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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-12252
EQUITY RESIDENTIAL PROPERTIES TRUST
(Exact Name of Registrant as Specified in Its Charter)
Maryland 13-3675988
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Two North Riverside Plaza, Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
(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
------ ------
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At August 13, 1997, 73,663,079 of the Registrant's Common Shares of Beneficial
Interest were outstanding.
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except for share amounts)
(Unaudited)
June 30, December 31,
1997 1996
---------- -------------
ASSETS
Investment in rental property
Land $ 466,377 $ 284,879
Depreciable property 4,016,057 2,698,631
---------- -----------
4,482,434 2,983,510
Accumulated depreciation (357,599) (301,512)
---------- -----------
Investment in rental property, net of accumulated depreciation 4,124,835 2,681,998
Real estate held for disposition 3,947 -
Cash and cash equivalents 311,358 147,271
Investment in mortgage notes, net 174,764 86,596
Rents receivable 2,078 1,450
Deposits - restricted 6,112 20,637
Escrow deposits - mortgage 28,698 15,434
Deferred financing costs, net 14,306 14,555
Other assets 72,636 18,186
---------- -----------
Total assets $4,738,734 $ 2,986,127
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 960,879 $ 755,434
Notes, net 754,508 498,840
Accounts payable and accrued expenses 43,001 33,117
Accrued interest payable 22,210 12,737
Due to affiliates 649 628
Rents received in advance and other liabilities 31,844 15,838
Security deposits 19,231 14,128
Distributions payable 64,506 45,938
---------- -----------
Total liabilities 1,896,828 1,376,660
---------- -----------
Commitments and contingencies
Minority Interests 179,222 150,637
---------- -----------
See accompanying notes.
2
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in thousands except for share amounts)
(Unaudited)
June 30, December 31,
1997 1996
------------- -------------
Shareholders' equity:
Preferred Shares of beneficial interest, $.01 par value;
100,000,000 shares authorized:
9 3/8% Series A Cumulative Redeemable Preferred
Shares of Beneficial Interest, liquidation preference
$25 per share, 6,120,000 shares issued and outstanding $ 153,000 $ 153,000
9 1/8% Series B Cumulative Redeemable Preferred
Shares of Beneficial Interest, liquidation preference
$250 per share, 500,000 shares issued and outstanding 125,000 125,000
9 1/8% Series C Cumulative Redeemable Preferred
Shares of Beneficial Interest, liquidation preference
$250 per share, 460,000 shares issued and outstanding 115,000 115,000
8.60% Series D Cumulative Redeemable Preferred
Shares of Beneficial Interest, liquidation preference
$250 per share, 700,000 shares issued and outstanding 175,000 -
Series E Cumulative Convertible Preferred
Shares of Beneficial Interest, liquidation preference
$25 per share, 3,999,800 shares issued and outstanding 99,995 -
9.65% Series F Cumulative Redeemable Preferred
Shares of Beneficial Interest, liquidation preference
$25 per share, 2,300,000 shares issued and outstanding 57,500 -
Common Shares of beneficial interest, $.01 par value,
200,000,000 shares authorized, 73,632,558 shares issued
and outstanding as of June 30, 1997 and 51,154,836
shares issued and outstanding as of December 31, 1996 736 512
Paid in capital 2,050,152 1,147,214
Employee notes (5,202) (5,255)
Distributions in excess of accumulated earnings (108,497) (76,641)
------------- -------------
Total shareholders' equity 2,662,684 1,458,830
------------- -------------
Total liabilities and shareholders' equity $ 4,738,734 $ 2,986,127
============= =============
See accompanying notes.
3
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except for per share data)
(Unaudited)
Six Months Ended June 30, Quarters Ended June 30,
------------------------------- ------------------------
1997 1996 1997 1996
------------------------------- ------------------------
REVENUES
Rental income $290,799 $209,239 $156,564 $107,796
Fee and asset management 3,110 3,303 1,532 1,758
Interest income - investment in mortgage notes 8,011 5,866 4,328 3,156
Interest and other income 4,404 1,180 2,513 557
-------- -------- -------- --------
Total revenues 306,324 219,588 164,937 113,267
-------- -------- -------- --------
EXPENSES
Property and maintenance 70,760 59,217 38,426 30,551
Real estate taxes and insurance 29,667 21,229 15,756 10,950
Property management 11,819 8,800 6,148 4,365
Fee and asset management 1,569 2,126 602 1,020
Depreciation 62,775 42,933 33,898 22,317
Interest:
Expense incurred 50,924 37,024 27,631 18,783
Amortization of deferred financing costs 1,220 1,895 617 951
General and administrative 6,206 4,105 3,231 2,026
-------- -------- -------- --------
Total expenses 234,940 177,329 126,309 90,963
-------- -------- -------- --------
Income before gain on disposition of properties
and allocation to Minority Interests 71,384 42,259 38,628 22,304
Gain on disposition of properties 3,632 2,346 - 1,006
-------- -------- -------- --------
Income before allocation to Minority Interests 75,016 44,605 38,628 23,310
Income allocated to Minority Interests (6,345) (5,923) (2,919) (3,022)
-------- -------- -------- --------
Net income 68,671 38,682 35,709 20,288
Preferred distributions (20,939) (12,874) (11,878) (6,437)
-------- -------- -------- --------
Net income available to Common Shares $ 47,732 $ 25,808 $ 23,831 $ 13,851
======== ======== ======== ========
Net income per weighted average Common Share outstanding $ 0.86 $ 0.65 $ 0.40 $ 0.34
========= ======== ======== ========
Weighted average Common Shares outstanding 55,385 39,496 58,940 41,114
========= ======== ======== ========
Distributions declared per Common Share outstanding $ 1.25 $ 1.18 $ 0.62 $ 0.59
========= ======== ======== ========
See accompanying notes.
4
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,671 $ 38,682
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to Minority Interests 6,345 5,923
Depreciation 62,775 42,933
Amortization of deferred financing costs (including discount on
1999 and 2002 Notes and premium on 2002-A Notes) 1,279 2,052
Amortization of discount on investment in mortgage notes (750) -
Gain on disposition of properties (3,632) (2,346)
Changes in assets and liabilities:
(Increase) in rents receivable (326) (661)
(Increase) decrease in deposits - restricted (237) 10,872
(Increase) decrease in other assets (4,240) 757
(Decrease) in due to affiliates (6) (200)
Increase in accounts payable and accrued expenses 5,093 6,262
Increase (decrease) in accrued interest payable 3,548 (307)
Increase in rents received in advance and other liabilities 7,280 1,679
-------- ---------
Net cash provided by operating activities 145,800 105,646
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties, net (333,770) (262,921)
Improvements to rental property (14,709) (13,749)
Additions to non-rental property (2,730) (725)
Proceeds from disposition of rental property, net 4,771 10,183
Purchase of contract rights (3,500) -
(Increase) in mortgage deposits (11,700) (711)
Deposits (made) on rental property acquisitions (1,700) (4,000)
Deposits applied on rental property acquisitions 16,761 100
Investment in mortgage notes, net (87,418) 386
Merger costs and related activities (51,639) -
Other investing activities, net (34,953) (96)
-------- ---------
Net cash (used for) investing activities (520,587) (271,533)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Shares 488,889 229,787
Proceeds from sale of Preferred Shares 175,000 -
Proceeds from exercise of options 3,250 2,551
Redemption of Preference Units - (1,083)
Payment of offering costs (6,082) (334)
Distributions to Common Share and Preferred Share owners (83,662) (55,736)
Distributions to Minority Interests (9,497) (10,100)
Principal receipts on employee notes 211 37
Proceeds from restructuring of tax-exempt bond investments 9,350 72,195
Proceeds from line of credit 185,000 157,000
Repayments on line of credit (185,000) (229,000)
Principal payments on mortgage notes payable (39,437) (1,864)
Loan and bond acquisition costs (1,026) (404)
Increase in security deposits 1,878 1,316
-------- ---------
Net cash provided by financing activities 538,874 164,365
-------- ---------
Net increase (decrease) in cash and cash equivalents 164,087 (1,522)
Cash and cash equivalents, beginning of period 147,271 13,428
-------- ---------
Cash and cash equivalents, end of period $311,358 $ 11,906
======== =========
See accompanying notes.
5
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
-------------------------
Supplemental information:
Cash paid during the period for interest $ 41,451 $37,331
======== =======
Mortgage loans and unsecured notes assumed through Merger and
acquisitions of rental properties $491,143 $30,878
======== =======
Rental property assumed through foreclosure $ - $10,854
======== =======
See accompanying notes.
6
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Definition of special terms:
Capitalized terms used but not defined herein are as defined in the Company's
Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended
December 31, 1996 ("Form 10-K").
1. Business
As used herein, the term "Company" includes Equity Residential Properties
Trust and its subsidiaries as the survivor of the merger between Wellsford
Residential Property Trust ("Wellsford") and Equity Residential Properties Trust
("EQR") (the "Merger"). The Company is engaged in the acquisition, ownership and
operation of multifamily properties and is a self-administered and self-managed
equity real estate investment trust ("REIT"). As of June 30, 1997, the Company
controlled a portfolio of 320 multifamily properties (individually a "Property"
and collectively the "Properties"). The Company's interest in six of the
Properties at the time of acquisition thereof consisted 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
and mortgage loans collateralized by five properties, (collectively, the
"Additional Properties").
2. Basis of Presentation
The Merger was treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Purchase accounting for a merger is the same as
the accounting treatment used for the acquisition of any group of assets. The
fair market value of the consideration given by the Company in the Merger was
used as the valuation basis of the combination. The assets acquired and the
liabilities assumed of Wellsford were recorded at their relative market values
as of May 30, 1997 (the "Closing Date"). The accompanying consolidated financial
statements include the results of operations of Wellsford from the Closing Date.
Due to the Company's ability as general partner to control, either through
ownership or by contract, the Operating Partnership, the Management
Partnerships, the Financing Partnerships and the LLCs, each such entity has been
consolidated with the Company for financial reporting purposes. In regard to
Management Corp. and Management Corp. II, the Company 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 Company 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 Company's Annual Report on 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
7
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
to the prior period's financial statements in order to conform with the current
period presentation.
3. Business Combinations
On the Closing Date of the Merger, 72 Properties containing 19,004 units
and other related assets were acquired for a total purchase price of
approximately $1 billion. The purchase price consisted of 10.8 million Common
Shares with a market value of $443.7 million, the liquidation value of $157.5
million for the Series E Preferred Shares and the Series F Preferred Shares, as
defined in the paragraph below, the assumption of mortgage indebtedness and
unsecured notes in the amount of $345 million, the assumption of other
liabilities of approximately $33.5 million and other Merger related costs of
approximately $23.4 million.
In connection with the Merger, as of the Closing Date, each outstanding
common share of beneficial interest of Wellsford was converted into .625 of a
Common Share of the Company. In addition, Wellsford's Series A Cumulative
Convertible Preferred Shares of Beneficial Interest were redesignated as the
Company's 3,999,800 Series E Cumulative Convertible Preferred Shares of
Beneficial Interest, $0.01 par value per share (the "Series E Preferred Shares")
and Wellsford's Series B Cumulative Redeemable Preferred Shares of Beneficial
Interest were redesignated as the Company's 2,300,000 9.65% Series F Cumulative
Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share
(the "Series F Preferred Shares").
The Series E Preferred Shares are cumulative from the date of original
issue and are payable quarterly on January 1, April 1, July 1 and October 1 in
an amount equal to $1.75 per share per annum. Each Series E Preferred Share is
convertible at the option of the holder thereof at any time into Common Shares
at a conversion price of $44.93 per Common Share (equivalent to a conversion
rate of approximately .5564 Common Share for each Series E Preferred Share). The
Series E Preferred Shares are not redeemable prior to November 1, 1998. On and
after November 1, 1998, the Series E Preferred Shares may be redeemed at the
option of the Company, in whole or in part, initially at $25.875 per share and
thereafter at prices declining to $25.00 per share on and after November 1,
2003, plus accrued and unpaid distributions, if any, thereon.
The Series F Preferred Shares are cumulative from the date of original
issue and are payable on or about the fifteenth day of January, April, July and
October of each year at the rate of 9.65% of the liquidation preference of $25
per share. The Series F Preferred Shares are not redeemable prior to August 24,
2000. On or after August 24, 2000, the Series F Preferred Shares may be redeemed
for cash at the option of the Company, in whole or in part, at a redemption
price of $25.00 per share, plus accrued and unpaid distributions, if any,
thereon.
4. Shareholders' Equity and Minority Interests
During the first six months of 1997, the Company issued 44,136 Common
Shares pursuant to the Employee Share Purchase Plan and received net proceeds of
approximately $1.6 million.
In March 1997, the Company completed offerings in the aggregate of
1,921,000 publicly registered Common Shares, which were sold to the public at a
price of $46 per share (the "March 1997 Common Share Offerings"). The Company
received net proceeds of approximately $88.3 million therefrom.
On May 14, 1997, the Company filed with the SEC a Form S-3 Registration
Statement to register $500 million of equity securities (the "1997 Equity Shelf
Registration"). The SEC declared this Registration effective on June 5, 1997.
In May 1997, the Company sold 7,000,000 depositary shares (the "Series D
Depositary Shares") pursuant to the 1997 Equity Shelf Registration. Each Series
D Depositary Share represents a 1/10 fractional interest in a 8.60% Series D
Cumulative Redeemable Preferred Share of Beneficial Interest, $0.01 par value
per share (the "Series D Preferred Shares"). The liquidation preference of each
of the Series D Preferred shares is $250.00 (equivalent to $25 per Series D
Depositary Share). The Company raised gross proceeds of approximately $175
million from this offering (the "Series D Preferred Share Offering"). The
Company received net proceeds of approximately $169.5 million thereform.
8
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In June 1997, the Company completed four separate public offerings in the
aggregate of 8,992,023 Common Shares, which were sold at prices ranging from
$44.06 to $45.88 per share (the "June 1997 Common Share Offerings"). The
Company received net proceeds of approximately $398.9 million therefrom.
The following table presents the changes in the Company's issued and
outstanding Common Shares for the six months ended June 30, 1997:
Balance at January 1, 1997 51,154,836
Common Shares issued through March 1997 Common Share Offerings 1,921,000
Common Shares issued through June 1997 Common Share Offerings 8,992,023
Common Shares issued through Employee Share Purchase Plan 44,136
Common Shares issued through conversion of Wellsford common shares 10,823,016
Conversion of OP Units into Common Shares 537,970
Common Shares issued through restricted share awards 28,246
Common Shares issued through exercise of options 118,191
Common Shares issued through 401(k) Plan 13,140
----------
Balance at June 30, 1997 73,632,558
==========
Assuming conversion of all OP Units into Common Shares, total Common Shares
outstanding at June 30, 1997 would have been 80,952,816.
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". As of June
30, 1997, the Minority Interests held 7,320,258 OP Units which represented a
9.04% interest in the Operating Partnership.
9
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Net proceeds from the Company's Common Share offerings are contributed by
the Company to the Operating Partnership in return for an increased ownership
percentage and are treated as capital transactions in the Company's Consolidated
Financial Statements. As a result, the net offering proceeds are allocated
between shareholders' equity and Minority Interests to account for the change in
their respective percentage ownership of the underlying equity of the Operating
Partnership.
The Company paid a $0.625 per Common Share distribution on July 11, 1997
for the quarter ended June 30, 1997 to Common Shareholders of record as of June
27, 1997.
On July 1, 1997, the Company paid, for the quarter ended June 30, 1997, a
$0.4375 per share distribution to Series E Preferred Shareholders of record as
of June 16, 1997. On July 15, 1997, the Company paid (i) a $0.585937 per share
distribution to Series A Preferred Share holders of record as of June 27, 1997;
(ii) a $0.570312 per share distribution to both Series B Depositary Share
holders and Series C Depositary Share holders of record as of June 27, 1997;
(iii) a $0.603125 per share distribution to Series F Preferred Share holders of
record on June 27, 1997 and (iv) a $0.3344 per share distribution to Series D
Preferred Share holders of record on June 27, 1997, representing the period from
May 21, 1997 (the day of issuance) to July 15, 1997.
5. Investment in Rental Property
In addition to the Merger, during the six months ended June 30, 1997, the
Company acquired the 31 Properties listed below. Each Property was purchased
from an unaffiliated third party, except for 10 of the Properties, which were
purchased from affiliates of the Company, Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership ("Zell/Merrill I") and subsidiaries of
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership II
("Zell/Merrill II"), for a total purchase price of $147.6 million. The cash
portion of these transactions was funded primarily from proceeds raised from the
March 1997 Common Share Offerings, the Series D Preferred Share Offering and the
June 1997 Common Share Offerings.
Total
Acquisition
Date Number Cost (in
Acquired Property Location of Units thousands)
- -------- -------- -------- -------- ----------
01/02/97 Town Center Kingwood, TX 258 $12,843
01/21/97 Harborview San Pedro, CA 160 19,040
01/31/97 The Cardinal Greensboro, NC 256 13,125
02/12/97 Trails at Dominion Houston, TX 843 38,335
02/25/97 Dartmouth Woods Lakewood, CO 201 12,454
02/28/97 Rincon Houston, TX 288 21,138
02/28/97 Waterford at the Lakes Kent, WA 344 19,281
10
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
03/17/97 Junipers at Yarmouth Yarmouth, ME 225 9,190
03/20/97 Lincoln Harbor Ft. Lauderdale, FL 324 22,212
03/24/97 Sedona Ridge Phoenix, AZ 250 15,226
03/28/97 Club at the Green Beaverton, OR 254 14,648
03/28/97 Boulder Creek (formerly Knight's Castle) Wilsonville, OR 296 15,060
04/04/97 Country Gables Beaverton, OR 288 17,079
04/04/97 Watermark Square Portland, OR 390 15,845
04/04/97 Indigo Springs Kent, WA 278 12,720
04/29/97 Summit Chase Coral Springs, FL 140 5,548
05/13/97 Willow Brook Durham, NC 176 8,515
05/15/97 The Willows Knoxville, TN 250 11,016
05/21/97 Cascade at Landmark Alexandria, VA 277 23,255
05/21/97 Sabal Palm Club Pompano Beach, FL 416 23,714
05/21/97 Tamarlane Portland, ME 115 5,843
05/22/97 Spinnaker Cove Hermitage, TN 278 14,230
05/29/97 Banyan Lake Boynton Beach, FL 288 13,942
05/30/97 Wyndridge III Memphis, TN 284 15,047
06/06/97 Wyndridge II Memphis, TN 284 15,099
06/13/97 Windemere Mesa, AZ 224 9,602
06/13/97 Preston Bend Dallas, TX 255 11,022
06/13/97 Highline Oaks Denver, CO 220 10,726
06/17/97 Hunter's Ridge/South Pointe St. Louis, MO 390 19,489
06/19/97 Club at Tanasbourne Hillsboro, OR 352 19,780
06/26/97 Wood Creek Pleasant Hill, CA 256 32,717
--- ------
8,860 $497,741
===== ========
6. Disposition of Rental Properties
On March 28, 1997, the Company sold Plantation Apartments located in
Monroe, Louisiana for a sales price of $4.8 million. The gain for financial
reporting purposes was approximately $3.6 million.
7. Commitments to Acquire Rental Properties
As of June 30, 1997, in addition to the properties which were subsequently
acquired as discussed in Note 16 of the Notes to Consolidated Financial
Statements, the Company had entered into agreements to acquire five multifamily
properties containing 1,363 units from various unaffiliated third parties. The
expected combined purchase price is approximately $55.7 million, which includes
the assumption of mortgage indebtedness of approximately $25.1 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
11
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
terms thereof will not differ in material respects from those summarized in the
preceding paragraph.
8. Investment in Mortgage Notes, Net
On April 28, 1997, the Company made an $88 million investment in six
mortgage loans collateralized by five multifamily properties. These five
multifamily properties are included in the Additional Properties.
Investment in mortgage notes, net, represents the Company's investment in
subordinated mortgages and mortgage loans collateralized by the Additional
Properties.
9. Calculation of Net Income Per Weighted Average Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute net income per weighted average Common Share and to restate all
prior periods. The impact of Statement 128 on the calculation of net income per
weighted average Common Share and net income per weighted average Common Share-
assuming dilution for these quarters is not expected to be material.
10. Mortgage Notes Payable
As of June 30, 1997, the Company had outstanding mortgage indebtedness of
approximately $960.9 million encumbering 106 of the Properties. The carrying
value of such Properties (net of accumulated depreciation of $135.7 million) was
approximately $1.5 billion. In connection with the Properties acquired during
the six months ended June 30, 1997, including the effects of the Merger, the
Company assumed the outstanding mortgage balances on 21 Properties in the
aggregate amount of $235.5 million.
Concurrent with the refinancing of certain tax-exempt bonds and as a
requirement of the credit provider of the bonds, the Financing Partnership,
which owns certain of the Properties entered into interest rate protection
agreements, which were assigned to the credit provider as additional security.
The Financing Partnership pays interest based on a fixed interest rate and the
counterparty of the agreement pays interest to the Company at a floating rate
which is calculated based on the Public Securities Association Index for
municipal bonds ("PSA Municipal Index"). As of June 30, 1997, the aggregate
notional amount of these agreements was approximately $175.3 million. The fixed
interest rates for these agreements were 4.81%, 4.528% and 4.90%. The
termination dates are October 1, 2003, January 1, 2004 and April 1, 2004. The
Company simultaneously entered into substantially identical reverse interest
rate protection agreements. Under these agreements the Company pays interest
monthly at a floating rate based on the PSA Municipal Index and the counterparty
pays interest to the Company based on a fixed
12
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
interest rate. As of June 30, 1997, the aggregate notional amount of these
agreements was approximately $175.3 million. The fixed interest rates received
by the Company in exchange for paying interest based on the PSA Municipal Index
for these agreements were 4.74%, 4.458% and 4.83%. The termination dates are
October 1, 2003, January 1, 2004 and April 1, 2004. Collectively, these
agreements effectively cost the Company 0.07% per annum on the current
outstanding aggregate notional amount. The Company believes that it has limited
exposure to the extent of non-performance by the counterparties of the
agreements since each counterparty is a major U.S. financial institution, and
the Company does not anticipate their non-performance. Furthermore, any non-
performance by the counterparty is offset by non-performance by the Company.
Scheduled maturities for the Company's outstanding mortgage indebtedness
are at various dates through August 1, 2030. As of June 30, 1997, 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 3.90% to 7.030%.
During the six months ended June 30, 1997, the Company repaid the outstanding
mortgage balances on seven Properties in the aggregate amount of $36.6 million.
Subsequent to June 30, 1997, the Company repaid the outstanding mortgage balance
on two Properties in the amount of approximately $16.2 million. In February
1996, the Company entered into an interest rate protection agreement which
hedged the interest rate risk of $50 million of mortgage loans scheduled to
mature in September 1997 by locking the five year Treasury Rate, commencing
October 1, 1997 through October 1, 2002.
11. Line of Credit
The Company, through the Operating Partnership, has a $250 million
unsecured line of credit with Morgan Guaranty Trust Company of New York and Bank
of America Illinois. As of June 30, 1997, there were no amounts outstanding on
this line of credit.
12. Notes
Included in the note balance are the 1999 Notes, the Floating Rate Notes,
the 2002 Notes, the 2026 Notes and four unsecured note issuances assumed in
connection with the Merger. These notes assumed are discussed in the following
three paragraphs. As of June 30, 1997, the unamortized discount balances related
to the 1999 Notes and the 2002 Notes were approximately $0.3 million and $0.7
million, respectively.
In January 1995, $100 million of senior unsecured notes due February 1,
2002 (the "2002-A Notes") were issued. The 2002-A Notes bear interest at a rate
of 9.375%, which is payable semiannually in arrears on August 1 and February 1.
In connection with the 2002-A Notes, the Company recorded a premium in the
amount of $5.6 million, which is being amortized over the remaining life of the
notes on a straight-line basis. As of June 30, 1997, the unamortized premium
balance relating to the 2002-A Notes was approximately $5.5 million.
13
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In August 1995, $125 million of senior unsecured notes were issued. Of the
$125 million issued, $55 million of these notes are due August 15, 2000 (the
"2000 Notes") and bear interest at a rate of 7.25%, which is payable
semiannually in arrears on February 15 and August 15. The remaining $70 million
of these notes are due August 15, 2005 (the "2005 Notes") and bear interest at a
rate of 7.75%, which is payable semiannually in arrears on February 1 and August
1.
In November 1996, $25 million of medium term floating rate notes due
November 24, 1999 (the "1999-A Notes") were issued. The 1999-A Notes bear
interest at 90 day LIBOR plus 0.32%, which is payable quarterly in arrears on
the 25th day of each February, May, August and November.
In February 1996 the Company entered into an interest rate protection
agreement that hedged the interest rate risk of the 1999 Notes by locking the
effective four year Treasury Rate, commencing May 15, 1999 through May 2003.
There was no current cost to the Company for entering into this agreement.
In connection with the Floating Rate Notes, the Operating Partnership has
entered into interest rate protection agreements which fix the interest rate at
an effective rate of 7.075% through the term of the Floating Rate Notes.
Prior to the issuance of the 2002 Notes, the Operating Partnership entered
into an interest rate protection agreement to effectively fix the interest rate
cost of such issuance. The Operating Partnership made a one time settlement
payment of this protection transaction, which was approximately $0.8 million and
is being amortized over the term of the 2002 Notes. As of June 30, 1997, the
unamortized balance of this cost was approximately $0.5 million.
Prior to the issuance of the 2026 Notes, the Company entered into an
interest rate protection agreement to effectively fix the interest rate cost of
this issuance. The Operating Partnership received a one time settlement payment
of this transaction, which was approximately $0.6 million, which amount is being
amortized over the term of the 2026 Notes. As of June 30, 1997, the unamortized
balance was approximately $0.5 million.
13. Deposits - restricted
Deposits - restricted, as of June 30, 1997, included deposits in the amount
of approximately $1.7 million held in third party escrow accounts. These
deposits are expected to be utilized for the acquisition of additional
properties. Also included in the deposits - restricted amount were tenant
security and utility deposits made for certain of the Company's Properties.
14
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
14. Summarized Pro Forma Condensed Statement of Operations (unaudited)
The following Summarized Pro Forma Condensed Statement of Operations has
been prepared as if the March 1997 Common Share Offerings, the Series D
Preferred Share Offering, the June 1997 Common Share Offerings, the Merger, the
acquisition of an additional 31 Properties, including the related assumption of
$167.7 million of mortgage indebtedness, the repayment of $36.6 million of
mortgage indebtedness and the disposition of one property had occurred on
January 1, 1997. This would result in 73,632,558 Common Shares outstanding. In
management's opinion, the Summarized Pro Forma Condensed Statement of Operations
does not purport to present what actual results would have been had the above
transactions occurred on January 1, 1997, or to project results for any future
period. The amounts presented in the following statement are in thousands except
for share amounts:
Summarized Pro Forma
Condensed Statement
of Operations
For the Six Months Ended
June 30, 1997
(Amounts in thousands
except per share amounts)
-------------------------
Total Revenues $ 380,349
----------
Total Expenses 291,686
----------
Pro Forma income before allocation to Minority
Interests 88,663
----------
Pro Forma net income 83,533
----------
Preferred distributions 31,921
----------
Pro Forma net income available for Common Shares 51,612
==========
Pro Forma net income per Common Share $ 0.70
==========
15. Commitments and Contingencies
On March 20, 1996, a legal proceeding (Nick J. Miletich, Administrator of
the Estates of Dorothy Miletich and Madelyne Miletich, deceased, v. Equity
Residential Properties Trust, Equity Residential Properties Management
Corporation, Curt Vajgrt, Raymond Countryman and Darla Countryman) (Iowa
District Court, Polk County, Iowa, Law Case No. CL 68908) was filed against the
Company. This legal proceeding arises out of the Company's ownership and
management of the apartment building known as 3000 Grand Ave. in Des Moines,
Iowa and alleges that Raymond
15
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
and Darla Countryman murdered Dorothy Miletich and Madelyne Miletich, who were
residents of the apartment complex, on June 15, 1995. Raymond Countryman is a
former employee of the Company. The plaintiff alleges, inter alia, that had the
Company learned of the background of Mr. Countryman prior to his employment, the
Company would not have hired him and the deaths of the Miletichs would have been
avoided. While the Company is vigorously contesting these claims, there is no
assurance that the Company will not be held liable for said deaths and there is
no assurance that its insurance coverage will cover all damages that may be
awarded against it. At this time, an estimate of the possible loss or range of
loss that the Company may incur cannot be determined.
The Company does not believe there is any other litigation, except as
mentioned in the previous paragraph, 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.
16. Subsequent Events
On July 2, 1997, the Company acquired two properties from Zell/Merrill I
for a total purchase price of approximately $15 million, including the
assumption of mortgage indebtedness of approximately $12.1 million. These
properties were Mountain Brook, a 280-unit property located in Chattanooga,
Tennessee and Ridgemont, a 226-unit property located in Chattanooga, Tennessee.
On July 7, 1997, the Company entered into an agreement to acquire 17
multifamily properties containing 5,015 units from an unaffiliated third party
for a total purchase price of $292 million, which includes the assumption of
mortgage indebtedness of $136 million and the issuance of Common Shares in the
amount of approximately $156 million. The closing of this pending transaction is
subject to certain contingencies and conditions; therefore, there can be no
assurance that this transaction will be consummated or that the final terms
thereof will not differ in material respects from those summarized above.
On July 11, 1997, the Company acquired Foxchase Apartments, a 260-unit
multifamily property located in Grand Prairie, Texas, from an unaffiliated third
party for a purchase price of approximately $8.25 million, including the
assumption of mortgage indebtedness of approximately $5.5 million.
On July 18, 1997, the Company acquired La Mirage Apartments, a 1,070-unit
multifamily property, including adjacent undeveloped land, located in San Diego,
California, from an unaffiliated third party for a purchase price of
approximately $128.75 million.
On July 28, 1997, the Company filed with the SEC a Form S-3 Registration
Statement to register $750 million in equity securities. The SEC declared this
Registration effective on August 4, 1997.
16
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On July 31, 1997, the Company acquired Bay Ridge Apartments, a 60-unit
multifamily property located in San Pedro, California, from an unaffiliated
third party for a purchase price of approximately $4.5 million.
On July 30, 1997, the Company entered into a nonbinding letter of intent
with a private unaffiliated REIT to acquire 48 multifamily properties containing
11,277 units for a total purchase price of $633 million, which may include the
assumption of mortgage indebtedness of up to $400 million. The closing of this
pending transaction is subject to entering into a binding agreement and certain
other contingencies and conditions; therefore, there can be no assurance that
this transaction will be consummated or that the final terms thereof will not
differ in material respects from those summarized above.
On August 7, 1997, the Company acquired Boynton Place Apartments, a 192-
unit multifamily property located in Boynton Beach, Florida, from an
unaffiliated third party for a purchase price of approximately $9.17 million.
On August 7, 1997, the Company acquired Gates of Redmond Apartments, a 180-
unit multifamily property located in Redmond, Washington, from an unaffiliated
third party for a purchase price of approximately $14.4 million, which included
the assumption of mortgage indebtedness of $6.5 million and the issuance of OP
units with a value of $2.8 million.
On August 12, 1997, the Company acquired Crosswinds Apartments, a 208-unit
multifamily property located in St. Petersburg, Florida, from an unaffiliated
third party for a purchase price of approximately $7.3 million.
On August 12, 1997, the Company acquired Cambridge Village Apartments, a
200-unit multifamily property located in Lewisville, Texas, from an unaffiliated
third party for a purchase price of approximately $9.5 million.
17
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion and analysis of the results of operations and
financial condition of the Company should be read in connection with the
Consolidated Financial Statements and Notes thereto. Due to the Company's
ability to control the Operating Partnership, the Management Partnerships, the
Financing Partnerships and the LLCs, each entity has been consolidated with the
Company for financial reporting purposes. Capitalized terms used herein and not
defined, are as defined in the Company's Annual Report on Form 10-K, as amended
by Form 10-K/A, for the year ended December 31, 1996.
Results of Operations
Since EQR's IPO and through June 30, 1997, the Company has acquired direct
or indirect interests in 263 properties, including properties acquired through
the Merger, (the "Acquired Properties"), containing 77,543 units in the
aggregate for a total purchase price of approximately $3.9 billion, including
the assumption of approximately $790 million of mortgage indebtedness. The
Company's interest in six of the Acquired Properties at the time of acquisition
thereof consisted solely of ownership of the debt collateralized by such
Acquired Properties. The Company purchased its interests in 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"); 49 of such
Acquired Properties consisting of 15,665 units in 1996 (the "1996 Acquired
Properties"); and 103 of such Acquired Properties consisting of 27,864 units in
1997 (the "1997 Acquired Properties"). In addition, in August 1995, the Company
made an investment in partnership interests and subordinated mortgages
collateralized by 21 of the Additional Properties. Also, in April 1997, the
Company made an $88 million investment in six mortgage loans collateralized by
five of the Additional Properties. The Acquired Properties were presented in the
Consolidated Financial Statements of the Company from the date of each
acquisition.
During the six months ended June 30, 1997, the Company disposed of one
property (the "1997 Disposed Property") for a sales price of $4.8 million.
The Company's overall results of operations for the quarter and six months
ended June 30, 1997 have been impacted by the Company'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 primarily be attributed to the acquisition of the
1996 Acquired Properties and 1997 Acquired Properties. The impact of the 1996
Acquired Properties and 1997 Acquired Properties is discussed in greater detail
in the following paragraphs. The Company's disposition activity partially offset
the increases to these same accounts.
18
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Properties that the Company owned for all of both six month periods ended
June 30, 1997 and June 30, 1996 (the "Six-Month 1997 Same Store Properties") and
Properties that the Company owned for all of both the quarters ended June 30,
1997 and June 30, 1996 (the "Second-Quarter 1997 Same Store Properties") also
impacted the Company's results of operations and are discussed as well in the
following paragraphs.
Comparison of six months ended June 30, 1997 to six months ended June 30, 1996
For the six months ended June 30, 1997, income before gain on disposition
of properties and allocation to Minority Interests increased by $29.1 million
when compared to the six months ended June 30, 1996. 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 and
depreciation expense. All of the increases in the various line item accounts
mentioned above can be primarily attributed to the 1997 Acquired Properties and
1996 Acquired Properties. These increases were partially offset by the 1996
Disposed Properties and the 1997 Disposed Property. The increase in interest
income of $2.1 million earned on the Company's mortgage note investments is
primarily attributable to the $88 million investment on six mortgage loans made
in the quarter ended June 30, 1997.
In regard to the Six-Month 1997 Same Store Properties, rental revenues
increased by approximately $5.2 million or 2.7% 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 decreased
approximately $1.8 million or 2.3%. This decrease was primarily the result of
lower medical and health care insurance costs, building and maintenance costs
and leasing and advertising costs.
Property management represents expenses associated with the management of
the Company's Properties. These expenses increased by approximately $3 million
primarily due to the continued expansion of the Company's property management
business to facilitate the management of the Company's additional properties.
The Company most recently opened new area offices in Houston, Texas; Ypsilanti,
Michigan; Kansas City, Kansas; Irvine, California; Raleigh, North Carolina and
assumed area offices in Tulsa and Oklahoma City, Oklahoma, related to the
Merger.
Fee and asset management revenues and fee and asset management expenses are
associated with the management of properties not owned by the Company that are
managed for affiliates. These expenses decreased by $0.6 million for the six
months ended June 30, 1997 when compared to the six months ended June 30, 1996,
due to the disposition of certain of these properties.
Interest expense, including amortization of deferred financing costs,
increased by approximately $13.2 million. The increase was primarily the result
of an increase in the Company's average indebtedness which increased by $419.1
million, primarily due to the Merger.
19
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
However, the Company's effective interest costs decreased from 8.02% in 1996 to
7.54% in 1997.
General and administrative expenses, which include corporate operating
expenses, increased approximately $2.1 million between the periods under
comparison. This increase was primarily due to adding corporate personnel,
higher compensation costs and shareholder reporting costs as well as an increase
in professional fees. General and administrative expenses as a percentage of
total revenues was 2.03% for the six months ended June 30, 1997.
Comparison of quarter ended June 30, 1997 to quarter ended June 30, 1996
For the quarter ended June 30, 1997, income before gain on disposition of
properties and allocation to Minority Interests increased by $16.3 million when
compared to the quarter ended June 30, 1996. 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,
depreciation, interest expense and general and administrative expenses. All of
the increases in the various line item accounts mentioned above can be primarily
attributed to the 1997 Acquired Properties and 1996 Acquired Properties. These
increases were partially offset by the 1996 Disposed Properties and the 1997
Disposed Property. The increase in interest income of $1.2 million earned on
the Company's mortgage note investments is primarily attributable to the $88
million investment on six mortgage loans made in the quarter ended June 30,
1997.
In regard to the Second Quarter 1997 Same Store Properties, rental revenues
increased by approximately $3 million or 2.9% 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 decreased
approximately $0.8 million or 2%. This decrease was primarily the result of
lower medical and health care insurance costs, building and maintenance costs
and leasing and advertising costs.
Property management represents expenses associated with the management of
the Company's Properties. These expenses increased by approximately $1.8 million
primarily due to the continued expansion of the Company's property management
business to facilitate the management of the Company's additional properties.
The Company most recently opened new area offices in Houston, Texas; Ypsilanti,
Michigan; Kansas City, Kansas; Irvine, California; Raleigh, North Carolina and
assumed area offices in Tulsa and Oklahoma City, Oklahoma, related to the
Merger.
Fee and asset management revenues and fee and asset management expenses are
associated with the management of properties not owned by the Company that are
managed for affiliates. These expenses decreased $0.4 million for the quarter
ended June 30, 1997 when compared to the quarter ended June 30, 1996, due to the
disposition of certain of these properties.
Interest expense, including amortization of deferred financing costs,
increased by approximately $8.5 million. This increase was primarily the result
of an increase in the Company's
20
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
average indebtedness outstanding which increased by $491.6 million, primarily
due to the Merger. However, the Company's effective interest costs decreased
from 8.0% in 1996 to 7.63% in 1997.
General and administrative expenses, which include corporate operating
expenses, increased approximately $1.2 million between the periods under
comparison. This increase was primarily due to adding corporate personnel,
higher compensation costs and shareholder reporting costs as well as an increase
in professional fees. General and administrative expenses as a percentage of
total revenues was 1.96% for the quarter ended June 30, 1997.
Liquidity and Capital Resources
As of January 1, 1997, the Company had approximately $147.3 million of cash
and cash equivalents and $250 million available on its line of credit. After
taking into effect the various transactions discussed in the following
paragraphs, the Company's cash and cash equivalents balance at June 30, 1997 was
approximately $311.4 million and the amount available on the Company's line of
credit was $250 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 Company's Statements of Cash Flows.
During the first six months of 1997, the Company issued 44,136 Common
Shares pursuant to the Employee Share Purchase Plan and received net proceeds of
approximately $1.6 million. The Company also completed the March 1997 Common
Share Offerings, the Series D Preferred Share Offering, and the June 1997 Common
Share Offerings and received net proceeds of approximately $656.7 million, which
proceeds have been or will be utilized to purchase additional properties.
With respect to Property acquisitions during the first six months of 1997,
including the effects of the Merger, the Company purchased 103 Properties
containing 27,864 units for a total purchase price of approximately $1.5
billion, including the assumption of mortgage indebtedness and unsecured notes
of approximately $491.1 million. These acquisitions were primarily funded from
proceeds received from the March 1997 Common Share Offerings, the Series D
Preferred Share Offering and the June 1997 Common Share Offerings. Subsequent to
June 30, 1997, the Company acquired nine additional properties containing 2,676
units for a total purchase price of approximately $196.9 million, including the
assumption of mortgage indebtedness of approximately $24.1 million and the
issuance of OP units valued at $2.8 million. These acquisitions were primarily
funded with proceeds from the June 1997 Common Share Offerings. The Company is
actively seeking to acquire additional multifamily properties with physical and
market characteristics similar to the Properties and as of August 13, 1997 was
under contract or negotiating with various sellers to purchase up to 27,118
units. The combined purchase price of these probable acquisitions is
approximately $1.5 billion, including the assumption of mortgage indebtedness of
approximately $835.9 million and issuance of Common Shares in the amount of
approximately $156 million. The closings of these transactions are subject to
certain contingencies and conditions, therefore, there can be no
21
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
assurance that these transactions will be consummated or that the final terms
will not differ in material respects. The Company expects to fund these probable
acquisitions from its remaining proceeds of the June 1997 Common Share
Offerings, its line of credit and through the issuance of additional
unsecured notes and or equity securities.
As of June 30, 1997, the Company had total indebtedness of approximately
$1.7 billion, which included mortgage indebtedness of $960.9 million, of which
$387.8 million represented tax-exempt bond indebtedness, and unsecured debt of
$754.5 million (net of a $1 million discount). During the six months ended June
30, 1997, the Company repaid an aggregate of $36.6 million of mortgage
indebtedness on seven of its Properties. The Company has, from time to time,
entered into interest rate protection agreements to reduce the potential impact
of increases in interest rates but has limited exposure to the extent of non-
performance by the counterparties of each protection agreement since each
counterparty is a major U.S. financial institution, and the Company does not
anticipate their non-performance. No such financial instrument has been used for
trading purposes. In February 1996, the Company entered into two interest rate
protection agreements that will hedge the Company's interest rate risk at
maturity of $175 million of indebtedness. The first agreement hedged the
interest rate risk of $50 million of mortgage loans scheduled to mature in
September 1997 by locking the five year Treasury Rate, commencing October 1,
1997. This agreement was cancelled in July 1997 in conjunction with a new
interest rate agreement discussed below. The second agreement hedged the
interest rate risk of the Operating Partnership's 1999 Notes by locking the
effective four year Treasury Rate commencing May 15, 1999. There was no current
cost to the Company for entering into these agreements. In July 1997, the
Company entered into two interest rate protection agreements to effectively fix
the interest rate cost of the Company's anticipated issuance of unsecured notes
in September 1997. One agreement was for a notional amount of $100 million with
a locked in treasury rate at 6.134%. The second agreement was for a notional
amount of $75 million with a locked in treasury rate of 6.287%.
During the six months ended June 30, 1997, total capital expenditures for
the Company approximated $21.7 million. Of this amount, approximately $3.1
million related to capital improvements and major repairs for certain of the
1994, 1995, 1996 and 1997 Acquired Properties. Capital improvements and major
repairs for all of the Company's pre-IPO properties and certain Acquired
Properties approximated $5.5 million, or $74 per unit. Capital spent for
replacement-type items approximated $8.1 million, or $109 per unit. In regard to
capital spent for upgrades at certain properties and tenant improvements with
respect to the retail and commercial office space at one Property, the amount
was approximately $2.3 million. Also included in total capital expenditures was
approximately $2.7 million expended for non-real estate additions such as
computer software, computer equipment, furniture and fixtures and leasehold
improvements for the Company's ROCs and its corporate headquarters. 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 1997 are budgeted to be approximately $26.3 million.
Minority Interests as of June 30, 1997 increased by $28.6 million when
compared to December 31, 1996. The primary factors that impacted this account
during the six month period were distributions declared to Minority Interests,
which amounted to $9.2 million for the six month period, the allocation of
income from operations in the amount of $6.3 million and the
22
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
conversion of OP Units into Common Shares and the issuances of Common Shares
during the six months.
Total distributions paid in July, 1997 for the quarter ended June 30, 1997
amounted to approximately $64.5 million.
The Company expects to meet its short-term liquidity requirements generally
through its working capital and net cash provided by operating activities. 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 mortgage
debt maturities, reduction of outstanding amounts under its line of credit,
property acquisitions and capital improvements through the issuance of unsecured
notes and equity securities including additional OP Units as well as from
undistributed FFO and proceeds received from the disposition of certain
Properties. In addition, the Company has certain uncollateralized Properties
available for 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.
The Company currently has a $250 million line of credit which is scheduled
to mature in November 1999. As of August 13, 1997, no amounts were outstanding
under the Company's line of credit. The Company is currently negotiating to
increase its line of credit to $500 million. The Company expects to have
this completed by September 1997.
Funds From Operations
The Company generally considers FFO to be one measure of the performance of
real estate companies including an equity REIT. The resolution adopted by the
Board of Governors of NAREIT defines FFO as 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 Company believes that FFO is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities it provides
investors with an understanding of the ability of the Company to incur and
service debt and to make capital expenditures. FFO in and of itself does not
represent cash generated from operating activities in accordance with GAAP and
therefore should not be considered an alternative to net income as an indication
of the Company's performance or to net cash flows from operating activities as
determined by GAAP as a measure of liquidity and is not necessarily indicative
of cash available to fund cash needs. The Company's calculation of FFO
represents net income available to Common Shares, excluding gains on
dispositions of properties, plus depreciation on real estate assets, income
allocated to Minority Interests and amortization of deferred financing costs
related to the Predecessor Business. The Company's
23
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
calculation of FFO may differ from the methodology for calculating FFO utilized
by other REITs and, accordingly, may not be comparable to such other REITs.
For the six months ended June 30, 1997, FFO increased by $40.8 million
representing a 57% increase when compared to the six months ended June 30, 1996.
For the quarter ended June 30, 1997, FFO increased by $22.4 million representing
a 59.3% increase when compared to the quarter ended June 30, 1996.
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, 1997 and 1996:
Six Six
Months Months Quarter Quarter
Ended Ended Ended Ended
6/30/97 6/30/96 6/30/97 6/30/96
-------- ------- ------- -------
Net income available to Common Shares $ 47,732 $25,808 $23,831 $13,851
Adjustments:
Income allocated to Minority Interests 6,345 5,923 2,919 3,022
Depreciation on real estate assets 61,885 41,937 33,453 21,804
Amortization of deferred financing costs
related to predecessor business 116 316 58 157
Gain on disposition of properties (3,632) (2,346) (0) (1,006)
-------- ------- ------ -------
FFO available to Common Shares and OP Units $112,446 $71,638 $60,261 $37,828
======== ======= ======= =======
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion in Note 15 of "Notes to Consolidated Financial Statements" is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
12 Computation of Ratio of Earnings to Fixed Charges.
(B) Reports on Form 8-K:
A report on Form 8-K, dated April 3, 1997.
A report on Form 8-K, dated May 16, 1997.
A report on Form 8-K, dated May 20, 1997.
A report on Form 8-K, dated May 30, 1997.
A report on Form 8-K, dated June 5, 1997.
A report on Form 8-K, dated June 9, 1997.
A report on Form 8-K, dated June 10, 1997.
A report on Form 8-K, dated June 23, 1997.
25
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.
EQUITY RESIDENTIAL PROPERTIES TRUST
Date: August 13, 1997 By: /s/ Bruce C. Strohm
--------------- -----------------------------------------
Bruce C. Strohm
Executive Vice President, General Counsel
and Secretary
Date: August 13, 1997 By: /s/ Michael J. McHugh
--------------- ------------------------------------------
Michael J. McHugh
Senior Vice President, Chief Accounting
Officer and Treasurer
26