FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-12252
EQUITY RESIDENTIAL
(Exact Name of Registrant as Specified in its Charter)
Maryland
13-3675988
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
Two North Riverside Plaza, Chicago, Illinois
60606
(Address of Principal Executive Offices)
(Zip Code)
(312) 474-1300
(Registrant’s Telephone Number, Including Area Code)
http://www.equityapartments.com
(Registrant’s web site)
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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o
The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on July 31, 2003 was 273,706,254.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except for share amounts)
(Unaudited)
June 30,2003
December 31,2002
ASSETS
Investment in real estate
Land
$
1,815,685
1,803,577
Depreciable property
11,178,596
11,240,245
Construction in progress
2,502
2,441
12,996,783
13,046,263
Accumulated depreciation
(2,247,136
)
(2,112,017
Investment in real estate, net of accumulated depreciation
10,749,647
10,934,246
Cash and cash equivalents
243,838
29,875
Investments in unconsolidated entities
509,937
509,789
Rents receivable
2,119
2,926
Deposits – restricted
280,935
141,278
Escrow deposits – mortgage
44,831
50,565
Deferred financing costs, net
32,321
32,144
Goodwill, net
30,000
Other assets
150,064
80,094
Total assets
12,043,692
11,810,917
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable
2,850,493
2,927,614
Notes, net
2,854,198
2,456,085
Line of credit
—
140,000
Accounts payable and accrued expenses
71,746
64,369
Accrued interest payable
64,374
63,151
Rents received in advance and other liabilities
165,244
165,095
Security deposits
44,965
45,333
Distributions payable
142,004
140,844
Total liabilities
6,193,024
6,002,491
Commitments and contingencies
Minority Interests:
Operating Partnership
347,598
349,646
Preference Interests
246,000
Junior Preference Units
5,846
Partially Owned Properties
8,622
9,811
Total Minority Interests
608,066
611,303
Shareholders’ equity:
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 7,101,384 shares issued and outstanding as of June 30, 2003 and 10,524,034 shares issued and outstanding as of December 31, 2002
995,591
946,157
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 273,119,105 shares issued and outstanding as of June 30, 2003 and 271,095,481 shares issued and outstanding as of December 31, 2002
2,731
2,711
Paid in capital
4,837,961
4,839,218
Deferred compensation
(7,538
(12,118
Distributions in excess of accumulated earnings
(547,693
(535,056
Accumulated other comprehensive loss
(38,450
(43,789
Total shareholders’ equity
5,242,602
5,197,123
Total liabilities and shareholders’ equity
See accompanying notes
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Six Months Ended June 30,
Quarter Ended June 30,
2003
2002
REVENUES
Rental income
943,529
950,540
473,967
476,418
Fee and asset management
7,878
4,310
5,390
2,592
Interest and other income
7,128
9,304
3,787
5,206
Total revenues
958,535
964,154
483,144
484,216
EXPENSES
Property and maintenance
258,017
239,744
129,269
120,338
Real estate taxes and insurance
101,780
96,872
50,455
48,267
Property management
32,194
37,663
16,343
18,213
3,607
3,620
1,837
1,758
Depreciation
231,582
218,684
116,555
110,464
Interest:
Expense incurred, net
164,532
170,528
84,103
86,573
Amortization of deferred financing costs
3,104
2,962
1,701
1,584
General and administrative
20,146
22,327
8,970
11,527
Impairment on technology investments
581
290
Total expenses
815,543
792,981
409,523
399,014
Income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations
142,992
171,173
73,621
85,202
Allocation to Minority Interests:
(18,281
(13,784
(9,171
(7,343
(243
(1,325
(128
(519
Income (loss) from investments in unconsolidated entities
(1,744
233
(1,851
7
Net gain (loss) on sales of unconsolidated entities
4,675
5,246
3,463
(411
Income from continuing operations
127,399
161,543
65,934
76,936
Net gain on sales of discontinued operations
140,992
28,446
70,320
25,630
Discontinued operations, net
3,347
24,186
137
10,731
Net income
271,738
214,175
136,391
113,297
Preferred distributions
(48,417
(48,781
(24,237
(24,256
Net income available to Common Shares
223,321
165,394
112,154
89,041
Net income per share – basic
0.82
0.61
0.41
0.33
Net income per share – diluted
0.60
0.32
Weighted average Common Shares outstanding – basic
271,031
272,126
271,380
273,146
Weighted average Common Shares outstanding – diluted
298,405
298,422
299,217
299,494
Distributions declared per Common Share outstanding
0.865
0.4325
3
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Comprehensive income:
Other comprehensive income (losses) – derivative and other instruments:
Unrealized holding gains (losses) arising during the period
1,879
1,085
1,742
(3,091
Equity in unrealized holding gains (losses) arising during the period – unconsolidated entities
2,759
905
1,565
(2,128
Losses reclassified into earnings from other comprehensive income
701
385
471
217
Comprehensive income
277,077
216,550
140,169
108,295
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
18,281
13,784
243
1,325
237,392
234,846
3,110
2,988
Amortization of discounts and premiums on debt
(451
(424
Amortization of deferred settlements on derivative instruments
104
(176
Loss (income) from investments in unconsolidated entities
1,744
(233
(140,992
(28,446
Net gain on sales of unconsolidated entities
(4,675
(5,246
Loss on debt extinguishments
380
468
Unrealized (gain) loss on derivative instruments
(83
483
Compensation paid with Company Common Shares
8,082
10,061
Changes in assets and liabilities:
Decrease (increase) in rents receivable
512
(227
(Increase) decrease in deposits – restricted
(404
12,108
(Increase) decrease in other assets
(21,912
3,898
Increase in accounts payable and accrued expenses
7,420
9,026
Increase in accrued interest payable
1,238
316
(Decrease) in rents received in advance and other liabilities
(10,792
(9,972
(Decrease) in security deposits
(686
(189
Net cash provided by operating activities
370,830
459,146
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions
(243,004
(153,034
Investment in real estate – development/other
(4,676
(57,066
Improvements to real estate
(76,821
(66,509
Additions to non-real estate property
(1,552
(4,602
Interest capitalized for real estate under development
(4,369
Interest capitalized for unconsolidated entities under development
(10,923
(7,954
Proceeds from disposition of real estate, net
473,186
183,494
Proceeds from disposition of furniture rental business
28,741
Proceeds from disposition of unconsolidated entities
8,595
11,317
(5,671
(42,441
Distributions from unconsolidated entities
14,557
21,483
(Increase) decrease in deposits on real estate acquisitions, net
(139,261
56,305
Decrease in mortgage deposits
5,848
14,651
Business combinations, net of cash acquired
(485
(461
Consolidation of previously Unconsolidated Properties
(697
Other investing activities, net
(45,912
192
Net cash (used for) investing activities
(26,816
(20,253
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan and bond acquisition costs
(3,616
(9,124
Mortgage notes payable:
Proceeds
48,680
47,213
Lump sum payoffs
(161,914
(119,386
Scheduled principal repayments
(16,187
(16,322
Prepayment premiums/fees
(472
(468
Notes, net:
398,816
397,064
(225,000
(195
(253
Line of credit:
172,000
292,000
Repayments
(312,000
(487,000
(Payments on) settlement of derivative instruments
(12,999
(1,533
Proceeds from sale of Common Shares
4,247
6,354
Proceeds from exercise of options
13,626
27,030
Proceeds from sale of Preferred Shares
150,000
Payment of offering/redemption costs
(5,099
(158
Redemption of Preferred Shares
(100,000
Distributions:
Common Shares
(235,081
(235,548
Preferred Shares
(37,861
(35,832
(10,106
(10,132
(162
Minority Interests – Operating Partnership
(19,270
(20,095
Minority Interests – Partially Owned Properties
(2,458
(10,375
Principal receipts on employee notes, net
173
Net cash (used for) financing activities
(130,051
(401,554
Net increase in cash and cash equivalents
213,963
37,339
Cash and cash equivalents, beginning of period
51,603
Cash and cash equivalents, end of period
88,942
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest
175,009
184,216
Real estate acquisitions/dispositions:
Mortgage loans assumed
34,968
14,000
Valuation of OP Units issued
105
Mortgage loans (assumed) by purchaser
(9,075
(1,680
Consolidation of previously Unconsolidated Properties:
26,500
4,231
Net (assets) liabilities recorded
1,633
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business of the Company
Equity Residential (“EQR”), formed in March 1993, is a fully integrated real estate company engaged in the acquisition, ownership, management and operation of multifamily properties. EQR has elected to be taxed as a real estate investment trust (“REIT”).
EQR is the general partner of, and as of June 30, 2003 owned an approximate 92.4% ownership interest in, ERP Operating Limited Partnership, an Illinois limited partnership (the “Operating Partnership”). The Operating Partnership is, 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 EQR, the Operating Partnership and each of the partnerships, limited liability companies and corporations controlled by the Operating Partnership and/or EQR.
As of June 30, 2003, the Company owned or had investments in 1,005 properties in 35 states consisting of 216,644 units. An ownership breakdown includes:
Number ofProperties
Number ofUnits
Wholly Owned Properties
884
187,043
Partially Owned Properties (Consolidated)
36
6,931
Unconsolidated Properties
85
22,670
Total Properties
1,005
216,644
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 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 six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.
The balance sheet at December 31, 2002 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, 2002.
Other
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 adopted the standard effective January 1, 2003.
In January 2003, the FASB issued Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires a variable interest entity to be consolidated if a company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The Company will adopt FIN No. 46 in the third quarter of 2003 prospectively using carryover basis. The Company has preliminarily determined its investment in real estate will increase approximately $1.3 billion, investment in unconsolidated entities will decrease approximately $494.5 million and mortgage notes payable will increase $833.5 million as a result of the consolidation of its previously unconsolidated stabilized development projects and projects under development (see Note 7). The Company does not anticipate that the adoption of FIN No. 46 will have any effect on net income.
3. Shareholders’ Equity and Minority Interests
Common Shares outstanding at January 1,
271,095,481
Common Shares Issued:
Conversion of Series E Preferred Shares
25,198
Employee Share Purchase Plan
203,498
Exercise of options
732,724
Restricted share grants, net
955,658
Conversion of OP Units
106,546
Common Shares outstanding at June 30,
273,119,105
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 22,353,524 units of limited partnership interest (“OP Units”), representing a 7.6% interest in the Operating Partnership, at June 30, 2003. Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding at June 30, 2003 would have been 295,472,629. Subject to applicable securities law restrictions, the Minority Interests – Operating Partnership may exchange their OP Units for EQR Common Shares on a one-for-one basis.
Net proceeds from the Company’s Common Share and Preferred Share (see definition below) offerings are contributed by the Company to the Operating Partnership. In return for those contributions, EQR receives a number of OP Units in the Operating Partnership equal to the number of Common Shares it has issued in the equity offering (or in the case of a preferred equity offering, a number of preference units in the Operating Partnership equal in number and having the same terms as the Preferred Shares issued in the equity offering). 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.
During the six months ended June 30, 2003, the Operating Partnership issued 159,427 OP Units to various limited partners at an average price of $27.48 per unit. These OP Units are classified as Minority Interests – Operating Partnership in the accompanying consolidated balance sheets.
8
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.
The following table presents the Company’s issued and outstanding Preferred Shares as of June 30, 2003 and December 31, 2002:
AnnualDividendRate perShare (1)
Amounts in thousands
June30, 2003
December31, 2002
Preferred Shares of beneficial interest, $0.01 par value;100,000,000 shares authorized:
9 1/8% Series B Cumulative Redeemable Preferred; liquidation value $250 per share; 500,000 shares issued and outstanding at June 30, 2003 and December 31, 2002
22.81252
125,000
9 1/8% Series C Cumulative Redeemable Preferred; liquidation value $250 per share; 460,000 shares issued and outstanding at June 30, 2003 and December 31, 2002
115,000
8.60% Series D Cumulative Redeemable Preferred; liquidation value $250 per share; 700,000 shares issued and outstanding at June 30, 2003 and December 31, 2002
21.50
175,000
7.00% Series E Cumulative Convertible Preferred; liquidation value $25 per share; 2,525,464 and 2,548,114 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively
1.75
63,137
63,703
7 1/4% Series G Convertible Cumulative Preferred; liquidation value $250 per share; 1,264,692 shares issued and outstanding at June 30, 2003 and December 31, 2002
18.125
316,173
7.00% Series H Cumulative Convertible Preferred; liquidation value $25 per share; 51,228 shares issued and outstanding at June 30, 2003 and December 31, 2002
1,281
8.29% Series K Cumulative Redeemable Preferred; liquidation value $50 per share; 1,000,000 shares issued and outstanding at June 30, 2003 and December 31, 2002
4.145
50,000
7.625% Series L Cumulative Redeemable Preferred; liquidation value $25 per share; 0 and 4,000,000 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively
(2
100,000
6.48% Series N Cumulative Redeemable Preferred; liquidation value $250 per share; 600,000 and 0 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively (3)
16.20
(1) Dividends on all series of Preferred Shares are payable quarterly at various pay dates. Dividend rates listed for Series B, C, D, G and N are Preferred Share rates and the equivalent Depositary Share annual dividend rates are $2.281252, $2.281252, $2.15, $1.8125 and $1.62, respectively.
9
(2) On June 19, 2003, the Company redeemed all of its outstanding Series L Cumulative Redeemable Preferred Shares at its liquidation value for total cash consideration of $100.0 million.
(3) On June 19, 2003, the Company issued 600,000 Series N Cumulative Redeemable Preferred Shares in a public offering. The Company received $145.3 million in net proceeds from this offering after payment of the underwriters’ fee.
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.
The following table presents the issued and outstanding Preference Interests as of June 30, 2003 and December 31, 2002:
AnnualDividendRate perUnit (1)
Preference Interests:
8.00% Series A Cumulative Redeemable Preference Interests; liquidation value $50 per unit; 800,000 units issued and outstanding at June 30, 2003 and December 31, 2002
4.00
40,000
8.50% Series B Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,100,000 units issued and outstanding at June 30, 2003 and December 31, 2002
4.25
55,000
8.50% Series C Cumulative Redeemable Preference Units; liquidation value $50 per unit; 220,000 units issued and outstanding at June 30, 2003 and December 31, 2002
11,000
8.375% Series D Cumulative Redeemable Preference Units; liquidation value $50 per unit; 420,000 units issued and outstanding at June 30, 2003 and December 31, 2002
4.1875
21,000
8.50% Series E Cumulative Redeemable Preference Units; liquidation value $50 per unit; 1,000,000 units issued and outstanding at June 30, 2003 and December 31, 2002
8.375% Series F Cumulative Redeemable Preference Units; liquidation value $50 per unit; 180,000 units issued and outstanding at June 30, 2003 and December 31, 2002
9,000
7.875% Series G Cumulative Redeemable Preference Units; liquidation value $50 per unit; 510,000 units issued and outstanding at June 30, 2003 and December 31, 2002
3.9375
25,500
7.625% Series H Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 190,000 units issued and outstanding at June 30, 2003 and December 31, 2002
3.8125
9,500
7.625% Series I Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 270,000 units issued and outstanding at June 30, 2003 and December 31, 2002
13,500
7.625% Series J Cumulative Convertible Redeemable Preference Units; liquidation value $50 per unit; 230,000 units issued and outstanding at June 30, 2003 and December 31, 2002
11,500
10
(1) Dividends on all series of Preference Interests are payable quarterly on March 25th, June 25th, September 25th, and December 25th of each year.
The following table presents the Operating Partnership’s issued and outstanding Junior Convertible Preference Units (the “Junior Preference Units”) as of June 30, 2003 and December 31, 2002:
AnnualDividendRate perUnit(1)
Junior Preference Units:
Series A Junior Convertible Preference Units; liquidation value $100 per unit; 56,616 units issued and outstanding at June 30, 2003 and December 31, 2002
5.46934
5,662
Series B Junior Convertible Preference Units; liquidation value $25 per unit; 7,367 units issued and outstanding at June 30, 2003 and December 31, 2002
2.00
184
(1) Dividends on both series of Junior Preference Units are payable quarterly at various pay dates.
4. Real Estate Acquisitions
During the six months ended June 30, 2003, the Company acquired the entire equity interest in the six properties listed below from unaffiliated parties, and two additional units at an existing property, for a total purchase price of $277.7 million.
DateAcquired
Property
Location
Numberof Units
Acquisition Price(in thousands)
01/30/03
The Reserve @ Eisenhower
Alexandria, VA
226
41,000
02/14/03
Artisan Square
Northridge, CA
140
27,466
03/05/03
LaSalle (1)
Beaverton, OR
554
43,000
05/01/03
Gateway at Malden Center (2)
Malden, MA
203
34,900
06/17/03
Mill Creek
Milpitas, CA
516
70,000
06/30/03
Carlyle Mill
317
61,200
Various
Rivers Bend (Condo Units)
Windsor, CT
125
1,958
277,691
(1) Includes 8,167 square feet of retail space.
(2) Includes 36,326 square feet of office space and a 324-space parking garage.
On May 8, 2003, the Company acquired the remaining third party equity interests it did not previously own in Liberty Park, a 202-unit property located in Braintree, Massachusetts. This property was accounted for under the equity method of accounting and subsequent to the purchase was consolidated. The Company recorded $33.0 million in investment in real estate at carryover basis and the following:
• Assumed $26.5 million in mortgage debt;
• Issued 153,851 OP Units having a value of $4.2 million;
• Paid cash of $0.7 million; and
• Assumed $1.6 million of other liabilities net of other assets acquired.
11
5. Real Estate Dispositions
During the six months ended June 30, 2003, the Company disposed of the forty-four properties listed below to unaffiliated parties. The Company recognized a net gain on sales of discontinued operations of approximately $141.0 million and a net gain on sales of unconsolidated entities of approximately $4.7 million.
DateDisposed
Number of Units
DispositionPrice(in thousands)
01/14/03
Strawberry Place
Plant City, FL
55
1,400
Smoketree Polo Club
Indio, CA
288
18,900
01/29/03
Amberwood I
Lake City, FL
50
1,175
Emerald Place
Bermuda Dunes, CA
240
20,125
Rolido Parque
Houston, TX
369
14,660
02/27/03
Fox Hill Commons
Vernon, CT
74
4,700
The Landings
Winter Haven, FL
60
1,475
Morningside
Titusville, FL
183
3,980
03/04/03
Colony Woods
Birmingham, AL
414
25,000
Hearthstone
San Antonio, TX
252
7,700
Northgate Village
264
10,150
03/19/03
Lincoln Green I, II & III
680
24,900
03/20/03
Meadows on the Lake
200
10,900
Meadows in the Park
Shoal Run
276
14,350
03/31/03
Colony Place
Fort Myers, FL
300
20,600
04/08/03
Mallgate (1)
Louisville, KY
540
15,500
04/15/03
Summit Chase
Coral Springs, FL
8,875
04/16/03
Bayside
Sebring, FL
59
885
04/30/03
Essex Place II (Vacant Land)
Tampa, FL
575
05/08/03
Pueblo Villas
Albuquerque, NM
232
9,250
05/14/03
Emerald Bay
Winter Park, FL
432
17,200
05/16/03
Meadowood
Flatwoods, KY
52
975
05/29/03
Spicewood Springs
Jacksonville, FL
28,000
05/30/03
Princeton Square
16,750
Boulder Creek
Wilsonville, OR
296
16,700
Bridge Creek
315
18,100
Settlers Point/Brookfield
Salt Lake City, UT
416
21,500
Ridgewood
Russellville, KY
06/04/03
Lake Point
Charlotte, NC
12,401
06/05/03
Clearlake Pines II
Cocoa, FL
1,392
Sky Pines I & II
Orlando, FL
3,694
Brandywine East
38
Woodland I & II
169
5,175
06/12/03
Parkville
Parkersburg, WV
49
1,063
Cedarwood I
Belpre, OH
44
889
06/24/03
Greenwood Village
Tempe, AZ
270
14,600
06/25/03
Woodbine
Portsmouth, OH
41
660
06/26/03
Laurel Gardens
384
34,550
06/27/03
Crystal Creek
Phoenix, AZ
273
12,775
Harbor Pointe
Milwaukee, WI
595
27,800
Calais
Arlington, TX
12,500
12
Four Lakes Condo Units
Lisle, IL
75
9,168
Pointe East Condo Units
Redmond, WA
17
3,177
Squaw Peak Condo Units
39
4,125
9,985
490,078
02/28/03
Kings Crossing I (2)
69
963
Culbreath Key (2)
254
7,382
323
8,345
Total
10,308
498,423
(1) The Company was leasing the land under a long-term operating ground lease.
(2) Disposition price listed represents the Company’s share of the net disposition proceeds. Culbreath Key was sold for $26.4 million with a portion of the net sales proceeds used to payoff the mortgage debt of $16.2 million.
6. Commitments to Acquire/Dispose of Real Estate
As of June 30, 2003, in addition to the property that was subsequently acquired as discussed in Note 19, the Company had entered into separate agreements to acquire four multifamily properties containing 1,205 units from unaffiliated parties. The Company expects a combined purchase price of approximately $195.4 million, including the assumption of mortgage debt of approximately $54.8 million.
As of June 30, 2003, in addition to the properties that were subsequently disposed of as discussed in Note 19, the Company had entered into separate agreements to dispose of twenty-three multifamily properties containing 6,426 units to unaffiliated parties. The Company expects a combined disposition price of approximately $341.8 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 co-invested in various properties with unrelated third parties. The following table summarizes the Company’s investments in unconsolidated entities as of June 30, 2003 (amounts in thousands except for project and unit amounts):
InstitutionalJointVentures
StabilizedDevelopmentProjects (1)
ProjectsUnder Development
Lexford/Other
Totals
Total projects
45
18
22
95
(2)
Total units
10,846
3,349
4,799
2,704
21,698
Company’s percentage share of outstanding debt
25.0
%
100.0
11.1
Company’s share of outstanding debt (4)
121,200
252,101
581,422
(3)
5,361
960,084
13
(1) The Company determines a project to be stabilized once it has maintained an average physical occupancy of 90% or more for a three-month period.
(2) Includes eleven projects under development containing 2,827 units, which are not included in the Company’s property/unit counts at June 30, 2003. Totals exclude Fort Lewis Military Housing consisting of one property and 3,799 units, which is not accounted for under the equity method of accounting. The Fort Lewis Military Housing is included in the Company’s property/unit counts at June 30, 2003.
(3) A total of $790.5 million is available for funding under this construction debt, of which $581.4 million was funded and outstanding at June 30, 2003.
(4) As of August 8, 2003, the Company has funded $51.0 million as additional collateral on selected debt (see Note 8). All remaining debt is non-recourse to the Company.
Investments in unconsolidated entities include the Unconsolidated Properties as well as various development properties under construction or pending construction. 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 capitalizes 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 six months ended June 30, 2003 and 2002, the Company capitalized $10.9 million and $8.0 million, respectively, in interest cost related to its unconsolidated development projects (which reduced interest expense incurred in the consolidated statements of operations).
The Company generally contributes between 25% and 35% of the project cost of the unconsolidated projects under development, with the remaining cost financed through third-party construction mortgages.
See Note 2 for further discussion regarding the adoption of FIN No. 46 and its effect on the Company’s unconsolidated development projects.
8. Deposits - - Restricted
As of June 30, 2003, deposits-restricted totaled $280.9 million and primarily included the following:
• Deposits in the amount of $51.0 million held in third party escrow accounts to provide collateral for third party construction financing in connection with unconsolidated development projects;
• Approximately $163.1 million in tax-deferred (1031) exchange proceeds; and
• Approximately $66.8 million for resident security, utility, and other deposits.
9. Mortgage Notes Payable
As of June 30, 2003, the Company had outstanding mortgage indebtedness of approximately $2.9 billion.
During the six months ended June 30, 2003, the Company:
• Repaid $178.1 million of mortgage loans;
• Assumed $61.5 million of mortgage debt on certain properties in connection with their acquisitions and/or consolidation;
• Obtained $48.7 million of mortgage loans on certain properties; and
14
• Relinquished $9.1 million of mortgage debt assumed by the purchaser in connection with the disposition of certain properties.
As of June 30, 2003, scheduled maturities for the Company’s outstanding mortgage indebtedness were at various dates through October 1, 2033. At June 30, 2003, the interest rate range on the Company’s mortgage debt was 0.90% to 12.465%. During the six months ended June 30, 2003, the weighted average interest rate on the Company’s mortgage debt was 5.96%.
10. Notes
As of June 30, 2003, the Company had outstanding unsecured notes of approximately $2.9 billion net of a $6.8 million discount and including a $7.9 million premium.
On June 5, 2003, the Operating Partnership filed a Form S-3 registration statement with the SEC to register $2.0 billion of debt securities. The SEC declared this registration statement effective on June 11, 2003. In addition, the Operating Partnership carried over $280.0 million related to the registration statement effective on September 8, 2000. As of June 30, 2003, $2.28 billion remained available for issuance under this registration statement.
• Issued $400.0 million of ten-year 5.20% fixed–rate public notes, receiving net proceeds of $397.5 million.
As of June 30, 2003, scheduled maturities for the Company’s outstanding notes were at various dates through 2029. At June 30, 2003, the interest rate range on the Company’s notes was 4.75% to 7.75%. During the six months ended June 30, 2003, the weighted average interest rate on the Company’s notes was 6.52%.
11. Line of Credit
The Company has a revolving credit facility with potential borrowings of up to $700.0 million. As of June 30, 2003, no amounts were outstanding and $50.2 million was restricted (dedicated to support letters of credit and not available for borrowing) on the line of credit. During the six months ended June 30, 2003, the weighted average interest rate was 1.85%. EQR has guaranteed the Operating Partnership’s line of credit up to the maximum amount and for the full term of the facility.
12. Derivative Instruments
The following table summarizes the consolidated derivative instruments at June 30, 2003 (dollar amounts are in thousands):
Cash FlowHedges
Fair Value Hedges
ForwardStarting Swaps
InterestRate Caps
OffsettingReceiveFloatingSwaps/Caps
Offsetting PayFloatingSwaps/Caps
Current Notional Balance
400,000
120,000
37,000
255,120
Lowest Possible Notional
251,410
Highest Possible Notional
431,444
Lowest Interest Rate
3.65
7.25
4.34
6.50
4.53
4.46
Highest Interest Rate
5.81
4.48
6.00
Earliest Maturity Date
2005
2014
2004
Latest Maturity Date
2007
Estimated Asset (Liability) Fair Value
(9,771
8,877
(2,413
(1,136
1,096
15
During the six months ended June 30, 2003, the Company paid approximately $13.0 million to terminate eight forward starting interest rate swaps in conjunction with the issuance of $400.0 million of ten-year unsecured notes. The $13.0 million payment has been deferred and will be recognized as additional interest expense over the ten-year life of the unsecured notes.
At June 30, 2003, certain unconsolidated 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 hedges on its consolidated balance sheets. These swaps have been designated as cash flow hedges with a current aggregate notional amount of $338.2 million (notional amounts range from $77.1 million to $391.2 million over the terms of the swaps) at interest rates ranging from 1.78% to 6.94% maturing at various dates ranging from 2003 to 2005 with a net liability fair value of $10.4 million. During the six months ended June 30, 2003, the Company recognized an unrealized gain of $0.8 million due to ineffectiveness of certain of these unconsolidated development derivatives (included in income from investments in unconsolidated entities).
On June 30, 2003, the net derivative instruments were reported at their fair value as other liabilities of approximately $3.3 million and as a reduction to investments in unconsolidated entities of approximately $10.4 million. As of June 30, 2003, there were approximately $39.0 million in deferred losses, net, included in accumulated other comprehensive loss. Based on the estimated fair values of the net derivative instruments at June 30, 2003, the Company may recognize an estimated $14.8 million of accumulated other comprehensive loss as additional interest expense during the twelve months ending June 30, 2004, of which $7.3 million is related to the unconsolidated development partnerships.
13. 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:
(Amounts in thousands except per share amounts)
Numerator:
Income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities, discontinued operations and preferred distributions
Income from continuing operations available to Common Shares
78,982
112,762
41,697
52,680
Numerator for net income per share – basic
Effect of dilutive securities:
Allocation to Minority Interests – Operating Partnership
9,171
7,343
Distributions on convertible preferred shares/units
2,425
1,211
Numerator for net income per share – diluted
244,027
179,178
122,536
96,406
16
Denominator:
Denominator for net income per share – basic
OP Units
22,294
22,831
22,316
22,653
Convertible preferred shares/units
3,136
3,133
Share options/restricted shares
1,944
3,465
2,388
Denominator for net income per share – diluted
Net income per share – basic (1):
0.43
0.17
0.20
0.48
0.10
0.24
0.09
0.01
0.08
0.04
Net income per share – diluted:
0.34
0.47
(1) All net income per share – basic amounts have been calculated considering an allocation for Minority Interests. The following amounts were used in the calculation of the individual components of net income per share – basic for the periods presented (all amounts are net of an allocation of Minority Interests in the Operating Partnership):
89,908
116,809
47,023
55,451
130,319
26,259
65,004
23,677
3,094
22,326
127
9,913
Convertible preferred share/units that could be converted into 11,807,095 and 15,648,034 weighted average Common Shares for the six months ended June 30, 2003 and 2002, respectively, and 11,807,095 and 15,369,255 weighted average Common Shares for the quarters ended June 30, 2003 and 2002, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
14. Discontinued Operations
The Company has presented separately as discontinued operations in all periods the results of operations for all wholly owned assets disposed of on or after January 1, 2002 (the date of adoption of SFAS No. 144).
The components of discontinued operations are outlined below and include the results of operations for the respective periods that the Company owned such assets during the six months and quarters ended
June 30, 2003 and 2002, including the following:
• The Wholly Owned Properties sold during 2003 (see Note 5); and
• The Wholly Owned Properties and the furniture rental business sold during 2002.
23,112
70,045
7,429
33,125
122
109
Furniture income
1,361
(4
23,234
71,423
7,538
33,126
EXPENSES (1)
10,643
20,270
4,239
10,289
2,631
7,424
936
3,409
112
83
62
43
5,810
16,162
1,919
7,614
685
1,969
244
1,027
26
1
Furniture expenses
1,303
19,887
47,237
7,401
22,395
(1) Includes expenses paid in the current period for Wholly Owned Properties sold in prior periods related to the Company’s period of ownership.
15. Stock-Based Compensation
Prior to 2003, the Company had chosen to account for its stock-based compensation in accordance with APB No. 25, Accounting for Stock Issued to Employees, which resulted in no compensation expense for options issued with an exercise price equal to or exceeding the market value of the Company’s Common Shares on the date of grant (intrinsic method). The Company has elected to expense its stock-based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148), Accounting for Stock Based Compensation, effective in the first quarter of 2003, which resulted in compensation expense being recorded based on the fair value of the stock compensation granted or modified.
SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123. The Company has chosen to use the “Prospective Method”. This method requires that companies apply the recognition provisions of SFAS No. 123 to only employee awards granted or modified after the beginning of the fiscal year in which the recognition provisions are first applied, or January 1, 2003. Compensation expense under all of the Company’s plans is generally recognized over periods ranging from three months to five years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the six months and quarter ended June 30, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.
The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period presented:
(Amounts in thousands except per share amounts )
Net income available to Common Shares – as reported
Add: Stock-based employee compensation expense included in reported net income:
Restricted/performance shares
9,912
2,912
4,828
Share options (1)
2,014
307
ESPP discount
805
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards:
(9,912
(2,912
(4,828
(4,165
(3,051
(1,266
(1,524
(805
(925
(315
(267
Net income available to Common Shares – pro forma
221,170
161,418
111,195
87,250
Earnings per share:
Basic – as reported
Basic – pro forma
0.59
Diluted – as reported
Diluted – pro forma
0.81
(1) Share options for the six months ended June 30, 2003 included $1.4 million of expense recognition related to options granted in the first quarter of 2003 to the Company’s former chief executive officer. These options vested immediately upon grant.
16. Commitments and Contingencies
The Company, as an owner of real estate, is subject to various Federal, state and local environmental laws. 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 pending or 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.
As of June 30, 2003, the Company has 18 projects in various stages of development with estimated completion dates ranging through December 31, 2004. The Company expects to fund approximately $5.6 million in connection with these properties during the remainder of 2003 and in 2004. The three development agreements currently in place have the following key terms:
• The first development 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 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. The Company has an obligation to fund up to an additional $13.0 million to
19
guarantee third party construction financing, if required.
• The second development partner has the right, at any time following completion of a project, to require the Company to purchase the partners’ interest in that project at a mutually agreeable price. If the Company and the 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 its 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 its 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, the Company must purchase, at the agreed-upon price, any projects remaining unsold.
• The third development partner has the exclusive right for six months following stabilization (generally defined as having achieved 90% occupancy for three consecutive months following the substantial completion of a project) to market a project for sale. Thereafter, either the Company or its development partner may market a project for sale. If the Company’s development partner proposes the sale, the Company may elect to purchase the project at the price proposed by its partner or defer the sale until two independent appraisers appraise the project. If the two appraised values vary by more than 5%, a third appraiser will be chosen to determine the fair market value of the property. Once a value has been determined, the Company may elect to purchase the property or authorize its development partner to sell the project at the agreed-upon value.
In connection with one of its mergers, 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 June 30, 2003, this enhancement was still in effect at a commitment amount of $12.7 million.
17. Asset Impairment
For both the six months ended June 30, 2003 and 2002, the Company recorded approximately $0.6 million of asset impairment charges related to its technology investments. These charges were the result of a review of the existing investments reflected on the consolidated balance sheet. These impairment losses are reflected on the consolidated statements of operations in total expenses and include the write-down of assets classified as other assets.
18. 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 and includes Equity Corporate Housing (“ECH”). 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 98.4% and 98.6% of total revenues for the six months ended June 30, 2003 and 2002, respectively, and approximately 98.1% and 98.4% of total revenues for the quarters ended June 30, 2003 and 2002, respectively. The Company’s rental real estate segment comprises approximately 99.8% and 99.7% of total assets at June 30, 2003 and December 31, 2002, respectively.
The primary financial measure for the Company’s rental real estate segment is net operating
20
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). The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities. 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 $551.5 million and $576.3 million for the six months ended June 30, 2003 and 2002, respectively, and approximately $277.9 million and $289.6 million for the quarters ended June 30, 2003 and 2002, respectively.
During the acquisition, development and/or disposition of real estate, the Company considers its NOI return on total investment as the primary measure of financial performance.
The Company’s fee and asset management activity is immaterial and does not meet the threshold requirements of a reportable segment as provided for in SFAS No. 131.
All revenues are from external customers and there is no customer who contributed 10% or more of the Company’s total revenues during the six months ended June 30, 2003 or 2002.
19. Subsequent Events/Other
Subsequent to June 30, 2003 and through August 8, 2003, the Company:
• Acquired one property consisting of 200 units for approximately $27.0 million;
• Disposed of three properties and various individual condominium units consisting of 592 units for approximately $43.7 million;
• Assumed $0.8 million of mortgage debt on one property in connection with its consolidation;
• Repaid $10.9 million of mortgage debt at/or prior to maturity; and
• Relinquished $15.7 million of mortgage debt assumed by the purchaser in connection with the disposition of certain properties.
21
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, 2002.
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”, “estimates”, “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:
• The total number of development units, cost of development and completion dates as well as anticipated capital expenditures for replacements and building improvements all reflect the Company’s best estimates and are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation;
• Alternative sources of capital to the Company or labor and materials required for maintenance, repair, capital expenditure or development are more expensive than anticipated;
• Occupancy levels and market rents may be adversely affected by national and local economic and market conditions including, without limitation, new construction of multifamily housing, continuing decline in employment, availability of low interest mortgages for single-family home buyers and the potential for geopolitical instability, all of which are beyond the Company’s control; and
• Additional factors as discussed in Part I of the Annual Report on Form 10-K, particularly those under “Risk Factors”.
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. Forward-looking statements and related uncertainties are also included in Note 6 to the Notes to Consolidated Financial Statements in this report.
Results of Operations
The following table summarizes the number of properties and related units for the periods presented:
Properties
Units
Purchase /Sale Price$ Millions
At December 31, 2001
1,076
224,801
Q1/Q2 2002 Acquisitions
1,983
166.5
Ft. Lewis Joint Venture
3,652
Q1/Q2 2002 Dispositions
(23
(3,654
197.2
Q1/Q2 2002 Completed Developments
1,181
At June 30, 2002
1,065
227,963
Q3/Q4 2002 Acquisitions
1,651
123.4
Q3/Q4 2002 Dispositions
(35
(7,059
349.0
Q3/Q4 2002 Completed Developments
1,020
Q3/Q4 2002 Unit Configuration Changes
At December 31, 2002
1,039
223,591
Q1/Q2 2003 Acquisitions
277.7
Q1/Q2 2003 Dispositions
(44
(10,308
498.4
Q1/Q2 2003 Completed Developments
1,274
Q1/Q2 2003 Unit Configuration Changes
129
At June 30, 2003
Significant changes in revenues between the six months and quarters presented have resulted primarily from reduced rental income through increased concessions or reduced apartment rents and occupancy at many of our properties. Significant changes in expenses have resulted from increases in property and maintenance expenses including payroll, maintenance, building, utilities and leasing and advertising as well as real estate taxes, partially offset by decreases in property management expenses. In addition, the Company’s acquisition, disposition and completed development activity has impacted overall results of operations for the six months and quarters ended June 30, 2003 and 2002. These changes are discussed in greater detail in the following paragraphs.
Properties that the Company owned for the entire six month periods ended June 30, 2003 as well as June 30, 2002 (the “Six-Month 2003 Same Store Properties”), which represented 185,329 units and properties that the Company owned for all of both the quarters ended June 30, 2003 and June 30, 2002 (the “Second Quarter 2003 Same Store Properties”), which represented 185,697 units, also impacted the Company’s results of operations. Both the Six-Month 2003 Same Store Properties and Second Quarter 2003 Same Store Properties are discussed in the following paragraphs.
Comparison of the six months ended June 30, 2003 to the six months ended June 30, 2002
For the six months ended June 30, 2003, income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations decreased by approximately $28.2 million when compared to the six months ended June 30, 2002.
Revenues from the Six-Month 2003 Same Store Properties decreased primarily as a result of lower overall physical occupancy, increased concessions and lower rental rates charged to both new and renewal residents. Property operating expenses from the Six-Month 2003 Same Store Properties increased mainly due to higher payroll, maintenance, utility and building costs. The following tables provide comparative revenue, expense, net operating income (“NOI”) and weighted average occupancy for the Six-Month 2003 Same Store Properties (NOI represents rental income less: 1) property and maintenance expense; 2) real estate taxes and insurance expense; and 3) property management expense):
23
June YTD 2003 vs. June YTD 2002
YTD over YTD Same-Store Results
$ in Millions – 185,329 Same-Store Units
Description
Revenues
Expenses
NOI
YTD 2003
874.9
344.6
530.3
YTD 2002
904.2
324.2
580.0
Change
(29.3
20.4
(49.7
(3.2
)%
6.3
(8.6
Same-Store Occupancy Statistics
92.8
94.1
(1.3
The Company’s primary financial measure for evaluating each of its apartment communities is NOI. The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s apartment communities.
For properties that the Company acquired prior to January 1, 2002 and expects to continue to own through December 31, 2003, the Company anticipates the following operating results for the full year ending December 31, 2003:
2003 Same-Store Operating Assumptions
Physical Occupancy
93.0%
Revenue Change
(3.5%) to (1.2%)
Expense Change
2.8% to 5.2%
NOI Change
(9.2%) to (3.7%)
Dispositions
$700.0 million
These 2003 operating assumptions are based on current expectations and are forward-looking.
Rental income from properties other than Six-Month 2003 Same Store Properties increased by approximately $22.3 million primarily as a result of revenue from properties acquired in 2002 and 2003 and additional Partially Owned Properties consolidated in the fourth quarter of 2002.
Interest and other income decreased by approximately $2.2 million, primarily as a result of lower interest rates being earned on short-term investment accounts along with lower balances on deposit in escrow related accounts.
Property management expenses include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to third party management companies. These expenses decreased by approximately $5.5 million or 14.5%. This decrease is primarily attributable to a reversal of a profit sharing accrual in the first quarter of 2003 related to the 2002 calendar year as the Company didn’t achieve its stated goals and management elected not to make a discretionary contribution to the plan. In addition, the Company recorded lower expense in connection with granting less restricted shares and the anticipated 401(k) match to its employees during the first six months of 2003 and no accrued expense related to 2003 profit sharing.
Fee and asset management revenues, net of fee and asset management expenses, increased by $3.6
24
million primarily as a result of additional income allocated from Ft. Lewis for 2002 activity and received in May 2003. As of June 30, 2003 and 2002, the Company managed 19,011 units and 20,142 units, respectively, for third parties and unconsolidated entities.
Interest expense, including amortization of deferred financing costs, decreased approximately $5.9 million primarily due to lower variable interest rates. During the six months ended June 30, 2003, the Company capitalized interest costs of approximately $10.9 million as compared to $12.3 million for the six months ended June 30, 2002. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities. The effective interest cost on all indebtedness for the six months ended June 30, 2003 was 6.40% as compared to 6.63% for the six months ended June 30, 2002.
General and administrative expenses, which include corporate operating expenses, decreased approximately $2.2 million between the periods under comparison. This decrease was primarily due to lower expenses recorded in connection with granting less restricted shares to employees during the first six months of 2003 offset by approximately a $2.1 million increase related to the Company’s decision to expense its stock based compensation in accordance with SFAS No. 123 and its amendment (SFAS No. 148). In addition, lower state income and franchise taxes also contributed to this decrease.
The Company recorded impairment charges on its technology investments of approximately $0.6 million for both the six months ended June 30, 2003 and 2002. See Note 17 in the Notes to Consolidated Financial Statements for further discussion.
Income (loss) from investments in unconsolidated entities decreased approximately $2.0 million between the periods under comparison. This decrease is primarily the result of increased operating losses from equity investments partially offset by unrealized gains on derivative instruments.
Net gain on sales of discontinued operations increased approximately $112.5 million between the periods under comparison. This increase is primarily the result of a greater number of properties sold during the six months ended June 30, 2003, as well as the fact that several properties were more fully depreciated.
Discontinued operations, net, decreased approximately $20.8 million between the periods under comparison. See Note 14 in the Notes to Consolidated Financial Statements for further discussion.
Comparison of the quarter ended June 30, 2003 to the quarter ended June 30, 2002
For the quarter ended June 30, 2003, income before allocation to Minority Interests, income (loss) from investments in unconsolidated entities, net gain (loss) on sales of unconsolidated entities and discontinued operations decreased by approximately $11.6 million when compared to the quarter ended June 30, 2002.
Revenues from the Second Quarter 2003 Same Store Properties decreased primarily as a result of lower overall physical occupancy, increased concessions and lower rental rates charged to both new and renewal residents. Property operating expenses from the Second Quarter 2003 Same Store Properties increased mainly due to higher payroll, maintenance, utility, building and leasing and advertising costs. The following tables provide comparative revenue, expense, NOI and weighted average occupancy for the Second Quarter 2003 Same Store Properties:
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Second Quarter 2003 vs. Second Quarter 2002
Quarter over Quarter Same-Store Results
$ in Millions – 185,697 Same-Store Units
Q2 2003
438.4
173.5
264.9
Q2 2002
451.9
164.8
287.1
(13.5
8.7
(22.2
(3.0
5.3
(7.7
93.0
(1.1
Rental income from properties other than Second Quarter 2003 Same Store Properties increased by approximately $11.1 million primarily as a result of revenue from properties acquired in 2002 and 2003 and additional Partially Owned Properties consolidated in the fourth quarter of 2002.
Interest and other income decreased by approximately $1.4 million, primarily as a result of a $0.7 million one-time financing fee related to the Fort Lewis loan closing in the second quarter of 2002. In addition, lower interest rates being earned on short-term investment accounts along with lower balances on deposit in escrow related accounts also contributed to this decrease.
Property management expenses include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to third party management companies. These expenses decreased by approximately $1.9 million or 10.3%. The Company recorded lower expense in connection with granting less restricted shares and the anticipated 401(k) match to its employees during the first six months of 2003 and no accrued expense related to 2003 profit sharing.
Fee and asset management revenues, net of fee and asset management expenses, increased by $2.7 million primarily as a result of additional income allocated from Ft. Lewis for 2002 activity and received in May 2003. As of June 30, 2003 and 2002, the Company managed 19,011 units and 20,142 units, respectively, for third parties and unconsolidated entities.
Interest expense, including amortization of deferred financing costs, decreased approximately $2.4 million primarily due to lower variable interest rates. During the quarter ended June 30, 2003, the Company capitalized interest costs of approximately $5.5 million as compared to $6.4 million for the quarter ended June 30, 2002. This capitalization of interest primarily related to equity investments in unconsolidated entities engaged in development activities. The effective interest cost on all indebtedness for the quarter ended June 30, 2003 was 6.40% as compared to 6.75% for the quarter ended June 30, 2002.
General and administrative expenses, which include corporate operating expenses, decreased approximately $2.6 million between the periods under comparison. This decrease was primarily due to lower expenses recorded in connection with granting less restricted shares to employees and lower accrued expenses related to deferred compensation during the quarter ended June 30, 2003 offset by a $0.3 million increase related to the Company’s decision to expense its stock based compensation. In addition, lower state income and franchise taxes also contributed to this decrease.
The Company recorded impairment charges on its technology investments of approximately $0.3 million for both quarters presented. See Note 17 in the Notes to Consolidated Financial Statements for
further discussion.
Income (loss) from investments in unconsolidated entities decreased approximately $1.9 million between the periods under comparison. This decrease is primarily the result of increased operating losses on equity investments.
Net gain on sales of discontinued operations increased approximately $44.7 million between the periods under comparison. This increase is primarily the result of a greater number of properties sold during the quarter ended June 30, 2003, as well as the fact that several properties were more fully depreciated.
Discontinued operations, net, decreased approximately $10.6 million between the periods under comparison. See Note 14 in the Notes to Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
As of January 1, 2003, the Company had approximately $29.9 million of cash and cash equivalents and $499.2 million available under its line of credit (net of $60.8 million which was restricted/dedicated to support letters of credit and not available for borrowing). After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Company’s cash and cash equivalents balance at June 30, 2003 was approximately $243.8 million and the amount available on the Company’s line of credit was $649.8 million (net of $50.2 million which was restricted/dedicated to support letters of credit and not available for borrowing).
Part of the Company’s acquisition and development funding strategy and the funding of investments in various unconsolidated entities 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 six months ended June 30, 2003, the Company:
• Disposed of forty-four properties (including two Unconsolidated Properties) and received net proceeds of approximately $481.8 million;
• Issued $400.0 million of 5.20% fixed rate unsecured debt receiving net proceeds of $397.5 million;
• Issued $150.0 million of 6.48% Series N Cumulative Redeemable Preferred Shares and received net proceeds of $145.3 million;
• Obtained $48.7 million in new mortgage financing; and
• Issued approximately 0.9 million Common Shares and received net proceeds of $17.9 million.
All of these proceeds were primarily utilized to:
• Purchase additional properties;
• Repay mortgage indebtedness on selected properties;
• Repay the line of credit; and
• Redeem the Series L Preferred Shares;
• Acquired six properties, and two additional units at an existing property, utilizing cash of $243.0 million;
• Repaid $140.0 million on its line of credit; and
• Redeemed $100.0 million of 7.625% Series L Cumulative Redeemable Preferred Shares at its
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liquidation value.
Depending on its analysis of market prices, economic conditions, and other opportunities for the investment of available capital, the Company may repurchase up to an additional $85.0 million of its Common Shares pursuant to its existing share buyback program authorized by the Board of Trustees. The Company did not repurchase any of its Common Shares during the six months ended June 30, 2003.
The Company’s total debt summary and debt maturity schedule as of June 30, 2003, are as follows:
Debt Summary
As of 6/30/03$Millions*
For the SixMonths Ended6/30/03WeightedAverage Rate*
Secured
2,851
5.96
Unsecured
2,854
6.38
5,705
6.17
Fixed Rate
5,073
6.67
Floating Rate
632
2.66
Above Totals Include:
Tax Exempt:
Fixed
533
4.28
Floating
439
2.13
972
3.31
Unsecured Revolving Credit Facility
1.85
* Net of the effect of any derivative instruments.
Debt Maturity Schedule as of June 30, 2003
Year
$Millions
% of Total
250
4.4
654
11.5
2005*
606
10.6
2006
490
8.6
298
5.2
2008
503
8.8
2009
248
4.3
2010
198
3.5
2011
691
12.1
2012+
1,767
31.0
* Includes $300 million of unsecured debt with a final maturity of 2015 that is putable/callable in 2005.
On June 5, 2003, the Operating Partnership filed a Form S-3 registration statement with the SEC to
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register $2.0 billion of debt securities. The SEC declared this registration statement effective on June 11, 2003. In addition, the Operating Partnership carried over $280.0 million related to the registration statement effective on September 8, 2000. As of June 30, 2003, $2.28 billion remained available for issuance under this registration statement.
The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of June 30, 2003 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 preference interests/units; and (iii) the liquidation value of all perpetual preferred shares and preference interests outstanding.
Capitalization as of June 30, 2003
Total Debt
5,704,691,089
Common Shares & OP Units
295,472,629
Common Share Equivalents (see below)
14,922,693
Total Outstanding at quarter-end
310,395,322
Common Share Price at June 30, 2003
25.95
8,054,758,606
Perpetual Preferred Shares Liquidation Value
615,000,000
Perpetual Preference Interests Liquidation Value
211,500,000
Total Market Capitalization
14,585,949,695
Debt/Total Market Capitalization
Convertible Preferred Shares, Preference Interests and Junior Preference Unitsas of June 30, 2003
Shares/Units
ConversionRatio
CommonShare Equivalents
Preferred Shares:
Series E
2,525,464
1.1128
2,810,336
Series G
1,264,692
8.5360
10,795,408
Series H
51,228
1.4480
74,178
190,000
1.5108
287,052
Series I
270,000
1.4542
392,634
Series J
230,000
1.4108
324,484
Series A
56,616
4.081600
231,084
Series B
7,367
1.020408
7,517
The Company’s policy is to maintain a ratio of consolidated debt-to-total market capitalization of less than 50%.
From July 1, 2003 through August 8, 2003, the Company:
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Off-Balance Sheet Arrangements and Contractual Obligations
As of June 30, 2003, the Company has 18 projects in various stages of development with estimated completion dates ranging through December 31, 2004. The three development agreements currently in place have the following key terms:
• The first development 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 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. The Company has an obligation to fund up to an additional $13.0 million to guarantee third party construction financing, if required.
In connection with one of its mergers, 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 August 8, 2003, this enhancement was still in effect at a commitment amount of $12.7 million.
As of August 8, 2003, the Company has a commitment to fund $5.9 million to Constellation Real Technologies, LLC, a real estate technology company.
See also Note 2 and Note 7 and the third paragraph of Note 16 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s investments in unconsolidated entities.
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Capitalization of Fixed Assets and Improvements to Real Estate
Our policy with respect to capital expenditures is generally to capitalize expenditures that improve the value of the property or extend the useful life of the component asset of the property. We track improvements to real estate in two major categories and several subcategories:
• Replacements (inside the unit). These include:
• carpets and hardwood floors;
• appliances;
• mechanical equipment such as individual furnace/air units, hot water heaters, etc;
• furniture and fixtures such as kitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors, countertops, etc;
• flooring such as vinyl, linoleum or tile; and
• blinds/shades.
We typically capitalize for established properties approximately $260 to $290 per unit annually for inside the unit replacements. All replacements are depreciated over a five-year estimated useful life. We expense as incurred all maintenance and turnover costs such as cleaning, interior painting of individual units and the repair of any replacement item noted above.
• Building improvements (outside the unit). These include:
• roof replacement and major repairs;
• paving or major resurfacing of parking lots, curbs and sidewalks;
• amenities and common areas such as pools, exterior sports and playground equipment, lobbies, clubhouses, laundry rooms, alarm and security systems and offices;
• major building mechanical equipment systems;
• interior and exterior structural repair and exterior painting and siding;
• major landscaping and grounds improvement; and
• vehicles and office and maintenance equipment.
We typically capitalize for established properties approximately $380 to $390 per unit annually for outside the unit building improvements. All building improvements are depreciated over a five to ten-year estimated useful life. We expense as incurred all recurring expenditures that do not improve the value of the asset or extend its useful life.
For the six months ended June 30, 2003, our actual improvements to real estate totaled approximately $76.8 million. This includes the following detail (amounts in thousands except for unit and per unit amounts):
Capitalized Improvements to Real EstateFor the Six Months Ended June 30, 2003
Total Units(1)
Replacements
Avg.Per Unit
BuildingImprovements
Avg.PerUnit
Established Properties (2)
175,480
27,299
156
35,401
201
62,700
357
New Acquisition Properties (3)
10,683
979
2,564
274
3,543
379
Other (4)
7,811
4,299
6,279
10,578
193,974
32,577
44,244
76,821
(1) Total units exclude 22,670 unconsolidated units.
(2) Wholly Owned Properties acquired prior to January 1, 2001.
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(3) Wholly Owned Properties acquired during 2001, 2002 and 2003. Per unit amounts are based on a weighted average of 9,351 units.
(4) Includes properties either Partially Owned or sold during the period, commercial space and condominium conversions.
We anticipate capitalizing annually an average of approximately $640 to $680 per unit for replacements and building improvements to our established properties. The Company expects to fund approximately $60.0 million for capital expenditures for replacements and building improvements for all consolidated properties for the remainder of 2003.
During the six months ended June 30, 2003, 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 $1.6 million. The Company expects to fund approximately $2.4 million in total additions to non-real estate property for the remainder of 2003.
Improvements to real estate and additions to non-real estate property were funded from net cash provided by operating activities.
Derivative Instruments
In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.
The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives.
See Note 12 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at June 30, 2003.
Minority Interests as of June 30, 2003 decreased by $3.2 million when compared to December 31, 2002. The primary factors that impacted this account in the Company’s consolidated statements of operations and balance sheets during the six months ended June 30, 2003 were:
• Distributions declared to Minority Interests, which amounted to $19.3 million (excluding Junior Preference Unit and Preference Interest distributions);
• The allocation of income from operations to holders of OP Units in the amount of $18.3 million;
• The allocation of income from operations to Partially Owned Properties in the amount of $0.2 million;
• The issuance of 159,427 OP Units to various limited partners at an average price of $27.48 per unit;
• The issuance of Common Shares; and
• The conversion of OP Units into Common Shares.
Total distributions paid in July 2003 amounted to $143.9 million (excluding distributions on Partially Owned Properties), which included certain distributions declared during the second quarter ended June 30, 2003.
The Company expects to meet its short-term liquidity requirements, including capital expenditures
32
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 or the cost of alternative sources of capital is too high. The fair value of and cash flow from these unencumbered properties are in excess of the requirements 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. This facility matures in May 2005 and will be used to fund property acquisitions, costs for certain properties under development and short term liquidity requirements. As of August 8, 2003, no amounts were outstanding under this facility.
Critical Accounting Policies and Estimates
The Company has identified six significant accounting policies as critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates. With respect to these critical accounting policies, management believes that the application of judgments and assessments is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The six critical accounting policies are:
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, expected holding period of each asset and legal and environmental concerns. 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.
Cost Capitalization
See the Capitalization of Fixed Assets and Improvements to Real Estate section for discussion of the policy with respect to capitalization vs. expensing of fixed asset/repair and maintenance costs. In addition, the Company capitalizes the payroll and associated costs of employees directly responsible for and who spend all of their time on the supervision of major capital projects. These costs are reflected on the balance sheet as an increase to depreciable property.
The Company follows the guidance in SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, for all development projects and uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. The Company capitalizes interest, real estate taxes and insurance and payroll and associated costs for those
33
individuals directly responsible for and who spend all of their time on development activities. The Company expenses as incurred all payroll costs of employees working directly at our properties, except for costs that are incurred during the initial lease-up phase on a development project. An allocated portion of payroll costs is capitalized based upon the occupancy of the project until stabilized occupancy is achieved. Stabilized occupancy is always deemed to have occurred no later than one year from cessation of major development activities. The incremental payroll and associated costs are capitalized to the projects under development based upon the effort directly identifiable with such projects. These costs are reflected on the balance sheet as either construction in progress or a separate component of investments in unconsolidated entities. The Company ceases the capitalization of such costs as the property becomes substantially complete and ready for its intended use.
Fair Value of Financial Instruments, Including Derivative Instruments
The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 and its amendments (SFAS Nos. 137/138/149) 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.
Revenue Recognition
Rental income attributable to leases is recorded when due from residents and is recognized monthly as it is earned, which is not materially different than on a straight-line basis. Leases entered into between a resident and a property for the rental of an apartment unit are generally year-to-year, renewable upon consent of both parties on an annual or monthly basis. Interest income is recorded on an accrual basis.
Stock-Based Compensation
SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123. The Company has chosen to use the “Prospective Method”. This method requires that companies apply the recognition provisions of SFAS No. 123 to only employee awards granted or modified after the beginning of the fiscal year in which the recognition provisions are first applied, or January 1, 2003. Compensation expense under all of the Company’s plans is generally recognized over periods ranging from three months to five years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the six months and quarter ended June 30, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. See Note 15 in the Notes to Consolidated Financial Statements for further discussion and comparative information regarding application of the fair value method to all outstanding employee awards.
34
Funds From Operations
For the six months ended June 30, 2003, Funds From Operations (“FFO”) available to Common Shares and OP Units decreased $44.1 million, or 11.6%, as compared to the six months ended June 30, 2002.
For the quarter ended June 30, 2003, FFO available to Common Shares and OP Units decreased $20.7 million, or 10.9%, as compared to the quarter ended June 30, 2002.
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, 2003 and 2002:
Funds From Operations(Amounts in thousands)(Unaudited)
Net income allocation to Minority Interests – Operating Partnership
Adjustments:
Depreciation – Non-real estate additions
(4,598
(4,573
(2,323
(2,596
Depreciation – Partially Owned Properties
(4,116
(3,751
(2,077
(1,880
Depreciation – Unconsolidated Properties
8,905
4,955
4,415
Net (gain) loss on sales of unconsolidated entities
(3,463
411
Discontinued Operations:
Net gain on sales of depreciable property
(138,105
(27,576
(67,876
(25,099
FFO available to Common Shares and OP Units – basic (1)(2)
337,650
381,783
169,015
189,713
(1) The National Association of Real Estate Investment Trusts (“NAREIT”) defines funds from operations (“FFO”) (April 2002 White Paper) as net income (computed in accordance with accounting principles generally accepted in the United States), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. The April 2002 White Paper states that gain or loss on sales of property is excluded from FFO for previously depreciated operating properties only. Once the Company commences the conversion of units to condominiums, it simultaneously discontinues depreciation of such property. Accordingly, the Company included in FFO its incremental gains or losses from the sale of condominium units to third parties, which represented net gains of $2,887 and $870 for the six months ended June 30, 2003 and 2002, respectively, and $2,444 and $531 for the quarters ended June 30, 2003 and 2002, respectively.
(2) The Company believes that FFO is helpful to investors as a supplemental measure of the operating performance of a real estate company because 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 net income or net cash flows from operating activities in accordance with GAAP. Therefore, FFO should not be exclusively considered as an alternative to net income or to net cash flows from operating activities as determined by GAAP or as a measure of liquidity. The Company’s calculation of FFO may differ from other real estate companies due to variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s market risk has not changed materially from the amounts and information reported in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, to the Company’s Form 10-K for the year ended December 31, 2002. See also Note 12 to the Notes to Consolidated Financial Statements for additional discussion of derivative instruments.
Item 4. Disclosure Controls and Procedures
Effective as of June 30, 2003, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in timely alerting them to material information. During the fiscal quarter ended June 30, 2003, there were no changes to the internal controls over financial reporting of the Company identified in connection with the Company’s evaluation or otherwise that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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, 2002.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 30, 2003. Shareholders holding 246,033,712 Common Shares (being the only class of shares entitled to vote at the meeting), or 90.29% of the Company’s issued and outstanding Common Shares as of the record date for the meeting, attended the meeting or were represented by proxy. The Company’s shareholders voted on three proposals presented at the meeting and all three received the requisite number of votes to pass. The results of the shareholders’ votes on each of the three proposals are as follows:
Proposal I— Election of the following trustees to annual terms expiring in 2004. One of the nominees, Douglas Crocker II, resigned from the Board of Trustees on April 29, 2003, and therefore did not stand for re-election at the Annual Meeting. A plurality of the votes cast is required for the election of trustees.
NOMINEE
FOR
WITHHELD
John W. Alexander
239,914,006
6,119,706
Bruce W. Duncan
241,652,507
4,381,205
Stephen O. Evans
188,931,503
57,102,209
James D. Harper, Jr.
239,892,931
6,140,781
Boone A. Knox
239,888,493
6,145,219
Sheli Z. Rosenberg
239,831,351
6,202,361
Gerald A. Spector
240,132,759
5,900,953
Michael N. Thompson
241,414,847
4,618,865
B. Joseph White
239,925,190
6,108,522
Samuel Zell
240,139,840
5,893,872
Proposal II– Amendment to the Company’s Declaration of Trust to declassify the Board of Trustees and provide for the annual election of trustees. This proposal required the affirmative vote of two-thirds of all
outstanding shares for approval.
AGAINST
ABSTAIN
Total Shares
243,072,662
1,250,928
1,710,116
% of Voted Shares
98.80
0.51
0.69
% of Outstanding
89.20
0.46
0.63
Proposal III– Approval of an amendment to the Company’s Employee Share Purchase Plan to increase the number of shares authorized for issuance under this plan. This proposal required a majority of the votes cast for approval.
238,705,998
5,231,066
2,091,551
97.02
0.85
87.60
1.92
0.77
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
3.1 Articles of Amendment to Equity Residential Declaration of Trust dated May 30, 2003.
10.1 First Amendment to Equity Residential 1993 Share Option and Share Award Plan dated as of June 10, 2003.
10.2 Second Amendment to Equity Residential 2002 Share Incentive Plan dated as of June 10, 2003.
12 Computation of Ratio of Earnings to Combined Fixed Charges.
31.1 Certification of Bruce W. Duncan, Chief Executive Officer.
31.2 Certification of David J. Neithercut, Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Bruce W. Duncan, Chief Executive Officer of the Company.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer of the Company.
(B) Reports on Form 8-K:
A report on Form 8-K filed June 19, 2003 containing information concerning the underwriting terms of the Company’s $150.0 million Series N Preferred Share offering.
37
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.
Date:
August 13, 2003
By: /s/
David J. Neithercut
Executive Vice President andChief Financial Officer
Michael J. McHugh
Executive Vice President,Chief Accounting Officerand Treasurer
Exhibit
Document
3.1
Articles of Amendment to Equity Residential Declaration of Trust dated May 30, 2003.
10.1
First Amendment to Equity Residential 1993 Share Option and Share Award Plan dated as of June 10, 2003.
10.2
Second Amendment to Equity Residential 2002 Share Incentive Plan dated as of June 10, 2003.
Computation of Ratio of Earnings to Combined Fixed Charges.
31.1
Certification of Bruce W. Duncan, Chief Executive Officer.
31.2
Certification of David J. Neithercut, Chief Financial Officer.
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Bruce W. Duncan, Chief Executive Officer of the Company.
32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of David J. Neithercut, Chief Financial Officer of the Company.