FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2003MARCH 31, 2004
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24920
ERP OPERATING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in its Charter)
Illinois |
| 36-3894853 | ||
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) | ||
| ||||
Two North Riverside Plaza, Chicago, Illinois |
| 60606 | ||
(Address of Principal Executive Offices) |
| (Zip Code) |
(312) 474-1300
(Registrant’s Telephone Number, Including Area Code)
(312) 474-1300
(Registrant’s Telephone Number, Including Area Code)
http://www.equityapartments.com
(Registrant’s web site)
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
| ||||
Investment in real estate |
|
|
|
|
|
|
|
|
|
| ||||
Land |
| $ | 1,816,571 |
| $ | 1,803,577 |
|
| $ | 2,066,965 |
| $ | 1,845,547 |
|
Depreciable property |
| 11,062,709 |
| 11,240,245 |
|
| 11,901,855 |
| 11,018,326 |
| ||||
Construction in progress |
| 2,617 |
| 2,441 |
| |||||||||
Construction in progress (including land) |
| 386,655 |
| 10,506 |
| |||||||||
Investment in real estate |
| 12,881,897 |
| 13,046,263 |
|
| 14,355,475 |
| 12,874,379 |
| ||||
Accumulated depreciation |
| (2,303,479 | ) | (2,112,017 | ) |
| (2,337,502 | ) | (2,296,013 | ) | ||||
Investment in real estate, net of accumulated depreciation |
| 10,578,418 |
| 10,934,246 |
| |||||||||
Investment in real estate, net |
| 12,017,973 |
| 10,578,366 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| 372,586 |
| 29,875 |
|
| 71,527 |
| 49,579 |
| ||||
Investments in unconsolidated entities |
| 521,750 |
| 509,789 |
|
| 13,503 |
| 473,977 |
| ||||
Rents receivable |
| 1,038 |
| 2,926 |
|
| 2,584 |
| 426 |
| ||||
Deposits – restricted |
| 287,838 |
| 141,278 |
|
| 135,664 |
| 133,752 |
| ||||
Escrow deposits – mortgage |
| 44,648 |
| 50,565 |
|
| 42,158 |
| 41,104 |
| ||||
Deferred financing costs, net |
| 31,616 |
| 32,144 |
|
| 31,852 |
| 31,135 |
| ||||
Goodwill, net |
| 30,000 |
| 30,000 |
|
| 30,000 |
| 30,000 |
| ||||
Other assets |
| 122,204 |
| 80,094 |
|
| 111,967 |
| 128,554 |
| ||||
Total assets |
| $ | 11,990,098 |
| $ | 11,810,917 |
|
| $ | 12,457,228 |
| $ | 11,466,893 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND PARTNERS’ CAPITAL |
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Mortgage notes payable |
| $ | 2,818,321 |
| $ | 2,927,614 |
|
| $ | 3,221,993 |
| $ | 2,693,815 |
|
Notes, net |
| 2,748,345 |
| 2,456,085 |
|
| 2,656,105 |
| 2,656,674 |
| ||||
Line of credit |
| — |
| 140,000 |
|
| 420,000 |
| 10,000 |
| ||||
Accounts payable and accrued expenses |
| 89,545 |
| 64,369 |
|
| 90,204 |
| 55,463 |
| ||||
Accrued interest payable |
| 71,767 |
| 63,151 |
|
| 71,914 |
| 60,334 |
| ||||
Rents received in advance and other liabilities |
| 178,280 |
| 165,095 |
|
| 198,625 |
| 189,372 |
| ||||
Security deposits |
| 44,987 |
| 45,333 |
|
| 46,937 |
| 44,670 |
| ||||
Distributions payable |
| 145,214 |
| 140,844 |
|
| 141,231 |
| 140,195 |
| ||||
Total liabilities |
| 6,096,459 |
| 6,002,491 |
|
| 6,847,009 |
| 5,850,523 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Commitments and contingencies |
|
|
|
|
| |||||||||
Commitments and contingencies |
|
|
|
|
| |||||||||
Minority Interests – Partially Owned Properties |
| 8,034 |
| 9,811 |
|
| 13,582 |
| 9,903 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Partners’ capital: |
|
|
|
|
|
|
|
|
|
| ||||
Preference Units |
| 994,661 |
| 946,157 |
|
| 669,750 |
| 670,913 |
| ||||
Preference Interests |
| 246,000 |
| 246,000 |
|
| 246,000 |
| 246,000 |
| ||||
Junior Preference Units |
| 5,846 |
| 5,846 |
|
| 2,217 |
| 2,217 |
| ||||
General Partner |
| 4,329,129 |
| 4,306,873 |
|
| 4,384,385 |
| 4,371,483 |
| ||||
Limited Partners |
| 344,766 |
| 349,646 |
|
| 326,332 |
| 342,809 |
| ||||
Deferred compensation |
| (5,535 | ) | (12,118 | ) |
| (2,641 | ) | (3,554 | ) | ||||
Accumulated other comprehensive loss |
| (29,262 | ) | (43,789 | ) |
| (29,406 | ) | (23,401 | ) | ||||
Total partners’ capital |
| 5,885,605 |
| 5,798,615 |
|
| 5,596,637 |
| 5,606,467 |
| ||||
Total liabilities and partners’ capital |
| $ | 11,990,098 |
| $ | 11,810,917 |
|
| $ | 12,457,228 |
| $ | 11,466,893 |
|
See accompanying notes
2
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per OP Unit data)
(Unaudited)
|
| Nine Months Ended |
| Quarter Ended |
|
| Quarter Ended March 31, |
| ||||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||||
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Rental income |
| $ | 1,393,278 |
| $ | 1,396,069 |
| $ | 469,893 |
| $ | 466,379 |
|
| $ | 459,654 |
| $ | 435,803 |
|
Fee and asset management |
| 10,961 |
| 6,957 |
| 3,083 |
| 2,647 |
|
| 3,007 |
| 2,488 |
| ||||||
Total revenues |
| 1,404,239 |
| 1,403,026 |
| 472,976 |
| 469,026 |
|
| 462,661 |
| 438,291 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Property and maintenance |
| 384,772 |
| 358,252 |
| 132,406 |
| 123,887 |
|
| 125,995 |
| 118,422 |
| ||||||
Real estate taxes and insurance |
| 149,202 |
| 141,624 |
| 50,008 |
| 47,087 |
|
| 52,471 |
| 47,857 |
| ||||||
Property management |
| 48,827 |
| 56,101 |
| 16,633 |
| 18,438 |
|
| 17,286 |
| 15,851 |
| ||||||
Fee and asset management |
| 5,556 |
| 5,409 |
| 1,949 |
| 1,789 |
|
| 1,995 |
| 1,770 |
| ||||||
Depreciation |
| 341,723 |
| 322,615 |
| 115,346 |
| 109,331 |
|
| 115,610 |
| 105,778 |
| ||||||
General and administrative |
| 28,854 |
| 33,000 |
| 8,708 |
| 10,673 |
|
| 9,988 |
| 11,176 |
| ||||||
Impairment on technology investments |
| 872 |
| 872 |
| 291 |
| 291 |
|
| — |
| 291 |
| ||||||
Impairment on corporate housing business |
| — |
| 17,122 |
| — |
| 17,122 |
| |||||||||||
Total expenses |
| 959,806 |
| 934,995 |
| 325,341 |
| 328,618 |
|
| 323,345 |
| 301,145 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating income |
| 444,433 |
| 468,031 |
| 147,635 |
| 140,408 |
|
| 139,316 |
| 137,146 |
| ||||||
|
|
|
|
|
| |||||||||||||||
Interest and other income |
| 13,740 |
| 11,526 |
| 6,612 |
| 2,231 |
|
| 2,108 |
| 3,337 |
| ||||||
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expense incurred, net |
| (246,793 | ) | (252,892 | ) | (82,792 | ) | (83,141 | ) |
| (79,858 | ) | (79,417 | ) | ||||||
Amortization of deferred financing costs |
| (4,406 | ) | (4,267 | ) | (1,319 | ) | (1,344 | ) |
| (1,426 | ) | (1,338 | ) | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income before allocation to Minority Interests, loss from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations |
| 206,974 |
| 222,398 |
| 70,136 |
| 58,154 |
| |||||||||||
Income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain on sales of unconsolidated entities and discontinued operations |
| 60,140 |
| 59,728 |
| |||||||||||||||
Allocation to Minority Interests – Partially Owned Properties |
| (77 | ) | (1,584 | ) | 166 |
| (259 | ) |
| (147 | ) | (115 | ) | ||||||
Loss from investments in unconsolidated entities |
| (3,594 | ) | (1,746 | ) | (1,850 | ) | (1,979 | ) | |||||||||||
Net gain (loss) on sales of unconsolidated entities |
| 4,673 |
| (626 | ) | (2 | ) | (5,872 | ) | |||||||||||
Income (loss) from investments in unconsolidated entities |
| (7,406 | ) | 107 |
| |||||||||||||||
Net gain on sales of unconsolidated entities |
| 2,434 |
| 1,212 |
| |||||||||||||||
Income from continuing operations |
| 207,976 |
| 218,442 |
| 68,450 |
| 50,044 |
|
| 55,021 |
| 60,932 |
| ||||||
Net gain on sales of discontinued operations |
| 218,975 |
| 61,209 |
| 77,983 |
| 32,763 |
|
| 71,499 |
| 70,672 |
| ||||||
Discontinued operations, net |
| 9,494 |
| 42,252 |
| (7 | ) | 11,137 |
|
| (1,815 | ) | 12,853 |
| ||||||
Net income |
| $ | 436,445 |
| $ | 321,903 |
| $ | 146,426 |
| $ | 93,944 |
|
| $ | 124,705 |
| $ | 144,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
ALLOCATION OF NET INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Preference Units |
| $ | 57,713 |
| $ | 57,568 |
| $ | 19,564 |
| $ | 19,055 |
|
| $ | 13,672 |
| $ | 19,046 |
|
Preference Interests |
| $ | 15,159 |
| $ | 15,158 |
| $ | 5,053 |
| $ | 5,052 |
|
| $ | 5,053 |
| $ | 5,053 |
|
Junior Preference Units |
| $ | 243 |
| $ | 243 |
| $ | 81 |
| $ | 81 |
|
| $ | 31 |
| $ | 81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
General Partner |
| $ | 335,896 |
| $ | 229,867 |
| $ | 112,575 |
| $ | 64,473 |
|
| $ | 98,309 |
| $ | 111,167 |
|
Limited Partners |
| 27,434 |
| 19,067 |
| 9,153 |
| 5,283 |
|
| 7,640 |
| 9,110 |
| ||||||
Net income available to OP Units |
| $ | 363,330 |
| $ | 248,934 |
| $ | 121,728 |
| $ | 69,756 |
|
| $ | 105,949 |
| $ | 120,277 |
|
Earnings per OP Unit – basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from continuing operations available to OP Units |
| $ | 0.46 |
| $ | 0.49 |
| $ | 0.15 |
| $ | 0.09 |
|
| $ | 0.12 |
| $ | 0.13 |
|
Net income available to OP Units |
| $ | 1.24 |
| $ | 0.84 |
| $ | 0.41 |
| $ | 0.24 |
|
| $ | 0.35 |
| $ | 0.41 |
|
Weighted average OP Units outstanding |
| 293,900 |
| 295,483 |
| 295,032 |
| 296,519 |
|
| 299,028 |
| 292,950 |
| ||||||
Earnings per OP Unit – diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from continuing operations available to OP Units |
| $ | 0.46 |
| $ | 0.49 |
| $ | 0.15 |
| $ | 0.08 |
|
| $ | 0.12 |
| $ | 0.13 |
|
Net income available to OP Units |
| $ | 1.23 |
| $ | 0.83 |
| $ | 0.41 |
| $ | 0.23 |
|
| $ | 0.35 |
| $ | 0.41 |
|
Weighted average OP Units outstanding |
| 296,184 |
| 298,690 |
| 297,941 |
| 299,057 |
|
| 301,781 |
| 294,508 |
| ||||||
|
|
|
|
|
| |||||||||||||||
Distributions declared per OP Unit outstanding |
| $ | 1.2975 |
| $ | 1.2975 |
| $ | 0.4325 |
| $ | 0.4325 |
|
| $ | 0.4325 |
| $ | 0.4325 |
|
See accompanying notes
3
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Amounts in thousands except per OP Unit data)
(Unaudited)
|
| Nine Months Ended |
| Quarter Ended |
| |||||||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| Quarter Ended March 31, |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| 2004 |
| 2003 |
| ||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income |
| $ | 436,445 |
| $ | 321,903 |
| $ | 146,426 |
| $ | 93,944 |
|
| $ | 124,705 |
| $ | 144,457 |
|
Other comprehensive income (losses) – derivative and other instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unrealized holding gains (losses) arising during the period |
| 8,355 |
| (10,602 | ) | 6,476 |
| (11,687 | ) |
| (10,154 | ) | 137 |
| ||||||
Equity in unrealized holding gains (losses) arising during the period – unconsolidated entities |
| 4,997 |
| (2,003 | ) | 2,238 |
| (2,908 | ) | |||||||||||
Equity in unrealized holding gains arising during the period –unconsolidated entities |
| 3,667 |
| 1,194 |
| |||||||||||||||
Losses reclassified into earnings from other comprehensive income |
| 1,175 |
| 615 |
| 474 |
| 230 |
|
| 482 |
| 230 |
| ||||||
Comprehensive income |
| $ | 450,972 |
| $ | 309,913 |
| $ | 155,614 |
| $ | 79,579 |
|
| $ | 118,700 |
| $ | 146,018 |
|
See accompanying notes
4
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
| Nine Months Ended |
|
| Quarter Ended March 31, |
| ||||||||
|
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 436,445 |
| $ | 321,903 |
|
| $ | 124,705 |
| $ | 144,457 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Allocation to Minority Interests – Partially Owned Properties |
| 77 |
| 1,584 |
|
| 147 |
| 115 |
| ||||
Depreciation |
| 354,898 |
| 353,206 |
|
| 117,185 |
| 118,918 |
| ||||
Amortization of deferred financing costs |
| 4,544 |
| 4,350 |
|
| 1,590 |
| 1,408 |
| ||||
Amortization of discounts and premiums on debt |
| (728 | ) | (589 | ) |
| (216 | ) | (239 | ) | ||||
Amortization of deferred settlements on derivative instruments |
| 556 |
| (238 | ) |
| 123 |
| (68 | ) | ||||
Impairment on corporate housing business |
| — |
| 17,122 |
| |||||||||
Impairment on technology investments |
| 872 |
| 872 |
|
| — |
| 291 |
| ||||
Loss from investments in unconsolidated entities |
| 3,594 |
| 1,746 |
| |||||||||
Loss (income) from investments in unconsolidated entities |
| 7,406 |
| (107 | ) | |||||||||
Net (gain) on sales of discontinued operations |
| (218,975 | ) | (61,209 | ) |
| (71,499 | ) | (70,672 | ) | ||||
Net (gain) loss on sales of unconsolidated entities |
| (4,673 | ) | 626 |
| |||||||||
Net (gain) on sales of unconsolidated entities |
| (2,434 | ) | (1,212 | ) | |||||||||
Loss on debt extinguishments |
| 1,465 |
| 468 |
|
| 93 |
| 183 |
| ||||
Unrealized (gain) loss on derivative instruments |
| (115 | ) | 383 |
| |||||||||
Unrealized loss (gain) on derivative instruments |
| 59 |
| (44 | ) | |||||||||
Compensation paid with Company Common Shares |
| 11,545 |
| 15,158 |
|
| 4,335 |
| 4,445 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Decrease (increase) in rents receivable |
| 1,580 |
| (551 | ) | |||||||||
(Increase) decrease in deposits – restricted |
| (2,002 | ) | 8,186 |
| |||||||||
(Increase) decrease in rents receivable |
| (1,534 | ) | 1,516 |
| |||||||||
(Increase) in deposits – restricted |
| (1,356 | ) | (2,283 | ) | |||||||||
(Increase) decrease in other assets |
| (19,530 | ) | 11,849 |
|
| (7,046 | ) | 322 |
| ||||
Increase in accounts payable and accrued expenses |
| 25,189 |
| 32,102 |
|
| 5,888 |
| 1,865 |
| ||||
Increase in accrued interest payable |
| 8,619 |
| 5,365 |
|
| 9,159 |
| 1,836 |
| ||||
(Decrease) in rents received in advance and other liabilities |
| (4,306 | ) | (579 | ) |
| (8,902 | ) | (6,788 | ) | ||||
(Decrease) in security deposits |
| (702 | ) | (1,037 | ) | |||||||||
Increase (decrease) in security deposits |
| 287 |
| (141 | ) | |||||||||
Net cash provided by operating activities |
| 598,353 |
| 710,717 |
|
| 177,990 |
| 193,802 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||
Investment in real estate – acquisitions |
| (308,689 | ) | (232,097 | ) |
| (187,996 | ) | (76,692 | ) | ||||
Investment in real estate – development/other |
| (6,818 | ) | (86,115 | ) |
| (4,722 | ) | (2,057 | ) | ||||
Improvements to real estate |
| (128,479 | ) | (110,291 | ) |
| (35,712 | ) | (33,602 | ) | ||||
Additions to non-real estate property |
| (2,307 | ) | (5,562 | ) |
| (667 | ) | (908 | ) | ||||
Interest capitalized for real estate under development |
| — |
| (6,952 | ) |
| (370 | ) | — |
| ||||
Interest capitalized for unconsolidated entities under development |
| (16,013 | ) | (12,492 | ) |
| (2,282 | ) | (5,437 | ) | ||||
Proceeds from disposition of real estate, net |
| 750,433 |
| 291,368 |
|
| 291,527 |
| 190,906 |
| ||||
Proceeds from disposition of furniture rental business |
| — |
| 28,741 |
| |||||||||
Proceeds from disposition of unconsolidated entities |
| 8,595 |
| 34,796 |
|
| 4,729 |
| 1,213 |
| ||||
Proceeds from refinancing of unconsolidated entities |
| — |
| 4,375 |
| |||||||||
Investments in unconsolidated entities |
| (13,587 | ) | (97,582 | ) |
| (406,115 | ) | (4,227 | ) | ||||
Distributions from unconsolidated entities |
| 16,800 |
| 31,021 |
|
| 23,416 |
| 6,041 |
| ||||
(Increase) decrease in deposits on real estate acquisitions, net |
| (144,565 | ) | 42,046 |
| |||||||||
Decrease (increase) in deposits on real estate acquisitions, net |
| 565 |
| (29,560 | ) | |||||||||
Decrease in mortgage deposits |
| 6,062 |
| 19,605 |
|
| 2,653 |
| 5,877 |
| ||||
Business combinations, net of cash acquired |
| (487 | ) | (658 | ) | |||||||||
Consolidation of previously Unconsolidated Properties |
| (827 | ) | — |
| |||||||||
Consolidation of previously Unconsolidated Properties: |
|
|
|
|
| |||||||||
Via acquisition (net of cash acquired) |
| (49,080 | ) | — |
| |||||||||
Via FIN 46 (cash consolidated) |
| 3,628 |
| — |
| |||||||||
Acquisition of Minority Interests – Partially Owned Properties |
| (125 | ) | — |
|
| (72 | ) | — |
| ||||
Other investing activities, net |
| (10,147 | ) | 192 |
|
| 1,401 |
| — |
| ||||
Net cash provided by (used for) investing activities |
| 149,846 |
| (99,605 | ) | |||||||||
Net cash (used for) provided by investing activities |
| (359,097 | ) | 51,554 |
|
See accompanying notes
5
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands)
(Unaudited)
|
| Nine Months Ended |
|
| Quarter Ended March 31, |
| ||||||||
|
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||
Loan and bond acquisition costs |
| $ | (4,416 | ) | $ | (10,495 | ) |
| $ | (707 | ) | $ | (3,153 | ) |
Mortgage notes payable: |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds |
| 48,680 |
| 104,572 |
|
| 16,450 |
| 48,680 |
| ||||
Lump sum payoffs |
| (211,240 | ) | (283,681 | ) |
| (80,692 | ) | (101,793 | ) | ||||
Scheduled principal repayments |
| (23,958 | ) | (24,351 | ) |
| (6,145 | ) | (8,285 | ) | ||||
Prepayment premiums/fees |
| (1,557 | ) | (468 | ) |
| (430 | ) | (183 | ) | ||||
Notes, net: |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds |
| 398,816 |
| 397,064 |
|
| — |
| 398,816 |
| ||||
Lump sum payoffs |
| (100,000 | ) | (225,000 | ) | |||||||||
Scheduled principal repayments |
| (4,480 | ) | (4,669 | ) |
| — |
| (192 | ) | ||||
Line of credit: |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds |
| 172,000 |
| 368,500 |
|
| 549,000 |
| 172,000 |
| ||||
Repayments |
| (312,000 | ) | (528,500 | ) |
| (139,000 | ) | (312,000 | ) | ||||
(Payments on) settlement of derivative instruments |
| (12,999 | ) | (1,534 | ) |
| (3,107 | ) | (12,999 | ) | ||||
Proceeds from sale of OP Units |
| 5,559 |
| 8,425 |
|
| 3,538 |
| 2,606 |
| ||||
Proceeds from exercise of EQR options |
| 50,669 |
| 28,542 |
|
| 20,923 |
| 4,270 |
| ||||
Proceeds from sale of Preference Units |
| 150,000 |
| — |
| |||||||||
Payment of offering costs |
| (5,273 | ) | (170 | ) |
| (24 | ) | (71 | ) | ||||
Redemption of Preference Units |
| (100,000 | ) | — |
| |||||||||
Distributions: |
|
|
|
|
|
|
|
|
|
| ||||
OP Units – General Partner |
| (353,211 | ) | (354,683 | ) |
| (119,740 | ) | (117,242 | ) | ||||
Preference Units |
| (55,012 | ) | (57,919 | ) |
| (13,693 | ) | (19,048 | ) | ||||
Preference Interests |
| (15,158 | ) | (15,185 | ) |
| (5,053 | ) | (5,053 | ) | ||||
Junior Preference Units |
| (243 | ) | (243 | ) |
| (81 | ) | (81 | ) | ||||
OP Units – Limited Partners |
| (28,910 | ) | (29,859 | ) |
| (9,411 | ) | (9,645 | ) | ||||
Minority Interests – Partially Owned Properties |
| (2,755 | ) | (11,568 | ) |
| (8,773 | ) | (1,549 | ) | ||||
Principal receipts on employee notes, net |
| — |
| 263 |
| |||||||||
Net cash (used for) financing activities |
| (405,488 | ) | (640,959 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents |
| 342,711 |
| (29,847 | ) | |||||||||
Net cash provided by financing activities |
| 203,055 |
| 35,078 |
| |||||||||
Net increase in cash and cash equivalents |
| 21,948 |
| 280,434 |
| |||||||||
Cash and cash equivalents, beginning of period |
| 29,875 |
| 51,603 |
|
| 49,579 |
| 29,875 |
| ||||
Cash and cash equivalents, end of period |
| $ | 372,586 |
| $ | 21,756 |
|
| $ | 71,527 |
| $ | 310,309 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
SUPPLEMENTAL INFORMATION: |
|
|
|
|
|
|
|
|
|
| ||||
Cash paid during the period for interest |
| $ | 255,456 |
| $ | 270,885 |
|
| $ | 73,800 |
| $ | 83,579 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Real estate acquisitions/dispositions: |
|
|
|
|
|
|
|
|
|
| ||||
Mortgage loans assumed |
| $ | 81,024 |
| $ | 14,000 |
|
| $ | 36,943 |
| $ | 34,968 |
|
|
|
|
|
|
| |||||||||
Valuation of OP Units issued |
| $ | 105 |
| $ | — |
| |||||||
|
|
|
|
|
| |||||||||
Mortgage loans (assumed) by purchaser |
| $ | (31,668 | ) | $ | (8,840 | ) |
| $ | (1,338 | ) | $ | — |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Consolidation of previously Unconsolidated Properties: |
|
|
|
|
| |||||||||
Consolidation of previously Unconsolidated Properties – Via acquisition: |
|
|
|
|
| |||||||||
Investment in real estate |
| $ | (955,073 | ) | $ | — |
| |||||||
Mortgage loans assumed |
| $ | 28,084 |
| $ | — |
|
| $ | 270,285 |
| $ | — |
|
Minority Interests – Partially Owned Properties |
| $ | 309 |
| $ | — |
| |||||||
Investments in unconsolidated entities |
| $ | 608,200 |
| $ | — |
| |||||||
Net other (assets) liabilities recorded |
| $ | 27,199 |
| $ | — |
| |||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Valuation of OP Units issued |
| $ | 4,231 |
| $ | — |
| |||||||
|
|
|
|
|
| |||||||||
Consolidation of previously Unconsolidated Properties – Via FIN 46: |
|
|
|
|
| |||||||||
Investment in real estate |
| $ | (548,342 | ) | $ | — |
| |||||||
Mortgage loans consolidated |
| $ | 294,722 |
| $ | — |
| |||||||
Minority Interests – Partially Owned Properties |
| $ | 3,074 |
| $ | — |
| |||||||
Investments in unconsolidated entities |
| $ | 1,159 |
| $ | — |
|
| $ | 234,984 |
| $ | — |
|
|
|
|
|
|
| |||||||||
Net (assets) liabilities recorded |
| $ | 579 |
| $ | — |
| |||||||
Net other (assets) liabilities recorded |
| $ | 19,190 |
| $ | — |
|
See accompanying notes
6
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
ERP Operating Limited Partnership (“ERPOP”), an Illinois limited partnership, was formed in May 1993 to conduct the multifamily residential property business of Equity Residential (“EQR”). EQR is a Maryland real estate investment trust (“REIT”) formed in March 1993 and is a fully integrated real estate company engaged in the acquisition, development, ownership, management and operation of multifamily properties.
EQR is the general partner of, and as of September 30, 2003March 31, 2004 owned an approximate 92.6%93.0% ownership interest in ERPOP. ERPOP is, directly or indirectly, a partner, member or shareholder of numerous partnerships, limited liability companies and corporations which have been established primarily to own fee simple title to multifamily properties or to conduct property management activities and other businesses related to the ownership and operation of multifamily residential real estate. As used herein, the term “Operating Partnership” includes ERPOP and those entities owned or controlled by it. As used herein, the term “Company” means EQR and the Operating Partnership.
As of September 30, 2003,March 31, 2004, the Operating Partnership, owneddirectly or hadindirectly through investments in 990title holding entities, owned all or a portion of 952 properties in 34 states consisting of 212,147203,590 units. AnThe ownership breakdown includes:
|
| Number of |
| Number of |
|
| Properties |
| Units |
|
Wholly Owned Properties |
| 867 |
| 182,163 |
|
| 849 |
| 179,115 |
|
Partially Owned Properties (Consolidated) |
| 36 |
| 6,931 |
|
| 40 |
| 7,857 |
|
Unconsolidated Properties |
| 87 |
| 23,053 |
|
| 63 |
| 16,618 |
|
Total Properties |
| 990 |
| 212,147 |
| |||||
|
| 952 |
| 203,590 |
|
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. Operating results for the nine monthsquarter ended September 30, 2003March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.2004.
The balance sheet at December 31, 20022003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
For further information, including definition of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2002.2003.
7
Stock-Based Compensation
Prior to 2003, the Company had chosen to account for its stock-based compensation in accordance with APB No. 25, Accounting for Stock Issued to Employees,which resulted in no
7
compensation expense for options issued with an exercise price equal to or exceeding the market value of EQR’s Common Shares on the date of grant (intrinsic method). The Company has elected to expense its stock-based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), Accounting for Stock Based Compensation, effective in the first quarter of 2003, which resulted in compensation expense being recorded based on the fair value of the stock compensation granted or modified.granted. Any Common Shares issued pursuant to EQR’s incentive equity compensation and employee share purchase plans will result in the Operating Partnership issuing units of limited partnership interest (“OP UnitsUnits”) to EQR on a one-for-one basis, with the Operating Partnership receiving the net cash proceeds of such issuances.
SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123. The Company has chosen to use the “Prospective Method”. This method which requires that companiesthe Company to apply the recognition provisions of SFAS No. 123 to only employee awards granted or modified after the beginning of the fiscal year in which the recognition provisions are first applied, or January 1, 2003. Compensation expense under all of the Company’s plans is generally recognized over periods ranging from three months to five years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for both the nine monthsquarters ended March 31, 2004 and quarter ended September 30, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.
The following table illustrates the effect on net income and earnings per OP Unit if the fair value based method had been applied to all outstanding and unvested awards in each period presented:
|
| Nine Months Ended |
| Quarter Ended |
|
| Quarter Ended March 31, |
| ||||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||||
|
| (Amounts in thousands except per OP Unit amounts) |
|
| (Amounts in thousands except |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income available to OP Units – as reported |
| $ | 363,330 |
| $ | 248,934 |
| $ | 121,728 |
| $ | 69,756 |
|
| $ | 105,949 |
| $ | 120,277 |
|
Add: Stock-based employee compensation expense included in reported net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
EQR’s restricted/performance shares |
| 8,157 |
| 15,204 |
| 2,911 |
| 5,060 |
|
| 2,882 |
| 2,334 |
| ||||||
EQR’s share options (1) |
| 2,321 |
| — |
| 307 |
| — |
|
| 789 |
| 1,707 |
| ||||||
EQR’s ESPP discount |
| 1,049 |
| — |
| 244 |
| — |
|
| 664 |
| 490 |
| ||||||
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
EQR’s restricted/performance shares |
| (8,157 | ) | (15,204 | ) | (2,911 | ) | (5,060 | ) |
| (2,882 | ) | (2,334 | ) | ||||||
EQR’s share options (1) |
| (5,503 | ) | (4,616 | ) | (1,338 | ) | (1,565 | ) |
| (1,558 | ) | (2,899 | ) | ||||||
EQR’s ESPP discount |
| (1,049 | ) | (1,194 | ) | (244 | ) | (269 | ) |
| (664 | ) | (490 | ) | ||||||
Net income available to OP Units – pro forma |
| $ | 360,148 |
| $ | 243,124 |
| $ | 120,697 |
| $ | 67,922 |
|
| $ | 105,180 |
| $ | 119,085 |
|
Earnings per OP Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic – as reported |
| $ | 1.24 |
| $ | 0.84 |
| $ | 0.41 |
| $ | 0.24 |
|
| $ | 0.35 |
| $ | 0.41 |
|
Basic – pro forma |
| $ | 1.23 |
| $ | 0.82 |
| $ | 0.41 |
| $ | 0.23 |
|
| $ | 0.35 |
| $ | 0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Diluted – as reported |
| $ | 1.23 |
| $ | 0.83 |
| $ | 0.41 |
| $ | 0.23 |
|
| $ | 0.35 |
| $ | 0.41 |
|
Diluted – pro forma |
| $ | 1.22 |
| $ | 0.81 |
| $ | 0.41 |
| $ | 0.23 |
|
| $ | 0.35 |
| $ | 0.40 |
|
(1) Share options for the nine monthsquarter ended September 30,March 31, 2003 included $1.4 million of expense recognition related to options granted in the first quarter of 2003 to EQR’s former chief executive officer. These options vested immediately upon grant.
8
Other
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other items, rescinds the automatic classification of costs incurred on debt extinguishment as extraordinary charges. Instead, gains and losses from debt extinguishment should only be classified as extraordinary if they meet the “unusual and infrequently occurring” criteria outlined in APB No. 30. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Operating Partnership adopted the standard effective January 1, 2003.
In January 2003, the FASB issued Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities,.as required, effective March 31, 2004. The adoption required the consolidation of all previously unconsolidated development projects. FIN No. 46 requires the Operating Partnership to consolidate the assets, liabilities and results of operations of the activities of a variable interest entity, which for the Operating Partnership includes only its development partnerships, if the Operating Partnership is entitled to be consolidated ifreceive a companymajority of the entity’s residual returns or is subject to a majority of the risk of loss from the variable interestsuch entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The Operating Partnership will adopt FIN No. 46 as required effective December 31, 2003. FASB Staff Position (“FSP”) No. FIN 46-6 deferred the effective date for applying the provisions of FIN No. 46 (for entities created before February 1, 2003) from July 1, 2003 to December 31, 2003. The Operating Partnership has preliminarily determined that its unconsolidated stabilized development projects and projects under development (see Note 7) are variable interest entities in which the Operating Partnership is the primary beneficiaryas of the dateactivities. As of the original formation of therespective joint ventures. On such respective formation dates,ventures, the Operating Partnership is considered to be the primary beneficiary and the fair value of the assets, liabilities and non-controlling interests of these development projects approximates carryover basis. IfDue to the March 31, 2004 effective date, the Operating Partnership has consolidated only the assets, liabilities and non-controlling interests of these development projects had beenproperties. The results of operations will be consolidated as of September 30, 2003, the Operating Partnership’s investment in real estate and mortgage notes payable would have increased by $1.4 billion and $890.3 million, respectively, and investments in unconsolidated entities would have decreased by $514.6 million.beginning April 1, 2004. The Operating Partnership does not anticipate that the adoption of FIN No. 46 will not have any material effect on net income.income as the aggregate results of operations of these development properties were previously taken into account in income (loss) from investments in unconsolidated entities. See Note 4 for additional discussion.
The Operating Partnership generally contributes between 25% and 35% of the project cost of the joint venture projects under development (constituting 100% of the equity), with the remaining cost financed through third-party construction mortgages. Voting rights are shared equally between the Operating Partnership and its respective development partners and accordingly, these projects were accounted for under the equity method prior to the adoption of FIN No. 46.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. On November 7, 2003, the FASB issued FSP No. FAS 150-3, which deferred for an indefinite period the classification and measurement provisions, but not the disclosure provisions (see discussion below), of SFAS No. 150 as it relates to noncontrolling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent’s financial statements under SFAS No. 150 (e.g., minority interests in consolidated limited-life subsidiaries). The Operating Partnership does not have any mandatorily redeemable preferred shares/units that fall within the scope of SFAS No. 150.
With regards to the aforementioned disclosure provisions, the Operating Partnership is presently the controlling partner in various consolidated partnerships consisting of 3640 properties and 6,931 units.7,857 units having a minority interest book value of $13.6 million at March 31, 2004. These partnerships contain provisions that require the partnerships to be liquidated through the salesales of itstheir assets upon reaching a date specified in each respective partnership agreement. The Operating Partnership, as controlling partner, has an obligation to cause the property owning partnerships to distribute proceeds of liquidation to the Minority Interests in these Partially Owned Properties only to the extent that the net proceeds received by the partnerships from the sale of its assets warrant a distribution based on the partnership agreements. As of September 30, 2003,March 31, 2004, the Operating Partnership estimates the value of Minority Interest distributions would have been approximately $100$107 million (“Settlement Value”) had the partnerships been liquidated. This Settlement Value is based on estimated third party consideration realized by the partnerships upon disposition of the Partially Owned Properties and is net of all other assets and liabilities, including yield maintenance on the mortgages encumbering the properties, that would have been due on September 30, 2003March 31, 2004 had those mortgages been prepaid. Due to, among other things, the inherent uncertainty in the sale of real estate assets, the amount of any potential distribution to the Minority Interests in the Operating Partnership’s Partially Owned Properties is subject to change. To the extent that the partnerships’ underlying assets are worth less than the underlying liabilities, the Operating Partnership has no obligation to remit any
9
consideration to the Minority Interests in Partially Owned Properties.
9
On July 31, 2003, the SEC clarified its position with respect to Emerging Issues Task Force (“EITF”) Topic D-42, The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock. Under the SEC’s revised interpretation, in connection with the redemption of preferred shares/units, the original issuance costs of these shares/units must be treated in a manner similar to preferred distributions and deducted from net income in arriving at net income available to OP Units. The clarification of EITF Topic D-42 was required to be adopted effective July 1, 2003 on a retroactive basis by restating prior periods included in the current financial statements. The adoption of the clarification of EITF Topic D-42 did not have any impact on the Operating Partnership’s consolidated financial position or cash flows nor did it impact the reported consolidated results of operations for the periods presented herein.
3. Partners’ Capital
|
|
| |
OP Units outstanding at January 1, | 299,551,617 |
| |
|
|
|
|
|
| ||
Issued to General |
|
|
|
Conversion of Series E Preference Units |
|
| |
Conversion of Series H Preference Units | 144 |
| |
Employee Share Purchase Plan |
|
|
|
Exercise of EQR options |
|
|
|
Restricted EQR share grants, net |
|
|
|
Other |
| (75 | |
| |||
|
| ) | |
|
|
|
|
|
|
|
|
The limited partners of the Operating Partnership as of September 30, 2003March 31, 2004 include various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units (the “Limited Partners”) and own an approximate 7.4%7.0% ownership interest (21,007,913 OP Units) in ERPOP. Subject to applicable securities law restrictions, the Limited Partners may exchange their OP Units for EQR Common Shares on a one-for-one basis.
EQR contributes all net proceeds from its various equity offerings (including proceeds from exercise of options for EQR Common Shares) to the Operating Partnership. In return for those contributions, EQR receives a number of OP Units in ERPOP equal to the number of Common Shares it has issued in the equity offering (or in the case of a preferred equity offering, a number of preference units in ERPOP equal in number and having the same terms as the preferred shares issued in the equity offering).
During the nine months ended September 30, 2003, the Operating Partnership issued 159,427 OP Units to various limited partners at an average price of $27.48 per unit.
The following table presents the Operating Partnership’s issued and outstanding “Preference Units”Preference Units as of September 30, 2003March 31, 2004 and December 31, 2002:2003:
10
|
| Annual |
|
|
| |||||
September |
| December | ||||||||
Preference Units: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
9 1/8% Series B Cumulative Redeemable Preference Units; liquidation value $250 per unit; 500,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 22.81252 |
| $ | 125,000 |
| $ | 125,000 |
|
|
|
|
|
|
|
|
| |||
9 1/8% Series C Cumulative Redeemable Preference Units; liquidation value $250 per unit; 460,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 22.81252 |
| 115,000 |
| 115,000 |
| ||
|
|
|
|
|
|
|
| |||
8.60% Series D Cumulative Redeemable Preference Units; liquidation value $250 per unit; 700,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 21.50 |
| 175,000 |
| 175,000 |
| ||
|
|
|
|
|
|
|
| |||
7.00% Series E Cumulative Convertible Preference Units; liquidation value $25 per unit; 2,488,290 and 2,548,114 units issued and outstanding at September 30, 2003 and December 31, 2002, respectively |
| $ | 1.75 |
| 62,207 |
| 63,703 |
| ||
|
|
|
|
|
|
|
| |||
7 1/4% Series G Convertible Cumulative Preference Units; liquidation value $250 per unit; 1,264,692 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 18.125 |
| 316,173 |
| 316,173 |
| ||
|
|
|
|
|
|
|
| |||
7.00% Series H Cumulative Convertible Preference Units; liquidation value $25 per unit; 51,228 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 1.75 |
| 1,281 |
| 1,281 |
| ||
|
|
|
|
|
|
|
| |||
8.29% Series K Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 4.145 |
| 50,000 |
| 50,000 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series L Cumulative Redeemable Preference Units; liquidation value $25 per unit; 0 and 4,000,000 units issued and outstanding at September 30, 2003 and December 31, 2002, respectively |
| (2 | ) | — |
| 100,000 |
| |||
|
|
|
|
|
|
|
| |||
6.48% Series N Cumulative Redeemable Preference Units; liquidation value $250 per unit; 600,000 and 0 units issued and outstanding at September 30, 2003 and December 31, 2002, respectively (3) |
| $ | 16.20 |
| 150,000 |
| — |
| ||
|
|
|
|
|
|
|
| |||
|
|
|
| $ | 994,661 |
| $ | 946,157 |
|
|
| Annual |
| Amounts in thousands |
| ||||||
March |
| December | |||||||||
Preference Units: |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
| ||||
9 1/8% Series B Cumulative Redeemable Preference Units; liquidation value $250 per unit; 500,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 22.81252 |
| $ | 125,000 |
| $ | 125,000 |
| |
|
|
|
|
|
|
|
| ||||
9 1/8% Series C Cumulative Redeemable Preference Units; liquidation value $250 per unit; 460,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 22.81252 |
| 115,000 |
| 115,000 |
| |||
|
|
|
|
|
|
|
| ||||
8.60% Series D Cumulative Redeemable Preference Units; liquidation value $250 per unit; 700,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 21.50 |
| 175,000 |
| 175,000 |
| |||
|
|
|
|
|
|
|
| ||||
7.00% Series E Cumulative Convertible Preference Units; liquidation value $25 per unit; 2,146,090 and 2,192,490 units issued and outstanding at March 31, 2004 and December 31, 2003, respectively |
| $ | 1.75 |
| 53,652 |
| 54,812 |
| |||
|
|
|
|
|
|
|
| ||||
7.00% Series H Cumulative Convertible Preference Units; liquidation value $25 per unit; 43,928 and 44,028 units issued and outstanding at March 31, 2004 and December 31, 2003, respectively |
| $ | 1.75 |
| 1,098 |
| 1,101 |
| |||
|
|
|
|
|
|
|
| ||||
8.29% Series K Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 4.145 |
| 50,000 |
| 50,000 |
| |||
|
|
|
|
|
|
|
| ||||
6.48% Series N Cumulative Redeemable Preference Units; liquidation value $250 per unit; 600,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 16.20 |
| 150,000 |
| 150,000 |
| |||
|
|
|
|
|
|
|
| ||||
|
|
|
| $ | 669,750 |
| $ | 670,913 |
| ||
(1) Dividends on all series of Preference Units are payable quarterly at various pay dates. Dividend rates listed for Series B, C, D G and N are Preference Unit rates and the equivalent depositary unitDepositary Unit annual dividend rates are $2.281252, $2.281252, $2.15 $1.8125 and $1.62, respectively.
(2) On June 19, 2003, the Operating Partnership redeemed all of its outstanding Series L Cumulative Redeemable Preference Units at liquidation value for total cash consideration of $100.0 million in conjunction with the concurrent redemption of the corresponding Preferred Shares of EQR. The Operating Partnership did not incur any original issuance costs as these units were issued by Merry Land and Investment Company, Inc. prior to its merger with the Company.
(3) On June 19, 2003, EQR issued 600,000 Series N Cumulative Redeemable Preferred Shares in a public offering. The Company received $145.3 million in net proceeds from this offering after payment of the underwriters’ fee. These net proceeds were contributed by EQR to the Operating Partnership in exchange for 600,000 of the Operating Partnership’s 6.48% Series N Cumulative Redeemable Preference Units.
11
The following table presents the issued and outstanding “Preference Interests”Preference Interests as of September 30, 2003March 31, 2004 and December 31, 2002:2003:
|
| Annual |
|
|
| |||||
September |
| December | ||||||||
Preference Interests: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 4.00 |
| $ | 40,000 |
| $ | 40,000 |
|
|
|
|
|
|
|
|
| |||
8.50% Series B Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 4.25 |
| 55,000 |
| 55,000 |
| ||
|
|
|
|
|
|
|
| |||
8.50% Series C Cumulative Redeemable Preference Units; liquidation value $50 per unit; 220,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 4.25 |
| 11,000 |
| 11,000 |
| ||
|
|
|
|
|
|
|
| |||
8.375% Series D Cumulative Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 4.1875 |
| 21,000 |
| 21,000 |
| ||
|
|
|
|
|
|
|
| |||
8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 4.25 |
| 50,000 |
| 50,000 |
| ||
|
|
|
|
|
|
|
| |||
8.375% Series F Cumulative Redeemable Preference Units; liquidation value $50 per unit; 180,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 4.1875 |
| 9,000 |
| 9,000 |
| ||
|
|
|
|
|
|
|
| |||
7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 3.9375 |
| 25,500 |
| 25,500 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 3.8125 |
| 9,500 |
| 9,500 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 3.8125 |
| 13,500 |
| 13,500 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 3.8125 |
| 11,500 |
| 11,500 |
| ||
|
|
|
| $ | 246,000 |
| $ | 246,000 |
|
|
| Annual |
| Amounts in thousands |
| |||||
March |
| December | ||||||||
Preference Interests: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 4.00 |
| $ | 40,000 |
| $ | 40,000 |
|
|
|
|
|
|
|
|
| |||
8.50% Series B Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 4.25 |
| 55,000 |
| 55,000 |
| ||
|
|
|
|
|
|
|
| |||
8.50% Series C Cumulative Redeemable Preference Units; liquidation value $50 per unit; 220,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 4.25 |
| 11,000 |
| 11,000 |
| ||
|
|
|
|
|
|
|
| |||
8.375% Series D Cumulative Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 4.1875 |
| 21,000 |
| 21,000 |
| ||
|
|
|
|
|
|
|
| |||
8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 4.25 |
| 50,000 |
| 50,000 |
| ||
|
|
|
|
|
|
|
| |||
8.375% Series F Cumulative Redeemable Preference Units; liquidation value $50 per unit; 180,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 4.1875 |
| 9,000 |
| 9,000 |
| ||
|
|
|
|
|
|
|
| |||
7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 3.9375 |
| 25,500 |
| 25,500 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 3.8125 |
| 9,500 |
| 9,500 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 3.8125 |
| 13,500 |
| 13,500 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 3.8125 |
| 11,500 |
| 11,500 |
| ||
|
|
|
| $ | 246,000 |
| $ | 246,000 |
|
(1) Dividends on all series of Preference Interests are payable quarterly on March 25th, June 25th, September 25th, and December 25th of each year.
12
The following table presents the Operating Partnership’s issued and outstanding Junior Convertible Preference Units (the “Junior Preference Units”) as of September 30, 2003March 31, 2004 and December 31, 2002:2003:
12
|
| Annual |
|
|
| |||||
September |
| December | ||||||||
Junior Preference Units: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Series A Junior Convertible Preference Units; liquidation value $100 per unit; 56,616 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 5.46934 |
| $ | 5,662 |
| $ | 5,662 |
|
|
|
|
|
|
|
|
| |||
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at September 30, 2003 and December 31, 2002 |
| $ | 2.00 |
| 184 |
| 184 |
| ||
|
|
|
| $ | 5,846 |
| $ | 5,846 |
|
|
| Annual |
| Amounts in thousands |
| |||||
March |
| December | ||||||||
Junior Preference Units: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Series A Junior Convertible Preference Units; liquidation value $100 per unit; 20,333 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 5.46934 |
| $ | 2,033 |
| $ | 2,033 |
|
|
|
|
|
|
|
|
| |||
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at March 31, 2004 and December 31, 2003 |
| $ | 2.00 |
| 184 |
| 184 |
| ||
|
|
|
| $ | 2,217 |
| $ | 2,217 |
|
(1) Dividends on both series of Junior Preference Units are payable quarterly at various pay dates.
4.Real Estate Acquisitions
During the nine monthsquarter ended September 30, 2003,March 31, 2004, the Operating Partnership acquired the entire equity interest in the eight fiveproperties listed belowcontaining 1,671 units from unaffiliated parties, and twoinclusive of three additional units at an existing property, for a total purchase price of $389.7$224.4 million.
Date |
| Property |
| Location |
| Number |
| Acquisition Price |
| |
01/30/03 |
| The Reserve at Eisenhower |
| Alexandria, VA |
| 226 |
| $ | 41,000 |
|
02/14/03 |
| Artisan Square |
| Northridge, CA |
| 140 |
| 27,466 |
| |
03/05/03 |
| LaSalle (1) |
| Beaverton, OR |
| 554 |
| 43,000 |
| |
05/01/03 |
| Gateway at Malden Center (2) |
| Malden, MA |
| 203 |
| 34,900 |
| |
06/17/03 |
| Mill Creek |
| Milpitas, CA |
| 516 |
| 70,000 |
| |
06/30/03 |
| Carlyle Mill |
| Alexandria, VA |
| 317 |
| 61,200 |
| |
08/01/03 |
| Gatewood |
| Pleasanton, CA |
| 200 |
| 27,000 |
| |
08/19/03 |
| The Oaks of Santa Clarita |
| Santa Clarita, CA |
| 520 |
| 85,000 |
| |
Various |
| Rivers Bend (condo units) |
| Windsor, CT |
| 2 |
| 125 |
| |
|
|
|
|
|
| 2,678 |
| $ | 389,691 |
|
(1) Includes 8,167 square feet of retail space.
(2) Includes 36,326 square feet of office space and a 324-space parking garage.
During the nine monthsquarter ended September 30, 2003,March 31, 2004, the Operating Partnership also acquired the majority of the remaining third party equity interests it did not previously own in sixteen properties, consisting of 4,739 completed units, 315 development units to be completed in the following three properties:
• Liberty Park, a 202-unit property located in Braintree, Massachusetts;
• Hickory Mill II, a 44-unit property located in Hurricane, West Virginia (property was subsequently sold – see Note 5);second quarter of 2004 and
• Winter Woods II, a 44-unit property located in Winter Garden, Florida.
two vacant land parcels. These properties were previously accounted for under the equity method of accounting and subsequent to each purchase were consolidated. The Operating Partnership recorded $34.9$955.1 million in investment in real estate at carryover basis and the following:
• | Assumed $270.3 million in mortgage debt; | |
• | Recorded $0.3 million of minority interest in partially owned properties; | |
• | Reduced investments in unconsolidated entities by $608.2 million (inclusive of $339.7 million in mortgage debt paid off prior to closing); | |
• | Assumed $27.2 million of other liabilities net of other assets acquired; and | |
• | Paid cash of $49.1 million (net of cash acquired). |
• Assumed $28.1
As previously noted, the Operating Partnership adopted FIN No. 46, as required, effective March 31, 2004. The adoption required the consolidation of all previously unconsolidated development projects. Accordingly, the Operating Partnership consolidated five completed properties containing 1,360 units, six projects under development which are anticipated to contain 1,592 units upon completion and various other vacant land parcels held for future development. The Operating Partnership recorded $548.3 million in mortgage debt;investment in real estate and the following:
• Issued 153,851 OP Units having a value of $4.2 million;
• | Consolidated $294.7 million in mortgage debt; | |
• | Recorded $3.0 million of minority interest in partially owned properties; | |
• | Reduced investments in unconsolidated entities by $235.0 million; | |
• | Consolidated $19.2 million of other liabilities net of other assets acquired; and | |
• | Consolidated $3.6 million of cash. |
• Reduced investments in unconsolidated entities by $1.2 million;
13
During the quarter ended March 31, 2004, the Operating Partnership disposed of twenty-two properties containing 5,990 units to unaffiliated parties, inclusive of various individual condominium units, for a total sales price of $301.3 million allocated as follows:
• Paid cashWholly Owned Properties – 19 properties containing 5,239 units for a total sales price of $0.8$269.4 million;
• Partially Owned Properties – 2 properties containing 487 units for a total sales price of $27.5 million; and
• Assumed $0.6Unconsolidated Properties – 1 property containing 264 units for a total sales price of $4.4 million (represents the Operating Partnership’s allocated share of other liabilitiesthe net of other assets acquired.disposition proceeds).
5. Real Estate Dispositions
During the nine months ended September 30, 2003, the Operating Partnership disposed of the sixty-three properties and various individual condominium units listed below to unaffiliated parties. The Operating Partnership recognized a net gain on sales of discontinued operations of approximately $219.0$71.5 million and a net gain on sales of unconsolidated entities of approximately $4.7 million.
Date |
| Property |
| Location |
| Number |
| Disposition |
| |
|
|
|
|
|
|
|
| (in thousands) |
| |
01/14/03 |
| Strawberry Place |
| Plant City, FL |
| 55 |
| $ | 1,400 |
|
01/14/03 |
| Smoketree Polo Club |
| Indio, CA |
| 288 |
| 18,900 |
| |
01/29/03 |
| Amberwood I |
| Lake City, FL |
| 50 |
| 1,175 |
| |
01/30/03 |
| Emerald Place |
| Bermuda Dunes, CA |
| 240 |
| 20,125 |
| |
01/30/03 |
| Rolido Parque |
| Houston, TX |
| 369 |
| 14,660 |
| |
02/27/03 |
| Fox Hill Commons |
| Vernon, CT |
| 74 |
| 4,700 |
| |
02/27/03 |
| The Landings |
| Winter Haven, FL |
| 60 |
| 1,475 |
| |
02/27/03 |
| Morningside |
| Titusville, FL |
| 183 |
| 3,980 |
| |
03/04/03 |
| Colony Woods |
| Birmingham, AL |
| 414 |
| 25,000 |
| |
03/04/03 |
| Hearthstone |
| San Antonio, TX |
| 252 |
| 7,700 |
| |
03/04/03 |
| Northgate Village |
| San Antonio, TX |
| 264 |
| 10,150 |
| |
03/19/03 |
| Lincoln Green I, II & III |
| San Antonio, TX |
| 680 |
| 24,900 |
| |
03/20/03 |
| Meadows on the Lake |
| Birmingham, AL |
| 200 |
| 10,900 |
| |
03/20/03 |
| Meadows in the Park |
| Birmingham, AL |
| 200 |
| 10,900 |
| |
03/20/03 |
| Shoal Run |
| Birmingham, AL |
| 276 |
| 14,350 |
| |
03/31/03 |
| Colony Place |
| Fort Myers, FL |
| 300 |
| 20,600 |
| |
04/08/03 |
| Mallgate (1) |
| Louisville, KY |
| 540 |
| 15,500 |
| |
04/15/03 |
| Summit Chase |
| Coral Springs, FL |
| 140 |
| 8,875 |
| |
04/16/03 |
| Bayside |
| Sebring, FL |
| 59 |
| 885 |
| |
04/30/03 |
| Essex Place II (Vacant Land) |
| Tampa, FL |
| — |
| 575 |
| |
05/08/03 |
| Pueblo Villas |
| Albuquerque, NM |
| 232 |
| 9,250 |
| |
05/14/03 |
| Emerald Bay |
| Winter Park, FL |
| 432 |
| 17,200 |
| |
05/16/03 |
| Meadowood |
| Flatwoods, KY |
| 52 |
| 975 |
| |
05/29/03 |
| Spicewood Springs |
| Jacksonville, FL |
| 512 |
| 28,000 |
| |
05/30/03 |
| Princeton Square |
| Jacksonville, FL |
| 288 |
| 16,750 |
| |
05/30/03 |
| Boulder Creek |
| Wilsonville, OR |
| 296 |
| 16,700 |
| |
05/30/03 |
| Bridge Creek |
| Wilsonville, OR |
| 315 |
| 18,100 |
| |
05/30/03 |
| Settlers Point/Brookfield |
| Salt Lake City, UT |
| 416 |
| 21,500 |
| |
05/30/03 |
| Ridgewood (2) |
| Russellville, KY |
| 52 |
| — |
| |
06/04/03 |
| Lake Point |
| Charlotte, NC |
| 296 |
| 12,401 |
| |
06/05/03 |
| Clearlake Pines II |
| Cocoa, FL |
| 52 |
| 1,392 |
| |
06/05/03 |
| Sky Pines I & II |
| Orlando, FL |
| 140 |
| 3,694 |
| |
06/05/03 |
| Brandywine East |
| Winter Haven, FL |
| 38 |
| 884 |
| |
06/05/03 |
| Woodland I & II |
| Orlando, FL |
| 169 |
| 5,175 |
| |
06/12/03 |
| Parkville |
| Parkersburg, WV |
| 49 |
| 1,063 |
| |
06/12/03 |
| Cedarwood I |
| Belpre, OH |
| 44 |
| 889 |
| |
06/24/03 |
| Greenwood Village |
| Tempe, AZ |
| 270 |
| 14,600 |
| |
06/25/03 |
| Woodbine |
| Portsmouth, OH |
| 41 |
| 660 |
| |
06/26/03 |
| Laurel Gardens |
| Coral Springs, FL |
| 384 |
| 34,550 |
| |
06/27/03 |
| Crystal Creek |
| Phoenix, AZ |
| 273 |
| 12,775 |
| |
06/30/03 |
| Harbor Pointe |
| Milwaukee, WI |
| 595 |
| 27,800 |
| |
14
Date |
| Property |
| Location |
| Number |
| Disposition |
| |
|
|
|
|
|
|
|
| (in thousands) |
| |
06/30/03 |
| Calais |
| Arlington, TX |
| 264 |
| $ | 12,500 |
|
07/25/03 |
| Wood Lane Place I |
| Woodbury, MN |
| 216 |
| 21,600 |
| |
07/31/03 |
| Cambridge Village |
| Lewisville, TX |
| 200 |
| 9,400 |
| |
08/05/03 |
| Hickory Mill I & II |
| Hurricane, WV |
| 92 |
| 2,050 |
| |
08/26/03 |
| Bear Canyon |
| Tucson, AZ |
| 238 |
| 18,350 |
| |
08/26/03 |
| Harrison Park I & II |
| Tucson, AZ |
| 360 |
| 23,875 |
| |
08/26/03 |
| La Reserve |
| Tucson, AZ |
| 240 |
| 16,750 |
| |
08/26/03 |
| Suntree Village |
| Tucson, AZ |
| 424 |
| 22,025 |
| |
08/27/03 |
| Carleton Court |
| Cross Lanes, WV |
| 73 |
| 2,000 |
| |
09/02/03 |
| Waterford at Regency |
| Jacksonville, FL |
| 159 |
| 8,650 |
| |
09/17/03 |
| Watermark Square |
| Portland, OR |
| 390 |
| 18,400 |
| |
09/22/03 |
| Arbors at Century Center |
| Memphis, TN |
| 420 |
| 14,800 |
| |
09/22/03 |
| Autumn Creek |
| Cordova, TN |
| 210 |
| 8,439 |
| |
09/22/03 |
| Trinity Lakes |
| Cordova, TN |
| 330 |
| 13,261 |
| |
09/23/03 |
| Breckinridge Court |
| Lexington, KY |
| 382 |
| 17,800 |
| |
09/30/03 |
| Sunny Oak Village |
| Overland Park, KS |
| 548 |
| 25,150 |
| |
09/30/03 |
| Copperfield |
| San Antonio, TX |
| 258 |
| 11,933 |
| |
09/30/03 |
| Songbird |
| San Antonio, TX |
| 262 |
| 13,933 |
| |
09/30/03 |
| Villas of Oak Creste |
| San Antonio, TX |
| 280 |
| 10,133 |
| |
09/30/03 |
| Belmont Landing |
| Riverdale, GA |
| 424 |
| 22,500 |
| |
Various |
| Four Lakes (condo units) |
| Lisle, IL |
| 156 |
| 19,075 |
| |
Various |
| Pointe East (condo units) |
| Redmond, WA |
| 54 |
| 10,269 |
| |
Various |
| Squaw Peak (condo units) |
| Phoenix, AZ |
| 103 |
| 10,863 |
| |
|
| Wholly Owned Properties |
|
|
| 15,673 |
| 794,864 |
| |
02/28/03 |
| Kings Crossing I (3) |
| Jacksonville, FL |
| 69 |
| 963 |
| |
05/14/03 |
| Culbreath Key (3) |
| Tampa, FL |
| 254 |
| 7,382 |
| |
|
| Unconsolidated Properties |
|
|
| 323 |
| 8,345 |
| |
Total |
|
|
|
|
| 15,996 |
| $ | 803,209 |
|
(1) The Operating Partnership was leasing$2.4 million on the land under a long-term operating ground lease.
(2)above sales. The Operating Partnership attempted to sell this property subject to assumption of the existing mortgage debt. When the lender would not accept a credit-worthy purchaser to assume the debt, title to this property was transferred to the lender in a deed-in-lieu of foreclosure transaction. The Operating Partnership recognized a net gain on debt extinguishment of approximately $92,000 as a component of interest and other income.
(3) Disposition listed represents the Operating Partnership’s share of the net disposition proceeds. Culbreath Key was sold for $26.4 million with a portion of the net sales proceeds used to payoff the mortgage debt of $16.2 million.
6.5. Commitments to Acquire/Dispose of Real Estate
As of November 4, 2003,April 28, 2004, in addition to the properties that were subsequently acquired as discussed in Note 18,16, the Operating Partnership had entered into a separate agreementsagreement to acquire sevenone multifamily propertiesproperty containing 2,265144 units from an unaffiliated parties.party. The Operating Partnership expects a combined purchase price of approximately $220.4 million, including the assumption of mortgage debt of approximately $21.5$16.4 million.
As of November 4, 2003,April 28, 2004, in addition to the properties that were subsequently disposed of as discussed in Note 18,16, the Operating Partnership had entered into separate agreements to dispose of thirty-three
15
eight multifamily properties containing 8,404 2,516units and one vacant land parcel to unaffiliated parties. The Operating Partnership expects a combined disposition price of approximately $456.9$156.6 million.
The closings of these pending transactions are subject to certain contingencies and conditions; therefore, there can be no assurance that these transactions will be consummated or that the final terms thereof will not differ in material respects from those summarized in the preceding paragraphs.
7.6. Investments in Unconsolidated Entities
The Operating Partnership has co-invested in various properties with unrelated third parties.parties which are accounted for under the equity method of accounting. The following table summarizes the Operating Partnership’s investments in unconsolidated entities as of September 30, 2003March 31, 2004 (amounts in thousands except for project and unit amounts):
|
| Institutional |
| Stabilized |
| Projects |
| Lexford/ |
| Totals |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total projects |
| 45 |
| 12 |
| 16 |
| 22 |
| 95 | (2) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total units |
| 10,846 |
| 3,812 |
| 4,336 |
| 2,616 |
| 21,610 | (2) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Partnership’s percentage share of outstanding debt |
| 25.0 | % | 100.0 | % | 100.0 | % | 11.0 | % |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Partnership’s share of outstanding debt (4) |
| $ | 121,200 |
| $ | 331,063 |
| $ | 559,201 | (3) | $ | 5,089 |
| $ | 1,016,553 |
|
14
|
| Institutional |
| Lexford/ |
| Totals |
| |||
|
|
|
|
|
|
|
| |||
Total projects |
| 45 |
| 17 |
| 62 | (1) | |||
|
|
|
|
|
|
|
| |||
Total units |
| 10,846 |
| 2,015 |
| 12,861 | (1) | |||
|
|
|
|
|
|
|
| |||
Operating Partnership’s ownership percentage of outstanding debt |
| 25.0 | % | 12.7 | % |
|
| |||
|
|
|
|
|
|
|
| |||
Operating Partnership’s share of outstanding debt (2) |
| $ | 121,200 |
| $ | 4,577 |
| $ | 125,777 |
|
|
|
|
|
|
|
|
| |||
(1)The Operating Partnership determines a project to be stabilized once it has maintained an average physical occupancy of 90% or more for a three-month period or one year from the cessation of major development activities, whichever is earlier.
(2)Includes nine projects under development containing 2,356 units, which are not included in the Operating Partnership’s property/unit counts at September 30, 2003. Totals exclude Fort Lewis Military Housing consisting of one property and 3,7993,757 units, which is not accounted for under the equity method of accounting. The Fort Lewis Military Housingaccounting but is included in the Operating Partnership’s property/unit counts at September 30, 2003.as of March 31, 2004.
(3)(2) A total of $706.3 million is available for funding under this construction debt, of which $559.2 million was funded and outstanding at September 30, 2003.
(4)As of November 4, 2003, the Operating Partnership has funded $44.0 million as additional collateral on selected debt (see Note 8). All remaining debt is non-recourse to EQR and the Operating Partnership.
Investments in unconsolidated entities include the Unconsolidated Properties as well as various development properties under construction or pending construction. These investments are accounted for utilizing the equity method of accounting. Under the equity method of accounting, the net equity investment of the Operating Partnership is reflected on the consolidated balance sheets and after the project is completed, the consolidated statements of operations include the Operating Partnership’s share of net income or loss from the unconsolidated entity. Prior to the project being completed, the Operating Partnership capitalizes interest on its equity contribution in accordance with the provisions of SFAS No. 58, Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method. During the nine months ended September 30, 2003 and 2002, the Operating Partnership capitalized $16.0 million and $12.5 million, respectively, in interest cost related to its unconsolidated
16
development projects (which reduced interest expense incurred in the consolidated statements of operations).
The Operating Partnership generally contributes between 25% and 35% of the project cost of the unconsolidated projects under development (constituting 100% of the equity), with the remaining cost financed through third-party construction mortgages. Voting rights are shared equally between the Operating Partnership and its respective development partners.
See Note 2 for further discussion regarding FIN No. 46 and its anticipated effect on the Operating Partnership’s unconsolidated development projects.
8.7. Deposits - - Restricted
As of September 30, 2003,March 31, 2004, deposits-restricted totaled $287.8$135.7 million and primarily included the following:
• Deposits in the amount of $51.0$32.0 million held in third party escrow accounts to provide collateral for third party construction financing in connection with unconsolidatedpartially owned (consolidated) development projects;
• Approximately $169.5$39.5 million in tax-deferred (1031) exchange proceeds; and
• Approximately $67.3$64.2 million for resident security, utility, and other deposits.
9.8. Mortgage Notes Payable
As of September 30, 2003,March 31, 2004, the Operating Partnership had outstanding mortgage indebtedness of approximately $2.8$3.2 billion.
During the nine monthsquarter ended September 30, 2003,March 31, 2004, the Operating Partnership:
• Repaid $235.2$86.8 million of mortgage loans;
• Assumed $109.1Assumed/consolidated $601.9 million of mortgage debt on certain properties in connection with their acquisitionsacquisition and/or consolidation;
• Obtained $48.7$16.5 million of mortgage loans on certain properties; and
• Relinquished $31.7Was released from $1.3 million of mortgage debt assumed by the purchaser on disposed properties.
As of September 30, 2003,March 31, 2004, scheduled maturities for the Operating Partnership’s outstanding mortgage indebtedness were at various dates through OctoberJanuary 1, 2033.2034. At September 30, 2003,March 31, 2004, the interest rate range on the Operating Partnership’s mortgage debt was 1.04%0.92% to 12.465%. During the nine monthsquarter ended September 30, 2003,March 31, 2004, the weighted average interest rate on the Operating Partnership’s mortgage debt was 5.84%5.59%.
15
10.9. Notes
As of September 30, 2003,March 31, 2004, the Operating Partnership had outstanding unsecured notes of approximately $2.7 billion.
On June 5, 2003, the Operating Partnership filed a Form S-3 registration statement with the SEC to register $2.0 billion of debt securities. The SEC declared this registration statement effective on June 11, 2003. In addition, the Operating Partnership carried over $280.0 million related to the registration statement effective on September 8, 2000. As of September 30, 2003, $2.28 billion remained available for issuance under this registration statement.
During the nine months ended September 30, 2003, the Operating Partnership:
• Issued $400.0 million of ten-year 5.20% fixed-rate public notes, receiving net proceeds of $397.5
17
million;
• Repaid $100.0 million of floating rate public notes at maturity; and
• Repaid $4.5 million of other unsecured notes.
As of September 30, 2003,March 31, 2004, scheduled maturities for the Operating Partnership’s outstanding notes were at various dates through 2029. At September 30, 2003,March 31, 2004, the interest rate range on the Operating Partnership’s notes was 4.75% to 7.75%. During the nine monthsquarter ended September 30, 2003,March 31, 2004, the weighted average interest rate on the Operating Partnership’s notes was 6.48%6.43%.
11.10. Line of Credit
The Operating Partnership has a revolving credit facility with potential borrowings of up to $700.0 million. As of September 30, 2003, no amounts wereMarch 31, 2004, $420.0 million was outstanding and $57.0$56.7 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit.credit facility. During the nine monthsquarter ended September 30, 2003,March 31, 2004, the weighted average interest rate was 1.85%1.51%. EQR has guaranteed the Operating Partnership’s line of credit facility up to the maximum amount and for the full term of the facility.
12.11. Derivative Instruments
The following table summarizes the consolidated derivative instruments at September 30, 2003March 31, 2004 (dollar amounts are in thousands):
|
| Cash Flow |
| Fair Value |
| Forward |
| Interest |
| Offsetting |
| Offsetting |
|
| Cash Flow |
| Fair Value |
| Forward |
| Interest |
| Offsetting |
| Offsetting |
| Development |
| |||||||||||||
Current Notional Balance |
| $ | 150,000 |
| $ | 120,000 |
| $ | 150,000 |
| $ | 37,000 |
| $ | 255,121 |
| $ | 255,121 |
|
| $ | 150,000 |
| $ | 320,000 |
| $ | 250,000 |
| $ | 37,000 |
| $ | 255,082 |
| $ | 255,082 |
| $ | 137,409 |
|
Lowest Possible Notional |
| $ | 150,000 |
| $ | 120,000 |
| $ | 150,000 |
| $ | 37,000 |
| $ | 251,410 |
| $ | 251,410 |
|
| $ | 150,000 |
| $ | 320,000 |
| $ | 250,000 |
| $ | 37,000 |
| $ | 99,524 |
| $ | 99,524 |
| $ | 19,993 |
|
Highest Possible Notional |
| $ | 150,000 |
| $ | 120,000 |
| $ | 150,000 |
| $ | 37,000 |
| $ | 431,444 |
| $ | 431,444 |
|
| $ | 150,000 |
| $ | 320,000 |
| $ | 250,000 |
| $ | 37,000 |
| $ | 264,419 |
| $ | 264,419 |
| $ | 137,409 |
|
Lowest Interest Rate |
| 3.683 | % | 7.25 | % | 4.34 | % | 6.50 | % | 4.53 | % | 4.46 | % |
| 3.68 | % | 3.25 | % | 4.34 | % | 6.50 | % | 4.90 | % | 4.83 | % | 1.93 | % | |||||||||||||
Highest Interest Rate |
| 3.683 | % | 7.25 | % | 4.48 | % | 6.50 | % | 6.00 | % | 6.00 | % |
| 3.68 | % | 7.25 | % | 4.90 | % | 6.50 | % | 6.00 | % | 6.00 | % | 5.23 | % | |||||||||||||
Earliest Maturity Date |
| 2005 |
| 2005 |
| 2014 |
| 2004 |
| 2003 |
| 2003 |
|
| 2005 |
| 2005 |
| 2014 |
| 2004 |
| 2004 |
| 2004 |
| 2004 |
| |||||||||||||
Latest Maturity Date |
| 2005 |
| 2005 |
| 2014 |
| 2004 |
| 2007 |
| 2007 |
|
| 2005 |
| 2009 |
| 2014 |
| 2004 |
| 2007 |
| 2007 |
| 2004 |
| |||||||||||||
Estimated Asset (Liability) Fair Value |
| $ | (7,433 | ) | $ | 7,464 |
| $ | 2,576 |
| $ | — |
| $ | 478 |
| $ | (486 | ) |
| $ | (5,652 | ) | $ | 3,815 |
| $ | (6,543 | ) | $ | — |
| $ | 385 |
| $ | (385 | ) | $ | (323 | ) |
During the nine monthsquarter ended September 30, 2003,March 31, 2004, the Operating Partnership paid approximately $13.0$3.1 million to terminate eight forward startingfour development interest rate swaps in conjunction with the issuance of $400.0 million of ten-year unsecured notes. The $13.0 million payment has been deferred and will be recognized as additional interest expense over the ten-year liferepayment of the unsecured notes.
At September 30, 2003, certain unconsolidated development partnerships in which the Operating Partnership invested had entered into swaps to hedge the interest rate risk exposure on unconsolidated floating raterespective construction mortgage loans. The Operating Partnership has recorded its proportionate share ofrecognized a $1.9 million loss in connection with these hedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges with a current aggregate notional amount of $307.5million (notional amounts range from $76.5million to $335.9million over the terms of the swaps) at interest rates ranging from 1.78% to 6.94% maturing at various dates ranging from 2003 to 2005 with a net liability fair value of $7.8million. During the nine months ended September 30, 2003, the Operating Partnership recognized an unrealized gain of $1.1 million due to ineffectiveness of certain of these unconsolidated development derivativesterminations (included in loss from investments in unconsolidated entities)entities as the losses occurred prior to the acquisition and/or consolidation of the respective development properties – see further discussion in Notes 2 and 4).
On September 30, 2003,March 31, 2004, the net derivative instruments were reported at their fair value as other assets of approximately $10.0$5.5 million and as other liabilities of approximately $7.4 million and as a reduction to investments in unconsolidated entities of approximately $7.8$14.2 million. As of September 30, 2003,March 31, 2004, there were approximately $28.9$29.3 million in deferred losses, net, included in accumulated other comprehensive loss.
18
Based on the estimated fair values of the net derivative instruments at September 30, 2003,March 31, 2004, the Operating Partnership may recognize an estimated $11.7$7.1 million of accumulated other comprehensive loss as additional interest expense ($6.1 million related to its consolidated derivatives) or as additional loss on investments in unconsolidated entities ($5.6 million related to its unconsolidated development partnerships) during the twelve months ending September 30, 2004.March 31, 2005.
16
13.12. Calculation of Net Income Earnings Per Weighted Average OP Unit
The following tables set forth the computation of net income per OP Unit – basic and net income per OP Unit – diluted:
|
| Quarter Ended March 31, |
| |||||||||||||||||
|
| Nine Months Ended |
| Quarter Ended |
|
| 2004 |
| 2003 |
| ||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| (Amounts in thousands except |
| ||||||||
|
| (Amounts in thousands except per OP Unit amounts) |
|
|
|
|
|
| ||||||||||||
Numerator for net income per OP Unit – basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from continuing operations |
| $ | 207,976 |
| $ | 218,442 |
| $ | 68,450 |
| $ | 50,044 |
|
| $ | 55,021 |
| $ | 60,932 |
|
Allocation to Preference Units |
| (57,713 | ) | (57,568 | ) | (19,564 | ) | (19,055 | ) |
| (13,672 | ) | (19,046 | ) | ||||||
Allocation to Preference Interests |
| (15,159 | ) | (15,158 | ) | (5,053 | ) | (5,052 | ) |
| (5,053 | ) | (5,053 | ) | ||||||
Allocation to Junior Preference Units |
| (243 | ) | (243 | ) | (81 | ) | (81 | ) |
| (31 | ) | (81 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from continuing operations available to OP Units |
| 134,861 |
| 145,473 |
| 43,752 |
| 25,856 |
|
| 36,265 |
| 36,752 |
| ||||||
Net gain on sales of discontinued operations |
| 218,975 |
| 61,209 |
| 77,983 |
| 32,763 |
|
| 71,499 |
| 70,672 |
| ||||||
Discontinued operations, net |
| 9,494 |
| 42,252 |
| (7 | ) | 11,137 |
|
| (1,815 | ) | 12,853 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Numerator for net income per OP Unit – basic |
| $ | 363,330 |
| $ | 248,934 |
| $ | 121,728 |
| $ | 69,756 |
|
| $ | 105,949 |
| $ | 120,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Numerator for net income per OP Unit – diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from continuing operations |
| $ | 207,976 |
| $ | 218,442 |
| $ | 68,450 |
| $ | 50,044 |
|
| $ | 55,021 |
| $ | 60,932 |
|
Allocation to Preference Units |
| (57,713 | ) | (57,568 | ) | (19,564 | ) | (19,055 | ) |
| (13,672 | ) | (19,046 | ) | ||||||
Allocation to Preference Interests |
| (15,159 | ) | (15,158 | ) | (5,053 | ) | (5,052 | ) |
| (5,053 | ) | (5,053 | ) | ||||||
Allocation to Junior Preference Units |
| (243 | ) | (243 | ) | (81 | ) | (81 | ) |
| (31 | ) | (81 | ) | ||||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
| |||||||||||
Distributions on convertible preference units/interests |
| — |
| — |
| — |
| — |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from continuing operations available to OP Units |
| 134,861 |
| 145,473 |
| 43,752 |
| 25,856 |
|
| 36,265 |
| 36,752 |
| ||||||
Net gain on sales of discontinued operations |
| 218,975 |
| 61,209 |
| 77,983 |
| 32,763 |
|
| 71,499 |
| 70,672 |
| ||||||
Discontinued operations, net |
| 9,494 |
| 42,252 |
| (7 | ) | 11,137 |
|
| (1,815 | ) | 12,853 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Numerator for net income per OP Unit – diluted |
| $ | 363,330 |
| $ | 248,934 |
| $ | 121,728 |
| $ | 69,756 |
|
| $ | 105,949 |
| $ | 120,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Denominator for net income per OP Unit – basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Denominator for net income per OP Unit – basic |
| 293,900 |
| 295,483 |
| 295,032 |
| 296,519 |
|
| 299,028 |
| 292,950 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Convertible preference units/interests |
| — |
| — |
| — |
| — |
| |||||||||||
Dilution for OP Units issuable upon assumed exercised/vesting of EQR’s share options/restricted shares |
| 2,284 |
| 3,207 |
| 2,909 |
| 2,538 |
| |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Dilution for OP Units issuable upon assumed exercise/vesting of EQR’s share options/restricted shares |
| 2,753 |
| 1,558 |
| |||||||||||||||
Denominator for net income per OP Unit – diluted |
| 296,184 |
| 298,690 |
| 297,941 |
| 299,057 |
|
| 301,781 |
| 294,508 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income per OP Unit – basic |
| $ | 1.24 |
| $ | 0.84 |
| $ | 0.41 |
| $ | 0.24 |
|
| $ | 0.35 |
| $ | 0.41 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income per OP Unit – diluted |
| $ | 1.23 |
| $ | 0.83 |
| $ | 0.41 |
| $ | 0.23 |
|
| $ | 0.35 |
| $ | 0.41 |
|
1917
|
| Quarter Ended March 31, |
| |||||||||||||||||
|
| Nine Months Ended |
| Quarter Ended |
|
| 2004 |
| 2003 |
| ||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| (Amounts in thousands except |
| ||||||||
|
| (Amounts in thousands except per OP Unit amounts) |
|
|
|
|
|
| ||||||||||||
Net income per OP Unit – basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from continuing operations available to OP Units |
| $ | 0.46 |
| $ | 0.49 |
| $ | 0.15 |
| $ | 0.09 |
|
| $ | 0.12 |
| $ | 0.13 |
|
Net gain on sales of discontinued operations |
| 0.75 |
| 0.21 |
| 0.26 |
| 0.11 |
|
| 0.24 |
| 0.24 |
| ||||||
Discontinued operations, net |
| 0.03 |
| 0.14 |
| — |
| 0.04 |
|
| (0.01 | ) | 0.04 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income per OP Unit – basic |
| $ | 1.24 |
| $ | 0.84 |
| $ | 0.41 |
| $ | 0.24 |
|
| $ | 0.35 |
| $ | 0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income per OP Unit – diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from continuing operations available to OP Units |
| $ | 0.46 |
| $ | 0.49 |
| $ | 0.15 |
| $ | 0.08 |
|
| $ | 0.12 |
| $ | 0.13 |
|
Net gain on sales of discontinued operations |
| 0.74 |
| 0.20 |
| 0.26 |
| 0.11 |
|
| 0.24 |
| 0.24 |
| ||||||
Discontinued operations, net |
| 0.03 |
| 0.14 |
| — |
| 0.04 |
|
| (0.01 | ) | 0.04 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income per OP Unit – diluted |
| $ | 1.23 |
| $ | 0.83 |
| $ | 0.41 |
| $ | 0.23 |
|
| $ | 0.35 |
| $ | 0.41 |
|
Convertible preference units/interests that could be converted into 14,932,0693,553,977 and 15,461,85514,945,776 weighted average Common Shares (which would be contributed to the Operating Partnership in exchange for OP Units) for the nine months ended September 30, 2003 and 2002, respectively, and 14,911,158 and 15,095,576 weighted average Common Shares for the quarters ended September 30,March 31, 2004 and 2003, and 2002, respectively, were outstanding but were not included in the computation of diluted earnings per OP Unit because the effects would be anti-dilutive.
14.13. Discontinued Operations
The Operating Partnership has presented separately as discontinued operations in all periods the results of operations for all wholly ownedconsolidated assets disposed of on or after January 1, 2002 (the date of adoption of SFAS No. 144).
The components of discontinued operations are outlined below and include the results of operations for the respective periods that the Operating Partnership owned such assets during each of the nine months and quarters ended September 30, 2003March 31, 2004 and 2002, including the following:2003.
•The sixty-one Wholly Owned Properties and various individual condominium units containing 15,673 units sold during 2003 (see Note 5); and
•The fifty-two Wholly Owned Properties and various individual condominium units containing 9,586 units and the furniture rental business sold during 2002.
2018
|
| Quarter Ended March 31, |
| |||||||||||||||||
|
| Nine Months Ended |
| Quarter Ended |
|
| 2004 |
| 2003 |
| ||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| (Amounts in thousands) |
| ||||||||
|
| (Amounts in thousands) |
|
|
|
|
|
| ||||||||||||
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Rental income |
| $ | 51,306 |
| $ | 127,964 |
| $ | 8,050 |
| $ | 37,069 |
|
| $ | 5,440 |
| $ | 49,442 |
|
Furniture income |
| — |
| 1,361 |
| — |
| — |
| |||||||||||
Total revenues |
| 51,306 |
| 129,325 |
| 8,050 |
| 37,069 |
|
| 5,440 |
| 49,442 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
EXPENSES (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Property and maintenance |
| 20,639 |
| 37,680 |
| 4,345 |
| 12,031 |
|
| 4,477 |
| 16,730 |
| ||||||
Real estate taxes and insurance |
| 5,994 |
| 13,504 |
| 777 |
| 3,745 |
|
| 604 |
| 5,163 |
| ||||||
Property management |
| 103 |
| 123 |
| (9 | ) | 40 |
|
| — |
| 50 |
| ||||||
Depreciation |
| 13,175 |
| 30,591 |
| 2,160 |
| 9,029 |
|
| 1,575 |
| 13,140 |
| ||||||
Furniture expenses |
| — |
| 1,303 |
| — |
| — |
| |||||||||||
Total expenses |
| 39,911 |
| 83,201 |
| 7,273 |
| 24,845 |
|
| 6,656 |
| 35,083 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Discontinued operating income |
| 11,395 |
| 46,124 |
| 777 |
| 12,224 |
| |||||||||||
Discontinued operating income (loss) |
| (1,216 | ) | 14,359 |
| |||||||||||||||
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest and other income |
| 175 |
| 26 |
| 53 |
| — |
|
| 20 |
| 17 |
| ||||||
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expense incurred, net |
| (1,938 | ) | (3,815 | ) | (722 | ) | (1,069 | ) |
| (455 | ) | (1,453 | ) | ||||||
Amortization of deferred financing costs |
| (138 | ) | (83 | ) | (115 | ) | (18 | ) |
| (164 | ) | (70 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Discontinued operations, net |
| $ | 9,494 |
| $ | 42,252 |
| $ | (7 | ) | $ | 11,137 |
|
| $ | (1,815 | ) | $ | 12,853 |
|
(1) Includes expenses paid in the current period for Wholly Owned Propertiesproperties sold in prior periods related to the Operating Partnership’s period of ownership.
For the properties sold during 2004, the investment in real estate, net and the mortgage notes payable balances at December 31, 2003 were $206.7 million and $43.1 million, respectively.
15.14. Commitments and Contingencies
The Operating Partnership, as an owner of real estate, is subject to various Federal, state and local environmental laws. Compliance by the Operating Partnership with existing laws has not had a material adverse effect on the Operating Partnership. 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 is a party to a class action lawsuit in Florida state court alleging that several of the types of fees that the Operating Partnership charged when residents breached their leases were illegal, as arewere all efforts to collect them. We areThe Operating Partnership is vigorously contesting the plaintiffs’ claims and will seekhas sought immediate appellate review of the recent2003 class action certification decision. Due to the preliminary natureuncertainty of many critical factual and legal issues, including the viability of the litigation,case as a class action, it is not possible to determine or predict the outcome. While no assurances can be given, we dothe Operating Partnership does not believe that this lawsuit, if adversely determined, will have a material adverse effect on the Operating Partnership.
The Operating Partnership does not believe there is any other litigation pending or threatened against the Operating Partnership which, individually or in the aggregate, reasonably may be expected to
21
have a material adverse effect on the Operating Partnership.
19
As of September 30, 2003,March 31, 2004, the Operating Partnership has 16seven projects with joint venture partners in various stages of development with estimated completion dates ranging through December 31,2005 which are consolidated as of March 31, 2004.2004 as a result of FIN No. 46. The three development agreements currently in place have the following key terms:
• The first development partner has the right, at any time following completion of a project, to stipulate a value for such project and offer to sell its interest in the project to the Operating Partnership based on such value. If the Operating Partnership chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Operating Partnership’s partner must exercise this right as to all projects within five years after the receipt of the final certificate of occupancy on the last developed property. In connection with this development partner,agreement, the Operating Partnership has an obligation to provide up to $40.0 million in credit enhancements to guarantee a portion of the third party construction financing. As of November 4, 2003,April 28, 2004, the Operating Partnership had set-aside $20.0$10.0 million towards this credit enhancement. The Operating Partnership would be required to perform under this agreement only if there was a material default under a third party construction mortgage agreement. This agreement expires no later than December 31, 2018. Notwithstanding the termination of the agreement, the Operating Partnership shall have recourse against its development partner for any losses incurred.
• The second development partner has the right, at any time following completion of a project, to require the Operating Partnership to purchase the partners’ interest in that project at a mutually agreeable price. If the Operating Partnership and the partner are unable to agree on a price, both parties will obtain appraisals. If the appraised values vary by more than 10%, both the Operating Partnership and its partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value. The Operating Partnership may elect at that time not to purchase the property and instead, authorize its partner to sell the project at or above the agreed-upon value to an unrelated third party. Five years following the receipt of the final certificate of occupancy on the last developed property, the Operating Partnership must purchase, at the agreed-upon price, any projects remaining unsold.
• The third development partner has the exclusive right for six months following stabilization, (generallyas defined, as having achieved 90% occupancy for three consecutive months following the substantial completion of a project) to market a project for sale. Thereafter, either the Operating Partnership or its development partner may market a project for sale. If the Operating Partnership’s development partner proposes the sale, the Operating Partnership may elect to purchase the project at the price proposed by its partner or defer the sale until two independent appraisers appraise the project. If the two appraised values vary by more than 5%, a third appraiser will be chosen to determine the fair market value of the property. Once a value has been determined, the Operating Partnership may elect to purchase the property or authorize its development partner to sell the project at the agreed-upon value.
In connection with one of its mergers, the Operating Partnership executedprovided a guaranty of a credit enhancement agreement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. The Operating Partnership has the obligation to facilitate credit underprovide this agreementguaranty for a period of eight years from the consummation of the merger or through May 2005. The Operating Partnership would be required to perform under this agreement only if there was a material default with respect todraw on the tax-exempt bonds. If there should be any default in connection with this agreement,letter of credit issued by the credit enhancement party. The counterparty has also indemnified the Operating Partnership has the right, among other remedies, to select an alternate interest rate on the bonds.for any losses suffered. As of September 30, 2003,March 31, 2004, this enhancementguaranty was still in effect at a commitment amount of $12.7 million and no current outstanding liability.
22
16. Asset Impairment
For both the nine months ended September 30, 2003 and 2002, the Operating Partnership recorded $0.9 million of asset impairment charges related to its technology investments. These charges were the result of a review of the existing investments reflected on the consolidated balance sheet. These impairment losses are reflected on the consolidated statements of operations in total expenses and include the write-down of assets classified as other assets.
For the nine months ended September 30, 2002, the Operating Partnership recorded approximately $17.1 million of asset impairment charges related to its corporate housing business. Following the guidance in SFAS No. 142, these charges were the result of the Operating Partnership’s decision to reduce the carrying value of its corporate housing business to $30.0 million, given the continued weakness in the economy and management’s expectations for near-term performance. This impairment loss is reflected on the consolidated statements of operations as impairment on corporate housing business and on the consolidated balance sheets as a reduction in goodwill, net.
17.15. Reportable Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management. Senior management decides how resources are allocated and assesses performance on a monthly basis.
20
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 residents and includes Equity Corporate Housing (“ECH”). Senior management evaluates the performance of each of our apartment communities on an individual basis; however, each of our apartment communities has similar economic characteristics, residents, and products and services so they have been aggregated into one reportable segment. The Operating Partnership’s rental real estate segment comprises approximately 99.2% and 99.5% of total revenues for the nine months ended September 30, 2003 and 2002, respectively, and approximately 99.3% and 99.4% of total revenues for both the quarters ended September 30, 2003March 31, 2004 and 2002, respectively.2003. The Operating Partnership’s rental real estate segment comprises approximately 99.8% and 99.7% of total assets at both September 30, 2003March 31, 2004 and December 31, 2002.2003, respectively.
The primary financial measure for the Operating Partnership’s rental real estate segment is net operating income (“NOI”), which represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense (all as reflected in the accompanying consolidated statements of operations). The Operating Partnership believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate Operating Partnershipcompany because it is a direct measure of the actual operating results of the Operating Partnership’s apartment communities. Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance. NOI from our rental real estate totaled approximately $810.5$263.9 million and $840.1 million for the nine months ended September 30, 2003 and 2002, respectively, and approximately $270.8 million and $277.0$253.7 million for the quarters ended September 30,March 31, 2004 and 2003, and 2002, respectively.
During the acquisition, development and/or disposition of real estate, the Operating Partnership considers its NOI return on total investment as the primary measure of financial performance.
The Operating Partnership’s fee and asset management activity is immaterial and does not meet the threshold requirements of a reportable segment as provided for in SFAS No. 131.
All revenues are from external customers and there is no customer who contributed 10% or more of the Operating Partnership’s total revenues during the nine monthsquarter ended September 30, 2003March 31, 2004 or 2002.2003.
23
18.16. Subsequent Events/Other
Subsequent to September 30, 2003March 31, 2004 and through November 4, 2003,April 28, 2004, the Operating Partnership:
• Acquired twofour properties consisting of 432814 units for approximately $79.2$98.8 million;
• Assumed $9.6$14.0 million of mortgage debt on certain propertiesone property in connection with their acquisitions and/or consolidation;its acquisition;
• Disposed of fourthree properties and various individual condominium units consisting of 561839 units for approximately $28.4$53.7 million;
• Repaid $23.5Obtained $220.0 million ofin new mortgage debt;
• Relinquished $7.0Repaid $82.5 million of mortgage debt assumed by the purchaser on disposed properties;debt; and
• Repaid $40.0$75.0 million of 6.875%7.5% fixed rate public notes at maturity; and
• Purchased a third party’s $20.0 million participation interest in a floating rate construction loan secured by one of the Operating Partnership’s unconsolidated development properties.maturity.
2421
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2002.2003.
Forward-looking statements in this report are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believes”, “estimates”, “expects” and “anticipates” and other similar expressions that 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 total number of development units, cost of development and completion dates as well as anticipated capital expenditures for replacements and building improvements all reflect the Operating Partnership’s best estimates and are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation;
• Alternative sourcesSources of capital to the Operating Partnership or labor and materials required for maintenance, repair, capital expenditure or development are more expensive than anticipated;
• Occupancy levels and market rents may be adversely affected by national and local economic and market conditions including, without limitation, new construction of multifamily housing, continuing decline inslow employment growth, availability of low interest mortgages for single-family home buyers and the potential for geopolitical instability, all of which are beyond the Operating Partnership’s control; and
• Additional factors as discussed in Part I of the Annual Report on Form 10-K, particularly those under “Risk Factors”.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Operating Partnership 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. Forward-looking statements and related uncertainties are also included in Notes 65 and 1211 to the Notes to Consolidated Financial Statements in this report.
2522
Results of Operations
The following table summarizes the number of properties and related units for the periods presented:
|
| Properties |
| Units |
| Purchase / |
| |
At December 31, 2001 |
| 1,076 |
| 224,801 |
|
|
| |
Q1/Q2/Q3 2002 Acquisitions |
| 10 |
| 3,053 |
| $ | 245.4 |
|
Ft. Lewis Military Housing |
| 1 |
| 3,652 |
|
|
| |
Q1/Q2/Q3 2002 Dispositions |
| (35 | ) | (6,046 | ) | $ | 338.9 |
|
Q1/Q2/Q3 2002 Completed Developments |
| 7 |
| 1,966 |
|
|
| |
At September 30, 2002 |
| 1,059 |
| 227,426 |
|
|
| |
Q4 2002 Acquisitions |
| 2 |
| 581 |
| $ | 44.5 |
|
Q4 2002 Dispositions |
| (23 | ) | (4,667 | ) | $ | 207.3 |
|
Q4 2002 Completed Developments |
| 1 |
| 235 |
|
|
| |
Q4 2002 Unit Configuration Changes |
| — |
| 16 |
|
|
| |
At December 31, 2002 |
| 1,039 |
| 223,591 |
|
|
| |
Q1/Q2/Q3 2003 Acquisitions |
| 8 |
| 2,678 |
| $ | 389.7 |
|
Q1/Q2/Q3 2003 Dispositions |
| (63 | ) | (15,996 | ) | $ | 803.2 |
|
Q1/Q2/Q3 2003 Completed Developments |
| 6 |
| 1,745 |
|
|
| |
Q1/Q2/Q3 2003 Unit Configuration Changes |
| — |
| 129 |
|
|
| |
At September 30, 2003 |
| 990 |
| 212,147 |
|
|
|
|
| Properties |
| Units |
| Purchase / |
| |
At December 31, 2002 |
| 1,039 |
| 223,591 |
|
|
| |
Q1 2003 Acquisitions |
| 3 |
| 920 |
| $ | 111.5 |
|
Q1 2003 Dispositions |
| (17 | ) | (4,000 | ) | $ | 195.0 |
|
Q1 2003 Completed Developments |
| 2 |
| 738 |
|
|
| |
At March 31, 2003 |
| 1,027 |
| 221,249 |
|
|
| |
Q2/Q3/Q4 2003 Acquisitions |
| 14 |
| 4,280 |
| $ | 572.6 |
|
Q2/Q3/Q4 2003 Dispositions |
| (79 | ) | (19,486 | ) | $ | 1,022.9 |
|
Q2/Q3/Q4 2003 Completed Developments |
| 6 |
| 1,374 |
|
|
| |
Q2/Q3/Q4 2003 Unit Configuration Changes |
| — |
| 89 |
|
|
| |
At December 31, 2003 |
| 968 |
| 207,506 |
|
| �� | |
Q1 2004 Acquisitions |
| 5 |
| 1,671 |
| $ | 224.4 |
|
Q1 2004 Dispositions |
| (22 | ) | (5,990 | ) | $ | 301.3 |
|
Q1 2004 Completed Developments |
| 1 |
| 403 |
|
|
| |
At March 31, 2004 |
| 952 |
| 203,590 |
|
|
|
Significant changesProperties that the Operating Partnership owned for both of the quarters ended March 31, 2004 and March 31, 2003 (the “First Quarter 2004 Same Store Properties”), which represented 170,836 units, impacted the Operating Partnership’s results of operations and are discussed in revenues between the nine months and quarters presented have resulted primarily from reduced rental income through increased concessions or reduced apartment rents and occupancy at many of our properties. Significant changes in expenses have resulted from increases in property and maintenance expenses including payroll, maintenance, building, utilities and leasing and advertising as well as real estate taxes, partially offset by decreases in property management expenses. In addition, thefollowing paragraphs.
The Operating Partnership’s acquisition, disposition and completed development activity hasactivities also impacted overall results of operations for the nine months and quarters ended September 30, 2003March 31, 2004 and 2002. These changes2003. The impacts of these activities are also discussed in greater detail in the following paragraphs.
Properties that the Operating Partnership owned for the entire nine month periods ended September 30, 2003 as well as September 30, 2002 (the “Nine-Month 2003 Same Store Properties”), which represented 179,233 units and properties that the Operating Partnership owned for all of both the quarters ended September 30, 2003 and September 30, 2002 (the “Third Quarter 2003 Same Store Properties”), which represented 181,656 units, also impacted the Operating Partnership’s results of operations. Both the Nine-Month 2003 Same Store Properties and Third Quarter 2003 Same Store Properties are discussed in the following paragraphs.
Comparison of the nine monthsquarter ended September 30, 2003March 31, 2004 to the nine monthsquarter ended September 30, 2002March 31, 2003
For the nine monthsquarter ended September 30, 2003,March 31, 2004, income before allocation to Minority Interests, lossincome (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations decreasedincreased by approximately $15.4$0.4 million when compared to the nine monthsquarter ended September 30, 2002.March 31, 2003.
Revenues from the Nine-Month 2003First Quarter 2004 Same Store Properties revenues decreased primarily as a result of lower overall physical occupancy, increased concessions and lower rental rates charged to both newresidents and renewal residents. Propertyproperty operating expenses from the Nine-Month 2003 Same Store Properties increased
26
primarily due to higher payroll, maintenance, utility and real estate taxes, leasing and advertising and buildingtax costs. The following tables provide comparative revenue, expense, net operating income (“NOI”) and weighted average occupancy for the Nine-Month 2003First Quarter 2004 Same Store Properties (NOI represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense):
23
First Quarter 2004 vs. September YTD 2002First Quarter 2003For Nine-Month Same Store PropertiesQuarter over Quarter Same-Store Results
$ in Millions – 179,233170,836 Same-Store Units
Description | Description |
| Revenues |
| Expenses |
| NOI |
|
| Revenues |
| Expenses |
| NOI |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
YTD 2003 |
|
| $ | 1,279.4 |
| $ | 508.7 |
| $ | 770.7 |
| ||||||||||
YTD 2002 |
|
| $ | 1,316.2 |
| $ | 482.6 |
| $ | 833.6 |
| ||||||||||
Q1 2004 |
| $ | 415.9 |
| $ | 168.7 |
| $ | 247.2 |
| |||||||||||
Q1 2003 |
| $ | 416.9 |
| $ | 163.8 |
| $ | 253.1 |
| |||||||||||
Change |
|
| $ | (36.8 | ) | $ | 26.1 |
| $ | (62.9 | ) |
| $ | (1.0 | ) | $ | 4.9 |
| $ | (5.9 | ) |
Change |
|
| (2.8 | )% | 5.4 | % | (7.5 | )% |
| (0.2 | )% | 3.0 | % | (2.3 | )% |
Same Store Occupancy Statistics
|
| 92.9 |
| % |
|
| 92.6 |
| % |
Change |
| 0.3 |
|
|
The Operating Partnership’s primary financial measure for evaluating each of its apartment communities is NOI. The Operating Partnership believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Operating Partnership’s apartment communities.
For properties that the Operating Partnership acquired prior to January 1, 2002 and expects to continue to own through December 31, 2003, the Operating Partnership anticipates the following same store results for the full year ending December 31, 2003:
2003 Same Store Assumptions
|
| ||
|
| ||
|
| ||
|
| ||
|
|
For properties that the Operating Partnership acquired prior to January 1, 2003 and expects to continue to own through December 31, 2004, the Operating Partnership anticipates the following same store results for the full year ending December 31, 2004:
2004 Same Store Assumptions
Physical Occupancy |
| 93.0% | |
Revenue Change |
| (0.75%) to 1.50% | |
Expense Change |
| 3.0% to 4.0% | |
NOI Change |
| (4.0%) to 0.5% | |
Acquisitions |
| $ 800 million | |
Dispositions |
| $ |
These 2003 and 2004 assumptions are based on current expectations and are forward-looking.
Rental income from properties other than Nine-Month 2003First Quarter 2004 Same Store Properties increased by
27
approximately $34.0$24.9 million primarily as a result of revenue fromnew properties acquired in 2002 and 2003 and additional Partially Owned Properties consolidated in the fourth quarter of 2002 and the first nine monthsquarter of 2003.2004.
Fee and asset management revenues, net of fee and asset management expenses, increased by $3.9$0.3 million primarily as a result of additional income allocated from Ft. Lewis Military Housing.Lewis. As of September 30,March 31, 2004 and 2003, and 2002, the Operating Partnership managed 18,89718,040 units and 20,14218,896 units, respectively, for third parties and unconsolidated entities.
Property management expenses include off-site expenses associated with the self-management of the Operating Partnership’s properties as well as management fees paid to third party management companies. These expenses decreasedincreased by approximately $7.3$1.4 million or 13.0%9.1%. This decreaseincrease is primarily attributable to a reversal of a profit sharing accrual in the first quarter of 2003 related to the 2002 calendar year as the Operating Partnership didn’t achieve its stated goalshigher payroll costs and management elected not to make a discretionary contribution to the plan. In addition, the Company recorded lower expense in connection with granting lessincreased expenses for additional restricted shares and reducing the expense associated with the Company’s matched funding of its 401(k) plan during the first nine months of 2003 and not incurring an expense for any 2003 profit sharing.stock options granted.
24
Depreciation expense, which includes depreciation on non-real estate assets, increased $19.1$9.8 million primarily as a result of properties acquired after September 30, 2002March 31, 2003, many of which had significantly higher per unit acquisition costs than properties previously acquired, and additional depreciation on capital expenditures for all properties owned.
General and administrative expenses, which include corporate operating expenses, decreased approximately $4.1$1.2 million between the periods under comparison. This decrease was primarily due to lower expenses recorded$1.4 million of immediate expense recognition related to options granted in connection with granting less restricted shares to employees during the first nine monthsquarter of 2003 offset by approximately a $3.4 million increase related to the Operating Partnership’s decision to expense its stock based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148). In addition, lower state income and franchise taxes also contributed to this decrease.
EQR’s former chief executive officer. The Operating Partnership recorded impairment charges on its technology investmentsanticipates that general and its corporate housing business of approximately $0.9 million and $18.0administrative expenses could approximate up to $48.0 million for the nine months ended September 30, 2003full year ending December 31, 2004 (an increase of approximately $9.0 million compared to 2003) as a result of consulting services contracted to enhance resident satisfaction/retention, unit pricing and 2002, respectively. See Note 16expense procurement/reduction. The Operating Partnership believes that these additional expenditures may be more than offset by increased rental revenues and/or reduced operating expenses in the Notes to Consolidated Financial Statements for further discussion.future years. The above assumptions are based on current expectations and are forward-looking.
Interest and other income increaseddecreased by approximately $2.2$1.2 million, primarily as a result of higher cashlower balances available for short-term investments throughout 2003.including deposits in tax deferred exchange accounts and collateral agreements related to development projects.
Interest expense, including amortization of deferred financing costs, decreasedincreased approximately $6.0$0.5 million primarily due to lower variable interest rates.million. During the nine monthsquarter ended September 30, 2003,March 31, 2004, the Operating Partnership capitalized interest costs of approximately $16.0$2.7 million as compared to $19.4$5.4 million for the nine monthsquarter ended September 30, 2002.March 31, 2003. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities. The effective interest cost on all indebtedness for the nine monthsquarter ended September 30, 2003March 31, 2004 was 6.37%6.14% as compared to 6.60%6.39% for the nine monthsquarter ended September 30, 2002.March 31, 2003.
Loss from investments in unconsolidated entities increased approximately $1.8$7.5 million between the periods under comparison. This increase is primarily the result of increased operating losses from equity investments partially offset by unrealized gainsand realized losses on the settlement of derivative instruments.instruments (see Note 11 in the Notes to Consolidated Financial Statements).
Net gain on sales of discontinued operations increased approximately $157.8 million between the periods under comparison. This increase is primarily the result of a greater number of properties sold during the nine months ended September 30, 2003, as well as the fact that several properties were more fully
28
depreciated.
Discontinued operations, net, decreased approximately $32.8 million between the periods under comparison. See Note 14 in the Notes to Consolidated Financial Statements for further discussion.
Comparison of the quarter ended September 30, 2003 to the quarter ended September 30, 2002
For the quarter ended September 30, 2003, income before allocation to Minority Interests, loss from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations increased by approximately $12.0 million when compared to the quarter ended September 30, 2002.
Revenues from the Third Quarter 2003 Same Store Properties decreased primarily as a result of lower overall physical occupancy, increased concessions and lower rental rates charged to both new and renewal residents. Property operating expenses from the Third Quarter 2003 Same Store Properties increased mainly due to higher payroll, maintenance, utility, real estate taxes, building and leasing and advertising costs. The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the Third Quarter 2003 Same Store Properties:
Third Quarter 2003 vs. Third Quarter 2002For Third Quarter 2003 Same Store Properties
$ in Millions – 181,656 Same-Store Units
Description |
| Revenues |
| Expenses |
| NOI |
| ||||
|
|
|
|
|
|
|
| ||||
Q3 2003 |
|
| $ | 433.8 |
| $ | 176.3 |
| $ | 257.5 |
|
Q3 2002 |
|
| $ | 442.2 |
| $ | 169.1 |
| $ | 273.1 |
|
Change |
|
| $ | (8.4 | ) | $ | 7.2 |
| $ | (15.6 | ) |
Change |
|
| (1.9 | )% | 4.3 | % | (5.7 | )% |
Same Store Occupancy Statistics
|
|
| ||
|
|
| ||
|
|
|
Rental income from properties other than Third Quarter 2003 Same Store Properties increased by approximately $11.9million primarily as a result of revenue from properties acquired in the fourth quarter of 2002 and throughout 2003.
Fee and asset management revenues, net of fee and asset management expenses, increased by $0.3 million primarily as a result of income from Ft. Lewis Military Housing. As of September 30, 2003 and 2002, the Operating Partnership managed 18,897units and 20,142 units, respectively, for third parties and unconsolidated entities.
Property management expenses include off-site expenses associated with the self-management of the Operating Partnership’s properties as well as management fees paid to third party management companies. These expenses decreased by approximately $1.8 million or 9.8%. The Company recorded lower expense in connection with granting less restricted shares and reducing the expense associated with the Company’s matched funding of its 401(k) plan during the first nine months of 2003 and not incurring an expense for any 2003 profit sharing.
Depreciation expense, which includes depreciation on non-real estate assets, increased $6.0 million
29
primarily as a result of properties acquired after September 30, 2002 and additional depreciation on capital expenditures for all properties owned.
General and administrative expenses, which include corporate operating expenses, decreased approximately $2.0 million between the periods under comparison. This decrease was primarily due to lower expenses recorded in connection with granting less restricted shares to employees and lower accrued expenses related to deferred compensation during the quarter ended September 30, 2003 offset by a $0.6 million increase related to the Operating Partnership’s decision to expense its stock based compensation.
The Operating Partnership recorded impairment charges on its technology investments and corporate housing business of approximately $0.3 million and $17.4 million for the quarters ended September 30, 2003 and 2002, respectively. See Note 16 in the Notes to Consolidated Financial Statements for further discussion.
Interest and other income increased by approximately $4.4 million, primarily as a result of higher cash balances available for short-term investments.
Interest expense, including amortization of deferred financing costs, decreased approximately $0.4 million primarily due to lower variable interest rates. During the quarter ended September 30, 2003, the Operating Partnership capitalized interest costs of approximately $5.1 million as compared to $7.1 million for the quarter ended September 30, 2002. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities.�� The effective interest cost on all indebtedness for the quarter ended September 30, 2003 was 6.32% as compared to 6.52% for the quarter ended September 30, 2002.
Loss from investments in unconsolidated entities decreased approximately $0.1 million between the periods under comparison. This decrease is primarily the result of unrealized gains on derivative instruments.
Net gain on sales of discontinued operations increased approximately $45.2$0.8 million between the periods under comparison. This increase is primarily the result of a greater number of properties sold during the quarter ended September 30, 2003,March 31, 2004, as well as the fact that several properties were more fully depreciated.
Discontinued operations, net, decreased approximately $11.1$14.7 million between the periods under comparison. The decrease in revenues and expenses between periods results from the timing and size of the properties sold. Any property sold after April 1, 2003 will include a full quarter’s results in the first quarter of 2003 but minimal to no results in the first quarter of 2004. See Note 1413 in the Notes to Consolidated Financial Statements for further discussion.
The Operating Partnership adopted FIN No. 46, as required, effective March 31, 2004. See Notes 2 and 4 in the Notes to Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
As of January 1, 2003,2004, the Operating Partnership had approximately $29.9$49.6 million of cash and cash equivalents and $499.2$633.3 million available under its line ofrevolving credit facility (net of $60.8$56.7 million which was restricted/dedicated to support letters of credit and not available for borrowing). After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Operating Partnership’s cash and cash equivalents balance at September 30, 2003March 31, 2004 was approximately $372.6$71.5 million and the amount available on the Operating Partnership’s line ofrevolving credit facility was $643.0$223.3 million (net of $57.0$56.7 million which was restricted/dedicated to support letters of credit and not available for borrowing).
25
During the nine monthsquarter ended September 30, 2003,March 31, 2004, the Operating Partnership generated proceedsand/or obtained cash from various transactions, which included the following:
• Increased borrowings by the net amount of $410.0 million on its revolving credit facility;
•Disposed of sixty-threetwenty-two properties (including twoone Unconsolidated Properties)Property) and received net proceeds of approximately $759.0 million;
30
• Issued $400.0 million of 5.20% fixed rate unsecured debt receiving net proceeds of $397.5 million;
• Issued $150.0 million of 6.48% Series N Cumulative Redeemable Preference Units and received net proceeds of $145.3$296.3 million;
• Obtained $48.7$16.5 million in new mortgage financing; and
• Issued approximately 2.71.0 million OP Units and received net proceeds of $56.2$24.5 million.
All of theseDuring the quarter ended March 31, 2004, the above proceeds were primarily utilized to:
• Purchase additional properties;Acquire the minority interests in fifteen previously unconsolidated development properties, two vacant land parcels and two other properties for $53.3 million in cash (prior to consideration of cash acquired of $4.2 million and the repayment of $339.7 million in mortgage debt prior to closing);
• RepayInvest $406.1 million primarily in previously unconsolidated development projects prior to their consolidation (inclusive of $339.7 million in mortgage indebtedness on selected properties;debt paid off prior to consolidation);
• Repay the line of credit;
• Repay public unsecured debt; and
• Redeem the Series L Preference Units.
During the nine months ended September 30, 2003, the Operating Partnership:
• Acquired eightAcquire five properties, and twothree additional units at an existing property, utilizing cash of $308.7$188.0 million;
• Repaid $235.2Pay OP Unit distributions of $129.2 million ($0.4325 per unit);
• Pay preference interest/unit distributions of $18.8 million; and
• Repay $86.8 million of mortgage loans;loans.
• Repaid $140.0 million on its line of credit;
• Repaid $100.0 million of floating rate public notes at maturity;
• Repaid $4.5 million of other unsecured notes; and
•Redeemed $100.0 million of 7.625% Series L Cumulative Redeemable Preference Units at liquidation value.
Depending on its analysis of market prices, economic conditions, and other opportunities for the investment of available capital, the CompanyEQR may repurchase up to an additional $85.0 million of its Common Shares pursuant to its existing share buyback program authorized by theits Board of Trustees. The Operating Partnership in turn would repurchase $85.0 million of its OP Units held by EQR. The CompanyEQR did not repurchase any of its Common Shares during the nine monthsquarter ended September 30, 2003.March 31, 2004.
The Operating Partnership’s total debt summary and debt maturity schedule as of September 30, 2003,March 31, 2004, are as follows:
3126
Debt Summary
|
| As of 9/30/03 |
| For the Nine Months |
|
| $ Millions (1) |
| Weighted Average Rate (1) |
| ||
Secured |
| $ | 2,819 |
| 5.84 | % |
| $ | 3,222 |
| 5.59 | % |
Unsecured |
| 2,748 |
| 6.39 | % |
| 3,076 |
| 6.12 | % | ||
Total |
| $ | 5,567 |
| 6.11 | % |
| $ | 6,298 |
| 5.86 | % |
|
|
|
|
|
|
|
|
|
|
| ||
Fixed Rate |
| $ | 4,835 |
| 6.64 | % |
| $ | 4,965 |
| 6.71 | % |
Floating Rate |
| 732 |
| 2.25 | % |
| 1,333 |
| 1.61 | % | ||
Total |
| $ | 5,567 |
| 6.11 | % |
| $ | 6,298 |
| 5.86 | % |
|
|
|
|
|
|
|
|
|
|
| ||
Above Totals Include: |
|
|
|
|
|
|
|
|
|
| ||
Tax Exempt: |
|
|
|
|
|
|
|
|
|
| ||
Fixed |
| $ | 383 |
| 4.31 | % |
| $ | 327 |
| 4.40 | % |
Floating |
| 568 |
| 1.83 | % |
| 573 |
| 1.38 | % | ||
Total |
| $ | 951 |
| 3.02 | % |
| $ | 900 |
| 2.47 | % |
|
|
|
|
|
|
|
|
|
|
| ||
Unsecured Revolving Credit Facility |
| $ | — |
| 1.85 | % |
| $ | 420 |
| 1.51 | % |
(1) Net of the effect of any derivative instruments.
Debt Maturity Schedule as of September 30, 2003March 31, 2004
Year |
| $ Millions |
| % of Total |
|
| $ Millions |
| % of Total |
| ||
2003 |
| $ | 121 |
| 2.2 | % | ||||||
2004 |
| 600 |
| 10.8 | % |
| $ | 787 |
| 12.5 | % | |
2005 (2) |
| 594 |
| 10.7 | % | |||||||
2005 (1)(2) |
| 1,065 |
| 16.9 | % | |||||||
2006 (3) |
| 490 |
| 8.8 | % |
| 480 |
| 7.6 | % | ||
2007 |
| 297 |
| 5.3 | % |
| 355 |
| 5.6 | % | ||
2008 |
| 488 |
| 8.8 | % |
| 624 |
| 9.9 | % | ||
2009 |
| 247 |
| 4.4 | % |
| 291 |
| 4.6 | % | ||
2010 |
| 197 |
| 3.5 | % |
| 196 |
| 3.1 | % | ||
2011 |
| 689 |
| 12.4 | % |
| 704 |
| 11.2 | % | ||
2012+ |
| 1,844 |
| 33.1 | % | |||||||
2012 |
| 460 |
| 7.3 | % | |||||||
2013+ |
| 1,336 |
| 21.2 | % | |||||||
Total |
| $ | 5,567 |
| 100.0 | % |
| $ | 6,298 |
| 100.0 | % |
(2)(1) Includes $300 million of unsecured debt with a final maturity of 2015 that is putable/callable in 2005.
(2) Includes $420 million outstanding on the Operating Partnership’s unsecured revolving credit facility.
(3) Includes $150 million of unsecured debt with a final maturity of 2026 that is putable in 2006.
On27
In June 5, 2003, the Operating Partnership filed and the SEC declared effective a Form S-3 registration statement with the SEC to register $2.0 billion of debt securities. The SEC declared this registration statement effective on June 11, 2003. In addition, the Operating Partnership carried over $280.0 million related to thea prior registration statement effective on September 8, 2000.statement. As of September 30, 2003,April 28, 2004, $2.28 billion in debt securities remained available for issuance under this registration statement.
In February 1998, the Company filed and the SEC declared effective a Form S-3 registration statement to register $1.0 billion of equity securities. In addition, the Company carried over $272.4 million related to a prior registration statement. As of April 28, 2004, $956.5 million in equity securities remained available for issuance under this registration statement. Per the terms of ERPOP’s partnership agreement, EQR contributes the net proceeds of all equity offerings to the capital of the Operating Partnership in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis) or preference units (on a one-for-one preferred share per preference unit basis).
The Operating Partnership’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of September 30, 2003March 31, 2004 is presented in the following table. The Operating Partnership calculates the equity
32
component of its market capitalization as the sum of (i) the total outstanding OP Units at the equivalent market value of the closing price of EQR’s Common Shares on the New York Stock Exchange; (ii) the “OP Unit Equivalent” of all convertible preference interests/units; and (iii) the liquidation value of all perpetual preference interests/units outstanding.
Capitalization as of September 30, 2003March 31, 2004
Total Debt |
|
|
| $ | 5,566,665,932 |
|
|
|
| $ | 6,298,098,129 |
| ||
|
|
|
|
|
| |||||||||
OP Units |
| 297,291,121 |
|
|
|
| 301,193,888 |
|
|
| ||||
OP Unit Equivalents (see below) |
| 14,881,326 |
|
|
|
| 3,546,455 |
|
|
| ||||
Total Outstanding at quarter-end |
| 312,172,447 |
|
|
|
| 304,740,343 |
|
|
| ||||
EQR Common Share Price at September 30, 2003 |
| $ | 29.28 |
|
|
| ||||||||
EQR Common Share Price at March 31, 2004 |
| $ | 29.85 |
|
|
| ||||||||
|
|
|
| 9,140,409,248 |
|
|
|
| 9,096,499,239 |
| ||||
Perpetual Preference Units Liquidation Value |
|
|
| 615,000,000 |
|
|
|
| 615,000,000 |
| ||||
Perpetual Preference Interests Liquidation Value |
|
|
| 211,500,000 |
|
|
|
| 211,500,000 |
| ||||
Total Market Capitalization |
|
|
| $ | 15,533,575,180 |
|
|
|
| $ | 16,221,097,368 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||||
Debt/Total Market Capitalization |
|
|
| 36 | % |
|
|
| 39 | % |
Convertible Preference Units, Preference Interests
and Junior Preference Units
as of September 30, 2003March 31, 2004
|
| Units |
| Conversion |
| OP Unit |
|
| Units |
| Conversion |
| OP Unit |
|
Preference Units: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series E |
| 2,488,290 |
| 1.1128 |
| 2,768,969 |
|
| 2,146,090 |
| 1.1128 |
| 2,388,169 |
|
Series G |
| 1,264,692 |
| 8.5360 |
| 10,795,408 |
| |||||||
Series H |
| 51,228 |
| 1.4480 |
| 74,178 |
|
| 43,928 |
| 1.4480 |
| 63,608 |
|
Preference Interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series H |
| 190,000 |
| 1.5108 |
| 287,052 |
|
| 190,000 |
| 1.5108 |
| 287,052 |
|
Series I |
| 270,000 |
| 1.4542 |
| 392,634 |
|
| 270,000 |
| 1.4542 |
| 392,634 |
|
Series J |
| 230,000 |
| 1.4108 |
| 324,484 |
|
| 230,000 |
| 1.4108 |
| 324,484 |
|
Junior Preference Units: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
| 56,616 |
| 4.081600 |
| 231,084 |
|
| 20,333 |
| 4.081600 |
| 82,991 |
|
Series B |
| 7,367 |
| 1.020408 |
| 7,517 |
|
| 7,367 |
| 1.020408 |
| 7,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
| 14,881,326 |
|
|
|
|
|
| 3,546,455 |
|
28
The Operating Partnership’s policy is to maintain a ratio of consolidated debt-to-total market capitalization of less than 50%.
From OctoberApril 1, 20032004 through November 4, 2003,April 28, 2004, the Operating Partnership:
• Acquired twofour properties consisting of 432814 units for approximately $79.2$98.8 million;
• Assumed $9.6$14.0 million of mortgage debt on certain propertiesone property in connection with their acquisitions and/or consolidation;its acquisition;
• Disposed of fourthree properties and various individual condominium units consisting of 561839 units for approximately $28.4$53.7 million;
• Repaid $23.5Obtained $220.0 million ofin new mortgage debt;
• Relinquished $7.0Repaid $82.5 million of mortgage debt assumed by the purchaser on disposed properties;debt; and
• Repaid $40.0$75.0 million of 6.875%7.5% fixed rate public notes at maturity;maturity.
Capitalization of Fixed Assets and Improvements to Real Estate
Our policy with respect to capital expenditures is generally to capitalize expenditures that improve the value of the property or extend the useful life of the component asset of the property. We track improvements to real estate in two major categories and several subcategories:
• Replacements (inside the unit). These include:
• carpets and hardwood floors;
• appliances;
• mechanical equipment such as individual furnace/air units, hot water heaters, etc;
• furniture and fixtures such as kitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors, countertops, etc;
• flooring such as vinyl, linoleum or tile; and
• Purchasedblinds/shades.
All replacements are depreciated over a third party’s $20.0five-year estimated useful life. We expense as incurred all maintenance and turnover costs such as cleaning, interior painting of individual units and the repair of any replacement item noted above.
• Building improvements (outside the unit). These include:
• roof replacement and major repairs;
• paving or major resurfacing of parking lots, curbs and sidewalks;
• amenities and common areas such as pools, exterior sports and playground equipment, lobbies, clubhouses, laundry rooms, alarm and security systems and offices;
• major building mechanical equipment systems;
• interior and exterior structural repair and exterior painting and siding;
• major landscaping and grounds improvement; and
• vehicles and office and maintenance equipment.
All building improvements are depreciated over a five to ten-year estimated useful life. We expense as incurred all recurring expenditures that do not improve the value of the asset or extend its useful life.
For the quarter ended March 31, 2004, our actual improvements to real estate totaled approximately $35.7 million. This includes the following detail (amounts in thousands except for unit and per unit amounts):
29
Capitalized Improvements to Real Estate
For the Quarter Ended March 31, 2004
|
| Total Units |
| Replacements |
| Avg. |
| Building |
| Avg. |
| Total |
| Avg. |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Established Properties (2) |
| 161,070 |
| $ | 12,308 |
| $ | 76 |
| $ | 16,584 |
| $ | 103 |
| $ | 28,892 |
| $ | 179 |
|
New Acquisition Properties (3) |
| 16,539 |
| 583 |
| 48 |
| 1,440 |
| 117 |
| 2,023 |
| 165 |
| ||||||
Other (4) |
| 9,363 |
| 2,580 |
|
|
| 2,217 |
|
|
| 4,797 |
|
|
| ||||||
Total |
| 186,972 |
| $ | 15,471 |
|
|
| $ | 20,241 |
|
|
| $ | 35,712 |
|
|
| |||
(1) Total units exclude 16,618 unconsolidated units.
(2) Wholly Owned Properties acquired prior to January 1, 2002.
(3) Wholly Owned Properties acquired during 2002, 2003 and 2004. Per unit amounts are based on a weighted average of 12,260 units.
(4) Includes properties either Partially Owned or sold during the period, commercial space and, condominium conversions.
The Operating Partnership expects to fund approximately $125.0 million participation interest in a floating rate construction loan secured by onefor capital expenditures for replacements and building improvements for all consolidated properties for the remainder of 2004.
During the quarter ended March 31, 2004, the Operating Partnership’s unconsolidated development properties.total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Operating Partnership’s property management offices and its corporate offices, was approximately $0.7 million. The Operating Partnership expects to fund approximately $5.8 million in total additions to non-real estate property for the remainder of 2004.
33Improvements to real estate and additions to non-real estate property were funded from net cash provided by operating activities.
Off-Balance Sheet Arrangements and Contractual ObligationsDerivative Instruments
AsIn the normal course of September 30, 2003,business, the Operating Partnership is exposed to the effect of interest rate changes. The Operating Partnership limits these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.
The Operating Partnership has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Operating Partnership has 16not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives.
See Note 11 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at March 31, 2004.
Other
Total distributions paid in April 2004 amounted to $142.9 million (excluding distributions on Partially Owned Properties), which included certain distributions declared during the first quarter ended March 31, 2004.
30
The Operating Partnership expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and certain scheduled unsecured note and mortgage note repayments, generally through its working capital, net cash provided by operating activities and borrowings under its revolving credit facility. The Operating Partnership considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The Operating Partnership also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities, including additional OP Units, and proceeds received from the disposition of certain properties. In addition, the Operating Partnership has certain unencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable or the cost of alternative sources of capital is too high. The fair value of and cash flow from these unencumbered properties are in excess of the requirements the Operating Partnership must maintain in order to comply with covenants under its unsecured notes and line of credit. Of the $12.0 billion in net investment in real estate on the Operating Partnership’s balance sheet at March 31, 2004, $7.2 billion (or 60.2%) was unencumbered.
The Operating Partnership has a revolving credit facility with potential borrowings of up to $700.0 million. This facility matures in May 2005 and may, among other potential uses, be used to fund property acquisitions, costs for certain properties under development and short term liquidity requirements. As of April 28, 2004, $455.0 million was outstanding under this facility (and $63.7 million was restricted and dedicated to support letters of credit).
As of March 31, 2004, the Operating Partnership has seven projects with joint venture partners in various stages of development with estimated completion dates ranging through December 31, 2004.2005 which are consolidated as of March 31, 2004 as a result of FIN No. 46. The three development agreements currently in place have the following key terms:
•The first development partner has the right, at any time following completion of a project, to stipulate a value for such project and offer to sell its interest in the project to the Operating Partnership based on such value. If the Operating Partnership chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Operating Partnership’s partner must exercise this right as to all projects within five years after the receipt of the final certificate of occupancy on the last developed property. In connection with this development partner, the Operating Partnership has an obligation to provide up to $40.0 million in credit enhancements to guarantee a portion of the third party construction financing. As of November 4, 2003,April 28, 2004, the Operating Partnership had set-aside $20.0$10.0 million towards this credit enhancement. The Operating Partnership would be required to perform under this agreement only if there was a material default under a third party construction mortgage agreement. This agreement expires no later than December 31, 2018. Notwithstanding the termination of the agreement, the Operating Partnership shall have recourse against its development partner for any losses incurred.
•The second development partner has the right, at any time following completion of a project, to require the Operating Partnership to purchase the partners’ interest in that project at a mutually agreeable price. If the Operating Partnership and the partner are unable to agree on a price, both parties will obtain appraisals. If the appraised values vary by more than 10%, both the Operating Partnership and its partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value. The Operating Partnership may elect at that time not to purchase the property and instead, authorize its partner to sell the project at or above the agreed-upon value to an unrelated third party. Five years following the receipt of the final certificate of occupancy on the last developed property, the Operating Partnership must purchase, at the agreed-upon price, any projects remaining unsold.
31
• The third development partner has the exclusive right for six months following stabilization, (generallyas defined, as having achieved 90% occupancy for three consecutive months following the substantial completion of a project) to market a project for sale. Thereafter, either the Operating Partnership or its development partner may market a project for sale. If the Operating Partnership’s development partner proposes the sale, the Operating Partnership may elect to purchase the project at the price proposed by its partner or defer the sale until two independent appraisers appraise the project. If the two appraised values vary by more than 5%, a third appraiser will be chosen to determine the fair market value of the property. Once a value has been determined, the Operating Partnership may elect to purchase the property or authorize its development partner to sell the project at the agreed-upon value.
Off-Balance Sheet Arrangements and Contractual Obligations
The Operating Partnership has co-invested in various properties that are unconsolidated and accounted for under the equity method of accounting. Management does not believe these investments have a materially different impact upon the Operating Partnership’s liquidity, capital resources, credit or market risk than its property management and ownership activities. The nature and business purpose of these ventures are as follows:
• Institutional Ventures – During 2000 and 2001, the Operating Partnership entered into ventures with an unaffiliated partner. At the respective closing dates, the Operating Partnership sold and/or contributed 45 properties containing 10,846 units to these ventures and retained a 25% ownership interest in the ventures. The Operating Partnership’s joint venture partner contributed cash equal to 75% of the agreed-upon equity value of the properties comprising the ventures, which was then distributed to the Operating Partnership. The Operating Partnership’s strategy with respect to these ventures was to reduce its concentration of properties in a variety of markets.
• Lexford/Other – As of March 31, 2004, the Operating Partnership has ownership interests in seventeen properties containing 2,015 units acquired in a prior merger. The current weighted average ownership percentage is 12.7%. The Operating Partnership’s strategy with respect to these interests is either to acquire a majority ownership or sell the Operating Partnership’s interest.
In connection with one of its mergers, the Operating Partnership executedprovided a guaranty of a credit enhancement agreement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. The Operating Partnership has the obligation to facilitate credit underprovide this agreementguaranty for a period of eight years from the consummation of the merger or through May 2005. The Operating Partnership would be required to perform under this agreementguaranty only if there was a material default with respect todraw on the tax-exempt bonds. If there should be any default in connection with this agreement,letter of credit issued by the credit enhancement party. The counterparty has also indemnified the Operating Partnership has the right, among other remedies, to select an alternate interest rate on the bonds.for any losses suffered. As of November 4, 2003,April 28, 2004, this enhancementguaranty was still in effect at a commitment amount of $12.7 million and no outstanding liability.
See also NoteNotes 2 and Note 7 and the third paragraph of Note 156 in the Notes to Consolidated
34
Financial Statements for additional discussion regarding the Operating Partnership’s investments in unconsolidated entities.
Capitalization of Fixed Assets and Improvements to Real Estate
Our policy with respect to capital expenditures is generally to capitalize expenditures that improve the value of the property or extend the useful life of the component asset of the property. We track improvements to real estate in two major categories and several subcategories:
•Replacements (inside the unit). These include:
•carpets and hardwood floors;
•appliances;
•mechanical equipment such as individual furnace/air units, hot water heaters, etc;
•furniture and fixtures such as kitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors, countertops, etc;
•flooring such as vinyl, linoleum or tile; and
•blinds/shades.
All replacements are depreciated over a five-year estimated useful life. We expense as incurred all maintenance and turnover costs such as cleaning, interior painting of individual units and the repair of any replacement item noted above.
•Building improvements (outside the unit). These include:
•roof replacement and major repairs;
•paving or major resurfacing of parking lots, curbs and sidewalks;
•amenities and common areas such as pools, exterior sports and playground equipment, lobbies, clubhouses, laundry rooms, alarm and security systems and offices;
•major building mechanical equipment systems;
•interior and exterior structural repair and exterior painting and siding;
•major landscaping and grounds improvement; and
•vehicles and office and maintenance equipment.
All building improvements are depreciated over a five to ten-year estimated useful life. We expense as incurred all recurring expenditures that do not improve the value of the asset or extend its useful life.
For the nine months ended September 30, 2003, our actual improvements to real estate totaled approximately $128.5 million. This includes the following detail (amounts in thousands except for unit and per unit amounts):
Capitalized Improvements to Real EstateFor the Nine Months Ended September 30, 2003
|
| Total Units |
| Replacements |
| Avg. |
| Building |
| Avg. |
| Total |
| Avg. |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Established Properties (2) |
| 169,402 |
| $ | 44,960 |
| $ | 265 |
| $ | 53,768 |
| $ | 317 |
| $ | 98,728 |
| $ | 582 |
|
New Acquisition Properties (3) |
| 11,447 |
| 1,786 |
| 180 |
| 3,520 |
| 354 |
| 5,306 |
| 534 |
| ||||||
Other (4) |
| 8,245 |
| 8,833 |
|
|
| 15,612 |
|
|
| 24,445 |
|
|
| ||||||
Total |
| 189,094 |
| $ | 55,579 |
|
|
| $ | 72,900 |
|
|
| $ | 128,479 |
|
|
| |||
(1) Total units exclude 23,053 unconsolidated units.
35
(2) Wholly Owned Properties acquired prior to January 1, 2001.
(3) Wholly Owned Properties acquired during 2001, 2002 and 2003. Per unit amounts are based on a weighted average of 9,931 units.
(4) Includes properties either Partially Owned or sold during the period, commercial space, condominium conversions and $3.6 million included in building improvements spent on five specific assets related to major renovations and repositioning of these assets.
The Operating Partnership expects to fund approximately $30.0million for capital expenditures for replacements and building improvements for all consolidated properties for the remainder of 2003.
During the nine months ended September 30, 2003, the Operating Partnership’s total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Operating Partnership’s property management offices and its corporate offices, was approximately $2.3million. The Operating Partnership expects to fund approximately $1.6 million in total additions to non-real estate property for the remainder of 2003.
Improvements to real estate and additions to non-real estate property were funded from net cash provided by operating activities.
Derivative Instruments
In the normal course of business, the Operating Partnership is exposed to the effect of interest rate changes. The Operating Partnership limits these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.
The Operating Partnership has a policy of only entering into contracts with major financial institutions based upon their credit ratingsPartnership’s contractual obligations for the next five years and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Operating Partnership hasthereafter have not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the futurechanged materially from the useamounts and disclosures included in its annual report on Form 10-K, other than as it relates to scheduled debt maturities due to the assumption or consolidation of derivatives.
mortgages on various completed and uncompleted development properties. See the updated debt maturity schedule included in Liquidity and Capital Resources and Note 124 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at September 30, 2003.
Other
Total distributions paid in October 2003 amounted to $147.8 million (excluding distributions on Partially Owned Properties), which included certain distributions declared during the third quarter ended September 30, 2003.
The Operating Partnership expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and certain scheduled unsecured note and mortgage note repayments, generally through its working capital, net cash provided by operating activities and borrowings under its line of credit. The Operating Partnership considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The Operating Partnership also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities, including additional OP Units, and proceeds received from the disposition of certain properties. In addition, the Operating Partnership has certain unencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable or the cost of alternative sources of capital is too high. The fair value of and cash flow from these unencumbered properties are in excess of the requirements the Operating Partnership must maintain in order to comply with covenants under its unsecured notes and line of credit.further discussion.
3632
The Operating Partnership has a revolving credit facility with potential borrowings of up to $700.0 million. This facility matures in May 2005 and may, among other potential uses, be used to fund property acquisitions, costs for certain properties under development and short term liquidity requirements. As of November 4, 2003, noamounts were outstanding under this facility.
Critical Accounting Policies and Estimates
The Operating Partnership has identified six significant accounting policies as critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates. With respect to these critical accounting policies, management believes that the application of judgments and assessments is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The six critical accounting policies are:
Impairment of Long-Lived Assets, Including Goodwill
The Operating Partnership periodically evaluates its long-lived assets, including its investments in real estate and goodwill, for impairment indicators.indicators of permanent impairment. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset and legal and environmental concerns. Future events could occur which would cause the Operating Partnership to conclude that impairment indicators exist and an impairment loss is warranted.
Depreciation of Investment in Real Estate
The Operating Partnership depreciates the building component of its investment in real estate over a 30-year estimated useful life, building improvements over a 5-year to 10-year estimated useful life and both the furniture, fixtures and equipment and replacements components over a 5-year estimated useful life, all of which are judgmental determinations.
Cost Capitalization
See the Capitalization of Fixed Assets and Improvements to Real Estate section for discussion of the policy with respect to capitalization vs. expensing of fixed asset/repair and maintenance costs. In addition, the Operating Partnership capitalizes the payroll and associated costs of employees directly responsible for and who spend all of their time on the supervision of major capital projects. These costs are reflected on the balance sheet as an increase to depreciable property.
The Operating Partnership follows the guidance in SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, for all development projects and uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. The Operating Partnership capitalizes interest, real estate taxes and insurance and payroll and associated costs for those individuals directly responsible for and who spend all of their time on development activities. The Operating Partnership expenses as incurred all payroll costs of employees working directly at our properties, except for costs that are incurred during the initial lease-up phase on a development project. An allocated portion of payroll costs is capitalized based upon the occupancy of the project until stabilized occupancy is achieved. Stabilized occupancy is always deemed to have occurred no later than one year from cessation of major development activities.the project becomes substantially complete and ready for its intended use. The incremental payroll and associated costs are capitalized to the projects under development based upon the effort directly identifiable with such projects. These costs are reflected on the balance sheet as either construction in progress or a separate component of investments in unconsolidated entities.progress. The Operating Partnership ceases the capitalization of such costs as the property becomes substantially complete and ready for its intended use.
37
Fair Value of Financial Instruments, Including Derivative Instruments
The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 and its amendments (SFAS Nos. 137/138/149) requires the Operating Partnership to make estimates and judgments that affect the fair value of the instruments. The Operating Partnership, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and
33
third party quotes. Where these are not available, the Operating Partnership bases its estimates on other factors relevant to the financial instruments.
Revenue Recognition
Rental income attributable to leases is recorded when due from residents and is recognized monthly as it is earned, which is not materially different than on a straight-line basis. Leases entered into between a resident and a property for the rental of an apartment unit are generally year-to-year, renewable upon consent of both parties on an annual or monthly basis. Interest income is recorded on an accrual basis.
Stock-Based Compensation
Prior to 2003, the Company had chosen to account for its stock-based compensation in accordance with APB No. 25, Accounting for Stock Issued to Employees,which resulted in no compensation expense for options issued with an exercise price equal to or exceeding the market value of EQR’s Common Shares on the date of grant (intrinsic method). The Company has elected to expense its stock-based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), Accounting for Stock Based Compensation, effective in the first quarter of 2003, which resulted in compensation expense being recorded based on the fair value of the stock compensation granted or modified.granted. Any Common Shares issued pursuant to EQR’s incentive equity compensation and employee share purchase plans will result in the Operating Partnership issuing OP Units to EQR on a one-for-one basis, with the Operating Partnership receiving the net cash proceeds of such issuances.
SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123. The Company has chosen to use the “Prospective Method”. This method which requires that companiesthe Company to apply the recognition provisions of SFAS No. 123 to only employee awards granted or modified after the beginning of the fiscal year in which the recognition provisions are first applied, or January 1, 2003. Compensation expense under all of the Company’s plans is generally recognized over periods ranging from three months to five years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for both the nine monthsquarters ended March 31, 2004 and quarter ended September 30, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. See Note 2 in the Notes to Consolidated Financial Statements for further discussion and comparative information regarding application of the fair value method to all outstanding employee awards.
Funds From Operations
For the nine monthsquarter ended September 30, 2003,March 31, 2004, Funds From Operations (“FFO”) available to OP Units decreased $39.8$12.5 million, or 7.3%, as compared to the nine months ended September 30, 2002.
For the quarter ended September 30, 2003, FFO available to OP Units increased $4.4 million, or 2.7%7.4%, as compared to the quarter ended September 30, 2002.March 31, 2003.
The following is a reconciliation of net income to FFO available to OP Units for the nine months and quarters ended September 30, 2003March 31, 2004 and 2002:2003:
3834
��
Funds From Operations
(Amounts in thousands)
(Unaudited)
|
| Nine Months Ended |
| Quarter Ended |
|
| Quarter Ended March 31, |
| ||||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||||
Net income |
| $ | 436,445 |
| $ | 321,903 |
| $ | 146,426 |
| $ | 93,944 |
|
| $ | 124,705 |
| $ | 144,457 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation |
| 341,723 |
| 322,615 |
| 115,346 |
| 109,331 |
|
| 115,610 |
| 105,778 |
| ||||||
Depreciation – Non-real estate additions |
| (6,524 | ) | (6,823 | ) | (1,926 | ) | (2,250 | ) |
| (1,300 | ) | (2,275 | ) | ||||||
Depreciation – Partially Owned Properties |
| (6,240 | ) | (5,710 | ) | (2,124 | ) | (1,959 | ) | |||||||||||
Depreciation – Unconsolidated Properties |
| 15,618 |
| 14,468 |
| 5,468 |
| 5,563 |
| |||||||||||
Net (gain) loss on sales of unconsolidated entities |
| (4,673 | ) | 626 |
| 2 |
| 5,872 |
| |||||||||||
Discontinued Operations: |
|
|
|
|
|
|
|
|
| |||||||||||
Depreciation– Partially Owned Properties |
| (2,096 | ) | (2,039 | ) | |||||||||||||||
Depreciation– Unconsolidated Properties |
| 6,763 |
| 5,195 |
| |||||||||||||||
Net (gain) on sales of unconsolidated entities |
| (2,434 | ) | (1,212 | ) | |||||||||||||||
Discontinued operations: |
|
|
|
|
| |||||||||||||||
Depreciation |
| 13,175 |
| 30,591 |
| 2,160 |
| 9,029 |
|
| 1,575 |
| 13,140 |
| ||||||
Net gain on sales of depreciable property |
| (211,488 | ) | (60,011 | ) | (73,383 | ) | (32,435 | ) | |||||||||||
Net (gain) on sales of discontinued operations |
| (71,499 | ) | (70,672 | ) | |||||||||||||||
Net incremental gain on sales of condominium units |
| 3,524 |
| 443 |
| |||||||||||||||
Net gain on sales of vacant land |
| 15 |
| — |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FFO (1)(2) |
| 578,036 |
| 617,659 |
| 191,969 |
| 187,095 |
|
| 174,863 |
| 192,815 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Preferred distributions |
| (73,115 | ) | (72,969 | ) | (24,698 | ) | (24,188 | ) |
| (18,756 | ) | (24,180 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
FFO available to OP Units |
| $ | 504,921 |
| $ | 544,690 |
| $ | 167,271 |
| $ | 162,907 |
|
| $ | 156,107 |
| $ | 168,635 |
|
(1) The National Association of Real Estate Investment Trusts (“NAREIT”) defines funds from operations (“FFO”) (April 2002 White Paper) as net income (computed in accordance with accounting principles generally accepted in the United States), excluding gains (or losses) from sales of depreciable property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. The April 2002 White Paper states that gain or loss on sales of property is excluded from FFO for previously depreciated operating properties only. Once the Operating Partnership commences the conversion of units to condominiums, it simultaneously discontinues depreciation of such property. Accordingly, the Operating Partnership included in FFO its incremental gains or losses from the sale of condominium units to third parties, which represented net gains of $7,487 and $1,198 for the nine months ended September 30, 2003 and 2002, respectively, and $4,600 and $328 for the quarters ended September 30, 2003 and 2002, respectively. Effective January 1, 2003, the Operating Partnership no longer adds back impairment losses when computing FFO in accordance with NAREIT’s definition. As a result, FFO for the nine months and quarter ended September 30, 2002 have been reduced by $17,994 and $17,413, respectively, to conform to the current year presentation.
(2) The Operating Partnership believes that FFO is helpful to investors as a supplemental measure of the operating performance of a real estate company because it provides investors an understanding of the ability of the Operating Partnership to incur and service debt and to make capital expenditures. FFO in and of itself does not represent net income or net cash flows from operating activities in accordance with GAAP. Therefore, FFO should not be exclusively considered as an alternative to net income or to net cash flows from operating activities as determined by GAAP or as a measure of liquidity. The Operating Partnership’s calculation of FFO may differ from other real estate companies due to, among other items, variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Operating Partnership’s market risk has not changed materially from the amounts and information reported in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, to the Operating Partnership’s Form 10-K for the year ended December 31, 2002.2003. See also Note 12 to11 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments.
3935
Item 4. Disclosure Controls and Procedures
Effective as of September 30, 2003,March 31, 2004, the Operating Partnership carried out an evaluation, under the supervision and with the participation of the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of EQR, of the effectiveness of the design and operation of the Operating Partnership’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in timely alerting them to material information. During the fiscal quarter ended September 30, 2003,March 31, 2004, there were no changes to the internal controls over financial reporting of the Operating Partnership identified in connection with the Operating Partnership’s evaluation or otherwise that has materially affected, or is reasonably likely to materially affect, the Operating Partnership’s internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Operating Partnership is a party to a class action lawsuit in Florida state court alleging that several of the types of fees that the Operating Partnership charged when residents breached their leases were illegal, as arewere all efforts to collect them. We areThe Operating Partnership is vigorously contesting the plaintiffs’ claims and will seekhas sought immediate appellate review of the recent2003 class action certification decision. Due to the preliminary natureuncertainty of many critical factual and legal issues, including the viability of the litigation,case as a class action, it is not possible to determine or predict the outcome. While no assurances can be given, we dothe Operating Partnership does not believe that this lawsuit, if adversely determined, will have a material adverse effect on the Operating Partnership.
Except as disclosed above, thereThere have been no new or significant developments related to the legal proceedings that were discussed in Part I, Item III of the Operating Partnership’s Form 10-K for the year ended December 31, 2002.2003.
40
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
12 Computation of Ratio of Earnings to Combined Fixed Charges.
31.1 Certification of Bruce W. Duncan, Chief Executive Officer of EQR.Registrant’s General Partner.
31.2 Certification of David J. Neithercut, Chief Financial Officer of EQR.Registrant’s General Partner.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Bruce W. Duncan, Chief Executive Officer of Registrant’s General Partner.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer of Registrant’s General Partner.
(B) Reports Filed on Form 8-K:
None.
4136
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.
| ERP OPERATING LIMITED PARTNERSHIP | ||||||||||||
| By: | EQUITY RESIDENTIAL, | |||||||||||
|
| ITS GENERAL PARTNER | |||||||||||
Date: |
|
| By: | /s/ | David J. Neithercut |
| |||||||
|
| David J. Neithercut |
| ||||||||||
|
| Executive Vice President, | |||||||||||
| Corporate Strategy and | ||||||||||||
Chief Financial Officer | |||||||||||||
|
| ||||||||||||
|
| ||||||||||||
Date: |
|
| By: | /s/ | Michael J. McHugh |
| |||||||
|
| Michael J. McHugh |
| ||||||||||
|
| Executive Vice President, | |||||||||||
|
| Chief Accounting Officer | |||||||||||
| and Treasurer | ||||||||||||
42
37
Exhibit |
| Document |
|
|
|
12 |
| Computation of Ratio of Earnings to Combined Fixed Charges. |
|
|
|
31.1 |
| Certification of Bruce W. Duncan, Chief Executive Officer of |
|
|
|
31.2 |
| Certification of David J. Neithercut, Chief Financial Officer of |
|
|
|
32.1 |
| Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Bruce W. Duncan, Chief Executive Officer of Registrant’s General Partner. |
|
|
|
32.2 |
| Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer of Registrant’s General Partner. |
43