FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-12252 EQUITY RESIDENTIAL PROPERTIES TRUST (Exact Name of Registrant as Specified in Its Charter) MARYLAND 13-3675988 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606 (Address of Principal Executive Offices) (Zip Code) (312) 474-1300 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE USERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: AT AUGUST 5, 1999, 122,299,926 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) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1999 1998 ---------------- ---------------- <S> <C> <C> ASSETS Investment in real estate Land $ 1,373,812 $ 1,326,148 Depreciable property 9,730,434 9,519,579 Construction in progress 59,744 96,336 ---------------- ---------------- 11,163,990 10,942,063 Accumulated depreciation (902,351) (718,491) ---------------- ---------------- Investment in real estate, net of accumulated depreciation 10,261,639 10,223,572 Real estate held for disposition 32,844 29,886 Cash and cash equivalents 95,496 3,965 Investment in mortgage notes, net 85,882 88,041 Rents receivable 957 4,758 Deposits - restricted 70,701 69,339 Escrow deposits - mortgage 68,416 68,725 Deferred financing costs, net 28,932 27,569 Other assets 196,942 184,405 ---------------- ---------------- TOTAL ASSETS $ 10,841,809 $ 10,700,260 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $ 2,323,247 $ 2,341,011 Notes, net 2,299,497 2,049,516 Lines of credit 85,000 290,000 Accounts payable and accrued expenses 107,763 100,926 Accrued interest payable 45,000 46,176 Rents received in advance and other liabilities 57,943 54,616 Security deposits 35,967 37,439 Distributions payable 114,103 18,755 ---------------- ---------------- TOTAL LIABILITIES 5,068,520 4,938,439 ---------------- ---------------- COMMITMENTS AND CONTINGENCIES Minority Interests 419,316 431,374 ---------------- ---------------- Shareholders' equity: Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized; 26,110,352 shares issued and outstanding as of June 30, 1999 and 29,097,951 shares issued and outstanding as of December 31, 1998 1,335,884 1,410,574 Common Shares of beneficial interest, $.01 par value; 350,000,000 shares authorized; 122,236,781 shares issued and outstanding as of June 30, 1999 and 118,230,009 shares issued and outstanding as of December 31, 1998 1,222 1,182 Paid in capital 4,305,522 4,169,102 Employee notes (4,778) (4,873) Distributions in excess of accumulated earnings (283,877) (245,538) ---------------- ---------------- Total shareholders' equity 5,353,973 5,330,447 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,841,809 $ 10,700,260 ================ ================ </TABLE> SEE ACCOMPANYING NOTES 2
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED QUARTER ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ---------------------------- ---------------------------- <S> <C> <C> <C> <C> REVENUES Rental income $ 819,178 $ 571,370 $ 413,116 $ 294,144 Fee and asset management 2,414 2,790 1,180 1,430 Interest income - investment in mortgage notes 5,644 10,221 2,749 5,290 Interest and other income 11,323 9,010 5,277 6,186 ------------ ------------- ------------ ----------- Total revenues 838,559 593,391 422,322 307,050 EXPENSES Property and maintenance 196,865 138,303 99,818 71,391 Real estate taxes and insurance 84,515 56,484 42,467 29,041 Property management 27,973 25,007 13,772 13,516 Fee and asset management 1,624 2,247 757 1,197 Depreciation 197,134 131,910 100,233 67,520 Interest: Expense incurred 158,499 105,651 79,302 55,397 Amortization of deferred financing costs 1,661 1,275 816 651 General and administrative 10,914 9,974 5,047 5,203 ------------ ------------- ------------ ----------- Total expenses 679,185 470,851 342,212 243,916 Income before gain on disposition of properties, net, extraordinary item and allocation to Minority 159,374 122,540 80,110 63,134 Interests Gain on disposition of properties, net 45,807 11,092 24,391 9,223 ------------ ------------- ------------ ----------- Income before extraordinary item and allocation to Minority Interests 205,181 133,632 104,501 72,357 Loss on early extinguishment of debt (451) - (451) - ------------ ------------- ------------ ----------- Income before allocation to Minority Interests 204,730 133,632 104,050 72,357 Income allocated to Minority Interests (14,514) (8,310) (7,388) (4,622) ------------ ------------- ------------ ----------- Net income 190,216 125,322 96,662 67,735 Preferred distributions (57,111) (43,384) (27,734) (21,692) ------------ ------------- ------------ ----------- Net income available to Common Shares $ 133,105 $ 81,938 $ 68,928 $ 46,043 ============ ============= ============ =========== Weighted average Common Shares outstanding 119,762 95,394 120,558 97,405 ============ ============= ============ =========== Distributions declared per Common Share outstanding $ 1.42 $ 1.34 $ 0.71 $ 0.67 ============ ============= ============ =========== Net income per weighted average Common Share outstanding $ 1.11 $ 0.86 $ 0.57 $ 0.47 ============ ============= ============ =========== Net income per weighted average Common Share outstanding - assuming dilution $ 1.11 $ 0.85 $ 0.57 $ 0.47 ============ ============= ============ =========== </TABLE> SEE ACCOMPANYING NOTES 3
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ------------------------------------- 1999 1998 ------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 190,216 $ 125,322 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Income allocated to Minority Interests 14,514 8,310 Depreciation 197,134 131,910 Amortization of deferred financing costs 1,661 1,275 Amortization of discounts and premiums on debt (1,172) (1,026) Amortization of treasury locks and options on debt 513 976 Amortization of discount on investment in mortgage notes - (1,000) Gain on disposition of properties, net (45,807) (11,092) CHANGES IN ASSETS AND LIABILITIES: Decrease (increase) in rents receivable 3,428 (1,825) (Increase) in deposits - restricted (4,342) (4,537) Decrease in other assets 51,052 3,000 Increase in accounts payable and accrued expenses 6,936 11,466 (Decrease) increase in accrued interest payable (1,176) 6,904 (Decrease) increase in security deposits (1,577) 5,607 Increase (decrease) in rents received in advance and other liabilities 6,411 (3,337) --------------- --------------- Net cash provided by operating activities 417,791 271,953 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in real estate, net (200,613) (499,239) Improvements to real estate (55,783) (32,397) Additions to non-real estate property (3,640) (4,445) Interest capitalized to real estate developments (943) (811) Proceeds from disposition of real estate, net 125,150 40,488 Purchase of management contract rights (285) (119) Decrease (increase) in mortgage deposits 131 (12,791) Decrease (increase) in deposits on real estate acquisitions, net 2,961 (7,781) Decrease in investment in mortgage notes 2,159 963 Investment in limited partnerships (44,314) (13,042) Costs related to Mergers (4,002) (1,851) Other investing activities 603 (10,583) --------------- --------------- Net cash used by investing activities (178,576) (541,608) --------------- --------------- </TABLE> SEE ACCOMPANYING NOTES 4
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ------------------------------------- 1999 1998 ------------------------------------- <S> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of Common Shares 5,661 419,619 Proceeds from exercise of options 24,254 4,459 Payment of offering costs (296) (10,314) Principal receipts on employee notes 95 196 Principal receipts on pledged notes receivable 7,375 - DISTRIBUTIONS: Common Shares (84,672) (64,258) Preferred Shares (57,111) (44,894) Minority Interests (9,654) (6,733) MORTGAGE NOTES PAYABLE: Proceeds 62,885 - Payoffs (54,231) (34,141) Monthly principal payments (8,400) (5,663) NOTES, NET: Proceeds 298,014 306,255 Payoffs (125,000) - LINES OF CREDIT: Proceeds 689,000 175,000 Payments (894,000) (235,000) Loss on early extinguishment of debt 451 - Loan and bond acquisition costs (2,055) (2,251) ---------------- --------------- Net cash (used by) provided by financing activities (147,684) 502,275 ---------------- --------------- Net increase in cash and cash equivalents 91,531 232,620 Cash and cash equivalents, beginning of period 3,965 33,295 ---------------- --------------- Cash and cash equivalents, end of period $ 95,496 $ 265,915 ================ =============== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 160,618 $ 98,747 ================ =============== Mortgage loans assumed and/or entered into through acquisitions of real estate $ 58,320 $ 232,801 ================ =============== Net real estate contributed in exchange for OP Units or Preference Units $ 14,183 $ 16,270 ================ =============== Transfers to real estate held for disposition $ 32,844 $ - ================ =============== Refinancing of mortgage notes payable in favor of notes, net $ 75,790 $ - ================ =============== </TABLE> SEE ACCOMPANYING NOTES 5
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) DEFINITION OF SPECIAL TERMS: Capitalized terms used but not defined in this Quarterly Report on Form 10-Q are as defined in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 ("Form 10-K"). 1. BUSINESS As used herein, the term "Company" means Equity Residential Properties Trust ("EQR") and its subsidiaries as the survivor of the mergers between EQR and each of Wellsford Residential Property Trust ("Wellsford") (the "Wellsford Merger"), Evans Withycombe Residential, Inc. ("EWR") (the "EWR Merger") and Merry Land & Investment Company, Inc. ("MRY") (the "MRY Merger"). The Company is engaged in the acquisition, ownership and operation of multifamily properties and is a self-administered and self-managed equity real estate investment trust ("REIT"). As of June 30, 1999, the Company controlled a portfolio of 659 multifamily properties (individually a "Property" and collectively the "Properties"). The Company's interest in six of these Properties consists solely of ownership of debt collateralized by such Properties. The Company also has an investment in partnership interests and subordinated mortgages collateralized by 21 properties and an investment in six joint ventures consisting of six properties (collectively, the "Additional Properties"). 2. BASIS OF PRESENTATION The balance sheet and statements of operations and cash flows as of and for the six months and quarter ended June 30, 1999 represent the consolidated financial information of the Company and its subsidiaries. Due to the Company's ability as general partner to control either through ownership or by contract the Operating Partnership, the Management Partnerships, the Financing Partnerships, the LLCs and Merry Land DownREIT I LP, each such entity has been consolidated with the Company for financial reporting purposes. In regard to Management Corp., Management Corp. II, Evans Withycombe Management, Inc. and ML Services, Inc., the Company does not have legal control; however, these entities are consolidated for financial reporting purposes, the effects of which are immaterial. Certain reclassifications have been made to the prior year's financial statements in order to conform to the current year presentation. These unaudited Consolidated Financial Statements of the Company have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K. The following Notes to Consolidated Financial Statements highlight significant changes to the notes included in the Form 10-K and present interim disclosures as required by the SEC. The accompanying Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. 6
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS The following table presents the changes in the Company's issued and outstanding Common Shares for the six months ended June 30, 1999: <TABLE> <S> <C> ------------------------------------------------------------------------------ Common Shares outstanding at January 1, 1999 118,230,009 COMMON SHARES ISSUED: Conversion of Series H Preferred Shares 5,495 Conversion of Series I Preferred Shares 1,912,263 Employee Share Purchase Plan 98,483 Dividend Reinvestment - DRIP Plan 9,838 Share Purchase - DRIP Plan 12,716 Exercise of options 705,393 Restricted share grants, net 300,738 Conversion of OP Units 931,586 Profit-sharing contribution/401(k) Plan 30,260 ------------------------------------------------------------------------------ Common Shares outstanding at June 30, 1999 122,236,781 ------------------------------------------------------------------------------ </TABLE> The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for a partnership interest are collectively referred to as the "Minority Interests". As of June 30, 1999, the Minority Interests held 12,644,403 OP Units, which included the OP Unit equivalent of 157,382 for the Junior Convertible Preference Units that were outstanding at June 30, 1999. As a result, the Minority Interests had a 9.37% interest in the Operating Partnership at June 30, 1999. Assuming conversion of all OP Units and Junior Convertible Preference Units into Common Shares, total Common Shares outstanding at June 30, 1999 would have been 134,881,184. Net proceeds from the Company's Common Share offerings are contributed by the Company to the Operating Partnership in return for an increased ownership percentage and are treated as capital transactions in the Company's Consolidated Financial Statements. As a result, the net offering proceeds are allocated between shareholders' equity and Minority Interests to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership. The following table presents the Company's issued and outstanding Preferred Shares as of June 30, 1999 and December 31, 1998 (amounts are in thousands): 7
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) <TABLE> <CAPTION> ---------------------------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, 1999 1998 ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Preferred Shares of beneficial interest, $.01 par value; 100,000,000 shares authorized: 9 3/8% Series A Cumulative Redeemable Preferred $ 153,000 $ 153,000 $25 per share, 6,120,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 9 1/8% Series B Cumulative Redeemable Preferred 125,000 125,000 $250 per share, 500,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 9 1/8% Series C Cumulative Redeemable Preferred 115,000 115,000 $250 per share, 460,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 8.60% Series D Cumulative Redeemable Preferred 175,000 175,000 $250 per share, 700,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 Series E Cumulative Convertible Preferred 99,925 99,925 $25 per share, 3,997,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 9.65% Series F Cumulative Redeemable Preferred 57,500 57,500 $25 per share, 2,300,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 7 1/4% Series G Convertible Cumulative Preferred 316,250 316,250 $250 per share, 1,265,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 7.00% Series H Cumulative Convertible Preferred 3,724 3,914 $25 per share, 148,952 and 156,551 shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively 8.82% Series I Cumulative Convertible Preferred 25,500 100,000 $25 per share, 1,020,000 and 4,000,000 shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively 8.60% Series J Cumulative Convertible Preferred 114,985 114,985 $25 per share, 4,599,400 shares issued and outstanding at June 30, 1999 and December 31, 1998 8.29% Series K Cumulative Redeemable Preferred 50,000 50,000 $50 per share, 1,000,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 7.625% Series L Cumulative Redeemable Preferred 100,000 100,000 $25 per share, 4,000,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 ---------------------------------------------------------------------------------------------------------- $ 1,335,884 $ 1,410,574 ---------------------------------------------------------------------------------------------------------- </TABLE> 8
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following table summarizes the distributions paid to Preferred and Depositary Shareholders and Common Shareholders related to the six months ended June 30, 1999: <TABLE> <CAPTION> FOR THE DIVIDEND QUARTER OR PERIOD RECORD AMOUNT DATE PAID ENDED DATE --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Series A Preferred Share holders $0.5859380 04/15/99 03/31/99 03/19/99 $0.5859370 07/15/99 06/30/99 06/18/99 Series B Depositary Share holders $0.5703130 04/15/99 03/31/99 03/19/99 $0.5703120 07/15/99 06/30/99 06/18/99 Series C Depositary Share holders $0.5703130 04/15/99 03/31/99 03/19/99 $0.5703120 07/15/99 06/30/99 06/18/99 Series D Depositary Share holders $0.5375000 04/15/99 03/31/99 03/19/99 $0.5375000 07/15/99 06/30/99 06/18/99 Series E Preferred Share holders $0.4375000 04/01/99 03/31/99 03/19/99 $0.4375000 07/01/99 06/30/99 06/18/99 Series F Preferred Share holders $0.6031250 04/15/99 03/31/99 03/19/99 $0.6031250 07/15/99 06/30/99 06/18/99 Series G Depositary Share holders $0.4531250 04/15/99 03/31/99 03/19/99 $0.4531250 07/15/99 06/30/99 06/18/99 Series H Preferred Share holders $0.4375000 03/31/99 03/31/99 03/19/99 $0.4375000 06/30/99 06/30/99 06/18/99 Series I Preferred Share holders $0.5512500 03/31/99 03/31/99 03/19/99 $0.5512500 06/30/99 06/30/99 06/18/99 Series J Preferred Share holders $0.5375000 03/31/99 03/31/99 03/19/99 $0.5375000 06/30/99 06/30/99 06/18/99 Series K Preferred Share holders $1.0362500 03/31/99 03/31/99 03/19/99 $1.0362500 06/30/99 06/30/99 06/18/99 Series L Preferred Share holders $0.4765625 03/31/99 03/31/99 03/19/99 $0.4765625 06/30/99 06/30/99 06/18/99 Common Shares $ 0.71 04/09/99 03/31/99 03/19/99 $ 0.71 07/09/99 06/30/99 06/18/99 </TABLE> 4. REAL ESTATE ACQUISITIONS During the six months ended June 30, 1999, the Company acquired the sixteen Properties listed below, of which nine were acquired from unaffiliated third parties and seven were acquired from an affiliated party. In connection with certain of the acquisitions listed below, the Company 9
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) assumed mortgage indebtedness of approximately $58.3 million, issued OP Units having a value of approximately $11.3 million and issued Junior Convertible Preference Units having a value of approximately $2.9 million. The cash portion of these transactions was funded primarily from proceeds received from the disposition of certain properties and working capital. <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- DATE NUMBER PURCHASE PRICE ACQUIRED PROPERTY LOCATION OF UNITS (IN THOUSANDS) - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 01/22/99 Fireside Park Rockville, MD 236 $14,279 01/22/99 Mill Pond Glen Burnie, MD 240 11,745 01/28/99 Aspen Crossing Wheaton, MD 192 11,386 02/24/99 Copper Canyon Highlands Ranch, CO 222 16,200 03/04/99 Siena Terrace Lake Forest, CA 356 33,000 03/23/99 Greenbriar Kirkwood, MO 218 12,033 03/24/99 Fairland Gardens Silver Spring, MD 400 25,897 04/28/99 Pine Tree Club Wildwood, MO 150 7,988 04/28/99 Westbrooke Village I & II Manchester, MO 252 12,642 04/29/99 Brookside Frederick, MD 228 10,809 04/30/99 Skyview Rancho Santa Margarita, CA 260 21,800 05/20/99 Lincoln at Defoors Atlanta, GA 300 25,500 05/25/99 Rosecliff Quincy, MA 156 18,263 05/25/99 Canyon Crest Santa Clarita, CA 158 12,500 06/29/99 Greentree I Glen Burnie, MD 350 15,625 06/29/99 Greentree III Glen Burnie, MD 207 9,598 - ---------------------------------------------------------------------------------------------------------------- 3,925 $259,265 - ---------------------------------------------------------------------------------------------------------------- </TABLE> 5. REAL ESTATE DISPOSITIONS During the six months ended June 30, 1999, the Company disposed of the eleven Properties listed below to unaffiliated third parties. The Company recognized a net gain for financial reporting purposes of approximately $45.8 million. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------- DISPOSITION DATE NUMBER PRICE DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS) ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 01/06/99 Fox Run Little Rock, AR 337 $10,623 01/06/99 Greenwood Forest Little Rock, AR 239 7,533 01/06/99 Walnut Ridge Little Rock, AR 252 7,943 01/06/99 Williamsburg Little Rock, AR 211 6,651 01/27/99 The Hawthorne Phoenix, AZ 276 20,500 03/02/99 The Atrium Durham, NC 208 10,750 03/24/99 Greenbriar Kirkwood, MO 218 12,525 05/06/99 Sandstone at Bear Creek Euless, TX 40 2,075 05/12/99 La Costa Brava/Cedar Cove Jacksonville, FL 464 17,650 05/18/99 Lands End Pacifica , CA 260 30,100 ------------------------------------------------------------------------------------------------------- 2,505 $126,350 ------------------------------------------------------------------------------------------------------- </TABLE> 10
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE As of June 30, 1999, in addition to the Properties that were subsequently acquired as discussed in Note 14 of the Notes to Consolidated Financial Statements, the Company entered into an agreement to acquire one multifamily property containing 919 units from an unaffiliated third party. The expected purchase price is approximately $128 million. As of June 30, 1999, in addition to the Properties that were subsequently disposed of as discussed in Note 14 of the Notes to Consolidated Financial Statements, the Company entered into separate agreements to dispose of eleven multifamily properties containing 2,522 units to unaffiliated third parties. The expected combined disposition price is approximately $88.4 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. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE COMMON SHARE The following tables set forth the computation of net income per weighted average Common Share outstanding and net income per weighted average Common Share outstanding - assuming dilution. 11
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, QUARTER ENDED JUNE 30, --------------------------------- ------------------------------ 1999 1998 1999 1998 --------------------------------- ------------------------------ (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> NUMERATOR: Income before gain on disposition of properties, net, extraordinary item, allocation of income to Minority Interests and preferred distributions $ 159,374 $ 122,540 $ 80,110 $ 63,134 Allocation of income to Minority Interests (14,514) (8,310) (7,388) (4,622) Distributions to preferred shareholders (57,111) (43,384) (27,734) (21,692) --------------------------------- -------------------------------- Income before gain on disposition of properties, net and extraordinary item 87,749 70,846 44,988 36,820 Gain on disposition of properties, net 45,807 11,092 24,391 9,223 Loss on early extinguishment of debt (451) - (451) - --------------------------------- -------------------------------- Numerator for net income per weighted average Common Share outstanding 133,105 81,938 68,928 46,043 Effect of dilutive securities: Allocation of income to Minority Interests 14,514 8,310 7,388 4,622 --------------------------------- -------------------------------- Numerator for net income per weighted average Common Share outstanding - assuming dilution $ 147,619 $ 90,248 $ 76,316 $ 50,665 ================================= ================================ DENOMINATOR: Denominator for net income per weighted Average Common Share outstanding 119,762 95,394 120,558 97,405 Effect of dilutive securities: Contingent incremental employee share options 742 1,118 908 1,047 OP Units 13,064 9,683 12,920 9,777 --------------------------------- -------------------------------- Denominator for net income per weighted average Common Share outstanding - assuming dilution 133,568 106,195 134,386 108,229 ================================= ================================ Net income per weighted average Common Share outstanding $ 1.11 $ 0.86 $ 0.57 $ 0.47 ================================= ================================ Net income per weighted average Common Share outstanding - assuming dilution $ 1.11 $ 0.85 $ 0.57 $ 0.47 ================================= ================================ </TABLE> 12
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, QUARTER ENDED JUNE 30, --------------------------------- ---------------------------- 1999 1998 1999 1998 --------------------------------- ---------------------------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> NET INCOME PER WEIGHTED AVERAGE COMMON SHARE OUTSTANDING: Income before gain on disposition of properties, net and extraordinary item per weighted average Common Share outstanding $ 0.77 $ 0.75 $ 0.39 $ 0.39 Gain on disposition of properties, net 0.34 0.11 0.18 0.08 Loss on early extinguishment of debt - - - - ---------------- --------------- -------------- --------------- Net income per weighted average Common Share outstanding $ 1.11 $ 0.86 $ 0.57 $ 0.47 ================ =============== ============== =============== NET INCOME PER WEIGHTED AVERAGE COMMON SHARE OUTSTANDING - ASSUMING DILUTION: Income before gain on disposition of properties, net and extraordinary item per weighted average Common Share outstanding - assuming dilution $ 0.77 $ 0.75 $ 0.39 $ 0.38 Gain on disposition of properties, net 0.34 0.10 0.18 0.09 Loss on early extinguishment of debt - - - - ---------------- --------------- -------------- --------------- Net income per weighted average Common Share outstanding - assuming dilution $ 1.11 $ 0.85 $ 0.57 $ 0.47 ================ =============== ============== =============== </TABLE> CONVERTIBLE PREFERRED SHARES THAT COULD BE CONVERTED INTO 12,761,757 AND 7,623,664 WEIGHTED COMMON SHARES FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998, AND 12,404,422 AND 7,623,507 WEIGHTED COMMON SHARES FOR THE QUARTER ENDED JUNE 30, 1999 AND 1998, RESPECTIVELY, WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS PER SHARE BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE. 13
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 8. MORTGAGE NOTES PAYABLE On June 1, 1999, the Company refinanced the debt on four existing properties with a net increase in mortgage indebtedness of approximately $18.0 million. During the quarter ended June 30, 1999, the Company repaid the outstanding mortgage balances on two Properties in the aggregate amount of $9.3 million. In connection with the above transactions, the Company incurred prepayment penalties of $0.5 million, which have been classified as losses on early extinguishment of debt. As of June 30, 1999, the Company had outstanding mortgage indebtedness of approximately $2.3 billion encumbering 217 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $312.7 million) was approximately $3.7 billion. The mortgage notes payables are generally due in monthly installments of principal and interest. In connection with the Properties acquired during the six months ended June 30, 1999, the Company assumed the outstanding mortgage balances on seven Properties in the aggregate amount of $58.3 million. As of June 30, 1999, scheduled maturities for the Company's outstanding mortgage indebtedness are at various dates through October 1, 2030. During the six months ended June 30, 1999, the effective interest cost on all of the Company's debt was 7.02%. 9. NOTES On May 15, 1999, the Company repaid the 1999 Notes. On June 17, 1999, the Company refinanced the bond indebtedness collateralized by four existing properties. The bond indebtedness on all four properties totaling $75.8 million is now unsecured. In June 1999, the Operating Partnership issued $300 million of redeemable unsecured fixed rate notes (the "June 2004 Notes") in connection with the Debt Shelf Registration in a public debt offering (the "Seventh Public Debt Offering"). The June 2004 Notes were issued at a discount, which is being amortized over the life of the June 2004 Notes on a straight-line basis. The June 2004 Notes are due June 23, 2004. The annual interest rate on the June 2004 Notes is 7.10%, which is payable semiannually in arrears on December 23 and June 23, commencing December 23, 1999. The Operating Partnership received net proceeds of approximately $298 million in connection with this issuance. As of June 30, 1999, the Company had outstanding unsecured notes of approximately $2.3 billion, net of a $5.0 million discount and including an $8.1 million premium. 10. LINES OF CREDIT The Company has a revolving credit facility with Morgan Guaranty Trust Company of New York ("Morgan Guaranty") and Bank of America Illinois ("Bank of America") as co-agents 14
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) to provide the Operating Partnership with potential borrowings of up to $500 million. As of June 30, 1999, $40 million was outstanding under this facility, bearing interest at a weighted average rate of 5.40%. In connection with the MRY Merger, the Company assumed an additional credit facility with First Union Bank as agent with potential borrowings of up to $120 million. As of June 30, 1999, $45 million was outstanding under this facility, bearing interest at a weighted average rate of 5.46%. 11. DEPOSITS - RESTRICTED Deposits-restricted as of June 30, 1999 primarily included a deposit in the amount of $25 million held in a third party escrow account to provide collateral for third party construction financing in connection with two separate joint venture agreements. Also, approximately $19.3 million was held in third party escrow accounts, representing proceeds received in connection with the Company's disposition of three properties and earnest money deposits made for additional acquisitions. In addition, approximately $26.4 million was for tenant security, utility deposits, and other deposits for certain of the Company's Properties. 12. 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 regard to the joint venture agreements with two multifamily residential real estate developers during the six months ended June 30, 1999, the Company funded a total of $44.3 million and during the remainder of 1999 the Company expects to fund approximately $24.1 million in connection with these agreements. Also in connection with these two agreements, the Company has an obligation to fund up to an additional $55 million to guarantee third party construction financing. In regard to certain other properties that were under development and/or expansion during the six months ended June 30, 1999, the Company funded $7.9 million. During the remainder of 1999, the Company expects to fund $43.1 million related to the continued development and/or expansion of as many as five Properties. 15
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) In regards to certain properties that were under earnout/development agreements, during the six months ended June 30, 1999, the Company funded the following: - - $16.2 million relating to the acquisition of Copper Canyon Apartments, - - $22.8 million relating to the acquisition of Skyview Apartments, which included a $1.0 million advance of the earnout payment to the developer of Skyview; and - - $18.3 million relating to the acquisition of Rosecliff Apartments. Subsequent to June 30, 1999, the Company funded an additional $1 million earnout payment to the developer of Copper Canyon as certain specified operation levels were achieved. During the remainder of 1999, the Company expects to fund approximately $3.1 million related to other earnout/development projects. In connection with the Wellsford Merger, the Company has provided a $14.8 million credit enhancement with respect to bonds issued to finance certain public improvements at a multifamily development project. Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real Properties, Inc. ("WRP Newco"), the Company has agreed to purchase up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per share on a standby basis over a three-year period ending on May 30, 2000. As of June 30, 1999, no shares of WRP Newco Series A Preferred had been acquired by the Company. In connection with the MRY Merger, the Company extended a $25 million, one year, non-revolving Senior Debt Agreement to MRYP Spinco. On June 24, 1999, MRYP Spinco repaid the Senior Note outstanding balance of $18.3 million and there is no further obligation by either party in connection with this agreement. 13. REPORTABLE SEGMENTS The following tables set forth the reconciliation of net income and total assets for the Company's reportable segments for the six months and quarter ended June 30, 1999 and net income for the six months and quarter ended June 30, 1998. 16
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1999 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Rental income $ 819,178 $ - $ 819,178 Property and maintenance expense (196,865) - (196,865) Real estate tax and insurance expense (84,515) - (84,515) Property management expense (27,973) - (27,973) ----------------------------------------------------- Net operating income 509,825 - 509,825 Fee and asset management income - 2,414 2,414 Interest income - investment in mortgage notes - 5,644 5,644 Interest and other income - 11,323 11,323 Fee and asset management expense - (1,624) (1,624) Depreciation expense on non-real estate assets - (3,423) (3,423) Interest expense: Expense incurred - (158,499) (158,499) Amortization of deferred financing costs - (1,661) (1,661) General and administrative expense - (10,914) (10,914) Preferred distributions - (57,111) (57,111) Adjustment for depreciation expense related to equity in unconsolidated joint ventures - 551 551 ----------------------------------------------------- Funds from operations available to Common Shares and OP Units 509,825 (213,300) 296,525 Depreciation expense on real estate assets (193,711) - (193,711) Gain on disposition of properties, net 45,807 - 45,807 Loss on early extinguishment of debt (451) (451) Income allocated to Minority Interests - (14,514) (14,514) Adjustment for depreciation expense related to equity in unconsolidated joint ventures - (551) (551) ----------------------------------------------------- Net income available to Common Shares $ 361,921 $ (228,816) $ 133,105 ===================================================== Investment in real estate, net of accumulated depreciation as of June 30, 1999 $10,246,211 $ 15,428 $ 10,261,639 ===================================================== Total assets as of June 30, 1999 $10,279,055 $ 562,754 $ 10,841,809 ===================================================== </TABLE> 17
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1998 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Rental income $ 571,370 $ - $ 571,370 Property and maintenance expense (138,303) - (138,303) Real estate tax and insurance expense (56,484) - (56,484) Property management expense (25,007) - (25,007) ------------------------------------------------- Net operating income 351,576 - 351,576 Fee and asset management income - 2,790 2,790 Interest income - investment in mortgage notes - 10,221 10,221 Interest and other income - 9,010 9,010 Fee and asset management expense - (2,247) (2,247) Depreciation expense on non-real estate assets - (2,523) (2,523) Interest expense: Expense incurred - (105,651) (105,651) Amortization of deferred financing costs - (1,275) (1,275) General and administrative expense - (9,974) (9,974) Preferred distributions - (43,384) (43,384) - Adjustment for amortization of deferred financing costs related to predecessor business - 35 35 ------------------------------------------------- Funds from operations available to Common Shares and OP Units 351,576 (142,998) 208,578 Depreciation expense on real estate assets (129,387) - (129,387) Gain on disposition of properties, net 11,092 - 11,092 Income allocated to Minority Interests - (8,310) (8,310) Adjustment for amortization of deferred financing costs related to predecessor business - (35) (35) ------------------------------------------------- Net income available to Common Shares $233,281 $(151,343) $ 81,938 ================================================= </TABLE> 18
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) <TABLE> <CAPTION> QUARTER ENDED JUNE 30, 1999 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Rental income $ 413,116 $ - $ 413,116 Property and maintenance expense (99,818) - (99,818) Real estate tax and insurance expense (42,467) - (42,467) Property management expense (13,772) - (13,772) ------------------------------------------------- Net operating income 257,059 - 257,059 Fee and asset management income - 1,180 1,180 Interest income - investment in mortgage notes - 2,749 2,749 Interest and other income - 5,277 5,277 Fee and asset management expense - (757) (757) Depreciation expense on non-real estate assets - (1,719) (1,719) Interest expense: Expense incurred - (79,302) (79,302) Amortization of deferred financing costs - (816) (816) General and administrative expense - (5,047) (5,047) Preferred distributions - (27,734) (27,734) Adjustment for depreciation expense related to equity in unconsolidated joint ventures - 276 276 ------------------------------------------------- Funds from operations available to Common Shares and OP Units 257,059 (105,893) 151,166 Depreciation expense on real estate assets (98,514) - (98,514) Gain on disposition of properties, net 24,391 - 24,391 Loss on early extinguishment of debt - (451) (451) Income allocated to Minority Interests - (7,388) (7,388) Adjustment for depreciation expense related to equity in unconsolidated joint ventures - (276) (276) ------------------------------------------------- Net income available to Common Shares $ 182,936 $(114,008) $ 68,928 ================================================= Investment in real estate, net of accumulated depreciation as of June 30, 1999 $ 10,246,211 $ 15,428 $ 10,261,639 ================================================= Total assets as of June 30, 1999 $ 10,279,055 $ 562,754 $ 10,841,809 ================================================= </TABLE> 19
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) <TABLE> <CAPTION> QUARTER ENDED JUNE 30, 1998 RENTAL REAL CORPORATE/ (AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Rental income $ 294,144 $ - $ 294,144 Property and maintenance expense (71,391) - (71,391) Real estate tax and insurance expense (29,041) - (29,041) Property management expense (13,516) - (13,516) ------------------------------------------------- Net operating income 180,196 - 180,196 Fee and asset management income - 1,430 1,430 Interest income - investment in mortgage notes - 5,290 5,290 Interest and other income - 6,186 6,186 Fee and asset management expense - (1,197) (1,197) Depreciation expense on non-real estate assets - (1,358) (1,358) Interest expense: Expense incurred - (55,397) (55,397) Amortization of deferred financing costs - (651) (651) General and administrative expense - (5,203) (5,203) Preferred distributions - (21,692) (21,692) Adjustment for amortization of deferred financing costs related to predecessor business - 23 23 ------------------------------------------------- Funds from operations available to Common Shares and OP Units 180,196 (72,569) 107,627 Depreciation expense on real estate assets (66,162) - (66,162) Gain on disposition of properties, net 9,223 - 9,223 Income allocated to Minority Interests - (4,622) (4,622) Adjustment for amortization of deferred financing costs related to predecessor business - (23) (23) ------------------------------------------------- Net income available to Common Shares $ 123,257 $(77,214) $ 46,043 ================================================= </TABLE> (1) The Company has one primary reportable business segment, which consists of investment in rental real estate. 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 tenants. (2) The Company has a segment for corporate level activity including such items as interest income earned on short-term investments, interest income earned on investment in mortgage notes, general and administrative expenses, and interest expense on mortgage notes payable and unsecured note issuances. In addition, the Company has a segment for third party management activity that is immaterial and does not meet the threshold requirements of a reportable segment as provided for in Statement No. 131. Interest expense on debt is not allocated to individual Properties, even if the Properties secure such debt. Further, income allocated to Minority Interests is not allocated to the Properties. 20
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 14. SUBSEQUENT EVENTS On July 1, 1999, the Company disposed of The Willows Apartments, a 250-unit multifamily property located in Knoxville, TN, to an unaffiliated third party for a total sales price of $12 million. On July 1, 1999, the Company announced that they have entered into a definitive agreement and plan of merger with Lexford Residential Trust ("Lexford"). The Lexford portfolio of 402 properties consists of 36,609 units in sixteen states. The tax-free merger calls for EQR to issue approximately 4.4 million new common shares and assume approximately $533 million of debt. The closing of this pending transaction is subject to entering into a binding agreement, shareholder approval and certain other contingencies and conditions; therefore, there can be no assurance that this transaction will be consummated or that the final terms thereof will not differ in material respects from those summarized above. On July 14, 1999, the Company acquired Brookdale Village Apartments, a 252-unit multifamily property located in Naperville, IL, from an unaffiliated third party for a purchase price of approximately $19.6 million, which included the assumption of approximately $11.6 million of mortgage indebtedness. On July 21, 1999, the Company filed a Form S-8 with the SEC to register an additional 4.5 million common shares for eventual grant and issuance under EQR's Fifth Amended and Restated 1993 Share Option and Share Award Plan. On July 23, 1999, the Company filed a Form S-4 with the SEC representing the joint prospectus/information statement for the merger of EQR and Lexford. On July 26, 1999, the Company disposed of Tivoli Lakes Club Apartments, a 278-unit multifamily property located in Deerfield Beach, FL, to an unaffiliated third party for a total sales price of $17 million. On July 29, 1999, the Company acquired Longfellow Place Apartments, a 710-unit multifamily property along with one ten story office building and two parking garages all located in Boston, MA, from an unaffiliated third party for a purchase price of approximately $237 million, which included the issuance of OP Units having an approximate value of $13.9 million, the issuance of Preference Units having an approximate value of $0.2 million and was partially financed by the issuance of new mortgage indebtedness of approximately $126.5 million, which is being collateralized by eleven previously unencumbered assets (not including Longfellow Place). On July 29, 1999, the Company disposed of The Seasons Apartments, a 120-unit multifamily property located in Boise, ID, to an unaffiliated third party for a total sales price of $6 million. On July 30, 1999, the Company acquired Greentree II Apartments, a 239-unit multifamily property located in Glen Burnie, MD, from an affiliated party for a purchase price of approximately $10.9 million. 21
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis of the results of operations and financial condition of the Company should be read in connection with the Consolidated Financial Statements and Notes thereto. Due to the Company's ability to control the Operating Partnership, the Management Partnerships, the Financing Partnerships, the LLCs, and Merry Land DownREIT I LP, each entity has been consolidated with the Company for financial reporting purposes. Capitalized terms used herein and not defined, are as defined in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Forward-looking statements in this report are 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 which 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: - alternative sources of capital to the Company are higher than anticipated; - occupancy levels and market rents may be adversely affected by local economic and market conditions, which are beyond the Company's control; and - additional factors as discussed in Part I of the Annual Report on Form 10-K. 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 acquired properties are presented in the Consolidated Financial Statements of the Company from the date of each acquisition or the closing dates of the Mergers. During the year ended 1998, the Company acquired 207 properties containing 55,143 units and four properties under development representing 1,378 units (the "1998 Acquired Properties"). In addition, during the six months ended June 30, 1999, the Company acquired sixteen properties containing 3,925 units (the "1999 Acquired Properties"). The Company also disposed of twenty properties containing 4,719 units during 1998 (the "1998 Disposed Properties"); and eleven properties containing 2,505 units during the six months ended June 30, 1999 (the "1999 Disposed Properties"). 22
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company's overall results of operations for the six months ended June 30, 1999 and 1998 have been significantly impacted by the Company's acquisition and disposition activity. The significant changes in rental revenues, property and maintenance expenses, real estate taxes and insurance, depreciation expense, property management and interest expense can all primarily be attributed to the acquisition of the 1998 Acquired Properties and the 1999 Acquired Properties, partially offset by the disposition of the 1998 Disposed Properties and the 1999 Disposed Properties. The impact of the 1998 Acquired Properties, the 1999 Acquired Properties, the 1998 Disposed Properties and the 1999 Disposed Properties is discussed in greater detail in the following paragraphs. Properties that the Company owned for all of both six month periods ended June 30, 1999 and June 30, 1998 (the "Six-Month 1999 Same Store Properties"), which represented 126,790 units, impacted the Company's results of operations. Properties that the Company owned for all of both the quarters ended June 30, 1999 and June 30, 1998 (the "Second-Quarter 1999 Same Store Properties"), which represented 130,182 units, also impacted the Company's results of operations. Both the Six-Month 1999 Same Store Properties and Second-Quarter 1999 Same Store Properties are discussed in the following paragraphs. COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED JUNE 30, 1998 For the six months ended June 30, 1999, income before gain on disposition of properties, net, extraordinary item and allocation to Minority Interests increased by $36.8 million when compared to the six months ended June 30, 1998. This increase was primarily due to the acquisition of the 1998 Acquired Properties and the 1999 Acquired Properties as well as increases in rental revenues net of increases in property and maintenance expenses, real estate taxes and insurance, property management expenses, depreciation expense, interest expense and general and administrative expenses. In regard to the Six-Month 1999 Same Store Properties, total revenues increased by approximately $20.1 million to $544.6 million or 3.83% primarily as a result of higher rental rates charged to new tenants and tenant renewals and an increase in income from billing tenants for their share of utility costs as well as other ancillary services provided to tenants. Overall, property operating expenses, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, increased approximately $2.7 million or 1.36%. This increase was primarily the result of higher on-site compensation costs and an increase in real estate taxes on certain properties, but was partially offset by lower expenses for leasing and advertising, administrative, maintenance and start-up costs. Property management represents expenses associated with the self-management of the Company's Properties. These expenses increased by approximately $3 million primarily due to the continued expansion of the Company's property management business. Fee and asset management revenues and fee and asset management expenses are associated 23
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) with the management of properties not owned by the Company that are managed for affiliates. These revenues and expenses decreased due to the Company acquiring certain of these properties that were formerly only fee-managed. Interest expense, including amortization of deferred financing costs, increased by approximately $53.2 million. This increase was primarily the result of an increase in the Company's average indebtedness outstanding which increased by $1.6 billion. However, the Company's effective interest costs decreased from 7.23% for the six months ended June 30, 1998 to 7.02% for the six months ended June 30, 1999. General and administrative expenses, which include corporate operating expenses, increased approximately $0.9 million between the periods under comparison. This increase was primarily due to the addition of corporate personnel. However, by gaining certain economies of scale with a much larger operation these expenses as a percentage of total revenues were 1.30% for the six months ended June 30, 1999 compared to 1.68% of total revenues for the six months ended June 30, 1998. COMPARISON OF QUARTER ENDED JUNE 30, 1999 TO QUARTER ENDED JUNE 30, 1998 For the quarter ended June 30, 1999, income before gain on disposition of properties, net, extraordinary item and allocation to Minority Interests increased by approximately $17 million when compared to the quarter ended June 30, 1998. This increase was primarily due to the acquisition of the 1998 Acquired Properties and the 1999 Acquired Properties as well as increases in rental revenues net of increases in property and maintenance expenses, real estate taxes and insurance, property management expenses, depreciation expense, and interest expense. In regard to the Second Quarter 1999 Same Store Properties, total revenues increased by approximately $9.7 million or 3.57% primarily as a result of higher rental rates charged to new tenants and tenant renewals and an increase in income from billing tenants for their share of utility costs as well as other ancillary services provided to tenants. Overall, property operating expenses, which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses, increased approximately $0.4 million or 0.38%. This increase was primarily the result of higher on-site compensation costs and an increase in real estate taxes on certain properties, but was partially offset by lower expenses for leasing and advertising, administrative and maintenance. Property management represents expenses associated with the self-management of the Company's Properties. These expenses increased by approximately $0.3 million primarily due to the continued expansion of the Company's property management business. Fee and asset management revenues and fee and asset management expenses are associated with the management of properties not owned by the Company that are managed for affiliates. These revenues and expenses decreased due to the Company acquiring certain of these properties 24
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) that were formerly only fee-managed. Interest expense, including amortization of deferred financing costs, increased by approximately $24.1 million. This increase was primarily the result of an increase in the Company's average indebtedness outstanding which increased by $1.5 billion. However, the Company's effective interest costs decreased from 7.20% for the quarter ended June 30, 1998 to 6.95% for the quarter ended June 30, 1999. General and administrative expenses, which include corporate operating expenses, decreased approximately $0.2 million between the periods under comparison. These expenses as a percentage of total revenues were 1.20% for the quarter ended June 30, 1999 compared to 1.69% of total revenues for the quarter ended June 30, 1998. LIQUIDITY AND CAPITAL RESOURCES As of January 1, 1999, the Company had approximately $4 million of cash and cash equivalents and $330 million available on its lines of credit, of which $12 million was restricted. After taking into effect the various transactions discussed in the following paragraphs, the Company's cash and cash equivalents balance at June 30, 1999 was approximately $95.5 million and the amount available on the Company's lines of credit was $535 million, of which $12 million was restricted. The following discussion also explains the changes in net cash provided by operating activities, net cash used by investing activities and net cash provided by (used by) financing activities, all of which are presented in the Company's Statements of Cash Flows. Part of the Company's strategy in funding the purchase of multifamily properties, funding its Properties in the development stage and the funding of the Company's investment in two joint ventures with multifamily real estate developers is to utilize its lines of credit and to subsequently repay the lines of credit from the issuance of additional equity or debt securities or the disposition of Properties. Utilizing this strategy during the first six months of 1999, the Company: - - issued the June 2004 Notes and received net proceeds of $298 million; - - refinanced four Properties and received additional net proceeds of $18 million; - - disposed of eleven properties and received net proceeds of $125.2 million; and - - issued approximately 0.8 million Common Shares and received net proceeds of $29.6 million. All of these proceeds were utilized to either: - - purchase additional properties; - - provide funding for properties in the development stage; and/or - - repay the lines of credit and mortgage indebtedness on certain Properties. 25
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) With respect to the 1999 Acquired Properties, the Company assumed and/or entered into new mortgage indebtedness of approximately $58.3 million, issued OP Units with a value of $11.3 million and issued Junior Convertible Preference Units with a value of $2.9 million. The total purchase price of the 1999 Acquired Properties was approximately $259.3 million. Subsequent to June 30, 1999 and through August 9, 1999, the Company acquired three additional properties containing 1,201 units for a total purchase price of approximately $267.5 million, which included the assumption of and/or issuance of new mortgage indebtedness of approximately $138.1 million, the issuance of OP Units having an approximate value of $13.9 million and the issuance of Junior Convertible Preference Units having an approximate value of $0.2 million. Subsequent to June 30, 1999 and through August 9, 1999, the Company disposed of three properties for a total sales price of $35 million. These proceeds will be utilized to purchase additional properties. The Company anticipates that it will continue to sell certain Properties in the portfolio. In regard to the joint venture agreements with two multifamily residential real estate developers during the six months ended June 30, 1999, the Company funded a total of $44.3 million and during the remainder of 1999 the Company expects to fund approximately $24.1 million in connection with these agreements. Also in connection with these two agreements, the Company has an obligation to fund up to an additional $55 million to guarantee third party construction financing. In regard to certain other properties that were under development and/or expansion during the six months ended June 30, 1999, the Company funded $7.9 million. During the remainder of 1999, the Company expects to fund $43.1 million related to the continued development and/or expansion of as many as five Properties. In regards to certain properties that were under earnout/development agreements, during the six months ended June 30, 1999, the Company funded the following: - - $16.2 million relating to the acquisition of Copper Canyon Apartments, - - $22.8 million relating to the acquisition of Skyview Apartments, which included a $1.0 million advance of the earnout payment to the developer of Skyview; and - - $18.3 million relating to the acquisition of Rosecliff Apartments. Subsequent to June 30, 1999, the Company funded an additional $1 million earnout payment to the developer of Copper Canyon as certain specified operation levels were achieved. During the remainder of 1999, the Company expects to fund approximately $3.1 million related to other earnout/development projects. 26
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In May 1999, the Company repaid its 1999 Notes that matured on May 15, 1999. The $125 million repayment was funded from borrowings under the Company's lines of credit. In addition, during the first six months of 1999, the Company repaid $9.3 million of mortgage indebtedness on two of its Properties. These repayments were funded from the Company's lines of credit and/or from disposition proceeds. As of June 30, 1999, the Company had total indebtedness of approximately $4.7 billion, which included mortgage indebtedness of $2.3 billion (including premiums of $3.9 million), of which $840.7 million represented tax-exempt bond indebtedness, and unsecured debt of $2.3 billion (including net discounts and premiums in the amount of $3.1 million), of which $111.4 million represented tax-exempt bond indebtedness. The Company has a policy of capitalizing expenditures made for new assets, including newly acquired properties and the costs associated with placing these assets into service. Expenditures for improvements and renovations that significantly enhance the value of existing assets or substantially extend the useful life of an asset are also capitalized. Capital spent for replacement-type items such as appliances, draperies, carpeting and floor coverings, mechanical equipment and certain furniture and fixtures is also capitalized. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. With respect to acquired properties, the Company has determined that it generally spends $1,000 per unit during its first three years of ownership to fully improve and enhance these properties to meet the Company's standards. In regard to replacement-type items described above, the Company generally expects to spend $250 per unit on an annual recurring basis. During the six months ended June 30, 1999, total capital expenditures for the Company approximated $59.4 million. Of this amount, approximately $21.1 million, or $175 per unit, related to capital improvements and major repairs for the 1997, 1998 and 1999 Acquired Properties. Capital improvements and major repairs for all of the Company's pre-EQR IPO properties and 1993, 1994, 1995 and 1996 Acquired Properties approximated $12.7 million, or $198 per unit. Capital spent for replacement-type items approximated $22 million, or $119 per unit. Also included in total capital expenditures was approximately $3.6 million expended for non-real estate additions such as computer software, computer equipment, and furniture and fixtures and leasehold improvements for the Company's property management offices and its corporate headquarters. Such capital expenditures were primarily funded from working capital reserves and from net cash provided by operating activities. Total capital expenditures for the remaining portion of 1999 are budgeted to be approximately $60 million. Minority Interests as of June 30, 1999 decreased by $12.1 million when compared to December 31, 1998. The primary factors that impacted this account during the six month period were distributions declared to Minority Interests, which amounted to $18.3 million for the six month period, the allocation of income from operations in the amount of $14.5 million and the conversion of OP Units into Common Shares and the issuance of Common Shares and OP Units during the six months ended June 30, 1999. 27
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Total distributions paid in July 1999 amounted to approximately $117 million, which included distributions declared for the quarter ended June 30, 1999. 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 lines 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, reduction of outstanding amounts under its lines of credit, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities including additional OP Units as well as from undistributed FFO and proceeds received from the disposition of certain Properties. In addition, the Company has certain uncollateralized Properties available for additional mortgage borrowings in the event that the public capital markets are unavailable to the Company or the cost of alternative sources of capital to the Company is too high. The Company has a revolving credit facility with Morgan Guaranty and Bank of America as co-agents to provide the Operating Partnership, with potential borrowings of up to $500 million. This credit facility matures in November 1999 and will continue to be used to fund property acquisitions, costs for certain Properties under development and short term liquidity requirements. As of August 9, 1999, $90 million was outstanding under this facility. In connection with the MRY Merger, the Company assumed a second revolving credit facility with First Union Bank as agent with potential borrowings of up to $120 million. This credit facility matures in September 2000 and will also be used to fund property acquisitions, costs for certain Properties under development and short term liquidity requirements. As of August 9, 1999, no amounts were outstanding under this facility. The Company anticipates closing on a new revolving credit facility in mid-August 1999 for potential borrowings of up to $700 million. The existing revolving credit facilities will be repaid in full and terminated upon the closing of the new facility. In connection with the Wellsford Merger, the Company provided a $14.8 million credit enhancement with respect to bonds issued to finance certain public improvements at a multifamily development project. Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real Properties, Inc. ("WRP Newco"), the Company has agreed to purchase up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per share on a standby basis over a three-year period ending on May 30, 2000. As of August 9, 1999, no shares of WRP Newco Series A Preferred had been acquired by the Company. In conjunction with the MRY Merger in October 1998, the Company entered into six 28
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) joint venture agreements with MRYP Spinco, the entity spun-off in the MRY Merger. The Company contributed six properties with an initial value of $52.7 million in return for a 50% ownership interest in each joint venture. In return for the spin-off of certain assets and liabilities to MRYP Spinco, the Company received (from MRYP Spinco) a Subordinated Note receivable totaling $20 million, a preferred stock investment with an initial value of $5 million and a $25 million, one year, non-revolving Senior Note receivable with an initial value of $18.3 million. On June 24, 1999, the Subordinated Note receivable, the preferred stock investment and the Senior Note receivable were all repaid by MRYP Spinco for a total amount of $41 million, which represented a discount of $2.3 million on the combined outstanding balance of these instruments and there is no further obligation by either party in connection therewith. YEAR 2000 ISSUE The year 2000 issue ("Year 2000") is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive hardware and software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, collect rents, or engage in similar normal business activities. The Company believes that it has identified all of its information technology ("IT") and non-IT systems to assess their Year 2000 readiness. Critical systems include, but are not limited to: accounts receivable and rent collections, accounts payable and general ledger, human resources and payroll (both property and corporate levels), cash management, fixed assets, all IT hardware (such as desktop/laptop computers, data networking equipment, telephone systems, fax machines, copy machines, etc.) and software, and property environmental, health safety and security systems (such as elevators and alarm systems). The Company anticipates that previously scheduled system upgrades to many of its IT systems will remediate any existing Year 2000 problems. The Company is currently in the process of testing and implementing the majority of its Year 2000 IT and non-IT system projects with completion anticipated during the third quarter of 1999. The Company has estimated that the total Year 2000 project cost will approximate $1 million, of which approximately 90% has been incurred as of June 30, 1999. During the first six months of 1999, the primary focus of the Year 2000 remediation efforts has been on implementing and testing the previously scheduled upgrades and Year 2000 compliant versions of existing IT systems as well as continuing the assessment of the Company's exposure regarding non-IT systems at property sites. Of the remaining $100,000 budgeted to complete the Company's Year 2000 remediation project, approximately $50,000 has been allocated to engage Year 2000 consultants to help the Company monitor its IT compliance progress and to complete final IT testing and implementation. The remaining $50,000 has been allocated to remediate non-IT systems at various property sites. The estimates are based on management's best estimates, which were derived utilizing numerous assumptions of future events, and there can be no guarantees that these estimates will be 29
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) achieved. In some cases, various third party vendors have been queried on their Year 2000 readiness. The Company continues to query its significant suppliers and vendors to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. To date, the Company is not aware of any significant suppliers or vendors with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, there can be no assurances that the systems of other companies, on which the Company's systems rely, will be timely converted and would not have an adverse effect on the Company's systems. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. In addition, the Company is developing its contingency plans for critical operational areas that might be affected by the Year 2000 issue if compliance by the Company is delayed. Aside from catastrophic failure of utility companies, banks or governmental agencies, the Company believes that it could continue its normal business operations if compliance by the Company is delayed. The Company does not believe that the Year 2000 issue will materially impact its results of operations, liquidity or capital resources. FUNDS FROM OPERATIONS The Company generally considers Funds From Operations ("FFO") to be one measure of the performance of real estate companies. The resolution adopted by the Board of Governors of NAREIT defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. The Company believes that FFO is helpful to investors as a measure of the performance of 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 represents net income available to Common Shares, excluding gains on dispositions of properties and gains/losses on early extinguishment of debt, plus depreciation on real estate assets, income allocated to Minority Interests and amortization of deferred financing costs related to the Predecessor Business. The Company's calculation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies and, accordingly, may not be comparable to such other real estate companies. For the six months ended June 30, 1999, FFO increased by $87.9 million representing a 30
EQUITY RESIDENTIAL PROPERTIES TRUST PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 42.2% increase when compared to the six months ended June 30, 1998. For the quarter ended June 30, 1999, FFO increased by $43.5 million representing a 40.5% increase when compared to the quarter ended June 30, 1998. The following is a reconciliation of net income available to Common Shares to FFO available to Common Shares and OP Units for the six months and quarters ended June 30, 1999 and 1998: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------- Six Months Six Months Quarter Quarter Ended Ended Ended Ended 6/30/99 6/30/98 6/30/99 6/30/98 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net income available to Common Shares $ 133,105 $ 81,938 $ 68,928 $ 46,043 Adjustments: Income allocated to Minority Interests 14,514 8,310 7,388 4,622 Depreciation on real estate assets* 194,262 129,387 98,790 66,162 Amortization of deferred financing costs related to predecessor business - 35 - 23 Loss on early extinguishment of debt 451 - 451 - Gain on disposition of properties, net (45,807) (11,092) (24,391) (9,223) - ---------------------------------------------------------------------------------------------------------------------- FFO available to Common Shares and OP Units $ 296,525 $ 208,578 $ 151,166 $ 107,627 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> * Includes $551 and $276 related to the Company's share of depreciation from unconsolidated joint ventures for the six months and quarter ended June 30, 1999, respectively. 31
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, 1998. ITEM 5. OTHER INFORMATION Any proposal which a stockholder intends to present at the annual meeting of stockholders in 2000 must be received by the Company by December 1, 1999 in order to be eligible for inclusion in the proxy statement and proxy form relating to such meeting. In addition, if any business should properly come before such annual meeting other than that which is stated in such proxy statement, then, if the Company does not receive timely notice of the matter, the persons designated in such proxy form will vote or refrain from voting in respect thereof in accordance with the judgment of the persons voting such proxies. To be timely, a shareholder's notice shall be delivered to the secretary of the Company at the Company's principal executive offices no later than January 1, 2000 and no earlier than December 1, 1999. Such notice also must otherwise comply with the provisions of the Company's bylaws. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: 3.2 Third Amended and Restated bylaws of Equity Residential Properties Trust. 12 Computation of Ratio of Earnings to Fixed Charges. (B) Reports on Form 8-K: None. 32
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EQUITY RESIDENTIAL PROPERTIES TRUST Date: August 12, 1999 By: /s/ Bruce C. Strohm --------------- ------------------------------------------ Bruce C. Strohm Executive Vice President, General Counsel and Secretary Date: August 12, 1999 By: /s/ Michael J. McHugh --------------- ------------------------------------------- Michael J. McHugh Executive Vice President, Chief Accounting Officer and Treasurer 33