Results of Operations
QuickLinks-- Click here to rapidly navigate through this documentFORM 10-Q
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
SEPTEMBERJUNE 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 November 1, 2001, 270,800,114 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)
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------ASSETS Investment in real estate Land $ 1,827,926 $ 1,770,019 Depreciable property 10,990,785 10,782,311 Construction in progress 81,062 39,130 -------------- ------------ 12,899,773 12,591,460 Accumulated depreciation (1,621,752) (1,352,236) -------------- ------------ Investment in real estate, net of accumulated depreciation 11,278,021 11,239,224 Real estate held for disposition 4,102 51,637 Cash and cash equivalents 110,807 23,772 Investment in mortgage notes, net - 77,184 Investments in unconsolidated entities 351,947 316,540 Rents receivable 4,070 1,801 Deposits - restricted 157,299 231,639 Escrow deposits - mortgage 79,350 70,470 Deferred financing costs, net 31,588 29,706 Rental furniture, net 23,897 60,183 Property and equipment, net 3,419 7,620 Goodwill, net 48,218 67,589 Other assets 101,899 86,601 -------------- ------------ Total assets $ 12,194,617 $ 12,263,966 ============== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $ 3,268,935 $ 3,230,611 Notes, net 2,419,245 2,120,079 Lines of credit - 355,462 Accounts payable and accrued expenses 135,153 107,818 Accrued interest payable 77,769 51,877 Rents received in advance and other liabilities 70,535 100,819 Security deposits 48,632 46,272 Distributions payable 144,535 18,863 -------------- ------------ Total liabilities 6,164,804 6,031,801 -------------- ------------ COMMITMENTS AND CONTINGENCIES Minority Interests: Operating Partnership 631,221 609,734 Partially Owned Properties 3,538 2,884 -------------- ------------ Total Minority Interests 634,759 612,618 -------------- ------------ Shareholders' equity: Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized; 11,387,345 shares issued and outstanding as of September 30, 2001 and 20,003,166 shares issued and outstanding as of December 31, 2000 967,741 1,183,136 Common Shares of beneficial interest, $.005 par value; 350,000,000 shares authorized; 270,375,138 shares issued and outstanding as of September 30, 2001 and 265,232,750 shares issued and outstanding as of December 31, 2000 1,352 1,326 Paid in capital 4,840,636 4,739,782 Employee notes (4,127) (4,346) Distributions in excess of accumulated earnings (385,160) (300,351) Accumulated other comprehensive income (25,388) - -------------- ------------ TOTAL SHAREHOLDERS' EQUITY 5,395,054 5,619,547 -------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,194,617 $ 12,263,966 ============== ============SEE ACCOMPANYING NOTES
(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)
NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- -------------------------- 2001 2000 2001 2000 ----------------------------- --------------------------REVENUES Rental income $ 1,556,812 $ 1,454,019 $ 529,141 $ 501,279 Fee and asset management 5,805 4,711 1,665 1,876 Interest income - investment in mortgage notes 8,786 8,282 23 2,783 Interest and other income 18,240 19,009 6,529 10,624 Furniture income 45,051 15,167 15,024 15,167 ------------ ------------- ----------- ----------- Total revenues 1,634,694 1,501,188 552,382 531,729 ------------ ------------- ----------- ----------- EXPENSES Property and maintenance 420,365 369,452 143,715 141,607 Real estate taxes and insurance 143,015 141,420 46,240 46,419 Property management 56,302 56,204 19,760 18,444 Fee and asset management 5,358 3,647 1,888 1,545 Depreciation 341,014 334,840 115,908 110,328 Interest: Expense incurred 287,329 285,337 96,946 95,074 Amortization of deferred financing costs 4,338 4,063 1,528 1,360 General and administrative 23,604 19,354 9,525 6,138 Furniture expenses 45,390 10,361 14,891 10,361 Amortization of goodwill 2,852 767 928 767 Impairment on furniture rental business 60,000 - 60,000 - Impairment on technology investments 7,968 - 1,193 - ------------ ------------- ----------- ----------- Total expenses 1,397,535 1,225,445 512,522 432,043 ------------ ------------- ----------- ----------- Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle 237,159 275,743 39,860 99,686 Allocation to Minority Interests: Operating Partnership (22,666) (32,388) (6,192) (13,256) Partially Owned Properties (1,523) 145 (1,285) (12) Income from investments in unconsolidated entities 20,252 14,589 8,029 5,525 Net gain on sales of real estate 100,132 165,025 53,567 77,373 ------------ ------------- ----------- ----------- Income before extraordinary items and cumulative effect of change in accounting principle 333,354 423,114 93,979 169,316 Extraordinary items (22) - (128) - Cumulative effect of change in accounting principle (1,270) - - - ------------ ------------- ----------- ----------- Net income 332,062 423,114 93,851 169,316 Preferred distributions (81,759) (83,597) (24,340) (27,943) ------------ ------------- ----------- ----------- Net income available to Common Shares $ 250,303 $ 339,517 $ 69,511 $ 141,373 ============ ============= =========== =========== Net income per share - basic $ 0.94 $ 1.31 $ 0.26 $ 0.54 ============ ============= =========== =========== Net income per share - diluted $ 0.93 $ 1.30 $ 0.26 $ 0.53 ============ ============= =========== =========== Weighted average Common Shares outstanding - basic 266,614 258,870 268,253 262,824 ============ ============= =========== =========== Weighted average Common Shares outstanding - diluted 294,661 289,894 296,391 304,988 ============ ============= =========== =========== Distributions declared per Common Share outstanding $ 1.2475 $ 1.1675 $ 0.4325 $ 0.4075 ============ ============= =========== ===========SEE ACCOMPANYING NOTES
(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)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 2001 2000 -----------------------------CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 332,062 $ 423,114 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: ALLOCATION TO MINORITY INTERESTS: Operating Partnership 22,666 32,388 Partially Owned Properties 1,523 (145) Cumulative effect of change in accounting principle 1,270 - Depreciation 349,313 335,844 Amortization of deferred financing costs 4,338 4,063 Amortization of discount on investment in mortgage notes (2,256) - Amortization of goodwill 2,852 767 Amortization of discounts and premiums on debt (1,424) (1,725) Amortization of deferred settlements on interest rate protection agreements 533 290 Impairment on furniture rental business 60,000 - Impairment on technology investments 7,968 - Income from investments in unconsolidated entities (20,252) (14,589) Net gain on sales of real estate (100,132) (165,025) Extraordinary items 22 - Unrealized gain on interest rate protection agreements (161) - Book value of furniture sales and rental buy outs 8,703 4,802 Compensation paid with Company Common Shares 12,298 4,300 CHANGES IN ASSETS AND LIABILITIES: (Increase) decrease in rents receivable (2,069) 44 Decrease in deposits - restricted 4,538 3,660 Additions to rental furniture (17,827) (7,477) (Increase) in other assets (17,630) (7,285) Increase in accounts payable and accrued expenses 25,535 39,186 Increase in accrued interest payable 25,702 22,612 (Decrease) in rents received in advance and other liabilities (7,628) (9,755) Increase in security deposits 885 14 ----------- ----------- Net cash provided by operating activities 690,829 665,083 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in real estate (296,710) (238,055) Improvements to real estate (108,310) (100,347) Additions to non-real estate property (5,210) (3,919) Interest capitalized for real estate under construction (2,159) (827) Proceeds from disposition of real estate, net 452,060 416,603 Investment in property and equipment (2,185) (416) Principal receipts on investment in mortgage notes 61,419 5,287 Investments in unconsolidated entities (69,195) (122,535) Distributions from unconsolidated entities 26,311 15,077 Proceeds from refinancing of unconsolidated entities, net 5,691 1,695 Proceeds from disposition of unconsolidated entities, net 359 4,602 Decrease (increase) in deposits on real estate acquisitions, net 98,582 (154,711) (Increase) decrease in mortgage deposits (4,167) 2,283 Purchase of management contract rights - (779) Consolidation of previously Unconsolidated Properties 52,841 (163) Business combinations, net of cash acquired (8,231) (71,228) Other investing activities, net 989 (2,950) ----------- ----------- Net cash provided by (used for) investing activities 202,085 (250,383) ----------- -----------SEE ACCOMPANYING NOTES 4
(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
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
6
EQUITY RESIDENTIALPROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 ---------------------------CASH FLOWS FROM FINANCING ACTIVITIES: Loan and bond acquisition costs $ (4,383) (2,392) MORTGAGE NOTES PAYABLE: Proceeds, net 59,312 389,051 Lump sum payoffs (315,302) (119,412) Scheduled principal repayments (24,210) (19,930) Prepayment premiums (201) - NOTES, NET: Proceeds, net 299,316 - Lump sum payoffs - (208,000) Scheduled principal repayments (4,649) - LINES OF CREDIT: Proceeds 436,491 209,305 Repayments (791,953) (505,179) (Payments) proceeds from settlement of interest rate protection agreements (7,360) 7,055 Proceeds from sale of Common Shares 7,277 5,901 Proceeds from sale of Preferred Shares/Units 48,500 137,000 Proceeds from exercise of options 56,326 18,964 Redemption of Preferred Shares (210,500) - Payment of offering costs (1,535) (3,637) DISTRIBUTIONS: Common Shares (218,632) (197,113) Preferred Shares/Units (82,887) (80,412) Minority Interests - Operating Partnership (19,738) (18,923) Minority Interests - Partially Owned Properties (31,970) (617) Principal receipts on employee notes, net 219 254 Principal receipts on other notes receivable, net - 510 ------------ ---------- Net cash (used for) financing activities (805,879) (387,575) ------------ ---------- Net increase in cash and cash equivalents 87,035 27,125 Cash and cash equivalents, beginning of period 23,772 29,117 ------------ ---------- Cash and cash equivalents, end of period $ 110,807 $ 56,242 ============ ========== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 270,849 264,582 ============ ========== Mortgage loans assumed through real estate acquisitions $ 45,918 $ 38,442 ============ ========== Net real estate contributed in exchange for OP Units or preference units $ - $ 4,707 ============ ========== Mortgage loans (assumed) by purchaser in real estate dispositions $ (28,231) $ (220,000) ============ ========== Transfers to real estate held for disposition $ 4,102 224,553 ============ ========== Mortgage loans recorded as a result of consolidation of previously Unconsolidated Properties $ 301,502 $ 65,095 ============ ========== Net (assets) liabilities recorded as a result of consolidation of previously Unconsolidated Properties $ (20,839) 792 ============ ==========SEE ACCOMPANYING NOTES 5EQUITY RESIDENTIAL PROPERTIES 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
SeptemberJune 30,2001,2002, the Company owned or had interests in a portfolio of1,0811,065 multifamily properties containing225,590227,963 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 961 201,089 Partially Owned Properties 36 6,963 Unconsolidated Properties 84 17,538 -------------------------------------------------------------- Total Properties 1,081 225,590 ==============================================================
Number of
PropertiesNumber
of UnitsWholly Owned Properties 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
ninesix months endedSeptemberJune 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. DERIVATIVE 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 exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives. 6The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives. On January 1, 2001, the 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 the balance sheet as liabilities of approximately $6.6 million; an adjustment of approximately $5.3 million to "Accumulated Other Comprehensive Income", which are gains and losses not affecting retained earnings in the Consolidated Statement of 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 September 30, 2001, there were approximately $25.4 million in deferred losses, net, included in accumulated other comprehensive income. At September 30, 2001, the Companyinvested had entered into swapswhichto hedge the interest rate risk exposure on unconsolidated floating rate construction mortgage loans. The Company has recorded its proportionate share of these qualifying hedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges withana current aggregate notional amount of$626.4$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% to6.15%6.94% maturing at various dates ranging from20032002 to20072005 with a net liability fair value of$27.1 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 $13.1$11.3 million.On
SeptemberJune 30,2001,2002, the net derivative instruments were reported at their fair value as other liabilities of approximately$14.0$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$7.6$16.4 million of accumulated other comprehensiveincomeloss as additional interestexpense. OTHERexpense 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
Financial Accounting Standards Board ("FASB")FASB issued SFAS No. 141,BUSINESS COMBINATIONS, andBusiness Combinations. SFAS No.142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS Nos.141and 142 requirerequires companies to account for all business combinations using the purchase method ofaccountingaccounting. SFAS No. 141 is effective for fiscal years beginning after December 15, 2001. The 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
Nos. 141 andNo. 142will beis effective for the fiscal years beginning after December 15, 2001. The Companywill adoptadopted thestandardsstandard effective January 1, 2002,and doesbut it has notanticipate that the adoptions will havehad a material impact on the Company's financial condition and results of operations.In
August 2001,April 2002, the FASB issued SFAS No.144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which145,Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other items, rescinds the automatic classification of costs incurred on debt extinguishment as extraordinary charges. Instead, gains and losses from debt extinguishment should only be classified as extraordinary if they meet the "unusual and infrequently occurring" criteria outlined in APB No. 30. SFAS No. 145 is effective for fiscal years beginning afterDecemberMay 15,2001.2002. The Company will adopt the standard effective8
January 1,
2002, and2003, but does notanticipate that the adoption willexpect it to have a material impact onthe Company'sits financial condition and results of operations.73.
SHAREHOLDERS' EQUITY AND MINORITY INTERESTS On October 11, 2001, the Company effected a two-for-one split of its common sharesShareholders' Equity andOP Units to shareholders and unit holders of record as of September 21, 2001. All Common Shares and OP Units presented have been retroactively adjusted to reflect the common share and OP Unit split.Minority InterestsThe following table presents the changes in the Company's issued and outstanding Common Shares for the
ninesix months endedSeptemberJune 30,2001:2002:
========================================================== 2001 ----------------------------------------------------------2002 Common Shares outstanding at January 1, 265,232,750 COMMON SHARES ISSUED:271,621,374
Common Shares Issued:Conversion of Series E Preferred Shares 212,444723,048 Conversion of Series H Preferred Shares 6,9724,050 Employee Share Purchase Plan 266,694212,395 Dividend Reinvestment -Reinvestment—DRIP Plan28,46226,843 Share Purchase -Purchase—DRIP Plan21,75221,819 Exercise of options 2,712,7141,301,917 Restricted share grants, net 756,598912,128 Conversion of OP Units 1,136,752 ----------------------------------------------------------644,207 Common Shares outstanding at SeptemberJune 30,270,375,138 ==========================================================275,467,781 The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for
OP Unitsa partnership interest are collectively referred to as the "MinorityInterests -Interests—Operating Partnership".As of September 30, 2001, theThe MinorityInterests -Interests—Operating Partnership held23,876,66222,555,505 OPUnits. AsUnits representing aresult, the Minority Interests - Operating Partnership had an 8.11%7.57% interest in the Operating Partnership atSeptemberJune 30,2001.2002. Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding atSeptemberJune 30,20012002 would have been294,251,800.298,023,286. 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
(including proceeds from exercise of options for Common Shares)are contributed by the Company to the OperatingPartnership 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 nine months ended September 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: - 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. - 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 8Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company or 287,052Company'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. - 270,000 7.625% Series I Cumulative Convertible Redeemable Preference Units with an equity value of $13.5 million. The liquidation value of these units is $50 per unit. The 270,000 units are exchangeable into 270,000 shares of 7.625% Series M-6 Convertible Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company or 392,634 Common Shares beginning June 2011. Dividends for the Series I Preference Interests or the Series M-6 Preferred Shares are payable quarterly at the rate of $3.8125 per unit/share per year. The 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 1.5108 common shares (equal to a conversion price of $33.095 per share) beginning in March 2011. The Series I Preference Interests and the Series M-6 Preferred Shares are convertible into EQR Common Shares at a conversion price ratio of 1.4542 common shares (equal to a conversion price of $34.38 per share) beginning in June 2011.The following table presents the Company's issued and outstanding Preferred Shares as of
SeptemberJune 30,20012002 and December 31,2000: 92001:
- ---------------------------------------------------------------------------------------------------------------- AMOUNTS IN THOUSANDS ----------------------------- ANNUAL DIVIDEND RATE PER SEPTEMBER 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 September 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 September 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 September 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 September 30, 2001 and December 31, 2000 Series E Cumulative Convertible Preferred; liquidation value $ 1.75000 85,215 89,990 $25 per share; 3,408,618 and 3,599,615 shares issued and outstanding at September 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 September 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 September 30, 2001 and December 31, 2000 7.00% Series H Cumulative Convertible Preferred; liquidation $ 1.75000 1,351 1,471 value $25 per share; 54,027 and 58,851 shares issued and outstanding at September 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 September 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 September 30, 2001 and December 31, 2000 - ---------------------------------------------------------------------------------------------------------------- $ 967,741 $ 1,183,136 - ----------------------------------------------------------------------------------------------------------------
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 total cash consideration of $210.5 million. 10various dates. 4. Real Estate Acquisitions
During the
ninesix months endedSeptemberJune 30,2001,2002, the Company acquired theelevenseven propertiesand one parcel of landlisted below from unaffiliated parties for a total purchase price of$287.8$166.5 million.
--------------------------------------------------------------------------------------------------------------- ACQUISITION DATE NUMBER PRICE ACQUIRED PROPERTY LOCATION OF UNITS (IN THOUSANDS) ---------------------------------------------------------------------------------------------------------------01/04/01 Suerte San Diego, CA 272 $ 37,500 02/08/01 Westside Villas VI Los Angeles, CA 18 4,550 02/15/01 Riverview Norwalk, CT 92 9,600 03/15/01 Grand Reserve at Eagle Valley Woodbury, MN 394 54,250 03/22/01 Legends at Preston Morrisville, NC 382 30,200 03/30/01 Mission Hills Oceanside, CA 282 26,750 03/30/01 River Oaks Oceanside, CA 280 26,250 05/18/01 Promenade at Aventura Aventura, FL 296 43,000 08/13/01 Vacant Land Westwood, MA 0 600 08/22/01 Shadetree West Palm Beach, FL 76 1,948 08/22/01 Suntree West Palm Beach, FL 67 1,944 09/26/01 Palladia Hillsboro, OR 497 51,250 --------------------------------------------------------------------------------------------------------------- 2,656 $ 287,842 ---------------------------------------------------------------------------------------------------------------On July 2, 2001, the Company acquired an additional ownership interest in 21 previously Unconsolidated Properties containing 3,896 units. Prior to July 2, 2001, the Company accounted for this portfolio as in investment in mortgage notes. As a result of this additional ownership acquisition, the Company acquired a controlling interest, and as such, now consolidates these properties for financial reporting purposes. The Company recorded additional investments in real estate totaling $258.9 million in connection with this transaction.
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
ninesix months endedSeptemberJune 30,2001,2002, the Company disposed of thethirty-seventwenty-three propertiesand two vacant parcels of landlisted below to unaffiliated parties.When combined with gains from the joint venture and unconsolidated property sale discussed below, theThe Company recognized a net gain on sales of discontinued operations of approximately$100.1$28.4 million and a net gain onthese sales. 11
------------------------------------------------------------------------------------------------------------ DISPOSITION DATE NUMBER PRICE DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS) ------------------------------------------------------------------------------------------------------------01/17/01 Meadowood II Indianapolis, IN 74 $ 1,300 01/31/01 Concorde Bridge Overland Park, KS 248 15,600 02/01/01 Springs of Country Woods Salt Lake City, UT 590 31,000 02/22/01 Riverview Estates Napoleon, OH 90 1,750 02/26/01 Chelsea Court Sandusky, OH 62 1,600 02/27/01 Concord Square Lawrenceburg, IN 48 1,200 02/28/01 Canyon Creek Tucson, AZ 242 9,220 03/06/01 Gentian Oaks Columbus, GA 62 1,620 03/06/01 Holly Park Columbus, GA 66 1,730 03/06/01 Stratford Lane I Columbus, GA 67 1,750 03/07/01 Estate on Quarry Lake Austin, TX 302 25,232 03/08/01 Meadowood Crawfordsville, IN 64 1,300 03/14/01 Mill Run Statesboro, GA 88 2,350 03/15/01 Laurel Court Fremont, OH 69 1,450 03/15/01 Regency Woods West Des Moines, IA 200 9,350 03/22/01 Vacant Land Richmond, VA 0 11,200 04/16/01 Rosewood Tampa, FL 66 1,650 04/25/01 Parkcrest Southfield, MI 210 12,950 04/27/01 Westwood Newark, OH 14 222 04/30/01 Desert Park Las Vegas, NV 368 9,900 05/15/01 Carleton Court Erie, PA 60 1,461 05/16/01 River Oak Louisville, KY 268 14,650 06/07/01 Willowood Milledgeville, GA 61 1,550 06/14/01 Quail Cove Salt Lake City, UT 420 20,000 06/15/01 Beckford Place Wapakoneta, OH 40 830 06/27/01 The Birches Lima, OH 58 1,120 06/28/01 Pelican Pointe I and II Jacksonville, FL 160 4,150 06/28/01 Vacant Land Jacksonville, FL 0 217 06/28/01 Camden Way I and II Kingsland, GA 118 2,000 07/11/01 Plantation Houston, TX 232 12,875 07/12/01 Wood Crest Villas Westland, MI 458 20,450 07/17/01 Hampshire Court Bluffton, IN 45 1,064 07/17/01 Meadowood Logansport, IN 42 993 07/17/01 Westwood Rochester, IN 42 993 07/19/01 Vista Pointe Irving, TX 231 17,200 07/31/01 Cedarwood Sabina, OH 31 385 08/09/01 Olentangy Commons Columbus, OH 827 53,000 08/31/01 Greenglen II Lima, OH 54 1,095 09/28/01 Glenview Huntsville, AL 90 1,687 ------------------------------------------------------------------------------------------------------------ 6,167 $ 298,094 ------------------------------------------------------------------------------------------------------------On February 23, 2001,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 distributed 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 12require the Company or the JVP to infuse cash into each joint venture. In addition, the Company and the JVP have not guaranteed the mortgage indebtedness of the 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. On May 17, 2001, the Company sold its entire interest in one Unconsolidated Property containing 74 units for approximately $0.4 million.net disposition proceeds.6. Commitments to Acquire/Dispose of Real Estate
At SeptemberAs of June 30,
2001,2002, in addition to thePropertyproperty that was subsequently acquired as discussed in Note16 below,17, the Company had entered into separate agreements to acquire two multifamily properties containing469603 units from unaffiliated parties. The Company expects a combined purchase price of approximately$76.5 million, including the assumption$42.1 million.As of
mortgage indebtedness of approximately $45.8 million. At SeptemberJune 30,2001,2002, in addition to thePropertiesproperties that were subsequently disposed of as discussed in Note16 below,17, the Company had entered into separate agreements to dispose ofsevenfourteen multifamily properties containing1,4602,756 unitsone vacant land parcel and retail space at a consolidated propertyto unaffiliated parties. The Company expects a combined disposition price of approximately$65.6$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 wherebycompanies. The following table summarizes theCompany contributes 25% to 30% of the development cost to the joint venture in return for preferential returns of 9.0% per annum. The basis of theCompany'sequity investments in these two joint ventures was $298.5 million and $235.9 million as of September 30, 2001 and December 31, 2000, respectively. The Company also has various otherinvestments in unconsolidated entitieswithas of June 30, 2002 (amounts in thousands except for project and 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 funded $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 include 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 interests
rangingin these entities range from1.5%4.5% to50.0%. The basis of these equity investments was $53.4 million and $80.6 million as of September57.0% 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
SeptemberJune 30,20012002, deposits-restricted totaled $149.9 million and primarily included the following:-
- •
- deposits in the amount of
$55.5$54.5 million held in third party escrow accounts to provide collateral for third party construction financing in connection withjoint venture agreements; -unconsolidated development projects;- •
- approximately
$39.2$32.9 million in tax-deferred(1031)exchange proceeds; and-- •
- approximately
$62.6$62.5 million fortenantresident security, utility, and other deposits.139.
MORTGAGE NOTES PAYABLEMortgage Notes PayableAs of
SeptemberJune 30,2001,2002, the Company had outstanding mortgage indebtedness of approximately$3.3$3.2 billion.During the
ninesix months endedSeptemberJune 30,20012002, the Company:-
- •
- repaid
$315.3$135.7 million ofmortgages due at or prior to maturity and/or at the disposition date of the respective Property; -mortgage loans;- •
- assumed
$45.9$14.0 million of mortgage debt onfour propertiesone property in connection withtheir acquisitions; -its acquisition;- •
- disposed of
$28.2$1.7 million of mortgage debt assumed by the purchaser in connection with the disposition of certainproperties; - obtained $26.0 million of new mortgage debt on previously unencumbered properties; - obtained $301.5 million of new mortgage debt on previously Unconsolidated Properties;properties and-the furniture rental business; and- •
- received
$33.3$47.2 million in construction loan draw proceeds ontwocertain properties.As of
SeptemberJune 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 was2.15%1.10% to 12.465% atSeptemberJune 30,2001.2002. During theninesix months endedSeptemberJune 30,2001,2002, the weighted average interest rateon the Company's mortgage debtwas6.59%6.41%.10.
NOTESNotesAs of
SeptemberJune 30,2001,2002, the Company had outstanding unsecured notes of approximately $2.4 billion.During the
ninesix months endedSeptemberJune 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
SeptemberJune 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% atSeptemberJune 30,2001.2002. During theninesix months endedSeptemberJune 30,2001,2002, the weighted average interest rateonwas 6.50%.11. Line of Credit
On May 30, 2002, the
Company's notes was 6.88%. 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 ofSeptemberJune 30,2001,2002, no amounts were outstandingunder this facilityand$60.0$84.0 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit.In connection withDuring theGlobe acquisition,six months ended June 30, 2002, theCompany assumed a revolving credit facility with potential borrowingsweighted average interest rate was 2.50%.12. Calculation of
up to $55.0 million. On May 31, 2001, this credit facility was terminated. 1412. 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.because the effects would be anti-dilutive.
NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 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 $ 237,159 $ 275,743 $ 39,860 $ 99,686 Allocation to Minority Interests: Operating Partnership (22,666) (32,388) (6,192) (13,256) Partially Owned Properties (1,523) 145 (1,285) (12) Income from investments in unconsolidated entities 20,252 14,589 8,029 5,525 Preferred distributions (81,759) (83,597) (24,340) (27,943) ----------- ------------ ------------ ----------- Income before net gain on sales of real estate, extraordinary items and cumulative effect of change in accounting principle 151,463 174,492 16,072 64,000 Net gain on sales of real estate 100,132 165,025 53,567 77,373 Extraordinary items (22) - (128) - Cumulative effect of change in accounting principle (1,270) - - - ----------- ------------ ------------ ----------- Numerator for net income per share - basic 250,303 339,517 69,511 141,373 Effect of dilutive securities: Allocation to Minority Interests - Operating Partnership 22,666 32,388 6,192 13,256 Distributions on convertible preferred shares/units 74 5,601 - 7,576 ----------- ------------ ----------- ----------- Numerator for net income per share - diluted $ 273,043 $ 377,506 $ 75,703 $ 162,205 =========== ============ =========== =========== DENOMINATOR: Denominator for net income per share - basic 266,614 258,870 268,253 262,824 Effect of dilutive securities: OP Units 24,189 24,766 23,960 24,640 Convertible preferred shares/units 82 4,816 - 15,554 Share options/restricted shares 3,776 1,442 4,178 1,970 ----------- ------------ ----------- ----------- Denominator for net income per share - diluted 294,661 289,894 296,391 304,988 =========== ============ =========== =========== Net income per share - basic $ 0.94 $ 1.31 $ 0.26 $ 0.54 =========== ============ =========== =========== Net income per share - diluted $ 0.93 $ 1.30 $ 0.26 $ 0.53 =========== ============ =========== ===========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,
NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 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 $ 0.60 $ 0.73 $ 0.08 $ 0.27 Net gain on sales of real estate 0.34 0.58 0.18 0.27 Extraordinary items - - - - Cumulative effect of change in accounting principle - - - - ---------------------------------------------------------- Net income per share - basic $ 0.94 $ 1.31 $ 0.26 $ 0.54 ========================================================== 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 $ 0.59 $ 0.73 $ 0.08 $ 0.28 Net gain on sales of real estate 0.34 0.57 0.18 0.25 Extraordinary items - - - - Cumulative effect of change in accounting principle - - - - ---------------------------------------------------------- Net income per share - diluted $ 0.93 $ 1.30 $ 0.26 $ 0.53 ==========================================================CONVERTIBLE PREFERRED SHARES/UNITS THAT COULD BE CONVERTED INTO 15,322,607 AND 13,922,972 WEIGHTED AVERAGE COMMON SHARES FOR THE NINE MONTHS ENDED SEPTEMBER2001. 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 15,626,902 AND 0 WEIGHTED AVERAGE COMMON SHARES FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000, RESPECTIVELY, WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS PER SHARE BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE. ON OCTOBER 11, 2001, THE COMPANY EFFECTED A TWO-FOR-ONE SPLIT OF ITS COMMON SHARES TO SHAREHOLDERS OF RECORD AS OF SEPTEMBER 21, 2001. ALL PER SHARE DATA AND NUMBERS OF COMMON SHARES HAVE BEEN RETROACTIVELY ADJUSTED TO REFLECT THE COMMON SHARE SPLIT. 13.for 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$109.5$40.3 million during theninesix months endedSeptemberJune 30,2001. During the fourth quarter of 2001, the Company expects to fund approximately $23.5 million in connection with these Properties.2002. In16connection with one joint venturedevelopment agreement, the Company has an obligation to fund up to an additional$6.5$9.5 million to guarantee third party construction financing. As ofSeptemberJune 30,2001,2002, the Company has1921 projects under development (includes three consolidated projects) with estimated completion dates rangingfrom Decemberthrough March 31,2001 through June 30, 2003. At2004.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 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
SeptemberJune 30,2001,2002, this enhancement was still in effect at a commitment amount of $12.7 million.14. ASSET IMPAIRMENT As of September 30, 2001, the Company recorded $60.0 million of asset impairment charges related to its furniture rental business. These charges were the result of review of the existing intangible and tangible assets reflected on the consolidated balance sheet as of September 30, 2001. The Company reviewed the current net book value taking into consideration existing business and economic conditions as well as projected operating cash flows. The impairment loss is reflected on the income statement in total expenses and includes the write-down of the following assets: a) goodwill of approximately $26.0 million; b) rental furniture, net of approximately $28.6 million; c) property and equipment, net of approximately $4.5 million; and d) other assets of approximately $0.9 million.15. Asset Impairment
For the
ninesix months endedSeptemberJune 30, 2002 and 2001, the Company recorded approximately$8.0$0.6 million and $6.8 million, respectively, of asset impairment charges related to its technology investments. These charges were the result of review of the existing investments reflected on the consolidated balance sheet.The Company reviewed the current relative value of each investment based on existing economic conditions and current events.These impairment losses are reflected on theincomestatement of operations in total expenses andincludesinclude the write-down of assets classified as other assets and investments in unconsolidated entities.15. REPORTABLE SEGMENTS16. Reportable Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management. Senior management decides how resources are allocated and assesses performance on a monthly basis.
The 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.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 segmentcomprisescomprised approximately95.2%98.7% and96.9%97.6% of total revenues for theninesix months endedSeptemberJune 30,20012002 and2000,2001, respectively, and approximately95.8%98.5% and94.3%97.5% of total revenues for the quarters endedSeptemberJune 30, 2002 and 2001, respectively. The Company's rental real estate segment comprised approximately 99.6% and2000,99.4% 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
17taxes 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 $937.1$613.4 million and$886.9$609.5 million for theninesix months endedSeptemberJune 30,20012002, and2000,2001, respectively, and approximately$319.4$307.9 million and$294.8$304.8 million for the quarters endedSeptemberJune 30, 2002 and 2001,and 2000,respectively.During the acquisition, development and/or disposition of real estate, the NOI return on total capitalized costs is the primary measure of financial performance
(capitalization rate)the Company 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. 131.16. SUBSEQUENT EVENTS17. Subsequent Events/Other
During the six months ended June 30, 2002, the Company 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
SeptemberJune 30,20012002 and throughNovember 7, 2001,July 29, 2002, the Company:-
- •
- acquired one
Propertyproperty consisting of296466 units for approximately$23.7$37.4 million;-- •
- disposed of
five Propertiesseven properties consisting of6361,171 units for approximately$22.1$67.2 million;-- •
- repaid
$25.1$25.2 million of mortgagedebt at or priorloans; and- •
- funded a net of $41.8 million related to
maturity on five Properties;the unconsolidated development agreements.20
Item 2. Management's Discussion and- relinquished $1.1 millionAnalysis ofmortgage debt assumed by the purchaser in connection with the dispositionFinancial Condition and Results oftwo Properties. 18ITEM 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 that are predictions of or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements of the 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:
-
- •
- alternative sources of capital to the Company are more expensive than anticipated;
-- •
- occupancy levels and market rents may be adversely affected by national and local economic and market conditions, which are beyond the Company's control; and
-- •
- additional factors as discussed in Part I of the Annual Report on Form
10-K.10-K, particularly those under "Risk Factors".Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The 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 - ---------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, - ---------------------------------------------------------------------------------------------------------------- 2001 2000 ---- ---- PROPERTIES UNITS PROPERTIES UNITSBeginning of period 1,104 227,704 1,064 226,317 Acquisitions 11 2,657 19 3,002 Dispositions (38) (6,241) (30) (7,354) Completed Developments 4 1,470 3 734 - ---------------------------------------------------------------------------------------------------------------- End of period 1,081 225,590 1,056 222,699 ================================================================================================================In addition, the Company sold and/or contributed eleven wholly owned Properties containing 3,011 units to a joint venture entity during the nine months ended September 30, 2001. The Company sold and/or contributed 21 wholly owned properties containing 5,211 units to two joint venture entities during the nine months ended September 30, 2000. The Company retained a 25% interest along with the rights to manage these joint venture Properties.
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's acquisition and disposition activity has impacted overall results of operations for the
ninesix months and quarters endedSeptemberJune 30,20012002 and2000.2001. Significant changes in revenues and expenses have resulted primarily from the consolidation of previously Unconsolidated Propertiesandin July 2001, theacquisitiondisposition ofGlobe,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 inexpense 19expenses has also resulted from an increase in insurance costs and general and administrative costs and reductions in variable interest rates, impairment charges (furniture rentalandunconsolidated technology investments) recorded in 2001.goodwill amortization. This impact is discussed in greater detail in the following paragraphs.Properties that the Company owned for all of both the
ninesix month periods endedSeptemberJune 30, 2002 and June 30, 2001and September 30, 2000(the"Nine-Month 2001"Six-Month 2002 Same Store Properties"), which represented184,391194,491 units, andPropertiesproperties that the Company owned for all of both the quarters endedSeptemberJune 30, 2002 and June 30, 2001and September 30, 2000(the"Third-Quarter 2001"Second Quarter 2002 Same Store Properties"), which represented185,759196,211 units, also impacted the Company's results of operations. Both theNine-Month 2001Six-Month 2002 Same Store Properties andThird-Quarter 2001Second Quarter 2002 Same Store Properties are discussed in the following paragraphs.COMPARISON OF NINE MONTHS ENDED SEPTEMBER
Comparison of the six months ended June 30,
2001 TO NINE MONTHS ENDED SEPTEMBER2002 to the six months ended June 30,20002001For the
ninesix months endedSeptemberJune 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 principle decreased by approximately$38.6$12.1 million when compared to theninesix months endedSeptemberJune 30,2000. Rental income2001.Revenues from the
Nine-Month 2001Six-Month 2002 Same Store Propertiesincreased by approximately $58.9 million to $1.3 billion, or 4.7%,decreased primarily as a result ofhigherlower rental rates chargedtonewtenantsresidents, increased concessions andtenant renewals and an increase in income from billing tenants for their share of utility costs as well as other ancillary services provided to tenants. For the remainder of 2001, the Company expects to achieve rental income increases of 3.75% to 4.0% from Same Store Properties. For 2002, the Company expects to see rental income within a range of being slightlylowerby 0.05% to slightly higher by as much as 1.0%. These estimated increases are subject tooccupancy at certainrisks and uncertainties including, but not limited to, maintaining an overall average occupancy rate of 93.5% to 94.0%.properties.22
Property operating expenses from the
Nine-Month 2001Six-Month 2002 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses,increased approximately $20.5 million or 4.5%.remained relatively stable with increases in real estate taxes and insurance costs offset by 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 $4.8 million, or 6.5%, increase in utilities and a $8.3 million, or 7.3% 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 3.75%continue to4.0% for the Same Store Properties. Forown through December 31, 2002, the Companyexpects to maintain expense growth between a range of 1.5% to 2.25%.anticipates the following operating assumptions for the 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
Nine-Month 2001Six-Month 2002 Same Store Properties increased by approximately$43.9$9.3 million primarily as a result of revenue from properties the Company acquired in 2001 and 2002 and additional Partially Owned Properties that the Company consolidated in 2001.Interest and other income decreased by approximately $2.2 million, primarily as a result of lower balances available for investment and related interest rates being earned on the Company's
corporate housing business and the acquisition of Properties during 2001, including the consolidation of previously Unconsolidated Properties.short-term investment accounts along with lower balances on deposit in tax-deferred exchange accounts.Interest
income-investmentincome—investment in mortgage notesincreaseddecreased byapproximately $0.5$8.8 million as a result ofreceiving deferred interest income on certain ofthemortgage notes. TheCompanyanticipates noconsolidating previously Unconsolidated Properties in July 2001. No additional interest income will be recognized onthesesuch mortgage notes in futurequartersyears as the Company now consolidates the results related to these previously Unconsolidated Properties.Interest and other income decreased by approximately $0.8 million, primarily as a result of lower balances and related interest rates being earned on these investments.23
Property management expenses
includedinclude off-site expenses associated with the self-management of the Company'sProperties.properties. These expenses increased by approximately$0.1 million.$0.9 million or 2.5%. These expenses increased due to higher 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 20acquires 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 ofSeptemberJune 30, 2002 and 2001, the Company managed15,94820,142 units and 19,844 units, respectively, for third parties andtheunconsolidatedjoint ventureentities.Furniture income and furniture expenses are associated with the operation of the furniture rental business assumed in connection with the Globe acquisition, which occurred in July 2000. Furniture expenses include a depreciation charge on furniture held in inventory and property and equipment directly related to the furniture business.The Company recorded impairment charges in 2002 totaling approximately
$68.0$0.6 million,ofwhich$60.0 millionis related tothe furniture rental business and approximately $8.0 million is related to certain investmentsone investment in a technologyentities.entity. SeeFootnote 14Note 15 in the Notes to the Consolidated Financial Statements for further discussion.Interest expense, including amortization of deferred financing costs,
increaseddecreased approximately$2.3 million.$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 theninesix months endedSeptemberJune 30,20012002 was6.99%6.63% as compared to7.25%7.07% for theninesix months endedSeptemberJune 30,2000. For the remainder of 2001, the Company expects its overall interest costs to decrease slightly due to lower variable interest rates. In connection with the scheduled maturity of $150 million of indebtedness due in November 2001, the Company anticipates to initially borrow under its line of credit to repay this indebtedness. The Company also expects to replace this indebtedness in the first quarter of 2002 for a similar amount and to incur interest costs approximating 6.5% to 7.0% per annum.2001.General and administrative expenses, which include corporate operating expenses, increased approximately
$4.3$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 vesting ofrestricted shares/awards granted to key employeesinand additional compensation charges and costs associated with thepast three years.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$64.9$17.8 million between the periods under comparison. This decrease is primarily the result ofaapproximately 3,500 fewer number of units sold during theninesix months endedSeptemberJune 30,2001 (9,252 units including the joint venture Properties)2002 as compared to theninesix months endedSeptemberJune 30,2000 (12,5652001 (includes approximately 3,000 unitsincluding thesold into a joint ventureProperties)in February 2001).In addition,
Comparison of the
Company sold older and more fully depreciated Properties during the nine monthsquarter endedSeptemberJune 30,2000 as compared2002 to thenine monthsquarter endedSeptemberJune 30,2001. COMPARISON OF QUARTER ENDED SEPTEMBER 30,2001TO QUARTER ENDED SEPTEMBER 30, 2000For the quarter ended
SeptemberJune 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 principle decreased by approximately$59.8$7.2 million when compared to the quarter endedSeptemberJune 30,2000. Rental income2001.Revenues from the
Third-Quarter 2001Second Quarter 2002 Same Store Propertiesincreased by approximately $14.8 million to $444.6 million or 3.4%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 3.75% to 4.0% from Same Store Properties. For 2002, the Company expects to see rental income within a range of being slightlylowerby 0.05% to slightly higher by as much as 1.0%. These estimated increases are subject tooccupancy at certainrisks and uncertainties including, but not limited to, maintaining an overall average occupancy rate of 93.5% to 94.0%. 21properties. Property operating expenses from the Third-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 $4.6 million or 2.9%. The increase in "same store" expenses isdecreased primarilyattributable toas a$1.3 million, or 3.4%, increaseresult of increases in real estate taxes anda $2.4 million, or 6.0% increaseinsurance costs partially offset by decreases inpayrollutility costs.For the remainder of 2001, the Company expects to maintainThe following tables provide comparative revenue, expense,growth at no more than 3.75% to 4.0%NOI and weighted average occupancy for the Second Quarter 2002 Same StoreProperties. ForProperties:Second Quarter 2002
the Company expects to maintain expense growth between a range of 1.5% to 2.25%.Same Store Results$ 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
Third-Quarter 2001Second Quarter 2002 Same Store Properties increased by approximately$13.1$7.6 million primarily as a result of revenue from properties the Company acquired in 2001 and 2002 and additional Partially Owned Properties that the Company consolidated in 2001.Interest and other income increased by approximately $0.2 million, primarily as a result of a $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
corporate housing business and the acquisition of properties during the third quarter of 2001.short term investment accounts along with lower balances on deposit in tax-deferred exchange accounts.Interest
income-investmentincome—investment in mortgage notes decreased byapproximately $2.8$6.0 million as a result of the Companyreceivingconsolidating previously Unconsolidated Properties in July 2001. No additional interest income will be recognized on such mortgage notes in future years as thefinal paymentCompany now consolidates the results related to thesenotes prior to consolidation of thesepreviously Unconsolidated Properties.Interest and other income decreased by approximately $4.1 million, primarily as a result of lower balances and related interest rates being earned on the Company's short-term investment accounts.Property management expenses
includedinclude off-site expenses associated with the self-management of the Company'sProperties.properties. These expenses increased by approximately$1.3$0.6 millionprimarilyor 3.2%. These expenses increased due to higher overall compensation costs related tohigher payroll costsa current period expense associated with restricted shares/awards granted to key employees. The Company continues to acquire properties in major metropolitan areas andincreased health costs for employees.dispose of assets in smaller multi-family rental markets where the Company does not have a significant management presence.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 assumed in connection with the Globe acquisition, which occurred in July 2000. Furniture expenses include a depreciation charge on furniture held in inventory and property and equipment directly related to the furniture business.The Company recorded impairment charges in 2002 totaling approximately
$61.2$0.3 million,ofwhich$60.0 millionis related tothe furniture rental business and approximately $1.2 million is related to certain investmentsone investment in a technologyentities.entity. SeeFootnote 14Note 15 in the Notes to the Consolidated Financial Statements for further discussion.Interest expense, including amortization of deferred financing costs,
increaseddecreased approximately$2.0 million.$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 quarter endedSeptemberJune 30,20012002 was6.82%6.75% as compared to7.28%7.07% for the quarter endedSeptemberJune 30,2000. For the remainder of 2001, the Company expects its overall interest cost to decrease slightly due to lower variable interest rates.2001.General and administrative expenses, which include corporate operating expenses, increased approximately
$3.4$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 the past three years. Net gain on sales of real estate decreased approximately $23.8 million between the periods under comparison. This decreaseis primarily the result offewer unitsmore fully depreciated properties sold during the quarterended September 30, 2001, which included 2,052 wholly ownedand an increase of approximately 1,000 unitsas compared to 3,959 wholly owned units sold in the quarter ended September 30, 2000. 22LIQUIDITY AND CAPITAL RESOURCESsold.Liquidity and Capital Resources
As 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 atSeptemberJune 30,20012002 was approximately$110.8$88.9 million and the amount available on the Company's line of credit was $700.0 million, of which$60.0$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 ofProperties, reinvestment ofproperties, retained cash flows or the issuance of additional equity or debt securities. Continuing to utilize this strategy during thefirst ninesix monthsof 2001,ended June 30, 2002, the Company:-
- •
- disposed of
thirty-eighttwenty-three properties (includingonetwo UnconsolidatedProperty) and two vacant parcels of landProperties) and received net proceeds of$284.8approximately $194.8 million;-- •
- disposed of the furniture rental business on January 11, 2002 and received net proceeds of approximately $28.7 million;
- •
- issued
$300.0$400.0 million of 6.625% fixed rate unsecured debt receiving net proceeds of$297.4$394.5 million;- 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;- issued $48.5 million of three new series of Preference Interestsandreceived net proceeds of $47.3 million; -26
- •
- obtained
$59.3$47.2 million in new mortgagefinancing;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
- received a $61.4 million pay-down of second and third mortgages on previously Unconsolidated Properties.- •
- purchase additional properties.
During the
ninesix months endedSeptemberJune 30,2001,2002, the Company:- reduced
- •
- repaid $195.0 million on its line of
credit borrowings by approximately $355.5 million; - funded $210.5 million to redeem all of its Series A and F Preferred Shares; -credit;- •
- repaid
approximately $315.3$135.7 million ofmortgages duemortgage loans;- •
- repaid $100.0 million of 9.375% fixed rate public notes at
or prior to maturity and/ormaturity;- •
- repaid $125.0 million of 7.95% fixed rate public notes at
the disposition date of respective properties; -maturity;- •
- funded a net of
$109.5$40.3 millionrelated toin accordance with its development agreements;- •
- funded $10.0 million in connection with its agreement with the
development, earnoutU.S. Army; andjoint venture agreements; and -- •
- acquired
elevenseven propertiesand vacant land for $288.9 million ($45.9 millionutilizing cash ofmortgage assumptions and $243.0 million of cash).$153.0 million.The Company's total debt summary and debt maturity schedule, as of
SeptemberJune 30,2001, included:
------------------------------------------------------------------------------ DEBT SUMMARY AS OF 9/30/01 ------------------------------------------------------------------------------ Weighted $ Millions Average Rate --------------------------------Secured 3,269 6.73% Unsecured 2,419 6.88% -------------------------------- Total 5,688 6.79% Fixed Rate 5,123 6.98% Floating Rate 565 5.02% -------------------------------- Total 5,688 6.79% ABOVE TOTALS INCLUDE: Total Tax Exempt 945 5.00% Unsecured Revolving Credit Facility - - ------------------------------------------------------------------------------23Subsequent2002, are as follows:Debt Summary as of June 30, 2002
$ 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
September 30, 2001 andmaintain a ratio of consolidated debt-to-total market capitalization of less than 50%.From July 1, 2002 through
November 7, 2001,July 29, 2002, the Company:-
- •
- acquired one
Propertyproperty consisting of296466 units for approximately$23.7$37.4 million;-- •
- disposed of
five Propertiesseven properties consisting of6361,171 units for approximately$22.1$67.2 million;-- •
- repaid
$25.1$25.2 million of mortgagedebt at or prior to maturity on five Properties; and - relinquished $1.1 million in mortgage debt assumed by the purchaser in connection with the dispositionloans;- •
- funded a net of
two Properties. During the fourth quarter of 2001, the Company expects to fund approximately $23.5$41.8 million related to the unconsolidated developmentearnoutagreements; andjoint venture agreements.- •
- announced that its Board of Trustees has approved a share repurchase program under which it may repurchase, from time to time, up to $200.0 million of its Common Shares through open market or privately negotiated transactions. This program would initially be funded using the Company's line of credit.
Investments in Unconsolidated Entities
In connection with one
joint venturedevelopment agreement, the Company has an obligation to fund up to an additional$6.5$9.5 million to guarantee third party construction financing. As ofSeptemberJune 30,2001,2002, the Company has1918 projects under development with estimated completion dates rangingfrom Decemberthrough March 31,2001 through June 30, 2003. At2004.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.
DuringThe Company may elect at that time not to purchase thenine months ended September 30, 2001,property and instead, authorize its partner to sell theCompany's totalproject 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
approximated $108.3in 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
which includesinclude newcarpeting,expenditures inside the units such as carpets, appliances, mechanical equipment, fixtures and vinylfloorsflooring.- (3)
- Building improvements include roof replacement, paving, amenities and
blindscommon 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
approximated $42.8 million, or $210 per unit. Building improvements for the 1999, 2000 and 2001 Acquired Properties approximated $19.4 million, or $375 per unit. Building improvements for all of the Company's pre-1999 Acquired Properties approximated $38.9 million or $257 per unit. In addition, approximately $3.6 million was spent on six specific assets related to major renovations and repositioning of these assets. Also included in totalcapital improvements to our realestate was approximately $3.6 million on commercial/other assets and Partially Owned Properties. Such improvements to real estate were primarily funded from net cash provided by operating activities.estate. Total improvements to real estatebudgetedfor the remainder of20012002 are estimated to beapproximately $25.0$65.0 million.During the
ninesix months endedSeptemberJune 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$5.2$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 $0.9 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 nine months ended September 30, 2001, total additions to rental furniture approximated $17.8 million and property and equipment approximated $2.2 million. Total additions to rental furniture and property and equipment budgeted for the remainder of 2001 are estimated to be approximately $1.0 million.
Other
Minority Interests as of
SeptemberJune 30,2001 increased2002 decreased by$22.1$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:24-
- •
- distributions declared to Minority Interests, which amounted to
$30.1$19.7 million for theninesix months endedSeptemberJune 30,20012002 (excludingpreference unit/interestJunior Preference Unit and Preference Interest distributions);-- •
- the allocation of income from operations in the amount of
$22.7$13.8 million;-- •
- the allocation of Minority Interests from Partially Owned Properties in the amount of
$1.5$1.3 million;-- •
- the conversion of OP Units into Common Shares; and
-- •
- the issuance of Common Shares
OP Units and Preference Interestsduring theninesix months endedSeptemberJune 30,2001.2002.Total distributions paid in
October 2001July 2002 amounted toapproximately $146.4$147.7 million (excluding distributions on Partially Owned Properties), which included certain distributions declaredforduring the quarter endedSeptemberJune 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 ofNovember 9, 2001, $35.0July 31, 2002, $40.0 million was outstanding under this new facility.In 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. This credit facility was terminated on May 31, 2001. 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
November 7, 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.
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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 HoldersThe Company held its Annual Meeting of Shareholders on May 15, 2002. Shareholders holding 241,525,692 Common Shares (being the only class of shares entitled to vote at the meeting), or 88.4% of the Company's issued and outstanding shares as of the record date for the meeting, attended the meeting or 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 the shareholders vote on each of the three matters are as follows:
Proposal I—Election of four trustees to terms expiring in 2005.
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 matter out of the total number of shares voted at the meeting, not out of the total shares outstanding. This 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: 3.1 Fourth AmendedExhibits andRestated Bylaws 12 Computation of Ratio of Earnings to Fixed Charges (B)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 26None.
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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 TreasurerEQUITY RESIDENTIALPROPERTIES TRUST Date: NOVEMBER 12, 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: NOVEMBER 12, 2001 By: /s/ Michael J. Mchugh ----------------------------- Michael J. McHugh Executive Vice President, Chief Accounting OfficerAnalysis of Financial Condition andTreasurer 27