<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 September 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 October 31, 1996, there were 21,999,464 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
-----
<S> <C>
Item 1: Financial Statements
Charles E. Smith Residential Realty L.P. Financial
Statements as of September 30, 1996 and 1995
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 21
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>
September 30, 1996 December 31, 1995
---------------------------- ----------------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, at predecessor cost, net $ 268,540 $ 276,269
Rental property, acquired and developed, net 202,487 138,221
Cash and cash equivalents 3,586 9,478
Tenants' security deposits 3,831 3,634
Escrow funds 6,449 5,371
Investment in and advances to Property Service Businesses
and other 11,364 8,348
Deferred charges, net 18,345 18,782
Other assets 9,211 9,219
---------------------------- ----------------------
$ 523,813 $ 469,322
============================ ======================
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 416,911 $ 413,973
Notes payable 129,736 69,204
Accounts payable and accrued expenses 10,486 12,693
Tenants' security deposits 3,831 3,634
Due to related parties 287 1,441
---------------------------- ----------------------
Total liabilities 561,251 500,945
---------------------------- ----------------------
Commitments and contingencies
Partners' deficit
21,999,464 and 21,913,562 units issued and outstanding
at September 30, 1996 and December 31, 1995, respectively (37,438) (31,623)
---------------------------- ----------------------
$ 523,813 $ 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 Nine Months
Ended September 30, Ended September 30,
---------------------------- -----------------------------------
1996 1995 1996 1995
------------- ------------- ---------------- ----------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
RENTAL PROPERTIES
Revenues $ 42,702 $ 37,251 $ 122,814 $ 106,096
Expenses
Operating 16,621 15,046 48,850 42,054
Real estate taxes 2,658 2,209 7,765 6,335
Depreciation and amortization 4,748 4,067 13,476 11,915
------------ ------------ ---------------- --------------
Total expenses 24,027 21,322 70,091 60,304
------------ ------------ ---------------- --------------
Operating profit - rental properties 18,675 15,929 52,723 45,792
------------ ------------ ---------------- --------------
PROPERTY SERVICE BUSINESSES
Equity in income of Property Service Businesses 1,797 1,994 4,789 4,141
------------ ------------ ---------------- --------------
General & administrative expenses (667) (611) (2,207) (2,034)
Interest income 192 365 726 999
Interest expense (11,206) (9,572) (32,248) (27,193)
------------ ------------ ---------------- --------------
Net income $ 8,791 $ 8,105 $ 23,783 $ 21,705
============ ============ ================ ==============
Net income per unit $ 0.40 $ 0.37 $ 1.09 $ 1.01
============ ============ ================ ==============
</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>
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 24 2,379 2,403
Amortization of deferred compensation - unit grants 4 401 405
Redemption of units - (192) (192)
Net income 238 23,545 23,783
Distributions ($1.47 per unit) (322) (31,892) (32,214)
----------- --------------- ---------------
Balance, September 30, 1996 (Unaudited) $ 2,071 $ (39,509) $ (37,438)
=========== =============== ===============
Units issued and outstanding at September 30, 1996 211,810 21,787,654 21,999,464
=========== =============== ===============
Units issued and outstanding at December 31, 1995 211,810 21,701,752 21,913,562
=========== =============== ===============
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
For the Nine Months
Ended September 30,
----------------------------------------------------
1996 1995
----------------------- ----------------------
<S> <C> <C>
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,783 $ 21,705
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 15,834 14,371
Decrease (increase) in other assets 8 (285)
Decrease in accounts payable and accrued expenses (2,207) (209)
---------------------- ----------------------
Net cash provided by operating activities 37,418 35,582
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (60,193) (36,285)
Additions to rental property (3,954) (2,592)
Increase (decrease) in related party payables:
Property Service Businesses (635) (9,171)
Affiliates (468) (928)
Predecessor (51) 112
Increase in investment in and advances
to Property Service Businesses and other (3,016) (2,605)
Other (2,797) (784)
---------------------- ----------------------
Net cash used in investing activities (71,114) (52,253)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITES:
Mortgage debt:
Proceeds 31,095 -
Repayments (31,417) (281)
Lines of credit:
Proceeds from draws 72,600 15,599
Repayments (13,100) -
Proceeds from construction loans 1,032 13,981
Redemption of units (192) -
Distributions to unitholders (32,214) (30,516)
---------------------- ----------------------
Net cash provided by (used in) financing activities 27,804 (1,217)
---------------------- ----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,892) (17,888)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,478 18,350
---------------------- ----------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,586 $ 462
====================== ======================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 30,294 $ 26,216
Purchase of property in exchange for units 2,403 13,727
Assumption of debt on acquisition 3,260 30,619
Capitalized interest - 598
</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
September 30, 1996 and the results of operations for the interim periods ended
September 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 decreased by
$325,000 and $986,000, respectively. The change had no effect on Funds from
Operations.
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 September 30, 1996, the Operating Partnership owns 42
existing multifamily properties containing 15,200 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, property renovation,
construction and construction management services, 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>
During the third quarter of 1996, the Operating Partnership acquired two
properties totaling 740 apartment units. A 625-unit highrise community in
Washington, D.C. was acquired in July for approximately $42 million in cash. In
August, 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
79,600 Operating Partnership units.
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 nine
months ended September 30, 1996 is computed based on 21,931,406 and 21,884,205
units, respectively, which represents the weighted average number of units
outstanding during the periods. Weighted average units for the three and nine
month periods ended September 30, 1995 were 21,765,777 and 21,529,082,
respectively.
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 nine months ended September 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.
9
<PAGE>
RENTAL PROPERTIES
Revenues, expenses and operating income before interest and
general/administrative expenses from the multifamily and retail properties for
the three and nine months ended September 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Multifamily Properties - Core
Revenues $ 33,267 $ 32,332 $ 98,845 $ 95,456
Expenses (15,489) (15,311) (46,166) (43,941)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 17,778 $ 17,021 $ 52,679 $ 51,515
======== ======== ======== ========
Multifamily Properties -
Acquisitions and development
Revenues $ 6,804 $ 2,046 $ 16,412 $ 2,914
Expenses (2,812) (1,182) (7,590) (1,896)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 3,992 $ 864 $ 8,822 $ 1,018
======== ======== ======== ========
Retail Properties
Revenues $ 2,631 $ 2,873 $ 7,557 $ 7,726
Expenses (978) (762) (2,859) (2,552)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 1,653 $ 2,111 $ 4,698 $ 5,174
======== ======== ======== ========
Total Rental Properties
Revenues $ 42,702 $ 37,251 $122,814 $106,096
Expenses (19,279) (17,255) (56,615) (48,389)
-------- -------- -------- --------
Operating income before
depreciation and amortization 23,423 19,996 66,199 57,707
Depreciation and amortization (4,748) (4,067) (13,476) (11,915)
-------- -------- -------- --------
Operating income before interest
and general/administrative
expenses $ 18,675 $ 15,929 $ 52,723 $ 45,792
======== ======== ======== ========
</TABLE>
10
<PAGE>
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 nine months ended September 30, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Multifamily and Retail Property
Management and Other
Revenues $ 2,942 $ 2,437 $ 8,737 $ 7,093
Expenses/1/ (2,338) (1,944) (6,833) (5,777)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 604 $ 493 $ 1,904 $ 1,316
======== ======== ======== ========
Interior Construction and Renovation
Services
Revenues $ 1,493 $ 1,654 $ 3,788 $ 4,187
Expenses/1/ (1,122) (1,122) (3,473) (3,592)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 371 $ 532 $ 315 $ 595
======== ======== ======== ========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 10,512 $ 10,162 $ 30,691 $ 29,759
Expenses/1/ (9,480) (9,292) (28,154) (27,318)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 1,032 $ 870 $ 2,537 $ 2,441
======== ======== ======== ========
Financing Services
Revenues $ 332 $ 574 $ 1,721 $ 1,614
Expenses/1/ (223) (150) (809) (840)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 109 $ 424 $ 912 $ 774
======== ======== ======== ========
Total Property Services
Revenues $ 15,279 $ 14,827 $ 44,937 $ 42,653
Expenses/1/ (13,163) (12,508) (39,269) (37,527)
-------- -------- -------- --------
Operating income before
depreciation and amortization 2,116 2,319 5,668 5,126
Depreciation and amortization (319) (325) (879) (985)
-------- -------- -------- --------
Equity in income of Property
Service Businesses $ 1,797 $ 1,994 $ 4,789 $ 4,141
======== ======== ======== ========
</TABLE>
/1/ Includes general and administrative costs.
11
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1996 to Three Months Ended
September 30, 1995.
Summary. Net income of the Operating Partnership increased $0.7 million, or
8.4%, from $8.1 million for the three months ended September 30, 1995 to $8.8
million for the three months ended September 30, 1996. Funds from Operations
("FFO") of the Operating Partnership increased $1.3 million, or 11.2%, from
$12.2 million to $13.5 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
decreased income from the Property Service Businesses and the retail properties.
Rental Properties. Revenue from rental properties increased $5.5 million,
or 14.6%, from $37.2 million for the three months ended September 30, 1995 to
$42.7 million for the three months ended September 30, 1996. The ten acquisition
and development properties (defined as properties with less than one full
calendar year of operations after stabilization and consisting of 2,738
apartment units, 309 and 740 of which were added during the first and third
quarters of 1996, respectively) contributed approximately 87%, or $4.8 million,
of the rental revenue increase.
Revenue from the core portfolio increased $0.9 million, or 2.9%, for the
three months ended September 30, 1996 compared to the prior year period with
average monthly revenue per apartment unit increasing from $865 to $890 per
unit. The increase is due primarily to higher market rents offset by slightly
higher vacancy over the prior year quarter. Average economic occupancy for the
core portfolio was 97.2% for the three months ended September 30, 1996 compared
to 97.7% for the comparable prior year quarter. The decrease in occupancy was
not unexpected given the aggressive efforts initiated by management to increase
market rents as well as the implementation during the third quarter of 1996 of
several revenue-enhancing initiatives, including a premium for month-to-month
leases and a move-in fee. The Company also continues to expand and aggressively
market the furnished apartment program. As a result, revenues on this product
increased $0.1 million, or 17%, over the prior year period.
Retail revenues during the three months ended September 30, 1996 decreased
$0.2 million, or 8.4%, compared to the three months ended September 30, 1995
reflecting decreased base rents and higher vacancy at the Skyline Mall. Average
occupancy at Skyline Mall declined from 96.4% during the three months ended
September 30, 1995 to 93.3% for the three months ended September 30, 1996 due to
several stores remaining vacant during the third quarter. As of October 31,
1996, Skyline Mall was 95.3% leased.
Expenses from rental operations increased $2.0 million, or 11.7%, from
$17.2 million during the three months ended September 30, 1995 to $19.2 million
during the three months ended
12
<PAGE>
September 30, 1996 due primarily to the larger acquisition and development
portfolio which contributed $1.6 million, or 81%, of the increase. Expenses
for the core residential portfolio increased $0.2 million, or 1.2%, during the
third quarter compared to the prior year. The increase is primarily due to
higher real estate taxes in the Virginia submarkets which constitute the
majority of the portfolio. Assessments averaged 5.5% higher in 1996 than in
1995 for the Virginia properties while local property tax rates for Arlington
and Fairfax counties increased by 2.1% and 5.9%, respectively. The Company also
incurred higher expenses during the third quarter of 1996 due to the expanded
furnished apartment program and the related marketing and advertising
activities. The increases in expenses were largely offset by utility savings
related to an unseasonably cool summer ($0.5 million), and a credit earned from
a ground lessor in connection with a debt refinancing ($0.2 million).
Property Service Businesses. The Operating Partnership's 99% equity in the
earnings of the Property Service Businesses decreased from $2.0 million during
the third quarter of 1995 to $1.8 million for the third quarter of 1996 as
operating income (before depreciation and amortization) from the Property
Service Businesses decreased $0.2 million, or 8.8%, from $2.3 million to $2.1
million. The decrease was primarily due to lower financing services fees as well
as lower revenue and margins on Interior Construction and Renovation Services.
These decreases were partially offset by higher operating income for both
Multifamily and Retail Property Management, and Engineering and Technical
Services. The Operating Partnership uses the equity method of accounting for
investments in the Property Service Businesses.
During the three months ended September 30, 1996, Interior Construction and
Renovation Services' revenue decreased $0.2 million, or 9.7%, compared to the
prior year quarter due primarily to a shift in the type of services provided.
During the third quarter of 1995, approximately 85% of revenue was derived from
general contracting services provided to affiliated partnerships and their
tenants. During the three months ended September 30, 1996, 71% of revenue was
derived from affiliated partnerships and their tenants while 29% was derived
from third party construction management services. As a result, revenue from
affiliated partnerships decreased by $0.2 million during the period compared to
the prior year. Management expects to continue pursuing third-party construction
management work, based on current market conditions. During the third quarter of
1996, the Interior Construction and Renovation Services was awarded a contract
with an agency of the Federal Government to manage an estimated $55 million,
multi-year construction renovation project.
Revenues for Multifamily and Retail Property Management increased $0.5
million, or 20.7%, during the third quarter of 1996 as compared to the
comparable prior year quarter due primarily to retail leasing fees earned on
leases associated with a third-party development project.
Engineering and Technical Services revenue increased $0.4 million, or 3.4%,
during the third quarter with a resulting increase of 2.0% in operating expenses
and 18.6% in operating income. Both the higher revenues and costs were
attributable primarily to large repair and replacement projects for affiliated
partnerships as well as additional services provided under contracts for
13
<PAGE>
HVAC operations and preventive maintenance.
Revenue for Financing Services decreased $0.2 million, or 42%, due to a
decrease in refinancings during the quarter. Approximately $13.8 million of
refinancings were closed in the third quarter of 1996 compared to $51 million
during the comparable quarter in the prior year.
Other. General and administrative expenses increased 9.2%, due primarily to
costs incurred in connection with the Operating Partnership's ongoing
acquisition and development efforts. Interest expense increased $1.6 million, or
17.1%, due to additional borrowings under the lines of credit for completed
acquisitions and development. Amounts outstanding under lines of credit averaged
$115.5 million for the three months ended September 30, 1996 compared to $43.3
million for the three months ended September 30, 1995.
Comparison of Nine Months Ended September 30, 1996 to Nine Months Ended
September 30, 1995
Summary. Net income of the Operating Partnership increased $2.1 million, or
9.6%, from $21.7 million for the nine months ended September 30, 1995, to $23.8
million for the nine months ended September 30, 1996. FFO increased $3.6
million, or 10.8%, during the same period. The increase in both net income and
FFO results from increases in operating income from the rental properties,
primarily the acquisition 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
and a decrease in interest income.
Rental Properties. Revenue from rental properties increased $16.7 million,
or 15.8%, from $106.1 million for the nine months ended September 30, 1995, to
$122.8 million for the nine months ended September 30, 1996. The ten acquisition
and development properties (consisting of 2,738 units), contributed $13.5
million, or 80.7%, of the rental property revenue increase. (Note that the two
properties purchased in 1994 totaling 627 apartment units were transferred into
the core portfolio on January 1, 1996.) The core portfolio contributed an
increase of $3.4 million, or 3.6%, in revenue during the nine months ended
September 30, 1996 over the prior year. Average monthly revenue per apartment
unit of the core portfolio increased from $851 to $881 per month for the nine
months ended September 30, 1995 and 1996, respectively, due to market rent
increases and a slightly improved occupancy. Average economic occupancy was
97.2% for the nine months ended September 30, 1996 versus 97.1% for the nine
months ended September 30, 1995. Core revenue includes a $0.2 million fee
recognized during the first quarter of 1996 for reimbursement of costs
associated with ongoing rental property operations.
Retail revenues decreased by $0.2 million, or 2.2%, during the nine months
ended September 30, 1996 compared to the prior year due to lower base and
percentage rents as well as higher vacancy at Skyline Mall. In addition, non-
escalatable repairs and maintenance expenses were higher than the prior year.
14
<PAGE>
Expenses from rental operations increased $8.2 million, or 17.0%, from
$48.4 million for the nine months ended September 30, 1995, to $56.6 million for
the nine months ended September 30, 1996. The increases resulted primarily from
the acquisition/development of 2,566 units (subsequent to the first quarter of
1995) which added $5.7 million to operating expenses compared to the prior year
period. The increase of $2.2 million, or 5.1%, in operating expenses for the
core portfolio was primarily due to expected increases in payroll and related
costs as well as higher furnished apartment expenses and related marketing costs
due to the expansion of this product in 1996. In addition, real estate taxes
were significantly higher in 1996 due to increases in rates and assessments. The
substantial increase in utility costs during the first quarter of 1996 due to
the record cold temperatures was substantially offset during the third quarter
due to an unseasonably cool summer. However, snow removal costs in 1996 were
substantially higher than in 1995 due to the record snowfall. In addition,
depreciation increased $1.6 million due to the acquisition of the 2,566 units.
Property Service Businesses. The Operating Partnership's 99% equity in the
earnings of the Property Service Businesses increased $0.6 million, or 15.6%,
during the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995. Operating income before depreciation and amortization
increased $0.6 million, or 10.6%, from $5.1 million for the nine months ended
September 30, 1995, to $5.7 million for the nine months ended September 30,
1996.
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.
In addition, approximately $0.3 million of leasing fees were earned during the
third quarter of 1996 in connection with retail leases for a third party
development project.
The decrease in revenues and operating income for Interior Construction and
Renovation Services during the nine months ended September 30, 1996 compared to
the prior year period is primarily due to a shift to lower margin, third party
construction management services compared to higher margin general contracting
services provided to affiliated partnerships.
Operating income from Engineering and Technical Services increased 3.9% due
primarily to an increase in third party consulting work.
Revenue from Financing Services increased $0.1 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. Overall, however, refinancings during the nine months ended September
30, 1996 were approximately $10.2 million lower than the comparable prior year
period which offset the termination related finance fee.
Other. General and administrative expenses increased $0.2 million, or 8.5%,
primarily due
15
<PAGE>
to legal and other costs incurred in connection with the Operating Partnership's
ongoing acquisition and development efforts. Interest expense increased $5.1
million, or 18.6%, 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 an alternative to net income as an indicator of the
Operating Partnership's operating performance, or an alternative to cash flow
from operations as a measure of liquidity or ability to pay dividends.
Funds from Operations for the three and nine months ended September 30,
1996 and 1995 are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
- ----------------------
Net Income of the Operating
Partnership $ 8,791 $ 8,105 $23,783 $21,705
Depreciation of Real Property 4,748 4,067 13,476 11,915
------- ------- ------- -------
Funds from Operations $13,539 $12,172 $37,259 $33,620
======= ======= ======= =======
</TABLE>
16
<PAGE>
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>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
(Dollars in Thousands)
Cash from operating
activities $37,418 $35,582
Proceeds from lines of
credit and construction
loans, net 60,532 29,580
Proceeds from mortgage debt, net 187 --
</TABLE>
In September 1996, an outstanding mortgage loan of $40.6 million (for which
the Operating Partnership and ground lessor are jointly and severally liable)
was refinanced for a new loan amount of $41 million. The ground lessor has been
allocated $9.9 million of the refinanced loan which bears interest at a fixed
rate of 8.24% and matures in August, 2009. The remaining $31.1 million allocated
to the Operating Partnership (Mortgage Pool Four) represents an increase of $0.2
million over the outstanding allocated balance at the time of refinancing and is
reflected above as net proceeds from mortgage debt.
The primary uses of liquidity are (i) acquisition and development of rental
property, (ii) dividends and distributions, (iii) capital improvements, and (iv)
payment on mortgage debt. A summary of the uses of liquidity are as follows:
17
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
(Dollars in Thousands)
Acquisition and development of
rental properties $60,193 $36,285
Distributions 32,214 30,516
Capital improvements 3,954 2,592
Principal payments on mortgage debt 509 281
</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.
During the third quarter of 1996, the Operating Partnership acquired two
properties totaling 740 apartment units. A 625-unit highrise community in
Washington, D.C. was acquired in July for approximately $42 million in cash
funded through borrowings against the lines of credit. In August, 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 79,600
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 September 30, 1996, the Operating Partnership had mortgage
indebtedness and other borrowings, which carried a weighted average interest
rate of 7.83%, as follows:
18
<PAGE>
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
---------- ------
<S> <C> <C>
Long-term mortgage debt
(maturities greater than 1 year)
Fixed rate $399,621 73.1%
Short-term mortgage debt
(maturities less than 1 year)
Variable rate 17,290 3.2%
$100M Acquisition Line of Credit 82,050 15.0%
83M Acquisition Line of Credit 30,000 5.5%
Construction loan 17,686 3.2%
-------- -----
Total Debt $546,647 100.0%
======== =====
</TABLE>
The Operating Partnership had $71 million of unused borrowing capacity
available on its lines of credit as of September 30, 1996.
As of September 30, 1996, the Operating Partnership's Debt to Total Market
Capitalization Ratio was 50.7%, based on 21,999,464 units outstanding at a
market price of $24.125. The Operating Partnership's Debt Coverage Ratio for the
three months ended September 30, 1996 was 2.37:1.
Distributions
During the nine months ended September 30, 1996, the Operating Partnership
paid distributions of $14.4 million, or $1.47 per unit. In October 1996, the
Operating Partnership declared a third quarter distribution of $0.505 per unit,
an increase of 3.1% over the $0.49 distribution paid in each of the first two
quarters of 1996.
Other
For the nine months ended September 30, 1996, total capital improvements
were $3.9 million, of which $3.1 million, or $251 per core apartment unit, were
for the core portfolio. Approximately 49% 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 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:
19
<PAGE>
<TABLE>
<CAPTION>
Total $ Actual # of Average $ Per Average $ Per
Expenditure Type Spent Units Improved Unit Improved Core Unit
- ---------------- -------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
Replacements:
Appliances $ 467.7 984 $ 475 $38
Window treatments 13.7 60 228 1
Carpet 497.0 475 1,046 40
Tile 11.0 12 920 1
Renovations:
Kitchen 286.0 130 2,200 23
Bath 244.9 63 3,887 20
-------- ------
Total revenue generating
improvements $1,520.3 $ 123
Non-revenue generating
improvements 1,603.7 128
-------- ------
Total capital expenditures
- core $3,124.0 $ 251
======== ======
</TABLE>
20
<PAGE>
PART II
Item 1. Legal Proceedings.
None except as previously reported.
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
None.
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: November 13, 1996 By: /s/ Charles R. Hagen
---------------------------------
Charles R. Hagen
Vice President, Chief Financial Officer and
Chief Accounting Officer 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,586
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,280
<PP&E> 660,109
<DEPRECIATION> (189,082)
<TOTAL-ASSETS> 523,813
<CURRENT-LIABILITIES> 14,604
<BONDS> 546,647
0
0
<COMMON> 0
<OTHER-SE> (37,438)
<TOTAL-LIABILITY-AND-EQUITY> 523,813
<SALES> 0
<TOTAL-REVENUES> 122,814
<CGS> 0
<TOTAL-COSTS> 70,091
<OTHER-EXPENSES> 2,207
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,522
<INCOME-PRETAX> 23,783
<INCOME-TAX> 0
<INCOME-CONTINUING> 23,783
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,783
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
