FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-24920
ERP OPERATING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
ILLINOIS 36-3894853
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 474-1300
(Registrant's Telephone Number, Including Area Code)
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 X No
--- ---
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
June 30, December 31,
1996 1995
---------- ------------
ASSETS
Investment in rental property
Land $ 237,482 $ 210,369
Depreciable property 2,242,492 1,976,267
---------- ----------
2,479,974 2,186,636
Accumulated depreciation (252,872) (217,183)
---------- ----------
Investment in rental property, net of accumulated depreciation 2,227,102 1,969,453
Real estate held for disposition 4,165 --
Cash and cash equivalents 11,906 13,428
Investment in mortgage notes, net 86,768 87,154
Rents receivable 1,734 1,073
Deposits - restricted 11,300 18,272
Escrow deposits - mortgage 17,456 16,745
Deferred financing costs, net 11,094 12,653
Other assets 22,610 22,482
---------- ----------
TOTAL ASSETS $2,394,135 $2,141,260
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgage notes payable $ 667,803 $ 561,695
Notes, net 348,681 348,524
Line of credit 20,000 92,000
Accounts payable and accrued expenses 29,478 23,544
Accrued interest payable 8,047 8,354
Due to affiliates 1,639 1,568
Rents received in advance and other liabilities 12,817 11,138
Security deposits 11,447 10,131
Distributions payable 37,210 30,826
---------- ----------
TOTAL LIABILITIES 1,137,122 1,087,780
---------- ----------
Commitments and contingencies
Redeemable Preference Interests -- 24,578
---------- ----------
9 3/8% Series A Cumulative Redeemable Preference Units 153,000 153,000
---------- ----------
9 1/8% Series B Cumulative Redeemable Preference Units 125,000 125,000
---------- ----------
Partners' capital:
General Partner 823,982 606,517
Limited Partners 155,031 144,385
---------- ----------
Total partners' capital 979,013 750,902
---------- ----------
Total liabilities and partners' capital $2,394,135 $2,141,260
========== ==========
The accompanying notes are an integral part of the financial statements.
2
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per OP Unit data)
(Unaudited)
Six Months Ended June 30, Quarters Ended June 30,
------------------------- -----------------------
1996 1995 1996 1995
------------------------- -----------------------
REVENUES
Rental income $209,239 $179,700 $107,796 $90,274
Fee and asset management 3,303 3,761 1,758 1,899
Interest income - investment in mortgage notes 5,866 - 3,156 -
Interest and other income 1,180 1,715 557 1,121
-------- -------- -------- -------
Total revenues 219,588 185,176 113,267 93,294
-------- -------- -------- -------
EXPENSES
Property and maintenance 59,217 51,594 30,551 26,346
Real estate taxes and insurance 21,229 18,383 10,950 9,093
Property management 8,800 7,688 4,365 3,668
Fee and asset management 2,126 1,940 1,020 954
Depreciation 42,933 33,920 22,317 17,311
Interest:
Expense incurred 37,024 39,091 18,783 19,526
Amortization of deferred financing costs 1,895 1,702 951 916
General and administrative 4,105 4,094 2,026 1,936
-------- -------- -------- -------
Total expenses 177,329 158,412 90,963 79,750
-------- -------- -------- -------
Income before gain on disposition of properties
and extraordinary item 42,259 26,764 22,304 13,544
Gain on disposition of properties 2,346 - 1,006 -
-------- -------- -------- -------
Income before extraordinary item 44,605 26,764 23,310 13,544
Gain on early extinguishment of debt - 2,000 - 2,000
-------- -------- -------- -------
Net income $ 44,605 $ 28,764 $ 23,310 $15,544
======== ======== ======== =======
ALLOCATION OF NET INCOME:
Redeemable Preference Interests $ 263 $ 770 $ - $ 384
======== ======== ======== =======
9-3/8% Series A Cumulative Redeemable
Preference Units $ 7,172 $ 1,195 $ 3,586 $ 1,195
======== ======== ======== =======
9-1/8% Series B Cumulative Redeemable
Preference Units $ 5,702 $ - $ 2,851 $ -
======== ======== ======== =======
General Partner 25,808 21,631 13,851 11,287
Limited Partners 5,660 5,168 3,022 2,678
-------- -------- -------- -------
$ 31,468 $ 26,799 $ 16,873 $13,965
======== ======== ======== =======
Net income per weighted average OP Unit outstanding $ 0.65 $ 0.63 $ 0.34 $ 0.33
======== ======== ======== =======
Weighted average OP Units outstanding 48,122 42,444 50,034 42,475
======== ======== ======== =======
The accompanying notes are an integral part of the financial statements.
3
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,605 $ 28,764
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 42,933 33,920
Amortization of deferred financing costs (including discount on 1999 and 2002 Notes) 2,052 1,817
Gain on disposition of properties (2,346) -
Gain on early extinguishment of debt - (2,000)
Changes in assets and liabilities:
(Increase) in rents receivable (661) (294)
Decrease (increase) in deposits - restricted 10,872 (1,101)
(Increase) decrease in other assets 757 2,311
(Decrease) in due to affiliates (200) (1,172)
Increase in accounts payable and accrued expenses 6,262 3,994
(Decrease) increase in accrued interest payable (307) 1,741
Increase in rents received in advance and other liabilities 1,679 1,149
--------- ---------
Net cash provided by operating activities 105,646 69,129
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties, net (262,921) (45,574)
Improvements to rental property (13,749) (13,506)
Additions to non-rental property (725) (2,026)
Proceeds from disposition of rental property 10,183 -
(Increase) in mortgage deposits (711) (2,926)
Deposits (made) on rental property acquisitions (4,000) (500)
Deposits applied on rental property acquisitions 100 2,058
Increase in investment in mortgage notes, net 386 -
Other investing activities (96) 4,301
--------- ---------
Net cash (used for) investing activities (271,533) (58,173)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from General Partner 232,004 148,001
Redemption of Preference Interests (1,083) (401)
Distributions paid to partners (65,836) (44,997)
Proceeds from sale of Fixed Rate Notes, net of discount - 124,011
Principal receipts on employee notes 37 124
Proceeds from restructuring of tax-exempt bond investments 77,095 -
Loan to title holding entities (4,900) -
Proceeds from line of credit 157,000 60,000
Repayments on line of credit (229,000) (222,000)
Principal payments on mortgage notes payable (1,864) (34,562)
Loan and bond acquisition costs (404) (2,325)
Increase in security deposits 1,316 241
--------- ---------
Net cash provided by financing activities 164,365 28,092
--------- ---------
Net (decrease) increase in cash and cash equivalents (1,522) 39,048
Cash and cash equivalents, beginning of period 13,428 20,038
--------- ---------
Cash and cash equivalents, end of period $ 11,906 $ 59,086
========= =========
The accompanying notes are an integral part of the financial statements.
4
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Amounts in thousands)
(Unaudited)
Six Months ended June 30,
-------------------------
1996 1995
-------------------------
Supplemental information:
Cash paid during the period for interest $ 37,331 $37,350
======== =======
Mortgage loans assumed through acquisitions of rental properties $ 30,878 $ -
======== =======
Rental property assumed through foreclosure $ 10,854 $ -
======== =======
The accompanying notes are an integral part of the financial statements.
5
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DEFINITION OF SPECIAL TERMS:
Capitalized terms used herein and not defined are as defined in the Operating
Partnership's Annual Report on Form 10-K for the year ended December 31, 1995.
1. BUSINESS
ERP Operating Limited Partnership (the "Operating Partnership"), an
Illinois limited partnership, was formed to conduct the multifamily residential
property business of Equity Residential Properties Trust (the "General Partner"
or the "Company"). The Company is a Maryland real estate investment trust formed
on March 31, 1993. The Company conducts substantially all of its operations
through the Operating Partnership. As of June 30, 1996, the Operating
Partnership controlled a portfolio of 191 multifamily residential properties
(individually a "Property" and collectively the "Properties"). The Company's
interest in six of these Properties consists solely of ownership of debt
collateralized by such Properties. The Company also has an investment in
partnership interests and subordinated mortgages collateralized by 21 properties
(the "Additional Properties").
2. BASIS OF PRESENTATION
The balance sheet and statements of operations and cash flows as of and for
the quarter and six months ended June 30, 1996 represent the consolidated
financial information of the Operating Partnership and its interests in the
Financing Partnerships and the Management Partnerships.
Due to the Operating Partnership's ability to control, through ownership,
the Management Partnerships and the Financing Partnerships, each such entity has
been consolidated with the Operating Partnership for financial reporting
purposes. In regard to Management Corp. and Management Corp. II, the Operating
Partnership does not have legal control; however, these entities are
consolidated for financial reporting purposes, the effects of which are
immaterial.
These unaudited Consolidated Financial Statements of the Operating
Partnership have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the Financial Statements and Notes thereto included in the Operating
Partnership's Annual Report on Form 10-K for the year ended December 31, 1995
("Form 10-K"). The following Notes to Consolidated Financial Statements
highlight significant changes to the notes included in the Form 10-K and present
interim disclosures as required by the SEC. The accompanying Consolidated
Financial Statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature. Certain reclassifications have
been made to the prior period's financial statements in order to conform with
the current period presentation.
6
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PARTNERS' CAPITAL
The limited partners of the Operating Partnership include various
individuals and entities that contributed their properties to the Operating
Partnership in exchange for a partnership interest (the "Limited Partners"). As
of June 30, 1996, the Limited Partners were represented by 8,850,756 partnership
interests ("OP Units") which are exchangeable on a one-for-one basis into the
Company's Common Shares. As of June 30, 1996, the General Partner had an
approximate 83.04% interest in the Operating Partnership and the Limited
Partners had an approximate 16.96% interest.
In regards to the General Partner, net proceeds from the various offerings
of the Company have been contributed by the Company to the Operating Partnership
in return for an increased ownership percentage. Due to the Limited Partners'
ability to convert their interest into an ownership interest in the General
Partner, the net offering proceeds are allocated between the Company (as General
Partner) and the Limited Partners (to the extent represented by OP Units) to
account for the change in their respective percentage ownership of the equity of
the Operating Partnership.
On May 21, 1996, the Company completed an offering of 2,300,000 publicly
registered Common Shares, which were sold at a net price of $30.50 per share. On
May 28, 1996, the Company completed the sale of 73,287 publicly registered
Common Shares to employees of the Company and to employees of EGI and certain of
their respective affiliates and consultants at a price equal to $30.50 per
share. On May 30, 1996, the Company completed an offering of 1,264,400 publicly
registered Common Shares, which were sold at a net price of $30.75 per share.
The Company received net proceeds of approximately $111.3 million in connection
with the sale of the 3,637,687 Common Shares mentioned above (collectively, the
"May 1996 Common Share Offerings").
On June 26, 1996, the Company filed with the SEC a Form S-3 Registration
Statement to register 608,665 Common Shares which may be issued by the Company
to holders of 608,665 OP Units. The SEC has not yet declared the Registration
Statement effective.
Minority Interests represented by the Company's indirect 1% interest in
various Financing Partnerships and LLCs are immaterial and have not been
accounted for in the Consolidated Financial Statements. In addition, certain
amounts due from the Company for its 1% interest in the Financing Partnerships
has not been reflected in the Consolidated Balance Sheets since such amounts are
immaterial to the Consolidated Balance Sheets.
7
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. INVESTMENT IN RENTAL PROPERTY
During the six months ended June 30, 1996, the Operating Partnership
acquired the 18 Properties listed below. Each Property was purchased from an
unaffiliated third party. The cash portion of these transactions was primarily
funded from the Operating Partnership's line of credit.
Total
Date Number Acquisition Cost
Acquired Property Location of Units (in thousands)
- --------- -------- -------- -------- ----------------
02/07/96 7979 Westheimer Houston, TX 459 $ 14,410
02/27/96 Sabal Pointe (formerly
Vinings at Coral Springs) Coral Springs, FL 275 19,452
03/01/96 The Plantations Cary, NC 344 19,879
03/05/96 Heron Landing (formerly Sunrise, FL
Oxford & Sussex) 144 7,112
03/12/96 Pines of Cloverlane Ann Arbor, MI 592 19,285
03/14/96 Regency Palms Huntington Beach, CA 310 18,629
03/21/96 Port Royale II Ft. Lauderdale, FL 161 10,196
04/16/96 Twenty-nine Hundred on
First Seattle, WA 135 11,782
05/22/96 Woodland Hills Decatur, GA 228 12,254
05/31/96 Ivy Place (formerly Post
Place) Atlanta, GA 122 7,933
06/03/96 Ridgetree Dallas, TX 798 20,949
06/05/96 Country Ridge Farmington Hills, MI 252 16,058
06/07/96 Rosehill Pointe Lenexa, KS 498 20,734
06/07/96 Forest Ridge Arlington, TX 660 23,393
06/12/96 Canyon Sands Phoenix, AZ 412 14,761
06/12/96 Desert Sands Phoenix, AZ 412 14,644
06/25/96 Chandler Court Chandler, AZ 311 13,531
06/28/96 Lands End Pacifica, CA 260 18,253
----- --------
6,373 $283,255
===== ========
In addition to the Properties mentioned above, on February 1, 1996,
Management Corp. II transferred to the Operating Partnership its interest in
Desert Park, a 368-unit Property located in Las Vegas, Nevada, subject to $8.1
million of indebtedness, in exchange for the forgiveness of a $2.7 million note
payable to the Operating Partnership.
8
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. DISPOSITION OF RENTAL PROPERTIES
On January 31, 1996, the Operating Partnership sold Sanddollar Apartments
located in Tulsa, Oklahoma for a sales price of $6.2 million. The gain for
financial reporting purposes was approximately $1.3 million.
On June 25, 1996, the Operating Partnership sold Deer Run Apartments
located in Charleston, South Carolina for a sales price of $3.95 million. The
gain for financial reporting purposes was approximately $1 million.
6. COMMITMENTS TO ACQUIRE AND DISPOSE RENTAL PROPERTIES
As of June 30, 1996, the Operating Partnership had entered into separate
agreements to acquire five multifamily residential properties containing 1,729
units and a vacant land parcel from unaffiliated third parties. The expected
combined purchase price is approximately $86.1 million, which includes the
assumption of mortgage indebtedness of $57.65 million.
Also as of June 30, 1996, the Operating Partnership had entered into an
agreement to dispose of one Property containing 200 units to an unaffiliated
third party. The expected sales price is $5.15 million.
The closings of these pending transactions are subject to certain
contingencies and conditions; therefore, there can be no assurance that these
transactions will be consummated or that the final terms thereof will not differ
in material respects from those summarized in the two preceding paragraphs.
7. INVESTMENT IN MORTGAGE NOTES
Investment in mortgage notes, net represents the Operating Partnership's
investment in subordinated mortgages collateralized by the Additional
Properties.
8. REDEEMABLE PREFERENCE INTERESTS
During the six months ended June 30, 1996, the Operating Partnership
redeemed 1,140 Preference Units for a total redemption price of approximately
$1.1 million.
On March 1, 1996, the Operating Partnership exercised its option to convert
all of the remaining Preference Units into OP Units. This conversion resulted in
1,182,835 OP Units being issued.
9
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. MORTGAGE NOTES PAYABLE
As of June 30, 1996, the Operating Partnership had outstanding mortgage
indebtedness of approximately $667.8 million encumbering 82 of the Properties.
The carrying value of such Properties (net of accumulated depreciation of $137.9
million) was $893.3 million. In connection with the Properties acquired during
the six months ended June 30, 1996, the Operating Partnership assumed the
outstanding mortgage balances on four Properties in the aggregate amount of
$30.9 million. In addition, the Operating Partnership restructured a portion of
its tax-exempt bond investments resulting in an increase in mortgage
indebtedness of approximately $77.1 million. Scheduled maturities for the
Operating Partnership's outstanding mortgage indebtedness are at various dates
through April 1, 2027. As of June 30, 1996, fixed interest rates on certain of
these mortgage notes ranged from 4% to 10.27% and variable interest rates on
certain of the mortgage notes ranged from 3.15% to 7.51%. Subsequent to June 30,
1996, the Operating Partnership repaid the outstanding mortgage balance on two
Properties in the aggregate amount of approximately $19 million.
10. LINE OF CREDIT
The Operating Partnership has a $250 million unsecured line of credit with
Wells Fargo Realty Advisors Funding, Incorporated, as agent. This line of credit
matures in November 1996 unless extended by the parties. Borrowings under this
line of credit currently bear interest at a rate equal to the one month LIBOR,
plus 1.375%. As of June 30, 1996, $20 million was outstanding under this
facility and was bearing interest at an interest rate of 6.875%.
11. NOTES
Included in this balance are the 1999 Notes, the Floating Rate Notes and
the 2002 Notes.
The 1999 Notes were issued at a discount, which is being amortized over the
life of the 1999 Notes on a straight-line basis. As of June 30, 1996, the
unamortized discount balance was approximately $0.5 million. The 1999 Notes are
due May 15, 1999 and bear interest at a rate of 8.5%, which is payable
semiannually in arrears on May 15 and November 15.
The Floating Rate Notes are due on December 22, 1997 and currently bear
interest at three-month LIBOR plus 0.75%, which is payable quarterly in arrears
on the third Wednesday of each February, May, August and November of each year.
The 2002 Notes were issued at a discount, which is being amortized over the
life of the 2002 Notes on a straight-line basis. As of June 30, 1996 the
unamortized discount balance was approximately $0.8 million. The 2002 Notes are
due on April 15, 2002 and bear interest at 7.95%, which is payable semi-annually
on each April 15 and October 15.
10
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. DEPOSITS - RESTRICTED
Deposits - restricted shown on the Operating Partnership's Consolidated
Balance Sheet as of June 30, 1996 included a deposit held in a third party
escrow account which deposit was made in connection with one of the Operating
Partnership's dispositions. Approximately $3.9 million were held in this account
and were utilized for one property the Operating Partnership purchased
subsequent to June 30, 1996. Also included in the deposits - restricted amount
were approximately $4 million of earnest money deposits made for property
acquisitions. Also included in the deposits - restricted amount were tenant
security and utility deposits made for certain of the Operating Partnership's
Properties.
13. COMMITMENTS AND CONTINGENCIES
There have been no new or significant developments related to the
commitments and contingencies that were discussed in Note 18 to the Operating
Partnership's Form 10-K for the year ended December 31, 1995.
14. SUBSEQUENT EVENTS
On July 12, 1996, the Operating Partnership paid a $0.59 per OP Unit
distribution for the quarter ended June 30, 1996 to OP Unit holders of record on
June 28, 1996. On July 15, 1996, the Operating Partnership paid a $0.5859
distribution and a $0.5703 distribution for the quarter ended June 30, 1996 to
the Company as holder of the Series A Cumulative Preference Units and the Series
B Cumulative Preference Units, respectively.
On July 2, 1996, the Operating Partnership acquired Sunny Oak Village
Apartments, a 548-unit multifamily residential property located in Overland
Park, Kansas from an unaffiliated third party. The purchase price was
approximately $22.2 million.
On July 2, 1996, the Operating Partnership acquired Mallard Cove
Apartments, a 211-unit multifamily residential property located in Greenville,
South Carolina from an unaffiliated third party. The purchase price was $7.85
million.
On July 16, 1996, the Operating Partnership acquired Pine Meadow
Apartments, a 204-unit multifamily residential property located in Greensboro,
North Carolina from an unaffiliated third party. The purchase price was $7.19
million, which included the assumption of mortgage indebtedness of approximately
$4.9 million.
On July 19, 1996, the Operating Partnership acquired Summer Ridge
Apartments (136 units) located in Riverside, California; Promenade Terrace
Apartments (330 units) located in Corona Hills, California; and South Creek
Apartments (528 units) located in Mesa, Arizona, all multifamily residential
properties from an unaffiliated third party. The combined purchase price was
$55.53 million, which included the assumption of mortgage indebtedness of
approximately $33.2 million.
11
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On August 1, 1996, the Operating Partnership acquired Pueblo Villas
Apartments, a 232-unit multifamily residential property located in Albuquerque,
New Mexico from an unaffiliated third party. The purchase price was $8.5
million.
Subsequent to June 30, 1996 and through August 13, 1996, the Operating
Partnership entered into separate agreements to acquire 11 multifamily
residential properties consisting of 2,777 units from unaffiliated third
parties. The expected combined purchase price is approximately $137.75 million
which includes the assumption of mortgage indebtedness of approximately $12.6
million.
The closings of these pending transactions are subject to certain
contingencies and conditions; therefore, there can be no assurance that these
transactions will be consummated or that the final terms thereof will not differ
in material respects from those summarized in the preceding paragraph.
In August 1996, the Operating Partnership issued $150 million of unsecured
fixed rate notes (the "2026 Notes") in connection with the Debt Shelf
Registration in a public debt offering. The 2026 Notes are due on August 15,
2026 and bear interest at 7.57%, which is payable semi-annually in arrears on
February 15 and August 15, commencing February 15, 1997. The Operating
Partnership received net proceeds of approximately $148.7 million in connection
with this offering and subsequently repaid amounts outstanding on the line of
credit.
12
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RUSULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis of the results of operations and
financial condition of the Operating Partnership should be read in connection
with the Consolidated Financial Statements and Notes thereto. Due to the
Operating Partnership's ability to control, through ownership, Equity
Residential Properties Management Limited Partnership and Equity Residential
Properties Management Limited Partnership II (collectively, the "Management
Partnerships"), a series of limited partnerships (the "Financing Partnerships")
and the LLCs, each entity has been consolidated with the Operating Partnership
for financial reporting purposes. Capitalized terms used herein and not
defined, are as defined in the Operating Partnership's Annual Report on Form
10-K for the year ended December 31, 1995.
RESULTS OF OPERATIONS
Since the Company's IPO, the Operating Partnership has acquired direct or
indirect interests in 130 properties (the "Acquired Properties"), containing
40,755 units in the aggregate for a total purchase price of approximately $1.9
billion, including the assumption of approximately $442.8 million of mortgage
indebtedness. The Operating Partnership's interest in six of the Acquired
Properties consists solely of ownership of the debt collateralized by such
Acquired Properties. The Operating Partnership purchased ten of such Acquired
Properties consisting of 2,694 units between the IPO and December 31, 1993 (the
"1993 Acquired Properties"); 84 of such Acquired Properties consisting of
26,285 units in 1994 (the "1994 Acquired Properties"); 17 of such Acquired
Properties consisting of 5,035 units in 1995 (the "1995 Acquired Properties")
and 19 of such Acquired Properties consisting of 6,741 units in 1996 (the "1996
Acquired Properties"). In addition, in August 1995, the Operating Partnership
made an investment in partnership interests and subordinated mortgages
collateralized by the 21 Additional Properties. The Acquired Properties were
presented in the Consolidated Financial Statements of the Operating Partnership
from the date of each acquisition.
During 1995, the Operating Partnership also disposed of six properties
containing 2,445 units (the "1995 Disposed Properties") for a total sales price
of approximately $52 million and the release of mortgage indebtedness of $20.5
million. During the six months ended June 30, 1996, the Operating Partnership
disposed of two properties (the "1996 Disposed Properties") for a total sales
price of $10.15 million.
The Operating Partnership's overall results of operations for the quarter and
six months ended June 30, 1996 have been significantly impacted by the Operating
Partnership's acquisition and disposition activity. The significant increases in
rental revenues, property and maintenance expenses, real estate taxes and
insurance, depreciation expense and property management can all
13
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
primarily be attributed to the acquisition of the 1995 Acquired Properties and
1996 Acquired Properties. The impact of the 1995 Acquired Properties is
discussed in greater detail in the following paragraphs. The Operating
Partnership's disposition activity partially offset the increases to these same
accounts.
Properties that the Operating Partnership owned for all of both the six
months ended June 30, 1996 and June 30, 1995 (the "Six-Month 1996 Same Store
Properties") and Properties that the Operating Partnership owned for all of
both the quarters ended June 30, 1996 and June 30, 1995 (the "Second-Quarter
1996 Same Store Properties") also impacted the Operating Partnership's results
of operations and are discussed as well in the discussed as well in the
following paragraphs.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 TO SIX MONTHS ENDED JUNE 30,
1995
For the six months ended June 30, 1996, income before gain on disposition of
properties and extraordinary item increased by $15.5 million when compared to
the six months ended June 30, 1995. This increase was primarily due to increases
in rental revenues net of increases in property and maintenance expenses, real
estate taxes and insurance, property management expenses, fee and asset
management and depreciation expense. All of the increases in the various line
item accounts mentioned above can be primarily attributed to the 1996 Acquired
Properties and 1995 Acquired Properties. These increases were partially offset
by the 1995 Disposed Properties and the 1996 Disposed Properties. Interest
income of $5.9 million earned on the Operating Partnership's mortgage note
investment was an additional factor that impacted the six month to six month
changes.
In regard to the Six-Month 1996 Same Store Properties, rental revenues
increased by approximately $9.9 million or 5.8% primarily as a result of higher
rental rates charged to new tenants and tenant renewals. Overall property
operating expenses which include property and maintenance, real estate taxes and
insurance and an allocation of property management expenses increased
approximately $2.9 million or 4%. This increase was primarily the result of
higher payroll expenses, leasing and advertising costs and utilities costs.
For 1996 the Operating Partnership also increased its per unit charge for
property level insurance which increased insurance expense by approximately $0.6
million.
Property management represents expenses associated with the management of the
Operating Partnership's Properties. These expenses increased by approximately
$1.1 million primarily as a result of the expansion of the Operating
Partnership's property management with the addition of a regional operations
center in Seattle, Washington.
Fee and asset management revenues and fee and asset management expenses are
associated with the management of properties not owned by the Operating
Partnership that are managed for
14
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
affiliates. These revenues decreased by $0.5 million due to the disposition of
certain of these properties.
Interest expense, including amortization of deferred financing costs,
decreased by approximately $1.9 million. Of this decrease, $3.9 million was due
to having a lower average balance outstanding on the Operating Partnership's
line of credit and $2.6 million was due to the repayment of mortgage
indebtedness on certain of the 1994 Acquired Properties and Zell Properties.
This decrease was offset by an increase of approximately $1.5 million due to the
interest associated with the debt assumed on the 1995 Acquired Properties and
1996 Acquired Properties, $0.1 million was due to interest related to the 1999
Notes and the Floating Rate Notes and $3 million was due to interest related to
the 2002 Notes.
General and administrative expenses, which include corporate operating
expenses, increased slightly between the periods under comparison. General and
administrative expenses as a percentage of total revenues decreased from 2.2%
for the six months ended June 30, 1995 to 1.9% for the six months ended June 30,
1996.
COMPARISON OF QUARTER ENDED JUNE 30, 1996 TO QUARTER ENDED JUNE 30, 1995
For the quarter ended June 30, 1996, income before gain on disposition of
property and extraordinary item increased by $8.8 million when compared to the
quarter ended June 30, 1995. This increase was primarily due to increases in
rental revenues net of increases in property and maintenance expenses, real
estate taxes and insurance, property management expenses, fee and asset
management and depreciation expense. All of the increases in the various line
item accounts mentioned above can be primarily attributed to the 1996 Acquired
Properties and 1995 Acquired Properties. These increases were partially offset
by the 1995 Disposed Properties and the 1996 Disposed Properties. Interest
income of $3.2 million earned on the Operating Partnership's mortgage note
investment was an additional factor that impacted the quarter to quarter
changes.
In regard to the Second Quarter 1996 Same Store Properties, rental revenues
increased by approximately $5.3 million or 6.1% as a result of higher rental
rates charged to new tenants and tenant renewals. Overall property operating
expenses which include property and maintenance, real estate taxes and insurance
and an allocation of property management expenses increased approximately $1.2
million or 3.2%. This increase was primarily the result of higher payroll
expenses, leasing and advertising costs and utilities costs. For 1996 the
Operating Partnership also increased its per unit charge for property level
insurance which increased insurance expense by $0.3 million.
Property management represents expenses associated with the management of the
Operating Partnership's Properties. These expenses increased by approximately
$0.7 million primarily as a
15
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
result of the expansion of the Operating Partnership's property management with
the addition of a regional operations center in Seattle, Washington.
Fee and asset management revenues and fee and asset management expenses are
associated with the management of properties not owned by the Operating
Partnership that are managed for affiliates. These revenues decreased by $0.1
million due to the disposition of certain of these properties.
Interest expense, including amortization of deferred financing costs,
decreased by approximately $0.8 million. Of this decrease, $1 million was due
to having a lower average balance outstanding on the Operating Partnership's
line of credit and $1 million was due to the repayment of mortgage indebtedness
on certain of the 1994 Acquired Properties and Zell Properties. This decrease
was offset by an increase of approximately $0.8 million due to interest
associated with the debt assumed on the 1995 Acquired Properties and 1996
Acquired Properties and $0.4 million was due to interest related to the 2002
Notes.
General and administrative expenses, which include corporate operating
expenses, increased slightly between the quarters under comparison. General
and administrative expenses as a percentage of total revenues decreased from
2.1% for the quarter ended June 30, 1995 to 1.8% for the quarter ended June 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
As of January 1, 1996, the Operating Partnership had approximately $13.4
million of cash and cash equivalents and $158 million available on its line of
credit. After taking into effect the various transactions discussed in the
following paragraphs, the Operating Partnership's cash and cash equivalents
balance at June 30, 1996 was approximately $11.9 million and the amount
available on the Operating Partnership's line of credit was $230 million. The
following discussion also explains the changes in net cash provided by operating
activities, net cash (used for) investing activities and net cash provided by
financing activities, which amounts for each period under comparison are
presented in the Operating Partnership's Statements of Cash Flows.
Part of the Operating Partnership's strategy in funding the purchase of
multifamily residential properties is to utilize its line of credit and to
subsequently repay the line of credit with proceeds contributed by the Company
from the issuance of additional equity or debt securities. Continuing to employ
this strategy, the Operating Partnership completed the January 1996 Common Share
Offering and received net proceeds of approximately $50.7 million, substantially
all of which were applied to repay a portion of the outstanding balance on the
Operating Partnership's line of credit. In addition, the Operating Partnership
completed the February 1996 Common Share Offering and received net proceeds of
approximately $67.8
16
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
million. Of these proceeds, $60 million were applied to repay the remaining
outstanding balance on the Operating Partnership's line of credit. The remaining
proceeds were subsequently used to purchase additional properties. In connection
with the May 1996 Common Share Offerings, the Operating Partnership received net
proceeds of approximately $111.3 million. Of these proceeds, $57 million were
applied to repay the remaining outstanding balance on the Operating
Partnership's line of credit and the remaining proceeds were subsequently used
to purchase additional Properties.
In June 1996, the Operating Partnership restructured certain of its tax-
exempt bond investments and received approximately $77.1 million of proceeds in
connection therewith. Of these proceeds $70 million were used to repay the
remaining outstanding balance on the Operating Partnership's line of credit.
Also in connection with this transaction, the Operating Partnership made a loan
in the amount of approximately $4.9 million to the entities that hold title to
the Properties that collateralize the tax-exempt bond indebtedness. The proceeds
of this loan were used to pay the costs related to this transaction.
In August 1996, the Operating Partnership issued $150 million of unsecured
fixed rate notes in connection with the Debt Shelf Registration in a public debt
offering. The Operating Partnership received net proceeds of approximately
$148.7 million in connection with this offering and subsequently repaid amounts
outstanding on the line of credit.
With respect to Property acquisitions during the six month period, the
Operating Partnership purchased 19 Properties containing 6,741 units for a total
of approximately $291 million, which included the assumption of $45.3 million of
mortgage indebtedness. These acquisitions were primarily funded from amounts
drawn on the Operating Partnership's line of credit, proceeds funded from third
party escrow accounts related to the tax-deferred exchange of certain properties
and a portion of the proceeds received in connection with the Common Share
offerings as mentioned in the previous paragraph. Subsequent to June 30, 1996,
the Operating Partnership acquired seven additional properties for a purchase
price of approximately $101 million. These acquisitions were funded from the
Operating Partnership's line of credit. The Operating Partnership is actively
seeking to acquire additional multifamily residential properties with physical
and market characteristics similar to the Properties and is currently under
contract with various sellers to purchase up to 4,506 units. The combined
purchase price of these probable acquisitions is approximately $224 million.
The closings of these transactions are subject to certain contingencies and
conditions, therefore, there can be no assurance that these transactions will be
consummated or that the final terms will not differ in material respects.
During the six months ended June 30, 1996, the Operating Partnership disposed
of two properties which generated net proceeds of $10 million. These proceeds
were ultimately applied to purchase additional properties.
17
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As of June 30, 1996, the Operating Partnership had total indebtedness of
approximately $1 billion, which included conventional mortgages of $428.8
million, unsecured debt of $350 million (net of a $1.3 million discount), tax
exempt bond indebtedness of $239 million and $20 million outstanding on the
Operating Partnership's line of credit.
During the six months ended June 30, 1996, total capital expenditures for
the Operating Partnership approximated $20 million. Of this amount,
approximately $5.6 million related to capital improvements and major repairs for
the Acquired Properties. Such capital expenditures were primarily funded from
working capital reserves and from net cash provided by operating activities.
Total capital expenditures for the remaining portion of 1996 including amounts
for the 1996 Acquired Properties are budgeted to be approximately $25 million.
Total distributions paid during the six months ended June 30, 1996 amounted
to $65.8 million. On May 29, 1996, the Operating Partnership declared a $0.59
distribution per OP Unit to holders of record on June 28, 1996 and a $0.5859
distribution and a $0.5703 distribution to the Company as holder of the Series A
Cumulative Preference Units and the Series B Cumulative Preference Units,
respectively. Total distributions paid in July 1996 for the quarter ended June
30, 1996 amounted to approximately $37 million.
The Operating Partnership expects to meet its short-term liquidity
requirements generally through its working capital and net cash provided by
operating activities. The Operating Partnership considers its cash provided by
operating activities to be adequate to meet operating requirements and payments
of distributions. The Operating Partnership also expects to meet its long-term
liquidity requirements, such as scheduled mortgage debt maturities, reduction of
outstanding amounts under its line of credit, property acquisitions and
significant capital improvements by long-term collateralized and un-
collateralized borrowings and the issuance of equity securities including
additional OP Units as well as from proceeds received from the disposition of
certain Properties. In addition, the Operating Partnership has certain
uncollateralized Properties available for additional mortgage borrowings in the
event that the public capital markets are unavailable to the Operating
Partnership or the cost of capital to the Operating Partnership in such markets
is too high.
The Operating Partnership currently has a $250 million line of credit which
will continue to be used for property acquisitions and for any working capital
needs. As of August 13, 1996, no amounts were outstanding under this facility.
This facility is scheduled to mature in November 1996; however, it is the
Operating Partnership's current intent to renegotiate the extension of this
facility or replace it with a similar facility.
FUNDS FROM OPERATIONS
The Operating Partnership generally considers FFO to be one measure of the
performance of real estate companies. In accordance with the new definition of
FFO adopted by the Board of
18
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Governors of NAREIT, FFO represents net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation on real estate assets and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect FFO on the same basis.
The Operating Partnership believes that FFO is helpful to investors as a measure
of the performance because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors an
understanding of the ability of the Operating Partnership to incur and service
debt and to make capital expenditures. FFO does not represent cash generated
from operating activities in accordance with GAAP and therefore should not be
considered an alternative to net income as an indication of the Operating
Partnership's performance or to net cash flows from operating activities as
determined by GAAP as a measure of liquidity and is not necessarily indicative
of cash available to fund cash needs.
For the six months ended June 30, 1996, FFO, based on the new definition
(except for the effect of amortization of deferred financing costs related to
Predecessor Business of approximately $316,000), increased by $12.2 million when
compared to the six months ended June 30, 1995 to approximately $71.6 million.
For the quarter ended June 30, 1996, FFO, based on the new definition (except
for the effect of amortization of deferred financing costs related to
Predecessor Business of approximately $157,000), increased by $8.2 million when
compared to the quarter ended June 30, 1995 to approximately $37.8 million.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The discussion in Note 13 of "Notes to Consolidated Statements" is
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: None
(B) Reports on Form 8-K:
A report on Form 8-K, dated May 23, 1996 was filed on June 5, 1996.
20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ERP OPERATING LIMITED PARTNERSHIP
BY: EQUITY RESIDENTIAL PROPERTIES TRUST,
ITS GENERAL PARTNER
Date: August 13, 1996 By: /s/ Bruce C. Strohm
--------------- -----------------------------------------
Bruce C. Strohm
Executive Vice President, General Counsel
and Secretary
Date: August 13, 1996 By: /s/ Michael J. McHugh
--------------- -----------------------------------------
Michael J. McHugh
Senior Vice President, Chief Accounting
Officer and Treasurer
21