertible Preference Units 100 - 100 -
---------- --------- --------- ---------
Denominator for net income per weighted average
OP Unit outstanding - assuming dilution 132,634 104,100
==================================133,568 106,195 134,386 108,229
========== ========= ========= =========
Net income per weighted average OP Unit outstanding $ 0.541.11 $ 0.38
==================================0.86 $ 0.57 $ 0.47
========== ========= ========= =========
Net income per weighted average OP Unit outstanding -
assuming dilution $ 0.541.11 $ 0.38
==================================0.85 $ 0.57 $ 0.47
========== ========= ========= =========
1011
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED) (CONTINUED)
SIX MONTHS ENDED QUARTER ENDED
MARCH 31,
----------------------------------JUNE 30, JUNE 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
Unit outstanding $ 0.380.77 $ 0.360.75 $ 0.39 $ 0.39
Gain on disposition of properties, net 0.16 0.02
----------------------------------0.34 0.11 0.18 0.08
Loss on early extinguishment of debt - - - -
-------------- ------------- -------------- -------------
Net income per weighted average OP Unit outstanding $ 0.541.11 $ 0.38
==================================0.86 $ 0.57 $ 0.47
============== ============= ============== =============
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 $ 0.380.77 $ 0.360.75 $ 0.39 $ 0.38
Gain on disposition of properties, net 0.16 0.02
----------------------------------0.34 0.10 0.18 0.09
Loss on early extinguishment of debt - - - -
-------------- ------------- -------------- -------------
Net income per weighted average OP Unit
outstanding - assuming dilution $ 0.541.11 $ 0.38
==================================0.85 $ 0.57 $ 0.47
============== ============= ============== =============
(1) Convertible Preference Units that could be converted into 13,123,062 and
7,623,745 weighted Common Shares (which would be contributed to the
Operating Partnership in exchange forCONVERTIBLE PREFERRED UNITS THAT COULD BE CONVERTED INTO 12,761,757 AND
7,623,664 WEIGHTED COMMON SHARES (WHICH WOULD BE CONTRIBUTED TO THE OPERATING
PARTNERSHIP IN EXCHANGE FOR OP Units) were outstanding for the
quarter ended March 31,UNITS) FOR THE SIX MONTHS ENDED JUNE 30, 1999
andAND 1998, respectively, but were not
included in the computation of diluted earnings perRESPECTIVELY, AND 12,404,422 AND 7,623,507 WEIGHTED COMMON SHARES
FOR THE QUARTER ENDED JUNE 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.
11UNIT
BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE.
12
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED) (CONTINUED)
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. During the quarter ended June 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 March 31,June 30, 1999, the Operating Partnership had outstanding
mortgage indebtedness of approximately $2.4$2.3 billion encumbering 218217 of the
Properties. The carrying value of such Properties (net of accumulated
depreciation of $286.1$312.7 million) was approximately $3.8$3.7 billion. The mortgage
notes payables are generally due in monthly installments of principal and
interest. In connection with the Properties acquired during the quartersix months
ended March 31,June 30, 1999, the Operating Partnership assumed the outstanding
mortgage balances on twoseven Properties in the aggregate amount of $16.9$58.3
million.
As of March 31,June 30, 1999, scheduled maturities for the Operating
Partnership's outstanding mortgage indebtedness are at various dates through
October 1, 2033.2030. During the quartersix months ended March 31,June 30, 1999, the effective
interest cost calculated for all of the Operating Partnership's debt was
7.09%7.02%.
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 December 23, 1999. The Operating
Partnership received net proceeds of approximately $298 million in connection
with this issuance.
As of March 31,June 30, 1999, the Operating Partnership had outstanding
unsecured notes of approximately $2.0$2.3 billion, net of a $5.0 million discount
and including a $8.6an $8.1 million premium.
10. LINES OF CREDIT
The Operating Partnership has a revolving credit facility with
Morgan Guaranty Trust Operating Partnership of New York ("Morgan Guaranty")
and Bank of America Illinois ("Bank of America") as co-agents to provide the
Operating Partnership with potential borrowings of up to $500 million. As of
March 31,June 30, 1999, $125$40 million was outstanding under this facility, bearing
interest at a weighted average rate of 5.33%5.40%.
In connection with the MRY Merger, the Operating Partnership assumed
an additional credit facility with First Union Bank as agent with potential
borrowings of up to $120 million. As of March 31,June 30, 1999, $40$45 million was
outstanding under this facility, bearing interest at a weighted average rate
of 5.42%5.46%.
13
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. DEPOSITS - RESTRICTED
Deposits-restricted as of March 31,June 30, 1999 primarily included a deposit
in the amount of $20$25 million held in a third party escrow account to provide
collateral for third party construction financing in connection with the Joint Venture Agreement.two
separate joint venture agreements. Also, approximately $2.7$19.3 million was held
in third party escrow accounts, representing proceeds received in connection
with the Operating Partnership's disposition of one propertythree properties and earnest
money deposits made for additional acquisitions. In addition, approximately
$19.8$26.4 million was for tenant security, utility deposits, and other deposits
for certain of the Operating Partnership's Properties.
12
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
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 regardsregard to the joint venture agreementagreements with atwo multifamily
residential real estate developerdevelopers during the quartersix months ended March 31,June 30, 1999,
the Operating Partnership funded a total of $15.9$44.3 million and during the
remainder of 1999 the Operating Partnership expects to fund approximately
$48.2$24.1 million in connection with this agreement.these agreements. Also in connection with
these two agreements, the Company has an obligation to fund up to an
additional $55 million to guarantee third party construction financing.
In regardsregard to certain other properties that were under development
and/or expansion during the quartersix months ended March 31,June 30, 1999, the Operating
Partnership funded $5.1$7.9 million. During the remainder of 1999, the Operating
Partnership expects to fund $52.9$43.1 million related to the continued
development and/or expansion of as many as five Properties.
In regards to certain properties that are under earnout/development
agreements, during the quartersix months ended March 31, 1999, $16.2 million was funded
relating to the completion/acquisition of Copper Canyon. In addition, the
Operating Partnership may be required to fund an additional $1 million
earnout payment to the developer of Copper Canyon if certain specified
operation levels are met. During the remainder ofJune 30, 1999, the Operating
Partnership expects to fund approximately $43.7 million related to other
earnout/development projects. Subsequent to March 31, 1999,funded the Operating
Partnership has funded $22.7following:
- - $16.2 million relating to the completion/acquisition of Copper Canyon Apartments;
- - $22.8 million relating to the acquisition of Skyview Apartments, which
included a $1.0 million advance of the earnout payment to the developer of
Skyview.Skyview; and
- - $18.3 million relating to the acquisition of Rosecliff Apartments.
Subsequent to June 30, 1999, the Company funded an additional $1
million earnout payment to the developer of Copper Canyon as certain
specified operation levels were achieved. During the remainder of 1999, the
Company expects to fund approximately $3.1 million related to other
earnout/development projects.
14
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In connection with the Wellsford Merger, the Operating Partnership
has provided a $14.8 million credit enhancement with respect to bonds issued
to finance certain public improvements at a multifamily development project.
Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real
Properties, Inc. ("WRP Newco"), the Operating Partnership has agreed to
purchase up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per
share on a standby basis over a three-year period ending on May 30, 2000. As
of March 31,June 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. At March 31,On
June 24, 1999, approximatelyMRYP Spinco repaid the Senior Note outstanding balance of
$18.3 million was outstanding,
bearing interest at LIBOR plus 250 basis points. The Operating Partnership
has a potentialand there is no further obligation to fund up to an additional $6.7 million under the
Senior Debt Agreement.
13
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)by either party in
connection with this agreement.
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 quarterssix
months and quarter ended March 31,June 30, 1999 and net income for the six months and
quarter ended June 30, 1998.
15
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 RENTAL REAL CORPORATE/
MARCH 31, 1999 (AMOUNTS IN THOUSANDS) ESTATE(1) OTHER(2)ESTATE (1) OTHER (2) CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Rental income $ 406,062819,178 $ --- $ 406,062819,178
Property and maintenance expense (97,047) - (97,047)(196,865) -- (196,865)
Real estate tax and insurance expense (42,048) - (42,048)(84,515) -- (84,515)
Property management expense (14,201) - (14,201)
-----------------------------------------------------(27,973) -- (27,973)
---------------------------------------------------
Net operating income 252,766 - 252,766509,825 -- 509,825
Fee and asset management income - 1,234 1,234-- 2,414 2,414
Interest income - investment in mortgage notes - 2,895 2,895-- 5,644 5,644
Interest and other income - 6,046 6,046-- 11,323 11,323
Fee and asset management expense - (867) (867)-- (1,624) (1,624)
Depreciation expense on non-real estate assets - (1,705) (1,705)-- (3,423) (3,423)
Interest expense:
Expense incurred - (79,197) (79,197)-- (158,499) (158,499)
Amortization of deferred financing costs - (845) (845)(1,661) (1,661)
General and administrative expense - (5,867) (5,867)-- (10,914) (10,914)
Allocation of net income to Preference Unit holders - (29,377) (29,377)-- (57,111) (57,111)
Adjustment for depreciation expense related
to equity in unconsolidated joint ventures - 276 276
------------------------------------------------------- 551 551
---------------------------------------------------
Funds from operations available to OP Units 252,766 (107,407) 145,359509,825 (213,300) 296,525
Depreciation expense on real estate assets (95,196) - (95,196)(193,711) -- (193,711)
Gain on disposition of properties, net 21,41645,807 -- 45,807
Loss on early extinguishment of debt -- (451) (451)
Allocation of net income allocated to Junior
Convertible Preference Unit holders -- (132) (132)
Adjustment for depreciation expense related
to equity in unconsolidated joint ventures -- (551) (551)
---------------------------------------------------
Net income available to OP Unit holders $ 361,921 $ (214,434) $ 147,487
===================================================
Investment in real estate, net of accumulated
depreciation as of June 30, 1999 $ 10,246,211 $ 15,428 $ 10,261,639
===================================================
Total assets as of June 30, 1999 $ 10,279,055 $ 562,754 $ 10,841,809
===================================================
16
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 RENTAL REAL CORPORATE/
(AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
- 21,416------------------------------------------------------------------------------------------------------
Rental income $ 571,370 $ -- $ 571,370
Property and maintenance expense (138,303) -- (138,303)
Real estate tax and insurance expense (56,484) -- (56,484)
Property management expense (25,007) -- (25,007)
-------------------------------------------
Net operating income 351,576 -- 351,576
Fee and asset management income -- 2,790 2,790
Interest income - investment in mortgage notes -- 10,221 10,221
Interest and other income -- 9,010 9,010
Fee and asset management expense -- (2,247) (2,247)
Depreciation expense on non-real estate assets -- (2,523) (2,523)
Interest expense:
Expense incurred -- (105,651) (105,651)
Amortization of deferred financing costs -- (1,275) (1,275)
General and administrative expense -- (9,974) (9,974)
Allocation of net income to Preference Unit holders -- (43,384) (43,384)
Adjustment for amortization of deferred financing costs
related to predecessor business -- 35 35
-------------------------------------------
Funds from operations available to OP Units 351,576 (142,998) 208,578
Depreciation expense on real estate assets (129,387) -- (129,387)
Gain on disposition of properties, net 11,092 -- 11,092
Adjustment for amortization of deferred financing costs
related to predecessor business -- (35) (35)
-------------------------------------------
Net income available to OP Unit holders $ 233,281 $(143,033) $ 90,248
===========================================
17
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
QUARTER ENDED JUNE 30, 1999 RENTAL REAL CORPORATE/
(AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
---------------------------------------------------------------------------------------------------------------
Rental income $ 413,116 $ -- $ 413,116
Property and maintenance expense (99,818) -- (99,818)
Real estate tax and insurance expense (42,467) -- (42,467)
Property management expense (13,772) -- (13,772)
---------------------------------------------------
Net operating income 257,059 -- 257,059
Fee and asset management income -- 1,180 1,180
Interest income - investment in mortgage notes -- 2,749 2,749
Interest and other income -- 5,277 5,277
Fee and asset management expense -- (757) (757)
Depreciation expense on non-real estate assets -- (1,719) (1,719)
Interest expense:
Expense incurred -- (79,302) (79,302)
Amortization of deferred financing costs -- (816) (816)
General and administrative expense -- (5,047) (5,047)
Allocation of net income to Preference Unit holders --- (27,734) (27,734)
Adjustment for depreciation expense related
to equity in unconsolidated joint ventures -- 276 276
---------------------------------------------------
Funds from operations available to OP Units 257,059 (105,893) 151,166
Depreciation expense on real estate assets (98,514) -- (98,514)
Gain on disposition of properties, net 24,391 -- 24,391
Loss on early extinguishment of debt -- (451) (451)
Allocation of net income allocated to Junior
Convertible Preference Unit holders -- (66) (66)
Adjustment for depreciation expense related
to equity in unconsolidated joint ventures --- (276) (276)
--------------------------------------------------------------------------------------------------------
Net income available to OP Unit holders $ 178,986182,936 $ (107,749)(106,686) $ 71,237
=====================================================76,250
===================================================
Investment in real estate, net of accumulated depreciation
as of June 30, 1999 $ 10,251,87110,246,211 $ 16,08115,428 $ 10,267,952
=====================================================10,261,639
===================================================
Total assets as of June 30, 1999 $ 10,251,87110,279,055 $ 450,090562,754 $ 10,701,961
=====================================================10,841,809
===================================================
1418
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED) (CONTINUED)
QUARTER ENDED JUNE 30, 1998 RENTAL REAL CORPORATE/
MARCH 31, 1998 (AMOUNTS IN THOUSANDS) ESTATE(1) OTHER(2)ESTATE (1) OTHER (2) CONSOLIDATED
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Rental income $ 277,226294,144 $ --- $ 277,226294,144
Property and maintenance expense (66,713) - (66,713)(71,391) -- (71,391)
Real estate tax and insurance expense (27,443) - (27,443)(29,041) -- (29,041)
Property management expense (11,579) (11,579)
-----------------------------------------------------(13,516) -- (13,516)
-------------------------------------------
Net operating income 171,491 - 171,491180,196 -- 180,196
Fee and asset management income - 1,360 1,360-- 1,430 1,430
Interest income - investment in mortgage notes - 4,931 4,931-- 5,290 5,290
Interest and other income - 2,824 2,824-- 6,186 6,186
Fee and asset management expense - (1,052) (1,052)-- (1,197) (1,197)
Depreciation expense on non-real estate assets - (1,165) (1,165)-- (1,358) (1,358)
Interest expense:
Expense incurred - (50,254) (50,254)-- (55,397) (55,397)
Amortization of deferred financing costs - (624) (624)-- (651) (651)
General and administrative expense - (4,880) (4,880)-- (5,203) (5,203)
Allocation of net income to Preference Unit holders --- (21,692) (21,692)
Adjustment for amortization of deferred financing costs
related to predecessor business - 12 12
------------------------------------------------------- 23 23
-------------------------------------------
Funds from operations available to OP Units 171,491 (70,540) 100,951180,196 (72,569) 107,627
Depreciation expense on real estate assets (63,225) - (63,225)(66,162) -- (66,162)
Gain on disposition of properties, net 1,869 - 1,8699,223 -- 9,223
Adjustment for amortization of deferred financing costs
related to predecessor business - (12) (12)
------------------------------------------------------- (23) (23)
-------------------------------------------
Net income available to OP Unit holders $ 110,135123,257 $ (70,552)(72,592) $ 39,583
=====================================================
Investment in real estate, net of
accumulated depreciation $ 6,843,693 $ 10,842 $ 6,854,535
=====================================================
Total assets $ 6,843,693 $ 485,649 $ 7,329,342
=====================================================50,665
===========================================
(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.
1519
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED) (CONTINUED)
14. SUBSEQUENT EVENTS
On April 28,July 1, 1999, the Operating Partnership disposed of The Willows
Apartments, a 250-unit multifamily property located in Knoxville, TN, to an
unaffiliated third party for a total sales price of $12 million.
On July 1, 1999, the Operating Partnership entered into a definitive
agreement and plan of merger with Lexford Residential Trust ("Lexford"). The
Lexford portfolio of 402 properties consists of 36,609 units in sixteen states.
The tax-free merger calls for EQR to issue approximately 4.4 million new common
shares and assume approximately $533 million of debt. The closing of this
pending transaction is subject to entering into a binding agreement, shareholder
approval and certain other contingencies and conditions; therefore, there can be
no assurance that this transaction will be consummated or that the final terms
thereof will not differ in material respects from those summarized above.
On July 14, 1999, the Operating Partnership acquired Pine Tree ClubBrookdale Village
Apartments, a 150-unit252-unit multifamily property located in Wildwood, Missouri,Naperville, IL, from an
unaffiliated third party for a purchase price of approximately $8.0$19.6 million,
which included the assumption of approximately $5.5$11.6 million of mortgage
indebtedness.
On April 28,July 26, 1999, the Operating Partnership disposed of Tivoli Lakes
Club Apartments, a 278-unit multifamily property located in Deerfield Beach, FL,
to an unaffiliated third party for a total sales price of $17 million.
On July 29, 1999, the Operating Partnership acquired Westbrooke
Village I & IILongfellow
Place Apartments, a 252-unit710-unit multifamily property along with one ten story
office building and two parking garages all located in Manchester, MissouriBoston, MA, from an
unaffiliated third party for a purchase price of approximately $12.6$237 million,
which included the assumptionissuance of OP Units having an approximate value of $13.9
million, the issuance of Junior Convertible Preference Units having an
approximate value of $0.2 million and was partially financed by the issuance
of new mortgage indebtedness of approximately $8.5 million of mortgage indebtedness.
On April 29, 1999, the Operating Partnership acquired Brookside
Apartments, a 228-unit multifamily property located in Frederick, Maryland,
from an affiliated party for a purchase price of approximately $10.8$126.5 million, which included the assumption of approximately $8.3 million of mortgage
indebtedness.is being
collateralized by eleven previously unencumbered assets (not including
Longfellow Place).
On April 30, 1999, the Operating Partnership acquired Skyview
Apartments, a 260-unit multifamily property located in Rancho Santa
Margarita, California, from an unaffiliated third party for a purchase price
of approximately $21.8 million. In addition, the Operating Partnership funded
a $1.0 million advance of the earnout payment to the developer of Skyview.
In April 1999, the Company issued 1,936 Common Shares pursuant to
the Share Purchase - DRIP Plan. The Company contributed to the Operating
Partnership net proceeds of $88,168 in connection therewith.
On May 6,July 29, 1999, the Operating Partnership disposed of Sandstone at
Bear CreekThe Seasons
Apartments, a 40-unit120-unit multifamily property located in Euless, TX,Boise, ID, to an
unaffiliated third party for a total sales price of $2.1$6 million.
16On July 30, 1999, the Operating Partnership acquired Greentree II
Apartments, a 239-unit multifamily property located in Glen Burnie, MD, from an
affiliated party for a purchase price of approximately $10.9 million.
20
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis of the results of operations and
financial condition of the Operating Partnership should be read in connection
with the Consolidated Financial Statements and Notes thereto. Due to the
Operating Partnership's ability to control the Management Partnerships, the
Financing Partnerships, and the LLCs, and Merry Land DownREIT I LP, each entity has
been consolidated with the Operating Partnership for financial reporting
purposes. Capitalized terms used herein and not defined are as defined in the
Operating Partnership's Annual Report on Form 10-K for the year ended December
31, 1998.
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
words "believes", "expects" and "anticipates" and other similar expressions
which are predictions of or indicate future events and trends and which do not
relate solely to historical matters, identify forward-looking statements. Such
forward-looking statements are subject to risks and uncertainties, which could
cause actual results, performance, or achievements of the Operating Partnership
to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. Factors
that might cause such differences include, but are not limited to, the
following:
- the alternative sources of capital to the Operating Partnership
are too high;
- occupancy levels and market rents may be adversely affected by
local economic and market conditions, which are beyond the
Operating Partnership's control; and
- additional factors as discussed in Part I of the Annual Report as
filed on Form 10-K.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Operating Partnership undertakes no obligation to publicly release any revisions
to these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
The acquired properties are presented in the Consolidated Financial
Statements of the Operating Partnership from the date of each acquisition or the
closing dates of the Mergers. During the year ended 1998, the Operating
Partnership acquired 207 properties containing 55,143 units and four properties
under development representing 1,378 units (the "1998 Acquired Properties"). In
addition, during the quartersix months ended March 31,June 30, 1999, the Operating Partnership
acquired sevensixteen properties containing 1,8643,925 units (the "1999 Acquired
Properties").
The Operating Partnership also disposed of twenty properties containing
4,719 units during 1998 (the "1998 Disposed Properties"); and seveneleven properties
containing 1,7412,505 units during the quartersix months ended March 31,June 30, 1999 (the "1999
Disposed Properties").
17
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Operating Partnership's overall results of operations for the quarterssix
months ended March 31,June 30, 1999 and 1998 have been significantly impacted by the
Operating Partnership's acquisition and disposition activity. The significant
changes in rental revenues, property and maintenance expenses, real estate taxes
and insurance, depreciation expense, property management and interest expense
can all primarily be attributed to the acquisition of the 1998 Acquired
Properties and the 1999 Acquired Properties, partially offset by the disposition
of the 1998 Disposed Properties and the 1999 Disposed Properties. The impact of
21
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
the 1998 Acquired Properties, the 1999 Acquired Properties, the 1998 Disposed
Properties and the 1999 AcquiredDisposed Properties is discussed in greater detail in
the following paragraphs.
Properties that the Operating Partnership owned for all of the
quarterboth six
month periods ended March 31,June 30, 1999 and March 31,June 30, 1998 (the "First Quarter"Six-Month 1999 Same
Store Properties"), which represented 127,514126,790 units, impacted the Operating
Partnership's results of operations. Properties that the Operating Partnership
owned for all of both the quarters ended June 30, 1999 and June 30, 1998 (the
"Second-Quarter 1999 Same Store Properties"), which represented 130,182 units,
also impacted the Operating Partnership's results of operationsoperations. Both the
Six-Month 1999 Same Store Properties and Second-Quarter 1999 Same Store
Properties are discussed as well in the following paragraphs.
COMPARISON OF QUARTERSIX MONTHS ENDED MARCH 31,JUNE 30, 1999 TO QUARTERSIX MONTHS ENDED MARCH 31,JUNE 30, 1998
For the quartersix months ended March 31,June 30, 1999, income before gain on
disposition of properties, net and extraordinary item increased by $19.9$36.8 million
when compared to the quartersix months ended March 31,June 30, 1998. This increase was primarily
due to the acquisition of the 1998 Acquired Properties and the 1999 Acquired
Properties as well as increases in rental revenues net of increases in property
and maintenance expenses, real estate taxes and insurance, property management
expenses, depreciation expense, interest expense and general and administrative
expenses.
In regard to the First QuarterSix-Month 1999 Same Store Properties, rentaltotal
revenues increased by approximately $10.9$20.1 million to $544.6 million or 4.2%3.83%
primarily as a result of higher rental rates charged to new tenants and
tenant renewals a
0.26% increase in average economic occupancy levels and a 0.65%an increase in income from billing tenants for their
share of utility costs.costs as well as other ancillary services provided to
tenants. Overall, property operating expenses, which include property and
maintenance, real estate taxes and insurance and an allocation of property
management expenses, increased approximately $1.3$2.7 million or 1.3%1.36%. This
increase was primarily the result of higher on-site compensation costs and an
increase in real estate taxes on certain properties, higher
on-site compensation costs,but was partially offset
by lower expenses for leasing and advertising, costsadministrative, maintenance
and utility charges.start-up costs.
Property management represents expenses associated with the
self-management of the Operating Partnership's Properties. These expenses
increased by approximately $2.6$3 million primarily due to the continued
expansion of the Operating Partnership's property management business.
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.
18Interest expense, including amortization of deferred financing
costs, increased by approximately $53.2 million. This increase was primarily
the result of an increase in the Operating Partnership's average indebtedness
outstanding which increased by $1.6 billion. However, the Operating
Partnership's effective interest costs decreased from 7.23% for the six
months ended June 30, 1998 to 7.02% for the six months ended June 30, 1999.
General and administrative expenses, which include corporate
operating expenses, increased approximately $0.9 million between the periods
under comparison. This increase was primarily due to the
22
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Interest expense, including amortization of deferred financing
costs, increased by approximately $29.2 million. This increase was primarily
the result of an increase in the Operating Partnership's average indebtedness
outstanding, which increased by $1.8 billion. However, the Operating
Partnership's effective interest costs decreased from 7.27% for the quarter
ended March 31, 1998 to 7.09% for the quarter ended March 31, 1999.
General and administrative expenses, which include corporate
operating expenses, increased approximately $1.0 million between the periods
under comparison. This increase was primarily due to the addition of corporate personnel in the Operating Partnership's Human Resources,
Accounting, Legal and Information Systems groups as well as higher
compensation costs, shareholder reporting costs and professional fees.personnel. However, by gaining certain economies of
scale with a much larger operation these expenses as a percentage of total
revenues were 1.41%1.30% for the six months ended June 30, 1999 compared to 1.68%
of total revenues for the six months ended June 30, 1998.
COMPARISON OF QUARTER ENDED JUNE 30, 1999 TO QUARTER ENDED JUNE 30, 1998
For the quarter ended June 30, 1999, income before gain on
disposition of properties, net and extraordinary item increased by
approximately $17 million when compared to the quarter ended June 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 Second Quarter 1999 Same Store Properties, total
revenues increased by approximately $9.7 million or 3.57% primarily as a
result of higher rental rates charged to new tenants and tenant renewals and
an increase in income from billing tenants for their share of utility costs
as well as other ancillary services provided to tenants. Overall, property
operating expenses, which include property and maintenance, real estate taxes
and insurance and an allocation of property management expenses, increased
approximately $0.4 million or 0.38%. This increase was primarily the result
of higher on-site compensation costs and an increase in real estate taxes on
certain properties, but was partially offset by lower expenses for leasing
and advertising, administrative and maintenance.
Property management represents expenses associated with the
self-management of the Operating Partnership's Properties. These expenses
increased by approximately $0.3 million primarily due to the continued
expansion of the Operating Partnership's property management business.
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 $24.1 million. This increase was primarily
the result of an increase in the Operating Partnership's average indebtedness
outstanding which increased by $1.5 billion. However, the Operating
Partnership's effective interest costs decreased from 7.20% for the quarter
ended March 31,June 30, 1998 to 6.95% for the quarter ended June 30, 1999.
General and administrative expenses, which include corporate
operating expenses, decreased approximately $0.2 million between the periods
under comparison. These expenses as a percentage of total revenues were 1.20%
for the quarter ended June 30, 1999 compared to 1.70%1.69% of total revenues for
the quarter ended March 31,June 30, 1998.
23
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of January 1, 1999, the Operating Partnership had approximately $4
million of cash and cash equivalents and $330 million available on its lines of
credit, of which $12 million was restricted. After taking into effect the
various transactions discussed in the following paragraphs, the Operating
Partnership's cash and cash equivalents balance at March 31,June 30, 1999 was
approximately $10.7$95.5 million and the amount available on the Operating
Partnership's lines of credit was $455$535 million, of which $12 million was
restricted. The following discussion also explains the changes in net cash
provided by operating activities, net cash (used for)used by investing activities and net
cash provided by (used for)by) financing activities, all of which are presented in
the Operating Partnership's Statements of Cash Flows.
Part of the Operating Partnership's strategy in funding the purchase of
multifamily properties, funding its Properties in the development stage and the
funding of the Operating Partnership's investment in two joint ventures with
multifamily real estate developers is to utilize its lines of credit and to
subsequently repay the lines of credit from the issuance of additional equity or
debt securities or the disposition of Properties. Utilizing this strategy during
the first six months of 1999, the Operating Partnership:
- - issued the June 2004 Notes and received net proceeds of $298 million;
- - refinanced four Properties and received additional net proceeds of
$18 million;
- - disposed of eleven properties and received net proceeds of $125.2 million;
and
- - issued approximately 0.8 million OP Units and received net proceeds of $29.6
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 Property acquisitions during the quarter,1999 Acquired Properties, the Operating Partnership
purchased sevenassumed and/or entered into new mortgage indebtedness of approximately $58.3
million, issued OP Units with a value of $11.3 million and issued Junior
Convertible Preference Units with a value of $2.9 million. The total purchase
price of the 1999 Acquired Properties was approximately $259.3 million.
Subsequent to June 30, 1999 and through August 9, 1999, the Operating
Partnership acquired three additional properties containing 1,8641,201 units for a
total purchase price of approximately $124.5$267.5 million, includingwhich included the
assumption of and/or issuance of new mortgage indebtedness of approximately
$16.9$138.1 million, the issuance of OP Units having an approximate value of $13.9
million and the issuance of OPJunior Convertible Preference Units with ahaving an
approximate value of $8.9$0.2 million. These acquisitions were
primarily funded from the disposition of certain properties and working
capital.
Subsequent to March 31,June 30, 1999 and through May 12, 1999, the Operating
Partnership acquired four additional properties containing 890 units for a
total purchase price of approximately $53.2 million and the assumption of
mortgage indebtedness of approximately $22.3 million. These acquisitions were
primarily funded with proceeds from the disposition of certain properties,
the lines of credit and working capital.
During the quarter ended March 31,August 9, 1999, the Operating
Partnership disposed of seventhree properties that generated net proceeds of $76 million.
These proceeds were or will be ultimately applied to purchase additional
properties.
19
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Subsequent to March 31, 1999 and through May 12, 1999, the Operating
Partnership disposed of one property for a total sales price of $2.1$35 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 regardsregard to the joint venture agreementagreements with atwo multifamily
residential real estate developerdevelopers during the quartersix months ended March 31,June 30, 1999,
the Operating Partnership funded a total of $15.9$44.3 million and
24
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
during the remainder of 1999 the Operating Partnership expects to fund
approximately $48.2$24.1 million in connection with this agreement.these agreements. Also in
connection with these two agreements, the Operating Partnership has an
obligation to fund up to an additional $55 million to guarantee third party
construction financing.
In regardsregard to certain other properties that were under development
and/or expansion during the quartersix months ended March 31,June 30, 1999, the Operating
Partnership funded $5.1$7.9 million. During the remainder of 1999, the Operating
Partnership expects to fund $52.9$43.1 million related to the continued development
and/or expansion of as many as five Properties.
In regards to certain properties that arewere under earnout/development
agreements, during the quartersix months ended March 31, 1999, $16.2 million was funded
relating to the completion/acquisition of Copper Canyon. In addition, the
Operating Partnership may be required to fund an additional $1 million
earnout payment to the developer of Copper Canyon if certain specified
operation levels are met. During the remainder ofJune 30, 1999, the Operating
Partnership expects to fund approximately $43.7 million related to other
earnout/development projects. Subsequent to March 31, 1999,funded the Operating
Partnership has funded $22.7following:
- - $16.2 million relating to the completion/acquisition of Copper Canyon Apartments,
- - $22.8 million relating to the acquisition of Skyview Apartments, which
included a $1.0 million advance of the earnout payment to the developer of
Skyview.
AsSkyview; and
- - $18.3 million relating to the acquisition of March 31,Rosecliff Apartments.
Subsequent to June 30, 1999, the Operating Partnership had total
indebtednessfunded an
additional $1 million earnout payment to the developer of Copper Canyon as
certain specified operation levels were achieved. During the remainder of 1999,
the Company expects to fund approximately $4.6 billion, which included mortgage
indebtedness of $2.4 billion (including premiums of $4.2 million), of which
$930.4$3.1 million represented tax-exempt bond indebtedness, and unsecured debt
of $2.0 billion, including net discounts and premiums in the amount of
$3.6 million.related to other
earnout/development projects.
In May 1999, the Operating Partnership expects to repayrepaid its 1999 Notes that
maturematured on May 15, 1999. The $125 million repayment will be
initiallywas funded from borrowings
under the Operating Partnership's lines of credit. In addition, on June 1,during the first
six months of 1999, the Operating Partnership anticipates
repaying the principal balancerepaid $9.3 million of mortgage
indebtedness on onetwo of its Properties. These repayments were funded from the
Operating Partnership's lines of credit and/or from disposition proceeds.
As of June 30, 1999, the Operating Partnership had total indebtedness
of approximately $4.7 billion, which included mortgage notesindebtedness of $2.3
billion (including premiums of $3.9 million), of which $840.7 million
represented tax-exempt bond indebtedness, and unsecured debt of $2.3 billion
(including net discounts and premiums in the amount of $8.0 million. This repayment will also be primarily funded from additional
borrowings under the lines$3.1 million), of credit.which
$111.4 million represented tax-exempt bond indebtedness.
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 service. Expenditures for improvements
and renovations that significantly enhance the value of existing assets or
substantially extend the useful life of an asset are also capitalized. Capital
spent for replacement-type items such as appliances, draperies, carpeting and
floor coverings, mechanical equipment and certain furniture and fixtures is also
capitalized. Expenditures for ordinary maintenance and repairs are expensed to
operations as incurred. With respect to 20
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
25
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
During the quartersix months ended March 31,June 30, 1999, total capital expenditures
for the Operating Partnership approximated $27.4$59.4 million. Of this amount,
approximately $8.8$21.1 million, or $73$175 per unit, related to capital improvements
and major repairs for the 1997, 1998 and 1999 Acquired Properties. Capital
improvements and major repairs for all of the Operating Partnership's pre-EQR
IPO properties and 1993, 1994, 1995 and 1996 Acquired Properties approximated
$5.9$12.7 million, or $92$198 per unit. Capital spent for replacement-type items
approximated $10.2$22 million, or $55$119 per unit. Also included in total capital
expenditures was approximately $2.5$3.6 million expended for non-real estate
additions such as computer software, computer equipment, furniture and fixtures
and leasehold improvements for the Operating Partnership's management offices
and its corporate headquarters. Such capital expenditures were primarily funded
from working capital reserves and from net cash provided by operating
activities. Total capital expenditures for the remaining portion of 1999 are
budgeted to be approximately $90$60 million.
Total distributions paid in AprilJuly 1999 amounted to approximately $115.2$117
million, which included distributions declared for the quarter ended March 31,June 30,
1999.
In April 1999, the Company issued 1,936 Common Shares pursuant to
the Share Purchase - DRIP Plan. The Company contributed to the Operating
Partnership net proceeds of $88,168 in connection therewith.
The Operating Partnership expects to meet its short-term liquidity
requirements, including capital expenditures relating to maintaining its
existing Properties and certain scheduled unsecured note and mortgage note
repayments, generally through its working capital, net cash provided by
operating activities and borrowings under its lines of credit. The Operating
Partnership considers its cash provided by operating activities to be adequate
to meet operating requirements and payments of distributions. The Operating
Partnership also expects to meet its long-term liquidity requirements, such as
scheduled unsecured note and mortgage debt maturities, reduction of outstanding
amounts under its lines of credit, property acquisitions, financing of
construction and development activities and capital improvements through the
issuance of unsecured notes and equity securities including additional OP Units
as well as from undistributed FFO and proceeds received from the disposition of
certain properties. In addition, the Operating Partnership has certain
uncollateralized Properties available for additional mortgage borrowings in the
event that the public capital markets are unavailable to the Operating
Partnership or the cost of alternative sources of capital to the Operating
Partnership is too high.
21
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Operating Partnership has a revolving credit facility with Morgan
Guaranty and Bank of America as co-agents to provide the Operating Partnership,
with potential borrowings of up to $500 million. This credit facility matures in
November 1999 and will continue to be used to fund property acquisitions, costs
for certain Properties under development and short term liquidity requirements.
As of May 11,August 9, 1999, $175$90 million was outstanding under this facility.
In connection with the MRY Merger, the Operating Partnership assumed a
second revolving credit facility with First Union Bank as agent with potential
borrowings of up to $120 million. This credit facility matures in September 2000
and will also be used to fund property acquisitions, costs for certain
Properties under development and short term liquidity requirements. As of May 11,August
9, 1999, $27 million wasno amounts were outstanding under this facility.
26
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Operating Partnership anticipates closing on a new revolving credit
facility in mid-August 1999 for potential borrowings of up to $700 million. The
existing revolving credit facilities will be repaid in full and terminated upon
the closing of the new facility.
In connection with the Wellsford Merger, the Operating Partnership
provided a $14.8 million credit enhancement with respect to bonds issued to
finance certain public improvements at a multifamily development project.
Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real
Properties, Inc. ("WRP Newco"), the Operating Partnership has agreed to purchase
up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per share on a
standby basis over a three-year period ending on May 30, 2000. As of May 12,August 9,
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, 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. In return for the spin-off of certain assets and
liabilities to MRYP Spinco, the Operating Partnership received (from MRYP
Spinco) a Subordinated Note receivable totaling $20 million, a preferred stock
investment with an initial value of $5 million and a $25 million, one year,
non-revolving Senior Note receivable. At March 31,receivable with an initial value of $18.3 million. On
June 24, 1999, approximately $18.3 million was outstanding onthe Subordinated Note receivable, the preferred stock investment
and the Senior Note bearing
interest at LIBOR plus 250 basis points. The Operating Partnership hasreceivable were all repaid by MRYP Spinco for a potentialtotal amount
of $41 million, which represented a discount of $2.3 million on the combined
outstanding balance of these instruments and there is no further obligation to fund up to an additional $6.7 million under the
Senior Note.by
either party in connection therewith.
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
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 22
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 is currently in the process of
testing and implementing the majority of its Year 2000 IT and non-IT system
projects with completion anticipated during the second or third quarter of 1999. The
Operating Partnership has estimated that the total Year 2000 project cost
will approximate $1 million, of which approximately 80%90% has been incurred as
27
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
of March 31,June 30, 1999. During the first quartersix 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
$200,000$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
$150,000$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, there can be no assurances 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.
23
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
FUNDS FROM OPERATIONS
The Operating Partnership generally considers Funds From Operations
("FFO") to be one measure of the performance of real estate companies. The
resolution adopted by the Board of Governors of NAREIT defines FFO as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation on real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis. The Operating Partnership believes that FFO is
helpful to investors as a measure of the performance of a real estate company
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
28
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
determined by GAAP as a measure of liquidity and is not necessarily
indicative of cash available to fund cash needs. The Operating Partnership's
calculation of FFO represents net income, excluding gains on dispositions of
properties and extraordinary items, plus depreciation on real estate assets,
amortization of deferred financing costs related to the Predecessor Business
and the allocation of net income to Cumulative Redeemable Preference Units.
The Operating Partnership's calculation of FFO may differ from the
methodology for calculating FFO utilized by other companies and, accordingly,
may not be comparable to such other companies.
For the quartersix months ended March 31,June 30, 1999, FFO increased $44.4$87.9 million,
representing a 44%42.2% increase when compared to the six months ended June 30,
1998. For the quarter ended June 30, 1999, FFO increased by $43.5 million
representing a 40.5% increase when compared to the quarter ended March 31,June 30, 1998.
The following is a reconciliation of net income to FFO for the six
months and quarters ended March 31,June 30, 1999 and 1998:
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Six Months Six Months Quarter Quarter
Ended Quarter Ended 3/31/Ended Ended
6/30/99 3/31/6/30/98 6/30/99 6/30/98
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net income $100,680 $ 61,275204,730 $ 133,632 $ 104,050 $ 72,357
Adjustments:
Depreciation on real estate assets* 95,472 63,225194,262 129,387 98,790 66,162
Amortization of deferred financing
costs related to predecessor business - 1235 - 23
Allocation of net income to
Preference Unit holders (29,377)(57,111) (43,384) (27,734) (21,692)
Loss on early extinguishment of debt 451 - 451 -
Gain on disposition of properties, (21,416) (1,869)net (45,807) (11,092) (24,391) (9,223)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FFO $145,359 $100,951
-------- --------available to OP Units $ 296,525 $ 208,578 $ 151,166 $ 107,627
======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Includes $275,603$551 and $276 related to the Operating Partnership's share of
depreciation from unconsolidated joint ventures for the six months and quarter
ended March 31, 1999.
24June 30, 1999, respectively.
29
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 Company's Form 10-K
for the year ended December 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
12 Computation of Ratio of Earnings to Fixed Charges.
(B) Reports on Form 8-K:
None.
25(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 23, 1999, reporting information on the $300
million public debt offering.
30
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: May 12,August 13, 1999 By: /s/ Bruce C. Strohm
------------ --------------------------------------------------------- ----------------------------------------
Bruce C. Strohm
Executive Vice President, General
Counsel and Secretary
Date: May 12,August 13, 1999 By: /s/ Michael J. McHugh
------------ ---------------------------------------------------------- ----------------------------------------
Michael J. McHugh
Executive Vice President, Chief Accounting
Officer and Treasurer
2631