<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
- ---- of the Securities Exchange Act of 1934
For the quarter ended June 30, 1996
or
- ---- Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the period from to
Commission File Number: 1934 Act File Number: 0-25968
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
(Exact name of registrant as specified in its charter)
Delaware 54-1681657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2345 Crystal Drive
Crystal City, VA 22202
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (703) 920-8500
--------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
As of August 8, 1996, there were 22,014,421 Units of Limited Partnership
Interest of the Registrant issued and outstanding.
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Pages
-----
<C> <C>
Item 1: Financial Statements
Charles E. Smith Residential Realty L.P.
Financial Statements as of June 30, 1996, and
December 31, 1995, Filed as a Part of This Report
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Partners' Deficit 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION 20
SIGNATURES 22
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Rental property, at predecessor cost, net $ 270,429 $ 276,269
Rental property, acquired and developed, net 155,376 138,221
Cash and cash equivalents 4,084 9,478
Tenants' security deposits 3,613 3,634
Escrow funds 7,021 5,371
Investment in and advances to Property Service Businesses
and other 11,439 8,348
Deferred charges, net 18,494 18,782
Other assets 9,543 9,219
-------------- -------------
$ 479,999 $ 469,322
============== =============
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C>
Liabilities
Mortgage loans $ 413,621 $ 413,973
Notes payable 87,136 69,204
Accounts payable and accrued expenses 12,672 12,693
Tenants' security deposits 3,613 3,634
Due to related parties 255 1,441
-------------- -------------
Total liabilities 517,297 500,945
-------------- -------------
Commitments and Contingencies
Partners' deficit
21,935,621 and 21,913,562 units issued and outstanding
at June 30, 1996 and December 31, 1995, respectively (37,298) (31,623)
-------------- -------------
$ 479,999 $ 469,322
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Dollars in Thousands, Except for Per Unit Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
RENTAL PROPERTIES
Revenues $ 40,571 $ 34,743 $ 80,112 $ 68,845
Expenses
Operating 15,557 13,464 32,229 27,008
Real estate taxes 2,665 2,098 5,107 4,126
Depreciation and amortization 4,336 3,918 8,728 7,848
--------- --------- --------- ---------
Total expenses 22,558 19,480 46,064 38,982
--------- --------- --------- ---------
Operating profit - rental properties 18,013 15,263 34,048 29,863
--------- --------- --------- ---------
PROPERTY SERVICE BUSINESSES
Equity in income of Property Service Businesses 1,444 1,586 2,992 2,147
--------- --------- --------- ---------
General & administrative expenses (795) (770) (1,540) (1,423)
Interest income 265 326 534 634
Interest expense (10,631) (8,958) (21,042) (17,621)
--------- --------- --------- ---------
Net income $ 8,296 $ 7,447 $ 14,992 $ 13,600
========= ========= ========= =========
Net income per unit $ 0.38 $ 0.35 $ 0.69 $ 0.64
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
General Limited
(Dollars in Thousands, Except for Per Unit Amounts) Partner Partners Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 29, 1994 $ - $ - $ -
Contribution by Predecessors of assets, at historical cost, net of liabilities - (244,208) (244,208)
Contribution by Charles E. Smith Residential Realty, Inc. 2,014 199,360 201,374
Unit grants 23 2,257 2,280
Deferred compensation - unit grants (20) (1,975) (1,995)
Net income 152 15,089 15,241
Distributions ($0.48 per unit) (102) (10,110) (10,212)
------------ ------------ ------------
Balance, December 31, 1994 2,067 (39,587) (37,520)
Units exchanged for acquisitions 155 15,336 15,491
Amortization of deferred compensation - unit grants 6 564 570
Net income 311 30,742 31,053
Distributions ($1.915 per unit) (412) (40,805) (41,217)
------------ ------------ ------------
Balance, December 31, 1995 2,127 (33,750) (31,623)
Units exchanged for acquisitions 5 508 513
Amortization of deferred compensation - unit grants 3 282 285
Net income 150 14,842 14,992
Distributions ($0.98 per unit) (215) (21,250) (21,465)
------------ ------------ ------------
Balance, June 30, 1996 (Unaudited) $ 2,070 $ (39,368) $ (37,298)
============ ============ ============
Units issued and outstanding at June 30, 1996 211,810 21,723,811 21,935,621
============ ============ ============
Units issued and outstanding at December 31, 1995 211,810 21,701,752 21,913,562
============ ============ ============
</TABLE>
The accompanying notes are integral part of these statements.
5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
For the Six Months
Ended June 30,
---------------------------
1996 1995
---------- ----------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,992 $ 13,600
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 10,289 9,454
Increase in other assets 676 150
(Decrease) increase in accounts payable and accrued expenses (21) 743
---------- ----------
Net cash provided by operating activities 25,936 23,947
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (17,144) (13,616)
Additions to rental property (2,248) (2,636)
Decrease in related party payables:
Property Service Businesses (886) (10,455)
Predecessor (300)
Increase in investment in and advances
to Property Service Businesses and other (3,091) (208)
Other (3,776) (446)
---------- ----------
Net cash used in investing activities (27,445) (27,361)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITES:
Repayments of mortgage debt (352) (159)
Lines of credit:
Proceeds from draws 30,000 14,725
Repayments (13,100) (7,000)
Proceeds from construction loans 1,032 11,358
Distributions to unitholders (21,465) (20,290)
---------- ----------
Net cash used in financing activities (3,885) (1,366)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,394) (4,780)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,478 18,350
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,084 $ 13,570
========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 19,764 $ 16,636
Purchase of property in exchange for units 513 13,727
Capitalized interest - 471
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial statements include all of the accounts
of Charles E. Smith Residential Realty L.P. (the "Operating Partnership") and
its subsidiary financing partnerships. All significant intercompany balances
and transactions have been eliminated. The financial information furnished is
unaudited and reflects all normal, recurring adjustments which management
believes are necessary for a fair presentation of financial position as of June
30, 1996 and the results of operations for the interim periods ended June 30,
1996 and 1995. Such interim results are not necessarily indicative of the
operating results for a full year. The accompanying financial statements should
be read in conjunction with the audited financial statements and related
footnotes appearing in the Operating Partnership's Annual Report on Form 10-K.
As discussed in the Form 10-K, 1995 results were restated to reflect a change in
accounting for the Property Service Businesses from the cost to the equity
method in compliance with the Emerging Issues Task Force consensus "Accounting
by a Real Estate Investment Trust for an Investment in a Service Corporation".
As a result, the Operating Partnership's net income for the three and six months
ended June 30, 1995 decreased by $335,000 and $660,000, respectively. The
change had no effect on Funds from Operations of the Operating Partnership.
The Operating Partnership and its subsidiaries are engaged in the
ownership, operation, management, leasing, acquisition, expansion and
development of real estate properties, primarily residential multifamily
properties. As of June 30, 1996, the Operating Partnership owns 40 existing
multifamily properties containing 14,460 apartment units, and owns and operates
two free-standing community retail shopping centers, aggregating 436,000 square
feet. Additionally, the Operating Partnership owns substantially all of the
economic interest in entities which provide multifamily and retail property
management, leasing and development services, interior construction and
renovation, building engineering and technical services, and financial advisory
services (collectively the "Property Service Businesses"). The Operating
Partnership uses the equity method of accounting for its investment in the
Property Service Businesses.
2. ACQUISITIONS
In March, 1996, the Operating Partnership acquired 309 apartment units
through the purchase of two properties in northern Virginia. A 262-unit garden-
style community in Reston, Virginia was acquired for approximately $13.7 million
in cash and 22,059 limited partnership units of the Operating Partnership valued
at $0.5 million. A 47-unit community in Old Town, Alexandria was purchased for
approximately $2.8 million in cash.
7
<PAGE>
3. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1996, the Operating Partnership implemented SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" which provides guidance on the carrying value of long-lived
assets. Implementation of the standard had no effect on the consolidated
financial statements.
4. PER UNIT DATA
Earnings per unit of the Operating Partnership for the three and six months
ended June 30, 1996 is computed based on 21,883,760 and 21,871,981 units,
respectively, which represents the weighted average number of units outstanding
during the period.
5. SUBSEQUENT EVENTS
Subsequent to June 30, 1996, the Operating Partnership acquired two
properties totaling 740 apartment units. A 625-unit highrise community in
Washington, D.C. was acquired on July 30, 1996 for approximately $42 million in
cash. On August 2, 1996, a 115-unit apartment community located in Washington,
D.C. was acquired for $5.2 million, based on assumed debt of $3.3 million and an
exchange of approximately 78,800 Operating Partnership units valued at $24 per
unit.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
accompanying financial statements and notes thereto. The results of operations
for the three and six months ended June 30, 1996 and 1995 presented in the
Consolidated Statements of Operations and discussed below represent the
operations of Charles E. Smith Residential Realty L.P. (the "Operating
Partnership") and its subsidiary financing partnerships.
FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes", "anticipates", and
"expects" and similar expressions are intended to identify forwarding-looking
statements. Such statements indicate that assumptions have been used that are
subject to a number of risks and uncertainties which could cause actual
financial results or management plans and objectives to differ materially from
those projected or expressed herein, including: the effect of national and
regional economic conditions, particularly with regard to the levels of
multifamily property occupancy and rental growth in the Washington, D.C.
metropolitan area; the registrant's ability to identify and secure additional
properties and sites that meet its criteria for acquisition or development; the
acceptance of the registrant's financing plans by the capital markets, and the
effect of prevailing market interest rates; and other risks described from time
to time in the registrant's filings with the Securities and Exchange Commission.
Given these uncertainties, readers are cautioned not to place undue reliance on
such statements. The registrant undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances.
RENTAL PROPERTIES
Revenues, expenses and operating income before interest and
general/administrative expenses from the multifamily and retail properties for
the three and six months ended June 30, 1996 and 1995 were as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Multifamily Properties - Core
Revenues $ 32,843 $ 31,667 $ 65,578 $ 63,124
Expenses (14,770) (14,081) (30,677) (28,630)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 18,073 $ 17,586 $ 34,901 $ 34,494
======== ======== ======== ========
Multifamily Properties -
Acquisitions and development
Revenues $ 5,244 $ 620 $ 9,608 $ 868
Expenses (2,519) (527) (4,778) (714)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 2,725 $ 93 $ 4,830 $ 154
======== ======== ======== ========
Retail Properties
Revenues $ 2,484 $ 2,456 $ 4,926 $ 4,853
Expenses (933) (954) (1,881) (1,790)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 1,551 $ 1,502 $ 3,045 $ 3,063
======== ======== ======== ========
Total Rental Properties
Revenues $ 40,571 $ 34,743 $ 80,112 $ 68,845
Expenses (18,222) (15,562) (37,336) (31,134)
-------- -------- -------- --------
Operating income before
depreciation and amortization 22,349 19,181 42,776 37,711
Depreciation and amortization (4,336) (3,918) (8,728) (7,848)
-------- -------- -------- --------
Operating income before interest
and general/administrative
expenses $ 18,013 $ 15,263 $ 34,048 $ 29,863
======== ======== ======== ========
</TABLE>
PROPERTY SERVICE BUSINESSES
The Operating Partnership's 99% interest in the revenues, expenses and
operating income before depreciation and amortization from the various Property
Service Businesses for the three and six months ended June 30, 1996 and 1995
were as follows:
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Multifamily and Retail Property
Management and Other
Revenues $ 2,688 $ 2,347 $ 5,795 $ 4,656
Expenses/1/ (2,303) (1,886) (4,495) (3,833)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 385 $ 461 $ 1,300 $ 823
======== ======== ======== ========
Interior Construction and Renovation
Services
Revenues $ 1,264 $ 1,404 $ 2,295 $ 2,533
Expenses/1/ (1,184) (1,201) (2,351) (2,470)
-------- -------- -------- --------
Operating income (loss) before
depreciation and amortization $ 80 $ 203 $ (56) $ 63
======== ======== ======== ========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 10,500 $ 9,571 $ 20,179 $ 19,597
Expenses/1/ (9,648) (8,753) (18,674) (18,026)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 852 $ 818 $ 1,505 $ 1,571
======== ======== ======== ========
Financing Services
Revenues $ 720 $ 805 $ 1,389 $ 1,040
Expenses/1/ (299) (366) (586) (690)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 421 $ 439 $ 803 $ 350
======== ======== ======== ========
Total Property Services
Revenues $ 15,172 $ 14,127 $ 29,658 $ 27,826
Expenses/1/ (13,434) (12,206) (26,106) (25,019)
-------- -------- -------- --------
Operating income before
depreciation and amortization 1,738 1,921 3,552 2,807
Depreciation and amortization (294) (335) (560) (660)
-------- -------- -------- --------
Equity in income of Property
Service Businesses $ 1,444 $ 1,586 $ 2,992 $ 2,147
======== ======== ======== ========
</TABLE>
/1/ Includes general and administrative costs.
11
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 1996 to Three Months Ended June 30,
1995.
Summary. Net income of the Operating Partnership increased $0.9
million, or 11.4%, from $7.4 million for the three months ended June 30, 1995 to
$8.3 million for the three months ended June 30, 1996. Funds from Operations
("FFO") of the Operating Partnership increased $1.3 million, or 11.1%, from
$11.3 million to $12.6 million, during the same period. FFO of the Operating
Partnership increased 19%, from $4.8 million to $5.7 million during the same
period. The increases in both net income and FFO are attributable to increases
in operating income from the residential properties, primarily the acquisition
and development properties. These increases were partially offset by increased
interest expense and a decrease in Property Service Business income.
Rental Properties. Revenue from rental properties increased $5.9
million, or 16.8%, from $34.7 million for the three months ended June 30, 1995
to $40.6 million for the three months ended June 30, 1996. The eight
acquisition and development properties (defined as properties with less than one
full calendar year of operations after stabilization and consisting of 1,998
apartment units, 309 of which were added during the first quarter of 1996)
contributed nearly 80%, or $4.6 million, of the rental revenue increase. This
reflects the acquisition/development of five properties (1,195 units)
subsequent to the second quarter of 1995.
Revenue from the core portfolio increased $1.2 million, or 3.7%, for
the three months ended June 30, 1996 compared to the prior year period with
average monthly revenue per apartment unit increasing from $847 to $878 per
unit. The balance of the increase in revenue is due primarily to higher market
rents and significantly improved vacancy over the prior year quarter. Average
economic occupancy for the core portfolio was 97.4% for the three months ended
June 30, 1996 compared to 96.5% for the comparable prior year quarter. The
increase in occupancy reflects enhanced and targeted marketing and advertising
programs implemented by management during the second quarter of 1995 in response
to softening demand at that time in certain submarkets of Virginia and
Washington, D.C.
Retail revenues during the three months ended June 30, 1996 increased
slightly (1.1%) compared to the three months ended June 30, 1995 reflecting no
significant changes in occupancy or rental rates for the retail portfolio.
Expenses from rental operations increased $2.6 million, or 17.1%, from
$15.6 million during the three months ended June 30, 1995 to $18.2 million
during the three months ended June 30, 1996 due primarily to the larger
acquisition and development portfolio which contributed $1.8 million, or 73%, of
the increase. Expenses for the core portfolio increased $.7 million, or 4.9%,
during the second quarter compared to the prior year due in part to higher real
estate taxes in the Virginia submarkets. The 1996 real estate tax assessments on
Virginia properties, which constitute the majority of the portfolio, averaged
5.5% higher than 1995 assessments while local property
12
<PAGE>
tax rates for Arlington and Fairfax counties increased by 2.1% and 5.9%,
respectively. The Operating Partnership also incurred additional expenses
related to higher than expected repair and maintenance costs for pools and
grounds due to an unseasonably cold winter season.
Property Service Businesses. The Operating Partnership's 99% equity
in the earnings of the Property Service Businesses decreased from $1.6 million
during the second quarter of 1995 to $1.4 million for the second quarter of 1996
as operating income before depreciation and amortization from the Property
Service Businesses decreased $.2 million, or 9.5%, from $1.9 million to $1.7
million. The decrease was primarily due to lower revenue and margins on work
performed by the Interior Construction and Renovation group as well as increased
expenses for Multifamily and Retail Property Management. The Operating
Partnership uses the equity method of accounting for investments in the Property
Service Businesses.
During the three months ended June 30, 1996, Interior Construction and
Renovation Services revenue decreased $0.1 million, or 10%, compared to the
prior year quarter due to a combination of a shift in the timing of several
large renovation projects for affiliated partnerships owning office buildings to
the third and fourth quarters, and an increase in third party construction
management services which carry lower margins. Third party revenue increased
from $0.2 million during the three months ended June 30, 1995 to $0.3 million
during the three months ended June 30, 1996.
Revenues for Multifamily and Retail Property Management increased $0.3
million, or 14.5%, during the second quarter of 1996 as compared to the
comparable prior year quarter due primarily to additional management fees earned
from an additional third party management contract and on the Operating
Partnership's residential portfolio. Expenses increased primarily due to
additional staffing needs related to the expanded portfolio and the associated
support costs.
Engineering and Technical Services revenue increased $.9 million, or
9.7%, during the second quarter with a resulting increase of 10.2% in operating
expenses and 4.2% in operating income. Both the higher revenues and costs were
attributable primarily to four new third party contracts for operation of HVAC
systems, as well as several large HVAC repair and replacement projects for
affiliated partnerships.
Revenue for Financing Services decreased $0.1 million, or 10%, due to
the acceleration of a refinancing in the first quarter of 1996 rather than the
second quarter. The impact, however, was mitigated by a decrease in operating
expenses. Approximately $74.1 million of refinancings were closed in the
second quarter of 1996 compared to $78.2 million during the comparable quarter
in the prior year.
Other. General and administrative expenses increased 3.2%, due
primarily to legal and other costs incurred in connection with the Operating
Partnership's ongoing acquisition and development efforts. Interest expense
increased $1.7 million, or 18.7%, due to additional borrowings under the line of
credit for completed acquisitions and development. Amounts outstanding under
lines of credit averaged $69,450 for the three months ended June 30, 1996
compared to $29,013 for the three months ended June 30, 1995.
13
<PAGE>
Comparison of Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995
Summary. Net income of the Operating Partnership increased $1.4
million, or 10.2%, from $13.6 million for the six months ended June 30, 1995, to
$15.0 million for the six months ended June 30, 1996. FFO increased $2.3
million, or 10.6%, during the same period. The increase in both net income and
FFO results from increases in operating income from the rental properties,
primarily the acquisitions and development properties as well as increased
income from the Property Service Businesses. Such increases were partially
offset by increases in interest expense and general and administrative expenses.
Rental Properties. Revenue from rental properties increased $11.3
million, or 16.4%, from $68.8 million for the six months ended June 30, 1995, to
$80.1 million for the six months ended June 30, 1996. The eight acquisition and
development properties (consisting of 1,998 units), contributed $8.7 million, or
78%, of the rental property revenue increase. Two properties purchased in 1994
totaling 627 apartment units were transferred into the core portfolio on January
1, 1996. Average monthly revenue per apartment unit of the core portfolio
increased 3.9% from $844 per month for the six months ended June 30, 1995, to
$877 per month for the six months ended June 30, 1996 due to market rent
increases and improved occupancy. Average economic occupancy was 97.2% for the
six months ended June 30, 1996 versus 96.7% for the six months ended June 30,
1995. In addition, the Operating Partnership recognized a $0.2 million fee
during the first quarter of 1996 for reimbursement of costs associated with
ongoing rental property operations. Together, these factors resulted in a $2.5
million, or 3.9%, increase in revenue from the core properties for the six
months ended June 30, 1996 compared to the six months ended June 30, 1995.
Retail revenues increased slightly (1.5%) with no significant changes
in occupancy or rental rates.
Expenses from rental operations increased $6.2 million, or 19.9%, from
$31.1 million for the six months ended June 30, 1995, to $37.3 million for the
six months ended June 30, 1996. The increases resulted primarily from the
acquisition/development of 1,826 units (subsequent to the first quarter of 1995)
which added $4.1 million to operating expenses compared to the prior year
period. The increase of $2.0 million in operating expenses for the core
portfolio was primarily due to the record cold temperatures and snowfall
experienced in the Washington, D.C. region during the first quarter of 1996.
This was primarily due to higher operating expenses for snow removal and
utilities, particularly fuel consumption, at the residential properties. In
addition, depreciation increased $0.9 million due to the acquisition of the
1,826 units.
Property Service Businesses. The Operating Partnership's 99% equity in
the earnings of the Property Service Businesses increased $0.8 million, or
39.4%, during the six months ended June 30, 1996 compared to the six months
ended June 30, 1995. Operating income before depreciation and amortization
increased $0.7 million, or 26.5%, from $2.8 million for the six months ended
June 30, 1995, to $3.6 million for the six months ended June 30, 1996.
14
<PAGE>
The increase in revenue and operating income for Multifamily and
Retail Property Management results primarily from the impact of a non-recurring
fee of $0.6 million related to the termination of a management agreement with a
hotel owned by a related party. The hotel was sold during the first quarter of
1996.
The decrease in revenues and operating income for Interior
Construction and Renovation Services during the six months ended June 30, 1996
compared to the comparable prior year is primarily due to a shift to lower
margin, third party construction management services compared to higher margin
renovation services provided to affiliated partnerships.
Operating income from Engineering and Technical Services declined 4.2%
despite a 3% increase in revenue due primarily to an increase in lower margin
third party consulting work, a decrease in HVAC projects, and the adverse impact
of severe winter weather during the first quarter.
Revenue from Financing Services increased $.3 million due primarily to
a refinancing fee earned in connection with the termination of a management
agreement with a hotel owned by a related party which was sold during the first
quarter. In addition, refinancings during the six months ended June 30, 1996
were approximately $27 million higher than the comparable prior year period.
Other. General and administrative expenses increased $.1 million, or
8.2%, due to legal and other costs incurred in connection with the Operating
Partnership's ongoing acquisition and development efforts. Interest expense
increased $3.4 million, or 19.4%, due to additional borrowings under the lines
of credit for acquisitions.
Funds from Operations. Industry analysts generally consider Funds
from Operations ("FFO") an appropriate measure of performance of an equity REIT.
The Operating Partnership computes FFO as net income (in accordance with
generally accepted accounting principles) excluding gains (or losses) from debt
restructuring, plus depreciation and amortization of real estate related assets,
in accordance with the revised definition adopted by the National Association of
Real Estate Investment Trusts. The Operating Partnership believes that to
facilitate a clear understanding of its operating results, FFO should be
examined in conjunction with net income as presented in the financial statements
and notes thereto included elsewhere in this report. FFO does not represent cash
flow from operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net income as an indicator of the
Operating Partnership's operating performance, or as an alternative to cash flow
from operations as a measure of liquidity or ability to make distributions.
Funds from Operations for the three and six months ended June 30,
1996 and 1995 are computed as follows:
15
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
- ----------------------
Net Income $ 8,296 $ 7,447 $14,992 $13,600
Depreciation of Real Property 4,336 3,918 8,728 7,848
------- ------- ------- -------
Funds from Operations $12,632 $11,365 $23,720 $21,448
======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Summary. The Operating Partnership's primary sources of liquidity are
cash flows from operating activities and proceeds from lines of credit and
construction loans. Secondary sources of liquidity include proceeds from
mortgage debt. A summary of the sources of liquidity follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
(Dollars in Thousands)
Cash from operating
activities $25,936 $23,947
Proceeds from lines of
credit and construction
loans, net 17,932 19,083
</TABLE>
The primary uses of liquidity are (i) acquisition and development of
rental property, (ii) distributions, (iii) capital improvements, and (iv)
payment on mortgage debt. A summary of the uses of liquidity are as follows:
16
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
(Dollars in Thousands)
Acquisition and development of
rental properties $17,144 $13,616
Distributions 21,465 20,290
Capital improvements 2,248 2,636
Principal payments on mortgage debt 352 159
</TABLE>
In March 1996, the Operating Partnership acquired two apartment
properties in northern Virginia totaling 309 apartment units. The 262-unit
garden apartment complex in Reston, Virginia was acquired for approximately
$13.7 million cash, and an exchange of 22,059 Operating Partnership units valued
at $0.5 million. The 47-unit community in Old Town, Alexandria was acquired for
approximately $2.8 million cash and was purchased to complement the 112-unit
apartment project Boulevard of Old Town which was purchased in April, 1995. The
acquisitions were funded through borrowings against the Operating Partnership's
lines of credit.
Subsequent to June 30, 1996, the Operating Partnership acquired two
properties totaling 740 apartment units. A 625-unit highrise community in
Washington, D.C. was acquired on July 30, 1996 for approximately $42 million in
cash funded through borrowings against the lines of credit. On August 2, 1996, a
115-unit apartment community located in Washington, D.C. was acquired for $5.2
million based upon assumed debt of $3.3 million and an exchange of approximately
78,800 Operating Partnership units valued at $1.9 million. These properties
bring the Operating Partnership's total acquisitions to eleven properties with
over 3,000 units acquired since mid-1994.
Debt
As of June 30, 1996, the Operating Partnership had mortgage
indebtedness and borrowings under the lines of credit and construction loan as
follows:
17
<PAGE>
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
--------- -----
<S> <C> <C>
Long-term mortgage debt
(maturities greater than 1 year)
Fixed rate $ 365,321 72.9%
Variable rate - -
Short-term mortgage debt
(maturities less than 1 year)
Fixed rate 30,966 6.2%
Variable rate 17,334 3.5%
$100M Acquisition Line of Credit 39,450 7.9%
$83M Acquisition Line of Credit 30,000 6.0%
Construction loan 17,686 3.5%
--------- -------
Total Debt $ 500,757 100.0%
========= =======
</TABLE>
As of June 30, 1996, the Operating Partnership's Debt to Total Market
Capitalization Ratio was 48.7%, based on 21,935,621 units outstanding at a price
of $24.00. The Operating Partnership's Debt Coverage Ratio for the three months
ended June 30, 1996 was 2.37:1.
Distributions
During the six months ended June 30, 1996, the Operating Partnership
paid distributions of $21.5 million, or $.49 per unit, representing an annual
rate of $1.96 per unit.
Other
For the six months ended June 30, 1996, total capital improvements
were $2.2 million, of which $1.7 million, or $136 per core apartment unit, were
for the core portfolio. Approximately 45% of the capital expenditures on the
core portfolio are considered by management to be revenue generating or economic
improvements, as shown below, which directly affect the Operating Partnership's
ability to increase rents on specific units. The remaining 55% of capital
expenditures on the core portfolio for such items as common area improvements
indirectly influence the Operating Partnership's ability to increase rents and
are considered non-revenue generating. A summary of core capital expenditures
follows:
18
<PAGE>
<TABLE>
<CAPTION>
Total $ Actual # of Average $ Per Average $ Per
Expenditure Type Spent Units Improved Units Improved Core unit
- ---------------- ----- -------------- -------------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Replacements:
Appliances $251.0 458 $ 548 $20
Window treatments 7.1 13 546 1
Carpet 297.4 266 1,118 24
Tile 6.1 8 763 1
Renovations:
Kitchen 80.3 44 1,825 6
Bath 117.1 30 3,903 9
------ ------
Total revenue generating
improvements 759.0 61
Non-revenue generating
improvements 934.7 75
------ ------
Total capital expenditures
- core $1,693.7 $ 136
======== ======
</TABLE>
19
<PAGE>
PART II
Item 1. Legal Proceedings.
Regarding the suit filed against Smith Realty Company on November 8,
1995, alleging sexual harassment and employment discrimination based on
sexual preference pursuant to Title VII of the Civil Rights Act of 1964,
the company's motion for summary judgment was granted in full on June 7,
1996, resulting in a dismissal of all claims. On June 20, 1996, the
plaintiff appealed to the United States Court of Appeals for the Fourth
Circuit for a review of the judgment, and such request is not expected to
be considered until early 1997. The Registrant reaffirms its belief that
an adverse outcome in the remaining litigation would not have a material
adverse impact on the Registrant's financial condition or results of
operations.
The Registrant previously reported on two lawsuits brought in 1994 by
Alder Branch Realty Limited Partnership, a limited partner in Plaza
Associates Limited Partnership ("Plaza") and Tower Associates Limited
Partnership ("Tower"), whose multifamily properties are currently being
managed by Smith Realty Company ("SRC"), one of the Registrant's Property
Service Businesses: one against Robert H. Smith, as a general partner of
Plaza and Tower, and its managing agent, Charles E. Smith Management,
Inc. ("CES"), whose residential management business was purchased by the
Registrant in the Formation Transactions; and the other, purporting to be
a class action, against Ernest A. Gerardi, Jr., and Messrs. Smith and
Kogod, present or former officers of CES. These suits allege breaches of
fiducuary duties by the general partners and the payment of unfair and
excessive management fees. Because the Registrant did and does not
believe that the outcome of the suits will jeopardize the continued
management of Plaza's and Tower's multifamily properties by SRC or have a
material impact on other properties which are managed by SRC but which
did not participate in the Formation Transactions, or that an adverse
outcome in such litigation would have a material adverse effect on the
Registrant's financial condition or results of operations, the Registrant
previously stated that it would no longer report on these proceedings in
its filings with the Commission. On May 31, 1996, however, Alder Branch
Limited Partnership filed a similar lawsuit against the Registrant and
its' general partner, Charles E. Smith Residential Realty, Inc., as well
as two of the three general partners of Tower, alleging the payment of
unfair and excessive management fees and breaches of fiduciary duties by
the named general partners of Tower. The suit seeks the restitution of
fees paid to SRC by Tower, a rescission of the management agreement, and
compensatory and punitive damages in unspecified amounts. The defendants
in the latest action have filed a motion to dismiss with prejudice all
counts against the Registrant and its general partner, which is scheduled
to be heard on September 6, 1996. The Registrant believes that it is
highly unlikely that the relief demanded in this lawsuit will be granted,
but that even an adverse outcome in such litigation would not have a
material adverse effect on the Registrant's financial condition or
results of operations. If a recovery against the Registrant were granted,
it would be entitled to reimbursement from Robert H. Smith and Robert P.
Kogod under a previously-delivered indemnity agreement.
20
<PAGE>
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K
A Current Report of the Registrant on Form 8-K was filed on August
13, 1996, describing and presenting financial statements for real
estate properties acquired by the Registrant during the current
fiscal year.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
By: Charles E. Smith Residential Realty
Inc., its General Partner
Date: August 12, 1996 By: /s/ Anthony J. LoPinto
-----------------------------------------------
Anthony J. LoPinto
Executive Vice President, Chief
Financial Officer and Treasurer of
Charles E. Smith Residential Realty,
Inc. (on behalf of the Registrant and
as Principal Financial Officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,084
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,634
<PP&E> 607,019
<DEPRECIATION> (181,214)
<TOTAL-ASSETS> 479,999
<CURRENT-LIABILITIES> 16,540
<BONDS> 500,757
0
0
<COMMON> 0
<OTHER-SE> (37,298)
<TOTAL-LIABILITY-AND-EQUITY> 479,999
<SALES> 0
<TOTAL-REVENUES> 80,112
<CGS> 0
<TOTAL-COSTS> 46,064
<OTHER-EXPENSES> 1,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,508
<INCOME-PRETAX> 14,992
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,992
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,992
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
