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 SEPTEMBER 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
Incorporation or Organization) Identification No.)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 474-1300
(Registrant's Telephone Number, Including Area Code)
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 NOVEMBER 11, 1997, 77,546,116 OF THE REGISTRANT'S COMMON SHARES OF BENEFICIAL
INTEREST WERE OUTSTANDING.
RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ----------------
ASSETS
Investment in rental property
Land $ 501,220 $ 284,879
Depreciable property 4,321,559 2,698,631
----------------- ----------------
4,822,779 2,983,510
Accumulated depreciation (400,550) (301,512)
----------------- ----------------
Investment in rental property, net of accumulated depreciation 4,422,229 2,681,998
Real estate held for disposition 3,948 -
Cash and cash equivalents 277,997 147,271
Investment in mortgage notes, net 176,051 86,596
Rents receivable 2,614 1,450
Deposits - restricted 7,761 20,637
Escrow deposits - mortgage 31,702 15,434
Deferred financing costs, net 14,168 14,555
Other assets 97,544 18,186
------------------ ----------------
TOTAL ASSETS $ 5,034,014 $ 2,986,127
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 963,819 $ 755,434
Notes, net 754,292 498,840
Accounts payable and accrued expenses 56,864 33,117
Accrued interest payable 20,493 12,737
Due to affiliates 783 628
Rents received in advance and other liabilities 28,928 15,838
Security deposits 21,196 14,128
Distributions payable 66,707 45,938
----------------- ----------------
TOTAL LIABILITIES 1,913,082 1,376,660
----------------- ----------------
Commitments and contingencies
Minority Interests 181,884 150,637
----------------- ----------------
See accompanying notes.
2
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 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 -
7 1/4% Series G Convertible Cumulative Preferred
Shares of Beneficial Interest, liquidation preference
$250 per share, 1,100,000 shares issued and outstanding 275,000 -
Common Shares of beneficial interest, $.01 par value,
200,000,000 shares authorized, 74,205,030 shares issued
and outstanding as of September 30, 1997 and 51,154,836
shares issued and outstanding as of December 31, 1996 742 512
Paid in capital 2,066,973 1,147,214
Employee notes (5,173) (5,255)
Distributions in excess of accumulated earnings (123,989) (76,641)
----------------- ----------------
Total shareholders' equity 2,939,048 1,458,830
----------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,034,014 $ 2,986,127
================= ================
3
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, QUARTERS ENDED SEPTEMBER 30,
---------------------------------- -------------------------------
1997 1996 1997 1996
---------------------------------- -------------------------------
REVENUES
Rental income $ 482,980 $ 327,749 $ 192,181 $ 118,510
Fee and asset management 4,364 4,982 1,254 1,679
Interest income - investment in
mortgage notes 14,821 9,084 6,810 3,218
Interest and other income 7,513 2,232 3,109 1,052
------------- ------------- ------------ ------------
Total revenues 509,678 344,047 203,354 124,459
------------- ------------- ------------ ------------
EXPENSES
Property and maintenance 117,681 93,128 46,921 34,183
Real estate taxes and insurance 48,560 32,301 18,893 11,072
Property management 18,765 13,136 6,946 4,336
Fee and asset management 2,523 3,037 954 911
Depreciation 106,114 66,759 43,339 23,826
Interest:
Expense incurred 82,775 58,632 31,851 21,608
Amortization of deferred
financing costs 1,810 2,860 590 965
General and administrative 10,037 6,690 3,831 2,313
------------- ------------- ------------ ------------
Total expenses 388,265 276,543 153,325 99,214
------------- ------------- ------------ ------------
Income before gain on disposition of
properties,
extraordinary item and allocation to
Minority Interests 121,413 67,504 50,029 25,245
Gain on disposition of properties 3,923 2,346 291 -
------------- ------------- ------------ ------------
Income before extraordinary item and
allocation
to Minority Interests 125,336 69,850 50,320 25,245
Write-off of unamortized costs on
refinanced debt - (3,134) - (3,134)
------------- ------------- ------------ ------------
Income before allocation to Minority
Interests 125,336 66,716 50,320 22,111
Income allocated to Minority Interests (9,431) (8,426) (3,086) (2,503)
------------- ------------- ------------ ------------
Net income 115,905 58,290 47,234 19,608
Preferred distributions (37,287) (19,953) (16,348) (7,079)
------------- ------------- ------------ ------------
Net income available to Common Shares $ 78,618 $ 38,337 $ 30,886 $ 12,529
============= ============= ============ ============
Net income per weighted average Common
Share outstanding $ 1.28 $ 0.94 $ 0.42 $ 0.29
============= ============= ============ ============
Weighted average Common Shares outstanding 61,577 40,934 73,757 43,781
============= ============= ============ ============
Distributions declared per Common Share
outstanding $ 1.88 $ 1.77 $ 0.63 $ 0.59
============= ============= ============ ============
See accompanying notes.
4
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1997 1996
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 115,905 $ 58,290
Adjustments to reconcile net income to net cash provided by operating
Activities:
Income allocated to Minority Interests 9,431 8,426
Depreciation 106,114 66,759
Amortization of deferred financing costs (including discount on
1999 and 2002 Notes and premium on 2002-A Notes) 1,652 3,097
Amortization of discount on investment in mortgage notes (2,480) -
Gain on disposition of properties (3,923) (2,346)
Write-off of unamortized costs on refinanced debt - 3,134
Changes in assets and liabilities:
(Increase) in rents receivable (862) (1,021)
(Increase) decrease in deposits - restricted (736) 14,471
(Increase) in other assets (6,306) (2,801)
Increase (decrease) in due to affiliates 77 (606)
Increase in accounts payable and accrued expenses 20,813 12,847
Increase in accrued interest payable 7,756 6,328
Increase in rents received in advance and other liabilities 6,901 5,134
--------------- ---------------
Net cash provided by operating activities 254,342 171,712
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in rental properties, net (630,419) (460,825)
Improvements to rental property (23,725) (23,381)
Additions to non-rental property (6,293) (1,672)
Proceeds from disposition of rental property, net 5,477 10,183
Purchase of contract rights (5,000) -
(Increase) decrease in mortgage deposits (14,704) 1,792
Deposits (made) on rental property acquisitions (2,850) (1,800)
Deposits applied on rental property acquisitions 16,761 100
Investment in mortgage notes, net (86,975) 668
Merger costs and related activities (60,429) -
Other investing activities, net (57,304) (629)
--------------- ---------------
Net cash (used for) investing activities (865,461) (475,564)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Shares 515,465 304,787
Proceeds from sale of Preferred Shares 450,000 115,000
Proceeds from exercise of options 4,321 3,358
Proceeds from sale of 2026 Notes - 150,000
Redemption of Preference Units - (1,083)
Payment of offering costs (18,840) (4,347)
Distributions to Common Share and Preferred Share owners (144,220) (87,775)
Distributions to Minority Interests (14,072) (15,297)
Principal receipts on employee notes 240 57
Proceeds from restructuring of tax-exempt bond investments 9,350 112,980
Loan to title holding entities - (4,092)
Proceeds from line of credit 185,000 250,000
Repayments on line of credit (185,000) (342,000)
Principal payments on mortgage notes payable (62,993) (35,725)
Loan and bond acquisition costs (1,697) (5,767)
Increase in security deposits 3,843 2,873
Net cash provided by financing activities 741,397 442,969
--------------- ---------------
Net increase in cash and cash equivalents 130,278 139,117
Cash and cash equivalents, beginning of period 147,271 13,428
--------------- ---------------
Cash and cash equivalents, end of period $ 277,549 $ 152,545
=============== ===============
See accompanying notes
5
EQUITY RESIDENTIAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1996
-----------------------------------------
Supplemental information:
Cash paid during the period for interest $ 75,019 $ 52,304
============= ===================
Mortgage loans and unsecured notes assumed
through Merger and acquisitions of rental properties $ 517,639 $ 99,912
============= ===================
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 September 30, 1997,
the Company controlled a portfolio of 336 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 fair 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
7
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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 quarterly 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.
8
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On August 27, 1997, the Company entered into an Agreement and Plan of
Merger regarding the planned acquisition of the multifamily property business of
Evans Withycombe Residential, Inc. ("EWR"), a Maryland corporation, by the
Company through the tax free merger of the Company and EWR (the "EWR Merger").
The transaction is valued at approximately $1 billion and includes 52
multifamily properties containing approximately 16,000 units. In the EWR Merger,
each outstanding share of common stock of Evans will be converted into .50 of a
Common Share of the Company. The EWR Merger is subject to approval of the
shareholders of the Company and EWR and, therefore, completion of the EWR Merger
is conditioned upon such approval and certain other closing conditions.
4. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
During the nine months ended September 30, 1997, the Company issued 71,254
Common Shares pursuant to the Employee Share Purchase Plan and received net
proceeds of approximately $2.7 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 "June 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 June 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 therefrom.
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 Third Amended and Restated Share Option and Share Award Plan ("Third
Amended Option and Award Plan") was approved by the Board of Trustees on June 5,
1997 and approved by the shareholders on July 22, 1997. The Third Amended
Option and Award Plan increased the number of Options and Awards which can be
issued by the Company to 5,600,000 Common Shares.
9
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On July 28, 1997, the Company filed with the SEC a Form S-3 Registration
Statement to register $750 million of equity securities (the "August 1997 Equity
Shelf Registration"). The SEC declared this Registration effective on August 4,
1997.
In September 1997, the Company completed the sale of 498,000 publicly
registered Common Shares which were sold at a price of $51.125 per share. The
Company received net proceeds of approximately $24.2 million in connection with
this offering (the "September 1997 Common Share Offering").
In September 1997, the Company sold 11,000,000 depositary shares (the
"Series G Depositary Shares") pursuant to the August 1997 Equity Shelf
Registration. Each Series G Depositary Share represents a 1/10 fractional
interest in a 7 1/4% Series G Convertible Cumulative Preferred Share of
Beneficial Interest, $0.01 par value per share (the "Series G Preferred
Shares"). Series G Depositary Shares representing Series G Preferred Shares are
convertible at the option of the holder thereof at any time into Common Shares
at a conversion price of $58.58 per Common Share (equivalent to a conversion
rate of approximately .4268 Common Shares for each Series G Depositary Share).
The liquidation preference of each of the Series G Preferred Shares is $250.00
per share (equivalent to $25 per Series G Depositary Share). The Company raised
gross proceeds of approximately $275 million from this offering (the "Series G
Preferred Share Offering"). The Company received net proceeds of approximately
$264 million therefrom. In addition, in October 1997, the Company sold 1,650,000
additional Series G Depositary Shares pursuant to an over allotment option
granted to the underwriters and raised gross proceeds of approximately $41.25
million therefrom. The Company received net proceeds of approximately $39.6
million therefrom.
The following table presents the changes in the Company's issued and
outstanding Common Shares for the nine months ended September 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 September 1997 Common Share Offering 498,000
Common Shares issued through Employee Share Purchase Plan 71,254
Common Shares issued through conversion of Wellsford common shares 10,823,016
Conversion of OP Units into Common Shares 546,214
Common Shares issued through restricted share awards 28,246
Common Shares issued through exercise of options 157,301
Common Shares issued through 401(k) Plan 13,140
----------
Balance at September 30, 1997 74,205,030
==========
Assuming conversion of all 7,424,241 OP Units into Common Shares, total Common
Shares outstanding at September 30, 1997 would have been 81,629,271.
10
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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
September 30, 1997, the Minority Interests held 7,424,241 OP Units which
represented a 9.10% interest in the Operating Partnership.
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 October 10, 1997
for the quarter ended September 30, 1997 to Common Share holders of record as of
September 26, 1997.
On October 1, 1997, the Company paid, for the quarter ended September 30,
1997, a $0.4375 per share distribution to Series E Preferred Share holders of
record as of September 15, 1997. On October 15, 1997, the Company paid, (i) a
$0.585938 per share distribution to Series A Preferred Share holders of record
as of September 26, 1997; (ii) a $0.570313 per share distribution to both Series
B Depositary Share holders and Series C Depositary Share holders of record as of
September 26, 1997; (iii) a $0.5375 per share distribution to Series D
Depositary Share holders of record as of September 26, 1997; (iv) a $0.603125
per share distribution to Series F Preferred Share holders of record on
September 26, 1997; and (v) a $0.1108 per share distribution to Series G
Depositary Share holders of record as of October 1, 1997, representing the
period from September 24, 1997 (the day of issuance) to October 15, 1997.
5. INVESTMENT IN RENTAL PROPERTY
In addition to the Merger, during the nine months ended September 30, 1997,
the Company acquired the 47 Properties listed below. Each Property was
purchased from an unaffiliated third party, except for 12 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"). The total purchase price for the Properties
acquired from Zell/Merrill I and Zell/Merrill II was approximately $162.6
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, the June 1997 Common Share Offerings and the September
1997 Common Share Offering.
11
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Total
Acquisition
Date Number Cost (in
--
Acquired Property Location of Units thousands)
-------- -------- -------- -------- -----------
01/02/97 Town Center Kingwood, TX 258 $ 12,853
01/21/97 Harborview San Pedro, CA 160 19,089
01/31/97 The Cardinal Greensboro, NC 256 13,174
02/12/97 Trails at Dominion Houston, TX 843 38,420
02/25/97 Dartmouth Woods Lakewood, CO 201 12,473
02/28/97 Rincon Houston, TX 288 21,150
02/28/97 Waterford at the Lakes Kent, WA 344 19,388
03/17/97 Junipers at Yarmouth Yarmouth, ME 225 9,215
03/20/97 Lincoln Harbor Ft. Lauderdale, FL 324 22,262
03/24/97 Sedona Ridge Phoenix, AZ 250 15,242
03/28/97 Club at the Green Beaverton, OR 254 14,703
03/28/97 Boulder Creek (formerly Knight's Castle) Wilsonville, OR 296 15,146
04/04/97 Country Gables Beaverton, OR 288 17,175
04/04/97 Watermark Square Portland, OR 390 15,929
04/04/97 Indigo Springs Kent, WA 278 12,812
04/29/97 Summit Chase Coral Springs, FL 140 5,593
05/13/97 Willow Brook Durham, NC 176 8,544
05/15/97 The Willows Knoxville, TN 250 11,038
05/21/97 Cascade at Landmark Alexandria, VA 277 23,292
05/21/97 Sabal Palm Club Pompano Beach, FL 416 23,809
05/21/97 Tamarlane Portland, ME 115 5,853
05/22/97 Spinnaker Cove Hermitage, TN 278 14,658
05/29/97 Banyan Lake Boynton Beach, FL 288 13,985
05/30/97 Wyndridge III Memphis, TN 284 15,103
06/06/97 Wyndridge II Memphis, TN 284 15,178
06/13/97 Windemere Mesa, AZ 224 9,629
06/13/97 Preston Bend Dallas, TX 255 11,042
06/13/97 Highline Oaks Denver, CO 220 10,754
06/17/97 Hunter's Ridge/South Pointe St. Louis, MO 390 19,524
06/19/97 Club at Tanasbourne Hillsboro, OR 352 19,817
06/26/97 Wood Creek Pleasant Hill, CA 256 32,752
07/02/97 Ridgemont/Mountain Brook Chattanooga, TN 506 15,084
07/11/97 Foxchase Grand Prairie, TX 260 8,446
07/18/97 La Mirage San Diego, CA 1,070 128,773
07/31/97 Bay Ridge San Pedro, CA 60 4,566
08/07/97 Boynton Place Boynton Beach, FL 192 9,340
08/12/97 Cambridge Village Lewisville, TX 200 9,564
08/12/97 Crosswinds St. Petersburg, FL 208 7,328
12
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Total
Acquisition
Date Number Cost (in
--
Acquired Property Location of Units thousands)
-------- -------- -------- -------- ----------
08/12/97 Gates of Redmond I Redmond, WA 180 14,336
08/15/97 Gates of Redmond II Redmond, WA 100 8,012
08/27/97 Paces Station/Paces on the Green Atlanta, GA 610 37,370
09/05/97 North Hill Atlanta, GA 420 21,034
09/05/97 Pardee Casas San Diego, CA 196 13,312
09/29/97 The Classic Stamford, CT 144 22,760
09/30/97 Cambridge at Hickory Hollow Nashville, TN 360 21,149
------ --------
13,366 $820,676
====== ========
6. DISPOSITIONS
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.
On August 25, 1997, the Company sold a parcel of vacant land located in
Hollywood, Florida for a sales price of $0.7 million. The gain for financial
reporting purposes was approximately $0.3 million.
7. COMMITMENTS TO ACQUIRE RENTAL PROPERTIES
As of September 30, 1997, in addition to the properties which were
subsequently acquired as discussed in Note 16 of the Notes to Consolidated
Financial Statements but excluding the EWR Merger, the Company had entered into
agreements to acquire 33 multifamily properties containing 7,745 units from
various unaffiliated third parties. The expected combined purchase price is
approximately $430 million, which includes the assumption of mortgage
indebtedness of approximately $238.1 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 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.
13
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 September 30, 1997, the Company had outstanding mortgage indebtedness
of approximately $963.8 million encumbering 103 of the Properties. The carrying
value of such Properties (net of accumulated depreciation of $149.1 million) was
approximately $1.4 billion. In connection with the Properties acquired during
the nine months ended September 30, 1997, including the effects of the Merger,
the Company assumed the outstanding mortgage balances on 24 Properties in the
aggregate amount of $262 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 September 30, 1997, the
aggregate notional amount of these agreements was approximately $174.8 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 interest rate. As of September
30, 1997, the aggregate notional amount of these agreements was approximately
$174.8 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.
14
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Scheduled maturities for the Company's outstanding mortgage indebtedness
are at various dates through August 1, 2030. As of September 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 4.15% to
7.072%. During the nine months ended September 30, 1997, the Company repaid the
outstanding mortgage balances on ten Properties in the aggregate amount of $58.4
million. Subsequent to September 30, 1997, the Company repaid the outstanding
mortgage balance on 18 Properties in the amount of approximately $52.4 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. This agreement was cancelled in July
1997 in conjunction with the Company entering into another interest rate
protection agreement to effectively fix the cost of the Company's anticipated
issuance of unsecured notes in the fourth quarter of 1997.
11. LINE OF CREDIT
The Company, through the Operating Partnership, had a $250 million
unsecured line of credit with Morgan Guaranty Trust Company of New York and Bank
of America Illinois. In September 1997, the Company increased the amount
available on this line of credit from $250 million to $500 million. As of
September 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 September 30, 1997, the unamortized discount balances
related to the 1999 Notes and the 2002 Notes were approximately $0.3 million and
$0.6 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 September 30, 1997, the unamortized
premium balance relating to the 2002-A Notes was approximately $5.2 million.
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.
15
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 September 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 September 30, 1997, the
unamortized balance was approximately $0.5 million.
13. DEPOSITS - RESTRICTED
Deposits - restricted, as of September 30, 1997, primarily included
deposits in the amount of approximately $2.85 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. 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
September 1997 Common Share Offering, the acquisition of an additional 47
Properties, including the related assumption of $193.5 million of mortgage
indebtedness, the repayment of $58.4 million of mortgage indebtedness and the
disposition of one property had occurred on January 1, 1997. This would result
in 74,205,030 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
16
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 Nine Months Ended
September 30, 1997
(Amounts in thousands
except per share amounts)
-------------------------
Total Revenues $608,419
--------
Total Expenses 456,223
--------
Pro Forma income before allocation to Minority Interests 152,196
--------
Pro Forma net income 142,703
--------
Preferred distributions 47,882
--------
Pro Forma net income available for Common Shares $ 94,821
========
Pro Forma net income per Common Share $1.28
========
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 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. During the quarter ended
September 30, 1997, the Company settled this lawsuit with all payments in excess
of $250,000 being borne by the Company's insurance coverage.
17
EQUITY RESIDENTIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 October 3, 1997, the Company acquired Brookfield Apartments, a 128-unit
multifamily property located in Salt Lake City, Utah, from an unaffiliated third
party for a purchase price of approximately $6.8 million.
On October 9, 1997, the Company acquired, from an unaffiliated third party,
21 multifamily properties containing 5,149 units for a total purchase price of
approximately $277.5 million.
On October 17, 1997, the Company acquired Deerwood Apartments, a 316-unit
multifamily property located in Corona, California, from an unaffiliated third
party for a purchase price of approximately $25 million.
On October 21, 1997, the Company acquired 17 multifamily properties
containing 5,015 units from an unaffiliated third party for a total purchase
price of $292.4 million, which included the assumption of mortgage indebtedness
of $136 million and the issuance of 3,315,500 Common Shares at a price of $45.25
per share.
In October 1997, the Operating Partnership issued $150,000,000 of 7 1/8%
unsecured fixed rate notes (the "2017 Notes") in connection with the 1996 Debt
Shelf Registration in a public debt offering (the "Fourth Public Debt
Offering"). The Operating Partnership received net proceeds of approximately
$147.4 million in connection with this issuance.
On November 3, 1997, the Company filed with the SEC a Form S-3 Registration
Statement to register 7,000,000 Common Shares pursuant to a Distribution
Reinvestment and Share Purchase Plan. The SEC has not yet declared this
Registration effective.
18
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 September 30, 1997, the Company has acquired
direct or indirect interests in 279 properties, including properties acquired
through the Merger, (the "Acquired Properties"), containing 82,050 units in the
aggregate for a total purchase price of approximately $4.2 billion, including
the assumption of approximately $816.6 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 26,286 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 119 of such Acquired Properties consisting of 32,370
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 are
presented in the Consolidated Financial Statements of the Company from the date
of each acquisition.
During the nine months ended September 30, 1997, the Company disposed of
one property (the "1997 Disposed Property") for a sales price of $4.8 million
and disposed of one parcel of vacant land for a sales price of $.7 million.
The Company's overall results of operations for the quarter and nine months
ended September 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.
19
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 nine month periods ended
September 30, 1997 and September 30, 1996 (the "Nine-Month 1997 Same Store
Properties") and Properties that the Company owned for all of both the quarters
ended September 30, 1997 and September 30, 1996 (the "Third-Quarter 1997 Same
Store Properties") also impacted the Company's results of operations and are
discussed as well in the following paragraphs.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
For the nine months ended September 30, 1997, income before gain on
disposition of properties, extraordinary item and allocation to Minority
Interests increased by $53.9 million when compared to the nine months ended
September 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 and interest
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
$5.7 million earned on the Company's mortgage note investments is primarily
attributable to the $88 million investment in six mortgage loans made in April
1997.
In regard to the Nine-Month 1997 Same Store Properties, rental revenues
increased by approximately $8 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 $1.5 million or 1.3%. 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 $5.6 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 an area office in Tulsa, 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 $0.5 million for the nine
months ended September 30, 1997 when compared to the nine months ended September
30, 1996, due to the disposition of certain of these properties, resulting in
the Company no longer providing fee and asset management services to such
properties.
20
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Interest expense, including amortization of deferred financing costs,
increased by approximately $23.1 million. The increase was primarily the result
of an increase in the Company's average indebtedness which increased by $465.8
million, primarily due to the Merger. However, the Company's effective interest
costs decreased from 7.93% in 1996 to 7.53% in 1997.
General and administrative expenses, which include corporate operating
expenses, increased approximately $3.3 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 1.97% for the nine months ended September 30, 1997.
COMPARISON OF QUARTER ENDED SEPTEMBER 30, 1997 TO QUARTER ENDED SEPTEMBER 30,
1996
For the quarter ended September 30, 1997, income before gain on disposition
of properties, extraordinary item and allocation to Minority Interests increased
by $24.8 million when compared to the quarter ended September 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 $3.6 million earned on the Company's mortgage note investments is
primarily attributable to the $88 million investment in six mortgage loans made
in April 1997.
In regard to the Third Quarter 1997 Same Store Properties, rental revenues
increased by approximately $3.5 million or 3.1% 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 $0.4 million or .8%. This decrease was primarily the result of
lower medical and health care insurance costs, maintenance costs and utilities.
Property management represents expenses associated with the management of
the Company's Properties. These expenses increased by approximately $2.6 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 an area office in Tulsa, Oklahoma, related to the Merger.
Interest expense, including amortization of deferred financing costs,
increased by approximately $9.9 million. This increase was primarily the result
of an increase in the Company's average indebtedness outstanding which increased
by $557.1 million, primarily due to the Merger. However, the Company's effective
interest costs decreased from 7.77% in 1996 to 7.52% in 1997.
21
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
General and administrative expenses, which include corporate operating
expenses, increased approximately $1.5 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 1.9% for the quarter ended September 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 September 30,
1997 was approximately $278 million and the amount available on the Company's
line of credit was $500 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 nine months ended September 30, 1997, the Company issued 71,254
Common Shares pursuant to the Employee Share Purchase Plan and received net
proceeds of approximately $2.7 million. The Company also completed the March
1997 Common Share Offerings, the Series D Preferred Share Offering, the June
1997 Common Share Offerings, the September 1997 Common Share Offering and the
Series G Preferred Share Offering and received in the aggregate net proceeds of
approximately $944.9 million, which proceeds have been or will be utilized to
purchase additional properties.
In October 1997, the Operating Partnership issued the 2017 Notes and
received net proceeds of approximately $147.4 million in connection therewith.
With respect to Property acquisitions during the first nine months of 1997,
including the effects of the Merger, the Company purchased 119 Properties
containing 32,370 units for a total purchase price of approximately $1.8
billion, including the issuance of 10.8 million Common Shares related to the
Merger and the assumption of mortgage indebtedness and unsecured notes of
approximately $517.6 million. The cash portion of these acquisitions was
primarily funded from proceeds received from the March 1997 Common Share
Offerings, the Series D Preferred Share Offering, the June 1997 Common Share
Offerings and the September 1997 Common Share Offering. Subsequent to September
30, 1997, the Company acquired 40 additional properties containing 10,608 units
for a total purchase price of approximately $601.7 million, including the
assumption of mortgage indebtedness of approximately $136 million and the
issuance of 3,315,500 Common Shares valued at approximately $150 million. These
acquisitions were primarily funded with proceeds from the Series G Preferred
Share Offering.
22
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As of September 30, 1997, the Company had total indebtedness of
approximately $1.7 billion, which included mortgage indebtedness of $963.8
million, of which $404.1 million represented tax-exempt bond indebtedness, and
unsecured debt of $754.3 million (net of a $.9 million discount). During the
nine months ended September 30, 1997, the Company repaid an aggregate of $58.4
million of mortgage indebtedness on ten 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 canceled 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 the fourth quarter of 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 nine months ended September 30, 1997, total capital expenditures
for the Company approximated $40.1 million. Of this amount, approximately $5.9
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 $10.3 million, or $125 per unit. Capital spent for
replacement-type items approximated $14.7 million, or $177 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 $2.9 million. Also included in total capital expenditures was
approximately $6.3 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
23
EQUITY RESIDENTIAL PROPERTIES TRUST
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 $7.9 million.
Minority Interests as of September 30, 1997 increased by $31.2 million when
compared to December 31, 1996. The primary factors that impacted this account
during the nine month period were distributions declared to Minority Interests,
which amounted to $14.1 million for the nine month period, the allocation of
income from operations in the amount of $9.4 million and the conversion of OP
Units into Common Shares and the issuance of Common Shares and OP Units during
the nine months.
In connection with the EWR Merger, the Company expects to assume
liabilities for financial statement purposes of approximately $442.1 million and
issue approximately 10.2 million Common Shares of the Company as well as 2.3
million Operating Partnership OP Units to consummate the EWR Merger. The Company
has recently made a $70 million loan to EWR in order for EWR to repay its line
of credit balance in advance of the closing of the EWR Merger. The Company also
anticipates to fund approximately $17.6 million to pay for related EWR Merger
costs. After the close of the EWR Merger, the Company expects to terminate EWR's
line of credit facility.
Total distributions paid in October, 1997 for the quarter ended September
30, 1997 amounted to approximately $66.7 million.
The Company expects to meet its short-term liquidity requirements,
including capital expenditures related to maintaining its existing properties
and EWR's stabilized communities, generally through its working capital and net
cash provided by operating activities and borrowings under its line of credit.
The Company considers its cash provided by operating activities to be adequate
to meet operating requirements and payments of distributions. The Company also
expects to meet its long-term liquidity requirements, such as scheduled mortgage
debt maturities, reduction of outstanding amounts under its line of credit,
property acquisitions, financing of construction and development activities
related to EWR 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.
In September, the Company increased the amount available on its line of
credit from $250 million to $500 million. As of November 11, 1997, $10 million
was outstanding under the Company's line of credit.
24
EQUITY RESIDENTIAL PROPERTIES TRUST
PART 1
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS AND FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (CONTINUED)
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 and extraordinary items 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
calculation of FFO may differ from the methodology for calculating FFO utilized
by other REITs and may differ as a result of differences between the Company's
and other REITs' accounting policies for replacement type items and,
accordingly, may not be comparable to such other REITs. The Company's accounting
policy with respect to replacement type items is to capitalize such items as
improvements and depreciate such improvements typically over a five year period.
For the nine months ended September 30, 1997, FFO increased by $75.3
million representing a 66% increase when compared to the nine months ended
September 30, 1996. For the quarter ended September 30, 1997, FFO increased by
$34.5 million representing an 83% increase when compared to the quarter ended
September 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 nine months and quarters
ended September 30, 1997 and 1996:
25
EQUITY RESIDENTIAL PROPERTIES TRUST
PART 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS(CONTINUED)
Nine Months Nine Months Quarter Quarter
Ended Ended Ended Ended
9/30/97 9/30/96 9/30/97 9/30/96
------- ------- ------- -------
Net income available to Common Shares $ 78,618 $ 38,337 $ 30,886 $ 12,529
Adjustments:
Income allocated to Minority 9,431 8,426 3,086 2,503
Interests
Depreciation on real estate assets 104,288 65,238 42,403 23,301
Amortization of deferred financing
costs related to predecessor 157 463 41 147
business
Write-off of unamortized costs on
refinanced debt (0) 3,134 (0) 3,134
Gain on disposition of properties (3,923) (2,346) (291) (0)
------- ------- ------- -------
FFO available to Common Shares and 188,571 113,252 76,125 41,614
OP Units $ ======== $ ======== $ ======== $ ========
26
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 August 15, 1997.
A report on Form 8-K, dated August 27, 1997.
A report on Form 8-K, dated September 10, 1997.
A report on Form 8-K, dated September 11, 1997.
A report on Form 8-K, dated September 17, 1997.
A report on Form 8-K, dated September 18, 1997.
27
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: November 11, 1997 By: /s/ Bruce C. Strohm
----------------- ----------------------------
Bruce C. Strohm
Executive Vice President, General Counsel
and Secretary
Date: November 11, 1997 By: /s/ Michael J.McHugh
----------------- --------------------------------------
Michael J. McHugh
Senior Vice President, Chief Accounting
Officer and Treasurer
28