Results of Operations
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,
Washington, D.C. 20549[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended JUNE 30,
20012002OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-12252
EQUITY RESIDENTIAL
(Exact name of registrant as specified in its charter)EQUITY RESIDENTIAL PROPERTIES TRUST
(Exact Name
(Former name ofRegistrant as Specified in Its Charter) MARYLAND 13-3675988 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606 (Address of Principal Executive Offices) (Zip Code)registrant, if changed since last report)
Maryland 13-3675988 (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)
(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
Xý No---- ---- APPLICABLE ONLY TO CORPORATE USERS: Indicate theThe number of
shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At August 1, 2001, 134,631,445 of the Registrant'sCommon Shares of Beneficial Interest,were outstanding.$0.01 par value, outstanding on July 31, 2002 was 275,538,420.
EQUITY RESIDENTIALPROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS) (UNAUDITED)
JUNE 30, DECEMBER 31, 2001 2000 --------------- ---------------ASSETS Investment in real estate Land $ 1,772,184 $ 1,770,019 Depreciable property 10,732,614 10,782,311 Construction in progress 60,971 39,130 --------------- --------------- 12,565,769 12,591,460 Accumulated depreciation (1,535,333) (1,352,236) --------------- --------------- Investment in real estate, net of accumulated depreciation 11,030,436 11,239,224 Real estate held for disposition 38,741 51,637 Cash and cash equivalents 26,614 23,772 Investment in mortgage notes, net 73,765 77,184 Investments in unconsolidated entities 328,231 316,540 Rents receivable 2,497 1,801 Deposits - restricted 235,619 231,639 Escrow deposits - mortgage 72,287 70,470 Deferred financing costs, net 29,177 29,706 Rental furniture, net 54,366 60,183 Property and equipment, net 7,989 7,620 Goodwill, net 75,288 67,589 Other assets 102,726 86,601 --------------- --------------- Total assets $ 12,077,736 $ 12,263,966 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $ 3,040,281 $ 3,230,611 Notes, net 2,417,307 2,120,079 Lines of credit 133,000 355,462 Accounts payable and accrued expenses 108,415 107,818 Accrued interest payable 63,503 51,877 Rents received in advance and other liabilities 68,896 100,819 Security deposits 46,775 46,272 Distributions payable 136,511 18,863 --------------- --------------- Total liabilities 6,014,688 6,031,801 --------------- --------------- COMMITMENTS AND CONTINGENCIES Minority Interests: Operating Partnership 638,107 609,734 Partially Owned Properties 2,457 2,884 --------------- --------------- Total Minority Interests 640,564 612,618 --------------- --------------- Shareholders' equity: Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized; 11,457,518 shares issued and outstanding as of June 30, 2001 and 20,003,166 shares issued and outstanding as of December 31, 2000 969,495 1,183,136 Common Shares of beneficial interest, $.01 par value; 350,000,000 shares authorized; 134,393,787 shares issued and outstanding as of June 30, 2001 and 132,616,375 shares issued and outstanding as of December 31, 2000 1,344 1,326 Paid in capital 4,802,073 4,739,782 Employee notes (4,201) (4,346) Distributions in excess of accumulated earnings (337,723) (300,351) Accumulated other comprehensive income (8,504) - --------------- --------------- Total shareholders' equity 5,422,484 5,619,547 --------------- --------------- Total liabilities and shareholders' equity $ 12,077,736 $ 12,263,966 =============== ===============
(Amounts in thousands)
(Unaudited)
June 30,
2002December 31,
2001ASSETS Investment in real estate Land $ 1,857,497 $ 1,840,170 Depreciable property 11,205,307 11,096,847 Construction in progress 94,292 79,166 13,157,096 13,016,183 Accumulated depreciation (1,929,115 ) (1,718,845 ) Investment in real estate, net of accumulated depreciation 11,227,981 11,297,338
Real estate held for disposition
—
3,371
Cash and cash equivalents 88,942 51,603 Investments in unconsolidated entities 423,529 397,237 Rents receivable 2,627 2,400 Deposits—restricted 149,927 218,557 Escrow deposits—mortgage 62,049 76,700 Deferred financing costs, net 32,964 27,011 Rental furniture, net — 20,168 Property and equipment, net — 3,063 Goodwill, net 47,122 47,291 Other assets 76,659 90,886 Total assets $ 12,111,800 $ 12,235,625
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities: Mortgage notes payable $ 3,210,510 $ 3,286,814 Notes, net 2,438,974 2,260,944 Line of credit — 195,000 Accounts payable and accrued expenses 116,192 108,254 Accrued interest payable 62,676 62,360 Rents received in advance and other liabilities 65,226 83,005 Security deposits 47,098 47,644 Distributions payable 145,880 141,832 Total liabilities 6,086,556 6,185,853
Commitments and contingencies
Minority Interests: Operating Partnership 364,233 379,898 Preference Interests 246,000 246,000 Junior Preference Units 5,846 5,846 Partially Owned Properties 11,503 4,078 Total Minority Interests 627,582 635,822
Shareholders' equity:
Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized; 10,691,940 shares issued and outstanding as of June 30, 2002 and 11,344,521 shares issued and outstanding as of December 31, 2001 950,356 966,671 Common Shares of beneficial interest, $.01 par value; 1,000,000,000 shares authorized; 275,467,781 shares issued and outstanding as of June 30, 2002 and 271,621,374 shares issued and outstanding as of December 31, 2001 2,755 2,716 Paid in capital 4,967,957 4,892,744 Employee notes (3,870 ) (4,043 ) Deferred compensation (31,607 ) (25,778 ) Distributions in excess of accumulated earnings (457,264 ) (385,320 ) Accumulated other comprehensive loss (30,665 ) (33,040 ) Total shareholders' equity 5,397,662 5,413,950 Total liabilities and shareholders' equity $ 12,111,800 $ 12,235,625 See accompanying notes
2
EQUITY RESIDENTIALPROPERTIES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, QUARTER ENDED JUNE 30, -------------------------- -------------------------------- 2001 2000 2001 2000 -------------------------- --------------------------------REVENUES Rental income $ 1,027,671 $ 952,740 $ 515,860 $ 479,193 Fee and asset management 4,140 2,835 2,168 1,435 Interest income - investment in mortgage notes 8,763 5,499 6,019 2,737 Interest and other income 11,711 8,385 5,209 4,907 Furniture income 30,027 -- 15,155 -- ----------- ----------- ----------- ----------- Total revenues 1,082,312 969,459 544,411 488,272 ----------- ----------- ----------- ----------- EXPENSES Property and maintenance 280,783 227,845 143,746 113,977 Real estate taxes and insurance 96,775 95,001 48,754 46,667 Property management 36,364 37,760 17,686 18,846 Fee and asset management 3,648 2,102 1,764 1,036 Depreciation 225,878 224,512 113,350 112,626 Interest: Expense incurred 190,383 190,263 95,107 95,152 Amortization of deferred financing costs 2,810 2,703 1,413 1,362 General and administrative 14,079 13,216 7,325 6,518 Furniture expenses 30,496 -- 15,668 -- Amortization of goodwill 1,924 -- 991 -- ----------- ----------- ----------- ----------- Total expenses 883,140 793,402 445,804 396,184 ----------- ----------- ----------- ----------- Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle 199,172 176,057 98,607 92,088 Allocation to Minority Interests: Operating Partnership (16,474) (19,132) (6,678) (12,036) Partially Owned Properties (238) 157 (133) 112 Income from investments in unconsolidated entities 10,350 9,064 6,553 4,841 Net gain on sales of real estate 46,565 87,652 4,787 67,654 ----------- ----------- ----------- ----------- Income before extraordinary items and cumulative effect of change in accounting principle 239,375 253,798 103,136 152,659 Extraordinary items 106 -- (205) -- Cumulative effect of change in accounting principle (1,270) -- -- -- ----------- ----------- ----------- ----------- Net income 238,211 253,798 102,931 152,659 Preferred distributions (57,419) (55,654) (28,893) (27,266) ----------- ----------- ----------- ----------- Net income available to Common Shares $ 180,792 $ 198,144 $ 74,038 $ 125,393 =========== =========== =========== =========== Net income per share - basic $ 1.36 $ 1.54 $ 0.56 $ 0.97 =========== =========== =========== =========== Net income per share - diluted $ 1.34 $ 1.54 $ 0.55 $ 0.96 =========== =========== =========== =========== Weighted average Common Shares outstanding - basic 132,890 128,435 133,179 129,072 =========== =========== =========== =========== Weighted average Common Shares outstanding - diluted 146,909 141,633 146,970 146,510 =========== =========== =========== =========== Distributions declared per Common Share outstanding $ 1.63 $ 1.52 $ 0.815 $ 0.76 =========== =========== =========== ===========
(Amounts in thousands except per share data)
(Unaudited)
Six Months Ended June 30, Quarter Ended June 30, 2002 2001 2002 2001 REVENUES Rental income $ 1,011,823 $ 1,014,813 $ 506,915 $ 509,428 Fee and asset management 4,310 4,140 2,592 2,168 Interest and other income 9,318 11,525 5,210 5,024 Interest income—investment in mortgage notes — 8,763 — 6,019 Total revenues 1,025,451 1,039,241 514,717 522,639 EXPENSES Property and maintenance 257,727 273,318 129,360 138,747 �� Real estate taxes and insurance 103,415 95,613 51,422 48,165 Property management 37,289 36,364 18,256 17,686 Fee and asset management 3,577 3,648 1,758 1,764 Depreciation 232,721 221,797 117,509 111,296 Interest: Expense incurred, net 171,993 178,660 87,229 88,857 Amortization of deferred financing costs 2,988 2,810 1,597 1,413 General and administrative 22,327 14,079 11,527 7,325 Impairment on technology investments 581 6,775 290 3,772 Amortization of goodwill — 1,281 — 638 Total expenses 832,618 834,345 418,948 419,663
Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle
192,833
204,896
95,769
102,976
Allocation to Minority Interests: Operating Partnership (13,784 ) (16,474 ) (7,343 ) (6,678 ) Partially Owned Properties (1,325 ) (238 ) (519 ) (133 ) Income from investments in unconsolidated entities 233 960 7 610 Net gain (loss) on sales of unconsolidated entities 5,246 339 (411 ) 339 Income before discontinued operations, extraordinary items and cumulative effect of change in accounting principle 183,203 189,483 87,503 97,114 Net gain on sales of discontinued operations 28,446 46,226 25,630 4,448 Discontinued operations, net 2,994 3,666 535 1,574 Income before extraordinary items and cumulative effect of change in accounting principle 214,643 239,375 113,668 103,136 Extraordinary items (468 ) 106 (371 ) (205 ) Cumulative effect of change in accounting principle — (1,270 ) — — Net income 214,175 238,211 113,297 102,931 Preferred distributions (48,781 ) (57,419 ) (24,256 ) (28,893 ) Net income available to Common Shares $ 165,394 $ 180,792 $ 89,041 $ 74,038 Net income per share—basic $ 0.61 $ 0.68 $ 0.33 $ 0.28 Net income per share—diluted $ 0.60 $ 0.67 $ 0.32 $ 0.27 Weighted average Common Shares outstanding—basic 272,126 265,781 273,146 266,357 Weighted average Common Shares outstanding—diluted 298,422 293,817 299,494 293,939 Distributions declared per Common Share outstanding $ 0.8650 $ 0.8150 $ 0.4325 $ 0.4075 See accompanying notes
3
Six Months Ended June 30, Quarter Ended June 30, 2002 2001 2002 2001 Comprehensive income: Net income $ 214,175 $ 238,211 $ 113,297 $ 102,931 Other comprehensive income (loss)—derivative instruments: Cumulative effect of change in accounting principle — (5,334 ) — — Unrealized holding gains (losses) arising during the period 1,990 (3,396 ) (5,219 ) 8,358 Losses reclassified into earnings from other comprehensive income 385 226 217 171 Comprehensive income $ 216,550 $ 229,707 $ 108,295 $ 111,460 See accompanying notes
4
EQUITY RESIDENTIALPROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS(AMOUNTS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2001 2000 --------- ---------CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 238,211 $ 253,798 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: ALLOCATION TO MINORITY INTERESTS: Operating Partnership 16,474 19,132 Partially Owned Properties 238 (157) Cumulative effect of change in accounting principle 1,270 -- Depreciation 230,805 224,512 Amortization of deferred financing costs 2,810 2,703 Amortization of discount on investment in mortgage notes (2,256) -- Amortization of goodwill 1,924 -- Amortization of discounts and premiums on debt (1,007) (1,153) Amortization of deferred settlements on interest rate protection agreements 317 246 Income from investments in unconsolidated entities (10,350) (9,064) Net gain on sales of real estate (46,565) (87,652) Extraordinary items (106) -- Unrealized gain on interest rate protection agreements (132) -- Book value of furniture sales and rental buy outs 5,497 -- Compensation paid with Company Common Shares 6,741 2,845 CHANGES IN ASSETS AND LIABILITIES: (Increase) decrease in rents receivable (705) 535 (Increase) in deposits - restricted (12,574) (3,510) Additions to rental furniture (14,532) -- (Increase) in other assets (15,585) (1,808) Increase in accounts payable and accrued expenses 597 16,769 Increase in accrued interest payable 11,626 818 (Decrease) in rents received in advance and other liabilities (4) (5,378) Increase (decrease) in security deposits 522 (803) --------- --------- Net cash provided by operating activities 413,216 411,833 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in real estate (218,531) (143,680) Improvements to real estate (63,269) (58,360) Additions to non-real estate property (3,520) (2,399) Interest capitalized for real estate under construction (1,408) (480) Proceeds from disposition of real estate, net 345,039 219,409 Investment in property and equipment (1,626) -- Principal receipts on investment in mortgage notes 5,675 3,200 Investments in unconsolidated entities (43,167) (87,105) Distributions from unconsolidated entities 16,711 9,845 Proceeds from refinancing of unconsolidated entities 4,450 1,000 Proceeds from disposition of unconsolidated entities 359 4,400 Decrease (increase) in deposits on real estate acquisitions, net 8,594 (35,854) (Increase) decrease in mortgage deposits (2,344) 2,461 Purchase of management contract rights -- (779) Business combinations, net of cash acquired (7,603) (4,261) Other investing activities, net (15) (11,827) --------- --------- Net cash provided by (used for) investing activities 39,345 (104,430) --------- ---------
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30, 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 214,175 $ 238,211 Adjustments to reconcile net income to net cash provided by operating activities: Allocation to Minority Interests: Operating Partnership 13,784 16,474 Partially Owned Properties 1,325 238 Cumulative effect of change in accounting principle — 1,270 Depreciation 234,846 230,805 Amortization of deferred financing costs 2,988 2,810 Amortization of discount on investment in mortgage notes — (2,256 ) Amortization of goodwill — 1,924 Amortization of discounts and premiums on debt (424 ) (1,007 ) Amortization of deferred settlements on interest rate protection agreements (176 ) 317 Impairment on technology investments 581 6,775 Income from investments in unconsolidated entities (233 ) (960 ) Net gain on sales of discontinued operations (28,446 ) (46,226 ) Net gain on sales of unconsolidated entities (5,246 ) (339 ) Extraordinary items 468 (106 ) Unrealized loss (gain) on interest rate protection agreements 483 (132 ) Book value of furniture sales and rental buyouts — 5,497 Compensation paid with Company Common Shares 10,061 6,741
Changes in assets and liabilities:
(Increase) in rents receivable (227 ) (705 ) Decrease (increase) in deposits—restricted 12,108 (12,574 ) Additions to rental furniture — (14,532 ) Decrease (increase) in other assets 3,898 (20,327 ) Increase in accounts payable and accrued expenses 9,026 597 Increase in accrued interest payable 316 11,626 (Decrease) in rents received in advance and other liabilities (9,972 ) (4 ) (Decrease) increase in security deposits (189 ) 522 Net cash provided by operating activities 459,146 424,639
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate—acquisitions (153,034 ) (187,059 ) Investment in real estate—development (57,066 ) (31,472 ) Improvements to real estate (66,509 ) (63,269 ) Additions to non-real estate property (4,602 ) (3,520 ) Interest capitalized for real estate under development (4,369 ) (3,501 ) Interest capitalized for unconsolidated entities under development (7,954 ) (9,316 ) Proceeds from disposition of real estate, net 183,494 345,039 Proceeds from disposition of furniture rental business 28,741 — Investment in property and equipment — (1,626 ) Principal receipts on investment in mortgage notes — 5,675 Investments in unconsolidated entities (42,441 ) (43,167 ) Distributions from unconsolidated entities 21,483 16,711 Proceeds from disposition of unconsolidated entities 11,317 359 Proceeds from refinancing of unconsolidated entities — 4,450 Decrease in deposits on real estate acquisitions, net 56,305 8,594 Decrease (increase) in mortgage deposits 14,651 (2,344 ) Business combinations, net of cash acquired (461 ) (7,603 ) Other investing activities, net 192 (29 ) Net cash (used for) provided by investing activities (20,253 ) 27,922 See accompanying notes
4EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------- 2001 2000 --------- ---------CASH FLOWS FROM FINANCING ACTIVITIES: Loan and bond acquisition costs $ (3,948) $ (2,005) MORTGAGE NOTES PAYABLE: Proceeds, net 45,118 378,318 Lump sum payoffs (237,040) (104,484) Scheduled principal repayments (16,367) (14,126) Prepayment premiums (202) -- NOTES, NET: Proceeds, net 299,316 -- Scheduled principal repayments (147) -- LINES OF CREDIT: Proceeds 316,491 162,000 Repayments (538,953) (462,000) (Payments) proceeds from settlement of interest rate protection agreements (7,360) 7,055 Proceeds from sale of Common Shares 5,383 4,575 Proceeds from sale of Preferred Shares/Units 48,500 87,000 Proceeds from exercise of options 29,468 9,473 Redemption of Preferred Shares (210,500) -- Payment of offering costs (1,317) (2,240) DISTRIBUTIONS: Common Shares (109,189) (97,486) Preferred Shares/Units (58,503) (55,444) Minority Interests - Operating Partnership (9,949) (9,592) Minority Interests - Partially Owned Properties (665) (617) Principal receipts on employee notes, net 145 119 --------- --------- Net cash (used for) financing activities (449,719) (99,454) --------- --------- Net increase in cash and cash equivalents 2,842 207,949 Cash and cash equivalents, beginning of period 23,772 29,117 --------- --------- Cash and cash equivalents, end of period $ 26,614 $ 237,066 ========= ========= SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 187,195 $ 190,854 ========= ========= Mortgage loans assumed through real estate acquisitions $ 45,918 $ -- ========= ========= Net real estate contributed in exchange for OP Units or preference units $ -- $ 636 ========= ========= Mortgage loans (assumed) by purchaser in real estate dispositions $ (27,358) $(220,000) ========= ========= Transfers to real estate held for disposition $ 38,741 $ 55,997 ========= ========= Mortgage loans recorded as a result of consolidation of previously Unconsolidated Properties $ -- $ 65,095 ========= ========= Net liabilities recorded as a result of consolidation of previously Unconsolidated Properties $ -- $ 792 ========= =========5
Six Months Ended June 30, 2002 2001 CASH FLOWS FROM FINANCING ACTIVITIES: Loan and bond acquisition costs $ (9,124 ) $ (3,948 ) Mortgage notes payable: Proceeds 47,213 45,118 Lump sum payoffs (119,386 ) (237,040 ) Scheduled principal repayments (16,322 ) (16,367 ) Prepayment premiums/fees (468 ) (202 ) Notes, net: Proceeds 397,064 299,316 Lump sum payoffs (225,000 ) — Scheduled principal repayments (253 ) (147 ) Lines of credit: Proceeds 292,000 316,491 Repayments (487,000 ) (538,953 ) (Payments) from settlement of interest rate protection agreements (1,533 ) (7,360 ) Proceeds from sale of Common Shares 6,354 5,383 Proceeds from sale of Preference Interests — 48,500 Proceeds from exercise of options 27,030 29,468 Redemption of Preferred Shares — (210,500 ) Payment of offering costs (158 ) (1,317 ) Distributions: Common Shares (235,548 ) (109,189 ) Preferred Shares (35,832 ) (49,898 ) Preference Interests (10,132 ) (8,496 ) Junior Preference Units (162 ) (109 ) Minority Interests—Operating Partnership (20,095 ) (9,949 ) Minority Interests—Partially Owned Properties (10,375 ) (665 ) Principal receipts on employee notes, net 173 145 Net cash (used for) financing activities (401,554 ) (449,719 )
Net increase in cash and cash equivalents
37,339
2,842
Cash and cash equivalents, beginning of period 51,603 23,772 Cash and cash equivalents, end of period $ 88,942 $ 26,614
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest
$
184,216
$
187,195
Mortgage loans assumed through real estate acquisitions
$
14,000
$
45,918
Mortgage loans (assumed) by purchaser in real estate and furniture rental business dispositions
$
(1,680
)
$
(27,358
)
Transfers to real estate held for disposition
$
—
$
38,741
See accompanying notes
56
EQUITY RESIDENTIALPROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
(Unaudited)1.
BUSINESSBusinessEquity Residential
Properties Trust,("EQR"), formed in March 1993,("EQR"),is aself-administered and self-managed equityfully integrated real estateinvestment trust ("REIT"). As used herein,company engaged in theterm "Company" means EQR,acquisition, ownership, management andits subsidiaries, as the survivoroperation ofthe mergers between EQR and each of Wellsford Residential Property Trust, Evans Withycombe Residential, Inc., Merry Land & Investment Company, Inc. and Lexford Residential Trust (collectively, the "Mergers"). The Company also includes the businesses formerly operated by Globe Business Resources, Inc. ("Globe"), Temporary Quarters, Inc. ("TQ") and Grove Property Trust ("Grove").multifamily properties. The Company has elected to be taxed as aREIT under Section 856(c)real estate investment trust ("REIT").EQR is the general partner of,
the Internal Revenue Code 1986,and asamendedof June 30, 2002 owned an approximate 92.4% ownership interest in, ERP Operating Limited Partnership (the"Code""Operating Partnership"). The Company conducts substantially all of its business and owns substantially all of its assets through the Operating Partnership. The Operating Partnership is,engagedin turn, 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 theacquisition, disposition,ownershipmanagementand operation of multifamilyproperties.residential real estate. References to the "Company" include EQR, the Operating Partnership and each of the partnerships, limited liability companies and corporations controlled by the Operating Partnership or EQR.As of June 30,
2001,2002, the Company owned or had interests in a portfolio of1,0861,065 multifamily properties containing226,150227,963 apartment units(individually a "Property" and collectively the "Properties")located in 36 states consisting of the following:
Number of Number of Properties Units ---------------- -----------------Wholly Owned Properties 968 202,501 Partially Owned Properties 15 3,067 Unconsolidated Properties 103 20,582 ---------------- ----------------- Total Properties 1,086 226,150 ================ =================
Number of
PropertiesNumber
of UnitsWholly Owned Properties 943 198,676 Partially Owned Properties (Consolidated) 36 6,931 Unconsolidated Properties 86 22,356 Total Properties 1,065 227,963 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATIONSummary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. Operating results for the six months ended June 30,
20012002 are not necessarily indicative of the results that may be expected for the yearendedending December 31,2001.2002.The balance sheet at December 31,
20002001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.For further information, including
definitions fordefinition of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31,2000. 6DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In2001.7
Derivative Instruments and Hedging Activities
The following table summarizes the
normal course of business,Company's consolidated derivative instruments and hedging activities at June 30, 2002 (amounts are in thousands):
Cash Flow
HedgesFair Value
HedgesOffsetting
Swaps/CapsOffsetting
Reverse
Swap/CapsCurrent Notional Balance $ 400,000 $ 220,000 $ 255,117 $ 255,117 Lowest Possible Notional $ 400,000 $ 220,000 $ 251,410 $ 251,410 Highest Possible Notional $ 400,000 $ 220,000 $ 431,444 $ 431,444 Lowest Interest Rate 3.65125 % 5.3325 % 4.528 % 4.458 % Highest Interest Rate 5.81000 % 7.2500 % 6.000 % 6.000 % Earliest Maturity Date 2003 2005 2003 2003 Latest Maturity Date 2005 2011 2007 2007 Estimated Asset (Liability) Fair Value $ (14,664 ) $ 4,258 $ (5,093 ) $ 4,821 At June 30, 2002, certain unconsolidated development partnerships in which the Company
is exposedinvested had entered into swaps to hedge theeffect ofinterest ratechanges. The Company limits these risks by following establishedriskmanagement policies and procedures including the use of derivatives.exposure on unconsolidated floating rate construction mortgage loans. The Company hasa policyrecorded its proportionate share ofonly 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 Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effectthese qualifying hedges on itsnet income or financial position in the future from the use of derivatives. On January 1, 2001, the Company adopted SFAS No. 133/138, which requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either shareholders' equity or net income depending on whether the derivative instruments qualify as a hedge for accounting purposes and, if so, the nature of the hedging activity. When the terms of an underlying transaction are modified, or when the underlying transaction is terminated or completed, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the instrument matures. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market each period. As of January 1, 2001, the adoption of the new standard resulted in derivative instruments reported on theconsolidated balancesheet as liabilities of approximately $6.6 million; an adjustment of approximately $5.3 million to "Accumulated Other Comprehensive Income", which are gains and losses not affecting retained earnings in the Consolidated Statement of Shareholders' Equity; and a charge of approximately $1.3 million as a cumulative effect of change in accounting principle in the Consolidated Statement of Operations. The Company employs derivative financial instruments to hedge qualifying anticipated transactions. Gains and losses are deferred and recognized in net income in the same period that the underlying transaction occurs, expires or is otherwise terminated. As of June 30, 2001, there were approximately $8.5 million in deferred losses, net, included in accumulated other comprehensive income. As of June 30, 2001, the Company has entered intosheets. These swapswhichhave been designated as cash flow hedges withana current aggregate notional amount of$927.9$379.3 million (notional amounts range from $123.9 million to $562.3 million over the terms of the swaps) at interest rates ranging from3.65125%2.28% to6.74%6.94% maturing at various dates ranging from20012002 to20072005 with a net liability fair value of$7.6 million; and swaps which have been designated as fair value hedges with an aggregate notional amount of $296.4 million at interest rates ranging from 4.458% to 7.25% maturing at various dates ranging from 2003 to 2005 with a net asset fair value of $3.9$11.3 million.On June 30,
2001,2002, the net derivative instruments were reported at their fair value as other liabilities of approximately$3.7$10.7 million and as a reduction to investment in unconsolidated entities of approximately $11.3 million.WithinAs of June 30, 2002, there were approximately $30.8 million in deferred losses, net, included in accumulated other comprehensive loss. Based on thenext twelve monthsestimated fair values of the net derivative instruments at June 30, 2002, the Companyexpects tomay recognize an estimated$3.9$16.4 million of accumulated other comprehensiveincomeloss as additional interestexpense. 7expense during the twelve months ending June 30, 2003, of which $6.0 million is related to the unconsolidated development partnerships.
Other
In June 2001, the FASB issued SFAS No. 141,Business Combinations. SFAS No. 141 requires companies to account for all business combinations using the purchase method of accounting. SFAS No. 141 is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, but it has not had any impact on the Company's financial condition and results of operations.
In June 2001, the FASB issued SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to eliminate the amortization of goodwill in favor of a periodic impairment based approach. SFAS No. 142 is effective for the fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, but it has not had a material impact on the Company's financial condition and results of operations.
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 Company will adopt the standard effective
8
January 1, 2003, but does not expect it to have a material impact on its financial condition and results of operations.
3.
SHAREHOLDERS' EQUITY AND MINORITY INTERESTSShareholders' Equity and Minority InterestsThe following table presents the changes in the Company's issued and outstanding Common Shares for the six months ended June 30,
2001:2002:
2001 ------------------------------------------------------ ----------------2002 Common Shares outstanding at January 1, 132,616,375 COMMON SHARES ISSUED: --------------------271,621,374
Common Shares Issued:Conversion of Series E Preferred Shares 67,764723,048 Conversion of Series H Preferred Shares 2,7454,050 Employee Share Purchase Plan 106,441212,395 Dividend Reinvestment -Reinvestment—DRIP Plan7,80426,843 Share Purchase -Purchase—DRIP Plan6,41521,819 Exercise of options 749,6531,301,917 Restricted share grants, net 332,177912,128 Conversion of OP Units 504,413 ------------------------------------------------------ ----------------644,207 Common Shares outstanding at June 30, 134,393,787 ------------------------------------------------------ ----------------275,467,781 The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for a partnership interest are collectively referred to as the "Minority
Interests -Interests—Operating Partnership".As of June 30, 2001, theThe MinorityInterests -Interests—Operating Partnership held12,002,29422,555,505 OPUnits. AsUnits representing aresult, the Minority Interests - Operating Partnership had an 8.20%7.57% interest in the Operating Partnership at June 30,2001.2002. Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding at June 30,20012002 would have been146,396,081.298,023,286. Subject to applicable securities law restrictions, the Minority Interests—Operating Partnership may exchange their OP Units for EQR Common Shares on a one-for-one basis.Net proceeds from the Company's Common Share and Preferred Share offerings are contributed by the Company to the Operating
Partnership inPartnership. In return foran increased ownership percentage and are treated as capital transactionsthose contributions, EQR receives a number of OP Units inthe Company's Consolidated Financial Statements. As a result, the net offering proceeds from Common Shares are allocated between shareholders' equity and Minority Interests - Operating Partnership to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership. During the six months ended June 30, 2001, the Company, through a subsidiary ofthe Operating Partnership 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 unitswith anin the Operating Partnership equal in number and having the same terms as the Preferred Shares issued in the equityvalueoffering).The Company's declaration of
$48.5 million, receiving net proceeds of $47.3 million: O 510,000 7.875% Series G Cumulative Redeemable Preference Units (known as "Preference Interests") with an equity value of $25.5 million. The liquidation value of these units is $50 per unit. The 510,000 units are exchangeable into 510,000trust authorizes the Company to issue up to 100,000,000 preferred shares of7.875% Series M-4 Cumulative Redeemable Preferred Sharesbeneficial interest, $0.01 par value per share (the "Preferred Shares"), with specific rights, preferences and other attributes as the Board ofBeneficial InterestTrustees may determine, which may include preferences, powers and rights that are senior to the rights of holders of theCompany. Dividends for the Series G Preference Interests or the Series M-4 Preferred Shares are payable quarterly at the rate of $3.9375 per unit/share per year. O 190,000 7.625% Series H Cumulative Convertible Redeemable Preference Units with an equity value of $9.5 million. The liquidation value of these units is $50 per unit. The 190,000 units are exchangeable into 190,000 shares of 7.625% Series M-5 Convertible Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company or 143,526Company's CommonShares beginning March 2011. Dividends for the Series H Preference Interests or the Series M-5 Preferred Shares are payable quarterly at the rate of $3.8125 per unit/share per year. O 270,000 7.625% Series I Cumulative Convertible Redeemable Preference Units with an equity value of $13.5 million. The liquidation value of these units is $50 per unit. The 270,000 units are exchangeable into 270,000 shares of 7.625% Series M-6 Convertible Cumulative 8Redeemable Preferred Shares of Beneficial Interest of the Company or 196,317 Common Shares beginning June 2011. Dividends for the Series I Preference Interests or the Series M-6 Preferred Shares are payable quarterly at the rate of $3.8125 per unit/share per year. The value of the Preference Interests are included in Minority Interests - Operating Partnership in the Consolidated Balance Sheets and the distributions incurred are included in preferred distributions in the Consolidated Statements of Operations. The Series M-4 Preferred Shares are not convertible into EQR CommonShares.The Series H Preference Interests and the Series M-5 Preferred Shares are convertible into EQR Common Shares at a conversion price ratio of 0.7554 common shares (equal to a conversion price of $66.19 per share) beginning in March 2011. The Series I Preference Interests and the Series M-6 Preferred Shares are convertible into EQR Common Shares at a conversion price ratio of 0.7271 common shares (equal to a conversion price of $68.76 per share) beginning in June 2011.9
The following table presents the Company's issued and outstanding Preferred Shares as of June 30,
20012002 and December 31,2000:
- --------------------------------------------------------------------------------------------------------------- AMOUNTS IN THOUSANDS ---------------------------- ANNUAL DIVIDEND RATE PER JUNE DECEMBER SHARE (1) 30, 2001 31, 2000 - ---------------------------------------------------------------------------------------------------------------Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized: 9 3/8% Series A Cumulative Redeemable Preferred; liquidation (2) $ - $ 153,000 value $25 per share; 0 and 6,120,000 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 9 1/8% Series B Cumulative Redeemable Preferred; liquidation $22.81252 125,000 125,000 value $250 per share; 500,000 shares issued and outstanding at June 30, 2001 and December 31, 2000 9 1/8% Series C Cumulative Redeemable Preferred; liquidation $22.81252 115,000 115,000 value $250 per share; 460,000 shares issued and outstanding at June 30, 2001 and December 31, 2000 8.60% Series D Cumulative Redeemable Preferred; liquidation $21.50000 175,000 175,000 value $250 per share; 700,000 shares issued and outstanding at June 30, 2001 and December 31, 2000 Series E Cumulative Convertible Preferred; liquidation value $1.75000 86,944 89,990 $25 per share; 3,477,765 and 3,599,615 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 9.65% Series F Cumulative Redeemable Preferred; liquidation (2) - 57,500 value $25 per share; 0 and 2,300,000 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 7 1/4% Series G Convertible Cumulative Preferred; liquidation $18.12500 316,175 316,175 value $250 per share; 1,264,700 shares issued and outstanding at June 30, 2001 and December 31, 2000 7.00% Series H Cumulative Convertible Preferred; liquidation $1.75000 1,376 1,471 value $25 per share; 55,053 and 58,851 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 8.29% Series K Cumulative Redeemable Preferred; liquidation $4.14500 50,000 50,000 value $50 per share; 1,000,000 shares issued and outstanding at June 30, 2001 and December 31, 2000 7.625% Series L Cumulative Redeemable Preferred; liquidation $1.90625 100,000 100,000 value $25 per share; 4,000,000 shares issued and outstanding at June 30, 2001 and December 31, 2000 - -------------------------------------------------------------------- ----------------------------------------- $ 969,495 $ 1,183,136 - -------------------------------------------------------------------- -----------------------------------------92001:
Amounts in thousandsAnnual
Dividend
Rate per
Share(1)June 30,
2002December 31, 2001 Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized:
91/8% Series B Cumulative Redeemable Preferred; liquidation value $250 per share; 500,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
$
22.81252
$
125,000
$
125,000
91/8% Series C Cumulative Redeemable Preferred; liquidation value $250 per share; 460,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
$
22.81252
115,000
115,000
8.60% Series D Cumulative Redeemable Preferred; liquidation value $250 per share; 700,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
$
21.50000
175,000
175,000
Series E Cumulative Convertible Preferred; liquidation value $25 per share; 2,716,012 and 3,365,794 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively
$
1.75000
67,900
84,145
71/4% Series G Convertible Cumulative Preferred; liquidation value $250 per share; 1,264,700 shares issued and outstanding at June 30, 2002 and December 31, 2001
$
18.12500
316,175
316,175
7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 51,228 and 54,027 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively
$
1.75000
1,281
1,351
8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
$
4.14500
50,000
50,000
7.625% Series L Cumulative Redeemable Preferred; liquidation value $25 per share; 4,000,000 shares issued and outstanding at June 30, 2002 and December 31, 2001
$
1.90625
100,000
100,000
$
950,356
$
966,671
- (1)
- Dividends on all series of Preferred Shares are payable quarterly at various
paydates. Dividend rates listed for Series B, C, D and G are Preferred Share rates and the equivalent Depositary Share annual dividend rates are $2.281252, $2.281252, $2.15 and $1.8125, respectively.(2) OnThe liquidation value of the Preference Interests and the Junior Preference Units (see below) are included as separate components of Minority Interests in the consolidated balance sheets and the distributions incurred are included in preferred distributions in the consolidated statements of operations.
10
The following table presents the issued and outstanding Preference Interests as of June 30, 2002 and December 31, 2001:
Amounts in thousandsAnnual
Dividend
Rate per
Unit(1)June 30,
2002December 31, 2001 Preference Interests:
8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
4.0000
$
40,000
$
40,000
8.50% Series B Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
4.2500
55,000
55,000
8.50% Series C Cumulative Redeemable Preference Units; liquidation value $50 per unit; 220,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
4.2500
11,000
11,000
8.375% Series D Cumulative Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
4.1875
21,000
21,000
8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
4.2500
50,000
50,000
8.375% Series F Cumulative Redeemable Preference Units; liquidation value $50 per unit; 180,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
4.1875
9,000
9,000
7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
3.9375
25,500
25,500
7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
3.8125
9,500
9,500
7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
3.8125
13,500
13,500
7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at June 30, 2002 and December 31, 2001
$
3.8125
11,500
11,500
$
246,000
$
246,000
- (1)
- Dividends on all series of Preference Interests are payable quarterly on March 25
2001,th, June 25th, September 25th, and December 25th of each year.11
The following table presents the
Company redeemed allOperating Partnership's issued and outstanding Junior Convertible Preference Units (the "Junior Preference Units") as ofits outstanding Series AJune 30, 2002 andF Cumulative Redeemable Preferred SharesDecember 31, 2001:
Amounts in thousandsAnnual
Dividend
Rate per
Unit(1)June 30, 2002 December 31, 2001 Junior Preference Units:
Series A Junior Convertible Preference Units; liquidation value $100 per unit; 56,616 units issued and outstanding at June 30, 2002 and December 31, 2001
$
5.46934
$
5,662
$
5,662
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at June 30, 2002 and December 31, 2001
$
2.00000
184
184
$
5,846
$
5,846
- (1)
- Dividends on both series of Junior Preference Units are payable quarterly at
their liquidation values for cash consideration of $210.5 million.various dates.4.
REAL ESTATE ACQUISITIONSReal Estate AcquisitionsDuring the six months ended June 30,
2001,2002, the Company acquired theeightseven properties listed below from unaffiliated parties for a total purchase price of$232.1$166.5 million.
----------------------------------------------------------------------------------------------------------------- ACQUISITION NUMBER PRICE DATE ACQUIRED PROPERTY LOCATION OF UNITS (IN THOUSANDS) --------------- --------------------------------------- -------------------------- ------------ -----------------01/04/01 Suerte San Diego, CA 272 $ 37,500 02/08/01 Westside Villas VI Los Angeles, CA 18 4,550 02/15/01 Riverview Norwalk, CT 92 9,600 03/15/01 Grand Reserve at Eagle Valley Woodbury, MN 394 54,250 03/22/01 Legends at Preston Morrisville, NC 382 30,200 03/30/01 Mission Hills Oceanside, CA 282 26,750 03/30/01 River Oaks Oceanside, CA 280 26,250 05/18/01 Promenade at Aventura Aventura, FL 296 43,000 --------------- --------------------------------------- -------------------------- ------------ ----------------- 2,016 $ 232,100 --------------- --------------------------------------- -------------------------- ------------ -----------------
Date
AcquiredProperty Location Number
of UnitsAcquisition Price (in thousands) 3/28/02 Isles at Sawgrass Sunrise, FL 368 $ 26,000 4/24/02 Center Pointe Beaverton, OR 264 19,100 4/30/02 Mira Flores Palm Beach Gardens, FL 352 29,250 5/15/02 Gramercy Park Houston, TX 384 26,000 5/31/02 Enclave at Winston Park Coconut Creek, FL 278 25,450 5/31/02 St. Andrews at Winston Park Coconut Creek, FL 284 25,450 6/21/02 Westside Villas VII Los Angeles, CA 53 15,250 1,983 $ 166,500 12
5.
REAL ESTATE DISPOSITIONSReal Estate DispositionsDuring the six months ended June 30,
2001,2002, the Company disposed of thetwenty-seventwenty-three properties listed below to unaffiliated parties.When combined with gains from the joint venture, unconsolidated property sale and land sales discussed below, theThe Company recognized a net gain on sales of discontinued operations of approximately$46.6$28.4 million and a net gain onthese sales. 10
--------------- ---------------------------------- -------------------------- ------------ ----------------- DISPOSITION NUMBER PRICE DATE DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS) --------------- ---------------------------------- -------------------------- ------------ -----------------01/17/01 Meadowood II Indianapolis, IN 74 $ 1,300 01/31/01 Concorde Bridge Overland Park, KS 248 15,600 02/01/01 Springs of Country Woods Salt Lake City, UT 590 31,000 02/22/01 Riverview Estates Napoleon, OH 90 1,750 02/26/01 Chelsea Court Sandusky, OH 62 1,600 02/27/01 Concord Square Lawrenceburg, IN 48 1,200 02/28/01 Canyon Creek Tucson, AZ 242 9,220 03/06/01 Gentian Oaks Columbus, GA 62 1,620 03/06/01 Holly Park Columbus, GA 66 1,730 03/06/01 Stratford Lane I Columbus, GA 67 1,750 03/07/01 Estate on Quarry Lake Austin, TX 302 25,232 03/08/01 Meadowood Crawfordsville, IN 64 1,300 03/14/01 Mill Run Statesboro, GA 88 2,350 03/15/01 Laurel Court Fremont, OH 69 1,450 03/15/01 Regency Woods West Des Moines, IA 200 9,350 04/16/01 Rosewood Tampa, FL 66 1,650 04/25/01 Parkcrest Southfield, MI 210 12,950 04/27/01 Westwood Newark, OH 14 222 04/30/01 Desert Park Las Vegas, NV 368 9,900 05/15/01 Carleton Court Erie, PA 60 1,461 05/16/01 River Oak Louisville, KY 268 14,650 06/07/01 Willowood Milledgeville, GA 61 1,550 06/14/01 Quail Cove Salt Lake City, UT 420 20,000 06/15/01 Beckford Place Wapakoneta, OH 40 830 06/27/01 The Birches Lima, OH 58 1,120 06/28/01 Pelican Pointe I and II Jacksonville, FL 160 4,150 06/28/01 Camden Way I and II Kingsland, GA 118 2,000 --------------- ---------------------------------- -------------------------- ------------ ----------------- 4,115 $ 176,935 --------------- ---------------------------------- -------------------------- ------------ -----------------On February 23, 2001,sales of unconsolidated entities of approximately $5.2 million.
Date
DisposedProperty Location Number
Of UnitsDisposition Price
(in thousands)01/17/02 Ravenwood Mauldin, SC 82 $ 2,425 01/24/02 Larkspur I & II Moraine, OH 45 899 01/31/02 Springwood II Austintown, OH 43 900 02/21/02 Scottsdale Courtyards Scottsdale, AZ 274 26,500 04/11/02 Applegate Lordstown, OH 39 723 04/11/02 Applerun Warren, OH 48 1,054 04/11/02 Brunswick Cortland, OH 59 1,424 05/01/02 The Landings Memphis, TN 292 10,300 05/03/02 Waterbury Clarksville, TN 54 1,385 05/09/02 Arboretum Tucson, AZ 496 25,000 05/09/02 Orange Grove Village Tucson, AZ 400 17,400 05/09/02 Village at Tanque Verde Tucson, AZ 217 9,100 05/14/02 Canyon Crest Views Riverside, CA 178 20,450 05/14/02 Merrimac Woods Costa Mesa, CA 123 12,950 05/14/02 Sierra Canyon Santa Clarita, CA 232 23,500 05/15/02 Meadowood Wellsville, OH 40 812 05/23/02 Pine Meadow Greensboro, NC 204 7,550 05/23/02 Palms at South Shore League City, TX 240 12,850 05/31/02 California Gardens Jacksonville, FL 71 1,468 05/31/02 Westcreek Jacksonville, FL 86 2,282 06/19/02 Apple Run Hillsdale, MI 39 1,047 Various Four Lakes Condo Units Lisle, IL 57 5,851 Wholly Owned Properties 3,319 185,870 01/31/02 Mount Laurel Crossing* Mt. Laurel, NJ 296 11,317 04/23/02 Foxton* Seymour, IN 39 — Unconsolidated Properties 335 11,317 Total 3,654 $ 197,187
- *
- Represents the
Company entered into a joint venture with an unaffiliated joint venture partner ("JVP"). At closing, the Company sold and/or contributed eleven wholly owned properties containing 3,011 units valued at $202.5 million to the joint venture encumbered with $20.2 million in mortgage loans obtained on February 16, 2001. An additional $123.6 million of mortgage loans was obtained by the joint venture. The JVP contributed cash in an amount equal to 75%Company's share of theequity in the joint venture, which was then distributednet disposition proceeds.6. Commitments to
the Company. The Company retained a 25% interest in the joint venture along with the right to manage the properties. In accordance with the respective joint venture organization documents, the Company and the JVP both shall have the right, but not the obligation, to infuse additional cash into the joint venture. There are no other agreements that require the Company or the JVP to infuse cash into each joint venture. In addition, the Company and the JVP have not guaranteed the mortgage indebtednessAcquire/Dispose ofthe joint venture. As a result, the Company recognized 75% of the gain on the sales and/or contributions of property to the joint venture, which totaled approximately $36.4 million. The Company has classified its initial $3.4 million 25% interest in the joint venture (at carryover basis) as investments in unconsolidated entities and accounted for it under the equity method of accounting. In addition, during the six months ended June 30, 2001, the Company sold its entire interest in one Unconsolidated Property containing 74 units for approximately $0.4 million and sold vacant parcels of land in Richmond, VA and Jacksonville, FL for $11.2 million and $0.2 million, respectively. 6. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATEReal EstateAs of June 30,
2001,2002, in addition to the property that was subsequently acquired as discussed in Note 17, the Company had entered into separate agreements to acquireeighttwo multifamily properties containing2,922603 units from unaffiliated parties. The Company expects a combined11purchase price of approximately $360.1 million, including the assumption of mortgage indebtedness of approximately $44.8$42.1 million.As of June 30,
2001,2002, in addition to thePropertiesproperties that were subsequently disposed of as discussed in Note15 of the Notes to Consolidated Financial Statements,17, the Company had entered into separate agreements to dispose offifteenfourteen multifamily properties containing2,9952,756 units to unaffiliated parties. The Company expects a combined disposition price of approximately$137.0$134.5 million.13
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.
INVESTMENTS IN UNCONSOLIDATED ENTITIESInvestments in Unconsolidated EntitiesThe Company has entered into
two separatevarious joint venture agreements with third partydevelopment companies whereby the Company contributes 25% to 30% of the development cost to the joint venture in return for preferential returns of 9.0% per annum.companies. Thebasis offollowing table summarizes the Company'sequityinvestments inthese two joint ventures was $273.8 million and $235.9 millionunconsolidated entities as of June 30,20012002 (amounts in thousands except for project andDecember 31, 2000, respectively.unit amounts):
Institutional
Joint
VenturesStabilized
Development
Projects(1)Projects
Under
DevelopmentLexford/
OtherTotals Total projects 45 10 18 26 99 (2)
Total units
10,846
3,038
5,523
3,313
22,720
(2)EQR's percentage ownership of mortgage notes payable 25.0 % 96.4 % 100.0 % 19.5 % EQR's share of mortgage notes payable(4) $ 121,200 $ 242,431 $ 341,703 $ 12,913 $ 718,247 (3)
- (1)
- The Company determines a project to be stabilized once it has maintained an average physical occupancy of 90% or more for a three-month period.
- (2)
- Includes four projects under development consisting of 1,522 units, which are completed and not yet stabilized, but are included in the Company's property/unit counts at June 30, 2002. The remaining 14 development properties containing 4,001 units are not included in the Company's property/unit counts at June 30, 2002. Totals also exclude Fort Lewis Military Housing consisting of 1 property and 3,637 units.
- (3)
- A total of $698,597 is available for funding under these construction loans, of which $341,703 was funded and outstanding at June 30, 2002.
- (4)
- As of July 30, 2002, EQR has
various other investmentsfunded $54.5 million as additional collateral for certain of these loans (see Note 8). All remaining debt is non-recourse to EQR.Investments in unconsolidated entities
withinclude the Unconsolidated Properties as well as various development properties under construction or pending construction. The Company does not consolidate these entities, as it does not have sole control of major decisions (such as sale and/or financing/refinancing). The Company's common equity ownership interestsrangingin these entities range from1.5%4.5% to50.0%. The basis of these equity investments was $54.4 million and $80.6 million as of57.0% at June 30,2001 and December 31, 2000, respectively.2002.These investments are accounted for
underutilizing the equity method of accounting. Under the equity method of accounting, the net equity investment of the Company is reflected on the consolidated balance sheets and after the project is completed, the consolidated statements of operations include the Company's share of net income or loss from the unconsolidated entity. Prior to the project being completed, the Company 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 six months ended June 30, 2002 and 2001, the Company capitalized $8.0 million and $9.3 million, respectively, in interest cost related to its unconsolidated development projects (which reduced interest expense incurred in the consolidated statements of operations).The Company generally contributes between 25% and 35% of the project cost of the unconsolidated projects under development, with the remaining cost financed through third-party construction mortgages.
14
8.
DEPOSITS - RESTRICTED Deposits-restricted asDeposits—RestrictedAs of June 30,
20012002, deposits-restricted totaled $149.9 million and primarily included the following:O
- •
- deposits in the amount of
$49.5$54.5 million held in third party escrow accounts to provide collateral for third party construction financing in connection withjoint venture agreements; Ounconsolidated development projects;- •
- approximately
$151.6$32.9 million in tax-deferred(1031)exchange proceeds; andO- •
- approximately
$34.5$62.5 million fortenantresident security, utility, and other deposits.9.
MORTGAGE NOTES PAYABLEMortgage Notes PayableAs of June 30,
2001,2002, the Company had outstanding mortgage indebtedness of approximately$3.0$3.2 billion.During the six months ended June 30,
20012002, the Company:O
- •
- repaid
$237.0$135.7 million ofmortgages due at or prior to maturity and/or at the disposition date of the respective Property; Omortgage loans;- •
- assumed
$45.9$14.0 million of mortgage debt onfour propertiesone property in connection withtheir acquisitions; Oits acquisition;- •
- disposed of
$27.4$1.7 million of mortgage debt assumed by the purchaser in connection with the disposition of certainproperties; O obtained $26.0 million of new mortgage debt on previously unencumbered properties;properties andOthe furniture rental business; and- •
- received
$19.1$47.2 million in construction loan draw proceeds ontwocertain properties.12As of June 30,
2001,2002, scheduled maturities for the Company's outstanding mortgage indebtednessarewere at various dates through October 1, 2033. The interest rate range on the Company's mortgage debt was2.5%1.10% to 12.465% at June 30,2001.2002. During the six months ended June 30,2001,2002, the weighted average interest rateon the Company's mortgage debtwas6.64%6.41%.10.
NOTESNotesAs of June 30,
2001,2002, the Company had outstanding unsecured notes of approximately $2.4 billion.During the six months ended June 30,
2001,2002, theCompanyCompany:
- •
- issued
$300.0$400.0 million of ten-year6.95% fixed-rate6.625% fixed rate publicunsecurednotes,and receivedreceiving net proceeds of$297.4 million.$394.5 million;- •
- repaid $100.0 million of 9.375% fixed rate public notes at maturity; and
- •
- repaid $125.0 million of 7.95% fixed rate pubic notes at maturity.
As of June 30,
2001,2002, scheduled maturities for the Company's outstanding notes are at various dates through 2029. The interest rate range on the Company's notes was 4.75% to9.375%7.75% at June 30,2001.2002. During the six months ended June 30,2001,2002, the weighted average interest rateonwas 6.50%.11. Line of Credit
On May 30, 2002, the
Company's notes was 6.99%. 11. LINES OF CREDIT TheCompanyhasobtained a new three-year $700.0 million unsecured revolving credit facility maturing May 29, 2005. The new line of credit replaced the Company's $700.0 million unsecured revolving credit facility that was scheduled toprovideexpire in August 2002. Advances under the new credit facility bear interest at variable rates based upon LIBOR at various interest periods, plus a spread dependent upon the OperatingPartnership with potential borrowingsPartnership's credit rating, or based upon bids received from the lending group. The prior existing revolving credit facility was terminated upon the closing ofup to $700.0 million.the new facility. As of June 30,2001, $133.02002, no amounts were outstanding and $84.0 million wasoutstanding under this facilityrestricted (dedicated to support letters of credit and$60.9 million was restrictednot available for borrowing) on the line of credit.In connection with the Globe acquisition, the Company assumed a revolving credit facility with potential borrowings of up to $55.0 million. On May 31, 2001, this credit facility was terminated.During the six months ended June 30,2001,2002, the weighted average interest rateon the Company's lineswas 2.50%.15
12. Calculation of
credit was 6.59%. 1312. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE COMMON SHARENet Income Per Weighted Average Common ShareThe following tables set forth the computation of net income per
share - -share—basic and net income per share—diluted:
Six Months Ended June 30, Quarter Ended June 30, 2002 2001 2002 2001 (Amounts in thousands except per share amounts) Numerator: Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items, cumulative effect of change in accounting principle and preferred distributions $ 192,833 $ 204,896 $ 95,769 $ 102,976
Allocation to Minority Interests:
Operating Partnership (13,784 ) (16,474 ) (7,343 ) (6,678 ) Partially Owned Properties (1,325 ) (238 ) (519 ) (133 ) Income from investments in unconsolidated entities 233 960 7 610 Preferred distributions (48,781 ) (57,419 ) (24,256 ) (28,893 )
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle
129,176
131,725
63,658
67,882
Net gain (loss) on sales of unconsolidated entities
5,246
339
(411
)
339
Net gain on sales of discontinued operations 28,446 46,226 25,630 4,448 Discontinued operations, net 2,994 3,666 535 1,574 Extraordinary items (468 ) 106 (371 ) (205 ) Cumulative effect of change in accounting principle — (1,270 ) — — Numerator for net income per share—basic 165,394 180,792 89,041 74,038
Effect of dilutive securities:
Allocation to Minority Interests—Operating Partnership 13,784 16,474 7,343 6,678 Distributions on convertible preferred shares/units — 242 22 — Numerator for net income per share—diluted $ 179,178 $ 197,508 $ 96,406 $ 80,716
Denominator:
Denominator for net income per share—basic 272,126 265,781 273,146 266,357
Effect of dilutive securities:
OP Units 22,831 24,305 22,653 24,152 Convertible preferred shares/units — 370 75 — Share options/restricted shares 3,465 3,361 3,620 3,430 Denominator for net income per share—diluted 298,422 293,817 299,494 293,939
Net income per share—basic
$
0.61
$
0.68
$
0.33
$
0.28
Net income per share—diluted
$
0.60
$
0.67
$
0.32
$
0.27
16
Six Months Ended June 30, Quarter Ended June 30, 2002 2001 2002 2001 (Amounts in thousands except per share amounts) Net income per share—basic: Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per share—basic $ 0.48 $ 0.51 $ 0.24 $ 0.26 Net gain (loss) on sales of unconsolidated entities 0.02 — — — Net gain on sales of discontinued operations 0.10 0.16 0.09 0.02 Discontinued operations, net 0.01 0.01 — — Extraordinary items — — — — Cumulative effect of change in accounting principle — — — — Net income per share—basic $ 0.61 $ 0.68 $ 0.33 $ 0.28
Net income per share—diluted:
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per share—diluted $ 0.48 $ 0.50 $ 0.24 $ 0.25 Net gain (loss) on sales of unconsolidated entities 0.01 — — — Net gain on sales of discontinued operations 0.10 0.16 0.08 0.02 Discontinued operations, net 0.01 0.01 — — Extraordinary items — — — — Cumulative effect of change in accounting principle — — — — Net income per share—diluted $ 0.60 $ 0.67 $ 0.32 $ 0.27 Convertible preferred shares/units that could be converted into 15,648,034 and 14,921,384 weighted average Common Shares for the six months ended June 30, 2002 and 2001, respectively, and 15,369,255 and 15,379,910 weighted average Common Shares for the quarters ended June 30, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per share
- diluted.
SIX MONTHS ENDED JUNE 30, QUARTER ENDED JUNE 30, ----------------------------------------------------------------- 2001 2000 2001 2000 ----------------------------------------------------------------- (amounts in thousands except per share amounts)NUMERATOR: Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of real estate, extraordinary items, cumulative effect of change in accounting principle and preferred distributions $ 199,172 $ 176,057 $98,607 $ 92,088 Allocation to Minority Interests: Operating Partnership (16,474) (19,132) (6,678) (12,036) Partially Owned Properties (238) 157 (133) 112 Income from investments in unconsolidated entities 10,350 9,064 6,553 4,841 Preferred distributions (57,419) (55,654) (28,893) (27,266) ------------------------------------------------------------ Income before net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle 135,391 110,492 69,456 57,739 Net gain on sales of real estate 46,565 87,652 4,787 67,654 Extraordinary items 106 - (205) - Cumulative effect of change in accounting principle (1,270) - - - ------------------------------------------------------------ Numerator for net income per share - basic 180,792 198,144 74,038 125,393 Effect of dilutive securities: Allocation to Minority Interests - Operating Partnership 16,474 19,132 6,678 12,036 Distributions on convertible preferred shares/units 242 267 - 3,526 ------------------------------------------------------------ Numerator for net income per share - diluted $197,508 $217,543 $80,716 $ 140,955 ============================================================ DENOMINATOR: Denominator for net income per share - basic 132,890 128,435 133,179 129,072 Effect of dilutive securities: OP Units 12,153 12,415 12,076 12,364 Convertible preferred shares/units 185 204 - 4,304 Share options/restricted shares 1,681 579 1,715 770 ------------------------------------------------------------ Denominator for net income per share - diluted 146,909 141,633 146,970 146,510 ============================================================ Net income per share - basic $ 1.36 $ 1.54 $ 0.56 $ 0.97 ============================================================ Net income per share - diluted $ 1.34 $ 1.54 $ 0.55 $ 0.96 ============================================================14
SIX MONTHS ENDED JUNE 30, QUARTER ENDED JUNE 30, --------------------------------------------------------------- 2001 2000 2001 2000 --------------------------------------------------------------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)NET INCOME PER SHARE - BASIC: Income before net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle per share - basic $ 1.05 $ 0.92 $ 0.53 $ 0.49 Net gain on sales of real estate 0.32 0.62 0.03 0.48 Extraordinary items - - - - Cumulative effect of change in accounting principle (0.01) - - - --------------------------------------------------------------- Net income per share - basic $ 1.36 $ 1.54 $ 0.56 $ 0.97 =============================================================== NET INCOME PER SHARE - DILUTED: Income before net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle per share - diluted $ 1.03 $ 0.92 $ 0.52 $ 0.50 Net gain on sales of real estate 0.32 0.62 0.03 0.46 Extraordinary items - - - - Cumulative effect of change in accounting principle (0.01) - - - --------------------------------------------------------------- Net income per share - diluted $ 1.34 $ 1.54 $ 0.55 $ 0.96 ===============================================================CONVERTIBLE PREFERRED SHARES/UNITS THAT COULD BE CONVERTED INTO 7,460,692 AND 9,970,878 WEIGHTED AVERAGE COMMON SHARES FOR THE SIX MONTHS ENDED JUNEbecause the effects would be anti-dilutive.On October 11, 2001, the Company effected a two-for-one split of its Common Shares and OP Units to shareholders and unitholders of record as of September 21, 2001. All per share and OP Unit data and numbers of Common Shares and OP Units have been retroactively adjusted to reflect the Common Share and OP Unit split.
13. Discontinued Operations
In August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, which did not have a material effect on the Company's financial condition and results of operations.
Under the provisions of SFAS No. 144, for long-lived assets to be held and used, the Company first determines whether any indicators of impairment exist. If indicators exist, the Company compares the expected future undiscounted cash flows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recorded for the difference between the estimated fair value and the carrying amount of the asset.
17
For long-lived assets to be disposed of, an impairment loss is recognized when the estimated fair value of the asset, less the estimated cost to sell, is less than the carrying amount of the asset measured at the time that the Company has determined it will sell the asset. Long-lived assets held for disposition are reported at the lower or their carrying amounts or their estimated fair values, less their costs to sell.
Goodwill and investments in unconsolidated entities accounted for under the equity method of accounting are specifically excluded from the scope of SFAS No. 144.
On January 11, 2002, the Company disposed of its furniture rental business for $30.0 million and received net proceeds of $28.7 million. No gain/loss on sale was recognized as the net book value at the sale date after giving effect to a previously recorded impairment loss approximated the sales price.
The components of discontinued operations for the six months and quarters ended June 30, 2002 and 2001, respectively, are outlined below and include the results of operations through the date of each respective sale for the six months and quarter ended June 30, 2002, and a full six months and quarter of operations for the six months and quarter ended June 30, 2001,
AND 2000, RESPECTIVELY, AND 7,689,955 AND 5,402,779 WEIGHTED AVERAGE COMMON SHARES FOR THE QUARTERS ENDED JUNE 30, 2001 AND JUNE 30, 2000, RESPECTIVELY, WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS PER SHARE BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE. 13. COMMITMENTS AND CONTINGENCIESfor the following:
- •
- the sale of the furniture rental business; and
- •
- the twenty-one Wholly Owned Properties sold (see Note 5).
Six Months Ended June 30, Quarter Ended June 30, 2002 2001 2002 2001 (Amounts in thousands) REVENUES Rental income $ 8,762 $ 12,858 $ 2,628 $ 6,432 Interest and other income 3 26 1 25 Furniture income 1,361 30,027 (4 ) 15,155 Total revenues 10,126 42,911 2,625 21,612
EXPENSES
Property and maintenance 2,787 3,332 1,267 1,617 Real estate taxes and insurance 881 1,162 254 589 Depreciation 2,125 3,309 569 1,662 Interest expense incurred, net 36 300 — 147 Furniture expenses 1,303 30,499 — 15,670 Amortization of goodwill — 643 — 353 Total expenses 7,132 39,245 2,090 20,038 Discontinued operations, net $ 2,994 $ 3,666 $ 535 $ 1,574 14. Commitments and Contingencies
The Company, as an owner of real estate, is subject to various environmental laws of Federal and local governments. Compliance by the Company with existing laws has not had a material adverse effect on the Company's financial condition and results of operations. However, the Company cannot predict the impact of new or changed laws or regulations on its current
Propertiesproperties or on properties that it may acquire in the future.The Company does not believe there is any litigation threatened against the Company other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by liability insurance, none of which is expected to have a material adverse effect on the consolidated financial statements of the Company.
18
In regards to the funding of
Propertiesproperties in the developmentand/or earnoutstage and thejoint ventureagreements withtwomultifamily residential real estate developers, the Company funded a net total of$71.4$40.3 million during the six months ended June 30,2001. During the remainder of 2001, the Company expects to fund approximately $66.0 million in connection with these Properties.2002. In connection with onejoint venturedevelopment agreement, the Company has an obligation to fund up to an additional$12.5$9.5 million to guarantee third party construction financing. As of June 30,2001,2002, the Company has2021 projects under development (includes three consolidated projects) with estimated completion dates rangingfrom September 30, 2001throughJune 30, 2003. AtMarch 31, 2004.For one development agreement, the Company's partner has the right, at any time following
thecompletion ofconstructiona project, to stipulate a value for such project and offer to sell its interest in the project to the Company based on such value. If the Company chooses not to purchase the interest, it must agree to a sale ofanythe project to an unrelated third party at such value. The Company'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.Under a second development
property,agreement, the Company'sjoint venture partners havepartner has the right, at any time following completion of a project, tocauserequire the Company toacquire their respective interestspurchase the partners' interest inthe completed projectsthat project at a mutually agreeable price. If the Company and thejoint venture 15partner are unable to agree on a price, appraisalsboth parties willbe obtained by both parties.obtain appraisals. If the appraised values vary by more than 10%, both the Company andthe joint ventureits partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value.In connection withThe Company may elect at that time not to purchase theWellsford Merger,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, any projects remaining unsold must be purchased by the Company at the agreed-upon price.The Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of June 30,
2001,2002, this enhancement was still in effect at a commitment amount of $12.7 million.14. REPORTABLE SEGMENTS The following tables set forth the reconciliation of net income and total assets for the Company's reportable segments for15. Asset Impairment
For the six months
and quarterended June 30, 2002 and 2001, the Company recorded approximately $0.6 million andnet income for$6.8 million, respectively, of asset impairment charges related to its technology investments. These charges were thesix monthsresult of review of the existing investments reflected on the consolidated balance sheet. These impairment losses are reflected on the statement of operations in total expenses andquarter ended June 30, 2000.
SIX MONTHS ENDED RENTAL REAL CORPORATE/ JUNE 30, 2001 (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED - ---------------------------------------------------------------------------------------------------------Rental income $ 1,027,671 $ -- $ 1,027,671 Fee and asset management income -- 4,140 4,140 Furniture income -- 30,027 30,027 Property and maintenance expense (280,783) -- (280,783) Real estate tax and insurance expense (96,775) -- (96,775) Property management expense (36,364) -- (36,364) Fee and asset management expense -- (3,648) (3,648) Furniture expenses -- (30,496) (30,496) -------------------------------------------- Net operating income 613,749 23 613,772 Interest income - investment in mortgage notes -- 8,763 8,763 Interest and other income -- 11,711 11,711 Depreciation expense on non-real estate assets -- (3,980) (3,980) Interest expense: Expense incurred -- (190,383) (190,383) Amortization of deferred financing costs -- (2,810) (2,810) General and administrative expense -- (14,079) (14,079) Allocation to Minority Interests - Partially Owned Properties -- (238) (238) Income from investments in unconsolidated entities -- 10,350 10,350 Preferred distributions -- (57,419) (57,419) Adjustment for loss on investment in technology segment -- 6,775 6,775 Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties -- 4,729 4,729 -------------------------------------------- Funds from operations available to Common Shares and OP Units 613,749 (226,558) 387,191 Depreciation/amortization (221,898) (1,924) (223,822) Net gain on sales of real estate 46,565 -- 46,565 Extraordinary items -- 106 106 Cumulative effect of change in accounting principle -- (1,270) (1,270) Allocation to Minority Interests - Operating Partnership -- (16,474) (16,474) Adjustment for loss on investment in technology segment -- (6,775) (6,775) Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties -- (4,729) (4,729) -------------------------------------------- Net income available to Common Shares $ 438,416 $ (257,624) $ 180,792 ============================================ Investment in real estate, net of accumulated depreciation $ 11,014,139 $ 16,297 $ 11,030,436 ============================================ Total assets $ 11,052,880 $ 1,024,856 $ 12,077,736 ============================================16
SIX MONTHS ENDED RENTAL REAL CORPORATE/ JUNE 30, 2000 (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED - -------------------------------------------------------------------------------------------------------Rental income $ 952,740 $ -- $ 952,740 Fee and asset management income -- 2,835 2,835 Property and maintenance expense (227,845) -- (227,845) Real estate tax and insurance expense (95,001) -- (95,001) Property management expense (37,760) -- (37,760) Fee and asset management expense -- (2,102) (2,102) -------------------------------------------- Net operating income 592,134 733 592,867 Interest income - investment in mortgage notes -- 5,499 5,499 Interest and other income -- 8,385 8,385 Depreciation expense on non-real estate assets -- (3,157) (3,157) Interest expense: Expense incurred -- (190,263) (190,263) Amortization of deferred financing costs -- (2,703) (2,703) General and administrative expense -- (13,216) (13,216) Allocation to Minority Interests - Partially Owned Properties -- 157 157 Income from investments in unconsolidated entities -- 9,064 9,064 Preferred distributions -- (55,654) (55,654) Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties -- (491) (491) -------------------------------------------- Funds from operations available to Common Shares and OP Units 592,134 (241,646) 350,488 Depreciation expense on real estate assets (221,355) -- (221,355) Net gain on sales of real estate 87,652 -- 87,652 Allocation to Minority Interests - Operating Partnership -- (19,132) (19,132) Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties -- 491 491 -------------------------------------------- Net income available to Common Shares $ 458,431 $ (260,287) $ 198,144 ============================================17
RENTAL REAL CORPORATE/ QUARTER ENDED JUNE 30, 2001 (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED --------------------------------------------------------------------------------------------------------Rental income $ 515,860 $ -- $ 515,860 Fee and asset management income -- 2,168 2,168 Furniture income -- 15,155 15,155 Property and maintenance expense (143,746) -- (143,746) Real estate tax and insurance expense (48,754) -- (48,754) Property management expense (17,686) -- (17,686) Fee and asset management expense -- (1,764) (1,764) Furniture expenses -- (15,668) (15,668) -------------------------------------------- Net operating income 305,674 (109) 305,565 Interest income - investment in mortgage notes -- 6,019 6,019 Interest and other income -- 5,209 5,209 Depreciation expense on non-real estate assets -- (1,998) (1,998) Interest expense: Expense incurred -- (95,107) (95,107) Amortization of deferred financing costs -- (1,413) (1,413) General and administrative expense -- (7,325) (7,325) Allocation to Minority Interests - Partially Owned Properties -- (133) (133) Income from investments in unconsolidated entities -- 6,553 6,553 Preferred distributions -- (28,893) (28,893) Adjustment for loss on investment in technology segment -- 3,772 3,772 Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties -- 2,734 2,734 -------------------------------------------- Funds from operations available to Common Shares and OP Units 305,674 (110,691) 194,983 Depreciation/amortization (111,352) (991) (112,343) Net gain on sales of real estate 4,787 -- 4,787 Extraordinary items -- (205) (205) Allocation to Minority Interests - Operating Partnership -- (6,678) (6,678) Adjustment for loss on investment in technology segment -- (3,772) (3,772) Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties -- (2,734) (2,734) -------------------------------------------- Net income available to Common Shares $ 199,109 $ (125,071) $ 74,038 ============================================18
RENTAL REAL CORPORATE/ QUARTER ENDED JUNE 30, 2000 (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED ------------------------------------------------------------------------------------------------------Rental income $ 479,193 $ -- $ 479,193 Fee and asset management income -- 1,435 1,435 Property and maintenance expense (113,977) -- (113,977) Real estate tax and insurance expense (46,667) -- (46,667) Property management expense (18,846) -- (18,846) Fee and asset management expense -- (1,036) (1,036) -------------------------------------------- Net operating income 299,703 399 300,102 Interest income - investment in mortgage notes -- 2,737 2,737 Interest and other income -- 4,907 4,907 Depreciation expense on non-real estate assets -- (1,590) (1,590) Interest expense: Expense incurred -- (95,152) (95,152) Amortization of deferred financing costs -- (1,362) (1,362) General and administrative expense -- (6,518) (6,518) Allocation to Minority Interests - Partially Owned Properties -- 112 112 Income from investments in unconsolidated entities -- 4,841 4,841 Preferred distributions -- (27,266) (27,266) Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties -- (253) (253) -------------------------------------------- Funds from operations available to Common Shares and OP Units 299,703 (119,145) 180,558 Depreciation expense on real estate assets (111,036) -- (111,036) Net gain on sales of real estate 67,654 -- 67,654 Allocation to Minority Interests - Operating Partnership -- (12,036) (12,036) Adjustment for depreciation expense related to Unconsolidated and Partially Owned Properties -- 253 253 -------------------------------------------- Net income available to Common Shares $ 256,321 $ (130,928) $ 125,393 ============================================(1)include the write-down of assets classified as other assets and investments in unconsolidated entities.16. Reportable Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management. Senior management decides how resources are allocated and assesses performance on a monthly basis.
The Company's primary business is owning, managing, and operating multifamily residential properties, which includes the generation of rental and other related income through the leasing of apartment units to
tenants. (2)residents. Senior management evaluates the performance of each of our apartment communities on an individual basis, however, each of our apartment communities has similar economic characteristics, residents, and products and services so they have been aggregated into one reportable segment. The Company's rental real estate segment comprised approximately 98.7% and 97.6% of total revenues for the six months ended June 30, 2002 and 2001, respectively, and approximately 98.5% and 97.5% of total revenues for the quarters ended June 30, 2002 and 2001, respectively. The Company's rental real estate segment comprised approximately 99.6% and 99.4% of total assets at June 30, 2002 and December 31, 2001, respectively.19
The primary financial measure for the Company's rental real estate segment is net operating income ("NOI"), which represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense (all as reflected in the accompanying statements of operations). Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance. NOI from our rental real estate totaled approximately $613.4 million and $609.5 million for the six months ended June 30, 2002, and 2001, respectively, and approximately $307.9 million and $304.8 million for the quarters ended June 30, 2002 and 2001, respectively.
During the acquisition, development and/or disposition of real estate, the NOI return on total capitalized costs is the primary measure of financial performance the Company
has a segment for corporate level activity including such items as fee and asset management activity, furniture rental/sales activity, interest income earned on short-term investments and investment in mortgage notes, investment in technology entities, income earned from investments in unconsolidated entities, general and administrative expenses, and interest expense on mortgage notes payable, unsecured note issuances and lines of credit.considers.The Company's fee and asset management activity
and furniture rental/sales activities areis immaterial anddodoes not meet the threshold requirements of a reportable segment as provided for in SFAS No. 131.Interest expense on debt is not allocated to individual Properties, even if17. Subsequent Events/Other
During the
Properties secure such debt. Further, income allocated to Minority Interests is not allocated tosix months ended June 30, 2002, theProperties. 1915. SUBSEQUENT EVENTSCompany entered into an agreement with the U.S. Army with an initial cash investment of $10.0 million and assumed management of 3,637 multifamily units at Fort Lewis, Washington.Subsequent to June 30,
20012002 and throughAugust 8, 2001,July 29, 2002, the Company:O
- •
- acquired one property consisting of 466 units for approximately $37.4 million;
- •
- disposed of seven
Propertiesproperties consisting of1,0811,171 units for approximately$54.0$67.2 million;O- •
- repaid
$9.4$25.2 million of mortgagedebt at maturity on one property; O obtained $301.5 million in new first mortgage financing on twenty-one Unconsolidated Properties,loans; and- •
- funded a net of
which $55.7 million of the refinancing proceeds was used to repay principal on the Company's investment in mortgage notes; O funded $11.7$41.8 million related to the unconsolidated developmentearnoutagreements.20
Item 2. Management's Discussion andjoint venture agreements;Analysis of Financial Condition andO announced a two-for-one splitResults ofits Common Shares and OP Units to be effective September 21, 2001. 20ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEWOperationsOverview
For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31,
2000.2001.Forward-looking statements in this report are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "believes", "expects" and "anticipates" and other similar expressions
whichthat are predictions of or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements of the Company 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:o
- •
- alternative sources of capital to the Company are more expensive than anticipated;
o- •
- occupancy levels and market rents may be adversely affected by national and local economic and market conditions, which are beyond the Company's control; and
o- •
- additional factors as discussed in Part I of the Annual Report on Form
10-K.10-K, particularly those under "Risk Factors".Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company
assumesundertakes no obligation toupdate or correctpublicly release anyofrevisions to these forward-looking statements,in light ofwhich may be made to reflect events or circumstancesarising or existingafter the datehereof. RESULTS OF OPERATIONShereof or to reflect the occurrence of unanticipated events.21
Results of Operations
The following table summarizes the number of
Propertiesproperties and related units for the year-to-date periods presented:PORTFOLIO SUMMARY
SIX MONTHS ENDED JUNE 30, ------------------------------------------------ 2001 2000 ---- ---- PROPERTIES UNITS PROPERTIES UNITS ---------- -------- ---------- --------Beginning of period 1,104 227,704 1,064 226,317 Acquisitions 8 2,017 3 952 Dispositions (28) (4,189) (16) (3,356) Completed Developments 2 618 2 470 -------- -------- -------- -------- End of period 1,086 226,150 1,053 224,383 ======== ======== ======== ========In addition, the Company sold and/or contributed eleven wholly owned Properties containing 3,011 units to a joint venture entity during the six months ended June 30, 2001.
Properties Units Purchase/
Sale Price
$ MillionsAt December 31, 2000 1,104 227,704 Q1/Q2 2001 Acquisitions 8 2,017 $ 232.2 Q1/Q2 2001 Dispositions (28 ) (4,189 ) $ 188.7 Q1/Q2 2001 Completed Developments 2 618 At June 30, 2001 1,086 226,150 Q3/Q4 2001 Acquisitions 6 1,406 $ 155.9 Q3/Q4 2001 Dispositions (21 ) (4,618 ) $ 228.2 Q3/Q4 2001 Completed Developments 5 1,887 Q4 2001 Unit Configuration Changes — (24 ) At December 31, 2001 1,076 224,801 Q1/Q2 2002 Acquisitions 7 1,983 $ 166.5 Q2 2002 Fort Lewis 1 3,637 Q1/Q2 2002 Dispositions (23 ) (3,654 ) $ 197.2 Q1/Q2 2002 Completed Developments 4 1,181 Q2 2002 Unit Configuration Changes — 15 At June 30, 2002 1,065 227,963 The
Company sold and/or contributed 21 wholly owned properties containing 5,211 units to two joint venture entities during the six months ended June 30, 2000. The Company retained a 25% interest along with the rights to manage these joint venture Properties. 21TheCompany's acquisition and disposition activity has impacted overall results of operations for the six months and quarters ended June 30,20012002 and2000 have been significantly impacted by the Company's acquisition and disposition activity. The significant2001. Significant changes in revenues and expensescanhave resulted primarilybe attributed tofrom theacquisitionconsolidation ofGlobepreviously Unconsolidated Properties in July 2001, the disposition of the furniture rental business on January 11, 2002, as well as the properties acquired and developments completed in 2001 andthe 2000 Acquired Properties,2002, which have been partially offset by thedisposition of theproperties disposed in 2001 andthe 2000 Disposed Properties.2002. Significant change in expenses has also resulted from an increase in insurance costs and general and administrative costs and reductions in variable interest rates, impairment charges and goodwill amortization. This impact is discussed in greater detail in the following paragraphs.Properties that the Company owned for all of both the six month periods ended June 30,
20012002 and June 30,20002001 (the "Six-Month20012002 Same Store Properties"), which represented186,443194,491 units, andPropertiesproperties that the Company owned for all of both the quarters ended June 30,20012002 and June 30,20002001 (the"Second-Quarter 2001"Second Quarter 2002 Same Store Properties"), which represented186,777196,211 units, also impacted the Company's results of operations. Both the Six-Month20012002 Same Store Properties andSecond-Quarter 2001Second Quarter 2002 Same Store Properties are discussed in the following paragraphs.COMPARISON OF SIX MONTHS ENDED JUNE
Comparison of the six months ended June 30,
2001 TO SIX MONTHS ENDED JUNE2002 to the six months ended June 30,20002001For the six months ended June 30,
2001,2002, income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales ofreal estate,unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principleincreaseddecreased by approximately$23.1$12.1 million when compared to the six months ended June 30,2000. Rental income2001.Revenues from the Six-Month
20012002 Same Store Propertiesincreased by approximately $44.7 million to $880.0 million or 5.4%decreased primarily as a result ofhigherlower rental rates chargedtonewtenantsresidents, increased concessions andtenant renewals and an increase in income from billing tenants for their share of utility costs as well as other ancillary services provided to tenants. For the remainder of 2001, the Company expects to achieve rental income increases of 4.75% to 5.0% from Same Store Properties. These estimated increases are subject tolower occupancy at certainrisks and uncertainties including, but not limited to, maintaining an overall average occupancy rate of 94.5%.properties.22
Property operating expenses from the Six-Month
20012002 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses,increased approximately $14.6 million or 4.8%.remained relatively stable with increases in real estate taxes and insurance costs offset by a decrease in utility costs. Theincreasefollowing tables provide comparative revenue, expense, net operating income ("NOI") and weighted average occupancy for the Six-Month 2002 Same Store Properties:June 30, 2002 Year-to-Date Same Store Results
$ in
"same store" expenses is primarily attributable to a $4.9 million, or 10.3%, increase in utilities and a $4.5 million, or 6.0% increase in payroll costs.Millions—194,491 Same Store Units
Description Revenues Expenses NOI YTD 2002 $ 918.0 $ 336.8 $ 581.2 YTD 2001 $ 930.3 $ 335.4 $ 594.9 Change $ (12.3 ) $ 1.4 $ (13.7 )
% Change
(1.3
)%
0.4
%
(2.3
)%Same Store Occupancy Statistics
YTD 2002 93.98 % YTD 2001 94.63 % Change (0.65 )% For
the remainder of 2001,properties that the Company acquired prior to December 31, 2000 and expects tomaintain expense growth at no more than 4.0%continue to4.5%own through December 31, 2002, the Company anticipates the following operating assumptions for theSame Store Properties.year ending December 31, 2002:2002 Operating Assumptions
Physical Occupancy 93.0% Revenue Change (2.3)% to (2.0)% Expense Change 1.0% to 1.5% NOI Change (4.5)% to (3.75)% Dispositions $500 million Refinancing $200 million at 7.0% These 2002 operating assumptions are based on current expectations and are forward-looking.
Rental income from properties other than Six-Month
20012002 Same Store Properties increased by approximately$30.2$9.3 million primarily as a result of revenue fromthe Company's corporate housing business and the acquisition of Properties during the periods presented. The Company expects similar trends in the future subject to certain risks and uncertainties including that any new acquisitions perform at the Company's pro forma expectations. Interest income-investment in mortgage notes increased by approximately $3.3 million as a result of receiving deferred interest income on certain of the mortgage notes. The payment of this deferred interest income was triggered by the refinancing of these mortgage notes subsequent to quarter-end. In addition, a portion of the proceeds from the refinancing were used to partially repay the Company's investment in mortgage notes. As a result,properties the Companyanticipatesacquired in 2001 and 2002 and additional Partially Owned Properties that theinterest income recognized on mortgage notes will declineCompany consolidated infuture quarters.2001.Interest and other income
increaseddecreased by approximately$3.3$2.2 million, primarily as a result ofcarrying largerlower balances available for investment and related interest rates being earned on the Company's short-term investment accounts along with lower balances on deposit invarious tax deferred 1031tax-deferred exchange accounts.These proceeds are investedInterest income—investment in
money market investments and earnmortgage notes decreased by $8.8 million as a result of the Company consolidating previously Unconsolidated Properties in July 2001. No additional interest incomeuntilwill be recognized on such mortgage notes in future years as the Companypurchases additional multi-family properties ornow consolidates theperiodresults related toreinvest such exchange proceeds expires. 22these previously Unconsolidated Properties. 23
Property management expenses
includedinclude off-site expenses associated with the self-management of the Company'sProperties.properties. These expensesdecreasedincreased by approximately$1.4 million. This decrease is primarily the result of managing fewer of the Company's properties and managing more properties that were either sold and/$0.9 million orcontributed2.5%. These expenses increased due tovarious unconsolidated joint ventures. In addition, thehigher overall compensation costs related to a current period expense associated with restricted shares/awards granted to key employees. The Company continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets where the Company does not have a significant management presence.As a result, the Company is able to achieve economies of scale by not increasing off-site management expenses as it acquires additional properties.Fee and asset management revenues,
andnet of fee and asset management expenses, increased slightly as a result of the Companycontinuing to manage Properties that were sold and/or contributed to various unconsolidated joint venture entities.managing an additional 3,637 units at Fort Lewis starting in April 2002. As of June 30,20012002 and2000,2001, the Company managed19,84420,142 units and18,36119,844 units, respectively, for third parties andtheunconsolidatedjoint ventureentities.Furniture income and furniture expenses are associated with the operation of the furniture rental business assumedThe Company recorded impairment charges in
connection with the Globe acquisition,2002 totaling approximately $0.6 million, whichoccurred in July 2000. Furniture expenses include a depreciation charge on furniture held in inventory and property and equipment directlyis related to one investment in a technology entity. See Note 15 in thefurniture business.Notes to the Consolidated Financial Statements for further discussion.Interest expense, including amortization of deferred financing costs,
increaseddecreased approximately$0.2 million.$6.5 million primarily due to lower variable interest rates. During the six months ended June 30, 2002, the Company capitalized interest costs of approximately $12.3 million as compared to $12.8 million for the six months ended June 30, 2001. This capitalization of interest primarily related to investments in unconsolidated entities engaged in development activities. The effective interest cost on all of the Company's indebtedness for the six monthsendingended June 30,20012002 was7.07%6.63% as compared to7.27%7.07% for the six months ended June 30,2000. For the remainder of 2001, the Company expects interest rates to decrease slightly due to lower variable rates. In connection with the scheduled maturity of $150 million of indebtedness due in November 2001, the Company anticipates to refinance this indebtedness for a similar amount and to incur interest costs approximating 7.0% per annum.2001.General and administrative expenses, which include corporate operating expenses, increased approximately
$0.9$8.2 million between theperiodssix months under comparison. This increase was primarily due to higher state income taxes in Michigan and New Jersey as well as the income taxes incurred at one of the Company's taxable REIT subsidiaries which has an ownership interest in properties that in prior periods were classified as Unconsolidated Properties. In addition,of corporate personnelretirement plan expenses for certain key executives, and higher overall compensation expenses including a currentyearperiod expense associated withthe awarding ofrestrictedsharesshares/awards granted to key employeesin 2001.and additional compensation charges and costs associated with the Company's new President also contributed to the increase.Net gain (loss) on sales of unconsolidated entities increased by $4.9 million primarily as a result of the sale of one stabilized development property (296 units).
Net gain on sales of
real estatediscontinued operations decreased approximately$41.1$17.8 million between the periods under comparison. This decrease is primarily the result ofaapproximately 3,500 fewer number of units sold during the six months ended June 30,2001 (7,200 units including the joint venture properties)2002 as compared to the six months ended June 30,2000 (8,5672001 (includes approximately 3,000 unitsincluding thesold into a joint ventureproperties)in February 2001).In addition,24
Comparison of the
Company sold older and more fully depreciated properties during the six monthsquarter ended June 30,2000 as compared2002 to thesix monthsquarter ended June 30,2001. COMPARISON OF QUARTER ENDED JUNE 30,2001TO QUARTER ENDED JUNE 30, 2000For the quarter ended June 30,
2001,2002, income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales ofreal estate,unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principleincreaseddecreased by approximately$6.5$7.2 million when compared to the quarter ended June 30,2000. Rental income2001.Revenues from the
Second-Quarter 2001Second Quarter 2002 Same Store Propertiesincreased by approximately $21.7 million to $443.9 million or 5.1%decreased primarily as a result ofhigherlower rental rates chargedtonewtenantsresidents, increased concessions andtenant renewals and an increase in income from billing tenants for their share of utility costs as well as other ancillary services provided to tenants. For the remainder of 2001, the Company expects to achieve rental income increases of 4.75% to 5.0% from Same Store Properties. These estimated increases are subject tolower occupancy at certainrisks and uncertainties including, but not limited to, maintaining an overall average occupancy rate of 94.5%. 23properties. Property operating expenses from the Second-Quarter 2001Second Quarter 2002 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses,increased approximately $5.9 million or 3.8%.decreased primarily as a result of increases in real estate taxes and insurance costs partially offset by decreases in utility costs. Theincrease in "same store" expenses is primarily attributable to a $1.2 million, or 4.9%, increase in utilitiesfollowing tables provide comparative revenue, expense, NOI anda $2.4 million, or 6.4% increase in payroll costs. For the remainder of 2001, the Company expects to maintain expense growth at no more than 4.0% to 4.5%weighted average occupancy for the Second Quarter 2002 Same StoreProperties.Properties:Second Quarter 2002 Same Store Results
$ in Millions—196,211 Same Store Units
Description Revenues Expenses NOI Q2 2002 $ 463.3 $ 173.3 $ 290.0 Q2 2001 $ 473.4 $ 170.6 $ 302.8 Change $ (10.1 ) $ 2.7 $ (12.8 )
% Change
(2.1
)%
1.6
%
(4.2
)%Same Store Occupancy Statistics
Q2 2002 94.01 % Q2 2001 94.60 % Change (0.59 )% Rental income from properties other than
Second-Quarter 2001Second Quarter 2002 Same Store Properties increased by approximately$15.0$7.6 million primarily as a result of revenue fromthe Company's corporate housing business and the acquisition ofpropertiesduring the periods presented. The Company expects similar trends in the future subject to certain risks and uncertainties including that any new acquisitions perform at the Company's pro forma expectations. Interest income-investment in mortgage notes increased by approximately $3.3 million as a result of receiving deferred interest income on certain of the mortgage notes. The payment of this deferred interest income was triggered by the refinancing of these mortgage notes subsequent to quarter-end. In addition, a portion of the proceeds from the refinancing were used to partially repay the Company's investment in mortgage notes. As a result,the Companyanticipatesacquired in 2001 and 2002 and additional Partially Owned Properties that theinterest income recognized on mortgage notes will declineCompany consolidated infuture quarters.2001.Interest and other income increased by approximately
$0.3$0.2 million, primarily as a result ofcarrying largera $0.7 million one-time financing fee related to the Fort Lewis loan closing, net of lower balances available for investment and related rates being earned on the Company's short term investment accounts along with lower balances on deposit invarious tax deferred 1031tax-deferred exchange accounts.These proceeds are investedInterest income—investment in
money market investments and earnmortgage notes decreased by $6.0 million as a result of the Company consolidating previously Unconsolidated Properties in July 2001. No additional interest incomeuntilwill be recognized on such mortgage notes in future years as the Companypurchases additional multi-family properties ornow consolidates theperiodresults related toreinvest such exchange proceeds expires.these previously Unconsolidated Properties.Property management expenses
includedinclude off-site expenses associated with the self-management of the Company'sProperties.properties. These expensesdecreasedincreased by approximately$1.4 million. This decrease is primarily the result of managing fewer of the Company's properties and managing more properties that were either sold and/$0.6 million orcontributed3.2%. These expenses increased due tovarious unconsolidated joint ventures. In addition, thehigher overall compensation costs related to a current period expense associated with restricted shares/awards granted to key employees. The Company continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets where the Company does not have a significant management presence.As a result, the Company is able to achieve economies of scale by not increasing off-site management expenses as it acquires additional properties.25
Fee and asset management revenues,
andnet of fee and asset management expenses, increased slightly as a result of the Companycontinuing to manage Properties that were sold and/or contributed to variousmanaging an additional 3,637 units at Fort Lewis starting in April 2002. As of June 30, 2002 and 2001, the Company managed 20,142 units and 19,844 units, respectively, for third parties and unconsolidatedjoint ventureentities.Furniture income and furniture expenses are associated with the operation of the furniture rental business assumedThe Company recorded impairment charges in
connection with the Globe acquisition,2002 totaling approximately $0.3 million, whichoccurred in July 2000. Furniture expenses include a depreciation charge on furniture held in inventory and property and equipment directlyis related to one investment in a technology entity. See Note 15 in thefurniture business.Notes to the Consolidated Financial Statements for further discussion.Interest expense, including amortization of deferred financing costs,
increased slightly.decreased approximately $1.4 million primarily due to lower variable interest rates. During the quarter ended June 30, 2002, the Company capitalized interest costs of approximately $6.4 million as compared to $6.8 million for the quarter ended June 30, 2001. This capitalization of interest primarily related to investments in unconsolidated entities engaged in development activities. The effective interest cost on all of the Company's indebtedness for the quarterendingended June 30,20012002 was7.07%6.75% as compared to7.39%7.07% for the quarter ended June 30,2000. For the remainder of 2001, the Company expects interest rates to decrease slightly due to lower variable rates.2001.General and administrative expenses, which include corporate operating expenses, increased approximately
$0.8$4.2 million between the quarters under comparison. This increase was primarily due to higher state income taxes in Michigan and New Jersey as well as the income taxes incurred at one of the Company's taxable REIT subsidiaries which has an ownership interest in properties that in prior periods were classified as Unconsolidated Properties. In addition, retirement plan expenses for certain key executives, and higher overall compensation expenses including a current period expense associated with restricted shares/awards granted to key employees and additional compensation charges and costs associated with the Company's new President also contributed to the increase.Net gain on sales of discontinued operations increased approximately $21.2 million between the periods under comparison. This increase
was primarily due to the addition of corporate personnel and higher overall compensation expenses including a current year expense associated with the awarding of restricted shares to key employees in 2001. 24Net gain on sales of real estate decreased approximately $62.9 million between the periods under comparison. This decreaseis primarily the result offewer unitsmore fully depreciated properties sold during the quarterended June 30, 2001, which included 1,917 wholly ownedand an increase of approximately 1,000 units74 unconsolidated unitssold.Liquidity and
one land sale as compared to 1,194 wholly owned units and 5,211 joint venture units (75% gain recognition) sold in the quarter ended June 30, 2000. LIQUIDITY AND CAPITAL RESOURCESCapital ResourcesAs of January 1,
2001,2002, the Company had approximately$23.8$51.6 million of cash and cash equivalents andthe amounts$505.0 million availableon the Company's linesunder its line of credit,were $399.5 million,of which$53.5$59 million wasrestricted.restricted (not available for borrowings). After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Company's cash and cash equivalents balance at June 30,20012002 was approximately$26.6$88.9 million and the amount available on the Company's line of credit was$567.0$700.0 million, of which$60.9$84.0 million wasrestricted.restricted (not available for borrowings).Part of the Company's
strategy inacquisition and development fundingthe purchase of multifamily properties, funding its Properties in the development and/or earnout stagestrategy and the funding of the Company's investment intwo joint ventures with multifamily real estate developersvarious unconsolidated entities is to utilize itslinesline of credit and to subsequently repay thelinesline of credit from the disposition ofPropertiesproperties, retained cash flows or the issuance of additional equity or debt securities. Continuing to utilize this strategy during thefirstsix monthsof 2001,ended June 30, 2002, the Company:o
- •
- disposed of
twenty-eighttwenty-three properties (includingonetwo UnconsolidatedProperty) and two vacant parcels of landProperties) and received net proceeds of$177.8approximately $194.8 million;o- •
- disposed of the furniture rental business on January 11, 2002 and received net proceeds of approximately $28.7 million;
- •
- issued
$300.0$400.0 million of 6.625% fixed rate unsecured debt receiving net proceeds of$297.4$394.5 million;o sold and/or contributed eleven properties to a joint venture- •
- issued approximately 1.6 million Common Shares and received net proceeds of
$167.6$33.4 million;o issued $48.5 million of three new series of Preference Interestsandreceived net proceeds of $47.3 million; and o26
- •
- obtained
$45.1$47.2 million in new mortgage financing.All of these proceeds were utilized to either:
- •
- repay the line of credit;
- •
- repay mortgage indebtedness on selected properties;
- •
- repay public unsecured debt;
- •
- invest in unconsolidated entities; and
- •
- purchase additional properties.
During the six months ended June 30,
2001,2002, the Company:O reduced
- •
- repaid $195.0 million on its line of
credit borrowings by approximately $222.5 million; O funded $210.5 million to redeem all of its Series A and F Preferred Shares; Ocredit;- •
- repaid
approximately $237.0$135.7 million of mortgageindebtedness; O funded $71.4 million related to the development, earnout and joint venture agreements; and O acquired $232.1loans;- •
- repaid $100.0 million of
additional properties ($45.99.375% fixed rate public notes at maturity;- •
- repaid $125.0 million of
mortgage assumptions7.95% fixed rate public notes at maturity;- •
- funded a net of $40.3 million in accordance with its development agreements;
- •
- funded $10.0 million in connection with its agreement with the U.S. Army; and
$186.2 million- •
- acquired seven properties utilizing cash of
cash). 25$153.0 million. The Company's total debt summary and debt maturity schedule, as of June 30,
2001, included: - ------------------------------------------------------------------------------- DEBT SUMMARY AS OF 6/30/01 - -------------------------------------------------------------------------------
Weighted $ Millions Average Rate --------------------- ------------------Secured 3,040 6.71% Unsecured 2,550 6.83% --------------------- ------------------ Total 5,590 6.77% Fixed Rate 4,860 7.01% Floating Rate 730 5.15% --------------------- ------------------ Total 5,590 6.77% ABOVE TOTALS INCLUDE: Total Tax Exempt 959 4.96% Unsecured Revolving Credit Facility 133 4.49% - -------------------------------------- --------------------- ------------------Subsequent to2002, are as follows:Debt Summary as of June 30,
20012002
$ Millions Weighted
Average RateSecured $ 3,210 6.28 % Unsecured 2,439 6.52 % Total $ 5,649 6.39 %
Fixed Rate
$
4,965
6.89
%Floating Rate 684 2.72 % Total $ 5,649 6.39 %
Above Totals Include:
Total Tax Exempt $ 958 3.75 % Unsecured Revolving Credit Facility $ — — 27
Debt Maturity Schedule as of June 30, 2002
Year $ Millions % of Total 2002 $ 245 4.3 % 2003 310 5.5 % 2004 592 10.5 % 2005* 684 12.1 % 2006 429 7.6 % 2007 273 4.8 % 2008 511 9.0 % 2009 405 7.2 % 2010 256 4.5 % 2011+ 1,944 34.4 % Total $ 5,649 100.0 %
- *
- Includes $300 million with a final maturity of 2015 that is putable/callable in 2005.
The Company's "Consolidated Debt-to-Total Market Capitalization Ratio" as of June 30, 2002 is presented in the following table. The Company calculates the equity component of its market capitalization as the sum of (i) the total outstanding Common Shares and assumed conversion of all OP Units at the equivalent market value of the closing price of the Company's Common Shares on the New York Stock Exchange; (ii) the "Common Share Equivalent" of all convertible preferred shares and preference interests/units; and (iii) the liquidation value of all perpetual preferred shares and preference interests outstanding.
Capitalization as of June 30, 2002
Total Debt $ 5,649,483,792
Common Shares & OP Units
298,023,286
Common Share Equivalents (see below) 15,134,806 Total Outstanding at quarter-end 313,158,092 Common Share Price at June 28, 2002 $ 28.75 9,003,295,145 Perpetual Preferred Shares Liquidation Value 565,000,000 Perpetual Preference Interests Liquidation Value 211,500,000 Total Market Capitalization $ 15,429,278,937
Debt/Total Market Capitalization
36.62
%28
Convertible Preferred Shares, Preference Interests and Junior Preference Units As of June 30, 2002
Shares/Units Conversion
RatioCommon
Share
EquivalentsPreferred Shares: Series E 2,716,012 1.1128 3,022,378 Series G 1,264,700 8.5360 10,795,479 Series H 51,228 1.4480 74,178 Preference Interests: Series H 190,000 1.5108 287,052 Series I 270,000 1.4542 392,634 Series J 230,000 1.4108 324,484 Junior Preference Units: Series A 56,616 4.081600 231,084 Series B 7,367 1.020408 7,517 Total Convertible 4,785,923 15,134,806 The Company's policy is to maintain a ratio of consolidated debt-to-total market capitalization of less than 50%.
From July 1, 2002 through
August 8, 2001,July 29, 2002, the Company:O
- •
- acquired one property consisting of 466 units for approximately $37.4 million;
- •
- disposed of seven
Propertiesproperties consisting of1,0811,171 units for approximately$54.0$67.2 million;O- •
- repaid
$9.4$25.2 million of mortgagedebt at maturity on one property; O obtained $301.5 million in new mortgage financing on twenty-one Unconsolidated Properties,loans;- •
- funded a net of
which $55.7 million of the refinancing proceeds was used to repay principal on the Company's investment in mortgage notes; O funded $11.7$41.8 million related to the unconsolidated developmentearnout, and joint ventureagreements; andO- •
- announced that its Board of Trustees has approved a
two-for-one splitshare repurchase program under which it may repurchase, from time to time, up to $200.0 million of its Common Sharesand OP Units tothrough open market or privately negotiated transactions. This program would initially beeffective September 21, 2001. Duringfunded using theremainderCompany's line of2001, the Company expects to fund approximately $66.0 million related to the development, earnout and joint venture agreements.credit.Investments in Unconsolidated Entities
In connection with one
joint venturedevelopment agreement, the Company has an obligation to fund up to an additional$12.5$9.5 million to guarantee third party construction financing. As of June 30,2001,2002, the Company has2018 projects under development with estimated completion dates rangingfrom September 30, 2001throughJune 30, 2003. AtMarch 31, 2004.For one development agreement, the Company's partner has the right, at any time following
thecompletion ofconstructiona project, to stipulate a value for such project and offer to sell its interest in the project to the Company based on such value. If the Company chooses not to purchase the interest, it must agree to a sale ofanythe project to an unrelated third party at such value. The Company'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.Under a second development
property,agreement, the Company'sjoint venture partners havepartner has the right, at any time following completion of a project, tocauserequire the Company toacquire their respective interestspurchase the partners' interest inthe completed projectsthat project at a mutually agreeable price. If the Company and thejoint venturepartner are unable to agree on a price,appraisalsboth parties willbe obtained by both parties.obtain appraisals. If the appraised values vary by more than 10%, both the Company andthe joint ventureits partner will agree on a third appraiser to determine which original appraisal is closest to its29
determination of value. The Company 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, any projects remaining unsold must be purchased by the Company at the agreed-upon price.
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
We capitalize approximately $260 to $270 per unit annually for inside the unit replacements. 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, 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 systems;
- •
- interior and exterior structural repair, replacements and exterior painting;
- •
- major landscaping and grounds improvement;
- •
- vehicles and office and maintenance equipment.
We capitalize approximately $340 to $370 per unit annually for outside the unit building improvements. 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.
30
For the six months ended June 30, 2002, our actual improvements to real estate totaled approximately $66.5 million. This includes the following detail (amounts in thousands except for unit and per unit amounts):
Capitalized Improvements to Real Estate
For the Six Months Ended June 30, 2002
Total Units(1) Replacements(2) Per
UnitBuilding
Improvements(3)Per
UnitTotal Per
UnitEstablished Properties(4) 178,870 $ 22,661 $ 127 $ 31,640 $ 177 $ 54,301 $ 304 New Acquisition Properties(5) 19,743 2,172 120 3,084 171 5,256 291 Other(6) 6,994 1,639 5,313 6,952 Total 205,607 $ 26,472 $ 40,037 $ 66,509
- (1)
- Total units exclude 22,356 unconsolidated units.
- (2)
- Replacements include new expenditures inside the units such as carpets, appliances, mechanical equipment, fixtures and vinyl flooring.
- (3)
- Building improvements include roof replacement, paving, amenities and common areas, building mechanical equipment systems, exterior painting and siding, major landscaping, vehicles and office and maintenance equipment.
- (4)
- Wholly Owned Properties acquired prior to January 1, 2000.
- (5)
- Wholly Owned Properties acquired during 2000, 2001 and YTD 2002. Per unit amounts are based on a weighted average of 18,070 units.
- (6)
- Other includes Partially Owned and sold properties, commercial space and condominium conversions.
31
We anticipate capitalizing an average of approximately $600 to $640 per unit annually for inside and outside the unit capital improvements to our real estate. Total improvements to real estate for the remainder of 2002 are estimated to be $65.0 million.
During the six months ended June 30,
2001, the Company's total improvements to real estate approximated $63.3 million. Replacements, which includes new carpeting, appliances, mechanical equipment, fixtures, vinyl floors and blinds inside the unit approximated $25.2 million, or $123 per unit. Building improvements for the 1999, 2000 and 2001 Acquired Properties approximated $11.9 million, or $232 per unit. Building improvements for all of the Company's pre-1999 Acquired Properties approximated $22.9 million or $150 per unit. In addition, approximately $2.2 million was spent on five specific assets related to major renovations and repositioning of these assets. Also included in total improvements to real estate was approximately $1.1 million on commercial/other assets and Partially Owned Properties. Such improvements to real estate were primarily funded from net cash provided by operating activities. Total improvements to real estate budgeted for the remainder of 2001 are estimated to be approximately $75.0 million. 26During the six months ended June 30, 2001,2002, the Company's total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company's property management offices and its corporate offices, was approximately$3.5$4.6 million.SuchTotal additions to non-real estate property for the remainder of 2002 are estimated at $2.2 million.Improvements to real estate and additions to non-real estate property for both 2002 and 2001 were funded from net cash provided by operating activities.
Total additions to non-real estate property budgeted for the remainder of 2001 are estimated to be approximately $2.5 million. The Company, through its Globe subsidiary, has a policy of capitalizing expenditures made for rental furniture and property and equipment. Globe purchases furniture to replace furniture that has been sold and to maintain adequate levels of rental furniture to meet existing and new customer needs. Expenditures for property and equipment that significantly enhance the value of existing assets or substantially extend the useful life of an asset are also capitalized. Expenditures for ordinary maintenance and repairs related to property and equipment are expensed as incurred. For the six months ended June 30, 2001, total additions to rental furniture approximated $14.5 million and property and equipment approximated $1.6 million. Total additions to rental furniture and property and equipment budgeted for the remainder of 2001 are estimated to be approximately $8.9 million. As of June 30, 2001, the Company recorded a $7.2 million reduction to rental furniture based on a review of the inventory on hand in its warehouses and the market value of such used furniture. Correspondingly, the Company recorded an increase in goodwill associated with the original acquisition of Globe.
Other
Minority Interests as of June 30,
2001 increased2002 decreased by$27.9$8.2 million when compared to December 31,2000.2001. The primary factors that impacted this account in the Company's consolidated statements of operations and balance sheets during thequartersix months were:o
- •
- distributions declared to Minority Interests, which amounted to $19.7 million for the six months ended June 30,
20012002 (excludingpreference unit/interestJunior Preference Unit and Preference Interest distributions);o- •
- the allocation of income from operations in the amount of
$16.5$13.8 million;o- •
- the allocation of Minority Interests from Partially Owned Properties in the amount of
$0.2$1.3 million;o- •
- the conversion of OP Units into Common Shares; and
o- •
- the issuance of Common Shares
OP Units and Preference Interestsduring the six months ended June 30,2001.2002.Total distributions paid in July
20012002 amounted toapproximately $138.7$147.7 million (excluding distributions on Partially Owned Properties), which included certain distributions declaredforduring the quarter ended June 30,2001.2002.The Company expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing
Propertiesproperties and certain scheduled unsecured note and mortgage note repayments, generally through its working capital, net cash provided by operating activities and borrowings under its line of credit. The Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The Company also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities, including additional OP Units, and proceeds received from the disposition of certainProperties.properties. In addition, the Company has certainuncollateralized Propertiesunencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable to the Company or the cost of alternative sources of capital to the Company is too high. These unencumbered properties are in excess of the value of unencumbered properties the Company must maintain in order to comply with covenants under its unsecured notes and line of credit.On May 30, 2002 the Company obtained a new three-year $700.0 million unsecured revolving credit facility. The
Company has anew line of credit replaces the Company's $700.0 million unsecured revolving credit facilitywith Bankthat was scheduled to expire in August 2002. The prior existing revolving credit facility terminated upon the closing ofAmerica Securities LLCthe new facility. This new facility matures in May 2005 andChase Securities Inc. acting as joint lead arrangerswill be used toprovide the Operating Partnership with potential borrowings of up to $700 million.fund property acquisitions, costs for certain Properties under development and short term liquidity requirements. As ofAugust 8, 2001, no amounts wereJuly 31, 2002, $40.0 million was outstanding under this new facility.27In connection with the Globe acquisition, the Company assumed a revolving credit facility with Fifth Third Bank with potential borrowings of up to $55.0 million. As of May 31, 2001, this credit facility was terminated. In connection with the Wellsford Merger, the32
The Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of
August 8, 2001,July 31, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.Critical Accounting Policies and Estimates
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosures. The Company believes that the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Impairment of Long-Lived Assets, Including Goodwill
The Company periodically evaluates its long-lived assets, including its investments in real estate and goodwill, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal factors. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted.
Depreciation of Investment in Real Estate
The Company depreciates the building component of its investment in real estate over a 30-year estimated useful life, building improvements over a 5-year to 10-year estimated useful life and both the furniture, fixtures and equipment and replacements components over a 5-year estimated useful life, all of which are judgmental determinations.
Fair Value of Financial Instruments, Including Derivative Instruments
The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on other factors relevant to the financial instruments.
Stock Option Compensation
The Company has chosen to account for its stock option compensation in accordance with APB No. 25, which results in no compensation expense for options issued with an exercise price equal to or exceeding market value of the Company's Common Shares on the date of grant, instead of Statement No. 123, which would result in compensation expense being recorded based on the fair value of the stock option compensation issued.
Adjusted Net Income
For the six months ended June 30 2002, Adjusted Net Income ("ANI") available to Common Shares and OP Units decreased $4.3 million as compared to the six months ended June 30, 2001.
For the quarter ended June 30, 2002, ANI available to Common Shares and OP Units increased $6.4 million as compared to the quarter ended June 30, 2001.
33
The following is a reconciliation of net income available to Common Shares to ANI available to Common Shares and OP Units for the six months and quarters ended June 30, 2002 and 2001:
Adjusted Net Income
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30, Quarter Ended June 30, 2002 2001 2002 2001 Net income available to Common Shares $ 165,394 $ 180,792 $ 89,041 $ 74,038 Net income allocation to Minority Interests—Operating Partnership 13,784 16,474 7,343 6,678 Adjustments: Acquisition cost depreciation* 192,005 187,797 95,847 94,324 Amortization of goodwill — 1,924 — 991 Acquisition cost depreciation accumulated on sold properties (22,532 ) (34,774 ) (18,588 ) (8,575 ) Extraordinary items 468 (106 ) 371 205 Cumulative effect of change in accounting principle — 1,270 — — ANI available to Common Shares and OP Units—basic** $ 349,119 $ 353,377 $ 174,014 $ 167,661 Depreciation for replacements and capital improvements $ 43,422 $ 38,830 $ 22,170 $ 19,762
- *
- Acquisition cost depreciation represents depreciation for the initial cost of the property, including buildings and furniture, fixtures and equipment and depreciation on capital improvements identified in the acquisition underwriting and incurred in the first twenty-four months of ownership when the total cost exceeds $2,000 per unit.
- **
- ANI represents net income (loss) (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), including gains or losses from sales of real estate, plus acquisition cost depreciation, plus amortization of goodwill, minus the accumulated acquisition cost depreciation on sold properties, plus/minus extraordinary items and plus the cumulative effect of change in accounting principle. Depreciation associated with replacements and capital improvements is deducted in calculating ANI.
34
The Company believes that ANI is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. ANI in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Company's calculation of ANI may differ from the methodology for calculating ANI utilized by other real estate companies and may differ, for example, due to variations among the Company's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.
Funds From Operations
For the six months ended June 30, 2002, Funds From Operations ("FFO") available to Common Shares and OP Units decreased $4.4 million as compared to the six months ended June 30, 2001.
For the quarter ended June 30, 2002, FFO available to Common Shares and OP Units decreased $4.3 million as compared to the quarter ended June 30, 2001.
The following is a reconciliation of net income available to Common Shares to FFO available to Common Shares and OP Units for the six months and quarters ended June 30, 2002 and 2001:
Funds from Operations
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30, Quarter Ended June 30, 2002 2001 2002 2001 Net income available to Common Shares $ 165,394 $ 180,792 $ 89,041 $ 74,038 Net income allocation to Minority Interests—Operating Partnership 13,784 16,474 7,343 6,678 Adjustments: Depreciation/amortization 235,427 228,551 118,017 115,077 Net gain on sales of discontinued operations (27,576 ) (46,226 ) (24,760 ) (4,448 ) Net (gain) loss on sales of unconsolidated entities (5,246 ) (339 ) 411 (339 ) Extraordinary items 468 (106 ) 371 205 Cumulative effect of change in accounting principle — 1,270 — — Impairment on technology investments 581 6,775 290 3,772 FFO available to Common Shares and OP Units—basic* $ 382,832 $ 387,191 $ 190,713 $ 194,983
- *
- FFO represents net income (loss) (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), excluding gains or losses from sales of property, plus depreciation and amortization (after adjustments for Partially Owned Properties and Unconsolidated Properties), plus/minus extraordinary items, and plus the cumulative effect of change in accounting principle and impairment charges. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
The Company believes that FFO is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities,
35
financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. FFO in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Company's calculation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies and may differ, for example, due to variations among the Company's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.
PART II. OTHER INFORMATIONITEMItem 1.
LEGAL PROCEEDINGSLegal ProceedingsThere have been no new or significant developments related to the legal proceedings that were discussed in Part I, Item III of the Company's Form 10-K for the year ended December 31,
2000. ITEM2001.
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In connection with theSubmission of Matters to a Vote of Security HoldersThe Company held its Annual Meeting of Shareholders
of the Company heldon May 15,2001,2002. Shareholders holding 241,525,692 Common Shares (being theproposalonly class of shares entitled toelectvote at thefive nomineesmeeting), or 88.4% of the Company's issued and outstanding shares as of the record date fortrustee passed. Atthe meeting,proxies representing 117,520,271 Common Sharesattended the meeting or88.5%were represented by proxy. The Company's shareholders voted on three matters presented at the meeting and all three received the requisite number of votes to pass. The results of thetotal outstanding shares votedshareholders vote on each of the three matters are as follows:Proposal I—Election of four trustees to terms expiring in
the following manner:2005.
TOTAL VOTE FOR EACH TRUSTEE* TOTAL VOTE WITHHELD FROM EACH TRUSTEE* ---------------------------- --------------------------------------Douglas Crocker II 93.00% 7.00% James D Harper, Jr. 93.42% 6.58% Sheli Z. Rosenberg 93.10% 6.90% Gerald A. Spector 92.99% 7.01% Michael N. Thompson 92.99% 7.01%
Total Vote for Each Trustee* Total Vote Withheld from Each Trustee* John W. Alexander 98.30 % 1.70 % Bruce W. Duncan 97.83 % 2.17 % Boone A. Knox 98.28 % 1.72 % Samuel Zell 97.80 % 2.20 %
- *
- This percentage represents the number of shares voting in this
mannermatter out of the total number of shares voted at the meeting, not out of the total shares outstanding.ITEMThis matter required a plurality of the votes cast for approval.Proposal II—Approval to change the Company's name to "Equity Residential" (this matter required the affirmative vote of two-thirds of all outstanding shares for approval).
For 88.14 % Against 0.08 % Abstain 0.14 % Non-Votes 11.64 % 36
Proposal III—Approval of the Company's 2002 Share Incentive Plan (this matter required a majority of the votes cast for approval).
For 190,637,623 88.51 % Against 24,759,248 11.49 % Abstain 927,564 — Broker Non-Votes 25,201,257 —
Item 6.EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: 12 Computation of Ratio of Earnings to Fixed Charges (B)Exhibits and Reports on Form 8-K
- (A)
- Exhibits:
3.1
Articles of Amendment to the Second Amended and Restated Declaration of Trust, dated May 15, 2002.
10.1
Revolving Credit Agreement, dated as of May 29, 2002, among ERP Operating Limited Partnership, Banc of America Securities LLC, JP Morgan Securities Inc. and the Banks named therein.
10.2
Guaranty of Payment, dated as of May 29, 2002, between Equity Residential and Bank of America, N.A., as administrative agent.
12
Computation of Ratio of Earnings to Combined Fixed Charges.
- (B)
- Reports on Form 8-K:
None 28None.
37
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
itsbehalf by the undersigned thereunto duly authorized.
EQUITY RESIDENTIAL
Date: August 13, 2002
By:
/s/ DAVID J. NEITHERCUT
David J. Neithercut
Executive Vice President and Chief Financial Officer
Date: August 13, 2002
By:
/s/ MICHAEL J. McHUGH
Michael J. McHugh
Executive Vice President, Chief Accounting Officer and Treasurer38
EQUITY RESIDENTIALPROPERTIES TRUST Date: AUGUST 13, 2001 By: /s/ BRUCE C. STROHM ----------------------------------------------- Bruce C. Strohm Executive Vice President, General CounselCONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited)
EQUITY RESIDENTIAL CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data) (Unaudited)
EQUITY RESIDENTIAL CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
EQUITY RESIDENTIAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)Item 2. Management's Discussion and
Secretary Date: AUGUST 13, 2001 By: /s/ MICHAEL J. MCHUGH ------------------------------------------------ Michael J. McHugh Executive Vice President, Chief Accounting OfficerAnalysis of Financial Condition andTreasurer 29