As filed with the Securities and Exchange Commission on November 13, 1997
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
May 30, 1997
(Date of Report)
ERP OPERATING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in its Charter)
0-24920
(Commission File No.)
Illinois 36-3894853
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) 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)
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ITEM 5. OTHER EVENTS
On January 16, 1997, Equity Residential Properties Trust ("EQR") entered
into an Agreement and Plan of Merger regarding the planned acquisition of the
multifamily property business of Wellsford Residential Property Trust
("Wellsford"), a Maryland real estate investment trust, by EQR through the tax
free merger of EQR and Wellsford (the "Merger"). The transaction is valued at
approximately $1 billion and includes 75 multifamily properties containing
19,004 units. In the Merger, each outstanding common share of beneficial
interest of Wellsford will be converted into .625 of a common share of the
surviving Maryland real estate investment trust in the Merger (the "Surviving
Trust"). ERP Operating Limited Partnership is filing the information contained
herein in order to provide its partners with additional information relating
to the Merger. The Merger is subject to approval of the shareholders of EQR and
Wellsford and, therefore, completion of the Merger is conditioned upon such
approval and certain other closing conditions. Upon completion of the Merger,
the current trustees of EQR, and two current trustees of Wellsford, Jeffrey H.
Lynford and Edward Lowenthal, will become trustees of the Surviving Trust.
2
In connection with the Merger, ERP Operating Limited Partnership is
hereby filing additional information regarding the business and properties of
Wellsford to be acquired in the Merger.
3
Wellsford Residential Property Trust was organized on July 21, 1992 as a
Maryland real estate investment trust ("REIT") and had its initial public
offering on November 27, 1992 (the "IPO").
Wellsford Residential Property Trust and subsidiaries (the "Company") is
a fully-integrated and self-administered equity REIT which owns and operates
high quality multifamily communities located in the Southwest and Pacific
Northwest regions of the United States. The Company owns and operates 72
multifamily communities (the "Communities") containing 19,004 apartment units
with an aggregate historical cost of approximately $773 million.
The Company's mission is to maximize long-term profitability for its
shareholders by providing quality housing and exceptional service for its
residents. The Company attempts to achieve its mission by acquiring,
developing and operating multifamily communities in target markets, applying
sophisticated management and operating techniques, and maintaining a
conservative capital structure. The Company generally seeks to acquire or
develop high quality communities that contain many interior and exterior
amenities and are well located within major metropolitan markets.
On January 16, 1997, the Company entered into a definitive merger
agreement with Equity Residential Properties Trust ("EQR"). The merger is
expected to close during the second quarter of 1997. See "Item 1. Business -
Recent Developments".
Acquisition and Development Strategy. The Company attempts to purchase or
develop communities with physical and market characteristics similar to the
Communities. The Company generally will seek to acquire or develop multifamily
communities that are (i) no more than ten years of age at the time of
acquisition; (ii) well located in their markets; (iii) capable of enhanced
performance through intensive management and cosmetic improvements; and (iv)
capable of producing a high component of anticipated total return derived from
current income. In connection with its acquisition and development of
multifamily communities, the Company will consider such factors as: (i) the
geographic location and type of community; (ii) the age, construction quality
and cost, condition and design of the community; (iii) the current and
projected cash flow of the community and the ability to increase cash flow;
(iv) the potential for capital appreciation of the community; (v) the terms of
tenant leases, including the potential for rent increases; (vi) the potential
for economic growth and the tax and regulatory environment of the neighborhoods
in which the community is located; (vii) the occupancy and demand by tenants
for communities of similar type in the vicinity; and (viii) the prospects for
liquidity through sale, financing or refinancing of the community.
The Company has generally considered acquiring a community if it meets the
criteria described above and has a minimum anticipated Initial Capitalization
Rate under current conditions of between 8.5% and 9.5%. Development of
communities would generally require anticipated Initial Capitalization Rates of
at least 10% upon stabilization of the community. "Initial Capitalization
Rate" means estimated net operating cash flow from a community for the 12
months following acquisition or stabilization and is expressed as a percentage
of the Company's total capitalized acquisition or development costs for the
community, which includes reserves for immediate capital improvements. The
4
Initial Capitalization Rate is calculated on the basis of projected rental
rates, expenses and occupancy levels, after adjustments are made to reflect
trends and to reflect occupancy rates which the Company believes are
sustainable on an ongoing basis. Therefore, an Initial Capitalization Rate
constitutes an estimate, and no assurance can be given that actual future
results will be consistent with such estimate. Nevertheless, the Company
believes that an Initial Capitalization Rate based upon careful criteria is a
reasonable estimate of the initial operating returns of a community to be
acquired or developed by the Company.
In December 1996, the Company sold two of its Communities located in
Washington, containing a total of 120 units, and received net proceeds of $1.6
million. A net loss of $0.1 million was recorded in connection with these
sales. The Company held a 50% interest in one of the sold communities.
In July 1996, the Company originated a $17.8 million mortgage on a 344
unit, newly constructed community in Tucson, Arizona known as Sonterra at
Williams Centre (the "Sonterra Mortgage"). The Company has the exclusive
option to purchase the community for approximately $20.5 million through
December 1997 and approximately $21 million during 1998.
In April 1996, the Company, through a wholly-owned subsidiary, acquired
Marks West, a multifamily community containing 280 units located in Denver,
Colorado, for approximately $18 million. The community's operations have been
combined with those of The Marks, an existing community located contiguous to
Marks West.
In December 1996, the Company completed its Summit at Lake Union
development project located in Seattle, Washington and containing 150 units at
a cost of approximately $16.5 million.
In October 1996, the Company completed two development projects. The Village
at Bear Creek II, a Denver, Colorado apartment community contiguous to the
Company's existing Bear Creek community, contains 216 units and was developed
at a cost of $18.8 million, including satisfaction of the developer's fixed
price contract. The operations of the two Bear Creek communities have been
combined. Seeley Lake III, a Tacoma, Washington apartment community developed
as an expansion to the Company's Village at Seeley Lake community, contains 182
units and was developed at a cost of $9.5 million.
In July 1996, the Company made a $0.7 million loan in connection with the
infrastructure related to a 441 unit development project in Portland, Oregon,
which the Company has an option to purchase. The Company expects to purchase
the land underlying the project for $2.8 million in mid-1997.
In May 1996, the Company purchased a parcel of land in Denver, Colorado
for $2.1 million. The land is located contiguous to the Company's Blue Ridge
development and will represent the second phase of the Company's Palomino Park
project.
The Company intends to develop selectively multifamily communities. It is
anticipated that the cost of projects under development at any time will
generally not exceed an amount equal to 10% of the total market value of the
Company's assets. The Company currently has the following development projects
under construction (collectively, the "Development Communities"):
Number Estimated
of Estimated Stabilization
Name Units Location Total Cost Date
-------------- ------ -------- ---------- -----------------
Blue Ridge 456 Denver $42.5 million Fourth Qtr. 1997
Red Canyon 304 Denver $33.6 million Fourth Qtr. 1998
--- -------------
760 $76.1 million
=== =============
The Blue Ridge and Red Canyon projects are being developed pursuant to
agreements whereby the Company has committed to purchase the projects for a
fixed price from a third-party developer upon their completion, thus reducing
the Company's exposure to construction risk. In the State of Washington, where
the Company has substantial development experience, the Company plans to
develop communities directly. However, in its other target markets, the
Company plans to explore entering into agreements to acquire newly developed
communities upon completion and achievement of certain specified occupancy
rates. The Company currently intends to fund the acquisition and construction
of the Development Communities with working capital, proceeds from $14.8
million of tax exempt bonds described in Item 7 below, and proceeds from its
line of credit with The First National Bank of Boston.
The Company will be subject to the risks of real estate development with
respect to the Development Communities, including the lack of financing,
construction delays, budget overruns and lease-up. The Company will be subject
to similar risks in connection with any future development of other
communities.
From time to time, the Company engages in the rehabilitation of its
communities in order to reposition a community within its market or where it
believes rehabilitation will enhance its ability to increase cash flow through
higher occupancy and rental rates.
Operating Strategy and Management. The Company aggressively manages the
Communities by monitoring daily community performance. The Company uses
sophisticated management information systems to identify and track competing
properties, monitor resident satisfaction and manage apartment inventory. Each
5
of the Communities is equipped with an on-site computer which compiles
occupancy, tenant traffic, leasing and turnover statistics, as well as
standardized revenue and expense data. This information is electronically
transferred from the Communities to the Company's offices in Denver, Tacoma
and New York.
The Company manages all of its Communities in Arizona, Colorado, New
Mexico, Oklahoma, Washington and San Antonio, totaling approximately 85% of the
Company's portfolio. The Company has a total of approximately 560 employees,
of which approximately 480 participate in the on-site management of the
Communities, including such tasks as leasing, rent collection, maintenance and
repairs. The Company's other employees work at the Company's executive and
regional offices. The Company currently retains local property management
companies supervised by the Company for its Communities in other locations.
The Company places special emphasis on its Resident Satisfaction Surveys
to measure the quality of its management and to obtain information about its
residents. Results from the Company's most recent Resident Satisfaction
Survey, which was returned by approximately 35% of the Company's residents,
indicated that nine out of ten residents would recommend their community to a
friend.
The Company attempts to balance rent increases with high occupancy and
controlled turnover costs. The Company believes that the management techniques
described above have contributed to the strong operating performance of its
portfolio, including a weighted average physical occupancy rate in excess of
94% for the eight year period ended December 31, 1996.
Each of the Communities is operated by a staff of approximately six to
seven individuals which includes a resident manager, assistant manager, leasing
agents, and a maintenance and apartment preparation staff. Policies and
procedures utilized at the community sites follow established federal and state
laws and regulations, including lease contracts, on-site marketing procedures,
credit collection and eviction standards. As a result of active on-site
management and strict prospective tenant qualification standards, the Company
experiences low rent loss due to delinquencies or early lease termination.
The Company generally offers leases of six to 12 months in term, although
approximately 7% of the current leases are for terms of 13-24 months,
reflecting part of the Company's attempt to reduce turnover costs. Individual
community lease programs are structured to respond to local market conditions.
None of the Communities are currently subject to rent control or rent
stabilization regulations. Standard lease terms stipulate due dates for rent
payments, late charges (typically with no grace period), no offset or
withholding provisions, security deposits and damage reimbursement clauses, as
well as many other provisions considered favorable to the property owner. Non-
payment of rent generally will be handled at the communities within 15 days
from the beginning of the month, with either collection or eviction occurring
within that time period.
All of the Communities are located in developed areas. There are numerous
other multifamily properties and real estate companies within the market area
of each such Community which will compete with the Company for tenants and
development and acquisition opportunities. The number of competitive
multifamily properties and real estate companies in such areas could have a
material effect on (i) the Company's ability to rent the apartments at the
Communities and the rents charged and (ii) development and acquisition
opportunities. The Company competes for tenants and acquisitions with others
who may have greater resources than the Company.
Financing Strategies. The Company seeks to maintain a well balanced,
conservative and flexible capital structure by : (i) targeting a ratio of long-
term debt to total market value of assets of approximately 35%; (ii) extending
and sequencing the maturity dates of its debt; (iii) borrowing generally at
fixed rates; (iv) borrowing generally on an unsecured basis; and (v)
maintaining conservative debt service and fixed charge coverage ratios.
Furthermore, the Company's strategy of maintaining a conservative ratio of
shareholder distributions to funds from operations applicable to common
shareholders enables the Company to retain funds for capital improvements,
acquisitions, development, other investments and scheduled payments of
principal and interest on indebtedness. Management believes that these
strategies have enabled and should continue to enable the Company to access the
debt and equity capital markets for its long-term capital requirements such as
debt refinancings and financings for acquisitions and development.
Since the IPO, the Company has demonstrated its ability to access several
different sources of financing. The proceeds from these financings have been
used to acquire and develop communities and prepay debt and for working capital
purposes. These financings have included: (i) a public offering of 2,594,000
common shares in July 1993 for an aggregate of approximately $64.9 million (the
"July 1993 Offering"), (ii) a public offering of 4,000,000 convertible
preferred shares in November 1993 for an aggregate of $100 million (the "Series
A Preferred Offering"), (iii) private offerings to domestic and foreign
institutional investors of 1,550,000 common shares in August 1994 for an
aggregate of approximately $32.6 million (the "August 1994 Private Placement"),
(iv) the sale, in five separate secured transactions, of approximately $53.9
million of tax exempt bonds (the "Tax Exempt Bonds"), (v) a $150 million
unsecured revolving credit facility with The First National Bank of Boston (the
"Bank of Boston Credit Facility"), (vi) the assumption of certain indebtedness,
including a $100 million non-recourse mortgage loan from General Electric
Capital Corporation ("GECC") assumed in connection with the acquisition of the
Communities located in Oklahoma (the "GECC Oklahoma Loan"), and a $115 million
non-recourse structured real estate mortgage (the "REMIC") assumed in
connection with the merger of Holly Residential Properties, Inc. ("Holly") into
a wholly-owned subsidiary of the Company (the "Holly Acquisition"), (vii) the
6
issuance of approximately 6,000,000 common shares in connection with the Holly
Acquisition at an aggregate market value of approximately $119.7 million,
(viii) the issuance of $100 million of senior unsecured notes due in 2002 (the
"2002 Notes") in January 1995, (ix) the issuance of $55 million of senior
unsecured notes due in 2000 (the "2000 Notes") and $70 million of senior
unsecured notes due in 2005 (the "2005 Notes") in August 1995, (x) a public
offering of 2,300,000 preferred shares in August 1995 for an aggregate of $57.5
million (the "Series B Preferred Offering") and (xi) the issuance of $25
million of medium-term senior unsecured notes due in 1999 (the "1999 Notes") in
November 1996.
Risks Associated with Forward-Looking Statements. This Form 10-K, together
with other statements and information publicly disseminated by the Company,
contains certain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements are based on current
expectations which involve a number of risk factors and uncertainties,
including, but not limited to, risks associated with the acquisition,
construction and development of multifamily communities, including the risk of
an over-supply of apartment units or a reduction in the demand for such units,
risks associated with construction and lease-up delays, budget over-runs, risks
that the Company's acquisition and development communities will fail to perform
as expected, financing risks, such as the availability of debt or equity
financing in the future and the risk of increasing costs of such financing, as
well as other risks listed from time to time in the Company's reports filed
with the SEC. Therefore, actual results could differ materially from those
projected in such statements.
Recent Developments. The Company has entered into an Agreement and Plan of
Merger, dated as of January 16, 1997 (the "Agreement"), with EQR. The
Agreement provides for the exchange of all of the outstanding common shares of
the Company for common shares of the surviving trust, at an exchange ratio of
0.625 common shares of the surviving trust for each common share of the Company
(the "Merger").
The Company has entered into contracts on five commercial office properties
(the "Commercial Properties") for $47.6 million in aggregate, and has closed on
four of the properties subsequent to December 31, 1996. The aggregate purchase
price for the Commercial Properties includes approximately $2.25 million in
value of common shares of Wellsford Real Properties, Inc. ("WRP Newco"), a
subsidiary of the Company, to be issued to an entity in consideration for the
assignment of the purchase contracts entered into by such entity. Upon
liquidation of such entity, each of the Chairman of the Board and President of
the Company, Messrs. Lynford and Lowenthal, will receive approximately 16.4% of
such shares, and the wife of Mark Germain, a trustee of the Company, will
receive approximately 13.8% of such shares. Each are owners of such entity.
Immediately prior to the Merger, and subject to the satisfaction or waiver of
all conditions thereto, the Company will contribute certain of its assets,
including the Commercial Properties, and certain of its liabilities to its
subsidiary (formed in 1997), WRP Newco, and distribute to its common
shareholders, on a pro rata basis, all of the shares it owns in WRP Newco.
The Merger is subject to the approval of the common shareholders of both EQR
and the Company and other conditions.
Multifamily Communities. The Company owns and operates 72 multifamily
communities located in eight states - Washington (27 communities), Texas (11),
Oklahoma (10), Colorado (10), Arizona (7), Nevada (3), Utah (3) and New Mexico
(1). Substantially all of the Communities are located in and around the
following major metropolitan areas: Albuquerque (1 community), Dallas (2),
Denver (9), Las Vegas (3), Oklahoma City (5), Phoenix (5), Salt Lake City (3),
San Antonio (9), Seattle (14), Tacoma (13), Tucson (2), and Tulsa (5). The
Communities include 46 multifamily communities having 200 or more apartment
units with the largest community having 714 apartment units. Forty-four of the
Communities were built since 1986, 26 were built between 1980 and 1985 and two
were built in 1979. All of the Communities are garden style communities except
for four mid-rise buildings (419 apartment units) in downtown Seattle. As of
December 31, 1996, the Communities had an average physical occupancy rate of
approximately 95.3%. All of the Communities provide residents with attractive
amenities. The Company manages all of its Communities in Arizona, Colorado,
New Mexico, Oklahoma, Washington and San Antonio. The Company currently
retains local property management companies supervised by the Company for its
Communities in other locations.
The Company believes the Communities provide the opportunity for increased
cash flows and appreciation in value through increases in occupancy rates and
rents, as well as expense controls. The Company also believes that the
Communities are well located in their markets and are well constructed and
designed.
The Communities are geographically diversified as follows:
Number of Number of Historical Cost
State Communities Units (in thousands)
- --------------- ----------- --------- ---------------
Arizona 7 2,110 $115,880
Colorado 10 3,142 136,092
Nevada 3 966 39,398
New Mexico 1 472 17,891
Oklahoma 10 3,121 99,332
Texas 11 2,725 64,235
Utah 3 1,298 36,522
Washington 27 5,170 264,019
-- ------ --------
72 19,004 $773,369
== ====== ========
7
The following tables present information concerning the Communities:
Average
Year Unit 1995 1996
Number Square Acreage Const- Size Average Average Encumbrance
of Units Footage (approx.) ructed (Sq. Ft.) Occupancy Occupancy (000's)
-------- ---------- --------- ------ --------- --------- --------- -----------
Albuquerque, NM
Mountain Run 472 335,744 16 1985 711 94.7% 92.0% --
Dallas, TX
Burn Brae 282 221,966 12 1984 787 97.8% 98.9% --
Calais 264 206,210 13 1986 781 96.1% 96.6% --
Denver, CO
The Village at
Bear Creek (A) 472 466,610 38 1987 989 96.5% 95.5% --
Cimarron Ridge 296 229,048 10 1984 774 97.3% 97.4% --
Colinas Pointe 272 213,984 13 1986 787 96.4% 94.3% --
Highland Point 318 237,886 14 1984 748 96.1% 97.4% --
Ironwood at the
Ranch 226 184,081 9 1986 815 94.4% 96.8% $ 6,070
The Marks (A) 616 520,712 26 1987 845 94.2% 94.9% $ 21,325
The Registry 208 156,558 9 1987 753 96.3% 97.0% --
Sterling Point 143 130,120 9 1979 910 95.9% 95.8% --
Warwick Station 332 250,432 18 1986 754 95.0% 96.1% $ 10,243
Fort Collins, CO
Parkwood East 259 215,064 25 1986 830 96.1% 98.2% --
Las Vegas, NV
Catalina Shores 256 230,872 14 1989 902 96.8% 96.3% --
Crossing at
Green Valley 384 330,714 15 1986 861 97.2% 97.2% --
Reflections at
the Lakes 326 274,992 16 1989 844 96.5% 95.6% --
Oklahoma City, OK
Augusta 197 153,308 7 1986 778 96.8% 95.0% --
Heritage Park 452 392,218 23 1983 868 90.5% 90.5% --
Invitational 344 254,976 10 1983 741 93.9% 91.9% --
Raindance 504 327,248 22 1984 649 91.9% 95.5% --
Windrush 160 130,112 10 1982 813 91.8% 93.4% --
Phoenix, AZ
Copper Creek 144 146,024 8 1984 1014 94.9% 94.1% --
Crown Court 416 464,582 27 1987 1117 95.1% 90.2% $ 5,679
Dos Caminos 264 265,884 16 1983 1007 96.0% 92.0% --
The Pointe at
South Mountain 364 309,548 14 1988 850 94.7% 93.2% $ 12,900
San Tropez 316 332,080 13 1989 1051 96.0% 94.9% --
Salt Lake City, UT
Quail Cove 420 362,580 17 1987 863 97.2% 96.6% --
Settlers Point 288 263,040 16 1986 913 95.6% 96.0% --
Springs of
Country Woods 590 486,648 24 1982 825 95.9% 96.0% --
San Antonio, TX
Copperfield 258 197,736 10 1984 766 92.6% 92.0% --
Countryside 220 159,214 9 1980 724 94.0% 93.7% --
Forest Valley 185 149,493 8 1983 808 93.6% 93.0% --
Landera 184 168,176 9 1983 914 93.3% 93.2% --
The Overlook (B) 411 298,133 16 1985 725 91.5% 92.7% --
Regatta (C) 200 171,634 10 1983 858 92.7% 96.3% --
Trails End 308 202,376 19 1983 657 94.4% 93.7% --
Villas of Oak
Creste (D) 280 208,446 10 1979 744 92.3% 94.8% --
Waterford 133 87,376 5 1983 657 96.4% 95.7% --
Seattle, WA
North Creek
Heights 114 104,306 9 1990 915 96.4% 98.4% --
Panther Ridge 260 221,000 20 1980 850 94.4% 95.5% --
Highland Creste 198 192,556 10 1989 973 94.8% 97.8% --
Ridgegate 153 141,594 9 1990 925 96.9% 96.5% --
Whitedove Pointe 96 102,834 5 1992 1071 93.3% 97.6% --
Cherry Hill 108 101,390 7 1991 939 95.0% 96.3% --
Plum Tree Park 196 174,310 8 1991 889 98.3% 97.3% --
Firdale Village 386 323,522 23 1986 838 95.1% 95.0% --
Martha Lake 155 135,662 8 1991 875 93.6% 96.2% --
Country Club
Village 151 157,898 7 1991 1046 94.0% 96.6% --
2300 Elliott 91 67,403 0.5 1992 741 93.9% 95.5% --
Metropolitan Park 82 49,702 0.4 1991 606 95.5% 95.8%
Seventh & James 96 61,282 0.7 1992 638 92.1% 94.6% --
Summit at Lake
Union 150 109,352 1.2 1996 729 N/A N/A (H) --
Tacoma, WA
Merrill Creek 149 138,867 15 1994 932 92.0% 93.5% $ 5,659
Stoney Creek 231 211,580 16 1990 916 92.1% 95.3% --
Windridge 80 65,111 4 1989 814 96.3% 91.2% --
Surprise Lake
Village 338 328,032 32 1986 971 93.9% 95.7% --
Cambridge 96 86,473 5 1988 901 93.5% 94.2% --
Chestnut Hills 157 143,236 8 1991 912 91.7% 90.5% --
The Hamptons 230 202,324 11 1991 880 93.3% 93.8% $ 6,100
Windemere 36 30,000 3 1987 833 95.1% 90.9% --
Crown Pointe 76 68,060 4 1987 896 93.8% 87.8% --
Gold Pointe 84 88,422 5 1990 1053 93.0% 95.8% --
The Village at
Seeley Lake (A) 522 473,370 30 1990 907 90.9% 94.1% --
The Westridges(E) 714 686,675 38 1991 962 93.1% 93.5% --
The Ridgetop 221 197,250 13 1988 893 95.0% 92.5% --
Tucson, AZ
Mission Palms 360 372,918 35 1980 1036 94.4% 95.5% --
Skyline Gateway 246 179,422 8 1985 729 95.5% 95.0% --
Tulsa, OK
Wellsford Oaks(F) 300 216,368 9 1991 721 92.7% 95.9% --
Huntington
Hollow (G) 288 180,648 9 1981 627 92.4% 95.8% --
One Eton Square 448 313,904 17 1985 701 95.8% 95.0% --
Silver Springs 200 143,704 12 1984 719 94.6% 97.5% --
Woodland Oaks 228 180,273 12 1983 791 94.4% 97.0% --
-------- ---------- --- ----- ------ ------ ----------
All Communities 19,004 15,985,273 955 841 94.6% 94.9% $ 67,976
======== ========== === ===== ====== ====== ==========
(A) Includes expansion completed / acquired in 1996.
(B) Formerly known as Springtree.
(C) Formerly known as Polo Run.
(D) Formerly known as Beacon Hill.
(E) During 1995, the Company combined the operations of its Westridge, The
Pointe at Westridge and The Village at Westridge Communities.
(F) Formerly known as Lincoln Oaks.
(G) Formerly known as The Mill.
(H) Summit at Lake Union was completed in December 1996. Therefore, it's
occupancy has been excluded.
8
Item 7.
A. Financial Statements of Business to be Acquired
REPORT OF
INDEPENDENT AUDITORS
--------------------
To the Shareholders and Board of Trustees of
Wellsford Residential Property Trust and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Wellsford
Residential Property Trust and subsidiaries (the "Company") as of December 31,
1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Wellsford Residential Property Trust and subsidiaries at December 31, 1996
and 1995, and the consolidated results of its operations and cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG, LLP
/s/ Ernst & Young LLP
______________________________
New York, New York
February 10, 1997,
except for Note 13, as to which the date is
February 28, 1997
9
WELLSFORD RESIDENTIAL PROPERTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------
1996 1995
------------- -------------
ASSETS
Real estate assets, at cost - Notes 4 and 5
Land ..................................................................... $ 114,214,888 $ 105,121,296
Buildings and improvements ............................................... 659,153,965 605,087,385
------------- -------------
773,368,853 710,208,681
Less, accumulated depreciation ........................................ (83,965,956) (58,490,833)
------------- -------------
689,402,897 651,717,848
Construction in progress ................................................. 22,210,933 26,189,876
------------- -------------
711,613,830 677,907,724
Cash and cash equivalents ................................................... 10,811,505 29,444,008
Restricted cash - Note 3 .................................................... 7,666,598 12,916,328
Mortgage note receivable - Note 4 ........................................... 17,800,000 --
Deferred financing costs .................................................... 5,400,787 5,928,869
Prepaid and other assets .................................................... 2,995,854 3,441,408
------------- -------------
Total Assets ................................................................ $ 756,288,574 $ 729,638,337
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Senior unsecured notes - Note 8 .......................................... $ 248,495,847 $ 223,306,778
Mortgage notes payable - Note 5 .......................................... 82,730,831 77,136,941
Unsecured credit facilities - Note 7 ..................................... 18,075,000 --
Accrued expenses and other liabilities ................................... 15,617,516 16,403,724
Dividends payable - Note 10 .............................................. 11,433,547 11,310,053
Security deposits ........................................................ 3,249,607 3,122,229
------------- -------------
Total Liabilities ........................................................ 379,602,348 331,279,725
------------- -------------
Commitments and contingencies - Notes 4, 5,
7, 8, 9, 10, 11 and 12 ................................................... -- --
Shareholders' Equity:
Shares of beneficial interest,
100,000,000 shares authorized -
3,999,800 Series A Convertible
Preferred Shares, $.01 par value per share,
liquidation preference $25 per share, issued
and outstanding at December 31, 1996 and 1995; ........................ 39,998 39,998
2,300,000 Series B Preferred Shares, $.01
par value per share, liquidation preference
$25 per share, issued and outstanding at
December 31, 1996 and 1995; ........................................... 23,000 23,000
17,101,812 and 17,026,342 Common Shares, $.01
par value per share, issued and outstanding at
December 31, 1996 and 1995, respectively .............................. 171,018 170,264
Paid in capital in excess of par ......................................... 461,290,031 459,634,825
Distributions in excess of net income - Note 10 .......................... (78,284,695) (55,284,084)
Deferred compensation and shareholder loans
receivable - Note 11 .................................................. (6,553,126) (6,225,391)
------------- -------------
Total Shareholders' Equity .................................................. 376,686,226 398,358,612
------------- -------------
Total Liabilities and Shareholders' Equity .................................. $ 756,288,574 $ 729,638,337
============= =============
10
WELLSFORD RESIDENTIAL PROPERTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------------------------------------
1996 1995 1994
---------------- ----------------- ---------------
REVENUE
Rental income $124,407,810 $123,566,442 $ 78,789,579
Other income 5,730,658 5,441,497 3,340,899
Interest income 1,682,935 2,224,263 663,429
--------------- --------------- --------------
Total Revenue 131,821,403 131,232,202 82,793,907
--------------- --------------- --------------
EXPENSES
Property operating and maintenance 40,353,994 40,919,501 27,476,613
Real estate taxes 9,881,577 9,595,845 5,869,684
Depreciation and amortization 26,564,838 26,912,423 17,535,935
Property management 4,770,188 4,950,773 3,139,266
Interest 23,599,368 26,972,892 15,297,950
General and administrative 3,865,444 4,360,566 3,979,875
--------------- --------------- --------------
Total Expenses 109,035,409 113,712,000 73,299,323
(Loss) on sale of investment communities (65,745) (819,288)
(Loss) on joint venture communities (57,859) (279,594)
--------------- --------------- --------------
Income before extraordinary items 22,662,390 16,421,320 9,494,584
Extraordinary item - (loss) on early
extinguishment of debt - Note 5 (5,553,048)
--------------- --------------- --------------
Net income 22,662,390 10,868,272 9,494,584
Preferred dividends 12,548,400 8,972,681 7,000,000
--------------- --------------- --------------
Net income available to common shareholders $10,113,990 $1,895,591 $2,494,584
=============== =============== ==============
Income per common share before
extraordinary items $0.59 $0.44 $0.25
=============== =============== ==============
Net income per common share $0.59 $0.11 $0.25
=============== =============== ==============
Weighted average number of common shares
outstanding 17,056,882 16,937,731 10,070,278
================ ================ ==============
Cash dividends declared per common share $1.94 $1.92 $1.80
================ ================ ==============
11
WELLSFORD RESIDENTIAL PROPERTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Series A Series B
Preferred Shares Preferred Shares
------------------------------ ------------------------------
Shares Amount Shares Amount
----------- ------------- ----------- -------------
JANUARY 1, 1994 4,000,000 $ 40,000
Repurchase of common
shares
Private offering of common
shares (net of issuance costs)
Issuance of common shares
in connection with Holly
Acquisition (net of issuance costs)
Shares issued pursuant to
deferred compensation and
shareholder loan plans
- Note 11 (net of issuance costs)
Deferred compensation and
shareholder loans receivable
Amortization of deferred
compensation and shareholder
loans receivable
Net income
Common dividends declared
Preferred dividends declared
------------ ----------- ----------- -------------
DECEMBER 31, 1994 4,000,000 40,000
Public offering of Series B
preferred shares (net of
issuance costs) 2,300,000 $ 23,000
Shares issued pursuant to
dividend reinvestment plan
(net of issuance costs)
Conversion of Series A
preferred shares into
common shares (200) (2)
Net shares issued pursuant to
deferred compensation and
shareholder loan plans
- Note 11 (net of issuance costs)
Deferred compensation and
shareholder loans receivable
Amortization of deferred
compensation and shareholder
loans receivable
Net income
Common dividends declared
Preferred dividends declared
------------ ----------- ----------- -------------
DECEMBER 31, 1995 3,999,800 39,998 2,300,000 23,000
Shares issued pursuant to
dividend reinvestment plan
(net of issuance costs)
Shares issued pursuant to
exercised options
Net shares issued pursuant to
deferred compensation and
shareholder loan plans
-Note 11 (net of issuance costs)
Deferred compensation and
shareholder loans receivable
Amortization and repayment
of shareholder loans receivable
Net income
Common dividends declared
Preferred dividends declared
------------ ----------- ----------- -------------
DECEMBER 31, 1996 3,999,800 $ 39,998 2,300,000 $ 23,000
============ =========== =========== =============
12
WELLSFORD RESIDENTIAL PROPERTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Common Shares Distributions Total
------------------------- Paid-in in Excess of Shareholders'
Shares Amount Capital Net Income Equity
----------- ----------- ------------- ---------------- -------------
JANUARY 1, 1994 9,206,712 $ 92,067 $246,058,566 $ (6,415,449) $ 239,775,184
Repurchase of common
shares (13,819) (138) (347,548) (347,686)
Private offering of common
shares (net of issuance costs) 1,550,000 15,500 30,887,605 30,903,105
Issuance of common shares
in connection with Holly
Acquisition (net of issuance costs) 5,985,168 59,852 119,143,508 119,203,360
Shares issued pursuant to
deferred compensation and
shareholder loan plans
- Note 11 (net of issuance costs) 181,250 1,812 3,521,625 3,523,437
Deferred compensation and
shareholder loans receivable (3,523,437) (3,523,437)
Amortization of deferred
compensation and shareholder
loans receivable 343,749 343,749
Net income 9,494,584 9,494,584
Common dividends declared (20,717,098) (20,717,098)
Preferred dividends declared (7,000,000) (7,000,000)
----------- ----------- ------------- ---------------- -------------
DECEMBER 31, 1994 16,909,311 169,093 396,084,068 (24,637,963) 371,655,198
Public offering of Series B
preferred shares (net of
issuance costs) 55,231,512 55,254,512
Shares issued pursuant to
dividend reinvestment plan
(net of issuance costs) 81,376 814 1,584,562 1,585,376
Conversion of Series A
preferred shares into
common shares 162 2 --
Net shares issued pursuant to
deferred compensation and
shareholder loan plans
- Note 11 (net of issuance costs) 35,493 355 864,370 864,725
Deferred compensation and
shareholder loans receivable (875,000) (875,000)
Amortization of deferred
compensation and shareholder
loans receivable 519,922 519,922
Net income 10,868,272 10,868,272
Common dividends declared (32,541,712) (32,541,712)
Preferred dividends declared (8,972,681) (8,972,681)
------------ ----------- ------------- ---------------- -------------
DECEMBER 31, 1995 17,026,342 170,264 453,409,434 (55,284,084) 398,358,612
Shares issued pursuant to
dividend reinvestment plan
(net of issuance costs) 28,026 280 597,342 597,622
Shares issued pursuant to
exercised options 500 5 9,465 9,470
Net shares issued pursuant to
deferred compensation and
shareholder loan plans
-Note 11 (net of issuance costs) 46,944 469 1,235,899 1,236,368
Deferred compensation and
shareholder loans receivable (1,250,000) (1,250,000)
Amortization and repayment of
shareholder loans receivable 734,765 734,765
Net income 22,662,390 22,662,390
Common dividends declared (33,114,601) (33,114,601)
Preferred dividends declared (12,548,400) (12,548,400)
----------- ----------- ------------- ---------------- -------------
DECEMBER 31, 1996 17,101,812 $ 171,018 $454,736,905 $(78,284,695) $ 376,686,226
----------- ----------- ------------- ---------------- -------------
13
WELLSFORD RESIDENTIAL PROPERTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31,
----------------------------------------------------------------
1996 1995 1994
------------------ ------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,662,390 $ 10,868,272 $ 9,494,584
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 27,479,653 29,966,707 20,437,548
Loss on sale of investment communities 65,745 819,288 --
Loss on early extinguishment of debt -- 5,553,048 --
Decrease (increase) in assets
Escrow cash 123,686 1,461,324 (381,590)
Debt service and construction reserve 5,126,044 (10,580,819) (258,635)
Rent receivables (410,169) 358,678 (672,671)
Prepaid and other assets 817,683 (787,832) (1,244,275)
(Decrease) increase in liabilities
Accounts payable (2,046,244) 1,824,210 770,939
Accrued expenses and other liabilities 1,260,036 2,252,959 5,787,321
Security deposits 127,378 30,173 1,811,208
------------------ --------------------- --------------------
Net cash provided by operating activities 55,206,202 41,766,008 35,744,429
------------------ --------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate assets (49,392,852) (28,166,487) (87,044,798)
Investment in note receivable (17,800,000) --
Proceeds from sale of real estate assets 1,567,351 35,511,101 --
------------------ --------------------- --------------------
Net cash provided by (used in) investing activities (65,625,501) 7,344,614 (87,044,798)
------------------ --------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred financing costs (730,635) (4,637,168) (4,014,601)
Proceeds from sale of rate protection agreements -- 3,055,500 --
Proceeds from mortgage notes payable -- 15,549,971 21,581,450
Proceeds from senior unsecured notes 25,000,000 223,205,050 --
Proceeds (payment) from credit facilities 18,075,000 (140,000,000) 140,000,000
Principal payments on mortgage notes (5,625,154) (146,090,053) (132,808,320)
Prepayment premium on mortgage notes -- (1,178,966) --
Distributions to shareholders (45,539,507) (39,563,528) (23,197,125)
Proceeds from dividend reinvestment plan 597,622 1,585,376 --
Proceeds from exercise of options 9,470 -- --
Proceeds from offerings of common shares -- -- 30,903,105
Proceeds from offerings of preferred shares -- 55,254,512 --
Repurchase of common shares -- -- (347,686)
------------------ ---------------------- --------------------
Net cash provided by (used in) financing activities (8,213,204) (32,819,306) 32,116,823
------------------ ---------------------- --------------------
Net increase (decrease) in cash and cash
equivalents (18,632,503) 16,291,316 (19,183,546)
Cash and cash equivalents, beginning of year 29,444,008 13,152,692 32,336,238
------------------ --------------------- --------------------
Cash and cash equivalents, end of year $ 10,811,505 $ 29,444,008 $ 13,152,692
================== ===================== ====================
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest $ 24,354,749 $ 19,627,141 $ 12,061,431
Fourth quarter dividends declared $ 11,433,547 $ 11,310,053 $ 9,359,190
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Purchase money and other mortgage notes
assumed, and common shares issued, in
connection with the acquisition of certain
multifamily communities and other assets:
Cost of assets acquired $ 17,512,162 $ -- $ 434,779,640
Value of common shares issued -- -- (119,203,360)
Cash paid (6,312,162) -- (66,594,551)
------------------ ----------------- -------------------
Purchase money and other mortgage notes $ 11,200,000 $ -- $ 248,981,729
================== ================== ===================
14
WELLSFORD RESIDENTIAL PROPERTY TRUST AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business
Wellsford Residential Property Trust was organized on July 21, 1992 as a
Maryland real estate investment trust ("REIT"). Wellsford Residential
Property Trust and its subsidiaries (the "Company") is a fully integrated
and self-administered equity REIT engaged in the acquisition, development
and operation of multifamily communities located in the Southwest and
Pacific Northwest regions of the United States. At December 31, 1996, the
Company owned 72 multifamily communities containing 19,004 apartment
units (the "Communities").
In December 1994, the Company consummated a merger (the "Holly
Acquisition") with Holly Residential Properties, Inc. ("Holly"), a public
REIT which owned and operated 34 multifamily communities containing 5,223
apartment units located in the Puget Sound region of the State of
Washington (the "Holly Communities"). The merger was financed through
the issuance of approximately six million common shares and the
assumption of approximately $129.7 million of mortgage notes.
(2) Summary of Significant Accounting Policies
Principles of Consolidation and Financial Statement Presentation. The
accompanying consolidated financial statements include the accounts of
Wellsford Residential Property Trust and its wholly-owned subsidiaries.
Investments in partnerships where the Company does not have a controlling
interest are accounted for under the equity method. All significant
inter-company accounts and transactions among Wellsford Residential
Property Trust and its subsidiaries have been eliminated in
consolidation.
The Holly Acquisition has been accounted for under the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16.
Income Recognition. Residential communities are leased under operating
leases with terms generally one year or less. Rental revenue is
recognized monthly as it is earned.
Cash and Cash Equivalents. The Company considers all demand and money
market accounts and short term investments in government funds with an
original maturity of three months or less to be cash and cash
equivalents.
Real Estate and Depreciation. Costs directly related to the acquisition
and improvement of real estate are capitalized, including all
improvements identified during the underwriting of a community
acquisition. Only those expenditures which generally do not recur
annually and/or that will increase the revenue potential of a property or
substantially extend its useful life are capitalized.
Ordinary repairs and maintenance are expensed as incurred. Expenditures
for painting, and replacement of items such as carpets, appliances and
blinds are generally expensed; major replacements and betterments are
capitalized and depreciated over their estimated useful lives.
Depreciation is computed over the expected useful lives of depreciable
property on a straight line basis, principally 25 years for buildings and
improvements and 5 to 12 years for furnishings and equipment.
Depreciation expense was $25.6 million in 1996.
In 1995, the Company adopted Statement of Financial Accounting Standard
("SFAS") 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" which requires that long-lived
assets to be held and used be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of SFAS 121 has not had an impact
on the Company's consolidated financial statements.
Mortgage Note Receivable Impairment. The Company considers a note
impaired if, based on current information and events, it is probable that
all amounts due under the note agreement are not collectable. Impairment
is measured based upon the fair value of the underlying collateral. No
impairment has been recorded through December 31, 1996.
Financing Costs. The Company has incurred costs relating to certain
financings, refinancings and credit facilities (Notes 5, 6, 7 and 8).
Financing and refinancing costs are capitalized and amortized over the
term of the related loan under the interest method. Credit facility fees
are capitalized and amortized over the term of the commitment on a
straight-line basis.
Interest Rate Protection Agreements. In November 1992, the Company
acquired a four-year interest rate protection agreement for $1.9 million
with a notional amount of $56.5 million. In connection with the Holly
Acquisition, the Company acquired an interest rate protection agreement
valued at $9.1 million. The costs of these interest rate protection
agreements were amortized over the life of the agreements into interest
expense using an effective yield method.
Share Based Compensation. SFAS 123 "Accounting for Stock-Based
Compensation" establishes a fair value based method of accounting for
share based compensation plans, including share options. The disclosure
requirements of SFAS 123 are effective for financial statements for
fiscal years beginning after December 15, 1995. However, registrants may
elect to continue accounting for share option plans under Accounting
Principles Board ("APB") 25, but are required to provide proforma net
income and earnings per share information "as if" the new fair value
approach had been adopted (see Note 11). Because the Company has elected
to continue to account for its share based compensation plans under APB
25, there has been no impact on the Company's consolidated financial
statements resulting from SFAS 123.
15
Income Taxes. The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). As a result, the
Company generally will not be subject to federal income taxation at the
corporate level to the extent it distributes annually at least 95% of its
REIT taxable income, as defined in the Code, to its shareholders and
satisfies certain other requirements. Accordingly, no provision has been
made for federal income taxes in the accompanying consolidated financial
statements.
In connection with the Company's initial public offering, the tax basis
of the real estate assets has been recorded based upon the value of
the consideration paid by the Company.
In connection with the Holly Acquisition, the tax basis of the real
assets has been recorded based on Holly's tax basis. Accordingly, the
tax basis of the real estate assets exceeds the book basis by
approximately $60.5 million.
Per Share Data. Earnings per common share are computed based upon the
weighted average number of common shares outstanding during the period
and after giving effect for the payment of dividends on the Company's
preferred shares.
Primary earnings per common share are based upon the weighted average
number of such shares and the assumed equivalent shares outstanding
during the period. The assumed exercise of outstanding share options,
using the treasury stock method, is not materially dilutive and such
amounts are not presented.
Fully diluted earnings per common share are based upon the increased
number of common shares that would be outstanding assuming the exercise
of common share options and the conversion of the convertible preferred
shares. Since fully diluted earnings per share amounts are anti-
dilutive, such amounts are not presented.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(3) Restricted Cash
Restricted cash primarily consists of escrow deposits for real estate
taxes and security deposits, and debt service and construction reserve
balances. At December 31, 1996 and 1995, escrow deposits amounted to
$1,131,401 and $1,255,087, respectively, and reserve balances amounted to
$6,535,197 and $11,661,241, respectively.
(4) Multifamily Communities and Mortgage Note Receivable
At December 31, 1993, the Company owned 32 communities containing a total
of 9,125 apartment units.
In 1994, the Company acquired two multifamily communities in Phoenix,
Arizona and a multifamily community in Tucson, Arizona, containing 1,092
apartment units for an aggregate purchase price of approximately $67.3
million. The Company also acquired a portfolio of eight multifamily
communities in Tulsa, Oklahoma and six multifamily communities in
Oklahoma City, Oklahoma, containing 5,101 apartment units for an
aggregate purchase price of approximately $133 million.
In 1994, the Company also acquired the Holly Communities for
approximately $254.9 million.
In 1995, the Company combined the operations of two of its Tacoma,
Washington communities into one community known as Ridgetop, consisting
of 221 apartment units.
In 1995, the Company sold four of its Oklahoma communities containing a
total of 1,980 apartment units for an aggregate of $36.7 million.
The Company also sold three of its Washington communities containing
a total of 265 apartment units for an aggregate of approximately $10.1
million. The Company held a 50% interest in two of these communities.
In December 1996, the Company sold two of its Communities located in
Washington, containing a total of 120 units, and received net proceeds of
$1.6 million after paying $0.8 million of related incentive compensation
to certain officers of the Company. The Company held a 50% interest in
one of the sold communities.
In July 1996, the Company originated a $17.8 million mortgage on a 344
unit, newly constructed community in Tucson, Arizona known as Sonterra at
Williams Centre (the "Sonterra Mortgage"). The Sonterra Mortgage is due
in July 1999 and bears interest at 9% per annum. The Company has the
exclusive option to purchase the community for approximately $20.5
million through December 1997 and approximately $21 million during 1998.
The fair market value of the company's note receivable, estimated by
using a discounted cash flow analysis, approximates the carrying amount.
16
In April 1996, the Company, through a wholly-owned subsidiary, acquired
Marks West, a multifamily community containing 280 units located in
Denver, Colorado, for approximately $18 million. The community's
operations have been combined with those of The Marks, an existing
community located contiguous to Marks West.
In October 1996, the Company completed two development projects. The
Village at Bear Creek II, a Denver, Colorado apartment community
contiguous to the Company's existing Bear Creek community, contains 216
units and was developed at a cost of $18.8 million, including
satisfaction of the developer's fixed price contract. The operations of
the two Bear Creek communities have been combined. Seeley Lake III, a
Tacoma, Washington apartment community developed as an expansion to the
Company's Village at Seeley Lake community, contains 182 units and was
developed at a cost of $9.5 million.
In December 1996, the Company completed its Summit at Lake Union
development project located in Seattle, Washington and containing 150
units at a cost of approximately $16.5 million.
The Company currently has two multifamily projects under development
totaling 760 apartment units (collectively, the "Development
Communities"). The Company expects to fund the construction of its
Development Communities from its working capital and with proceeds from
the Bank of Boston Credit Facility (Note 7) and a $14.8 million tax
exempt mortgage (Note 5). The Development Communities are being
developed pursuant to fixed-price contracts and are estimated to cost
approximately $76.1 million in total, including certain development and
incentive fees payable to the developer. The Company is committed to
purchase 100% of these projects upon completion and the achievement of
certain occupancy levels. During the year ended December 31, 1996, the
Company capitalized $2.3 million of interest to the Development
Communities and to certain development projects which were completed
during the year, as described above.
(5) Mortgage Notes Payable
Mortgage notes payable at December 31, 1996 and 1995 aggregated $82.7
million and $77.1 million, respectively, and were collateralized by six
and eight multifamily communities, respectively (plus one development
project). At December 31, 1996 and 1995, mortgage notes payable net of
discounts consist of the following:
Stated Balance
Community Maturity Interest -----------------------
Securing Debt Date Rate 12/31/96 12/31/95
------------- --------- --------- ---------- ---------
(000s) (000s)
The Pointe @ South Mt. 03/2000 8.00% (A) $12,900 $12,900
Parkwood East Repaid 01/1996 9.625% -- 4,928
Crown Court 11/1997 9.05% 5,679 5,767
The Hamptons 11/2001 8.48% 6,100 6,100
Merrill Creek 11/1998 8.00% 5,659 5,738
Palomino Park (B) 12/2035 Variable (C) 14,755 14,755
Ironwood @ the Ranch (B) 12/2019 Average 7.34% 6,070 6,150
The Marks East (B) 12/2018 6.00% 10,125 10,337
Warwick Station (B) 12/2018 6.00% 10,243 10,462
Marks West tax exempt
bonds 12/2026 6.65% 11,200 --
------- -------
$82,731 $77,137
======= =======
(A) 7.5% before May 1, 1996.
(B) Mortgage secures tax exempt bonds.
(C) Rate approximates the Standard & Poor's / J.J. Kenney index for short-term
high grade tax-exempt bonds (currently 3.65%).
During 1995 the Company recognized an extraordinary loss of $5.6 million
from the early extinguishment of debt. The loss was primarily
attributable to a 1% prepayment penalty incurred for the retirement of
certain debt assumed in the Holly Acquisition and a non-cash charge for
the sale of the related interest rate protection agreement.
The tax-exempt bonds which are secured by the Palomino Park mortgage are
backed by a letter of credit from a AAA rated financial institution. The
Company has guaranteed the reimbursement of the financial institution in
the event that the letter of credit is drawn upon.
The fair market value of the fixed rate mortgage notes, estimated by
discounting cash flows and adjusting the results for subjective factors
including loan to value ratios, approximates the carrying amount of the
mortgage notes. The fair market value of the variable rate mortgage notes
is considered to be the carrying amount.
17
(6) Convertible Note Payable
In connection with its initial public offering, the Company issued a $56.5
million convertible note (the "Convertible Note") in modification of
approximately $56.5 million of non-recourse participating mortgage
notes secured by liens on nine of the Communities. The holder of the
Convertible Note was General Electric Capital Corporation ("GECC").
Interest on the Convertible Note was payable quarterly at an adjustable
rate equal to LIBOR plus 1.75% until the second anniversary of its
issuance and thereafter at a rate equal to LIBOR plus 3.75%.
(7) Credit Facilities
In June 1995, the Company modified its $150 million revolving credit
facility from The First National Bank of Boston (the "Bank of Boston
Credit Facility") to reduce the interest rate on advances under the
facility to LIBOR + 1.50% and eliminate the need for communities to serve
as collateral for such borrowings. Proceeds from the Bank of Boston
Credit Facility may be used to provide short-term financing for
acquisitions, development, capital expenditures, repayment of indebtedness
and related expenditures. All outstanding borrowings under the Bank of
Boston Credit Facility will be due and payable on June 30, 1998 with a
provision for annual one year extensions subject to bank approval. The
Company is obligated to pay a fee equal to one-quarter of one percent
(.25%) per annum on the average daily amount of the unused portion of the
commitment during the revolving loan period. Borrowings under the
facility will bear interest at either (i) The First National Bank of
Boston's base rate (which is substantially similar to the prime rate) or
(ii) 1.50% per annum above the Eurodollar Rate (which is substantially
similar to LIBOR), at the Company's option. The average interest rate on
the Bank of Boston Credit Facility during 1996 and 1995 was 6.9% and 7.9%,
respectively.
The Bank of Boston Credit Facility is a recourse obligation of the
Company. The Bank of Boston Credit Facility contains various customary
loan covenants, and requires the Company to maintain its status as a REIT,
to maintain a ratio of total consolidated liabilities to total
consolidated assets of not more than 0.55 to 1, to maintain a ratio of
total consolidated secured debt to gross consolidated real estate assets
of not more than 0.4 to 1, to maintain a ratio of total consolidated
unencumbered operating real estate assets to total consolidated unsecured
debt of not less than 1.8 to 1, and to maintain an overall debt service
coverage ratio of at least 2 to 1. The facility also limits the number of
development projects the Company may undertake. The Bank of Boston Credit
Facility is cross-defaulted with respect to certain other borrowings of
the Company. As of December 31, 1996 $18.1 million was outstanding on
the Bank of Boston Credit Facility, leaving $131.9 million undrawn.
In 1994, the Company terminated its $45 million credit facility with GECC
(the "GECC Credit Facility"). In connection with any advance under the
GECC Credit Facility, the Company was obligated to pay an advance fee
equal to 1% of the amount of such borrowing. Borrowings under the
facility bore interest at an adjustable rate equal to LIBOR plus 2.50%,
payable monthly.
In connection with the Holly Acquisition, the Company assumed two
unsecured credit facilities from Key Bank of Washington which bore
interest at Key Bank's prime rate plus one percent (1%). Both of these
facilities were repaid and terminated in February 1995.
The fair market value of the credit facilities is considered to be the
carrying amount.
(8) Senior Unsecured Notes
In January 1995, the Company sold $100 million of 9.375% investment grade
senior unsecured notes due February 1, 2002 (the "2002 Notes"). The 2002
Notes were priced at 99.396% to yield 9.495% and have an effective
interest cost to the Company of 9.65% after giving effect to an interest
rate protection agreement. The 2002 Notes, which are rated Baa3 by
Moody's and BBB by Standard & Poor's and Duff & Phelps, are redeemable at
any time after February 1, 2000, at the option of the Company, subject to
certain make whole provisions as defined in the 2002 Notes. The net
proceeds from the sale of the 2002 Notes were used to prepay the remaining
balance of a mortgage on five Oklahoma communities and to repay a portion
of the Bank of Boston Credit Facility.
In August 1995, the Company sold $125 million of investment grade senior
unsecured notes, which are rated Baa3 by Moody's and BBB by Standard &
Poor's and Duff & Phelps. $55 million of these notes (the "2000 Notes")
bear interest at 7.25%, are due on August 15, 2000, and were priced at
99.381% to yield 7.40%. $70 million of these notes (the "2005 Notes")
bear interest at 7.75%, are due on August 15, 2005, and were priced at
98.785% to yield 7.93%. The 2005 Notes are redeemable at any time after
August 24, 2002, at the option of the Company, subject to certain make
whole provisions as defined in the 2005 Notes. The net proceeds from the
sale of the 2000 Notes and the 2005 Notes were used to repay the
outstanding balances of the Bank of Boston Credit Facility and certain
debt assumed in the Holly Acquisition.
In November 1996, the Company sold $25 million of investment grade senior
unsecured notes (the "1999 Notes"), which are rated Baa3 by Moody's and
BBB by Standard & Poor's and Duff & Phelps. The 1999 Notes bear interest
at LIBOR plus 0.32%, are due in November 1999 and are redeemable beginning
in November 1997. The net proceeds from the sale of the 1999 Notes were
used to repay amounts outstanding under the Bank of Boston Credit
Facility.
18
The 1999 Notes, 2000 Notes, 2002 Notes, and 2005 Notes contain various
customary loan covenants, and also require the Company to maintain its
status as a REIT, to maintain a ratio of total consolidated debt to total
consolidated assets of not more than 0.6 to 1, to maintain a ratio of
total consolidated secured debt to total consolidated assets of not more
than 0.4 to 1, to maintain a ratio of total consolidated unencumbered
assets to total consolidated unsecured debt of not less than 1.5 to 1, and
to maintain an overall debt service coverage ratio of not less than 1.5 to
1.
The fair market value of the senior unsecured notes, determined by
reference to various market data, aggregates approximately $260.8 million
at December 31, 1996.
The Company's long-term debt obligations, including the mortgage notes
payable (Note 5), the credit facilities (Note 7), and the senior unsecured
notes, as of December 31, 1996, require aggregate principal (or principal
sinking fund, as applicable) payments (before giving effect to applicable
discounts) as follows:
Year Amount
------------ -----------
1997 $ 6.3 million
1998 24.2 million
1999 25.6 million
2000 68.6 million
2001 6.8 million
Thereafter $ 219.7 million
(9) Transactions With Affiliates
In connection with the Holly Acquisition, the Company entered into a two-
year consulting agreement with David M. Kelley, the brother of the
Company's Vice Chairman, Daniel M. Kelley. Under the agreement, David
Kelley consulted with and advised the Company with respect to the
construction of certain development projects in the Puget Sound region of
the State of Washington and received an annual consulting fee of $170,000.
In addition, pursuant to the merger agreement with Holly, David Kelley
was granted options to purchase 100,000 common shares at an exercise price
of $21 per share.
In connection with the construction by the Company of one of its
development projects, a construction management contract was entered into
with DRK Development, Inc. ("DRK"), the stock of which is owned solely by
D. Reed Kelley, the nephew of Daniel M. Kelley. During 1996 and 1995, DRK
was paid $89,600 and $132,000, respectively, under this contract.
(10) Shareholders' Equity
The Company has 3,999,800 shares of Series A Cumulative Convertible
Preferred Shares ("Series A Preferred Shares") outstanding. The rating on
the Series A Preferred Shares was upgraded to an investment grade level of
BBB- by both Standard & Poor's and Duff & Phelps in August 1995. The
holders of the Series A Preferred Shares are entitled to an annual cash
distribution of $1.75 per share, payable quarterly, and a liquidation
preference of $25 per share plus accrued and unpaid distributions. The
Series A Preferred Shares are convertible at any time at the option of the
holder at a conversion rate of approximately .8122 common shares for each
Series A Preferred Share. The Series A Preferred Shares are not redeemable
prior to November 1, 1998. On or after November 1, 1998, the Series A
Preferred Shares can be redeemed, in whole or in part, at the option of
the Company, at an initial conversion rate of $25.875 per share and
thereafter at prices declining to $25 per share on and after November 1,
2003.
In August 1994, the Company completed a private offering to domestic and
foreign institutional investors of 1,550,000 common shares of beneficial
interest at $21 per share. The net proceeds from this offering were
approximately $31 million and were used for the repayment of certain
adjustable rate debt. These shares were registered for trading in
January, 1995.
In connection with the Holly Acquisition, the Company issued 5,985,168
common shares of beneficial interest at $20 per share in exchange for all
of the outstanding common shares of Holly.
In April 1995, the Company implemented a dividend reinvestment and share
purchase plan (the "DRIP"). One million common shares have been allocated
for the DRIP. This plan allows shareholders to acquire additional shares
by automatically reinvesting dividends and making optional cash payments.
During 1996 and 1995, the Company issued 28,026 and 81,376 new common
shares, respectively, to shareholders who elected to participate in this
plan at an average price of $21.62 and $20.74 per share, respectively.
In August 1995, the Company issued 2,300,000 Series B Cumulative
Redeemable Preferred Shares ("Series B Preferred Shares") at $25 per
share. The Series B Preferred Shares carry an investment grade rating of
BBB- from both Standard & Poor's and Duff & Phelps and are rated Ba1 by
Moody's. The holders of the Series B Preferred Shares are entitled to an
annual cash distribution of $2.4125 per share, payable quarterly, and a
liquidation preference of $25 per share plus accrued and unpaid
distributions. The Series B Preferred Shares are not redeemable prior to
August 24, 2000. On or after August 24, 2000, the Series B Preferred
Shares can be redeemed, in whole or in part, at the option of the Company,
at a redemption price of $25 per share. The Series B Preferred Shares
rank pari passu with the Company's Series A Preferred Shares.
19
In 1996, the Company made quarterly distributions of $.485 per share
($1.94 annually) to the holders of its common shares.
As described in Note 2, the Company has elected to be treated, for federal
income tax purposes, as a REIT. As such, the Company is required to
distribute annually, in the form of dividends to its shareholders, at
least 95% of its taxable income. In reporting periods where taxable
income exceeds net income, shareholders' equity will be reduced by the
distributions in excess of net income in such period; and will be
increased by the excess of net income over distributions in reporting
periods where net income exceeds taxable income. For tax reporting
purposes, a portion of the dividends declared during the years ended
December 31, 1996, 1995 and 1994 represents a return of capital.
For federal income tax purposes, the following summarizes the taxability
of dividends paid in 1996:
Common Shares Preferred Shares
-------------------------- --------------------------
Dividend Percentage Dividend Percentage
--------------- ---------- -------------- ----------
Ordinary Income $19.15 million 57.83% $12.55 million 100.00%
Return of Capital 13.96 million 42.17% -- --
-------------- --------- -------------- ---------
$33.11 million 100.00% $12.55 million 100.00%
============== ========= ============== =========
(11) Share Option Plan, Loans to Shareholders and Deferred Compensation
The Company has adopted certain incentive plans for the purpose of
attracting and retaining the Company's trustees, officers and employees.
The Company has established Share Option Plans (the "Option Plans") which
reserved 1,332,900 common shares for issuance under the Option Plans.
Options granted under the Option Plans expire ten years from the date of
grant and contain certain share appreciation rights and the right to
receive reload options under certain conditions. At December 31, 1996,
634,540 of the Company's outstanding options are exercisable. Options
outstanding for the periods ended December 31, 1996 and 1995 are as
follows:
December 31, 1995 (issued between $18.94 and $29.38 per share) 1,043,025
Issued in 1996 (at $21.69 per share) 23,750
Exercised in 1996 (at $18.94 per share) (500)
Forfeited in 1996 (61,950)
Expired in 1996 --
---------
December 31, 1996 (weighted average exercise price of $21.94) 1,004,325
=========
Pursuant to SFAS 123, described in Note 2, the pro forma 1996 and 1995 net
income available to common shareholders as if the fair value approach to
accounting for share-based compensation had been applied would be $10.1
million and $1.7 million, respectively, or $0.59 and $0.10 per common
share, respectively. The 1996 proforma amounts just described do not
differ materially from the actual amounts reported. The fair values of
the options used in calculating these amounts were calculated using the
Black-Scholes option pricing model and the following assumptions: (i) a
risk-free interest rate of 6.29% and 5.59% in 1996 and 1995, respectively,
(ii) an expected life of 10 years, (iii) an expected volatility of 12%
and 16% in 1996 and 1995, respectively, and (iv) expected dividends of
$1.94 per common share per year. The Black-Scholes option pricing model
was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition,
option pricing models require the input of highly subjective assumptions
including the expected share price volatility. Because the Company's
employee share options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee share options.
In December 1993, five shareholders who are officers of the Company
purchased 52,131 of the Company's common shares at the average market
price of $26.375 per share. In December 1994, seven shareholders who are
officers of the Company purchased 181,250 of the Company's common shares
at the average market price of approximately $19.44 per share. In
December 1995, four shareholders who are officers of the Company purchased
38,462 of the Company's common shares at the average market price of
approximately $22.75 per share. In September 1996, three shareholders who
are officers of the Company purchased 54,052 of the Company's common
shares at the average market price of approximately $23.125 per share.
The Company financed these purchases with loans that are secured by the
shares, bear no interest and mature in ten years. One twentieth of each
loan will be forgiven each year for ten years so long as the officer is
still employed by the Company. Approximately $254,687 of these loans were
forgiven during 1996, which is included in general and administrative
expense.
In December 1995, one of these officers retired from the Company effective
February 1996. At such time, the shares securing the $59,375 balance of
his loans were returned to the Company. In September 1996, one of these
officers resigned from the Company. At such time, the shares securing the
$112,500 balance of his loans were returned to the Company. The remaining
$480,079 balance of his loans was repaid to the Company in January 1997.
20
In December 1993, the Company granted 52,131 restricted common shares to
its officers. The grants were to vest, and become unrestricted, ratably
over a five year period on each anniversary of the share grant assuming
that each recipient is employed by the Company on such anniversary, and
assuming that the Company has achieved certain annual performance
requirements based upon growth in its Funds from Operations. None of
these shares vested and became unrestricted during 1996. The remaining
unvested shares will vest and become unrestricted ratably over the next
two years on each anniversary of the share grant, assuming that the
aforementioned conditions are met. This results in a maximum annual
vesting of $375,000.
In September 1996, one of these officers resigned from the Company. At
such time, his 2,843 unvested shares were returned to the Company.
(12) Commitments and Contingencies
Two of the communities transferred to the Company, Countryside and The
Overlook (the "San Antonio Communities"), were transferred subject to
existing contract rights between the Company and affiliates of Laramie
Associates (collectively, "Laramie") which are unaffiliated with the
Company. Pursuant to these contracts, Laramie has certain rights relating
to a subsequent sale of each of the San Antonio Communities, including a
right of first refusal to match a bona fide third party offer. In
addition, Laramie could receive 1% of annual net cash flow from operations
of the San Antonio Communities and 15% to 20% of net proceeds from sales
of such San Antonio Communities based upon the achievement of certain
levels of cash flow from operations, none of which were achieved during
1996, subordinated to significant priorities in favor of the Company.
The Company has entered into employment agreements with each of its
officers. Such agreements are for terms which expire between December 1997
and December 1998, and provide for aggregate annual base salaries of
$1.1 million and $0.9 million in 1997 and 1998, respectively.
As a commercial real estate owner, the Company is subject to potential
environmental costs. At this point in time, management of the Company is
not aware of any environmental concerns that would have a material adverse
effect on the Company's financial position or future results of
operations.
In 1994 the Company adopted a defined contribution savings plan pursuant
to Section 401 of the Internal Revenue Code. Under such a plan there are
no prior service costs. All employees are eligible to participate in the
plan after one year of service. Employer contributions are made based on a
discretionary amount determined by the Company's management. Employer
contributions, if any, are based upon the amount contributed by an
employee. During 1996, 1995 and 1994 the Company made contributions of
approximately $42,000, $29,000 and $5,400, respectively.
(13) Recent Developments
The Company has entered into an Agreement and Plan of Merger, dated as of
January 16, 1997 (the "Agreement"), with Equity Residential Properties
Trust ("EQR"). The Agreement provides for the exchange of all of the
outstanding common shares of the Company for common shares of the
surviving trust, at an exchange ratio of 0.625 common shares of the
surviving trust for each common share of the Company (the "Merger").
The Company has entered into contracts on five commercial office
properties (the "Commercial Properties") for $47.6 million in aggregate,
and has closed on four of the properties subsequent to December 31, 1996.
The aggregate purchase price for the Commercial Properties includes
approximately $2.25 million in value of common shares of Wellsford Real
Properties, Inc. ("WRP Newco") to be issued to an entity in consideration
for the assignment of the purchase contracts entered into by such entity.
Upon liquidation of such entity, each of the Chairman of the Board and
President of the Company, Messrs. Lynford and Lowenthal, will receive
approximately 16.4% of such shares, and the wife of Mark Germain, a
trustee of the Company, will receive approximately 13.8% of such shares.
Each are owners of such entities.
Immediately prior to the Merger, and subject to the satisfaction or waiver
of all conditions thereto, the Company will contribute certain of its
assets, including the Commercial Properties, and certain of its
liabilities to its subsidiary (formed in 1997), WRP Newco, and distribute
to its common shareholders, on a pro rata basis, all of the shares it owns
in WRP Newco.
The Merger is subject to the approval of the common shareholders of both
EQR and the Company and other conditions.
21
(14) Unaudited Summarized Consolidated Quarterly Information
Summarized consolidated quarterly financial information for the years
ended December 31, 1996 and 1995 is as follows:
Three Months Ended (Unaudited)
----------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ----------- -----------
1996
_____________
Revenue $34,669,041 $32,752,665 $32,360,211 $32,039,486
Expenses 28,909,883 27,020,853 26,797,059 26,365,473
Gain (loss) on sale
of communities (65,745) -- -- --
----------- ----------- ----------- -----------
Net income (loss) 5,693,413 5,731,812 5,563,152 5,674,013
Preferred dividends 3,137,100 3,137,100 3,137,100 3,137,100
----------- ----------- ----------- -----------
Net income (loss)
available for common
shareholders $ 2,556,313 $ 2,594,712 $ 2,426,052 $ 2,536,913
=========== =========== =========== ===========
Net income (loss)
per common share $ 0.15 $ 0.15 $ 0.14 $ 0.15
=========== =========== =========== ===========
Weighted average
number of common
shares outstanding 17,104,096 17,053,683 17,038,158 17,031,108
=========== =========== =========== ===========
Three Months Ended (Unaudited)
----------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ----------- -----------
1995
_____________
Revenue $33,169,285 $32,666,357 $32,654,707 $32,741,853
Expenses 27,684,240 28,927,920 28,636,040 28,743,394
Gain (loss) on sale
of communities (1,335,057) (162,849) 678,618 --
(Loss) on early
extinguishment of debt (423,684) (5,129,364) -- --
----------- ------------ ----------- -----------
Net income (loss) 3,726,304 (1,553,776) 4,697,285 3,998,459
Preferred dividends 3,137,101 2,335,580 1,750,000 1,750,000
Net income (loss)
available for common
shareholders $ 589,203 $(3,889,356) $ 2,947,285 $ 2,248,459
=========== =========== =========== ===========
Net income (loss)
per common share $ 0.03 $ (0.23) $ 0.18 $ 0.13
=========== =========== =========== ===========
Weighted average
number of common
shares outstanding 16,987,603 16,944,495 16,909,403 16,909,311
=========== =========== =========== ===========
22
Wellsford Residential Property Trust and Subsidiaries
Consolidated Balance Sheets
March 31, December 31,
1997 1996
-------------- ---------------
(Unaudited)
ASSETS
Real estate assets, at cost:
Land .............................................................................. $ 114,275,557 $ 114,214,888
Buildings and improvements ........................................................ 660,081,262 659,153,965
------------- -------------
774,356,819 773,368,853
Less, accumulated depreciation ................................................. (90,733,339) (83,965,956)
------------- -------------
683,623,480 689,402,897
Construction in progress .......................................................... 48,781,059 22,210,933
------------- -------------
732,404,539 711,613,830
Cash and cash equivalents ............................................................ 29,371,713 10,811,505
Restricted cash ...................................................................... 5,774,702 7,666,598
Mortgage note receivable ............................................................. 17,800,000 17,800,000
Deferred financing costs ............................................................. 5,168,974 5,400,787
Prepaid and other assets ............................................................. 6,941,017 2,995,854
------------- -------------
Total Assets ......................................................................... $ 797,460,945 $ 756,288,574
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Senior unsecured notes ............................................................ $ 248,545,888 $ 248,495,847
Mortgage notes payable ............................................................ 82,673,731 82,730,831
Unsecured credit facilities ....................................................... 63,575,000 18,075,000
Accrued expenses and other liabilities ............................................ 13,085,625 15,617,516
Dividends payable ................................................................. 11,495,180 11,433,547
Security deposits ................................................................. 3,234,835 3,249,607
------------- -------------
Total Liabilities .................................................................... 422,610,259 379,602,348
------------- -------------
Commitments and contingencies ........................................................ -- --
Shareholders' Equity:
Shares of beneficial interest, 100,000,000 shares authorized -
3,999,800 Series A Convertible Preferred Shares, $.01 par value
per share, liquidation preference $25 per share, issued and
outstanding; ................................................................... 39,998 39,998
2,300,000 Series B Preferred Shares,
$.01 par value per share, liquidation preference $25 per share,
issued and outstanding; ........................................................ 23,000 23,000
17,233,152 and 17,101,812 Common Shares,
$.01 par value per share, issued and outstanding at
March 31, 1997 and December 31, 1996, respectively ............................. 172,332 171,018
Paid in capital in excess of par value ............................................ 464,955,263 461,290,031
Distributions in excess of net income ............................................. (83,786,781) (78,284,695)
Deferred compensation and shareholder loans receivable ............................ (6,553,126) (6,553,126)
------------- -------------
Total Shareholders' Equity ........................................................... 374,850,686 376,686,226
------------- -------------
Total Liabilities and Shareholders' Equity ........................................... $ 797,460,945 $ 756,288,574
============= =============
23
Wellsford Residential Property Trust and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
----------------------------
1997 1996
------------- -------------
REVENUE
Rental income .................... $ 32,608,636 $ 30,408,668
Other income ..................... 1,498,821 1,370,674
Interest income .................. 544,299 260,144
------------ -----------
Total Revenue ................. 34,651,756 32,039,486
------------ -----------
EXPENSES
Property operating and maintenance 10,543,184 9,722,165
Real estate taxes ................ 2,512,444 2,420,048
Depreciation and amortization .... 7,026,142 6,436,099
Property management .............. 1,129,391 1,237,540
Interest ......................... 6,589,512 5,517,230
General and administrative ....... 857,988 1,011,621
------------ -----------
Total Expenses ................ 28,658,661 26,344,703
------------ -----------
(Loss) on JV communities ............ -- (20,770)
------------ -----------
Net income .......................... 5,993,095 5,674,013
Preferred dividends ................. 3,137,100 3,137,100
------------ -----------
Income (loss) available for
common shareholders .............. $ 2,855,995 $ 2,536,913
=========== ===========
Net income (loss) per common share .. $ 0.17 0.15
============ ===========
Weighted average number of common
shares outstanding ............... 17,150,966 17,031,108
============ ===========
Cash dividends declared per common
share ............................ $ 0.485 $ 0.485
============ ===========
See accompanying notes.
24
Wellsford Residential Property Trust and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
---------- ------------
Net income .................................................................... $5,993,095 $5,674,013
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization .............................................. 7,234,536 6,594,497
Amortization of deferred compensation and
shareholder loans receivable ............................................... -- 140,050
Decrease (increase) in assets
Escrow cash ............................................................. (68,439) 43,123
Debt service reserve .................................................... 1,960,335 391,106
Rent receivables ........................................................ (313,183) 11,401
Prepaid and other assets ................................................ (3,683,104) 68,721
(Decrease) increase in liabilities
Accounts payable ........................................................ (175,843) (453,567)
Accrued expenses and other liabilities .................................. (2,356,048) (3,753,763)
Security deposits ....................................................... (14,772) (41,260)
------------ ------------
Net cash provided by operating activities .................................. 8,576,577 8,674,321
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate assets .............................................. (27,558,092) (4,585,341)
------------ ------------
Net cash provided by (used in) investing activities ........................ (27,558,092) (4,585,341)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage notes payable .......................................... -- --
Proceeds (payment) from credit facilities ..................................... 45,500,000 --
Payment of deferred financing costs ........................................... (129,333) (59,046)
Principal payments on mortgage notes .......................................... (61,942) (4,968,568)
Distributions to shareholders ................................................. (11,433,547) (11,310,053)
Proceeds from dividend reinvestment plan ...................................... 573,151 121,598
Proceeds from exercise of options ............................................. 3,093,394 --
------------ ------------
Net cash provided by (used in) financing activities ........................ 37,541,723 (16,216,069)
------------ ------------
Net (decrease) in cash and cash equivalents ................................... 18,560,208 (12,127,089)
Cash and cash equivalents, beginning of period ................................ 10,811,505 29,444,008
------------ ------------
Cash and cash equivalents, end of period ...................................... $ 29,371,713 $ 17,316,919
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest ...................................... $ 10,914,113 $ 9,900,073
First quarter dividends declared .............................................. $ 11,495,180 $ 11,397,667
See accompanying notes.
25
WELLSFORD RESIDENTIAL PROPERTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
Wellsford Residential Property Trust and Subsidiaries (the "Company") is a
fully integrated and self administered equity real estate investment trust
("REIT") principally engaged in the acquisition, development and operation
of multifamily communities located in the Southwest and Pacific Northwest
regions of the United States. At March 31, 1997, the Company owned 72
multifamily communities containing 19,004 units and four commercial office
buildings comprising 750,400 square feet. In addition, the Company has two
multifamily communities under development, comprising 760 units.
The accompanying financial statements and related notes of the Company
have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared under generally accepted accounting principles have
been condensed or omitted pursuant to such rule. In the opinion of
management, all adjustments considered necessary for a fair presentation
of the Company's financial position, results of operations and cash flows
have been included and are of a normal and recurring nature. These
financial statements should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
2. Merger and Recent Development
The Company has entered into an Agreement and Plan of Merger, dated as of
January 16, 1997 (the "Agreement"), with Equity Residential Properties
Trust("EQR"). The Agreement provides for the exchange of all of the
outstanding common shares of the Company for common shares of the
surviving trust, at an exchange ratio of 0.625 common shares of the
surviving trust for each common share of the Company (the "Merger").
Immediately prior to the Merger, and subject to the satisfaction or waiver
of all conditions thereto, the Company will contribute certain of its
assets, including the Commercial Properties (as defined below), and
certain of its liabilities to its subsidiary, WRP Newco (as defined below)
and distribute to its common shareholders, on a pro rata basis, all of the
shares it owns in WRP Newco (the "Spin Off").
In contemplation of the Merger and Spin Off, the Company has acquired five
commercial office properties (the "Commercial Properties") for $47.6
million in aggregate, has closed on four of the properties during the
first quarter of 1997 and one in April 1997 and has acquired a $20 million
portion of an $80 millon subordinated mezzanine real estate loan bearing
interest at approximately 12% per annum. The aggregate purchase price for
the Commercial Properties includes approximately $2.25 million in value of
common shares of Wellsford Real Properties, Inc. ("WRP Newco") to be
issued to an entity in consideration for the assignment of the purchase
contracts entered into by such entity. Upon liquidation of such entity,
each of the Chairman of the Board and President of the Company, Messrs.
Lynford and Lowenthal, will receive approximately 16.4% of such shares,
and the wife of Mark Germain, a trustee of the Company, will receive
approximately 13.8% of such shares. Each are owners of such entity. The
four commercial properties acquired during the first quarter are currently
vacant and undergoing renovations and are included in the construction in
progress balance at March 31, 1997.
The Merger is subject to the approval of the common shareholders of both
EQR and the Company.
3. Earnings Per Share
Net income per share was calculated using the weighted average number of
shares outstanding of 17,150,966 and 17,031,108 for the three months ended
March 31, 1997 and 1996, respectively. The Company declared a common
dividend of $0.485 per common share, a Series A preferred dividend of
$0.4375 per share, and a Series B preferred dividend of $0.603125 per
share on March 12, 1997 payable to shareholders of record on March 25,
1997.
26
ERP OPERATING LIMITED PARTNERSHIP
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
The Unaudited Pro Forma Combined Balance Sheet gives effect of the acquisition
of the multifamily property business of Wellsford Residential Property Trust,
a Maryland real estate investment trust ("Wellsford"), by Equity Residential
Properties Trust ("EQR") through the tax-free merger of EQR and Wellsford ("the
Merger") and the corresponding effect of the contribution of the Wellsford
properties and related assets and liabilities to ERP Operating Limited
Partnership ("ERP"). Immediately prior to the Merger, Wellsford also contributed
certain assets to Wellsford Real Properties, Inc. ("WRP NewCo"), a subsidiary of
Wellsford. The effects of the Merger are presented as if the Merger and
corresponding contribution to ERP had occurred on March 31, 1997. The Unaudited
Pro Forma Combined Balance Sheet gives effect to the Merger under the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16. In the opinion of management, all significant adjustments necessary to
reflect the effects of the Merger have been made.
The Unaudited Pro Forma Combined Balance Sheet is presented for comparative
purposes only and is not necessarily indicative of what the actual combined
financial position of ERP and Wellsford would have been at March 31, 1997, nor
does it purport to represent the future combined financial position of ERP and
Wellsford. This Unaudited Pro Forma Combined Balance Sheet should be read in
conjunction with, and is qualified in its entirety by, the respective historical
financial statements and notes thereto of ERP and Wellsford.
ERP OPERATING LIMITED PARTNERSHIP
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
Pro Forma ERP
ERP WRP Merger Pro Forma
Historical Historical Adjustments (A) Combined
---------- ---------- --------------- ----------
ASSETS
Rental property, net $2,873,260 $683,623 $388,847 (B) $3,945,730
Real Estate held for disposition - - - -
Construction in progress - 48,781 (47,806)(C) 975
Investment in mortgage notes, net 86,895 17,800 (17,800)(D) 86,895
Cash and cash equivalents 84,829 29,372 (112,612)(E) 1,589
Rents receivables 1,351 - - 1,351
Deposits-restricted 9,007 5,775 (3,228)(F) 11,554
Escrow deposits-mortgage 17,582 - - 17,582
Deferred financing costs, net 14,425 5,169 (5,169)(G) 14,425
Other assets 25,886 6,941 2,250 (H) 35,077
---------- -------- -------- ----------
Total assets $3,113,235 $797,461 $204,482 $4,115,178
========== ======== ======== ==========
LIABILITIES AND PARTNERS' CAPITAL/SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 795,723 $ 82,674 $ (8,632)(I) $ 869,765
Line of credit - 63,575 (45,014)(J) 18,561
Notes, net 498,918 248,546 - 747,464
Accounts payable and accrued expenses 31,243 13,085 - 44,328
Accrued interest payable 15,447 - - 15,447
Due to affiliates 656 - - 656
Rents received in advance and other liabilities 18,904 - - 18,904
Security deposits 15,123 3,235 - 18,358
Distributions payable 47,220 11,495 - 58,715
---------- -------- -------- ----------
Total liabilities 1,423,234 422,610 (53,646) 1,792,198
========== ======== ======== ==========
Commitments and contingencies (K)
Partners' Capital/Shareholders' Equity:
Common shares - 172 (172)(L) -
Preferred shares - 64 (64)(M) -
Paid in capital - 464,955 (464,955)(N) -
Distributions in excess of accumulated earnings - (83,787) 83,787 (N) -
Deferred compensation and shareholder loans receivable - (6,553) 6,553 (0) -
---------- -------- -------- ----------
Total shareholders' equity - 374,851 (374,851) -
========== ======== ======== ==========
9 3/8% Series A Cumulative Redeemable Preference Units 153,000 - - 153,000
9 1/8% Series B Cumulative Redeemable Preference Units 125,000 - - 125,000
9 1/8% Series C Cumulative Redeemable Preference Units 115,000 - - 115,000
Series E Cumulative Convertible Preference Units - - 99,995 (M) 99,995
9.65% Series F Cumulative Redeemable Preference Units - - 57,500 (M) 57,500
Partners' Capital
General partner 1,152,737 - 438,955 (P) 1,591,692
Limited partners 144,264 - 36,529 (Q) 180,793
---------- -------- -------- ----------
Total partners' capital 1,297,001 - 475,484 1,772,485
---------- -------- -------- ----------
Total liabilities and partners'
capital/shareholders' equity $3,113,235 $797,461 $204,482 $4,115,178
========== ======== ======== ==========
ERP OPERATING LIMITED PARTNERSHIP
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
The Unaudited Pro Forma Combined Statement of Operations for the three months
ended March 31, 1997 is presented as if the Merger had occurred on January 1,
1997. The Unaudited Pro Forma Combined Statement of Operations gives effect to
the Merger under the purchase method of accounting in accordance with Accounting
Principles Board Opinion No. 16. In the opinion of management, all significant
adjustments necessary to reflect the effects of these transactions have been
made.
The Unaudited Pro Forma Combined Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
combined results of ERP and Wellsford would have been for the three months ended
March 31, 1997, nor does it purport to be indicative of the results of
operations in future periods. The Unaudited Pro Forma Combined Statement of
Operations should be read in conjunction with, and are qualified in their
entirety by, the respective historical financial statements and notes thereto of
ERP and Wellsford.
ERP OPERATING LIMITED PARTNERSHIP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS EXCEPT PER UNIT DATA)
ERP
ERP Wellsford Merger Pro Forma
Historical Historical (R) Adjustments Combined
---------- -------------- ----------- ---------
REVENUES
Rental Income $134,235 $32,609 $ $166,844
Fee and asset management 1,578 - 1,578
Interest income-investment in mortgage notes 3,683 401 (401) (S) 3,683
Interest and other income 1,891 1,642 3,533
-------- ------- ------- --------
Total revenues 141,387 34,652 (401) 175,638
-------- ------- ------- --------
EXPENSES
Property and maintenance 32,334 10,543 42,877
Real estate taxes and insurance 13,911 2,513 16,424
Property management 5,671 1,129 (131) (T) 6,669
Fee and asset management 967 - 967
Depreciation 28,877 6,827 1,264 (U) 36,968
Interest:
Expense incurred 23,293 6,428 (353) (V) 29,368
Amortization of deferred financing costs 603 361 (361) (W) 603
General and administrative 2,975 858 (734) (X) 3,099
-------- ------- ------- --------
Total expenses 108,631 28,659 (315) 136,975
-------- ------- ------- --------
Income before gain on disposition of properties, (loss) on
joint venture communities and extraordinary item 32,756 5,993 (86) 38,663
Gain (loss) on disposition of properties 3,632 - - 3,632
(Loss) on joint venture communities - - - -
-------- ------- ------- --------
Income before extraordinary item 36,388 5,993 (86) 42,295
Extraordinary item:
Write-off of unamortized costs on refinanced debt - - - -
-------- ------- ------- --------
Net income $ 36,388 $ 5,993 $ (86) $ 42,295
======== ======= ======= ========
Allocation of net income:
Redeemable Preference Interests - - - -
9 3/8% Series A Cumulative Redeemable Preference Units 3,586 - - 3,586
9 1/8% Series B Cumulative Redeemable Preference Units 2,852 - - 2,852
9 1/8% Series C Cumulative Redeemable Preference Units 2,623 - - 2,623
Series E Cumulative Convertible Preference Units - - 1,750 1,750
9.65% Series F Cumulative Redeemable Preference Units - - 1,387 1,387
General partner 23,901 - 5,019 (Y) 28,920
Limited partners 3,426 - 888 (Y) 4,314
-------- ------- ------- --------
Net income $ 27,327 $ - $ 5,907 $ 33,234
======== ======= ======= ========
Net income per weighted average OP Unit outstanding $ 0.46 $ - $ 0.55 $ 0.47
======== ======= ======= ========
Weighted average OP Units outstanding 59,269 - 10,811 (Z) 70,080
======== ======= ======= ========
ERP OPERATING LIMITED PARTNERSHIP
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996 is presented as if the Merger had occurred on January 1, 1996.
The Unaudited Pro Forma Combined Statement of Operations gives effect to the
Merger under the purchase method of accounting in accordance with Accounting
Principles Board Opinion No. 16. In the opinion of management, all significant
adjustment necessary to reflect the effects of these transactions have been
made.
The Unaudited Pro Forma Combined Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
combined results of ERP and Wellsford would have been for the year ended
December 31, 1996, nor does it purport to be indicative of the results of
operations in future periods. The Unaudited Pro Forma Combined Statement of
Operations should be read in conjunction with, and are qualified in their
entirety by, the respective historical financial statements and notes thereto of
ERP and Wellsford.
ERP OPERATING LIMITED PARTNERSHIP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS EXCEPT PER UNIT DATA)
ERP
ERP Wellsford Merger Pro Forma
Historical Historical (AA) Adjustments Combined
---------- --------------- ----------- ---------
REVENUES
Rental Income $454,412 $124,408 $ $578,820
Fee and asset management 6,749 - 6,749
Interest income-investment in mortgage notes 12,819 757 (757) (BB) 12,819
Interest and other income 4,405 6,656 11,061
-------- -------- ------- --------
Total revenues 478,385 131,821 (757) 609,449
-------- -------- ------- --------
EXPENSES
Property and maintenance 127,172 40,354 167,526
Real estate taxes and insurance 44,128 9,882 54,010
Property management 17,512 4,770 (776) (CC) 21,506
Fee and asset management 3,837 - 3,837
Depreciation 93,253 25,179 7,164 (DD) 125,596
Interest:
Expense incurred 81,351 23,599 (1,412) (EE) 103,538
Amortization of deferred financing costs 4,242 1,386 (1,386) (FF) 4,242
General and administrative 9,857 3,865 (3,369) (GG) 10,353
-------- -------- ------- --------
Total expenses 381,352 109,035 221 490,608
-------- -------- ------- --------
Income before gain on disposition of properties, (loss)
on joint venture communities and extraordinary item 97,033 22,786 (978) 118,841
Gain (loss) on disposition of properties 22,402 (66) - 22,336
(Loss) on joint venture communities - (58) - (58)
-------- -------- ------- --------
Income before extraordinary item 119,435 22,662 (978) 141,119
Extraordinary item:
Write-off of unamortized costs on refinanced debt (3,512) - - (3,512)
-------- -------- ------- --------
Net income $115,923 $ 22,662 $ (978) $137,607
======== ======== ======= ========
Allocation of net income:
Redeemable Preference Interests 263 - - 263
9 3/8% Series A Cumulative Redeemable Preference Units 14,345 - - 14,345
9 1/8% Series B Cumulative Redeemable Preference Units 11,406 - - 11,406
9 1/8% Series C Cumulative Redeemable Preference Units 3,264 - - 3,264
Series E Cumulative Convertible Preference Units - - 5,549 5,549
9.65% Series F Cumulative Redeemable Preference Units - - 6,999 6,999
General partner 72,609 - 9,399 (HH) 82,008
Limited partners 14,036 - (263) (HH) 13,773
-------- -------- ------- --------
Net income $ 86,645 $ - $ 9,136 $ 95,781
======== ======== ======= ========
Net income per weighted average OP Unit outstanding $ 1.70 $ - $ 0.85 $ 1.55
======== ======== ======= ========
Weighted average OP Units outstanding 51,108 - 10,811 (II) 61,919
======== ======== ======= ========
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
(A) Represents adjustments to record the Merger in accordance with the purchase
method of accounting, based upon the assumed purchase price of $1,078,753.
Issuance of 10,811 OP Units of ERP to EQR in exchange for the contribution of
Wellsford's properties to ERP $ 475,684
Issuance of ERP Series E Cumulative Convertible Preference Units 99,995
Issuance of ERP Series F Cumulative Redeemable Preference Units 57,500
Assumption of Wellsford's liabilities, net 415,824
Adjustment to increase the assumed Wellsford debt to its fair value (see Note I) 6,123
Merger costs (see calculation below) 23,627
----------
$1,078,753
==========
The value of the issuance of the ERP Series E Cumulative Convertible
Preference Units and the ERP Series F Cumulative Redeemable Preference
Units is based upon Wellsford's outstanding shares of 3,999.8 Series A
Convertible Preferred Shares with a liquidation preference at $25 per share
and Wellsford's outstanding shares of 2,300 Series B Preferred Shares with
a liquidation preference at $25 per share, respectively.
The following is a calculation of the estimated fees and other expenses
related to the Merger:
Employee termination costs $ 10,063
Buyout of stock options 4,227
Advisory fees 2,350
Legal and accounting fees 2,225
Consulting contracts 2,000
Other, including printing, filing, transfer and spin-off costs 2,762
----------
TOTAL $ 23,627
==========
(B) Represents the estimated increase in Wellsford's rental property, net based
upon ERP's purchase price and the adjustment to eliminate the basis of
Wellsford's net assets acquired:
Purchase Price (see Note A) $1,078,753
Less: Historical basis of Wellsford's net assets acquired
Rental property, net 683,623
Construction in progress, net of spin-off to WRP NewCo of $47,806 975
Restricted deposits, net of spin-off to WRP NewCo of $3,228 2,547
Other assets, net of spin-off to WRP NewCo of $489 and $3,691 of prepaid
merger costs 2,761
----------
Step-up to record fair value of Wellsford rental property $ 388,847
==========
(C) Decrease reflects the spin-off of costs related to the Palomino Park
project to WRP NewCo.
(D) Decrease results from the spin-off of the Sonterra mortgage notes
receivable to WRP NewCo.
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
(E) Decrease to Cash and Cash Equivalents reflects the following:
Spin-off of WRP NewCo, including an investment of $2,930 for ERP's 20% interest in
the Palomino Park project (see Note H) $ 21,710
The expected payment for Merger costs (see Note A) and registration costs
(see Note P) 23,827
Repayment of Wellsford's line of credit 63,575
ERP's purchase of WRP NewCo common stock 3,500
----------------
$ 112,612
================
(F) Decrease results from the spin-off of restricted cash to WRP NewCo for the Palomino Park project.
(G) Decrease due to elimination of Wellsford deferred loan costs in connection with the Merger.
(H) Increase to Other Assets reflects the following:
ERP purchase of WRP NewCo common stock $ 3,500
ERP's 20% investment in the Palomino Park project 2,930
Interest receivable related to the Sonterra mortgage notes receivable not assumed by
ERP (489)
Prepaid Merger costs (3,691)
-----------------
$ 2,250
=================
(I) Decrease to Mortgage Notes Payable reflects the following:
Spin-off of bonds on the Palomino Park project to WRP NewCo $ 14,755
Premium required to adjust Wellsford's debt to its estimated fair value. (6,123)
-----------------
$ 8,632
=================
(J) Reflects the repayment of Wellsford's line of credit of $63,575 and a borrowing of $18,561 from ERP's line of credit.
(K) ERP has committed to acquire up to 1,000 shares of WRP NewCo Series A 8% Convertible Redeemable Preferred Stock; has provided
stand-by obligations with respect to a $36,800 agreement with respect to the construction financing of Phase I of Palomino Park
and $30,000 pursuant to an agreement expected to be entered into with respect to the construction financing for Phase II of
Palomino Park; and a $14,800 credit enhancement with respect to bonds issued to finance certain public improvements at Palomino
Park.
(L) Elimination of Wellsford common shares at $.01 par value ($172).
(M) Elimination of $64 of Wellsford Preferred Shares and the issuance of $99,995 of ERP Series E Cumulative Convertible Preference
Units and of $57,500 of EQR Series F Cumulative Redeemable Preference Units (see Note A).
(N) Elimination of Wellsford's historical paid in capital and distributions in excess of accumulated earnings as a result of the
Merger.
(O) Elimination of deferred compensation and the forgiveness of all of Wellsford's shareholder loans as a result of the Merger.
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
(P) Increase to general partner's capital reflects the following:
Issuance of 10,811 ERP OP Units to EQR $ 475,684
Registration costs incurred in connection with the Merger (200)
Adjustment to limited partners' ownership in ERP (see Note Q) (36,529)
-----------
$ 438,955
===========
The 10.2% limited partners' ownership is calculated as follows:
Shares Units
------ ------
Wellsford's historical Shares outstanding 17,297 -
=========== ===========
EQR's Shares/Units to be issued based on the .625 Merger exchange ratio 10,811 10,811
EQR's historical Shares/Units outstanding 53,713 61,061
----------- -----------
EQR's proforma Shares/Units outstanding 64,524 71,872
=========== ===========
EQR ownership percentage of ERP 89.8%
===========
Limited partners' ownership percentage of ERP 10.2%
===========
(Q) The pro forma allocation to the limited partners is based upon the
percentage owned by such limited partners as follows:
Total partners' capital $ 1,772,485
Limited partners percentage ownership in ERP (see Note P) 10.2%
-----------
Pro Forma Combined limited partners' ownership in ERP 180,793
ERP historical limited partners' ownership in ERP (144,264)
-----------
Adjustment to limited partners' ownership in ERP $ 36,529
===========
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(R) Certain reclassifications have been made to Wellsford's Historical
Statement of Operations to conform to ERP's Statement of Operations
presentation.
(S) Decrease results from the loss of interest income related to the $17,800
Sonterra mortgage notes receivable not assumed by ERP.
(T) Decrease results from operating efficiencies expected to occur as a result
of the Merger.
(U) Represents the net increase in depreciation of real estate owned as a
result of recording the Wellsford real estate assets at fair value versus
historical cost. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets which have a useful life of
approximately 30 years.
The calculation of the fair value of depreciable real estate assets at
March 31, 1997 is as follows:
Historical basis of Wellsford's rental property $ 683,623
Plus: Step up to Wellsford's rental property, net (see Note B) 388,847
----------------
Pro forma basis of Wellsford's rental property at fair value 1,072,470
Less: Fair value allocated to land (107,247)
----------------
Pro forma basis of Wellsford's depreciable rental property at fair value $ 965,223
================
Calculation of depreciation of rental property for the three months ended March 31,1997 is as follows:
Depreciation expense based upon an estimated useful life of approximately 30 years 8,044
Less: historic Wellsford depreciation of rental property (6,780)
----------------
Pro forma adjustment $ 1,264
================
(V) Decrease results from the amortization of the premium required to record
Wellsford's debt at its estimated fair value.
(W) Decrease results from the elimination of amortization of Wellsford's
deferred financing costs, which costs would be eliminated in connection
with the Merger.
(X) Decrease results from identified historic costs of certain items which are
anticipated to be eliminated or reduced as a result of the Merger as
follows:
Duplication of public company expenses $ 149
Net reduction in salary, benefits and occupancy 425
Other 160
-----------
Total $ 734
===========
(Y) Represents an adjustment to reflect the general partner and limited
partners' change in ownership percentages (see Note P).
(Z) Represents the issuance of OP Units of ERP to EQR in exchange for the
contribution of Wellsford's properties to ERP.
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMEDNT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT DATA)
(AA) Amounts shown represent historical amounts for Wellsford. Certain
reclassifications have been made to Wellsford's Historical Statement of
Operations to conform to ERP's Statement of Operations presentation.
(BB) Decrease results from the loss of interest income related to the $17,800
Sonterra mortgage notes receivable not assumed by ERP.
(CC) Decrease results from operating efficiencies expected to occur as a result
of the Merger.
(DD) Represents the net increase in depreciation of real estate owned as a
result of recording the Wellsford real estate assets at fair value versus
historical cost. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets which have a useful life of
approximately 30 years.
The calculation of the fair value of depreciable real estate assets at
March 31, 1997 is as follows:
Historical basis of Wellsford's rental property $ 683,623
Plus: Step up to Wellsford's rental property, net (see Note B) 388,847
----------
Pro forma basis of Wellsford's rental property at fair value 1,072,470
Less: Fair value allocated to land (107,247)
----------
Pro forma basis of Wellsford's depreciable rental property at fair value $ 965,223
==========
Calculation of depreciation of rental property
for the year ended December 31, 1996 is as follows:
Depreciation expense based upon an estimated useful life of approximately
30 years $ 32,174
Less: historic Wellsford depreciation of rental property (25,010)
----------
Pro forma adjustment $ 7,164
==========
(EE) Decrease results from the amortization of the premium required to record
Wellsford's debt at its estimated fair value.
(FF) Decrease results from the elimination of amortization of Wellsford's
deferred financing costs, which costs would be eliminated in connection
with the Merger.
(GG) Decrease results from identified historic costs of certain items which are
anticipated to be eliminated or reduced as a result of the Merger as
follows:
Duplication of public company expenses $ 626
Net reduction in salary, benefits and occupancy 1,732
Other 1,011
------
Total $3,369
======
(HH) Represents an adjustment to reflect the general partner and limited
partners' change in ownership percentages (see Note P).
(II) Represents the issuance of OP Units of ERP to EQR in exchange for the
contribution of Wellsford's properties to ERP.
ITEM 7.
C. Exhibits
23 Consent of Ernst & Young LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ERP OPERATING LIMITED PARTNERSHIP
BY: EQUITY RESIDENTIAL PROPERTIES TRUST,
ITS GENERAL PARTNER
November 13, 1997 By: /s/ Michael J. McHugh
----------------- -----------------------------------------
(Date) Michael J. McHugh
Senior Vice President, Chief Accounting
Officer and Treasurer