FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR |
For the quarterly period ended MARCH 31,JUNE 30, 2002
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR |
Commission File Number: 0-24920
ERP OPERATING LIMITED PARTNERSHIP
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
Illinois (State or Other Jurisdiction of Incorporation or Organization) | 36-3894853 (I.R.S. Employer Identification No.) |
Two North Riverside Plaza, Chicago, Illinois (Address of Principal Executive Offices) | 60606 (Zip Code) |
(312) 474-1300
(Registrant's Telephone Number, Including Area Code)
http://www.equityapartments.com
(Registrant's web site)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
| | March 31, 2002 | December 31, 2001 | | June 30, 2002 | December 31, 2001 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS | ASSETS | ASSETS | |||||||||||||||||
Investment in real estate | Investment in real estate | Investment in real estate | |||||||||||||||||
Land | $ | 1,844,098 | $ | 1,840,170 | Land | $ | 1,857,497 | $ | 1,840,170 | ||||||||||
Depreciable property | 11,135,057 | 11,096,847 | Depreciable property | 11,205,307 | 11,096,847 | ||||||||||||||
Construction in progress | 104,158 | 79,166 | Construction in progress | 94,292 | 79,166 | ||||||||||||||
13,083,313 | 13,016,183 | 13,157,096 | 13,016,183 | ||||||||||||||||
Accumulated depreciation | (1,831,277 | ) | (1,718,845 | ) | Accumulated depreciation | (1,929,115 | ) | (1,718,845 | ) | ||||||||||
Investment in real estate, net of accumulated depreciation | Investment in real estate, net of accumulated depreciation | 11,252,036 | 11,297,338 | Investment in real estate, net of accumulated depreciation | 11,227,981 | 11,297,338 | |||||||||||||
Real estate held for disposition | Real estate held for disposition | 3,505 | 3,371 | Real estate held for disposition | — | 3,371 | |||||||||||||
Cash and cash equivalents | Cash and cash equivalents | 249,762 | 51,603 | Cash and cash equivalents | 88,942 | 51,603 | |||||||||||||
Investments in unconsolidated entities | Investments in unconsolidated entities | 396,733 | 397,237 | Investments in unconsolidated entities | 423,529 | 397,237 | |||||||||||||
Rents receivable | Rents receivable | 1,355 | 2,400 | Rents receivable | 2,627 | 2,400 | |||||||||||||
Deposits — restricted | 210,496 | 218,557 | |||||||||||||||||
Escrow deposits — mortgage | 72,595 | 76,700 | |||||||||||||||||
Deposits—restricted | Deposits—restricted | 149,927 | 218,557 | ||||||||||||||||
Escrow deposits—mortgage | Escrow deposits—mortgage | 62,049 | 76,700 | ||||||||||||||||
Deferred financing costs, net | Deferred financing costs, net | 28,563 | 27,011 | Deferred financing costs, net | 32,964 | 27,011 | |||||||||||||
Rental furniture, net | Rental furniture, net | — | 20,168 | Rental furniture, net | — | 20,168 | |||||||||||||
Property and equipment, net | Property and equipment, net | — | 3,063 | Property and equipment, net | — | 3,063 | |||||||||||||
Goodwill, net | Goodwill, net | 47,122 | 47,291 | Goodwill, net | 47,122 | 47,291 | |||||||||||||
Other assets | Other assets | 66,086 | 90,886 | Other assets | 76,659 | 90,886 | |||||||||||||
Total assets | $ | 12,328,253 | $ | 12,235,625 | Total assets | $ | 12,111,800 | $ | 12,235,625 | ||||||||||
LIABILITIES AND PARTNERS' CAPITAL | LIABILITIES AND PARTNERS' CAPITAL | LIABILITIES AND PARTNERS' CAPITAL | |||||||||||||||||
Liabilities: | Liabilities: | Liabilities: | |||||||||||||||||
Mortgage notes payable | $ | 3,279,105 | $ | 3,286,814 | Mortgage notes payable | $ | 3,210,510 | $ | 3,286,814 | ||||||||||
Notes, net | 2,556,358 | 2,260,944 | Notes, net | 2,438,974 | 2,260,944 | ||||||||||||||
Line of credit | — | 195,000 | Line of credit | — | 195,000 | ||||||||||||||
Accounts payable and accrued expenses | 99,669 | 108,254 | Accounts payable and accrued expenses | 116,192 | 108,254 | ||||||||||||||
Accrued interest payable | 72,323 | 62,360 | Accrued interest payable | 62,676 | 62,360 | ||||||||||||||
Rents received in advance and other liabilities | 87,219 | 83,005 | Rents received in advance and other liabilities | 65,226 | 83,005 | ||||||||||||||
Security deposits | 47,574 | 47,644 | Security deposits | 47,098 | 47,644 | ||||||||||||||
Distributions payable | 145,433 | 141,832 | Distributions payable | 145,880 | 141,832 | ||||||||||||||
Total liabilities | 6,287,681 | 6,185,853 | Total liabilities | 6,086,556 | 6,185,853 | ||||||||||||||
Commitments and contingencies | |||||||||||||||||||
Commitments and contingencies | Commitments and contingencies | ||||||||||||||||||
Minority Interests — Partially Owned Properties | 13,953 | 4,078 | Minority Interests—Partially Owned Properties | 11,503 | 4,078 | ||||||||||||||
Partners' capital: | Partners' capital: | Partners' capital: | |||||||||||||||||
Preference Units | 965,738 | 966,671 | Preference Units | 950,356 | 966,671 | ||||||||||||||
Preference Interests | 246,000 | 246,000 | Preference Interests | 246,000 | 246,000 | ||||||||||||||
Junior Preference Units | 5,846 | 5,846 | Junior Preference Units | 5,846 | 5,846 | ||||||||||||||
General Partner | 4,503,191 | 4,506,097 | General Partner | 4,509,578 | 4,506,097 | ||||||||||||||
Limited Partners | 368,372 | 379,898 | Limited Partners | 364,233 | 379,898 | ||||||||||||||
Deferred compensation | (36,865 | ) | (25,778 | ) | Deferred compensation | (31,607 | ) | (25,778 | ) | ||||||||||
Accumulated other comprehensive loss | (25,663 | ) | (33,040 | ) | Accumulated other comprehensive loss | (30,665 | ) | (33,040 | ) | ||||||||||
Total partners' capital | 6,026,619 | 6,045,694 | Total partners' capital | 6,013,741 | 6,045,694 | ||||||||||||||
Total liabilities and partners' capital | $ | 12,328,253 | $ | 12,235,625 | Total liabilities and partners' capital | $ | 12,111,800 | $ | 12,235,625 | ||||||||||
See accompanying notes
2
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per OP Unit data)(Unaudited)
| Quarter Ended March 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||||
REVENUES | ||||||||||
Rental income | $ | 510,376 | $ | 510,675 | ||||||
Fee and asset management | 1,718 | 1,972 | ||||||||
Interest and other income | 4,107 | 6,502 | ||||||||
Interest income — investment in mortgage notes | — | 2,744 | ||||||||
Total revenues | 516,201 | 521,893 | ||||||||
EXPENSES | ||||||||||
Property and maintenance | 129,679 | 135,985 | ||||||||
Real estate taxes and insurance | 52,560 | 47,937 | ||||||||
Property management | 19,033 | 18,687 | ||||||||
Fee and asset management | 1,819 | 1,875 | ||||||||
Depreciation | 116,587 | 111,845 | ||||||||
Interest: | ||||||||||
Expense incurred, net | 84,795 | 89,898 | ||||||||
Amortization of deferred financing costs | 1,391 | 1,397 | ||||||||
General and administrative | 10,800 | 6,754 | ||||||||
Impairment on technology investments | 291 | 3,003 | ||||||||
Amortization of goodwill | — | 643 | ||||||||
Total expenses | 416,955 | 418,024 | ||||||||
Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle | 99,246 | 103,869 | ||||||||
Allocation to Minority Interests — Partially Owned Properties | (806 | ) | (105 | ) | ||||||
Income from investments in unconsolidated entities | 226 | 350 | ||||||||
Net gain on sales of unconsolidated entities | 5,657 | — | ||||||||
Income before discontinued operations, extraordinary items and cumulative effect of change in accounting principle | 104,323 | 104,114 | ||||||||
Net gain on sales of discontinued operations | 2,816 | 41,778 | ||||||||
Discontinued operations, net | 277 | 143 | ||||||||
Income before extraordinary items and cumulative effect of change in accounting principle | 107,416 | 146,035 | ||||||||
Extraordinary items | (97 | ) | 311 | |||||||
Cumulative effect of change in accounting principle | — | (1,270 | ) | |||||||
Net income | $ | 107,319 | $ | 145,076 | ||||||
ALLOCATION OF NET INCOME: | ||||||||||
Preference Units | $ | 19,391 | $ | 24,459 | ||||||
Preference Interests | $ | 5,053 | $ | 3,958 | ||||||
Junior Preference Units | $ | 81 | $ | 109 | ||||||
General Partner | $ | 76,353 | $ | 106,754 | ||||||
Limited Partners | 6,441 | 9,796 | ||||||||
Net income available to OP Units | $ | 82,794 | $ | 116,550 | ||||||
Net income per OP Unit — basic | $ | 0.28 | $ | 0.40 | ||||||
Net income per OP Unit — diluted | $ | 0.28 | $ | 0.40 | ||||||
Weighted average OP Units outstanding — basic | 294,106 | 289,659 | ||||||||
Weighted average OP Units outstanding — diluted | 297,229 | 297,184 | ||||||||
Distributions declared per OP Unit outstanding | $ | 0.4325 | $ | 0.4075 | ||||||
Comprehensive income: | ||||||||||
Net income | $ | 107,319 | $ | 145,076 | ||||||
Other comprehensive income (loss) — derivative instruments: | ||||||||||
Cumulative effect of change in accounting principle | — | (5,334 | ) | |||||||
Unrealized holding gains (losses) arising during the period | 7,209 | (11,754 | ) | |||||||
Losses reclassified into earnings from other comprehensive income | 168 | 55 | ||||||||
Comprehensive income | $ | 114,696 | $ | 128,043 | ||||||
(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—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 | 196,987 | 205,957 | 94,846 | 103,792 | |||||||||||
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 | 228,427 | 255,849 | 121,011 | 109,814 | |||||||||||
Extraordinary items | (468 | ) | 106 | (371 | ) | (205 | ) | ||||||||
Cumulative effect of change in accounting principle | — | (1,270 | ) | — | — | ||||||||||
Net income | $ | 227,959 | $ | 254,685 | $ | 120,640 | $ | 109,609 | |||||||
ALLOCATION OF NET INCOME: | |||||||||||||||
Preference Units | $ | 38,513 | $ | 48,672 | $ | 19,122 | $ | 24,213 | |||||||
Preference Interests | $ | 10,106 | $ | 8,557 | $ | 5,053 | $ | 4,599 | |||||||
Junior Preference Units | $ | 162 | $ | 190 | $ | 81 | $ | 81 | |||||||
General Partner | $ | 165,394 | $ | 180,792 | $ | 89,041 | $ | 74,038 | |||||||
Limited Partners | 13,784 | 16,474 | 7,343 | 6,678 | |||||||||||
Net income available to OP Units | $ | 179,178 | $ | 197,266 | $ | 96,384 | $ | 80,716 | |||||||
Net income per OP Unit—basic | $ | 0.61 | $ | 0.68 | $ | 0.33 | $ | 0.28 | |||||||
Net income per OP Unit—diluted | $ | 0.60 | $ | 0.67 | $ | 0.32 | $ | 0.27 | |||||||
Weighted average OP Units outstanding—basic | 294,957 | 290,086 | 295,799 | 290,509 | |||||||||||
Weighted average OP Units outstanding—diluted | 298,422 | 293,817 | 299,494 | 293,939 | |||||||||||
Distributions declared per OP Unit outstanding | $ | 0.8650 | $ | 0.8150 | $ | 0.4325 | $ | 0.4075 | |||||||
See accompanying notes
3
ERP OPERATING LIMITED PARTNERSHIPCONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)(Unaudited)
| Quarter Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 107,319 | $ | 145,076 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Allocation to Minority Interests — Partially Owned Properties | 806 | 105 | ||||||
Cumulative effect of change in accounting principle | — | 1,270 | ||||||
Depreciation | 116,767 | 115,029 | ||||||
Amortization of deferred financing costs | 1,391 | 1,397 | ||||||
Amortization of discount on investment in mortgage notes | — | (161 | ) | |||||
Amortization of goodwill | — | 933 | ||||||
Amortization of discounts and premiums on debt | (327 | ) | (590 | ) | ||||
Amortization of deferred settlements on interest rate protection agreements | (101 | ) | 101 | |||||
Impairment on technology investments | 291 | 3,003 | ||||||
Income from investments in unconsolidated entities | (226 | ) | (350 | ) | ||||
Net gain on sales of discontinued operations | (2,816 | ) | (41,778 | ) | ||||
Net gain on sales of unconsolidated entities | (5,657 | ) | — | |||||
Extraordinary items | 97 | (311 | ) | |||||
Unrealized gain on interest rate protection agreements | (62 | ) | (71 | ) | ||||
Book value of furniture sales and rental buyouts | — | 2,851 | ||||||
Compensation paid with Company Common Shares | 4,964 | 2,867 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease (increase) in rents receivable | 1,045 | (188 | ) | |||||
Decrease in deposits — restricted | 14,133 | 5,343 | ||||||
Additions to rental furniture | — | (6,272 | ) | |||||
Decrease (increase) in other assets | 18,446 | (3,002 | ) | |||||
(Decrease) in accounts payable and accrued expenses | (7,498 | ) | (9,153 | ) | ||||
Increase in accrued interest payable | 9,963 | 19,752 | ||||||
Increase in rents received in advance and other liabilities | 2,852 | 219 | ||||||
Increase in security deposits | 287 | 343 | ||||||
Net cash provided by operating activities | 261,674 | 236,413 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Investment in real estate — acquisitions | (26,100 | ) | (143,399 | ) | ||||
Investment in real estate — development | (24,338 | ) | (13,758 | ) | ||||
Improvements to real estate | (27,697 | ) | (28,166 | ) | ||||
Additions to non-real estate property | (3,004 | ) | (1,830 | ) | ||||
Interest capitalized for real estate under development | (5,884 | ) | (5,987 | ) | ||||
Proceeds from disposition of real estate, net | 31,722 | 280,448 | ||||||
Proceeds from disposition of partial interest in real estate | 1,715 | — | ||||||
Proceeds from disposition of furniture rental business | 28,741 | — | ||||||
Investment in property and equipment | — | (673 | ) | |||||
Principal receipts on investment in mortgage notes | — | 2,998 | ||||||
Investments in unconsolidated entities | (12,099 | ) | (16,613 | ) | ||||
Distributions from unconsolidated entities | 14,765 | 8,364 | ||||||
Proceeds from disposition of unconsolidated entities | 11,317 | — | ||||||
(Increase) in deposits on real estate acquisitions, net | (6,288 | ) | (28,506 | ) | ||||
Decrease in mortgage deposits | 4,105 | 870 | ||||||
Business combinations, net of cash acquired | (207 | ) | (5,538 | ) | ||||
Other investing activities, net | 193 | (48 | ) | |||||
Net cash (used for) provided by investing activities | (13,059 | ) | 48,162 | |||||
| Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||||
Comprehensive income: | |||||||||||||||
Net income | $ | 227,959 | $ | 254,685 | $ | 120,640 | $ | 109,609 | |||||||
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 | $ | 230,334 | $ | 246,181 | $ | 115,638 | $ | 118,138 | |||||||
See accompanying notes
4
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands)(Unaudited)
| Quarter Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Loan and bond acquisition costs | $ | (3,040 | ) | $ | (3,390 | ) | ||
Mortgage notes payable: | ||||||||
Proceeds, net | 20,772 | 29,052 | ||||||
Lump sum payoffs | (18,267 | ) | (176,746 | ) | ||||
Scheduled principal repayments | (8,469 | ) | (8,451 | ) | ||||
Prepayment premiums/fees | (97 | ) | — | |||||
Notes, net: | ||||||||
Proceeds | 397,064 | 299,316 | ||||||
Lump sum payoffs | (100,000 | ) | — | |||||
Scheduled principal repayments | — | (119 | ) | |||||
Lines of credit: | ||||||||
Proceeds | 245,000 | 176,686 | ||||||
Repayments | (440,000 | ) | (532,148 | ) | ||||
Proceeds (payments) from settlement of interest rate protection agreements | 835 | (7,360 | ) | |||||
Proceeds from sale of OP Units | 4,236 | 3,266 | ||||||
Proceeds from sale of Preference Interests | — | 35,000 | ||||||
Proceeds from exercise of EQR options | 9,777 | 8,210 | ||||||
Payment of offering costs | (141 | ) | (938 | ) | ||||
Distributions: | ||||||||
OP Units — General Partner | (117,338 | ) | (416 | ) | ||||
Preference Units | (16,441 | ) | (21,516 | ) | ||||
Preference Interests | (5,080 | ) | (3,916 | ) | ||||
Junior Preference Units | (81 | ) | — | |||||
OP Units — Limited Partners | (10,151 | ) | (9 | ) | ||||
Minority Interests — Partially Owned Properties | (9,120 | ) | (108 | ) | ||||
Principal receipts on employee notes, net | 85 | 71 | ||||||
Net cash (used for) financing activities | (50,456 | ) | (203,516 | ) | ||||
Net increase in cash and cash equivalents | 198,159 | 81,059 | ||||||
Cash and cash equivalents, beginning of period | 51,603 | 23,772 | ||||||
Cash and cash equivalents, end of period | $ | 249,762 | $ | 104,831 | ||||
SUPPLEMENTAL INFORMATION: | ||||||||
Cash paid during the period for interest | $ | 81,566 | $ | 76,777 | ||||
Mortgage loans assumed through real estate acquisitions | $ | — | $ | 45,918 | ||||
Mortgage loans (assumed) by purchaser in real estate and furniture rental business dispositions | $ | (1,680 | ) | $ | (22,815 | ) | ||
Transfers to real estate held for disposition | $ | 3,505 | $ | 21,886 | ||||
(Unaudited)
| Six Months Ended June 30, | |||||||
---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 227,959 | $ | 254,685 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Allocation to Minority Interests—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 OP Units | 6,354 | 5,383 | ||||||
Proceeds from sale of Preference Interests | — | 48,500 | ||||||
Proceeds from exercise of EQR options | 27,030 | 29,468 | ||||||
Redemption of Preference Units | — | (210,500 | ) | |||||
Payment of offering costs | (158 | ) | (1,317 | ) | ||||
Distributions: | ||||||||
OP Units—General Partner | (235,548 | ) | (109,189 | ) | ||||
Preference Units | (35,832 | ) | (49,898 | ) | ||||
Preference Interests | (10,132 | ) | (8,496 | ) | ||||
Junior Preference Units | (162 | ) | (109 | ) | ||||
OP Units—Limited Partners | (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
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
ERP Operating Limited Partnership ("ERPOP"), an Illinois limited partnership, was formed in May 1993 to conduct the multifamily residential property business of Equity Residential Properties Trust ("EQR"). EQR is a Maryland real estate investment trust ("REIT") formed on March 31, 1993 and is a fully integrated real estate company engaged in the acquisition, ownership, management and operation of multifamily properties. As used herein, the term "Operating Partnership" includes ERPOP and those entities owned or controlled by it. As used herein, the term "Company" means EQR and the Operating Partnership.
EQR is the general partner of, and as of March 31,June 30, 2002, owned an approximate 92.3%92.4% ownership interest in ERPOP. The Company conducts substantially all of its business and owns substantially all of its assets through ERPOP. ERPOP is, in 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 the ownership and operation of multifamily residential real estate. As used herein, the term "Operating Partnership" includes ERPOP and those entities owned or controlled by it. As used herein, the term "Company" means EQR and the Operating Partnership.
As of March 31,June 30, 2002, the Operating Partnership owned or had interests in a portfolio of 1,0731,065 multifamily properties containing 225,000227,963 apartment units located in 36 states consisting of the following:
| Number of Properties | Number of Units | Number of Properties | Number of Units | ||||
---|---|---|---|---|---|---|---|---|
Wholly Owned Properties | 951 | 199,305 | 943 | 198,676 | ||||
Partially Owned Properties | 37 | 7,231 | ||||||
Partially Owned Properties (Consolidated) | 36 | 6,931 | ||||||
Unconsolidated Properties | 85 | 18,464 | 86 | 22,356 | ||||
Total Properties | 1,073 | 225,000 | 1,065 | 227,963 | ||||
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. Operating results for the threesix months ended March 31,June 30, 2002 are not necessarily indicative of the results that may be expected for the year endedending December 31, 2002.
The balance sheet at December 31, 2001 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.
7
For further information, including definition of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Operating Partnership's annual report on Form 10-K for the year ended December 31, 2001.
Derivative Instruments and Hedging Activities
At March 31, 2002,The following table summarizes the Operating Partnership had entered into swaps which have been designated as cash flow hedges with a current aggregate notional amount of $614.7 million (notional amounts range from $610.4 million to $626.4 million over the terms of the swaps)Partnership's consolidated derivative instruments and hedging activities at interest rates ranging from 3.65% to 6.15% maturing at various dates ranging from 2003 to 2007 with a net liability fair value of $19.0 million; and swaps which have been designated as fair value hedges with a current aggregate notional amount of $384.7 millionJune 30, 2002 (amounts are in thousands):
6
(notional amounts range from $380.4 million to $396.4 million over the terms of the swaps) at interest rates ranging from 4.46% to 7.25% maturing at various dates ranging from 2003 to 2011 with a net asset fair value of $2.0 million.
| Cash Flow Hedges | Fair Value Hedges | Offsetting Swaps/Caps | Offsetting Reverse Swap/Caps | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current 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 March 31,June 30, 2002, certain joint ventureunconsolidated development partnerships in which the Company invested had entered into swaps to hedge the interest rate risk exposure on unconsolidated floating rate construction mortgage loans. The Operating Partnership has recorded its proportionate share of these qualifying hedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges with a current aggregate notional amount of $329.4$379.3 million (notional amounts range from $120.0$123.9 million to $538.1$562.3 million over the terms of the swaps) at interest rates ranging from 2.28% to 6.94% maturing at various dates ranging from 2002 to 2005 with a net liability fair value of $7.3$11.3 million.
As of March 31, 2002, there were approximately $25.5 million in deferred losses, net, included in accumulated other comprehensive loss. On March 31,June 30, 2002, the net derivative instruments were reported at their fair value as other liabilities of approximately $17.0$10.7 million and as a reduction to investment in unconsolidated entities of approximately $7.3$11.3 million. TheAs of June 30, 2002, there were approximately $30.8 million in deferred losses, net, included in accumulated other comprehensive loss. Based on the estimated fair values of the net derivative instruments at June 30, 2002, the Operating Partnership expects tomay recognize an estimated $12.1$16.4 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending March 31,June 30, 2003, of which $4.6$6.0 million is related to the unconsolidated development joint venture swaps.partnerships.
Other
In June 2001, the FASB issued SFAS No. 141,Business Combinations. SFAS No. 141 requires companies to account for all business combinations using the purchase method of accounting. SFAS No. 141 is effective for fiscal years beginning after December 15, 2001. The Operating Partnership adopted the standard effective January 1, 2002, but it has not had any impact on the Operating Partnership'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
8
approach. SFAS No. 142 is effective for the fiscal years beginning after December 15, 2001. The Operating Partnership adopted the standard effective January 1, 2002, but it has not had a material impact on the Operating Partnership's financial condition and results of operations.
In April 2002, the FASB issued SFAS No. 145,Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other items, rescinds the automatic classification of costs incurred on debt extinguishment as extraordinary charges. Instead, gains and losses from debt extinguishment should only be classified as extraordinary if they meet the "unusual and infrequently occurring" criteria outlined in APB No. 30. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Operating Partnership will adopt the standard effective January 1, 2003, but does not expect it to have a material impact on its financial condition and results of operations.
3. Partners' Capital
The following table presents the changes in the Operating Partnership's issued and outstanding OP Units for the quartersix months ended March 31,June 30, 2002:
| 2002 | |
---|---|---|
Operating Partnership's OP Units outstanding at January 1, | 294,818,566 | |
Issued to General Partner: | ||
Conversion of Series E Preference Units | ||
Conversion of Series H Preference Units | ||
Employee Share Purchase Plan | ||
Dividend | ||
Share | ||
Exercise of EQR options | ||
Restricted EQR share grants, net | ||
Issued to Limited Partners: | ||
Issuance through acquisitions | 2,520 | |
Operating Partnership's OP Units outstanding at | ||
7
The limited partners of the Operating Partnership as of March 31,June 30, 2002 include various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units (the "Limited Partners") and own an approximate 7.7%7.57% ownership interest in ERPOP. Subject to applicable securities law restrictions, the Limited Partners may exchange their OP Units for EQR Common Shares on a one-for-one basis.
EQR contributes all net proceeds from theits various equity offerings (including proceeds from exercise of options for EQR Common Shares) to the Operating Partnership inPartnership. In return for an increased ownership percentage. Duethose contributions, EQR receives a number of OP Units in ERPOP equal to the Limited Partners' ability to convert their interest into an ownership interestnumber of Common Shares it has issued in the general partner (onequity offering (or in the case of a one-for-one common share per OP Unit basis),preferred equity offering, a number of preference units in ERPOP equal in number and having the net offering proceeds are allocated between EQR (as general partner) andsame terms as the Limited Partners (to the extent represented by OP Units) to account for the changepreferred shares issued in their respective percentage ownership of the equity of the Operating Partnership.offering).
9
The following table presents the Operating Partnership's issued and outstanding "Preference Units" as of March 31,June 30, 2002 and December 31, 2001:
| | Amounts in thousands | |||||||
---|---|---|---|---|---|---|---|---|---|
| Annual Dividend Rate per Unit (1) | ||||||||
| March 31, 2002 | December 31, 2001 | |||||||
Preference Units: | |||||||||
91/8% Series B Cumulative Redeemable Preference Units; liquidation value $250 per unit; 500,000 units issued and outstanding at March 31, 2002 and December 31, 2001 | $ | 22.81252 | $ | 125,000 | $ | 125,000 | |||
91/8% Series C Cumulative Redeemable Preference Units; liquidation value $250 per unit; 460,000 units issued and outstanding at March 31, 2002 and December 31, 2001 | $ | 22.81252 | 115,000 | 115,000 | |||||
8.60% Series D Cumulative Redeemable Preference Units; liquidation value $250 per unit; 700,000 units issued and outstanding at March 31, 2002 and December 31, 2001 | $ | 21.50000 | 175,000 | 175,000 | |||||
Series E Cumulative Convertible Preference Units; liquidation value $25 per unit; 3,329,198 and 3,365,794 units issued and outstanding at March 31, 2002 and December 31, 2001, respectively | $ | 1.75000 | 83,230 | 84,145 | |||||
71/4% Series G Convertible Cumulative Preference Units; liquidation value $250 per unit; 1,264,700 units issued and outstanding at March 31, 2002 and December 31, 2001 | $ | 18.12500 | 316,175 | 316,175 | |||||
7.00% Series H Cumulative Convertible Preference Units, liquidation value $25 per unit; 53,311 and 54,027 units issued and outstanding at March 31, 2002 and December 31, 2001, respectively | $ | 1.75000 | 1,333 | 1,351 | |||||
8.29% Series K Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at March 31, 2002 and December 31, 2001 | $ | 4.14500 | 50,000 | 50,000 | |||||
7.625% Series L Cumulative Redeemable Preference Units; liquidation value $25 per unit; 4,000,000 units issued and outstanding at March 31, 2002 and December 31, 2001 | $ | 1.90625 | 100,000 | 100,000 | |||||
$ | 965,738 | $ | 966,671 | ||||||
| | Amounts in thousands | |||||||
---|---|---|---|---|---|---|---|---|---|
| Annual Dividend Rate per Unit(1) | ||||||||
| June 30, 2002 | December 31, 2001 | |||||||
Preference Units: | |||||||||
91/8% Series B Cumulative Redeemable Preference Units; liquidation value $250 per unit; 500,000 units issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 22.81252 | $ | 125,000 | $ | 125,000 | |||
91/8% Series C Cumulative Redeemable Preference Units; liquidation value $250 per unit; 460,000 units issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 22.81252 | 115,000 | 115,000 | |||||
8.60% Series D Cumulative Redeemable Preference Units; liquidation value $250 per unit; 700,000 units issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 21.50000 | 175,000 | 175,000 | |||||
Series E Cumulative Convertible Preference Units; liquidation value $25 per unit; 2,716,012 and 3,365,794 units issued and outstanding at June 30, 2002 and December 31, 2001, respectively | $ | 1.75000 | 67,900 | 84,145 | |||||
71/4% Series G Convertible Cumulative Preference Units; liquidation value $250 per unit; 1,264,700 units issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 18.12500 | 316,175 | 316,175 | |||||
7.00% Series H Cumulative Convertible Preference Units, liquidation value $25 per unit; 51,228 and 54,027 units issued and outstanding at June 30, 2002 and December 31, 2001, respectively | $ | 1.75000 | 1,281 | 1,351 | |||||
8.29% Series K Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 4.14500 | 50,000 | 50,000 | |||||
7.625% Series L Cumulative Redeemable Preference Units; liquidation value $25 per unit; 4,000,000 units issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 1.90625 | 100,000 | 100,000 | |||||
$ | 950,356 | $ | 966,671 | ||||||
810
The following table presents the issued and outstanding Preference Interests as of March 31,June 30, 2002 and December 31, 2001:
| | Amounts in thousands | |||||||
---|---|---|---|---|---|---|---|---|---|
| Annual Dividend Rate per Unit (1) | ||||||||
| March 31, 2002 | December 31, 2001 | |||||||
Preference Interests: | |||||||||
8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 2002 and December 31, 2001 | $ | 3.8125 | 11,500 | 11,500 | |||||
$ | 246,000 | $ | 246,000 | ||||||
| | Amounts in thousands | |||||||
---|---|---|---|---|---|---|---|---|---|
| Annual Dividend Rate per Unit(1) | ||||||||
| June 30, 2002 | December 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 | ||||||
911
The following table presents the Operating Partnership's issued and outstanding Junior Convertible Preference Units (the "Junior Preference Units") as of March 31,June 30, 2002 and December 31, 2001:
| | Amounts in thousands | |||||||
---|---|---|---|---|---|---|---|---|---|
| Annual Dividend Rate per Unit (1) | ||||||||
| March 31, 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 March 31, 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 March 31, 2002 and December 31, 2001 | $ | 2.00000 | 184 | 184 | |||||
$ | 5,846 | $ | 5,846 | ||||||
| | Amounts in thousands | |||||||
---|---|---|---|---|---|---|---|---|---|
| Annual 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 | ||||||
4. Real Estate Acquisitions
During the quartersix months ended March 31,June 30, 2002, the Operating Partnership acquired one property located in Sunrise, Floridathe seven properties listed below from an unaffiliated party, consisting of 368 unitsparties for a total purchase price of approximately $26.0$166.5 million.
Date Acquired | Property | Location | Number of Units | Acquisition 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 | |||||||
5. Real Estate Dispositions
During the quartersix months ended March 31,June 30, 2002, the Operating Partnership disposed of the fourtwenty-three properties listed below to unaffiliated parties andparties. The Operating Partnership recognized a net gain
12
on sales of discontinued operations of approximately $2.8$28.4 million and a net gain on these sales.sales of unconsolidated entities of approximately $5.2 million.
Date Disposed | Property | Location | Number Of Units | Disposition 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 | |||||
444 | $ | 30,724 | |||||||
In addition, during the quarter ended March 31, 2002,Date
Disposed Property Location Number Of
Units Disposition
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
6. Commitments to Acquire/Dispose of Real Estate
As of March 31,June 30, 2002, in addition to the property that was subsequently acquired as discussed in Note 17, the Operating Partnership had entered into separate agreements to acquire two multifamily properties containing 736603 units from unaffiliated parties. The Operating Partnership expects a combined purchase price of approximately $55.3 million, including the assumption of mortgage indebtedness of approximately $14.0$42.1 million.
As of March 31,June 30, 2002, in addition to the properties that were subsequently disposed of as discussed in Note 17, the Operating Partnership had entered into separate agreements to dispose of twenty-fourfourteen multifamily properties containing 4,5642,756 units to unaffiliated parties. The Operating Partnership expects a combined disposition price of approximately $244.0$134.5 million.
The closings of these pending transactions are subject to certain contingencies and conditions,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 Entities
The Operating Partnership has entered into various joint venture agreements with third party companies. The following table summarizes the Operating Partnership's investments in unconsolidated entities as of March 31,June 30, 2002 (amounts in thousands except for project and unit amounts):
| Institutional Joint Ventures | Stabilized Development Joint Ventures (1) | Joint Venture Projects Under Development | Lexford / Other | Totals | Institutional Joint Ventures | Stabilized Development Projects(1) | Projects Under Development | Lexford / Other | Totals | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total projects | 45 | 10 | 16(2 | ) | 27 | 98 | 45 | 10 | 18 | 26 | 99 | (2) | |||||||||||||||||||
Total units | 10,846 | 3,038 | 5,179(2 | ) | 3,348 | 22,411 | 10,846 | 3,038 | 5,523 | 3,313 | 22,720 | (2) | |||||||||||||||||||
ERPOP's percentage ownership of mortgage notes payable | 25.0 | % | 85.4 | % | 100.0 | % | 15.6 | % | 25.0 | % | 96.4 | % | 100.0 | % | 19.5 | % | |||||||||||||||
ERPOP's share of mortgage notes payable (4) | $ | 121,200 | $ | 214,615 | $ | 285,655(3 | ) | $ | 10,509 | $ | 631,979 | ||||||||||||||||||||
ERPOP's share of mortgage notes payable(4) | $ | 121,200 | $ | 242,431 | $ | 341,703 | $ | 12,913 | $ | 718,247 | (3) | ||||||||||||||||||||
Investments in unconsolidated entities includesinclude the Unconsolidated Properties as well as various uncompleted development joint venture properties.properties under construction or pending construction. The Operating Partnership does not consolidate these entities, as it does not have sole control of major decisions (such as sale and/or financing/refinancing). The Operating Partnership's common equity ownership interests in these entities range from 1.5%4.5% to 57.0% at March 31,June 30, 2002.
These investments are accounted for utilizing the equity method of accounting. Under the equity method of accounting, the net equity investment of the Operating Partnership is reflected on the consolidated balance sheets and after the project is completed, the consolidated statements of operations include the Operating Partnership's share of net income or loss from the unconsolidated entity. Prior to the project being completed, the Operating Partnership capitalizedcapitalizes 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 quarterssix months ended March 31,June 30, 2002 and 2001, the Operating Partnership capitalized $3.8$8.0 million and $4.3
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$9.3 million, respectively, in interest cost related to its unconsolidated joint venture development projects (which reduced interest expense incurred in the consolidated statements of operations).
The Operating Partnership generally contributes between 25% and 30%35% of the project cost of the joint venturesunconsolidated projects under development, with the remaining cost financed through third-party construction mortgages.
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8. Deposits—Restricted
As of March 31,June 30, 2002, deposits-restricted totaled $210.5$149.9 million and primarily included the following:
9. Mortgage Notes Payable
As of March 31,June 30, 2002, the Operating Partnership had outstanding mortgage indebtedness of approximately $3.3$3.2 billion.
During the quartersix months ended March 31,June 30, 2002, the Operating Partnership:
As of March 31,June 30, 2002, scheduled maturities for the Operating Partnership's outstanding mortgage indebtedness were at various dates through October 1, 2033. The interest rate range on the Operating Partnership's mortgage debt was 1.30%1.10% to 12.465% at March 31,June 30, 2002. During the quartersix months ended March 31,June 30, 2002, the weighted average interest rate was 6.42%6.41%.
10. Notes
As of March 31,June 30, 2002, the Operating Partnership had outstanding unsecured notes of approximately $2.6$2.4 billion.
During the quartersix months ended March 31,June 30, 2002, the Operating Partnership:
As of March 31,June 30, 2002, scheduled maturities for the Operating Partnership's outstanding notes are at various dates through 2029. The interest rate range on the Operating Partnership's notes was 4.75% to 7.95%7.75% at March 31,June 30, 2002. During the quartersix months ended March 31,June 30, 2002, the weighted average interest rate was 6.39%6.50%.
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11. Line of Credit
TheOn May 30, 2002, the Operating Partnership hasobtained a new three-year $700.0 million unsecured revolving credit facility with potential borrowingsmaturing May 29, 2005. The new line of upcredit replaced the Operating Partnership's $700.0 million unsecured revolving credit facility that was scheduled to $700.0 million.expire 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 Operating Partnership's credit rating, or based upon bids received from the lending group. The prior existing revolving credit facility was terminated upon the closing of the new facility. As of March 31,June 30, 2002, no amounts were outstanding and $57.4$84.0 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit. During the quartersix months ended March 31,June 30, 2002, the weighted average interest rate was 2.50%.
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12. Calculation of Net Income Per Weighted Average OP Unit
The following tables set forth the computation of net income per OP Unit—basic and net income per OP Unit—diluted:
| | Quarter Ended March 31, | | Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | | 2002 | 2001 | 2002 | 2001 | ||||||||||||||
| | (Amounts in thousands except per OP Unit amounts) | | (Amounts in thousands except per OP Unit amounts) | ||||||||||||||||||
Numerator: | Numerator: | Numerator: | ||||||||||||||||||||
Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of unconsolidated entities, discontinued operations, extraordinary items, cumulative effect of change in accounting principle and allocation to preference unit/interest distributions | $ | 99,246 | $ | 103,869 | ||||||||||||||||||
Allocation to Minority Interests — Partially Owned Properties | (806 | ) | (105 | ) | ||||||||||||||||||
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 allocation to preference unit/interest distributions | 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 allocation to preference unit/interest distributions | $ | 192,833 | $ | 204,896 | $ | 95,769 | $ | 102,976 | |||||||||||||
Allocation to Minority Interests—Partially Owned Properties | Allocation to Minority Interests—Partially Owned Properties | (1,325 | ) | (238 | ) | (519 | ) | (133 | ) | |||||||||||||
Income from investments in unconsolidated entities | Income from investments in unconsolidated entities | 226 | 350 | Income from investments in unconsolidated entities | 233 | 960 | 7 | 610 | ||||||||||||||
Allocation to Preference Units | Allocation to Preference Units | (19,391 | ) | (24,459 | ) | Allocation to Preference Units | (38,513 | ) | (48,672 | ) | (19,122 | ) | (24,213 | ) | ||||||||
Allocation to Preference Interests | Allocation to Preference Interests | (5,053 | ) | (3,958 | ) | Allocation to Preference Interests | (10,106 | ) | (8,557 | ) | (5,053 | ) | (4,599 | ) | ||||||||
Allocation to Junior Preference Units | Allocation to Junior Preference Units | (81 | ) | (109 | ) | Allocation to Junior Preference Units | (162 | ) | (190 | ) | (81 | ) | (81 | ) | ||||||||
Income before net gain on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle | 74,141 | 75,588 | ||||||||||||||||||||
Net gain on sales of unconsolidated entities | 5,657 | — | ||||||||||||||||||||
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle | Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle | 142,960 | 148,199 | 71,001 | 74,560 | |||||||||||||||||
Net gain (loss) on sales of unconsolidated entities | Net gain (loss) on sales of unconsolidated entities | 5,246 | 339 | (411 | ) | 339 | ||||||||||||||||
Net gain on sales of discontinued operations | Net gain on sales of discontinued operations | 2,816 | 41,778 | Net gain on sales of discontinued operations | 28,446 | 46,226 | 25,630 | 4,448 | ||||||||||||||
Discontinued operations, net | Discontinued operations, net | 277 | 143 | Discontinued operations, net | 2,994 | 3,666 | 535 | 1,574 | ||||||||||||||
Extraordinary items | Extraordinary items | (97 | ) | 311 | Extraordinary items | (468 | ) | 106 | (371 | ) | (205 | ) | ||||||||||
Cumulative effect of change in accounting principle | Cumulative effect of change in accounting principle | — | (1,270 | ) | Cumulative effect of change in accounting principle | — | (1,270 | ) | — | — | ||||||||||||
Numerator for net income per OP Unit — basic | 82,794 | 116,550 | ||||||||||||||||||||
Numerator for net income per OP Unit—basic | Numerator for net income per OP Unit—basic | 179,178 | 197,266 | 96,384 | 80,716 | |||||||||||||||||
Effect of dilutive securities: | Effect of dilutive securities: | Effect of dilutive securities: | ||||||||||||||||||||
Distributions on convertible preference units/interests | — | 1,692 | Distributions on convertible preference units/interests | — | 242 | 22 | — | |||||||||||||||
Numerator for net income per OP Unit — diluted | $ | 82,794 | $ | 118,242 | ||||||||||||||||||
Numerator for net income per OP Unit—diluted | Numerator for net income per OP Unit—diluted | $ | 179,178 | $ | 197,508 | $ | 96,406 | $ | 80,716 | |||||||||||||
Denominator: | ||||||||||||||||||||||
Denominator for net income per OP Unit — basic | 294,106 | 289,659 | ||||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||
Convertible preference units/interests | — | 4,370 | ||||||||||||||||||||
Dilution for OP Units issuable upon assumed exercise/vesting of the Company's share options/restricted shares | 3,123 | 3,155 | ||||||||||||||||||||
Denominator for net income per OP Unit — diluted | 297,229 | 297,184 | ||||||||||||||||||||
Net income per OP Unit — basic | $ | 0.28 | $ | 0.40 | ||||||||||||||||||
Net income per OP Unit — diluted | $ | 0.28 | $ | 0.40 | ||||||||||||||||||
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| Quarter Ended March 31, | |||||
---|---|---|---|---|---|---|
| 2002 | 2001 | ||||
| (Amounts in thousands except per OP Unit amounts) | |||||
Net income per OP Unit — basic: | ||||||
Income before net gain on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per OP Unit — basic | $ | 0.25 | $ | 0.26 | ||
Net gain on sales of unconsolidated entities | 0.02 | — | ||||
Net gain on sales of discontinued operations | 0.01 | 0.14 | ||||
Discontinued operations, net | — | — | ||||
Extraordinary items | — | — | ||||
Cumulative effect of change in accounting principle | — | — | ||||
Net income per OP Unit — basic | $ | 0.28 | $ | 0.40 | ||
Net income per OP Unit — diluted: | ||||||
Income before net gain on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per OP Unit — diluted | $ | 0.25 | $ | 0.26 | ||
Net gain on sales of unconsolidated entities | 0.02 | — | ||||
Net gain on sales of discontinued operations | 0.01 | 0.14 | ||||
Discontinued operations, net | — | — | ||||
Extraordinary items | — | — | ||||
Cumulative effect of change in accounting principle | — | — | ||||
Net income per OP Unit — diluted | $ | 0.28 | $ | 0.40 | ||
Denominator: | ||||||||||||||
Denominator for net income per OP Unit—basic | 294,957 | 290,086 | 295,799 | 290,509 | ||||||||||
Effect of dilutive securities: | ||||||||||||||
Convertible preference units/interests | — | 370 | 75 | — | ||||||||||
Dilution for OP Units issuable upon assumed exercise/vesting of the Company's share options/restricted shares | 3,465 | 3,361 | 3,620 | 3,430 | ||||||||||
Denominator for net income per OP Unit—diluted | 298,422 | 293,817 | 299,494 | 293,939 | ||||||||||
Net income per OP Unit—basic | $ | 0.61 | $ | 0.68 | $ | 0.33 | $ | 0.28 | ||||||
Net income per OP Unit—diluted | $ | 0.60 | $ | 0.67 | $ | 0.32 | $ | 0.27 | ||||||
Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||
| (Amounts in thousands except per OP Unit amounts) | |||||||||||
Net income per OP Unit—basic: | ||||||||||||
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per OP Unit—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 OP Unit—basic | $ | 0.61 | $ | 0.68 | $ | 0.33 | $ | 0.28 | ||||
Net income per OP Unit—diluted: | ||||||||||||
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per OP Unit—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 OP Unit—diluted | $ | 0.60 | $ | 0.67 | $ | 0.32 | $ | 0.27 | ||||
Convertible preference units/interests that could be converted into 15,853,68715,648,034 and 10,831,70414,921,384 weighted average Common Shares (which would be contributed to the Operating Partnership in exchange for OP Units) 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 March 31,June 30, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per OP Unit because the effects would be anti-dilutive.
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On October 11, 2001, the Operating Partnership effected a two-for-one split of its OP Units to unitholders of record as of September 21, 2001. All per OP Unit data and numbers of OP Units have been retroactively adjusted to reflect the OP Unit split.
13. Discontinued Operations
In August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. The Operating Partnership adopted the standard effective January 1, 2002, which did not have a material effect on the Operating Partnership's financial condition and results of operations.
Under the provisions of SFAS No. 144, for long-lived assets to be held and used, the Operating Partnership first determines whether any indicators of impairment exist. If indicators exist, the Operating Partnership 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.
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 Operating Partnership has determined it will sell the asset. Long-lived assets held for disposition are reported at the lower of 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 Operating Partnership 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.
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The components of discontinued operations for the six months and quarters ended March 31,June 30, 2002 and 2001 are outlined below and include the results of operations through the date of each respective sale for the six months and quarter ended March 31,June 30, 2002 and a full six months and quarter of operations for the six months and quarter ended March 31,June 30, 2001, for the following:
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| | Quarter Ended March 31, | | Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | | 2002 | 2001 | 2002 | 2001 | ||||||||||||||
| | (Amounts in thousands) | | (Amounts in thousands) | ||||||||||||||||||
REVENUES | REVENUES | REVENUES | ||||||||||||||||||||
Rental income | $ | 666 | $ | 1,136 | Rental income | $ | 8,762 | $ | 12,858 | $ | 2,628 | $ | 6,432 | |||||||||
Interest and other income | 3 | — | Interest and other income | 3 | 26 | 1 | 25 | |||||||||||||||
Furniture income | 1,365 | 14,872 | Furniture income | 1,361 | 30,027 | (4 | ) | 15,155 | ||||||||||||||
Total revenues | 2,034 | 16,008 | Total revenues | 10,126 | 42,911 | 2,625 | 21,612 | |||||||||||||||
EXPENSES | EXPENSES | EXPENSES | ||||||||||||||||||||
Property and maintenance | 208 | 301 | Property and maintenance | 2,787 | 3,332 | 1,267 | 1,617 | |||||||||||||||
Real estate taxes and insurance | 60 | 84 | Real estate taxes and insurance | 881 | 1,162 | 254 | 589 | |||||||||||||||
Depreciation | 181 | 303 | Depreciation | 2,125 | 3,309 | 569 | 1,662 | |||||||||||||||
Interest expense incurred, net | 5 | 58 | Interest expense incurred, net | 36 | 300 | — | 147 | |||||||||||||||
Furniture expenses | 1,303 | 14,829 | Furniture expenses | 1,303 | 30,499 | — | 15,670 | |||||||||||||||
Amortization of goodwill | — | 290 | Amortization of goodwill | — | 643 | — | 353 | |||||||||||||||
Total expenses | 1,757 | 15,865 | Total expenses | 7,132 | 39,245 | 2,090 | 20,038 | |||||||||||||||
Discontinued operations, net | Discontinued operations, net | $ | 277 | $ | 143 | Discontinued operations, net | $ | 2,994 | $ | 3,666 | $ | 535 | $ | 1,574 | ||||||||
14. Commitments and Contingencies
The Operating Partnership, as an owner of real estate, is subject to various environmental laws of Federal and local governments. Compliance by the Operating Partnership with existing laws has not had a material adverse effect on the Operating Partnership's financial condition and results of operations. However, the Operating Partnership cannot predict the impact of new or changed laws or regulations on its current properties or on properties that it may acquire in the future.
The Operating Partnership does not believe there is any litigation threatened against the Operating Partnership other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by liability insurance, none of which is expected to have a material adverse effect on the consolidated financial statements of the Operating Partnership.
In regards to the funding of properties in the development and/or earnout stage and the joint venture agreements with multifamily residential real estate developers, the Operating Partnership funded a net total of $5.6$40.3 million during the quartersix months ended March 31, 2002. The Operating Partnership expects to fund approximately $22.7 million in connection with these properties for the remainder ofJune 30, 2002. In connection with one joint venturedevelopment agreement, the Operating Partnership has an obligation to fund up to an additional $6.5$9.5 million to guarantee third party construction financing. As of March 31,June 30, 2002, the Operating Partnership has 2021 projects under development (includes three consolidated projects) with estimated completion dates ranging from June 30, 2002 through March 31, 2004.
For one development joint venture agreement, the Operating Partnership's joint venture partner has the right, at any time following completion of a project, to stipulate a value for such project and offer to sell its interest in the project to the Operating Partnership based on such value. If the Operating Partnership chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Operating Partnership's joint venture 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 joint venture agreement, the Operating Partnership's joint venture partner has the right, at any time following completion of a project, to require the Operating Partnership to purchase the joint
15
venture partners' interest in that project at a mutually agreeable price. If the Operating Partnership and the joint venture partner are unable to agree on a price, both parties will obtain appraisals. If the appraised values vary by more than 10%, both the Operating Partnership and the joint ventureits partner will agree on a third appraiser to determine
19
which original appraisal is closest to its determination of value. The Operating Partnership may elect at that time not to purchase the property and instead, authorize the joint ventureits 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 Operating Partnership at the agreed-upon price.
The Operating Partnership provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of March 31,June 30, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.
15. Asset Impairment
For the quarterssix months ended March 31,June 30, 2002 and 2001, the Operating Partnership recorded approximately $0.3$0.6 million and $3.0$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 Operating Partnership reviewed the current relative value of each investment based on existing economic conditions and current events. These impairment losses are reflected on the statement of operations in total expenses and include the write-down of assets classified as other assets and investments in unconsolidated entities.
16. Reportable Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management. Senior management decides how resources are allocated and assesses performance on a monthly basis.
The Operating Partnership's primary business is owning, managing, and operating multifamily residential properties, which includes the generation of rental and other related income through the leasing of apartment units to residents. Senior management evaluates the performance of each of our apartment communities on an individual basis, however, each of our apartment communities has similar economic characteristics, residents, and products and services so they have been aggregated into one reportable segment. The Operating Partnership's rental real estate segment comprisescomprised approximately 98.9%98.7% and 97.9%97.6% of total revenues for the six months ended June 30, 2002, and 2001, respectively, and approximately 98.5% and 97.5% of total revenues for the quarters ended March 31,June 30, 2002 and 2001, respectively. The Operating Partnership's rental real estate segment comprisescomprised approximately 99.6% and 99.4% of total assets at March 31,June 30, 2002 and December 31, 2001, respectively.
The primary financial measure for the Operating Partnership's rental real estate segment is net operating income ("NOI"), which represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense (all as reflected in the accompanying 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 $309.1$613.4 million and $308.1$609.5 million for the six months ended June 30, 2002 and 2001, respectively, and approximately $307.9 million and $304.8 million for the quarters ended March 31,June 30, 2002 and 2001, respectively.
During the acquisition, development and/or disposition of real estate, the NOI return on total capitalized costs is the primary measure of financial performance (capitalization rate) the Operating Partnership considers.
The Operating Partnership's fee and asset management activity areis immaterial and dodoes not meet the threshold requirements of a reportable segment as provided for in SFAS No. 131.
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17. Subsequent EventsEvents/Other
Subsequent to March 31, 2002 and through April 26,During the six months ended June 30, 2002, the Operating Partnership:
Subsequent to June 30, 2002 and through July 29, 2002, the Operating Partnership:
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Operating Partnership's annual report on Form 10-K for the year ended December 31, 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 Operating Partnership to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, the following:
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Operating Partnership undertakes no obligation to publicly release any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Results of Operations
The following table summarizes the number of properties and related units for the year-to-date periods presented:
| Properties | Units | Purchase / Sale Price $ Millions | |||||
---|---|---|---|---|---|---|---|---|
At December 31, 2000 | 1,104 | 227,704 | ||||||
Q1 2001 Acquisitions | 7 | 1,721 | $ | 189.2 | ||||
Q1 2001 Dispositions | (15 | ) | (2,272 | ) | $ | 117.7 | ||
At March 31, 2001 | 1,096 | 227,153 | ||||||
Q2/Q3/Q4 2001 Acquisitions | 7 | 1,702 | $ | 198.9 | ||||
Q2/Q3/Q4 2001 Dispositions | (34 | ) | (6,535 | ) | $ | 299.2 | ||
Q2/Q3/Q4 2001 Completed Developments | 7 | 2,505 | ||||||
Q4 2001 Unit Configuration Changes | — | (24 | ) | |||||
At December 31, 2001 | 1,076 | 224,801 | ||||||
Q1 2002 Acquisitions | 1 | 368 | $ | 26.0 | ||||
Q1 2002 Dispositions | (5 | ) | (757 | ) | $ | 43.7 | ||
Q1 2002 Completed Developments | 1 | 588 | ||||||
At March 31, 2002 | 1,073 | 225,000 | ||||||
| Properties | Units | Purchase / Sale Price $ Millions | |||||
---|---|---|---|---|---|---|---|---|
At 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 | ||||||
22
The Operating Partnership's acquisition and disposition activity has impacted overall results of operations for the six months and quarters ended March 31,June 30, 2002 and 2001. Significant changes in revenues and expenses have resulted primarily from the consolidation of previously Unconsolidated Properties in July 2001, the disposition of the Globe furniture rental business on January 11, 2002, as well as the properties acquired and developments completed in 2001 Acquisitions and Completed Development properties,2002, which have been partially offset by the disposition of the 2002properties disposed in 2001 and the 2001 Disposed properties.2002. Significant change in expenses has also resulted from an increase in insurance costs and general and administrative costs and reductions in variable interest rates, impairment charges and goodwill amortization. This impact is discussed in greater detail in the following paragraphs.
17
Properties that the Operating Partnership owned for all of both the six month periods ended June 30, 2002 and June 30, 2001 (the "Six-Month 2002 Same Store Properties"), which represented 194,491 units, and properties that the Operating Partnership owned for all of both the quarters ended March 31,June 30, 2002 and March 31,June 30, 2001 (the "First"Second Quarter 2002 Same Store Properties"), which represented 197,305196,211 units, also impacted the Operating Partnership's results of operationsoperations. Both the Six-Month 2002 Same Store Properties and Second Quarter 2002 Same Store Properties are discussed as well in the following paragraphs.
Comparison of the quartersix months ended March 31,June 30, 2002 to the quartersix months ended March 31,June 30, 2001
For the quartersix months ended March 31,June 30, 2002, 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 decreased by approximately $4.6$12.1 million when compared to the quartersix months ended March 31,June 30, 2001.
Revenues from the First QuarterSix-Month 2002 Same Store Properties decreased primarily as a result of lower rental rates charged new residents, increased concessions and lower occupancy at certain properties. Property operating expenses from the First QuarterSix-Month 2002 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, remained relatively stable with increases in real estate taxes and insurance costs offset by decreasesa decrease in utility costs. The following tables provide comparative revenue, expenses,expense, net operating income ("NOI") and weighted average occupancy for the First QuarterSix-Month 2002 Same Store Properties:
June 30, 2002 Year-to-Date Same Store Results
$ in Millions—194,491 Same Store Units
Same Store Net Operating Income ("NOI") | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
$ in Millions — 197,305 Same Store Units | ||||||||||
Description | Revenues | Expenses | NOI | |||||||
Q1 2002 | $ | 466.0 | $ | 168.7 | $ | 297.3 | ||||
Q1 2001 | $ | 467.7 | $ | 168.9 | $ | 298.8 | ||||
Change | $ | (1.7 | ) | $ | (0.2 | ) | $ | (1.5 | ) | |
% Change | (0.4 | %) | (0.1 | %) | (0.5 | %) | ||||
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
93.98 | % | ||||
% | |||||
Change | ( | %) | |||
23
For 2002 properties that the Operating Partnership acquired prior to December 31, 2000 and willexpects to continue to own through December 31, 2002, the Operating Partnership anticipates the following operating assumptions for the year endedending December 31, 2002:
2002 to see the following operating assumptions:Operating Assumptions
Physical Occupancy | 93.0% | |
Revenue | ||
Expense | 1.0% to 1.5% | |
NOI | ||
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 First QuarterSix-Month 2002 Same Store Properties increased by approximately $1.4$9.3 million primarily as a result of revenue from properties the Operating Partnership'sPartnership acquired in 2001 Acquired Propertiesand 2002 and additional 2001 Partially Owned Properties.Properties that the Operating Partnership consolidated in 2001.
Interest and other income decreased by approximately $2.4$2.2 million, primarily as a result of lower balances available for investment and related interest rates being earned on the Operating Partnership's short-term investment accounts along with lower balances on deposit in tax-deferred exchange accounts.
Interest income—investment in mortgage notes decreased by $2.7$8.8 million as a result of the Operating Partnership consolidating these previously Unconsolidated Properties in July 2001. No additional interest income will be recognized on thesuch mortgage notes in future years as the Operating Partnership now consolidates the results related to these previously Unconsolidated Properties.
18
Property management expenses include off-site expenses associated with the self-management of the Operating Partnership's properties. These expenses increased by approximately $0.3$0.9 million or less than 2%2.5%. These expenses increased due to higher overall compensation costs related to a current period expense associated with EQR restricted shares/awards granted to key employees. The Operating Partnership continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets where the Operating Partnership does not have a significant management presence. As a result, the Operating Partnership was able to maintain off-site management expenses at a constant level between the two reporting periods.
Fee and asset management revenues, andnet of fee and asset management expenses, decreasedincreased slightly as a result of the Operating Partnership managing feweran additional 3,637 units quarter over quarter for outside owners and unconsolidated entities.at Fort Lewis starting in April 2002. As of March 31,June 30, 2002 and 2001, the Operating Partnership managed 16,53920,142 units and 20,30019,844 units, respectively, for third parties and the unconsolidated joint venture entities.
The Operating Partnership recorded impairment charges in 2002 totaling approximately $0.3$0.6 million, which is related to one investment in a technology entity. See Note 15 in the Notes to the Consolidated Financial Statements for further discussion.
Interest expense, including amortization of deferred financing costs, decreased approximately $5.1$6.5 million primarily due to lower variable interest rates. During the six months ended June 30, 2002, the Operating Partnership 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 Operating Partnership's indebtedness for the six months ended June 30, 2002 was 6.63% as compared to 7.07% for the six months ended June 30, 2001.
24
General and administrative expenses, which include corporate operating expenses, increased approximately $8.2 million between the six 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 Operating Partnership'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 EQR restricted shares/awards granted to key employees and additional compensation charges and costs associated with EQR'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 discontinued operations decreased approximately $17.8 million between the periods under comparison. This decrease is primarily the result of approximately 3,500 fewer number of units sold during the six months ended June 30, 2002 as compared to the six months ended June 30, 2001 (includes approximately 3,000 units sold into a joint venture in February 2001).
Comparison of the quarter ended June 30, 2002 to the quarter ended June 30, 2001
For the quarter ended June 30, 2002, 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 decreased by approximately $7.2 million when compared to the quarter ended June 30, 2001.
Revenues from the Second Quarter 2002 Same Store Properties decreased primarily as a result of lower rental rates charged new residents, increased concessions and lower occupancy at certain properties. Property operating expenses from the Second Quarter 2002 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, decreased primarily as a result of increases in real estate taxes and insurance costs partially offset by decreases in utility costs. The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the Second Quarter 2002 Same Store Properties:
Second Quarter 2002 Same Store Results
$ in Millions—196,211 Same Store Units
Description | Revenues | Expenses | NOI | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Q2 2002 | $ | 463.3 | $ | 173.3 | $ | 290.0 | |||||
Q2 2001 | $ | 473.4 | $ | 170.6 | $ | 302.8 | |||||
Change | $ | (10.1 | ) | $ | 2.7 | $ | (12.8 | ) | |||
% Change | (2.1 | %) | 1.6 | % | (4.2 | %) |
Same Store Occupancy Statistics
Q2 2002 | 94.01 | % | ||
Q2 2001 | 94.60 | % | ||
Change | (0.59 | %) |
Rental income from properties other than Second Quarter 2002 Same Store Properties increased by approximately $7.6 million primarily as a result of revenue from the properties the Operating Partnership acquired in 2001 and 2002 and additional Partially Owned Properties that the Operating Partnership consolidated in 2001.
25
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 Operating Partnership's short term investment accounts along with lower balances on deposit in tax-deferred exchange accounts.
Interest income—investment in mortgage notes decreased by $6.0 million as a result of the Operating Partnership consolidating previously Unconsolidated Properties in July 2001. No additional interest income will be recognized on such mortgage notes in future years as the Operating Partnership now consolidates the results related to these previously Unconsolidated Properties.
Property management expenses include off-site expenses associated with the self-management of the Operating Partnership's properties. These expenses increased by approximately $0.6 million or 3.2%. These expenses increased due to higher overall compensation costs related to a current period expense associated with EQR restricted shares/awards granted to key employees. The Operating Partnership continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets where the Operating Partnership does not have a significant management presence.
Fee and asset management revenues, net of fee and asset management expenses, increased slightly as a result of the Operating Partnership managing an additional 3,637 units at Fort Lewis starting in April 2002. As of June 30, 2002 and 2001, the Operating Partnership managed 20,142 units and 19,844 units, respectively, for third parties and unconsolidated entities.
The Operating Partnership recorded impairment charges in 2002 totaling approximately $0.3 million, which is related to one investment in a technology entity. See Note 15 in the Notes to the Consolidated Financial Statements for further discussion.
Interest expense, including amortization of deferred financing costs, decreased approximately $1.4 million primarily due to lower variable interest rates. During the quarter ended March 31,June 30, 2002, the Operating Partnership capitalized interest costs of approximately $5.9$6.4 million as compared to $6.0$6.8 million for the quarter ended March 31,June 30, 2001. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities. The effective interest cost on all of the Operating Partnership's indebtedness for the quarter ended March 31,June 30, 2002 was 6.51%6.75% as compared to 7.07% for the quarter ended March 31,June 30, 2001.
General and administrative expenses, which include corporate operating expenses, increased approximately $4.0$4.2 million between the quarters under comparison. This increase was primarily due to the addition ofhigher state income taxes from previouslyin Michigan and New Jersey as well as the income taxes incurred at one of the Operating Partnership's taxable REIT subsidiaries, which has an ownership interest in properties that in prior periods were classified as Unconsolidated Properties,Properties. In addition, retirement plan expenses for certain key executives, and higher overall compensation expenses including a current period expense associated with EQR restricted shares/awards granted to key employees.
Net gain on sales of unconsolidated entities increased by $5.7 million as a result ofemployees and additional compensation charges and costs associated with EQR's new President also contributed to the sale of one stabilized development joint venture property (296 units).increase.
Net gain on sales of discontinued operations decreasedincreased approximately $39.0$21.2 million between the periods under comparison. This decreaseincrease is primarily the result of a fewer number of unitsmore fully depreciated properties sold during the quarter ended March 31, 2002 (461 units) as compared to the quarter ended March 31, 2001 (5,283and an increase of approximately 1,000 units including interests in properties sold into institutional joint ventures).sold.
Liquidity and Capital Resources
As of January 1, 2002, the Operating Partnership had approximately $51.6 million of cash and cash equivalents and $505.0 million available under its line of credit, of which $59 million was restricted (not available for borrowings). After taking into effect the various transactions discussed in the following paragraphs, the Operating Partnership's cash and cash equivalents balance at March 31,June 30, 2002 was
26
approximately $249.8$88.9 million and the amount available on the Operating Partnership's line of credit was $700.0 million, of which $57.4$84.0 million was restricted (not available for borrowings).
Part of the Operating Partnership's acquisition and development funding strategiesstrategy and the funding of the Operating Partnership's investment in various joint venturesunconsolidated entities is to utilize its line of credit and to subsequently repay the line of credit from the disposition of Properties, retained cash flows or the issuance of additional equity or debt securities. Continuing to utilize this strategy during the quartersix months ended March 31,June 30, 2002, EQR and/or the Operating Partnership:
19
All of these proceeds were utilized to:
During the quartersix months ended March 31,June 30, 2002, the Operating Partnership:
27
The Operating Partnership's total debt summary and debt maturity schedule, as of March 31,June 30, 2002, are as follows:
Debt Summary as of June 30, 2002
Debt Summary as of March 31, 2002 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | $ Millions | Weighted Average Rate | | $ Millions | Weighted Average Rate | ||||||||
Secured | Secured | $ | 3,279 | 6.29 | % | Secured | $ | 3,210 | 6.28 | % | ||||
Unsecured | Unsecured | 2,556 | 6.62 | % | Unsecured | 2,439 | 6.52 | % | ||||||
Total | $ | 5,835 | 6.44 | % | Total | $ | 5,649 | 6.39 | % | |||||
Fixed Rate | Fixed Rate | $ | 5,130 | 6.94 | % | Fixed Rate | $ | 4,965 | 6.89 | % | ||||
Floating Rate | Floating Rate | 705 | 2.79 | % | Floating Rate | 684 | 2.72 | % | ||||||
Total | $ | 5,835 | 6.44 | % | Total | $ | 5,649 | 6.39 | % | |||||
Above Totals Include: | Above Totals Include: | Above Totals Include: | ||||||||||||
Total Tax Exempt | Total Tax Exempt | $ | 974 | 3.82 | % | Total Tax Exempt | $ | 958 | 3.75 | % | ||||
Unsecured Revolving Credit Facility | Unsecured Revolving Credit Facility | $ | — | — | Unsecured Revolving Credit Facility | $ | — | — |
Debt Maturity Schedule as of June 30, 2002
Debt Maturity Schedule as of March 31, 2002 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year | Year | $ Millions | % of Total | $ Millions | % of Total | ||||||||
2002* | $ | 387 | 6.6 | % | |||||||||
2003 | 306 | 5.2 | % | ||||||||||
2004 | 596 | 10.2 | % | ||||||||||
2005 | 717 | 12.3 | % | ||||||||||
2006 | 440 | 7.5 | % | ||||||||||
2007 | 277 | 4.7 | % | ||||||||||
2008 | 496 | 8.5 | % | ||||||||||
2009 | 411 | 7.0 | % | ||||||||||
2010 | 262 | 4.5 | % | ||||||||||
2011+ | 1,943 | 33.3 | % | ||||||||||
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 | Total | $ | 5,835 | 100.0 | % | $ | 5,649 | 100.0 | % | ||||
*
The Operating Partnership's "Consolidated Debt-to-Total Market Capitalization Ratio" as of March 31,June 30, 2002 is presented in the following table. The Operating Partnership calculates the equity component of its market
20
capitalization as the sum of (i) the total outstanding OP Units at the equivalent market value of the closing price of EQR's Common Shares on the New York Stock Exchange; (ii) the "OP Unit Equivalent" of all convertible preference interests/units; and (iii) the liquidation value of all perpetual preference interests/units outstanding.
28
Capitalization as of June 30, 2002
Capitalization as of March 31, 2002 | ||||||||||||||
Total Debt | $ | 5,835,463,307 | $ | 5,649,483,792 | ||||||||||
OP Units | 296,557,258 | 298,023,286 | ||||||||||||
OP Unit Equivalents (see below) | 15,820,176 | 15,134,806 | ||||||||||||
Total Outstanding at quarter-end | 312,377,434 | 313,158,092 | ||||||||||||
Price of EQR Common Shares at March 28, 2002 | $ | 28.74 | ||||||||||||
EQR Common Share Price at June 28, 2002 | $ | 28.75 | ||||||||||||
8,977,727,453 | 9,003,295,145 | |||||||||||||
Perpetual Preference Units Liquidation Value | 565,000,000 | 565,000,000 | ||||||||||||
Perpetual Preference Interests Liquidation Value | 211,500,000 | 211,500,000 | ||||||||||||
Total Market Capitalization | $ | 15,589,690,760 | $ | 15,429,278,937 | ||||||||||
Debt/Total Market Capitalization | 37.43 | % | 36.62 | % |
Convertible Preference Units, Preference Interests
and Junior Preference Units
As of June 30, 2002
Convertible Preference Units, Preference Interests and Junior Preference Units As of March 31, 2002 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Units | Conversion Ratio | OP Unit Equivalents | | Units | Conversion Ratio | OP Unit Equivalents | ||||||
Preference Units: | Preference Units: | Preference Units: | ||||||||||||
Series E | 3,329,198 | 1.1128 | 3,704,732 | Series E | 2,716,012 | 1.1128 | 3,022,378 | |||||||
Series G | 1,264,700 | 8.5360 | 10,795,479 | Series G | 1,264,700 | 8.5360 | 10,795,479 | |||||||
Series H | 53,311 | 1.4480 | 77,194 | Series H | 51,228 | 1.4480 | 74,178 | |||||||
Preference Interests: | Preference Interests: | Preference Interests: | ||||||||||||
Series H | 190,000 | 1.5108 | 287,052 | Series H | 190,000 | 1.5108 | 287,052 | |||||||
Series I | 270,000 | 1.4542 | 392,634 | Series I | 270,000 | 1.4542 | 392,634 | |||||||
Series J | 230,000 | 1.4108 | 324,484 | Series J | 230,000 | 1.4108 | 324,484 | |||||||
Junior Preference Units: | Junior Preference Units: | Junior Preference Units: | ||||||||||||
Series A | 56,616 | 4.081600 | 231,084 | Series A | 56,616 | 4.081600 | 231,084 | |||||||
Series B | 7,367 | 1.020408 | 7,517 | Series B | 7,367 | 1.020408 | 7,517 | |||||||
Total Convertible | Total Convertible | 5,401,192 | 15,820,176 | Total Convertible | 4,785,923 | 15,134,806 | ||||||||
The Operating Partnership's policy is to maintain a ratio of consolidated debt-to-total market capitalization of less than 50%.
From AprilJuly 1, 2002 through April 26,July 29, 2002, the Operating Partnership:
During the remainder of 2002, the Operating Partnership expects to fund approximately $22.7 million related to wholly owned developments and joint venture projects under development.29
Investments in Unconsolidated Entities
In connection with one joint venturedevelopment agreement, the Operating Partnership has an obligation to fund up to an additional $6.5$9.5 million to guarantee third party construction financing. As of March 31,June 30, 2002, the Operating Partnership has 2018 projects under development with estimated completion dates ranging from June 30, 2002 through March 31, 2004.
21
For one development joint venture agreement, the Operating Partnership's joint venture partner has the right, at any time following completion of a project, to stipulate a value for such project and offer to sell its interest in the project to the Operating Partnership based on such value. If the Operating Partnership chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Operating Partnership's joint venture 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 joint venture agreement, the Operating Partnership's joint venture partner has the right, at any time following completion of a project, to require the Operating Partnership to purchase the joint venture partners' interest in that project at a mutually agreeable price. If the Operating Partnership and the joint venture partner are unable to agree on a price, both parties will obtain appraisals. If the appraised values vary by more than 10%, both the Operating Partnership and the joint ventureits partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value. The Operating Partnership may elect at that time not to purchase the property and instead, authorize the joint ventureits 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 Operating Partnership at the agreed-upon price.
Capitalization of Fixed Assets and Improvements to Real Estate:
DuringOur policy with respect to capital expenditures is generally to capitalize expenditures that improve the quarter ended March 31, 2002,value of the Operating Partnership's totalproperty or extend the useful life of the component asset of the property. We track improvements to real estate approximated $27.7in two major categories and several subcategories:
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.
30
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.
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 Unit | Building Improvements(3) | Per Unit | Total | Per Unit | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Established 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 |
We anticipate capitalizing an average of approximately $600 to $640 per unit. Building improvementsunit annually for all ofinside and outside the Operating Partnership's pre-2000 Acquired Properties approximated $12.5 million or $69 per unit. In addition, approximately $1.1 million was spent on one specific asset related to major renovations and repositioning of this asset. Also included in totalunit capital improvements to our real estate was approximately $1.7 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 estate for the remainder of 2002 are estimated at $100.0to be $65.0 million.
During the quartersix months ended March 31,June 30, 2002, the Operating Partnership's total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Operating Partnership's property management offices and its corporate offices, was approximately $3.0$4.6 million. Such additions to non-real estate property were funded from net cash provided by operating activities. Total additions to non-real estate property for the remainder of 2002 are estimated at $3.8$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.
31
Other
Total distributions paid in AprilJuly 2002 amounted to $147.3$147.7 million (excluding distributions on Partially Owned Properties), which included certain distributions declared induring the quarter ended March 31,June 30, 2002.
The Operating Partnership expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and certain scheduled unsecured note and mortgage note repayments, generally through its working capital, net cash provided by operating activities and borrowings under its line of credit. The Operating Partnership considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The Operating Partnership also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities including additional OP Units, and proceeds received from the disposition of certain properties. In addition, the Operating Partnership has certain unencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable to the Operating Partnership or the cost of alternative sources of capital to the Operating Partnership is too high. These unencumbered properties are in excess of the value of unencumbered properties the Operating Partnership must maintain in order to comply with covenants under its unsecured notes and line of credit.
TheOn May 30, 2002 the Operating Partnership hasobtained a new three-year $700.0 million unsecured revolving credit facility. The new line of credit replaces the Operating Partnership's $700.0 million unsecured revolving credit facility with potential borrowings of up to $700.0 million. As of May 7, 2002, no amounts were outstanding under this facility. This credit facility isthat was scheduled to expire in August 20022002. The prior existing revolving credit facility terminated upon the closing of the new facility. This new facility matures in May 2005 and the Operating Partnership has begun the process of replacing its line of credit with a new line of credit, which it believes will be on at least as favorable terms.used to fund property acquisitions, costs for certain Properties under development and short term liquidity requirements. As of July 31, 2002, $40.0 million was outstanding under this new facility.
The Operating Partnership provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of May 1,July 31, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.
22
Critical Accounting Policies and Estimates
The Operating Partnership's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Operating Partnership to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosures. The Operating Partnership 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 Operating Partnership 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 Operating Partnership to conclude that impairment indicators exist and an impairment loss is warranted.
32
Depreciation of Investment in Real Estate
The Operating Partnership depreciates the building component of its investment in real estate over a 30-year estimated useful life, building improvements over a 5-year to 10-year estimated useful life and both the furniture, fixtures and equipment and replacements components over a 5-year estimated useful life, all of which are judgmental determinations.
Fair Value of Financial Instruments, Including Derivative Instruments
The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 requires the Operating Partnership to make estimates and judgments that affect the fair value of the instruments. The Operating Partnership, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Operating Partnership 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. Any Common Shares issued pursuant to EQR's share option plan will result in the Operating Partnership issuing OP Units to EQR on a one-for-one basis.
Adjusted Net Income
For the quartersix months ended March 31,June 30, 2002, Adjusted Net Income ("ANI") available to OP units decreased $10.6$4.3 million as compared to the six months ended June 30, 2001.
For the quarter ended June 30, 2002, ANI available to OP Units increased $6.4 million as compared to the quarter ended March 31,June 30, 2001.
2333
The following is a reconciliation of net income available to OP Units to ANI available to OP Units for the six months and quarters ended March 31,June 30, 2002 and 2001:
Adjusted Net Income (Amounts in thousands) (Unaudited) | ||||||||
---|---|---|---|---|---|---|---|---|
| Quarter Ended March 31, | |||||||
| 2002 | 2001 | ||||||
Net income available to OP Units | $ | 82,794 | $ | 116,550 | ||||
Adjustments: | ||||||||
Acquisition cost depreciation* | 96,158 | 93,473 | ||||||
Amortization of goodwill | — | 933 | ||||||
Acquisition cost depreciation accumulated on sold properties | (3,944 | ) | (26,199 | ) | ||||
Extraordinary items | 97 | (311 | ) | |||||
Cumulative effect of change in accounting principle | — | 1,270 | ||||||
ANI available to OP Units — basic** | $ | 175,105 | $ | 185,716 | ||||
Depreciation for replacements and capital improvements | $ | 21,252 | $ | 19,068 | ||||
Adjusted Net Income
(Amounts in thousands)
(Unaudited)
| Six Months Ended June 30, | Quarter Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
Net income available to OP Units | $ | 179,178 | $ | 197,266 | $ | 96,384 | $ | 80,716 | ||||||
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 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 | ||||||
The Operating Partnership 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 Operating Partnership 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 Operating Partnership's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Operating Partnership's calculation of 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 Operating Partnership'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 quartersix months ended March 31,June 30, 2002, Funds From Operations ("FFO") available to OP Units decreased $0.1$4.4 million as compared to the six months ended June 30, 2001.
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For the quarter ended June 30, 2002, FFO available to OP Units decreased $4.3 million as compared to the quarter ended March 31,June 30, 2001.
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The following is a reconciliation of net income available to OP Units to FFO available to OP Units for the six months and quarters ended March 31,June 30, 2002 and 2001:
Funds from Operations (Amounts in thousands) (Unaudited) | ||||||||
---|---|---|---|---|---|---|---|---|
| Quarter Ended March 31, | |||||||
| 2002 | 2001 | ||||||
Net income available to OP Units | $ | 82,794 | $ | 116,550 | ||||
Adjustments: | ||||||||
Depreciation/amortization | 117,410 | 113,474 | ||||||
Net gain on sales of discontinued operations | (2,816 | ) | (41,778 | ) | ||||
Net gain on sales of unconsolidated entities | (5,657 | ) | — | |||||
Extraordinary items | 97 | (311 | ) | |||||
Cumulative effect of change in accounting principle | — | 1,270 | ||||||
Impairment on technology investments | 291 | 3,003 | ||||||
FFO available to OP Units — basic* | $ | 192,119 | $ | 192,208 | ||||
Funds from Operations
(Amounts in thousands)
(Unaudited)
| Six Months Ended June 30, | Quarter Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
Net income available to OP Units | $ | 179,178 | $ | 197,266 | $ | 96,384 | $ | 80,716 | ||||||
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 OP Units—basic* | $ | 382,832 | $ | 387,191 | $ | 190,713 | $ | 194,983 | ||||||
The Operating Partnership 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, financing activities and investing activities, it provides investors an understanding of the ability of the Operating Partnership to incur and service debt and to make capital expenditures. FFO in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Operating Partnership's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Operating Partnership's calculation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies and may differ, for example, due to variations among the Operating Partnership's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.
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There have been no new or significant developments related to the legal proceedings that were discussed in Part I, Item III of the Operating Partnership's Form 10-K for the year ended December 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
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 | ||||
10.2* | |||||
12 | Computation of Ratio of Earnings to Combined Fixed |
A report on Form 8-K dated March 14, 2002 containing additional information on the prospectus supplement for the Operating Partnership's $400.0 million unsecured note offering. None.
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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 behalf by the undersigned thereunto duly authorized.
ERP OPERATING LIMITED PARTNERSHIP | ||||
BY: | EQUITY RESIDENTIAL, | |||
ITS GENERAL PARTNER | ||||
Date: | By: | /s/ Executive Vice President | ||
Date: | By: | /s/ MICHAEL J. MCHUGH Michael J. McHugh Executive Vice President, Chief Accounting Officer |