FORM 10-Q
UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
For the quarterly period ended MARCH 31, 2002
OR
Commission File Number: 1-12252
EQUITY RESIDENTIAL PROPERTIES TRUST (Exact Name of Registrant as Specified in Its Charter)
(312) 474-1300 (Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
At May 1, 2002, 274,583,528 of the Registrant's Common Shares of Beneficial Interest were outstanding.
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (Amounts in thousands except for share amounts) (Unaudited)
See accompanying notes
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EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except for share data) (Unaudited)
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EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
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EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Amounts in thousands) (Unaudited)
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EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Business
Equity Residential Properties Trust ("EQR"), formed in March 1993, is a fully integrated real estate company engaged in the acquisition, ownership, management and operation of multifamily properties. As used herein, the term "Company" means EQR, and its subsidiaries. The Company has elected to be taxed as a real estate investment trust ("REIT").
EQR is the general partner of, and as of March 31, 2002, owned an approximate 92.3% ownership interest in, ERP Operating Limited Partnership (the "Operating Partnership"). The Company conducts substantially all of its business and owns substantially all of its assets through the Operating Partnership. The Operating Partnership is, in turn, directly or indirectly, a partner, member or shareholder of numerous partnerships, limited liability companies and corporations which have been established primarily to own fee simple title to multifamily properties or to conduct property management activities and other businesses related to the ownership and operation of multifamily residential real estate. References to the Company include the Operating Partnership and each of the partnerships, limited liability companies and corporations controlled by the Operating Partnership or EQR.
As of March 31, 2002, the Company owned or had interests in a portfolio of 1,073 multifamily properties containing 225,000 apartment units located in 36 states consisting of the following:
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of the Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
For further information, including definition of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001.
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Derivative Instruments and Hedging Activities
At March 31, 2002, the Company had entered into swaps which have been designated as cash flow hedges with a current aggregate notional amount of $614.7 million (notional amounts range from $610.4 million to $626.4 million over the terms of the swaps) at interest rates ranging from 3.65% to 6.15% maturing at various dates ranging from 2003 to 2007 with a net liability fair value of $19.0 million; and swaps which have been designated as fair value hedges with a current aggregate notional amount of $384.7 million (notional amounts range from $380.4 million to $396.4 million over the terms of the swaps) at interest rates ranging from 4.46% to 7.25% maturing at various dates ranging from 2003 to 2011 with a net asset fair value of $2.0 million.
At March 31, 2002, certain joint venture development partnerships in which the Company invested had entered into swaps to hedge the interest rate risk exposure on unconsolidated floating rate construction mortgage loans. The Company has recorded its proportionate share of these qualifying hedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges with a current aggregate notional amount of $329.4 million (notional amounts range from $120.0 million to $538.1 million over the terms of the swaps) at interest rates ranging from 2.28% to 6.94% maturing at various dates ranging from 2002 to 2005 with a net liability fair value of $7.3 million.
As of March 31, 2002, there were approximately $25.5 million in deferred losses, net, included in accumulated other comprehensive loss. On March 31, 2002, the net derivative instruments were reported at their fair value as other liabilities of approximately $17.0 million and as a reduction to investment in unconsolidated entities of approximately $7.3 million. The Company expects to recognize an estimated $12.1 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending March 31, 2003, of which $4.6 million is related to the development joint venture swaps.
Other
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 requires companies to account for all business combinations using the purchase method of accounting. SFAS No. 141 is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, but it has not had any impact on the Company's financial condition and results of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to eliminate the amortization of goodwill in favor of a periodic impairment based approach. SFAS No. 142 is effective for the fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, but it has not had a material impact on the Company's financial condition and results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145, among other items, rescinds the automatic classification of costs incurred on debt extinguishment as extraordinary charges. Instead, gains and losses from debt extinguishment should only be classified as extraordinary if they meet the "unusual and infrequently occurring" criteria outlined in APB No. 30. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company will adopt the standard effective January 1, 2003, but does not expect it to have a material impact on its financial condition and results of operations.
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3. Shareholders' Equity and Minority Interests
The following table presents the changes in the Company's issued and outstanding Common Shares for the quarter ended March 31, 2002:
The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for a partnership interest are collectively referred to as the "Minority Interests—Operating Partnership". The Minority Interests—Operating Partnership held 22,720,891 OP Units representing a 7.66% interest in the Operating Partnership at March 31, 2002. Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding at March 31, 2002 would have been 296,557,258.
Net proceeds from the Company's Common Share and Preferred Share offerings are contributed by the Company to the Operating Partnership in return for an increased ownership percentage and are treated as capital transactions in the Company's consolidated financial statements. As a result, the net offering proceeds from Common Shares are allocated between shareholders' equity and Minority Interests—Operating Partnership to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership.
The Company's declaration of trust authorizes the Company to issue up to 100,000,000 preferred shares of beneficial interest, $0.01 par value per share (the "Preferred Shares"), with specific rights, preferences and other attributes as the Board of Trustees may determine, which may include preferences, powers and rights that are senior to the rights of holders of the Company's Common Shares.
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The following table presents the Company's issued and outstanding Preferred Shares as of March 31, 2002 and December 31, 2001:
The liquidation value of the Preference Interests and the Junior Preference Units (both as defined below) are included as separate components of Minority Interests in the consolidated balance sheets and the distributions incurred are included in preferred distributions in the consolidated statements of operations.
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The following table presents the issued and outstanding Preference Interests as of March 31, 2002 and December 31, 2001:
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The following table presents the Operating Partnership's issued and outstanding Junior Convertible Preference Units (the "Junior Preference Units") as of March 31, 2002 and December 31, 2001:
4. Real Estate Acquisitions
During the quarter ended March 31, 2002, the Company acquired one property located in Sunrise, Florida from an unaffiliated party, consisting of 368 units for a purchase price of approximately $26.0 million.
5. Real Estate Dispositions
During the quarter ended March 31, 2002, the Company disposed of the four properties listed below to unaffiliated parties and recognized a net gain on sales of discontinued operations of approximately $2.8 million on these sales.
In addition, during the quarter ended March 31, 2002, the Company:
6. Commitments to Acquire/Dispose of Real Estate
As of March 31, 2002, in addition to the property that was subsequently acquired as discussed in Note 17, the Company had entered into separate agreements to acquire two multifamily properties containing 736 units from unaffiliated parties. The Company expects a combined purchase price of approximately $55.3 million, including the assumption of mortgage indebtedness of approximately $14.0 million.
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As of March 31, 2002, in addition to the properties that were subsequently disposed of as discussed in Note 17, the Company entered into separate agreements to dispose of twenty-four multifamily properties containing 4,564 units to unaffiliated parties. The Company expects a combined disposition price of approximately $244.0 million.
The closings of these pending transactions are subject to certain contingencies and conditions, therefore, there can be no assurance that these transactions will be consummated or that the final terms thereof will not differ in material respects from those summarized in the preceding paragraphs.
7. Investments in Unconsolidated Entities
The Company has entered into various joint venture agreements with third party companies. The following table summarizes the Company's investments in unconsolidated entities as of March 31, 2002 (amounts in thousands except for project and unit amounts):
Investments in unconsolidated entities includes the Unconsolidated Properties as well as various uncompleted development joint venture properties. The Company does not consolidate these entities, as it does not have sole control of major decisions (such as sale and/or financing/refinancing). The Company's common equity ownership interests in these entities range from 1.5% to 57.0% at March 31, 2002.
These investments are accounted for utilizing the equity method of accounting. Under the equity method of accounting, the net equity investment of the Company is reflected on the consolidated balance sheets and after the project is completed, the consolidated statements of operations include the Company's share of net income or loss from the unconsolidated entity. Prior to the project being completed, the Company capitalized interest on its equity contribution in accordance with the provisions of SFAS No. 58, Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method. During the quarters ended March 31, 2002 and 2001, the Company capitalized $3.8 million and $4.3 million, respectively, in interest cost related to its
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unconsolidated joint venture development projects (which reduced interest expense incurred in the consolidated statements of operations).
The Company generally contributes between 25% and 30% of the project cost of the joint ventures under development, with the remaining cost financed through third-party construction mortgages.
8. Deposits—Restricted
As of March 31, 2002, deposits-restricted totaled $210.5 million and primarily included the following:
9. Mortgage Notes Payable
As of March 31, 2002, the Company had outstanding mortgage indebtedness of approximately $3.3 billion.
During the quarter ended March 31, 2002, the Company:
As of March 31, 2002, scheduled maturities for the Company's outstanding mortgage indebtedness were at various dates through October 1, 2033. The interest rate range on the Company's mortgage debt was 1.30% to 12.465% at March 31, 2002. During the quarter ended March 31, 2002, the weighted average interest rate was 6.42%.
10. Notes
As of March 31, 2002, the Company had outstanding unsecured notes of approximately $2.6 billion.
As of March 31, 2002, scheduled maturities for the Company's outstanding notes are at various dates through 2029. The interest rate range on the Company's notes was 4.75% to 7.95% at March 31, 2002. During the quarter ended March 31, 2002, the weighted average interest rate was 6.39%.
11. Line of Credit
The Company has a revolving credit facility with potential borrowings of up to $700.0 million. As of March 31, 2002, no amounts were outstanding and $57.4 million was restricted (dedicated to support
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letters of credit and not available for borrowing) on the line of credit. During the quarter ended March 31, 2002, the weighted average interest rate was 2.50%.
12. Calculation of Net Income Per Weighted Average Common Share
The following tables set forth the computation of net income per share—basic and net income per share—diluted:
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Convertible preferred shares/units that could be converted into 15,853,687 and 10,831,704 weighted average Common Shares for the quarters ended March 31, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
On October 11, 2001, the Company effected a two-for-one split of its Common Shares and OP Units to shareholders and unitholders of record as of September 21, 2001. All per share and OP Unit data and numbers of Common Shares and OP Units have been retroactively adjusted to reflect the Common Share and OP Unit split.
13. Discontinued Operations
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002, which did not have a material effect on the Company's financial condition and results of operations.
Under the provisions of SFAS No. 144, for long-lived assets to be held and used, the Company first determines whether any indicators of impairment exist. If indicators exist, the Company compares the expected future undiscounted cash flows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recorded for the difference between the estimated fair value and the carrying amount of the asset.
For long-lived assets to be disposed of, an impairment loss is recognized when the estimated fair value of the asset, less the estimated cost to sell, is less than the carrying amount of the asset measured at the time that the Company has determined it will sell the asset. Long-lived assets held for disposition are reported at the lower or their carrying amounts or their estimated fair values, less their costs to sell.
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Goodwill and investments in unconsolidated entities accounted for under the equity method of accounting are specifically excluded from the scope of SFAS No. 144.
On January 11, 2002, the Company disposed of its furniture rental business for $30.0 million and received net proceeds of $28.7 million. No gain/loss on sale was recognized as the net book value at the sale date after giving effect to a previously recorded impairment loss approximated the sales price.
The components of discontinued operations for the quarters ended March 31, 2002 and 2001 are outlined below and include the results of operations through the date of each respective sale for the quarter ended March 31, 2002 and a full quarter of operations for the quarter ended March 31, 2001, for the following:
14. Commitments and Contingencies
The Company, as an owner of real estate, is subject to various environmental laws of Federal and local governments. Compliance by the Company with existing laws has not had a material adverse effect on the Company's financial condition and results of operations. However, the Company cannot predict the impact of new or changed laws or regulations on its current properties or on properties that it may acquire in the future.
The Company does not believe there is any litigation threatened against the Company other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by liability insurance, none of which is expected to have a material adverse effect on the consolidated financial statements of the Company.
In regards to the funding of properties in the development and/or earnout stage and the joint venture agreements with multifamily residential real estate developers, the Company funded a net total of $5.6 million during the quarter ended March 31, 2002. The Company expects to fund approximately
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$22.7 million in connection with these properties during the remainder of 2002. In connection with one joint venture agreement, the Company has an obligation to fund up to an additional $6.5 million to guarantee third party construction financing. As of March 31, 2002, the Company has 20 projects under development with estimated completion dates ranging from June 30, 2002 through March 31, 2004.
For one development joint venture agreement, the Company's joint venture partner has the right, at any time following completion of a project, to stipulate a value for such project and offer to sell its interest in the project to the Company based on such value. If the Company chooses not to purchase the interest, it must agree to a sale of the project to an unrelated third party at such value. The Company's joint venture partner must exercise this right as to all projects within five years after the receipt of the final certificate of occupancy on the last developed property.
Under a second development joint venture agreement, the Company's joint venture partner has the right, at any time following completion of a project, to require the Company to purchase the joint venture partners' interest in that project at a mutually agreeable price. If the Company and the joint venture partner are unable to agree on a price, both parties will obtain appraisals. If the appraised values vary by more than 10%, both the Company and the joint venture partner will agree on a third appraiser to determine which original appraisal is closest to its determination of value. The Company may elect at that time not to purchase the property and instead, authorize the joint venture partner to sell the project at or above the agreed-upon value to an unrelated third party. Five years following the receipt of the final certificate of occupancy on the last developed property, any projects remaining unsold must be purchased by the Company at the agreed-upon price.
The Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of March 31, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.
15. Asset Impairment
For the quarters ended March 31, 2002 and 2001, the Company recorded approximately $0.3 million and $3.0 million, respectively, of asset impairment charges related to its technology investments. These charges were the result of review of the existing investments reflected on the consolidated balance sheet. The Company reviewed the current relative value of each investment based on existing economic conditions and current events. These impairment losses are reflected on the statement of operations in total expenses and include the write-down of assets classified as other assets and investments in unconsolidated entities.
16. Reportable Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management. Senior management decides how resources are allocated and assesses performance on a monthly basis.
The Company's primary business is owning, managing, and operating multifamily residential properties, which includes the generation of rental and other related income through the leasing of apartment units to residents. Senior management evaluates the performance of each of our apartment communities on an individual basis, however, each of our apartment communities has similar economic characteristics, residents, and products and services so they have been aggregated into one reportable segment. The Company's rental real estate segment comprises approximately 98.9% and 97.9% of total revenues for the quarters ended March 31, 2002 and 2001, respectively. The Company's rental real estate segment comprises approximately 99.6% and 99.4% of total assets at March 31, 2002 and December 31, 2001, respectively.
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The primary financial measure for the Company's rental real estate segment is net operating income ("NOI"), which represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense (all as reflected in the accompanying statements of operations). Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance. NOI from our rental real estate totaled approximately $309.1 million and $308.1 million for the quarters ended March 31, 2002, and 2001, respectively.
During the acquisition, development and/or disposition of real estate, the NOI return on total capitalized costs is the primary measure of financial performance (capitalization rate) the Company considers.
The Company's fee and asset management activity are immaterial and do not meet the threshold requirements of a reportable segment as provided for in SFAS No. 131.
17. Subsequent Events
Subsequent to March 31, 2002 and through April 26, 2002, the Company:
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001.
Forward-looking statements in this report are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "believes", "expects" and "anticipates" and other similar expressions that are predictions of or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to, the following:
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Results of Operations
The following table summarizes the number of properties and related units for the year-to-date periods presented:
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The Company's acquisition and disposition activity has impacted overall results of operations for the quarters ended March 31, 2002 and 2001. Significant changes in revenues and expenses have resulted primarily from the consolidation of previously Unconsolidated Properties in July 2001, the disposition of the Globe furniture rental business on January 11, 2002, as well as the 2001 Acquisitions and Completed Development properties, which have been partially offset by the disposition of the 2002 and the 2001 Disposed properties. Significant change in expenses has also resulted from an increase in insurance costs and general and administrative costs and reductions in variable interest rates, impairment charges and goodwill amortization. This impact is discussed in greater detail in the following paragraphs.
Properties that the Company owned for all of the quarters ended March 31, 2002 and March 31, 2001 (the "First Quarter 2002 Same Store Properties"), which represented 197,305 units, also impacted the Company's results of operations and are discussed as well in the following paragraphs.
Comparison of the quarter ended March 31, 2002 to the quarter ended March 31, 2001
For the quarter ended March 31, 2002, income before allocation to Minority Interests, income from investments in unconsolidated entities, net gain on sales of unconsolidated entities, discontinued operations, extraordinary items and cumulative effect of change in accounting principle decreased by approximately $4.6 million when compared to the quarter ended March 31, 2001.
Revenues from the First Quarter 2002 Same Store Properties decreased primarily as a result of lower rental rates charged new residents, increased concessions and lower occupancy at certain properties. Property operating expenses from the First Quarter 2002 Same Store Properties, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, remained relatively stable with increases in real estate taxes and insurance costs offset by decreases in utility costs. The following tables provide comparative revenue, expenses, net operating income and weighted average occupancy for the First Quarter 2002 Same Store Properties:
Same Store Net Operating Income ("NOI")
$ in Millions—197,305 Same Store Units
Same Store Occupancy Rates
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For 2002 properties that the Company acquired prior to December 31, 2000 and will continue to own through December 31, 2002, the Company anticipates for the year ended December 31, 2002 to see the following operating assumptions:
2002 Operating Assumptions
These 2002 operating assumptions are based on current expectations and are forward-looking.
Rental income from properties other than First Quarter 2002 Same Store Properties increased by approximately $1.4 million primarily as a result of revenue from the Company's 2001 Acquired Properties and additional 2001 Partially Owned Properties.
Interest and other income decreased by approximately $2.4 million, primarily as a result of lower balances available for investment and related interest rates being earned on the Company's short-term investment accounts.
Interest income—investment in mortgage notes decreased by $2.7 million as a result of the Company consolidating these previously Unconsolidated Properties in July 2001. No additional interest income will be recognized on the mortgage notes in future years as the Company now consolidates the results related to these previously Unconsolidated Properties.
Property management expenses include off-site expenses associated with the self-management of the Company's properties. These expenses increased by approximately $0.3 million or less than 2%. The Company continues to acquire properties in major metropolitan areas and dispose of assets in smaller multi-family rental markets where the Company does not have a significant management presence. As a result, the Company was able to maintain off-site management expenses at a constant level between the two reporting periods.
Fee and asset management revenues and fee and asset management expenses decreased as a result of the Company managing fewer units quarter over quarter for outside owners and unconsolidated entities. As of March 31, 2002 and 2001, the Company managed 16,539 units and 20,300 units, respectively, for third parties and the unconsolidated joint venture entities.
The Company recorded impairment charges in 2002 totaling approximately $0.3 million, which is related to one investment in a technology entity. See Note 15 in the Notes to the Consolidated Financial Statements for further discussion.
Interest expense, including amortization of deferred financing costs, decreased approximately $5.1 million primarily due to lower variable interest rates. During the quarter ended March 31, 2002, the Company capitalized interest costs of approximately $5.9 million as compared to $6.0 million for the quarter ended March 31, 2001. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities. The effective interest cost on all of the Company's indebtedness for the quarter ended March 31, 2002 was 6.51% as compared to 7.07% for the quarter ended March 31, 2001.
General and administrative expenses, which include corporate operating expenses, increased approximately $4.0 million between the quarters under comparison. This increase was primarily due to the addition of income taxes from previously Unconsolidated Properties, retirement plan expenses for
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certain key executives, and higher overall compensation expenses including a current expense associated with restricted shares/awards granted to key employees.
Net gain on sales of unconsolidated entities increased by $5.7 million as a result of the sale of one stabilized development joint venture property (296 units).
Net gain on sales of discontinued operations decreased approximately $39.0 million between the periods under comparison. This decrease is primarily the result of a fewer number of units sold during the quarter ended March 31, 2002 (461 units) as compared to the quarter ended March 31, 2001 (5,283 units including interests in properties sold into institutional joint ventures).
Liquidity and Capital Resources
As of January 1, 2002, the Company had approximately $51.6 million of cash and cash equivalents and $505.0 million available under its line of credit, of which $59 million was restricted (not available for borrowings). After taking into effect the various transactions discussed in the following paragraphs and for borrowings the net cash provided by operating activities, the Company's cash and cash equivalents balance at March 31, 2002 was approximately $249.8 million and the amount available on the Company's line of credit was $700.0 million, of which $57.4 million was restricted (not available for borrowings).
Part of the Company's acquisition and development funding strategy and the funding of the Company's investment in various joint ventures is to utilize its line of credit and to subsequently repay the line of credit from the disposition of properties, retained cash flows or the issuance of additional equity or debt securities. Continuing to utilize this strategy during the quarter ended March 31, 2002, the Company:
All of these proceeds were utilized to either:
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The Company's total debt summary and debt maturity schedule, as of March 31, 2002, are as follows:
Debt Summary as of March 31, 2002
Debt Maturity Schedule as of March 31, 2002
The Company's "Consolidated Debt-to-Total Market Capitalization Ratio" as of March 31, 2002 is presented in the following table. The Company calculates the equity component of its market capitalization as the sum of (i) the total outstanding Common Shares and assumed conversion of all OP Units at the equivalent market value of the closing price of the Company's Common Shares on the New York Stock Exchange; (ii) the "Common Share Equivalent" of all convertible preferred shares and
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preference interests/units; and (iii) the liquidation value of all perpetual preferred shares and preference interests outstanding.
Capitalization as of March 31, 2002
Convertible Preferred Shares, Preference Interests and Junior Preference UnitsAs of March 31, 2002
The Company's policy is to maintain a ratio of consolidated debt-to-total market capitalization of less than 50%.
From April 1, 2002 through April 26, 2002, the Company:
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During the remainder of 2002, the Company expects to fund approximately $22.7 million related to wholly owned developments and joint venture projects under development. In connection with one joint venture agreement, the Company has an obligation to fund up to an additional $6.5 million to guarantee third party construction financing. As of March 31, 2002, the Company has 20 projects under development with estimated completion dates ranging from June 30, 2002 through March 31, 2004.
During the quarter ended March 31, 2002, the Company's total improvements to real estate approximated $27.7 million. Replacements, which include new carpeting, appliances, mechanical equipment, fixtures, vinyl floors and blinds inside the unit approximated $10.9 million, or $55 per unit. Building improvements for the 2000, 2001 and 2002 Acquired Properties approximated $1.5 million, or $89 per unit. Building improvements for all of the Company's pre-2000 Acquired Properties approximated $12.5 million or $69 per unit. In addition, approximately $1.1 million was spent on one specific asset related to major renovations and repositioning of this asset. Also included in total improvements to real estate was approximately $1.7 million on commercial/other assets and Partially Owned Properties. Such improvements to real estate were primarily funded from net cash provided by operating activities. Total improvements to real estate for the remainder of 2002 are estimated at $100.0 million.
During the quarter ended March 31, 2002, the Company's total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company's property management offices and its corporate offices, was approximately $3.0 million. Such additions to non-real estate property were funded from net cash provided by operating activities. Total additions to non-real estate property for the remainder of 2002 are estimated at $3.8 million.
Minority Interests as of March 31, 2002 decreased by $1.7 million when compared to December 31, 2001. The primary factors that impacted this account in the Company's consolidated statements of operations and balance sheets during the quarter were:
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Total distributions paid in April 2002 amounted to $147.3 million (excluding distributions on Partially Owned Properties), which included certain distributions declared during the quarter ended March 31, 2002.
The Company expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and certain scheduled unsecured note and mortgage note repayments, generally through its working capital, net cash provided by operating activities and borrowings under its line of credit. The Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The Company also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities, including additional OP Units, and proceeds received from the disposition of certain properties. In addition, the Company has certain unencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable to the Company or the cost of alternative sources of capital to the Company is too high. These unencumbered properties are in excess of the value of unencumbered properties the Company must maintain in order to comply with covenants under its unsecured notes and line of credit.
The Company has a revolving credit facility with potential borrowings of up to $700.0 million. As of May 7, 2002, no amounts were outstanding under this facility. This credit facility is scheduled to expire in August 2002 and the Company has begun the process of replacing its line of credit with a new line of credit, which it believes will be on at least as favorable terms.
The Company provided a credit enhancement with respect to certain tax-exempt bonds issued to finance certain public improvements at a multifamily development project. As of May 1, 2002, this enhancement was still in effect at a commitment amount of $12.7 million.
Critical Accounting Policies and Estimates
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and the related disclosures. The Company believes that the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Impairment of Long-Lived Assets, Including Goodwill
The Company periodically evaluates its long-lived assets, including its investments in real estate and goodwill, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal factors. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted.
Depreciation of Investment in Real Estate
The Company depreciates the building component of its investment in real estate over a 30-year estimated useful life, building improvements over a 5-year to 10-year estimated useful life and both the furniture, fixtures and equipment and replacements components over a 5-year estimated useful life, all of which are judgmental determinations.
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Fair Value of Financial Instruments, Including Derivative Instruments
The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on other factors relevant to the financial instruments.
Stock Option Compensation
The Company has chosen to account for its stock option compensation in accordance with APB No. 25, which results in no compensation expense for options issued with an exercise price equal to or exceeding market value of the Company's Common Shares on the date of grant, instead of Statement No. 123, which would result in compensation expense being recorded based on the fair value of the stock option compensation issued.
Adjusted Net Income
For the quarter ended March 31, 2002, Adjusted Net Income ("ANI") available to Common Shares and OP units decreased $10.6 million as compared to the quarter ended March 31, 2001.
The following is a reconciliation of net income available to Common Shares to ANI available to Common Shares and OP Units for the quarters ended March 31, 2002 and 2001:
Adjusted Net Income (Amounts in thousands)(Unaudited)
The Company believes that ANI is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. ANI in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not
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be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Company's calculation of ANI may differ from the methodology for calculating ANI utilized by other real estate companies and may differ, for example, due to variations among the Company's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.
Funds From Operations
For the quarter ended March 31, 2002, Funds From Operations ("FFO") available to Common Shares and OP Units decreased $0.1 million as compared to the quarter ended March 31, 2001.
The following is a reconciliation of net income available to Common Shares to FFO available to Common Shares and OP Units for the quarters ended March 31, 2002 and 2001:
Funds from Operations (Amounts in thousands)(Unaudited)
The Company believes that FFO is helpful to investors as a supplemental measure of the operating performance of a real estate company because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company to incur and service debt and to make capital expenditures. FFO in and of itself does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by GAAP as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. The Company's calculation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies and may differ, for example, due to variations among the Company's and other real estate companies' accounting policies for replacement type items and, accordingly, may not be comparable to such other real estate companies.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no new or significant developments related to the legal proceedings that were discussed in Part I, Item III of the Company's Form 10-K for the year ended December 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.
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