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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JUNE 30, 2002
OR
For the quarterly period ended JUNE 30, 2003 | |||
OR | |||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-12252
EQUITY RESIDENTIAL(Exact name of registrant as specified in its charter)
EQUITY RESIDENTIAL PROPERTIES TRUST(Former name of registrant, if changed since last report)
Commission File Number: 1-12252 | ||
EQUITY RESIDENTIAL | ||
(Exact Name of Registrant as Specified in its Charter) | ||
Maryland | 13-3675988 | |
(State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
Two North Riverside Plaza, Chicago, Illinois |
| |
(Address of Principal Executive Offices) | (Zip Code) | |
(312) 474-1300 | ||
(Registrant’s Telephone Number, Including Area Code) | ||
http://www.equityapartments.com | ||
(Registrant’s web site) |
(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 Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o
The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on July 31, 20022003 was 275,538,420.273,706,254.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
thousands except for share amounts)
(Unaudited)
| June 30, 2002 | December 31, 2001 | |||||||
---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||
Investment in real estate | |||||||||
Land | $ | 1,857,497 | $ | 1,840,170 | |||||
Depreciable property | 11,205,307 | 11,096,847 | |||||||
Construction in progress | 94,292 | 79,166 | |||||||
13,157,096 | 13,016,183 | ||||||||
Accumulated depreciation | (1,929,115 | ) | (1,718,845 | ) | |||||
Investment in real estate, net of accumulated depreciation | 11,227,981 | 11,297,338 | |||||||
Real estate held for disposition | — | 3,371 | |||||||
Cash and cash equivalents | 88,942 | 51,603 | |||||||
Investments in unconsolidated entities | 423,529 | 397,237 | |||||||
Rents receivable | 2,627 | 2,400 | |||||||
Deposits—restricted | 149,927 | 218,557 | |||||||
Escrow deposits—mortgage | 62,049 | 76,700 | |||||||
Deferred financing costs, net | 32,964 | 27,011 | |||||||
Rental furniture, net | — | 20,168 | |||||||
Property and equipment, net | — | 3,063 | |||||||
Goodwill, net | 47,122 | 47,291 | |||||||
Other assets | 76,659 | 90,886 | |||||||
Total assets | $ | 12,111,800 | $ | 12,235,625 | |||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
Liabilities: | |||||||||
Mortgage notes payable | $ | 3,210,510 | $ | 3,286,814 | |||||
Notes, net | 2,438,974 | 2,260,944 | |||||||
Line of credit | — | 195,000 | |||||||
Accounts payable and accrued expenses | 116,192 | 108,254 | |||||||
Accrued interest payable | 62,676 | 62,360 | |||||||
Rents received in advance and other liabilities | 65,226 | 83,005 | |||||||
Security deposits | 47,098 | 47,644 | |||||||
Distributions payable | 145,880 | 141,832 | |||||||
Total liabilities | 6,086,556 | 6,185,853 | |||||||
Commitments and contingencies | |||||||||
Minority Interests: | |||||||||
Operating Partnership | 364,233 | 379,898 | |||||||
Preference Interests | 246,000 | 246,000 | |||||||
Junior Preference Units | 5,846 | 5,846 | |||||||
Partially Owned Properties | 11,503 | 4,078 | |||||||
Total Minority Interests | 627,582 | 635,822 | |||||||
Shareholders' equity: | |||||||||
Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized; 10,691,940 shares issued and outstanding as of June 30, 2002 and 11,344,521 shares issued and outstanding as of December 31, 2001 | 950,356 | 966,671 | |||||||
Common Shares of beneficial interest, $.01 par value; 1,000,000,000 shares authorized; 275,467,781 shares issued and outstanding as of June 30, 2002 and 271,621,374 shares issued and outstanding as of December 31, 2001 | 2,755 | 2,716 | |||||||
Paid in capital | 4,967,957 | 4,892,744 | |||||||
Employee notes | (3,870 | ) | (4,043 | ) | |||||
Deferred compensation | (31,607 | ) | (25,778 | ) | |||||
Distributions in excess of accumulated earnings | (457,264 | ) | (385,320 | ) | |||||
Accumulated other comprehensive loss | (30,665 | ) | (33,040 | ) | |||||
Total shareholders' equity | 5,397,662 | 5,413,950 | |||||||
Total liabilities and shareholders' equity | $ | 12,111,800 | $ | 12,235,625 | |||||
|
| June 30, |
| December 31, |
| ||
ASSETS |
|
|
|
|
| ||
Investment in real estate |
|
|
|
|
| ||
Land |
| $ | 1,815,685 |
| $ | 1,803,577 |
|
Depreciable property |
| 11,178,596 |
| 11,240,245 |
| ||
Construction in progress |
| 2,502 |
| 2,441 |
| ||
|
| 12,996,783 |
| 13,046,263 |
| ||
Accumulated depreciation |
| (2,247,136 | ) | (2,112,017 | ) | ||
Investment in real estate, net of accumulated depreciation |
| 10,749,647 |
| 10,934,246 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents |
| 243,838 |
| 29,875 |
| ||
Investments in unconsolidated entities |
| 509,937 |
| 509,789 |
| ||
Rents receivable |
| 2,119 |
| 2,926 |
| ||
Deposits – restricted |
| 280,935 |
| 141,278 |
| ||
Escrow deposits – mortgage |
| 44,831 |
| 50,565 |
| ||
Deferred financing costs, net |
| 32,321 |
| 32,144 |
| ||
Goodwill, net |
| 30,000 |
| 30,000 |
| ||
Other assets |
| 150,064 |
| 80,094 |
| ||
Total assets |
| $ | 12,043,692 |
| $ | 11,810,917 |
|
|
|
|
|
|
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Mortgage notes payable |
| $ | 2,850,493 |
| $ | 2,927,614 |
|
Notes, net |
| 2,854,198 |
| 2,456,085 |
| ||
Line of credit |
| — |
| 140,000 |
| ||
Accounts payable and accrued expenses |
| 71,746 |
| 64,369 |
| ||
Accrued interest payable |
| 64,374 |
| 63,151 |
| ||
Rents received in advance and other liabilities |
| 165,244 |
| 165,095 |
| ||
Security deposits |
| 44,965 |
| 45,333 |
| ||
Distributions payable |
| 142,004 |
| 140,844 |
| ||
Total liabilities |
| 6,193,024 |
| 6,002,491 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
Minority Interests: |
|
|
|
|
| ||
Operating Partnership |
| 347,598 |
| 349,646 |
| ||
Preference Interests |
| 246,000 |
| 246,000 |
| ||
Junior Preference Units |
| 5,846 |
| 5,846 |
| ||
Partially Owned Properties |
| 8,622 |
| 9,811 |
| ||
Total Minority Interests |
| 608,066 |
| 611,303 |
| ||
|
|
|
|
|
| ||
Shareholders’ equity: |
|
|
|
|
| ||
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 7,101,384 shares issued and outstanding as of June 30, 2003 and 10,524,034 shares issued and outstanding as of December 31, 2002 |
| 995,591 |
| 946,157 |
| ||
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 273,119,105 shares issued and outstanding as of June 30, 2003 and 271,095,481 shares issued and outstanding as of December 31, 2002 |
| 2,731 |
| 2,711 |
| ||
Paid in capital |
| 4,837,961 |
| 4,839,218 |
| ||
Deferred compensation |
| (7,538 | ) | (12,118 | ) | ||
Distributions in excess of accumulated earnings |
| (547,693 | ) | (535,056 | ) | ||
Accumulated other comprehensive loss |
| (38,450 | ) | (43,789 | ) | ||
Total shareholders’ equity |
| 5,242,602 |
| 5,197,123 |
| ||
Total liabilities and shareholders’ equity |
| $ | 12,043,692 |
| $ | 11,810,917 |
|
See accompanying notes
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
| Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||||
REVENUES | |||||||||||||||
Rental income | $ | 1,011,823 | $ | 1,014,813 | $ | 506,915 | $ | 509,428 | |||||||
Fee and asset management | 4,310 | 4,140 | 2,592 | 2,168 | |||||||||||
Interest and other income | 9,318 | 11,525 | 5,210 | 5,024 | |||||||||||
Interest income—investment in mortgage notes | — | 8,763 | — | 6,019 | |||||||||||
Total revenues | 1,025,451 | 1,039,241 | 514,717 | 522,639 | |||||||||||
EXPENSES | |||||||||||||||
Property and maintenance | 257,727 | 273,318 | 129,360 | 138,747 | |||||||||||
�� | Real estate taxes and insurance | 103,415 | 95,613 | 51,422 | 48,165 | ||||||||||
Property management | 37,289 | 36,364 | 18,256 | 17,686 | |||||||||||
Fee and asset management | 3,577 | 3,648 | 1,758 | 1,764 | |||||||||||
Depreciation | 232,721 | 221,797 | 117,509 | 111,296 | |||||||||||
Interest: | |||||||||||||||
Expense incurred, net | 171,993 | 178,660 | 87,229 | 88,857 | |||||||||||
Amortization of deferred financing costs | 2,988 | 2,810 | 1,597 | 1,413 | |||||||||||
General and administrative | 22,327 | 14,079 | 11,527 | 7,325 | |||||||||||
Impairment on technology investments | 581 | 6,775 | 290 | 3,772 | |||||||||||
Amortization of goodwill | — | 1,281 | — | 638 | |||||||||||
Total expenses | 832,618 | 834,345 | 418,948 | 419,663 | |||||||||||
Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle | 192,833 | 204,896 | 95,769 | 102,976 | |||||||||||
Allocation to Minority Interests: | |||||||||||||||
Operating Partnership | (13,784 | ) | (16,474 | ) | (7,343 | ) | (6,678 | ) | |||||||
Partially Owned Properties | (1,325 | ) | (238 | ) | (519 | ) | (133 | ) | |||||||
Income from investments in unconsolidated entities | 233 | 960 | 7 | 610 | |||||||||||
Net gain (loss) on sales of unconsolidated entities | 5,246 | 339 | (411 | ) | 339 | ||||||||||
Income before discontinued operations, extraordinary items and cumulative effect of change in accounting principle | 183,203 | 189,483 | 87,503 | 97,114 | |||||||||||
Net gain on sales of discontinued operations | 28,446 | 46,226 | 25,630 | 4,448 | |||||||||||
Discontinued operations, net | 2,994 | 3,666 | 535 | 1,574 | |||||||||||
Income before extraordinary items and cumulative effect of change in accounting principle | 214,643 | 239,375 | 113,668 | 103,136 | |||||||||||
Extraordinary items | (468 | ) | 106 | (371 | ) | (205 | ) | ||||||||
Cumulative effect of change in accounting principle | — | (1,270 | ) | — | — | ||||||||||
Net income | 214,175 | 238,211 | 113,297 | 102,931 | |||||||||||
Preferred distributions | (48,781 | ) | (57,419 | ) | (24,256 | ) | (28,893 | ) | |||||||
Net income available to Common Shares | $ | 165,394 | $ | 180,792 | $ | 89,041 | $ | 74,038 | |||||||
Net income per share—basic | $ | 0.61 | $ | 0.68 | $ | 0.33 | $ | 0.28 | |||||||
Net income per share—diluted | $ | 0.60 | $ | 0.67 | $ | 0.32 | $ | 0.27 | |||||||
Weighted average Common Shares outstanding—basic | 272,126 | 265,781 | 273,146 | 266,357 | |||||||||||
Weighted average Common Shares outstanding—diluted | 298,422 | 293,817 | 299,494 | 293,939 | |||||||||||
Distributions declared per Common Share outstanding | $ | 0.8650 | $ | 0.8150 | $ | 0.4325 | $ | 0.4075 | |||||||
|
| Six Months Ended June 30, |
| Quarter Ended June 30, |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
REVENUES |
|
|
|
|
|
|
|
|
| ||||
Rental income |
| $ | 943,529 |
| $ | 950,540 |
| $ | 473,967 |
| $ | 476,418 |
|
Fee and asset management |
| 7,878 |
| 4,310 |
| 5,390 |
| 2,592 |
| ||||
Interest and other income |
| 7,128 |
| 9,304 |
| 3,787 |
| 5,206 |
| ||||
Total revenues |
| 958,535 |
| 964,154 |
| 483,144 |
| 484,216 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
EXPENSES |
|
|
|
|
|
|
|
|
| ||||
Property and maintenance |
| 258,017 |
| 239,744 |
| 129,269 |
| 120,338 |
| ||||
Real estate taxes and insurance |
| 101,780 |
| 96,872 |
| 50,455 |
| 48,267 |
| ||||
Property management |
| 32,194 |
| 37,663 |
| 16,343 |
| 18,213 |
| ||||
Fee and asset management |
| 3,607 |
| 3,620 |
| 1,837 |
| 1,758 |
| ||||
Depreciation |
| 231,582 |
| 218,684 |
| 116,555 |
| 110,464 |
| ||||
Interest: |
|
|
|
|
|
|
|
|
| ||||
Expense incurred, net |
| 164,532 |
| 170,528 |
| 84,103 |
| 86,573 |
| ||||
Amortization of deferred financing costs |
| 3,104 |
| 2,962 |
| 1,701 |
| 1,584 |
| ||||
General and administrative |
| 20,146 |
| 22,327 |
| 8,970 |
| 11,527 |
| ||||
Impairment on technology investments |
| 581 |
| 581 |
| 290 |
| 290 |
| ||||
Total expenses |
| 815,543 |
| 792,981 |
| 409,523 |
| 399,014 |
| ||||
Income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations |
| 142,992 |
| 171,173 |
| 73,621 |
| 85,202 |
| ||||
Allocation to Minority Interests: |
|
|
|
|
|
|
|
|
| ||||
Operating Partnership |
| (18,281 | ) | (13,784 | ) | (9,171 | ) | (7,343 | ) | ||||
Partially Owned Properties |
| (243 | ) | (1,325 | ) | (128 | ) | (519 | ) | ||||
Income (loss) from investments in unconsolidated entities |
| (1,744 | ) | 233 |
| (1,851 | ) | 7 |
| ||||
Net gain (loss) on sales of unconsolidated entities |
| 4,675 |
| 5,246 |
| 3,463 |
| (411 | ) | ||||
Income from continuing operations |
| 127,399 |
| 161,543 |
| 65,934 |
| 76,936 |
| ||||
Net gain on sales of discontinued operations |
| 140,992 |
| 28,446 |
| 70,320 |
| 25,630 |
| ||||
Discontinued operations, net |
| 3,347 |
| 24,186 |
| 137 |
| 10,731 |
| ||||
Net income |
| 271,738 |
| 214,175 |
| 136,391 |
| 113,297 |
| ||||
Preferred distributions |
| (48,417 | ) | (48,781 | ) | (24,237 | ) | (24,256 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income available to Common Shares |
| $ | 223,321 |
| $ | 165,394 |
| $ | 112,154 |
| $ | 89,041 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per share – basic |
| $ | 0.82 |
| $ | 0.61 |
| $ | 0.41 |
| $ | 0.33 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per share – diluted |
| $ | 0.82 |
| $ | 0.60 |
| $ | 0.41 |
| $ | 0.32 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average Common Shares outstanding – basic |
| 271,031 |
| 272,126 |
| 271,380 |
| 273,146 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Weighted average Common Shares outstanding – diluted |
| 298,405 |
| 298,422 |
| 299,217 |
| 299,494 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Distributions declared per Common Share outstanding |
| $ | 0.865 |
| $ | 0.865 |
| $ | 0.4325 |
| $ | 0.4325 |
|
See accompanying notes
3
| Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||||
Comprehensive income: | |||||||||||||||
Net income | $ | 214,175 | $ | 238,211 | $ | 113,297 | $ | 102,931 | |||||||
Other comprehensive income (loss)—derivative instruments: | |||||||||||||||
Cumulative effect of change in accounting principle | — | (5,334 | ) | — | — | ||||||||||
Unrealized holding gains (losses) arising during the period | 1,990 | (3,396 | ) | (5,219 | ) | 8,358 | |||||||||
Losses reclassified into earnings from other comprehensive income | 385 | 226 | 217 | 171 | |||||||||||
Comprehensive income | $ | 216,550 | $ | 229,707 | $ | 108,295 | $ | 111,460 | |||||||
EQUITY RESIDENTIAL
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Amounts in thousands except per share data)
(Unaudited)
|
| Six Months Ended June 30, |
| Quarter Ended June 30, |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 271,738 |
| $ | 214,175 |
| $ | 136,391 |
| $ | 113,297 |
|
Other comprehensive income (losses) – derivative and other instruments: |
|
|
|
|
|
|
|
|
| ||||
Unrealized holding gains (losses) arising during the period |
| 1,879 |
| 1,085 |
| 1,742 |
| (3,091 | ) | ||||
Equity in unrealized holding gains (losses) arising during the period – unconsolidated entities |
| 2,759 |
| 905 |
| 1,565 |
| (2,128 | ) | ||||
Losses reclassified into earnings from other comprehensive income |
| 701 |
| 385 |
| 471 |
| 217 |
| ||||
Comprehensive income |
| $ | 277,077 |
| $ | 216,550 |
| $ | 140,169 |
| $ | 108,295 |
|
See accompanying notes
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| Six Months Ended June 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||
Net income | $ | 214,175 | $ | 238,211 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Allocation to Minority Interests: | |||||||||
Operating Partnership | 13,784 | 16,474 | |||||||
Partially Owned Properties | 1,325 | 238 | |||||||
Cumulative effect of change in accounting principle | — | 1,270 | |||||||
Depreciation | 234,846 | 230,805 | |||||||
Amortization of deferred financing costs | 2,988 | 2,810 | |||||||
Amortization of discount on investment in mortgage notes | — | (2,256 | ) | ||||||
Amortization of goodwill | — | 1,924 | |||||||
Amortization of discounts and premiums on debt | (424 | ) | (1,007 | ) | |||||
Amortization of deferred settlements on interest rate protection agreements | (176 | ) | 317 | ||||||
Impairment on technology investments | 581 | 6,775 | |||||||
Income from investments in unconsolidated entities | (233 | ) | (960 | ) | |||||
Net gain on sales of discontinued operations | (28,446 | ) | (46,226 | ) | |||||
Net gain on sales of unconsolidated entities | (5,246 | ) | (339 | ) | |||||
Extraordinary items | 468 | (106 | ) | ||||||
Unrealized loss (gain) on interest rate protection agreements | 483 | (132 | ) | ||||||
Book value of furniture sales and rental buyouts | — | 5,497 | |||||||
Compensation paid with Company Common Shares | 10,061 | 6,741 | |||||||
Changes in assets and liabilities: | |||||||||
(Increase) in rents receivable | (227 | ) | (705 | ) | |||||
Decrease (increase) in deposits—restricted | 12,108 | (12,574 | ) | ||||||
Additions to rental furniture | — | (14,532 | ) | ||||||
Decrease (increase) in other assets | 3,898 | (20,327 | ) | ||||||
Increase in accounts payable and accrued expenses | 9,026 | 597 | |||||||
Increase in accrued interest payable | 316 | 11,626 | |||||||
(Decrease) in rents received in advance and other liabilities | (9,972 | ) | (4 | ) | |||||
(Decrease) increase in security deposits | (189 | ) | 522 | ||||||
Net cash provided by operating activities | 459,146 | 424,639 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||
Investment in real estate—acquisitions | (153,034 | ) | (187,059 | ) | |||||
Investment in real estate—development | (57,066 | ) | (31,472 | ) | |||||
Improvements to real estate | (66,509 | ) | (63,269 | ) | |||||
Additions to non-real estate property | (4,602 | ) | (3,520 | ) | |||||
Interest capitalized for real estate under development | (4,369 | ) | (3,501 | ) | |||||
Interest capitalized for unconsolidated entities under development | (7,954 | ) | (9,316 | ) | |||||
Proceeds from disposition of real estate, net | 183,494 | 345,039 | |||||||
Proceeds from disposition of furniture rental business | 28,741 | — | |||||||
Investment in property and equipment | — | (1,626 | ) | ||||||
Principal receipts on investment in mortgage notes | — | 5,675 | |||||||
Investments in unconsolidated entities | (42,441 | ) | (43,167 | ) | |||||
Distributions from unconsolidated entities | 21,483 | 16,711 | |||||||
Proceeds from disposition of unconsolidated entities | 11,317 | 359 | |||||||
Proceeds from refinancing of unconsolidated entities | — | 4,450 | |||||||
Decrease in deposits on real estate acquisitions, net | 56,305 | 8,594 | |||||||
Decrease (increase) in mortgage deposits | 14,651 | (2,344 | ) | ||||||
Business combinations, net of cash acquired | (461 | ) | (7,603 | ) | |||||
Other investing activities, net | 192 | (29 | ) | ||||||
Net cash (used for) provided by investing activities | (20,253 | ) | 27,922 | ||||||
|
| Six Months Ended June 30, |
| ||||
|
| 2003 |
| 2002 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net income |
| $ | 271,738 |
| $ | 214,175 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Allocation to Minority Interests: |
|
|
|
|
| ||
Operating Partnership |
| 18,281 |
| 13,784 |
| ||
Partially Owned Properties |
| 243 |
| 1,325 |
| ||
Depreciation |
| 237,392 |
| 234,846 |
| ||
Amortization of deferred financing costs |
| 3,110 |
| 2,988 |
| ||
Amortization of discounts and premiums on debt |
| (451 | ) | (424 | ) | ||
Amortization of deferred settlements on derivative instruments |
| 104 |
| (176 | ) | ||
Impairment on technology investments |
| 581 |
| 581 |
| ||
Loss (income) from investments in unconsolidated entities |
| 1,744 |
| (233 | ) | ||
Net gain on sales of discontinued operations |
| (140,992 | ) | (28,446 | ) | ||
Net gain on sales of unconsolidated entities |
| (4,675 | ) | (5,246 | ) | ||
Loss on debt extinguishments |
| 380 |
| 468 |
| ||
Unrealized (gain) loss on derivative instruments |
| (83 | ) | 483 |
| ||
Compensation paid with Company Common Shares |
| 8,082 |
| 10,061 |
| ||
|
|
|
|
|
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Decrease (increase) in rents receivable |
| 512 |
| (227 | ) | ||
(Increase) decrease in deposits – restricted |
| (404 | ) | 12,108 |
| ||
(Increase) decrease in other assets |
| (21,912 | ) | 3,898 |
| ||
Increase in accounts payable and accrued expenses |
| 7,420 |
| 9,026 |
| ||
Increase in accrued interest payable |
| 1,238 |
| 316 |
| ||
(Decrease) in rents received in advance and other liabilities |
| (10,792 | ) | (9,972 | ) | ||
(Decrease) in security deposits |
| (686 | ) | (189 | ) | ||
Net cash provided by operating activities |
| 370,830 |
| 459,146 |
| ||
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
Investment in real estate – acquisitions |
| (243,004 | ) | (153,034 | ) | ||
Investment in real estate – development/other |
| (4,676 | ) | (57,066 | ) | ||
Improvements to real estate |
| (76,821 | ) | (66,509 | ) | ||
Additions to non-real estate property |
| (1,552 | ) | (4,602 | ) | ||
Interest capitalized for real estate under development |
| — |
| (4,369 | ) | ||
Interest capitalized for unconsolidated entities under development |
| (10,923 | ) | (7,954 | ) | ||
Proceeds from disposition of real estate, net |
| 473,186 |
| 183,494 |
| ||
Proceeds from disposition of furniture rental business |
| — |
| 28,741 |
| ||
Proceeds from disposition of unconsolidated entities |
| 8,595 |
| 11,317 |
| ||
Investments in unconsolidated entities |
| (5,671 | ) | (42,441 | ) | ||
Distributions from unconsolidated entities |
| 14,557 |
| 21,483 |
| ||
(Increase) decrease in deposits on real estate acquisitions, net |
| (139,261 | ) | 56,305 |
| ||
Decrease in mortgage deposits |
| 5,848 |
| 14,651 |
| ||
Business combinations, net of cash acquired |
| (485 | ) | (461 | ) | ||
Consolidation of previously Unconsolidated Properties |
| (697 | ) | — |
| ||
Other investing activities, net |
| (45,912 | ) | 192 |
| ||
Net cash (used for) investing activities |
| (26,816 | ) | (20,253 | ) | ||
See accompanying notes
5
| Six Months Ended June 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||
Loan and bond acquisition costs | $ | (9,124 | ) | $ | (3,948 | ) | |||
Mortgage notes payable: | |||||||||
Proceeds | 47,213 | 45,118 | |||||||
Lump sum payoffs | (119,386 | ) | (237,040 | ) | |||||
Scheduled principal repayments | (16,322 | ) | (16,367 | ) | |||||
Prepayment premiums/fees | (468 | ) | (202 | ) | |||||
Notes, net: | |||||||||
Proceeds | 397,064 | 299,316 | |||||||
Lump sum payoffs | (225,000 | ) | — | ||||||
Scheduled principal repayments | (253 | ) | (147 | ) | |||||
Lines of credit: | |||||||||
Proceeds | 292,000 | 316,491 | |||||||
Repayments | (487,000 | ) | (538,953 | ) | |||||
(Payments) from settlement of interest rate protection agreements | (1,533 | ) | (7,360 | ) | |||||
Proceeds from sale of Common Shares | 6,354 | 5,383 | |||||||
Proceeds from sale of Preference Interests | — | 48,500 | |||||||
Proceeds from exercise of options | 27,030 | 29,468 | |||||||
Redemption of Preferred Shares | — | (210,500 | ) | ||||||
Payment of offering costs | (158 | ) | (1,317 | ) | |||||
Distributions: | |||||||||
Common Shares | (235,548 | ) | (109,189 | ) | |||||
Preferred Shares | (35,832 | ) | (49,898 | ) | |||||
Preference Interests | (10,132 | ) | (8,496 | ) | |||||
Junior Preference Units | (162 | ) | (109 | ) | |||||
Minority Interests—Operating Partnership | (20,095 | ) | (9,949 | ) | |||||
Minority Interests—Partially Owned Properties | (10,375 | ) | (665 | ) | |||||
Principal receipts on employee notes, net | 173 | 145 | |||||||
Net cash (used for) financing activities | (401,554 | ) | (449,719 | ) | |||||
Net increase in cash and cash equivalents | 37,339 | 2,842 | |||||||
Cash and cash equivalents, beginning of period | 51,603 | 23,772 | |||||||
Cash and cash equivalents, end of period | $ | 88,942 | $ | 26,614 | |||||
SUPPLEMENTAL INFORMATION: | |||||||||
Cash paid during the period for interest | $ | 184,216 | $ | 187,195 | |||||
Mortgage loans assumed through real estate acquisitions | $ | 14,000 | $ | 45,918 | |||||
Mortgage loans (assumed) by purchaser in real estate and furniture rental business dispositions | $ | (1,680 | ) | $ | (27,358 | ) | |||
Transfers to real estate held for disposition | $ | — | $ | 38,741 | |||||
EQUITY RESIDENTIAL
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands)
(Unaudited)
|
| Six Months Ended June 30, |
| ||||
|
| 2003 |
| 2002 |
| ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
Loan and bond acquisition costs |
| $ | (3,616 | ) | $ | (9,124 | ) |
Mortgage notes payable: |
|
|
|
|
| ||
Proceeds |
| 48,680 |
| 47,213 |
| ||
Lump sum payoffs |
| (161,914 | ) | (119,386 | ) | ||
Scheduled principal repayments |
| (16,187 | ) | (16,322 | ) | ||
Prepayment premiums/fees |
| (472 | ) | (468 | ) | ||
Notes, net: |
|
|
|
|
| ||
Proceeds |
| 398,816 |
| 397,064 |
| ||
Lump sum payoffs |
| — |
| (225,000 | ) | ||
Scheduled principal repayments |
| (195 | ) | (253 | ) | ||
Line of credit: |
|
|
|
|
| ||
Proceeds |
| 172,000 |
| 292,000 |
| ||
Repayments |
| (312,000 | ) | (487,000 | ) | ||
(Payments on) settlement of derivative instruments |
| (12,999 | ) | (1,533 | ) | ||
Proceeds from sale of Common Shares |
| 4,247 |
| 6,354 |
| ||
Proceeds from exercise of options |
| 13,626 |
| 27,030 |
| ||
Proceeds from sale of Preferred Shares |
| 150,000 |
| — |
| ||
Payment of offering/redemption costs |
| (5,099 | ) | (158 | ) | ||
Redemption of Preferred Shares |
| (100,000 | ) | — |
| ||
Distributions: |
|
|
|
|
| ||
Common Shares |
| (235,081 | ) | (235,548 | ) | ||
Preferred Shares |
| (37,861 | ) | (35,832 | ) | ||
Preference Interests |
| (10,106 | ) | (10,132 | ) | ||
Junior Preference Units |
| (162 | ) | (162 | ) | ||
Minority Interests – Operating Partnership |
| (19,270 | ) | (20,095 | ) | ||
Minority Interests – Partially Owned Properties |
| (2,458 | ) | (10,375 | ) | ||
Principal receipts on employee notes, net |
| — |
| 173 |
| ||
Net cash (used for) financing activities |
| (130,051 | ) | (401,554 | ) | ||
Net increase in cash and cash equivalents |
| 213,963 |
| 37,339 |
| ||
Cash and cash equivalents, beginning of period |
| 29,875 |
| 51,603 |
| ||
Cash and cash equivalents, end of period |
| $ | 243,838 |
| $ | 88,942 |
|
|
|
|
|
|
| ||
SUPPLEMENTAL INFORMATION: |
|
|
|
|
| ||
Cash paid during the period for interest |
| $ | 175,009 |
| $ | 184,216 |
|
|
|
|
|
|
| ||
Real estate acquisitions/dispositions: |
|
|
|
|
| ||
Mortgage loans assumed |
| $ | 34,968 |
| $ | 14,000 |
|
|
|
|
|
|
| ||
Valuation of OP Units issued |
| $ | 105 |
| $ | — |
|
|
|
|
|
|
| ||
Mortgage loans (assumed) by purchaser |
| $ | (9,075 | ) | $ | (1,680 | ) |
|
|
|
|
|
| ||
Consolidation of previously Unconsolidated Properties: |
|
|
|
|
| ||
Mortgage loans assumed |
| $ | 26,500 |
| $ | — |
|
|
|
|
|
|
| ||
Valuation of OP Units issued |
| $ | 4,231 |
| $ | — |
|
|
|
|
|
|
| ||
Net (assets) liabilities recorded |
| $ | 1,633 |
| $ | — |
|
See accompanying notes
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
1. Business(Unaudited)
1. Business of the Company
Equity Residential ("EQR"(“EQR”), formed in March 1993, is a fully integrated real estate company engaged in the acquisition, ownership, management and operation of multifamily properties. The CompanyEQR has elected to be taxed as a real estate investment trust ("REIT"(“REIT”).
EQR is the general partner of, and as of June 30, 20022003 owned an approximate 92.4% ownership interest in, ERP Operating Limited Partnership, an Illinois limited partnership (the "Operating Partnership"“Operating Partnership”). The Company conducts substantially all of its business and owns substantially all of its assets through the Operating Partnership. The Operating Partnership is, 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. References to the "Company"“Company” include EQR, the Operating Partnership and each of the partnerships, limited liability companies and corporations controlled by the Operating Partnership and/or EQR.
As of June 30, 2002,2003, the Company owned or had interestsinvestments in a portfolio of 1,065 multifamily 1,005properties containing 227,963 apartment units located in 3635 states consisting of the following:216,644 units. An ownership breakdown includes:
| Number of Properties | Number of Units | ||
---|---|---|---|---|
Wholly Owned Properties | 943 | 198,676 | ||
Partially Owned Properties (Consolidated) | 36 | 6,931 | ||
Unconsolidated Properties | 86 | 22,356 | ||
Total Properties | 1,065 | 227,963 | ||
|
| Number of |
| Number of |
|
Wholly Owned Properties |
| 884 |
| 187,043 |
|
Partially Owned Properties (Consolidated) |
| 36 |
| 6,931 |
|
Unconsolidated Properties |
| 85 |
| 22,670 |
|
Total Properties |
| 1,005 |
| 216,644 |
|
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 six months ended June 30, 20022003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.2003.
The balance sheet at December 31, 20012002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
For further information, including definition of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company'sCompany’s annual report on Form 10-K for the year ended December 31, 2001.
7
Derivative Instruments and Hedging Activities
The following table summarizes the Company's consolidated derivative instruments and hedging activities at June 30, 2002 (amounts are in thousands):
| 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 June 30, 2002, certain unconsolidated 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 Company 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 $379.3 million (notional amounts range from $123.9 million to $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 $11.3 million.2002.
On June 30, 2002, the net derivative instruments were reported at their fair value as other liabilities of approximately $10.7 million and as a reduction to investment in unconsolidated entities of approximately $11.3 million. As 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 Company may recognize an estimated $16.4 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending June 30, 2003, of which $6.0 million is related to the unconsolidated development partnerships.
Other
In June 2001, the FASB issued SFAS No. 141,Business Combinations. SFAS No. 141 requires companies to account for all business combinations using the purchase method of accounting. SFAS No. 141 is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, but it has not had any impact on the Company's financial condition and results of operations.
In June 2001, the FASB issued SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to eliminate the amortization of goodwill in favor of a periodic impairment based approach. SFAS No. 142 is effective for the fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, but it has not had a material impact on the Company's financial condition and results of operations.
In April 2002, the FASB issued SFAS No. 145,Rescission of FASB Statements No. 4, 44 and 64,
7
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“unusual and infrequently occurring"occurring” criteria outlined in APB No. 30. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company will adoptadopted the standard effective
8
January 1, 2003.
In January 2003, butthe FASB issued Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires a variable interest entity to be consolidated if a company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The Company will adopt FIN No. 46 in the third quarter of 2003 prospectively using carryover basis. The Company has preliminarily determined its investment in real estate will increase approximately $1.3 billion, investment in unconsolidated entities will decrease approximately $494.5 million and mortgage notes payable will increase $833.5 million as a result of the consolidation of its previously unconsolidated stabilized development projects and projects under development (see Note 7). The Company does not expect it toanticipate that the adoption of FIN No. 46 will have a material impactany effect on its financial condition and results of operations.net income.
3. Shareholders' Shareholders’ Equity and Minority Interests
| ||||||
Common Shares outstanding at January 1, | 271,095,481 | |||||
Common Shares | ||||||
Conversion of Series E Preferred Shares | 25,198 | |||||
Employee Share Purchase Plan | 203,498 | |||||
Exercise of options | 732,724 | |||||
Restricted share grants, net | 955,658 | |||||
Conversion of OP Units | 106,546 | |||||
Common Shares outstanding at June 30, | ||||||
273,119,105 |
The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for a partnership interest are collectively referred to as the "Minority Interests—“Minority Interests – Operating Partnership"Partnership”. The Minority Interests—Interests – Operating Partnership held 22,555,505 22,353,524 units of limited partnership interest (“OP UnitsUnits”), representing a 7.57%7.6% interest in the Operating Partnership, at June 30, 2002.2003. Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding at June 30, 20022003 would have been 298,023,286.295,472,629. Subject to applicable securities law restrictions, the Minority Interests—Interests – Operating Partnership may exchange their OP Units for EQR Common Shares on a one-for-one basis.
Net proceeds from the Company'sCompany’s Common Share and Preferred Share (see definition below) offerings are contributed by the Company to the Operating Partnership. In return for those contributions, EQR receives a number of OP Units in the Operating Partnership equal to the number of Common Shares it has issued in the equity offering (or in the case of a preferred equity offering, a number of preference units in the Operating Partnership equal in number and having the same terms as the Preferred Shares issued in the equity offering). As a result, the net offering proceeds from Common Shares are allocated between shareholders’ equity and Minority Interests – Operating Partnership to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership.
During the six months ended June 30, 2003, the Operating Partnership issued 159,427 OP Units to various limited partners at an average price of $27.48 per unit. These OP Units are classified as Minority Interests – Operating Partnership in the accompanying consolidated balance sheets.
8
The Company'sCompany’s declaration of trust authorizes the Company to issue up to 100,000,000 preferred shares of beneficial interest, $0.01 par value per share (the "Preferred Shares"“Preferred Shares”), with specific rights, preferences and other attributes as the Board of Trustees may determine, which may include preferences, powers and rights that are senior to the rights of holders of the Company'sCompany’s Common Shares.
9
The following table presents the Company'sCompany’s issued and outstanding Preferred Shares as of June 30, 20022003 and December 31, 2001:2002:
|
| Annual |
| Amounts in thousands |
| |||||
|
|
| June |
| December |
| ||||
|
|
|
|
| ||||||
Preferred Shares of beneficial interest, $0.01 par value; |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
9 1/8% Series B Cumulative Redeemable Preferred; liquidation value $250 per share; 500,000 shares issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 22.81252 |
| $ | 125,000 |
| $ | 125,000 |
|
|
|
|
|
|
|
|
| |||
9 1/8% Series C Cumulative Redeemable Preferred; liquidation value $250 per share; 460,000 shares issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 22.81252 |
| 115,000 |
| 115,000 |
| ||
|
|
|
|
|
|
|
| |||
8.60% Series D Cumulative Redeemable Preferred; liquidation value $250 per share; 700,000 shares issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 21.50 |
| 175,000 |
| 175,000 |
| ||
|
|
|
|
|
|
|
| |||
7.00% Series E Cumulative Convertible Preferred; liquidation value $25 per share; 2,525,464 and 2,548,114 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively |
| $ | 1.75 |
| 63,137 |
| 63,703 |
| ||
|
|
|
|
|
|
|
| |||
7 1/4% Series G Convertible Cumulative Preferred; liquidation value $250 per share; 1,264,692 shares issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 18.125 |
| 316,173 |
| 316,173 |
| ||
|
|
|
|
|
|
|
| |||
7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 51,228 shares issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 1.75 |
| 1,281 |
| 1,281 |
| ||
|
|
|
|
|
|
|
| |||
8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 4.145 |
| 50,000 |
| 50,000 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series L Cumulative Redeemable Preferred; liquidation value $25 per share; 0 and 4,000,000 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively |
| (2 | ) | — |
| 100,000 |
| |||
|
|
|
|
|
|
|
| |||
6.48% Series N Cumulative Redeemable Preferred; liquidation value $250 per share; 600,000 and 0 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively (3) |
| $ | 16.20 |
| 150,000 |
| — |
| ||
|
|
|
| $ | 995,591 |
| $ | 946,157 |
|
(1)
| | Amounts in thousands | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Annual Dividend Rate per Share(1) | |||||||||
| June 30, 2002 | December 31, 2001 | ||||||||
Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized: | ||||||||||
91/8% Series B Cumulative Redeemable Preferred; liquidation value $250 per share; 500,000 shares issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 22.81252 | $ | 125,000 | $ | 125,000 | ||||
91/8% Series C Cumulative Redeemable Preferred; liquidation value $250 per share; 460,000 shares issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 22.81252 | 115,000 | 115,000 | ||||||
8.60% Series D Cumulative Redeemable Preferred; liquidation value $250 per share; 700,000 shares issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 21.50000 | 175,000 | 175,000 | ||||||
Series E Cumulative Convertible Preferred; liquidation value $25 per share; 2,716,012 and 3,365,794 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively | $ | 1.75000 | 67,900 | 84,145 | ||||||
71/4% Series G Convertible Cumulative Preferred; liquidation value $250 per share; 1,264,700 shares issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 18.12500 | 316,175 | 316,175 | ||||||
7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 51,228 and 54,027 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively | $ | 1.75000 | 1,281 | 1,351 | ||||||
8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 4.14500 | 50,000 | 50,000 | ||||||
7.625% Series L Cumulative Redeemable Preferred; liquidation value $25 per share; 4,000,000 shares issued and outstanding at June 30, 2002 and December 31, 2001 | $ | 1.90625 | 100,000 | 100,000 | ||||||
$ | 950,356 | $ | 966,671 | |||||||
9
(2) On June 19, 2003, the Company redeemed all of its outstanding Series L Cumulative Redeemable Preferred Shares at its liquidation value for total cash consideration of $100.0 million.
(3) On June 19, 2003, the Company issued 600,000 Series N Cumulative Redeemable Preferred Shares in a public offering. The Company received $145.3 million in net proceeds from this offering after payment of the underwriters’ fee.
The liquidation value of the Preference Interests and the Junior Preference Units (see(both as defined below) are included as separate components of Minority Interests in the consolidated balance sheets and the distributions incurred are included in preferred distributions in the consolidated statements of operations.
10
The following table presents the issued and outstanding Preference Interests as of June 30, 20022003 and December 31, 2001:2002:
| | 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 | |||||||
|
| Annual |
| Amounts in thousands |
| |||||
|
|
| June |
| December |
| ||||
|
|
|
|
|
|
|
| |||
Preference Interests: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 4.00 |
| $ | 40,000 |
| $ | 40,000 |
|
|
|
|
|
|
|
|
| |||
8.50% Series B Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 4.25 |
| 55,000 |
| 55,000 |
| ||
|
|
|
|
|
|
|
| |||
8.50% Series C Cumulative Redeemable Preference Units; liquidation value $50 per unit; 220,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 4.25 |
| 11,000 |
| 11,000 |
| ||
|
|
|
|
|
|
|
| |||
8.375% Series D Cumulative Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 4.1875 |
| 21,000 |
| 21,000 |
| ||
|
|
|
|
|
|
|
| |||
8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 4.25 |
| 50,000 |
| 50,000 |
| ||
|
|
|
|
|
|
|
| |||
8.375% Series F Cumulative Redeemable Preference Units; liquidation value $50 per unit; 180,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 4.1875 |
| 9,000 |
| 9,000 |
| ||
|
|
|
|
|
|
|
| |||
7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 3.9375 |
| 25,500 |
| 25,500 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 3.8125 |
| 9,500 |
| 9,500 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 3.8125 |
| 13,500 |
| 13,500 |
| ||
|
|
|
|
|
|
|
| |||
7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 3.8125 |
| 11,500 |
| 11,500 |
| ||
|
|
|
| $ | 246,000 |
| $ | 246,000 |
|
10
(1)
11
The following table presents the Operating Partnership'sPartnership’s issued and outstanding Junior Convertible Preference Units (the "Junior“Junior Preference Units"Units”) as of June 30, 20022003 and December 31, 2001:2002:
| | 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 | |||||||
|
| Annual |
| Amounts in thousands |
| |||||
|
|
| June |
| December |
| ||||
Junior Preference Units: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Series A Junior Convertible Preference Units; liquidation value $100 per unit; 56,616 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 5.46934 |
| $ | 5,662 |
| $ | 5,662 |
|
|
|
|
|
|
|
|
| |||
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at June 30, 2003 and December 31, 2002 |
| $ | 2.00 |
| 184 |
| 184 |
| ||
|
|
|
| $ | 5,846 |
| $ | 5,846 |
|
(1)Dividends on both series of Junior Preference Units are payable quarterly at various pay dates.
4.Real Estate Acquisitions
During the six months ended June 30, 2002,2003, the Company acquired the seven entire equity interest in the sixproperties listed below from unaffiliated parties, and two additional units at an existing property, for a total purchase price of $166.5$277.7 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 | |||||||
12
Date |
| Property |
| Location |
| Number |
| Acquisition Price |
| |
01/30/03 |
| The Reserve @ Eisenhower |
| Alexandria, VA |
| 226 |
| $ | 41,000 |
|
02/14/03 |
| Artisan Square |
| Northridge, CA |
| 140 |
| 27,466 |
| |
03/05/03 |
| LaSalle (1) |
| Beaverton, OR |
| 554 |
| 43,000 |
| |
05/01/03 |
| Gateway at Malden Center (2) |
| Malden, MA |
| 203 |
| 34,900 |
| |
06/17/03 |
| Mill Creek |
| Milpitas, CA |
| 516 |
| 70,000 |
| |
06/30/03 |
| Carlyle Mill |
| Alexandria, VA |
| 317 |
| 61,200 |
| |
Various |
| Rivers Bend (Condo Units) |
| Windsor, CT |
| 2 |
| 125 |
| |
|
|
|
|
|
| 1,958 |
| $ | 277,691 |
|
(1) Includes 8,167 square feet of retail space.
(2) Includes 36,326 square feet of office space and a 324-space parking garage.
On May 8, 2003, the Company acquired the remaining third party equity interests it did not previously own in Liberty Park, a 202-unit property located in Braintree, Massachusetts. This property was accounted for under the equity method of accounting and subsequent to the purchase was consolidated. The Company recorded $33.0 million in investment in real estate at carryover basis and the following:
• Assumed $26.5 million in mortgage debt;
• Issued 153,851 OP Units having a value of $4.2 million;
• Paid cash of $0.7 million; and
• Assumed $1.6 million of other liabilities net of other assets acquired.
11
5. �� Real Estate Dispositions
During the six months ended June 30, 2002,2003, the Company disposed of the twenty-threeforty-four properties listed below to unaffiliated parties. The Company recognized a net gain on sales of discontinued operations of approximately $28.4$141.0 million and a net gain on sales of unconsolidated entities of approximately $5.2$4.7 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 | |||||
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 | ||||||
Date |
| Property |
| Location |
| Number |
| Disposition |
| |
01/14/03 |
| Strawberry Place |
| Plant City, FL |
| 55 |
| $ | 1,400 |
|
01/14/03 |
| Smoketree Polo Club |
| Indio, CA |
| 288 |
| 18,900 |
| |
01/29/03 |
| Amberwood I |
| Lake City, FL |
| 50 |
| 1,175 |
| |
01/30/03 |
| Emerald Place |
| Bermuda Dunes, CA |
| 240 |
| 20,125 |
| |
01/30/03 |
| Rolido Parque |
| Houston, TX |
| 369 |
| 14,660 |
| |
02/27/03 |
| Fox Hill Commons |
| Vernon, CT |
| 74 |
| 4,700 |
| |
02/27/03 |
| The Landings |
| Winter Haven, FL |
| 60 |
| 1,475 |
| |
02/27/03 |
| Morningside |
| Titusville, FL |
| 183 |
| 3,980 |
| |
03/04/03 |
| Colony Woods |
| Birmingham, AL |
| 414 |
| 25,000 |
| |
03/04/03 |
| Hearthstone |
| San Antonio, TX |
| 252 |
| 7,700 |
| |
03/04/03 |
| Northgate Village |
| San Antonio, TX |
| 264 |
| 10,150 |
| |
03/19/03 |
| Lincoln Green I, II & III |
| San Antonio, TX |
| 680 |
| 24,900 |
| |
03/20/03 |
| Meadows on the Lake |
| Birmingham, AL |
| 200 |
| 10,900 |
| |
03/20/03 |
| Meadows in the Park |
| Birmingham, AL |
| 200 |
| 10,900 |
| |
03/20/03 |
| Shoal Run |
| Birmingham, AL |
| 276 |
| 14,350 |
| |
03/31/03 |
| Colony Place |
| Fort Myers, FL |
| 300 |
| 20,600 |
| |
04/08/03 |
| Mallgate (1) |
| Louisville, KY |
| 540 |
| 15,500 |
| |
04/15/03 |
| Summit Chase |
| Coral Springs, FL |
| 140 |
| 8,875 |
| |
04/16/03 |
| Bayside |
| Sebring, FL |
| 59 |
| 885 |
| |
04/30/03 |
| Essex Place II (Vacant Land) |
| Tampa, FL |
| — |
| 575 |
| |
05/08/03 |
| Pueblo Villas |
| Albuquerque, NM |
| 232 |
| 9,250 |
| |
05/14/03 |
| Emerald Bay |
| Winter Park, FL |
| 432 |
| 17,200 |
| |
05/16/03 |
| Meadowood |
| Flatwoods, KY |
| 52 |
| 975 |
| |
05/29/03 |
| Spicewood Springs |
| Jacksonville, FL |
| 512 |
| 28,000 |
| |
05/30/03 |
| Princeton Square |
| Jacksonville, FL |
| 288 |
| 16,750 |
| |
05/30/03 |
| Boulder Creek |
| Wilsonville, OR |
| 296 |
| 16,700 |
| |
05/30/03 |
| Bridge Creek |
| Wilsonville, OR |
| 315 |
| 18,100 |
| |
05/30/03 |
| Settlers Point/Brookfield |
| Salt Lake City, UT |
| 416 |
| 21,500 |
| |
05/30/03 |
| Ridgewood |
| Russellville, KY |
| 52 |
| — |
| |
06/04/03 |
| Lake Point |
| Charlotte, NC |
| 296 |
| 12,401 |
| |
06/05/03 |
| Clearlake Pines II |
| Cocoa, FL |
| 52 |
| 1,392 |
| |
06/05/03 |
| Sky Pines I & II |
| Orlando, FL |
| 140 |
| 3,694 |
| |
06/05/03 |
| Brandywine East |
| Winter Haven, FL |
| 38 |
| 884 |
| |
06/05/03 |
| Woodland I & II |
| Orlando, FL |
| 169 |
| 5,175 |
| |
06/12/03 |
| Parkville |
| Parkersburg, WV |
| 49 |
| 1,063 |
| |
06/12/03 |
| Cedarwood I |
| Belpre, OH |
| 44 |
| 889 |
| |
06/24/03 |
| Greenwood Village |
| Tempe, AZ |
| 270 |
| 14,600 |
| |
06/25/03 |
| Woodbine |
| Portsmouth, OH |
| 41 |
| 660 |
| |
06/26/03 |
| Laurel Gardens |
| Coral Springs, FL |
| 384 |
| 34,550 |
| |
06/27/03 |
| Crystal Creek |
| Phoenix, AZ |
| 273 |
| 12,775 |
| |
06/30/03 |
| Harbor Pointe |
| Milwaukee, WI |
| 595 |
| 27,800 |
| |
06/30/03 |
| Calais |
| Arlington, TX |
| 264 |
| 12,500 |
| |
12
Date |
| Property |
| Location |
| Number |
| Disposition |
| |
Various |
| Four Lakes Condo Units |
| Lisle, IL |
| 75 |
| $ | 9,168 |
|
Various |
| Pointe East Condo Units |
| Redmond, WA |
| 17 |
| 3,177 |
| |
Various |
| Squaw Peak Condo Units |
| Phoenix, AZ |
| 39 |
| 4,125 |
| |
|
| Wholly Owned Properties |
|
|
| 9,985 |
| 490,078 |
| |
02/28/03 |
| Kings Crossing I (2) |
| Jacksonville, FL |
| 69 |
| 963 |
| |
05/14/03 |
| Culbreath Key (2) |
| Tampa, FL |
| 254 |
| 7,382 |
| |
|
| Unconsolidated Properties |
|
|
| 323 |
| 8,345 |
| |
Total |
|
|
|
|
| 10,308 |
| $ | 498,423 |
|
(1) The Company was leasing the Company'sland under a long-term operating ground lease.
(2) Disposition price listed represents the Company’s share of the net disposition proceeds. Culbreath Key was sold for $26.4 million with a portion of the net sales proceeds used to payoff the mortgage debt of $16.2 million.
6. Commitments to Acquire/Dispose of Real Estate
As of June 30, 2002,2003, in addition to the property that was subsequently acquired as discussed in Note 17,19, the Company had entered into separate agreements to acquire twofour multifamily properties containing 6031,205 units from unaffiliated parties. The Company expects a combined purchase price of approximately $42.1$195.4 million, including the assumption of mortgage debt of approximately $54.8 million.
As of June 30, 2002,2003, in addition to the properties that were subsequently disposed of as discussed in Note 17,19, the Company had entered into separate agreements to dispose of fourteentwenty-three multifamily properties containing 2,756 6,426units to unaffiliated parties. The Company expects a combined disposition price of approximately $134.5$341.8 million.
13
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 Company has entered intoco-invested in various joint venture agreementsproperties with unrelated third party companies.parties. The following table summarizes the Company'sCompany’s investments in unconsolidated entities as of June 30, 20022003 (amounts in thousands except for project and unit amounts):
| Institutional Joint Ventures | Stabilized Development Projects(1) | Projects Under Development | Lexford/ Other | Totals | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total projects | 45 | 10 | 18 | 26 | 99 | (2) | ||||||||||
Total units | 10,846 | 3,038 | 5,523 | 3,313 | 22,720 | (2) | ||||||||||
EQR's percentage ownership of mortgage notes payable | 25.0 | % | 96.4 | % | 100.0 | % | 19.5 | % | ||||||||
EQR's share of mortgage notes payable(4) | $ | 121,200 | $ | 242,431 | $ | 341,703 | $ | 12,913 | $ | 718,247 | (3) | |||||
|
| Institutional |
| Stabilized |
| Projects |
| Lexford/ |
| Totals |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total projects |
| 45 |
| 10 |
| 18 |
| 22 |
| 95 | (2) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total units |
| 10,846 |
| 3,349 |
| 4,799 |
| 2,704 |
| 21,698 | (2) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Company’s percentage share of outstanding debt |
| 25.0 | % | 100.0 | % | 100.0 | % | 11.1 | % |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Company’s share of outstanding debt (4) |
| $ | 121,200 |
| $ | 252,101 |
| $ | 581,422 | (3) | $ | 5,361 |
| $ | 960,084 |
|
13
(1)The Company determines a project to be stabilized once it has maintained an average physical occupancy of 90% or more for a three-month period.
(2)
(3)
(4)
Investments in unconsolidated entities include the Unconsolidated Properties as well as various development properties under construction or pending construction. The Company does not consolidate these entities, as it does not have sole control of major decisions (such as sale and/or financing/refinancing). The Company's common equity ownership interests in these entities range from 4.5% to 57.0% at 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 Company is reflected on the consolidated balance sheets and after the project is completed, the consolidated statements of operations include the Company'sCompany’s share of net income or loss from the unconsolidated entity. Prior to the project being completed, the Company capitalizes interest on its equity contribution in accordance with the provisions of SFAS No. 58,Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method. During the six months ended June 30, 20022003 and 2001,2002, the Company capitalized $8.0$10.9 million and $9.3$8.0 million, respectively, in interest cost related to its unconsolidated development projects (which reduced interest expense incurred in the consolidated statements of operations).
The Company generally contributes between 25% and 35% of the project cost of the unconsolidated projects under development, with the remaining cost financed through third-party construction mortgages.
14
8. Deposits—RestrictedSee Note 2 for further discussion regarding the adoption of FIN No. 46 and its effect on the Company’s unconsolidated development projects.
8. Deposits - - Restricted
As of June 30, 2002,2003, deposits-restricted totaled $149.9$280.9 million and primarily included the following:
•
•
•
9. Mortgage Notes Payable
As of June 30, 2002,2003, the Company had outstanding mortgage indebtedness of approximately $3.2$2.9 billion.
During the six months ended June 30, 2002,2003, the Company:
•
•
•
14
• Relinquished $9.1 million of mortgage debt assumed by the purchaser in connection with the disposition of certain properties and the furniture rental business; and
As of June 30, 2002,2003, scheduled maturities for the Company'sCompany’s outstanding mortgage indebtedness were at various dates through October 1, 2033. TheAt June 30, 2003, the interest rate range on the Company'sCompany’s mortgage debt was 1.10%0.90% to 12.465% at June 30, 2002.. During the six months ended June 30, 2002,2003, the weighted average interest rate on the Company’s mortgage debt was 6.41%5.96%.
10. Notes
As of June 30, 2002,2003, the Company had outstanding unsecured notes of approximately $2.4 billion.$2.9 billion net of a $6.8 million discount and including a $7.9million premium.
On June 5, 2003, the Operating Partnership filed a Form S-3 registration statement with the SEC to register $2.0 billion of debt securities. The SEC declared this registration statement effective on June 11, 2003. In addition, the Operating Partnership carried over $280.0 million related to the registration statement effective on September 8, 2000. As of June 30, 2003, $2.28 billion remained available for issuance under this registration statement.
During the six months ended June 30, 2002,2003, the Company:
•
As of June 30, 2002,2003, scheduled maturities for the Company'sCompany’s outstanding notes arewere at various dates through 2029. TheAt June 30, 2003, the interest rate range on the Company'sCompany’s notes was 4.75% to 7.75% at June 30, 2002.. During the six months ended June 30, 2002,2003, the weighted average interest rate on the Company’s notes was 6.50%6.52%.
11. Line of Credit
On May 30, 2002, the
The Company obtainedhas a new three-year $700.0 million unsecured revolving credit facility maturing May 29, 2005. The new linewith potential borrowings of credit replaced the Company'sup to $700.0 million unsecured revolving credit facility that was scheduled to 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.million. As of June 30, 2002,2003, no amounts were outstanding and $84.0$50.2 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit. During the six months ended June 30, 2002,2003, the weighted average interest rate was 2.50%1.85%. EQR has guaranteed the Operating Partnership’s line of credit up to the maximum amount and for the full term of the facility.
12. Derivative Instruments
The following table summarizes the consolidated derivative instruments at June 30, 2003 (dollar amounts are in thousands):
|
| Cash Flow |
| Fair Value Hedges |
| Forward |
| Interest |
| Offsetting |
| Offsetting |
| ||||||
Current Notional Balance |
| $ | 400,000 |
| $ | 120,000 |
| $ | 150,000 |
| $ | 37,000 |
| $ | 255,120 |
| $ | 255,120 |
|
Lowest Possible Notional |
| $ | 400,000 |
| $ | 120,000 |
| $ | 150,000 |
| $ | 37,000 |
| $ | 251,410 |
| $ | 251,410 |
|
Highest Possible Notional |
| $ | 400,000 |
| $ | 120,000 |
| $ | 150,000 |
| $ | 37,000 |
| $ | 431,444 |
| $ | 431,444 |
|
Lowest Interest Rate |
| 3.65 | % | 7.25 | % | 4.34 | % | 6.50 | % | 4.53 | % | 4.46 | % | ||||||
Highest Interest Rate |
| 5.81 | % | 7.25 | % | 4.48 | % | 6.50 | % | 6.00 | % | 6.00 | % | ||||||
Earliest Maturity Date |
| 2003 |
| 2005 |
| 2014 |
| 2004 |
| 2003 |
| 2003 |
| ||||||
Latest Maturity Date |
| 2005 |
| 2005 |
| 2014 |
| 2004 |
| 2007 |
| 2007 |
| ||||||
Estimated Asset (Liability) Fair Value |
| $ | (9,771 | ) | $ | 8,877 |
| $ | (2,413 | ) | $ | — |
| $ | (1,136 | ) | $ | 1,096 |
|
15
During the six months ended June 30, 2003, the Company paid approximately $13.0 million to terminate eight forward starting interest rate swaps in conjunction with the issuance of $400.0 million of ten-year unsecured notes. The $13.0 million payment has been deferred and will be recognized as additional interest expense over the ten-year life of the unsecured notes.
At June 30, 2003, certain unconsolidated 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 Company has recorded its proportionate share of these hedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges with a current aggregate notional amount of $338.2million (notional amounts range from $77.1million to $391.2million over the terms of the swaps) at interest rates ranging from 1.78% to 6.94% maturing at various dates ranging from 2003 to 2005 with a net liability fair value of $10.4million. During the six months ended June 30, 2003, the Company recognized an unrealized gain of $0.8 million due to ineffectiveness of certain of these unconsolidated development derivatives (included in income from investments in unconsolidated entities).
12. On June 30, 2003, the net derivative instruments were reported at their fair value as other liabilities of approximately $3.3 million and as a reduction to investments in unconsolidated entities of approximately $10.4 million. As of June 30, 2003, there were approximately $39.0 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, 2003, the Company may recognize an estimated $14.8 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending June 30, 2004, of which $7.3 million is related to the unconsolidated development partnerships.
13.Calculation of Net Income Per Weighted Average Common Share
The following tables set forth the computation of net income per share—share – basic and net income per share—share – diluted:
| Six Months Ended June 30, | Quarter Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
| (Amounts in thousands except per share amounts) | |||||||||||||
Numerator: | ||||||||||||||
Income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items, cumulative effect of change in accounting principle and preferred distributions | $ | 192,833 | $ | 204,896 | $ | 95,769 | $ | 102,976 | ||||||
Allocation to Minority Interests: | ||||||||||||||
Operating Partnership | (13,784 | ) | (16,474 | ) | (7,343 | ) | (6,678 | ) | ||||||
Partially Owned Properties | (1,325 | ) | (238 | ) | (519 | ) | (133 | ) | ||||||
Income from investments in unconsolidated entities | 233 | 960 | 7 | 610 | ||||||||||
Preferred distributions | (48,781 | ) | (57,419 | ) | (24,256 | ) | (28,893 | ) | ||||||
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle | 129,176 | 131,725 | 63,658 | 67,882 | ||||||||||
Net gain (loss) on sales of unconsolidated entities | 5,246 | 339 | (411 | ) | 339 | |||||||||
Net gain on sales of discontinued operations | 28,446 | 46,226 | 25,630 | 4,448 | ||||||||||
Discontinued operations, net | 2,994 | 3,666 | 535 | 1,574 | ||||||||||
Extraordinary items | (468 | ) | 106 | (371 | ) | (205 | ) | |||||||
Cumulative effect of change in accounting principle | — | (1,270 | ) | — | — | |||||||||
Numerator for net income per share—basic | 165,394 | 180,792 | 89,041 | 74,038 | ||||||||||
Effect of dilutive securities: | ||||||||||||||
Allocation to Minority Interests—Operating Partnership | 13,784 | 16,474 | 7,343 | 6,678 | ||||||||||
Distributions on convertible preferred shares/units | — | 242 | 22 | — | ||||||||||
Numerator for net income per share—diluted | $ | 179,178 | $ | 197,508 | $ | 96,406 | $ | 80,716 | ||||||
Denominator: | ||||||||||||||
Denominator for net income per share—basic | 272,126 | 265,781 | 273,146 | 266,357 | ||||||||||
Effect of dilutive securities: | ||||||||||||||
OP Units | 22,831 | 24,305 | 22,653 | 24,152 | ||||||||||
Convertible preferred shares/units | — | 370 | 75 | — | ||||||||||
Share options/restricted shares | 3,465 | 3,361 | 3,620 | 3,430 | ||||||||||
Denominator for net income per share—diluted | 298,422 | 293,817 | 299,494 | 293,939 | ||||||||||
Net income per share—basic | $ | 0.61 | $ | 0.68 | $ | 0.33 | $ | 0.28 | ||||||
Net income per share—diluted | $ | 0.60 | $ | 0.67 | $ | 0.32 | $ | 0.27 | ||||||
|
| Six Months Ended June 30, |
| Quarter Ended June 30, |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
|
| (Amounts in thousands except per share amounts) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Numerator: |
|
|
|
|
|
|
|
|
| ||||
Income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations and preferred distributions |
| $ | 142,992 |
| $ | 171,173 |
| $ | 73,621 |
| $ | 85,202 |
|
|
|
|
|
|
|
|
|
|
| ||||
Allocation to Minority Interests: |
|
|
|
|
|
|
|
|
| ||||
Operating Partnership |
| (18,281 | ) | (13,784 | ) | (9,171 | ) | (7,343 | ) | ||||
Partially Owned Properties |
| (243 | ) | (1,325 | ) | (128 | ) | (519 | ) | ||||
Income (loss) from investments in unconsolidated entities |
| (1,744 | ) | 233 |
| (1,851 | ) | 7 |
| ||||
Net gain (loss) on sales of unconsolidated entities |
| 4,675 |
| 5,246 |
| 3,463 |
| (411 | ) | ||||
Preferred distributions |
| (48,417 | ) | (48,781 | ) | (24,237 | ) | (24,256 | ) | ||||
Income from continuing operations available to Common Shares |
| 78,982 |
| 112,762 |
| 41,697 |
| 52,680 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net gain on sales of discontinued operations |
| 140,992 |
| 28,446 |
| 70,320 |
| 25,630 |
| ||||
Discontinued operations, net |
| 3,347 |
| 24,186 |
| 137 |
| 10,731 |
| ||||
Numerator for net income per share – basic |
| 223,321 |
| 165,394 |
| 112,154 |
| 89,041 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
| ||||
Allocation to Minority Interests – Operating Partnership |
| 18,281 |
| 13,784 |
| 9,171 |
| 7,343 |
| ||||
Distributions on convertible preferred shares/units |
| 2,425 |
| — |
| 1,211 |
| 22 |
| ||||
Numerator for net income per share – diluted |
| $ | 244,027 |
| $ | 179,178 |
| $ | 122,536 |
| $ | 96,406 |
|
16
| Six Months Ended June 30, | Quarter Ended June 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||
| (Amounts in thousands except per share amounts) | |||||||||||
Net income per share—basic: | ||||||||||||
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per share—basic | $ | 0.48 | $ | 0.51 | $ | 0.24 | $ | 0.26 | ||||
Net gain (loss) on sales of unconsolidated entities | 0.02 | — | — | — | ||||||||
Net gain on sales of discontinued operations | 0.10 | 0.16 | 0.09 | 0.02 | ||||||||
Discontinued operations, net | 0.01 | 0.01 | — | — | ||||||||
Extraordinary items | — | — | — | — | ||||||||
Cumulative effect of change in accounting principle | — | — | — | — | ||||||||
Net income per share—basic | $ | 0.61 | $ | 0.68 | $ | 0.33 | $ | 0.28 | ||||
Net income per share—diluted: | ||||||||||||
Income before net gain (loss) on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle per share—diluted | $ | 0.48 | $ | 0.50 | $ | 0.24 | $ | 0.25 | ||||
Net gain (loss) on sales of unconsolidated entities | 0.01 | — | — | — | ||||||||
Net gain on sales of discontinued operations | 0.10 | 0.16 | 0.08 | 0.02 | ||||||||
Discontinued operations, net | 0.01 | 0.01 | — | — | ||||||||
Extraordinary items | — | — | — | — | ||||||||
Cumulative effect of change in accounting principle | — | — | — | — | ||||||||
Net income per share—diluted | $ | 0.60 | $ | 0.67 | $ | 0.32 | $ | 0.27 | ||||
|
| Six Months Ended June 30, |
| Quarter Ended June 30, |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 | �� | 2002 |
| ||||
|
| (Amounts in thousands except per share amounts) |
| ||||||||||
Denominator: |
|
|
|
|
|
|
|
|
| ||||
Denominator for net income per share – basic |
| 271,031 |
| 272,126 |
| 271,380 |
| 273,146 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
| ||||
OP Units |
| 22,294 |
| 22,831 |
| 22,316 |
| 22,653 |
| ||||
Convertible preferred shares/units |
| 3,136 |
| — |
| 3,133 |
| 75 |
| ||||
Share options/restricted shares |
| 1,944 |
| 3,465 |
| 2,388 |
| 3,620 |
| ||||
Denominator for net income per share – diluted |
| 298,405 |
| 298,422 |
| 299,217 |
| 299,494 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income per share – basic |
| $ | 0.82 |
| $ | 0.61 |
| $ | 0.41 |
| $ | 0.33 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per share – diluted |
| $ | 0.82 |
| $ | 0.60 |
| $ | 0.41 |
| $ | 0.32 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per share – basic (1): |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations available to Common Shares |
| $ | 0.33 |
| $ | 0.43 |
| $ | 0.17 |
| $ | 0.20 |
|
Net gain on sales of discontinued operations |
| 0.48 |
| 0.10 |
| 0.24 |
| 0.09 |
| ||||
Discontinued operations, net |
| 0.01 |
| 0.08 |
| — |
| 0.04 |
| ||||
Net income per share – basic |
| $ | 0.82 |
| $ | 0.61 |
| $ | 0.41 |
| $ | 0.33 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per share – diluted: |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations available to Common Shares |
| $ | 0.34 |
| $ | 0.43 |
| $ | 0.17 |
| $ | 0.20 |
|
Net gain on sales of discontinued operations |
| 0.47 |
| 0.09 |
| 0.24 |
| 0.08 |
| ||||
Discontinued operations, net |
| 0.01 |
| 0.08 |
| — |
| 0.04 |
| ||||
Net income per share – diluted |
| $ | 0.82 |
| $ | 0.60 |
| $ | 0.41 |
| $ | 0.32 |
|
(1) All net income per share – basic amounts have been calculated considering an allocation for Minority Interests. The following amounts were used in the calculation of the individual components of net income per share – basic for the periods presented (all amounts are net of an allocation of Minority Interests in the Operating Partnership):
|
| Six Months Ended June 30, |
| Quarter Ended June 30, |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
|
| (Amounts in thousands) |
| ||||||||||
Income from continuing operations available to Common Shares |
| $ | 89,908 |
| $ | 116,809 |
| $ | 47,023 |
| $ | 55,451 |
|
Net gain on sales of discontinued operations |
| 130,319 |
| 26,259 |
| 65,004 |
| 23,677 |
| ||||
Discontinued operations, net |
| 3,094 |
| 22,326 |
| 127 |
| 9,913 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Numerator for net income per share – basic |
| $ | 223,321 |
| $ | 165,394 |
| $ | 112,154 |
| $ | 89,041 |
|
Convertible preferred shares/share/units that could be converted into 15,648,03411,807,095 and 14,921,38415,648,034 weighted average Common Shares for the six months ended June 30, 20022003 and 2001,2002, respectively, and 15,369,25511,807,095 and 15,379,91015,369,255 weighted average Common Shares for the quarters ended June 30, 20022003 and 2001,2002, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
On October 11, 2001, the Company effected a two-for-one split of its Common Shares and OP Units to shareholders and unitholders of record as of September 21, 2001. All per share and OP Unit data and numbers of Common Shares and OP Units have been retroactively adjusted to reflect the Common Share and OP Unit split.
13.14. Discontinued Operations
In August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001.
The Company adoptedhas presented separately as discontinued operations in all periods the standard effectiveresults of operations for all wholly owned assets disposed of on or after January 1, 2002 which did not have a material effect on the Company's financial condition and results(the date of operations.
Under the provisionsadoption of SFAS No. 144, for long-lived assets to be held and used, the Company first determines whether any indicators of impairment exist. If indicators exist, the Company compares the expected future undiscounted cash flows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recorded for the difference between the estimated fair value and the carrying amount of the asset.
17
For long-lived assets to be disposed of, an impairment loss is recognized when the estimated fair value of the asset, less the estimated cost to sell, is less than the carrying amount of the asset measured at the time that the Company has determined it will sell the asset. Long-lived assets held for disposition are reported at the lower or their carrying amounts or their estimated fair values, less their costs to sell.144).
Goodwill and investments in unconsolidated entities accounted for under the equity method of accounting are specifically excluded from the scope of SFAS No. 144.
On January 11, 2002, the Company disposed of its furniture rental business for $30.0 million and received net proceeds of $28.7 million. No gain/loss on sale was recognized as the net book value at the sale date after giving effect to a previously recorded impairment loss approximated the sales price.
The components of discontinued operations for the six months and quarters ended June 30, 2002 and 2001, respectively, are outlined below and include the results of operations throughfor the respective periods that the Company owned such assets during the six months and quarters ended
17
June 30, 2003 and 2002, including the following:
• The Wholly Owned Properties sold during 2003 (see Note 5); and
• The Wholly Owned Properties and the furniture rental business sold during 2002.
|
| Six Months Ended June 30, |
| Quarter Ended June 30, |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
|
| (Amounts in thousands) |
| ||||||||||
REVENUES |
|
|
|
|
|
|
|
|
| ||||
Rental income |
| $ | 23,112 |
| $ | 70,045 |
| $ | 7,429 |
| $ | 33,125 |
|
Interest and other income |
| 122 |
| 17 |
| 109 |
| 5 |
| ||||
Furniture income |
| — |
| 1,361 |
| — |
| (4 | ) | ||||
Total revenues |
| 23,234 |
| 71,423 |
| 7,538 |
| 33,126 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
EXPENSES (1) |
|
|
|
|
|
|
|
|
| ||||
Property and maintenance |
| 10,643 |
| 20,270 |
| 4,239 |
| 10,289 |
| ||||
Real estate taxes and insurance |
| 2,631 |
| 7,424 |
| 936 |
| 3,409 |
| ||||
Property management |
| 112 |
| 83 |
| 62 |
| 43 |
| ||||
Depreciation |
| 5,810 |
| 16,162 |
| 1,919 |
| 7,614 |
| ||||
Interest: |
|
|
|
|
|
|
|
|
| ||||
Expense incurred, net |
| 685 |
| 1,969 |
| 244 |
| 1,027 |
| ||||
Amortization of deferred financing costs |
| 6 |
| 26 |
| 1 |
| 13 |
| ||||
Furniture expenses |
| — |
| 1,303 |
| — |
| — |
| ||||
Total expenses |
| 19,887 |
| 47,237 |
| 7,401 |
| 22,395 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Discontinued operations, net |
| $ | 3,347 |
| $ | 24,186 |
| $ | 137 |
| $ | 10,731 |
|
(1) Includes expenses paid in the current period for Wholly Owned Properties sold in prior periods related to the Company’s period of ownership.
15. Stock-Based Compensation
Prior to 2003, the Company had chosen to account for its stock-based compensation in accordance with APB No. 25, Accounting for Stock Issued to Employees,which resulted in no compensation expense for options issued with an exercise price equal to or exceeding the market value of the Company’s Common Shares on the date of each respective salegrant (intrinsic method). The Company has elected to expense its stock-based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), Accounting for Stock Based Compensation, effective in the first quarter of 2003, which resulted in compensation expense being recorded based on the fair value of the stock compensation granted or modified.
SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123. The Company has chosen to use the “Prospective Method”. This method requires that companies apply the recognition provisions of SFAS No. 123 to only employee awards granted or modified after the beginning of the fiscal year in which the recognition provisions are first applied, or January 1, 2003. Compensation expense under all of the Company’s plans is generally recognized over periods ranging from three months to five years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the six months and quarter ended June 30, 2002,2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.
The following table illustrates the effect on net income and a full six monthsearnings per share if the fair value based method had been applied to all outstanding and quarter of operationsunvested awards in each period presented:
18
|
| Six Months Ended June 30, |
| Quarter Ended June 30, |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
|
| (Amounts in thousands except per share amounts ) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Net income available to Common Shares – as reported |
| $ | 223,321 |
| $ | 165,394 |
| $ | 112,154 |
| $ | 89,041 |
|
Add: Stock-based employee compensation expense included in reported net income: |
|
|
|
|
|
|
|
|
| ||||
Restricted/performance shares |
| 5,246 |
| 9,912 |
| 2,912 |
| 4,828 |
| ||||
Share options (1) |
| 2,014 |
| — |
| 307 |
| — |
| ||||
ESPP discount |
| 805 |
| — |
| 315 |
| — |
| ||||
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards: |
|
|
|
|
|
|
|
|
| ||||
Restricted/performance shares |
| (5,246 | ) | (9,912 | ) | (2,912 | ) | (4,828 | ) | ||||
Share options (1) |
| (4,165 | ) | (3,051 | ) | (1,266 | ) | (1,524 | ) | ||||
ESPP discount |
| (805 | ) | (925 | ) | (315 | ) | (267 | ) | ||||
Net income available to Common Shares – pro forma |
| $ | 221,170 |
| $ | 161,418 |
| $ | 111,195 |
| $ | 87,250 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Basic – as reported |
| $ | 0.82 |
| $ | 0.61 |
| $ | 0.41 |
| $ | 0.33 |
|
Basic – pro forma |
| $ | 0.82 |
| $ | 0.59 |
| $ | 0.41 |
| $ | 0.32 |
|
Diluted – as reported |
| $ | 0.82 |
| $ | 0.60 |
| $ | 0.41 |
| $ | 0.32 |
|
Diluted – pro forma |
| $ | 0.81 |
| $ | 0.59 |
| $ | 0.41 |
| $ | 0.32 |
|
(1) Share options for the six months and quarter ended June 30, 2001, for2003 included $1.4 million of expense recognition related to options granted in the following:
| Six Months Ended June 30, | Quarter Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
| (Amounts in thousands) | |||||||||||||
REVENUES | ||||||||||||||
Rental income | $ | 8,762 | $ | 12,858 | $ | 2,628 | $ | 6,432 | ||||||
Interest and other income | 3 | 26 | 1 | 25 | ||||||||||
Furniture income | 1,361 | 30,027 | (4 | ) | 15,155 | |||||||||
Total revenues | 10,126 | 42,911 | 2,625 | 21,612 | ||||||||||
EXPENSES | ||||||||||||||
Property and maintenance | 2,787 | 3,332 | 1,267 | 1,617 | ||||||||||
Real estate taxes and insurance | 881 | 1,162 | 254 | 589 | ||||||||||
Depreciation | 2,125 | 3,309 | 569 | 1,662 | ||||||||||
Interest expense incurred, net | 36 | 300 | — | 147 | ||||||||||
Furniture expenses | 1,303 | 30,499 | — | 15,670 | ||||||||||
Amortization of goodwill | — | 643 | — | 353 | ||||||||||
Total expenses | 7,132 | 39,245 | 2,090 | 20,038 | ||||||||||
Discontinued operations, net | $ | 2,994 | $ | 3,666 | $ | 535 | $ | 1,574 | ||||||
14.16. Commitments and Contingencies
The Company, as an owner of real estate, is subject to various environmental laws of Federal, state and local governments.environmental laws. Compliance by the Company with existing laws has not had a material adverse effect on the Company'sCompany’s financial condition and results of operations. However, the Company 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 Company does not believe there is any litigation pending or threatened against the Company other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by liability insurance, none of which is expected to have a material adverse effect on the consolidated financial statements of the Company.
18
In regards to the funding of properties in the development stage and the agreements with multifamily residential real estate developers, the Company funded a net total of $40.3 million during the six months ended June 30, 2002. In connection with one development agreement, the Company has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. As of June 30, 2002,2003, the Company has 2118 projects underin various stages of development (includes three consolidated projects) with estimated completion dates ranging through MarchDecember 31,2004. The Company expects to fund approximately $5.6 million in connection with these properties during the remainder of 2003 and in 2004. The three development agreements currently in place have the following key terms:
For one
•The first development agreement, the Company's 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 Company based on such value. If the Company chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Company'sCompany’s partner must exercise this right as to all projects within five years after the receipt of the final certificate of occupancy on the last developed property. The Company has an obligation to fund up to an additional $13.0 million to
19
guarantee third party construction financing, if required.
Under a
•The second development agreement, the Company's partner has the right, at any time following completion of a project, to require the Company to purchase the partners'partners’ interest in that project at a mutually agreeable price. If the Company and the partner are unable to agree on a price, both parties will obtain appraisals. If the appraised values vary by more than 10%, both the Company and its partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value. The Company may elect at that time not to purchase the property and instead, authorize its partner to sell the project at or above the agreed-upon value to an unrelated third party. Five years following the receipt of the final certificate of occupancy on the last developed property, the Company must purchase, at the agreed-upon price, any projects remaining unsold mustunsold.
• The third development partner has the exclusive right for six months following stabilization (generally defined as having achieved 90% occupancy for three consecutive months following the substantial completion of a project) to market a project for sale. Thereafter, either the Company or its development partner may market a project for sale. If the Company’s development partner proposes the sale, the Company may elect to purchase the project at the price proposed by its partner or defer the sale until two independent appraisers appraise the project. If the two appraised values vary by more than 5%, a third appraiser will be purchased bychosen to determine the fair market value of the property. Once a value has been determined, the Company may elect to purchase the property or authorize its development partner to sell the project at the agreed-upon price.value.
The
In connection with one of its mergers, the Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of June 30, 2002,2003, this enhancement was still in effect at a commitment amount of $12.7 million.
15. 17.Asset Impairment
For both the six months ended June 30, 20022003 and 2001,2002, the Company recorded approximately $0.6 million and $6.8 million, respectively, of asset impairment charges related to its technology investments. These charges were the result of a review of the existing investments reflected on the consolidated balance sheet. These impairment losses are reflected on the statementconsolidated statements of operations in total expenses and include the write-down of assets classified as other assets and investments in unconsolidated entities.assets.
16.18. Reportable Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management. Senior management decides how resources are allocated and assesses performance on a monthly basis.
The Company'sCompany’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.residents and includes Equity Corporate Housing (“ECH”). Senior management evaluates the performance of each of our apartment communities on an individual basis, however, each of our apartment communities has similar economic characteristics, residents, and products and services so they have been aggregated into one reportable segment. The Company'sCompany’s rental real estate segment comprisedcomprises approximately 98.7%98.4% and 97.6%98.6% of total revenues for the six months ended June 30, 20022003 and 2001,2002, respectively, and approximately 98.5%98.1% and 97.5%98.4% of total revenues for the quarters ended June 30, 20022003 and 2001,2002, respectively. The Company'sCompany’s rental real estate segment comprisedcomprises approximately 99.6%99.8% and 99.4%99.7% of total assets at June 30, 20022003 and December 31, 2001,2002, respectively.
19
The primary financial measure for the Company'sCompany’s rental real estate segment is net operating
20
income ("NOI"(“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). The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities. Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance. NOI from our rental real estate totaled approximately $613.4 $551.5million and $609.5$576.3 million for the six months ended June 30, 2002,2003 and 2001,2002, respectively, and approximately $307.9$277.9 million and $304.8$289.6 million for the quarters ended June 30, 2003 and 2002, and 2001, respectively.
During the acquisition, development and/or disposition of real estate, the Company considers its NOI return on total capitalized costs isinvestment as the primary measure of financial performance the Company considers.performance.
The Company'sCompany’s fee and asset management activity is immaterial and does not meet the threshold requirements of a reportable segment as provided for in SFAS No. 131.
17. Subsequent Events/Other
DuringAll revenues are from external customers and there is no customer who contributed 10% or more of the Company’s total revenues during the six months ended June 30, 2002, the Company entered into an agreement with the U.S. Army with an initial cash investment of $10.0 million and assumed management of 3,637 multifamily units at Fort Lewis, Washington.2003 or 2002.
19. Subsequent Events/Other
Subsequent to June 30, 20022003 and through July 29, 2002,August 8, 2003, the Company:
•
•
•
• Repaid $10.9 million of mortgage debt at/or prior to maturity; and
•
20
21
Item 2. Management'sManagement’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 Company'sCompany’s annual report on Form 10-K for the year ended December 31, 2001.2002.
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"“believes”, "expects"“estimates”, “expects” and "anticipates"“anticipates” and other similar expressions that are predictions of or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, the following:
•
• Alternative sources of capital to the Company or labor and materials required for maintenance, repair, capital expenditure or development are more expensive than anticipated;
•
•
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Forward-looking statements and related uncertainties are also included in Note 6 to the Notes to Consolidated Financial Statements in this report.
21
Results of Operations
The following table summarizes the number of properties and related units for the year-to-date periods presented:
22
| 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 | |||||
|
| Properties |
| Units |
| Purchase / |
| |
At December 31, 2001 |
| 1,076 |
| 224,801 |
|
|
| |
Q1/Q2 2002 Acquisitions |
| 7 |
| 1,983 |
| $ | 166.5 |
|
Ft. Lewis Joint Venture |
| 1 |
| 3,652 |
|
|
| |
Q1/Q2 2002 Dispositions |
| (23 | ) | (3,654 | ) | $ | 197.2 |
|
Q1/Q2 2002 Completed Developments |
| 4 |
| 1,181 |
|
|
| |
At June 30, 2002 |
| 1,065 |
| 227,963 |
|
|
| |
Q3/Q4 2002 Acquisitions |
| 5 |
| 1,651 |
| $ | 123.4 |
|
Q3/Q4 2002 Dispositions |
| (35 | ) | (7,059 | ) | $ | 349.0 |
|
Q3/Q4 2002 Completed Developments |
| 4 |
| 1,020 |
|
|
| |
Q3/Q4 2002 Unit Configuration Changes |
| — |
| 16 |
|
|
| |
At December 31, 2002 |
| 1,039 |
| 223,591 |
|
|
| |
Q1/Q2 2003 Acquisitions |
| 6 |
| 1,958 |
| $ | 277.7 |
|
Q1/Q2 2003 Dispositions |
| (44 | ) | (10,308 | ) | $ | 498.4 |
|
Q1/Q2 2003 Completed Developments |
| 4 |
| 1,274 |
|
|
| |
Q1/Q2 2003 Unit Configuration Changes |
| — |
| 129 |
|
|
| |
At June 30, 2003 |
| 1,005 |
| 216,644 |
|
|
|
The Company's
Significant changes in revenues between the six months and quarters presented have resulted primarily from reduced rental income through increased concessions or reduced apartment rents and occupancy at many of our properties. Significant changes in expenses have resulted from increases in property and maintenance expenses including payroll, maintenance, building, utilities and leasing and advertising as well as real estate taxes, partially offset by decreases in property management expenses. In addition, the Company’s acquisition, disposition and dispositioncompleted development activity has impacted overall results of operations for the six months and quarters ended 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 furniture rental business on January 11, 2002, as well as the properties acquired and developments completed in 2001 and 2002, which have been partially offset by the properties disposed in 20012003 and 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 isThese changes are discussed in greater detail in the following paragraphs.
Properties that the Company owned for all of both the entire six month periods ended June 30, 2002 and2003 as well as June 30, 20012002 (the "Six-Month 2002“Six-Month 2003 Same Store Properties"Properties”), which represented 194,491185,329 units and properties that the Company owned for all of both the quarters ended June 30, 20022003 and June 30, 20012002 (the "Second“Second Quarter 20022003 Same Store Properties"Properties”), which represented 196,211185,697 units, also impacted the Company'sCompany’s results of operations. Both the Six-Month 20022003 Same Store Properties and Second Quarter 20022003 Same Store Properties are discussed in the following paragraphs.
Comparison of the six months ended June 30, 20022003 to the six months ended June 30, 20012002
For the six months ended June 30, 2002,2003, income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations extraordinary items and cumulative effect of change in accounting principle decreased by approximately $12.1$28.2 million when compared to the six months ended June 30, 2001.2002.
Revenues from the Six-Month 20022003 Same Store Properties decreased primarily as a result of lower rental rates charged new residents,overall physical occupancy, increased concessions and lower occupancy at certain properties.
22
rental rates charged to both new and renewal residents. Property operating expenses from the Six-Month 20022003 Same Store Properties which include propertyincreased mainly due to higher payroll, maintenance, utility 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 a decrease in utilitybuilding costs. The following tables provide comparative revenue, expense, net operating income ("NOI"(“NOI”) and weighted average occupancy for the Six-Month 20022003 Same Store Properties:Properties (NOI represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense):
23
June 30,YTD 2003 vs. June YTD 2002 Year-to-Date Same Store
YTD over YTD Same-Store Results
$ in Millions—194,491 Same StoreMillions – 185,329 Same-Store Units
Description | Description | Revenues | Expenses | NOI |
| Revenues |
| Expenses |
| NOI |
| ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
|
|
| ||||||||||||||
YTD 2003 |
| $ | 874.9 |
| $ | 344.6 |
| $ | 530.3 |
| |||||||||||
YTD 2002 | YTD 2002 | $ | 918.0 | $ | 336.8 | $ | 581.2 |
| $ | 904.2 |
| $ | 324.2 |
| $ | 580.0 |
| ||||
YTD 2001 | $ | 930.3 | $ | 335.4 | $ | 594.9 | |||||||||||||||
Change | $ | (12.3 | ) | $ | 1.4 | $ | (13.7 | ) | |||||||||||||
% Change | (1.3 | )% | 0.4 | % | (2.3 | )% | |||||||||||||||
Change |
| $ | (29.3 | ) | $ | 20.4 |
| $ | (49.7 | ) | |||||||||||
Change |
| (3.2 | )% | 6.3 | % | (8.6 | )% |
Same Store
Same-Store Occupancy Statistics
YTD | 92.8 | % | ||
YTD | 94.1 | % | ||
Change | (1.3 | |||
)% |
The Company’s primary financial measure for evaluating each of its apartment communities is NOI. The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities.
For properties that the Company acquired prior to December 31, 2000January 1, 2002 and expects to continue to own through December 31, 2002,2003, the Company anticipates the following operating assumptionsresults for the full year ending December 31, 2002:2003:
2002
2003 Same-Store Operating Assumptions
Physical Occupancy | 93.0% | |
Revenue Change | (3.5%) to | |
Expense Change | 2.8% to | |
NOI Change | (9.2%) to | |
Dispositions | $ | |
These 20022003 operating assumptions are based on current expectations and are forward-looking.
Rental income from properties other than Six-Month 20022003 Same Store Properties increased by approximately $9.3 $22.3million primarily as a result of revenue from properties the Company acquired in 20012002 and 20022003 and additional Partially Owned Properties that the Company consolidated in 2001.the fourth quarter of 2002.
Interest and other income decreased by approximately $2.2million, primarily as a result of lower balances available for investment and related interest rates being earned on the Company's short-term investment accounts along with lower balances on deposit in tax-deferred exchangeescrow related accounts.
Interest income—investment in mortgage notes decreased by $8.8 million as a result of the Company consolidating previously Unconsolidated Properties in July 2001. No additional interest income will be recognized on such mortgage notes in future years as the Company now consolidates the results related to these previously Unconsolidated Properties.
23
Property management expenses include off-site expenses associated with the self-management of the Company's properties.Company’s properties as well as management fees paid to third party management companies. These expenses increaseddecreased by approximately $0.9$5.5 million or 2.5%14.5%. These expenses increased dueThis decrease is primarily attributable to higher overall compensation costsa reversal of a profit sharing accrual in the first quarter of 2003 related to a current period expense associated with restricted shares/awards granted to key employees. The Company continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets wherethe 2002 calendar year as the Company doesdidn’t achieve its stated goals and management elected not haveto make a significant management presence.discretionary contribution to the plan. In addition, the Company recorded lower expense in connection with granting less restricted shares and the anticipated 401(k) match to its employees during the first six months of 2003 and no accrued expense related to 2003 profit sharing.
Fee and asset management revenues, net of fee and asset management expenses, increased slightlyby $3.6
24
million primarily as a result of the Company managing an additional 3,637 units at Fortincome allocated from Ft. Lewis startingfor 2002 activity and received in April 2002.May 2003. As of June 30, 20022003 and 2001,2002, the Company managed 20,142 19,011units and 19,84420,142 units, respectively, for third parties and unconsolidated entities.
The Company recorded impairment charges in 2002 totaling approximately $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 $6.5 $5.9million primarily due to lower variable interest rates. During the six months ended June 30, 2002,2003, the Company capitalized interest costs of approximately $12.3$10.9 million as compared to $12.8$12.3 million for the six months ended June 30, 2001.2002. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities. The effective interest cost on all of the Company's indebtedness for the six months ended June 30, 20022003 was 6.63%6.40% as compared to 7.07%6.63% for the six months ended June 30, 2001.2002.
General and administrative expenses, which include corporate operating expenses, increaseddecreased approximately $8.2$2.2 million between the six monthsperiods under comparison. This increasedecrease was primarily due to higherlower expenses recorded in connection with granting less restricted shares to employees during the first six months of 2003 offset by approximately a $2.1 million increase related to the Company’s decision to expense its stock based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148). In addition, lower state income taxes in Michigan and New Jersey as well as the incomefranchise taxes incurred at one of the Company's taxable REIT subsidiaries which has an ownership interest in properties that in prior periods were classified as Unconsolidated Properties. In addition, retirement plan expenses for certain key executives, and higher overall compensation expenses including a current period expense associated with restricted shares/awards granted to key employees and additional compensation charges and costs associated with the Company's new President also contributed to the increase.this decrease.
Net gain
The Company recorded impairment charges on its technology investments of approximately $0.6 million for both the six months ended June 30, 2003 and 2002. See Note 17 in the Notes to Consolidated Financial Statements for further discussion.
Income (loss) on sales offrom investments in 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$2.0 million between the periods under comparison. This decrease is primarily the result of increased operating losses from equity investments partially offset by unrealized gains on derivative instruments.
Net gain on sales of discontinued operations increased approximately 3,500 fewer$112.5 million between the periods under comparison. This increase is primarily the result of a greater number of unitsproperties sold during the six months ended June 30, 20022003, as comparedwell as the fact that several properties were more fully depreciated.
Discontinued operations, net, decreased approximately $20.8 million between the periods under comparison. See Note 14 in the Notes to the six months ended June 30, 2001 (includes approximately 3,000 units sold into a joint venture in February 2001).Consolidated Financial Statements for further discussion.
24
Comparison of the quarter ended June 30, 20022003 to the quarter ended June 30, 20012002
For the quarter ended June 30, 2002,2003, income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations extraordinary items and cumulative effect of change in accounting principle decreased by approximately $7.2$11.6 million when compared to the quarter ended June 30, 2001.2002.
Revenues from the Second Quarter 20022003 Same Store Properties decreased primarily as a result of lower rental rates charged new residents,overall physical occupancy, increased concessions and lower occupancy at certain properties.rental rates charged to both new and renewal residents. Property operating expenses from the Second Quarter 20022003 Same Store Properties which include propertyincreased mainly due to higher payroll, maintenance, utility, building and maintenance, real estate taxesleasing 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 utilityadvertising costs. The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the Second Quarter 20022003 Same Store Properties:
25
Second Quarter 2003 vs. Second Quarter 2002 Same Store
Quarter over Quarter Same-Store Results
$ in Millions—196,211 Same StoreMillions – 185,697 Same-Store Units
Description | Description | Revenues | Expenses | NOI |
| Revenues |
| Expenses |
| NOI |
| ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
|
|
| ||||||||||||||
Q2 2003 |
| $ | 438.4 |
| $ | 173.5 |
| $ | 264.9 |
| |||||||||||
Q2 2002 | Q2 2002 | $ | 463.3 | $ | 173.3 | $ | 290.0 |
| $ | 451.9 |
| $ | 164.8 |
| $ | 287.1 |
| ||||
Q2 2001 | $ | 473.4 | $ | 170.6 | $ | 302.8 | |||||||||||||||
Change | $ | (10.1 | ) | $ | 2.7 | $ | (12.8 | ) | |||||||||||||
% Change | (2.1 | )% | 1.6 | % | (4.2 | )% | |||||||||||||||
Change |
| $ | (13.5 | ) | $ | 8.7 |
| $ | (22.2 | ) | |||||||||||
Change |
| (3.0 | )% | 5.3 | % | (7.7 | )% |
Same Store
Same-Store Occupancy Statistics
Q2 | 93.0 | % | ||
Q2 | 94.1 | % | ||
Change | (1.1 | |||
)% |
Rental income from properties other than Second Quarter 20022003 Same Store Properties increased by approximately $7.6 $11.1million primarily as a result of revenue from properties the Company acquired in 20012002 and 20022003 and additional Partially Owned Properties that the Company consolidated in 2001.the fourth quarter of 2002.
Interest and other income increaseddecreased by approximately $0.2$1.4 million, primarily as a result of a $0.7 million one-time financing fee related to the Fort Lewis loan closing netin the second quarter of 2002. In addition, lower balances available for investment and relatedinterest rates being earned on the Company's short termshort-term investment accounts along with lower balances on deposit in tax-deferred exchange accounts.escrow related accounts also contributed to this decrease.
Interest income—investment in mortgage notes decreased by $6.0 million as a result of the Company consolidating previously Unconsolidated Properties in July 2001. No additional interest income will be recognized on such mortgage notes in future years as the Company now consolidates the results related to these previously Unconsolidated Properties.
Property management expenses include off-site expenses associated with the self-management of the Company's properties.Company’s properties as well as management fees paid to third party management companies. These expenses increaseddecreased by approximately $0.6$1.9 million or 3.2%10.3%. These expenses increased dueThe Company recorded lower expense in connection with granting less restricted shares and the anticipated 401(k) match to higher overall compensation costsits employees during the first six months of 2003 and no accrued expense related to a current period expense associated with restricted shares/awards granted to key employees. The Company continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets where the Company does not have a significant management presence.2003 profit sharing.
25
Fee and asset management revenues, net of fee and asset management expenses, increased slightlyby $2.7 million primarily as a result of the Company managing an additional 3,637 units at Fortincome allocated from Ft. Lewis startingfor 2002 activity and received in April 2002.May 2003. As of June 30, 20022003 and 2001,2002, the Company managed 20,142 19,011units and 19,84420,142 units, respectively, for third parties and unconsolidated entities.
The Company 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$2.4 million primarily due to lower variable interest rates. During the quarter ended June 30, 2002,2003, the Company capitalized interest costs of approximately $6.4$5.5 million as compared to $6.8$6.4 million for the quarter ended June 30, 2001.2002. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities. The effective interest cost on all of the Company's indebtedness for the quarter ended June 30, 20022003 was 6.75%6.40% as compared to 7.07%6.75% for the quarter ended June 30, 2001.2002.
General and administrative expenses, which include corporate operating expenses, increaseddecreased approximately $4.2$2.6 million between the quartersperiods under comparison. This increasedecrease was primarily due to higherlower expenses recorded in connection with granting less restricted shares to employees and lower accrued expenses related to deferred compensation during the quarter ended June 30, 2003 offset by a $0.3 million increase related to the Company’s decision to expense its stock based compensation. In addition, lower state income taxes in Michigan and New Jersey as well as the incomefranchise taxes incurred at one of the Company's taxable REIT subsidiaries which has an ownership interest in properties that in prior periods were classified as Unconsolidated Properties. In addition, retirement plan expenses for certain key executives, and higher overall compensation expenses including a current period expense associated with restricted shares/awards granted to key employees and additional compensation charges and costs associated with the Company's new President also contributed to the increase.this decrease.
The Company recorded impairment charges on its technology investments of approximately $0.3 million for both quarters presented. See Note 17 in the Notes to Consolidated Financial Statements for
26
further discussion.
Income (loss) from investments in unconsolidated entities decreased approximately $1.9 million between the periods under comparison. This decrease is primarily the result of increased operating losses on equity investments.
Net gain on sales of discontinued operations increased approximately $21.2$44.7 million between the periods under comparison. This increase is primarily the result of more fully depreciateda greater number of properties sold during the quarter and an increase ofended June 30, 2003, as well as the fact that several properties were more fully depreciated.
Discontinued operations, net, decreased approximately 1,000 units sold.$10.6 million between the periods under comparison. See Note 14 in the Notes to Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
As of January 1, 2002,2003, the Company had approximately $51.6$29.9 million of cash and cash equivalents and $505.0$499.2 million available under its line of credit (net of $60.8 million which $59 million was restricted (notrestricted/dedicated to support letters of credit and not available for borrowings)borrowing). After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Company'sCompany’s cash and cash equivalents balance at June 30, 20022003 was approximately $88.9$243.8 million and the amount available on the Company'sCompany’s line of credit was $700.0$649.8 million (net of $50.2 million which $84.0 million was restricted (notrestricted/dedicated to support letters of credit and not available for borrowings)borrowing).
Part of the Company'sCompany’s acquisition and development funding strategy and the funding of the Company's investmentinvestments in various unconsolidated 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 six months ended June 30, 2002,2003, the Company:
•
•
•
• Obtained $48.7 million in new mortgage financing; and
• Issued approximately 1.60.9 million Common Shares and received net proceeds of $33.4 million; and
26$17.9 million.
All of these proceeds were primarily utilized to either:to:
•
•
•
•
During the six months ended June 30, 2002,2003, the Company:
•
• Repaid $178.1 million of mortgage loans;
• Repaid $140.0 million on its line of credit;
•
27
liquidation value.
Depending on its analysis of market prices, economic conditions, and other opportunities for the investment of available capital, the Company may repurchase up to an additional $85.0 million of 7.95% fixed rate public notes at maturity;
The Company'sCompany’s total debt summary and debt maturity schedule as of June 30, 2002,2003, are as follows:
Debt Summary as
|
| As of 6/30/03 |
| For the Six |
| |
Secured |
| $ | 2,851 |
| 5.96 | % |
Unsecured |
| 2,854 |
| 6.38 | % | |
Total |
| $ | 5,705 |
| 6.17 | % |
|
|
|
|
|
| |
Fixed Rate |
| $ | 5,073 |
| 6.67 | % |
Floating Rate |
| 632 |
| 2.66 | % | |
Total |
| $ | 5,705 |
| 6.17 | % |
|
|
|
|
|
| |
Above Totals Include: |
|
|
|
|
| |
Tax Exempt: |
|
|
|
|
| |
Fixed |
| $ | 533 |
| 4.28 | % |
Floating |
| 439 |
| 2.13 | % | |
Total |
| $ | 972 |
| 3.31 | % |
|
|
|
|
|
| |
Unsecured Revolving Credit Facility |
| $ | — |
| 1.85 | % |
* Net of June 30, 2002the effect of any derivative instruments.
| $ Millions | Weighted Average Rate | |||||
---|---|---|---|---|---|---|---|
Secured | $ | 3,210 | 6.28 | % | |||
Unsecured | 2,439 | 6.52 | % | ||||
Total | $ | 5,649 | 6.39 | % | |||
Fixed Rate | $ | 4,965 | 6.89 | % | |||
Floating Rate | 684 | 2.72 | % | ||||
Total | $ | 5,649 | 6.39 | % | |||
Above Totals Include: | |||||||
Total Tax Exempt | $ | 958 | 3.75 | % | |||
Unsecured Revolving Credit Facility | $ | — | — |
27
Debt Maturity Schedule as of June 30, 20022003
Year |
| $ Millions |
| % of Total |
| |
2003 |
| $ | 250 |
| 4.4 | % |
2004 |
| 654 |
| 11.5 | % | |
2005* |
| 606 |
| 10.6 | % | |
2006 |
| 490 |
| 8.6 | % | |
2007 |
| 298 |
| 5.2 | % | |
2008 |
| 503 |
| 8.8 | % | |
2009 |
| 248 |
| 4.3 | % | |
2010 |
| 198 |
| 3.5 | % | |
2011 |
| 691 |
| 12.1 | % | |
2012+ |
| 1,767 |
| 31.0 | % | |
Total |
| $ | 5,705 |
| 100.0 | % |
Year | $ Millions | % of Total | ||||
---|---|---|---|---|---|---|
2002 | $ | 245 | 4.3 | % | ||
2003 | 310 | 5.5 | % | |||
2004 | 592 | 10.5 | % | |||
2005* | 684 | 12.1 | % | |||
2006 | 429 | 7.6 | % | |||
2007 | 273 | 4.8 | % | |||
2008 | 511 | 9.0 | % | |||
2009 | 405 | 7.2 | % | |||
2010 | 256 | 4.5 | % | |||
2011+ | 1,944 | 34.4 | % | |||
Total | $ | 5,649 | 100.0 | % |
*
On June 5, 2003, the Operating Partnership filed a Form S-3 registration statement with the SEC to
28
register $2.0 billion of debt securities. The Company's "ConsolidatedSEC declared this registration statement effective on June 11, 2003. In addition, the Operating Partnership carried over $280.0 million related to the registration statement effective on September 8, 2000. As of June 30, 2003, $2.28 billion remained available for issuance under this registration statement.
The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio"Ratio” as of June 30, 20022003 is presented in the following table. The Company calculates the equity component of its market capitalization as the sum of (i) the total outstanding Common Shares and assumed conversion of all OP Units at the equivalent market value of the closing price of the Company'sCompany’s Common Shares on the New York Stock Exchange; (ii) the "Common“Common Share Equivalent"Equivalent” of all convertible preferred shares and preference interests/units; and (iii) the liquidation value of all perpetual preferred shares and preference interests outstanding.
Capitalization as of June 30, 20022003
Total Debt | $ | 5,649,483,792 | |||||
Common Shares & OP Units | 298,023,286 | ||||||
Common Share Equivalents (see below) | 15,134,806 | ||||||
Total Outstanding at quarter-end | 313,158,092 | ||||||
Common Share Price at June 28, 2002 | $ | 28.75 | |||||
9,003,295,145 | |||||||
Perpetual Preferred Shares Liquidation Value | 565,000,000 | ||||||
Perpetual Preference Interests Liquidation Value | 211,500,000 | ||||||
Total Market Capitalization | $ | 15,429,278,937 | |||||
Debt/Total Market Capitalization | 36.62 | % |
28
Total Debt |
|
|
| $ | 5,704,691,089 |
| |
Common Shares & OP Units |
| 295,472,629 |
|
|
| ||
Common Share Equivalents (see below) |
| 14,922,693 |
|
|
| ||
Total Outstanding at quarter-end |
| 310,395,322 |
|
|
| ||
Common Share Price at June 30, 2003 |
| $ | 25.95 |
|
|
| |
|
|
|
| 8,054,758,606 |
| ||
Perpetual Preferred Shares Liquidation Value |
|
|
| 615,000,000 |
| ||
Perpetual Preference Interests Liquidation Value |
|
|
| 211,500,000 |
| ||
Total Market Capitalization |
|
|
| $ | 14,585,949,695 |
| |
|
|
|
|
|
| ||
Debt/Total Market Capitalization |
|
|
| 39 | % | ||
Convertible Preferred Shares, Preference Interests and Junior Preference Units As
as of June 30, 20022003
| Shares/Units | Conversion Ratio | Common Share Equivalents | ||||
---|---|---|---|---|---|---|---|
Preferred Shares: | |||||||
Series E | 2,716,012 | 1.1128 | 3,022,378 | ||||
Series G | 1,264,700 | 8.5360 | 10,795,479 | ||||
Series H | 51,228 | 1.4480 | 74,178 | ||||
Preference Interests: | |||||||
Series H | 190,000 | 1.5108 | 287,052 | ||||
Series I | 270,000 | 1.4542 | 392,634 | ||||
Series J | 230,000 | 1.4108 | 324,484 | ||||
Junior Preference Units: | |||||||
Series A | 56,616 | 4.081600 | 231,084 | ||||
Series B | 7,367 | 1.020408 | 7,517 | ||||
Total Convertible | 4,785,923 | 15,134,806 | |||||
|
| Shares/Units |
| Conversion |
| Common |
|
Preferred Shares: |
|
|
|
|
|
|
|
Series E |
| 2,525,464 |
| 1.1128 |
| 2,810,336 |
|
Series G |
| 1,264,692 |
| 8.5360 |
| 10,795,408 |
|
Series H |
| 51,228 |
| 1.4480 |
| 74,178 |
|
Preference Interests: |
|
|
|
|
|
|
|
Series H |
| 190,000 |
| 1.5108 |
| 287,052 |
|
Series I |
| 270,000 |
| 1.4542 |
| 392,634 |
|
Series J |
| 230,000 |
| 1.4108 |
| 324,484 |
|
Junior Preference Units: |
|
|
|
|
|
|
|
Series A |
| 56,616 |
| 4.081600 |
| 231,084 |
|
Series B |
| 7,367 |
| 1.020408 |
| 7,517 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
| 14,922,693 |
|
The Company'sCompany’s policy is to maintain a ratio of consolidated debt-to-total market capitalization of less than 50%.
From July 1, 20022003 through July 29, 2002,August 8, 2003, the Company:
•
29
•
•
• Repaid $10.9 million of its Common Shares through open market mortgage debt at/or privately negotiated transactions. This program would initially be funded usingprior to maturity; and
• Relinquished $15.7 million of mortgage debt assumed by the Company's line of credit.
Investmentspurchaser in Unconsolidated Entities
In connection with one development agreement, the Company has an obligation to fund up to an additional $9.5 million to guarantee third party construction financing. disposition of certain properties.
Off-Balance Sheet Arrangements and Contractual Obligations
As of June 30, 2002,2003, the Company has 18 projects underin various stages of development with estimated completion dates ranging through MarchDecember 31, 2004. The three development agreements currently in place have the following key terms:
For one
•The first development agreement, the Company's 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 Company based on such value. If the Company chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Company'sCompany’s partner must exercise this right as to all projects within five years after the receipt of the final certificate of occupancy on the last developed property. The Company has an obligation to fund up to an additional $13.0 million to guarantee third party construction financing, if required.
Under a
•The second development agreement, the Company's partner has the right, at any time following completion of a project, to require the Company to purchase the partners'partners’ interest in that project at a mutually agreeable price. If the Company and the partner are unable to agree on a price, both parties will obtain appraisals. If the appraised values vary by more than 10%, both the Company and its partner will agree on a third appraiser to determine which original appraisal is closest to its
29
determination of value. The Company may elect at that time not to purchase the property and instead, authorize its partner to sell the project at or above the agreed-upon value to an unrelated third party. Five years following the receipt of the final certificate of occupancy on the last developed property, the Company must purchase, at the agreed-upon price, any projects remaining unsold mustunsold.
• The third development partner has the exclusive right for six months following stabilization (generally defined as having achieved 90% occupancy for three consecutive months following the substantial completion of a project) to market a project for sale. Thereafter, either the Company or its development partner may market a project for sale. If the Company’s development partner proposes the sale, the Company may elect to purchase the project at the price proposed by its partner or defer the sale until two independent appraisers appraise the project. If the two appraised values vary by more than 5%, a third appraiser will be purchased bychosen to determine the fair market value of the property. Once a value has been determined, the Company may elect to purchase the property or authorize its development partner to sell the project at the agreed-upon price.value.
In connection with one of its mergers, the Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of August 8, 2003, this enhancement was still in effect at a commitment amount of $12.7 million.
As of August 8, 2003, the Company has a commitment to fund $5.9 million to Constellation Real Technologies, LLC, a real estate technology company.
See also Note 2 and Note 7 and the third paragraph of Note 16 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s investments in unconsolidated entities.
30
Capitalization of Fixed Assets and Improvements to Real Estate:Estate
Our policy with respect to capital expenditures is generally to capitalize expenditures that improve the value of the property or extend the useful life of the component asset of the property. We track improvements to real estate in two major categories and several subcategories:
•
•
•
•
•
•
•
We typically capitalize for established properties approximately $260 to $270$290 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.
•
•
•
•
•
•
•
•
We typically capitalize for established properties approximately $340$380 to $370$390 per unit annually for outside the unit building improvements. All building improvements are depreciated over a five to ten-year estimated useful life. We expense as incurred all recurring expenditures that do not improve the value of the asset or extend its useful life.
30
For the six months ended June 30, 2002,2003, our actual improvements to real estate totaled approximately $66.5$76.8 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, 20022003
| 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 | |||||||||||||
|
| Total Units |
| Replacements |
| Avg. |
| Building |
| Avg. |
| Total |
| Avg. |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Established Properties (2) |
| 175,480 |
| $ | 27,299 |
| $ | 156 |
| $ | 35,401 |
| $ | 201 |
| $ | 62,700 |
| $ | 357 |
|
New Acquisition Properties (3) |
| 10,683 |
| 979 |
| 105 |
| 2,564 |
| 274 |
| 3,543 |
| 379 |
| ||||||
Other (4) |
| 7,811 |
| 4,299 |
|
|
| 6,279 |
|
|
| 10,578 |
|
|
| ||||||
Total |
| 193,974 |
| $ | 32,577 |
|
|
| $ | 44,244 |
|
|
| $ | 76,821 |
|
|
| |||
(1)Total units exclude 22,35622,670 unconsolidated units.
(2)
31
(3)Wholly Owned Properties acquired during 2000, 2001, 2002 and YTD 2002.2003. Per unit amounts are based on a weighted average of 18,0709,351 units.
(4) Includes properties either Partially Owned andor sold properties,during the period, commercial space and condominium conversions.
31
We anticipate capitalizing annually an average of approximately $600$640 to $640$680 per unit annually for insidereplacements and outside the unit capitalbuilding improvements to our real estate. Totalestablished properties. The Company expects to fund approximately $60.0million for capital expenditures for replacements and building improvements to real estatefor all consolidated properties for the remainder of 2002 are estimated to be $65.0 million.2003.
During the six months ended June 30, 2002,2003, the Company'sCompany’s total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company'sCompany’s property management offices and its corporate offices, was approximately $4.6 $1.6million. TotalThe Company expects to fund approximately $2.4 million in total additions to non-real estate property for the remainder of 2002 are estimated at $2.2 million.2003.
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.
OtherDerivative Instruments
In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.
The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives.
See Note 12 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at June 30, 2003.
Other
Minority Interests as of June 30, 20022003 decreased by $8.2$3.2 million when compared to December 31, 2001.2002. The primary factors that impacted this account in the Company'sCompany’s consolidated statements of operations and balance sheets during the six months ended June 30, 2003 were:
•
•
•
•
•The issuance of Common Shares; and
•The conversion of OP Units into Common Shares; and
Total distributions paid in July 20022003 amounted to $147.7$143.9 million (excluding distributions on Partially Owned Properties), which included certain distributions declared during the second quarter ended June 30, 2002.2003.
The Company expects to meet its short-term liquidity requirements, including capital expenditures
32
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 Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The Company also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities, including additional OP Units, and proceeds received from the disposition of certain properties. In addition, the Company has certain unencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable to the Company or the cost of alternative sources of capital to the Company is too high. TheseThe fair value of and cash flow from these unencumbered properties are in excess of the value of unencumbered propertiesrequirements the Company must maintain in order to comply with covenants under its unsecured notes and line of credit.
On May 30, 2002 the
The Company obtainedhas a new three-year $700.0 million unsecured revolving credit facility. The new line of credit replaces the Company's $700.0 million unsecured revolving credit facility that was scheduledwith potential borrowings of up to expire in August 2002. The prior existing revolving credit facility terminated upon the closing of the new facility.$700.0 million. This new facility matures in May 2005 and will be used to fund property acquisitions, costs for certain Propertiesproperties under development and short term liquidity requirements. As of July 31, 2002, $40.0 million wasAugust 8, 2003, noamounts were outstanding under this new facility.
32
The Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of July 31, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.
Critical Accounting Policies and Estimates
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosures.
The Company has identified six significant accounting policies as critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates. With respect to these critical accounting policies, management believes that the followingapplication of judgments and assessments is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The six critical accounting policies among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.are:
Impairment of Long-Lived Assets, Including Goodwill
The Company periodically evaluates its long-lived assets, including its investments in real estate and goodwill, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset and legal factors.and environmental concerns. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted.
Depreciation of Investment in Real Estate
The Company depreciates the building component of its investment in real estate over a 30-year estimated useful life, building improvements over a 5-year to 10-year estimated useful life and both the furniture, fixtures and equipment and replacements components over a 5-year estimated useful life, all of which are judgmental determinations.
Cost Capitalization
See the Capitalization of Fixed Assets and Improvements to Real Estate section for discussion of the policy with respect to capitalization vs. expensing of fixed asset/repair and maintenance costs. In addition, the Company capitalizes the payroll and associated costs of employees directly responsible for and who spend all of their time on the supervision of major capital projects. These costs are reflected on the balance sheet as an increase to depreciable property.
The Company follows the guidance in SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, for all development projects and uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. The Company capitalizes interest, real estate taxes and insurance and payroll and associated costs for those
33
individuals directly responsible for and who spend all of their time on development activities. The Company expenses as incurred all payroll costs of employees working directly at our properties, except for costs that are incurred during the initial lease-up phase on a development project. An allocated portion of payroll costs is capitalized based upon the occupancy of the project until stabilized occupancy is achieved. Stabilized occupancy is always deemed to have occurred no later than one year from cessation of major development activities. The incremental payroll and associated costs are capitalized to the projects under development based upon the effort directly identifiable with such projects. These costs are reflected on the balance sheet as either construction in progress or a separate component of investments in unconsolidated entities. The Company ceases the capitalization of such costs as the property becomes substantially complete and ready for its intended use.
Fair Value of Financial Instruments, Including Derivative Instruments
The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 and its amendments (SFAS Nos. 137/138/149) requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on other factors relevant to the financial instruments.
Revenue Recognition
Rental income attributable to leases is recorded when due from residents and is recognized monthly as it is earned, which is not materially different than on a straight-line basis. Leases entered into between a resident and a property for the rental of an apartment unit are generally year-to-year, renewable upon consent of both parties on an annual or monthly basis. Interest income is recorded on an accrual basis.
Stock-Based Compensation
Stock Option Compensation
ThePrior to 2003, the Company hashad chosen to account for its stock optionstock-based compensation in accordance with APB No. 25, Accounting for Stock Issued to Employees,which resultsresulted in no compensation expense for options issued with an exercise price equal to or exceeding the market value of the Company'sCompany’s Common Shares on the date of grant instead of Statement(intrinsic method). The Company has elected to expense its stock-based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), Accounting for Stock Based Compensation, effective in the first quarter of 2003, which would resultresulted in compensation expense being recorded based on the fair value of the stock option compensation issued.
Adjusted Net Incomegranted or modified.
SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123. The Company has chosen to use the “Prospective Method”. This method requires that companies apply the recognition provisions of SFAS No. 123 to only employee awards granted or modified after the beginning of the fiscal year in which the recognition provisions are first applied, or January 1, 2003. Compensation expense under all of the Company’s plans is generally recognized over periods ranging from three months to five years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the six months and quarter ended June 30, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. See Note 15 in the Notes to Consolidated Financial Statements for further discussion and comparative information regarding application of the fair value method to all outstanding employee awards.
34
Funds From Operations
For the six months ended June 30, 2002, Adjusted Net Income ("ANI"2003, Funds From Operations (“FFO”) available to Common Shares and OP Units decreased $4.3$44.1 million, or 11.6%, as compared to the six months ended June 30, 2001.2002.
For the quarter ended June 30, 2002, ANI available to Common Shares and OP Units increased $6.4 million as compared to the quarter ended June 30, 2001.
33
The following is a reconciliation of net income available to Common Shares to ANI available to Common Shares and OP Units for the six months and quarters ended June 30, 2002 and 2001:
Adjusted Net Income(Amounts in thousands)(Unaudited)
| Six Months Ended June 30, | Quarter Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
Net income available to Common Shares | $ | 165,394 | $ | 180,792 | $ | 89,041 | $ | 74,038 | ||||||
Net income allocation to Minority Interests—Operating Partnership | 13,784 | 16,474 | 7,343 | 6,678 | ||||||||||
Adjustments: | ||||||||||||||
Acquisition cost depreciation* | 192,005 | 187,797 | 95,847 | 94,324 | ||||||||||
Amortization of goodwill | — | 1,924 | — | 991 | ||||||||||
Acquisition cost depreciation accumulated on sold properties | (22,532 | ) | (34,774 | ) | (18,588 | ) | (8,575 | ) | ||||||
Extraordinary items | 468 | (106 | ) | 371 | 205 | |||||||||
Cumulative effect of change in accounting principle | — | 1,270 | — | — | ||||||||||
ANI available to Common Shares and OP Units—basic** | $ | 349,119 | $ | 353,377 | $ | 174,014 | $ | 167,661 | ||||||
Depreciation for replacements and capital improvements | $ | 43,422 | $ | 38,830 | $ | 22,170 | $ | 19,762 | ||||||
34
The Company believes that ANI is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. ANI in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Company's calculation of ANI may differ from the methodology for calculating ANI utilized by other real estate companies and may differ, for example, due to variations among the Company's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.
Funds From Operations
For the six months ended June 30, 2002, Funds From Operations ("FFO") available to Common Shares and OP Units decreased $4.4 million as compared to the six months ended June 30, 2001.
For the quarter ended June 30, 2002,2003, FFO available to Common Shares and OP Units decreased $4.3$20.7 million, or 10.9%, as compared to the quarter ended June 30, 2001.2002.
The following is a reconciliation of net income available to Common Shares to FFO available to Common Shares and OP Units for the six months and quarters ended June 30, 20022003 and 2001:2002:
Funds fromFrom Operations
(Amounts in thousands)
(Unaudited)
| Six Months Ended June 30, | Quarter Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
Net income available to Common Shares | $ | 165,394 | $ | 180,792 | $ | 89,041 | $ | 74,038 | ||||||
Net income allocation to Minority Interests—Operating Partnership | 13,784 | 16,474 | 7,343 | 6,678 | ||||||||||
Adjustments: | ||||||||||||||
Depreciation/amortization | 235,427 | 228,551 | 118,017 | 115,077 | ||||||||||
Net gain on sales of discontinued operations | (27,576 | ) | (46,226 | ) | (24,760 | ) | (4,448 | ) | ||||||
Net (gain) loss on sales of unconsolidated entities | (5,246 | ) | (339 | ) | 411 | (339 | ) | |||||||
Extraordinary items | 468 | (106 | ) | 371 | 205 | |||||||||
Cumulative effect of change in accounting principle | — | 1,270 | — | — | ||||||||||
Impairment on technology investments | 581 | 6,775 | 290 | 3,772 | ||||||||||
FFO available to Common Shares and OP Units—basic* | $ | 382,832 | $ | 387,191 | $ | 190,713 | $ | 194,983 | ||||||
|
| Six Months Ended June 30, |
| Quarter Ended June 30, |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
Net income available to Common Shares |
| $ | 223,321 |
| $ | 165,394 |
| $ | 112,154 |
| $ | 89,041 |
|
Net income allocation to Minority Interests – Operating Partnership |
| 18,281 |
| 13,784 |
| 9,171 |
| 7,343 |
| ||||
Adjustments: |
|
|
|
|
|
|
|
|
| ||||
Depreciation |
| 231,582 |
| 218,684 |
| 116,555 |
| 110,464 |
| ||||
Depreciation – Non-real estate additions |
| (4,598 | ) | (4,573 | ) | (2,323 | ) | (2,596 | ) | ||||
Depreciation – Partially Owned Properties |
| (4,116 | ) | (3,751 | ) | (2,077 | ) | (1,880 | ) | ||||
Depreciation – Unconsolidated Properties |
| 10,150 |
| 8,905 |
| 4,955 |
| 4,415 |
| ||||
Net (gain) loss on sales of unconsolidated entities |
| (4,675 | ) | (5,246 | ) | (3,463 | ) | 411 |
| ||||
Discontinued Operations: |
|
|
|
|
|
|
|
|
| ||||
Depreciation |
| 5,810 |
| 16,162 |
| 1,919 |
| 7,614 |
| ||||
Net gain on sales of depreciable property |
| (138,105 | ) | (27,576 | ) | (67,876 | ) | (25,099 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
FFO available to Common Shares and OP Units – basic (1)(2) |
| $ | 337,650 |
| $ | 381,783 |
| $ | 169,015 |
| $ | 189,713 |
|
(1)*
(2)
The Company believes that FFO is helpful to investors as a supplemental measure of the operating performance of a real estate company because along with cash flows from operating activities,
35
financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. FFO in and of itself does not represent net income or net cash generatedflows from operating activities in accordance with GAAP and thereforeGAAP. Therefore, FFO should not be exclusively considered as an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP or as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs.liquidity. The Company'sCompany’s calculation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies and may differ, for example, due to variations among the Company's and other real estate companies' accountingin cost capitalization policies for replacement type itemscapital expenditures and, accordingly, may not be comparable to such other real estate companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s market risk has not changed materially from the amounts and information reported in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, to the Company’s Form 10-K for the year ended December 31, 2002. See also Note 12 to the Notes to Consolidated Financial Statements for additional discussion of derivative instruments.
Item 4. Disclosure Controls and Procedures
Effective as of June 30, 2003, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in timely alerting them to material information. During the fiscal quarter ended June 30, 2003, there were no changes to the internal controls over financial reporting of the Company identified in connection with the Company’s evaluation or otherwise that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II.OTHER INFORMATION
There have been no new or significant developments related to the legal proceedings that were discussed in Part I, Item III of the Company'sCompany’s Form 10-K for the year ended December 31, 2001.2002.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 15, 2002.30, 2003. Shareholders holding 241,525,692246,033,712 Common Shares (being the only class of shares entitled to vote at the meeting), or 88.4%90.29% of the Company'sCompany’s issued and outstanding sharesCommon Shares as of the record date for the meeting, attended the meeting or were represented by proxy. The Company'sCompany’s shareholders voted on three mattersproposals presented at the meeting and all three received the requisite number of votes to pass. The results of the shareholders voteshareholders’ votes on each of the three mattersproposals are as follows:
Proposal I—Election of fourthe following trustees to annual terms expiring in 2005.
| Total Vote for Each Trustee* | Total Vote Withheld from Each Trustee* | |||
---|---|---|---|---|---|
John W. Alexander | 98.30 | % | 1.70 | % | |
Bruce W. Duncan | 97.83 | % | 2.17 | % | |
Boone A. Knox | 98.28 | % | 1.72 | % | |
Samuel Zell | 97.80 | % | 2.20 | % |
NOMINEE |
| FOR |
| WITHHELD |
John W. Alexander |
| 239,914,006 |
| 6,119,706 |
Bruce W. Duncan |
| 241,652,507 |
| 4,381,205 |
Stephen O. Evans |
| 188,931,503 |
| 57,102,209 |
James D. Harper, Jr. |
| 239,892,931 |
| 6,140,781 |
Boone A. Knox |
| 239,888,493 |
| 6,145,219 |
Sheli Z. Rosenberg |
| 239,831,351 |
| 6,202,361 |
Gerald A. Spector |
| 240,132,759 |
| 5,900,953 |
Michael N. Thompson |
| 241,414,847 |
| 4,618,865 |
B. Joseph White |
| 239,925,190 |
| 6,108,522 |
Samuel Zell |
| 240,139,840 |
| 5,893,872 |
Proposal II—Approval – Amendment to change the Company's nameCompany’s Declaration of Trust to "Equity Residential" (this matterdeclassify the Board of Trustees and provide for the annual election of trustees. This proposal required the affirmative vote of two-thirds of all
36
outstanding shares for approval).approval.
36
|
| FOR |
| AGAINST |
| ABSTAIN |
|
Total Shares |
| 243,072,662 |
| 1,250,928 |
| 1,710,116 |
|
% of Voted Shares |
| 98.80 | % | 0.51 | % | 0.69 | % |
% of Outstanding |
| 89.20 | % | 0.46 | % | 0.63 | % |
Proposal III— – Approval of an amendment to the Company's 2002Company’s Employee Share IncentivePurchase Plan (this matterto increase the number of shares authorized for issuance under this plan. This proposal required a majority of the votes cast for approval).approval.
For | 190,637,623 | 88.51 | % | ||
Against | 24,759,248 | 11.49 | % | ||
Abstain | 927,564 | — | |||
Broker Non-Votes | 25,201,257 | — |
|
| FOR |
| AGAINST |
| ABSTAIN |
|
Total Shares |
| 238,705,998 |
| 5,231,066 |
| 2,091,551 |
|
% of Voted Shares |
| 97.02 | % | 2.13 | % | 0.85 | % |
% of Outstanding |
| 87.60 | % | 1.92 | % | 0.77 | % |
Item 6.Exhibits and Reports on Form 8-K
(A)
3.1Articles of Amendment to Equity Residential Declaration of Trust dated May 30, 2003.
10.1First Amendment to Equity Residential 1993 Share Option and Share Award Plan dated as of June 10, 2003.
10.2Second Amendment to Equity Residential 2002 Share Incentive Plan dated as of June 10, 2003.
12Computation of Ratio of Earnings to Combined Fixed Charges.
31.1Certification of Bruce W. Duncan, Chief Executive Officer.
31.2Certification of David J. Neithercut, Chief Financial Officer.
32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Bruce W. Duncan, Chief Executive Officer of the Company.
32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer of the Company.
(B)
None.
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A report on Form 8-K filed June 19, 2003 containing information concerning the underwriting terms of the Company’s $150.0 million Series N Preferred Share offering.
37
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.
EQUITY RESIDENTIAL | |||||||||
Date: | August 13, | By: /s/ | David J. Neithercut | ||||||
David J. Neithercut | |||||||||
Executive Vice President and | |||||||||
Date: | August 13, | By: /s/ | Michael J. McHugh | ||||||
Michael J. McHugh | |||||||||
Executive Vice President, | |||||||||
38
Exhibit | Document | |
3.1 | Articles of Amendment to Equity Residential Declaration of Trust dated May 30, 2003. | |
10.1 | First Amendment to Equity Residential 1993 Share Option and Share Award Plan dated as of June 10, 2003. | |
10.2 | Second Amendment to Equity Residential 2002 Share Incentive Plan dated as of June 10, 2003. | |
12 | Computation of Ratio of Earnings to Combined Fixed Charges. | |
31.1 | Certification of Bruce W. Duncan, Chief Executive Officer. | |
31.2 | Certification of David J. Neithercut, Chief Financial Officer. | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Bruce W. Duncan, Chief Executive Officer of the Company. | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer of the Company. |
39