<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[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/A
<TABLE>
<CAPTION>
INDEX
Pages
-----
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements
Charles E. Smith Residential Realty L.P. Financial
Statements as of September 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' Interest 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 10
SIGNATURES 21
</TABLE>
<PAGE>
PART 1 - 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)
ASSETS
<S> <C> <C>
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
Other Operating Partnership Unitholders' Interest
12,055,953 and 12,205,439 units issued and outstanding
at September 30, 1996 and December 31, 1995,
respectively, at redemption value 290,850 288,663
Partners' Equity
General Partner's General and Limited Partnership Interest
9,943,511 and 9,708,123 units issued and outstanding
at September 30, 1996 and December 31, 1995, respectively (328,288) (320,286)
----------- -----------
$ 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
Property operating expenses 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
PROPERTY SERVICE BUSINESSES
Equity in income of Property Service Businesses 1,797 1,994 4,789 4,141
Corporate 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' INTEREST
(Dollars in Thousands, Except for Per Unit Amounts)
<TABLE>
<CAPTION>
General Partner's Other Operating
General and Limited Partnership Unitholders'
Interest Interest
------------------------ ------------------------
<S> <C> <C>
Balance, June 29, 1994 $ - $ -
Contribution by Predecessors of assets,
at historical cost, net of liabilities - (244,208)
Contribution by Charles E. Smith
Residential Realty, Inc. 201,374 -
Unit grants - 2,280
Deferred compensation-unit grants - (1,995)
Net income 6,532 8,709
Distributions ($.48 per unit) (4,344) (5,868)
Adjustment to reflect Other Operating Partnership Unitholders'
interest at redemption value (551,329) 551,329
------------------------ ------------------------
Balance, December 31, 1994 (347,767) 310,247
Units exchanged for acquisitions - 15,491
Amortization of deferred compensation - unit grants - 570
Net income 13,405 17,648
Distributions ($1.915 per unit) (17,693) (23,524)
Adjustment to reflect Other Operating Partnership Unitholders'
interest at redemption value 31,769 (31,769)
------------------------ ------------------------
Balance, December 31, 1995 (320,286) 288,663
Units exchanged for acquisitions - 2,403
Amortization of deferred compensation - unit grants - 405
Redemption of units - (192)
Net income 10,736 13,047
Distributions ($1.47 per unit) (14,441) (17,773)
Adjustment to reflect Other Operating Partnership Unitholders'
interest at redemption value (4,297) 4,297
------------------------ ------------------------
Balance, September 30, 1996 (unaudited) $ (328,288) $ 290,850
======================== ========================
Units issued and outstanding at September 30, 1996 9,943,511 12,055,953
======================== ========================
Units issued and outstanding at December 31, 1995 9,708,123 12,205,439
======================== ========================
</TABLE>
The accompanying notes are an 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 Nine Months
Ended September 30,
---------------------------------------------
1996 1995
-------------------- --------------------
<S> <C> <C>
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 ACTIVITIES:
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 acquisitions 3,260 30,619
Capitalized interest - 598
Change in redemption value of Other Operating Partnership
Unitholders' interest 4,297 (38,925)
</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 in management's opinion, includes all adjustments (consisting
only of normal, recurring adjustments), that 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 amended. 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 nine month periods ended
September 30, 1995 decreased by $325,000 ($.015 per unit) and $986,000 ($.045
per unit), 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.
7
<PAGE>
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.
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. Management assesses for impairment any property whenever events or
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recognized when the estimated future net cash flows from the
property are less than its carrying value. Implementation of the standard had no
effect on the consolidated financial statements.
On January 1, 1996, the Operating Partnership also implemented SFAS
No. 123, "Accounting for Stock-Based Compensation," which requires entities to
measure compensation costs related to awards of stock-based compensation using
either the fair value method or the intrinsic value method. The Operating
Partnership has elected to account for stock-based compensation programs using
the intrinsic value method consistent with existing accounting policies and,
therefore, implementation of the standard had no effect on the consolidated
financial statements. Use of the fair value method would also have had no effect
since there were no options or grants issued during 1995 or the nine months
ended September 30, 1996.
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>
5. OTHER OPERATING PARTNERSHIP UNITHOLDERS' INTEREST
Limited partnership units of the Other Operating Partnership Unitholders
may be redeemed at the unitholders' discretion. At the option of the general
partner, Charles E. Smith Residential Realty, Inc. ("the Company"), such
redemption may be made for cash, at the then fair value of the Company's stock,
or for shares of common stock of the Company on a one-for-one basis. The Company
has reserved approximately 19.3 million shares of common stock for possible
issuance upon redemption of limited partnership units.
The Other Limited Partnership Unitholders' redemption rights are not to be
included in partners' equity. Consequently, the accompanying consolidated
balance sheets and statements of partners' deficit have been retroactively
reclassified to reflect the Other Operating Partnership Unitholders' interests
in the Operating Partnership, measured at redemption value. This
reclassification results in a reduction of partners' equity of $290,850 and
$288,663 as of September 30, 1996 and December 31, 1995, respectively.
9
<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 forward-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 the pricing of the Company's
stock; 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 income from the multifamily and retail properties
for the three and nine months ended September 30, 1996 and 1995 were as follows:
10
<PAGE>
<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)
-------- -------- -------- --------
Income before depreciation $ 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)
-------- -------- -------- --------
Income before depreciation $ 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)
-------- -------- -------- --------
Income before depreciation $ 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)
Depreciation and amortization (4,748) (4,067) (13,476) (11,915)
-------- -------- -------- --------
Income from rental properties $ 18,675 $ 15,929 $ 52,723 $ 45,792
======== ======== ======== ========
</TABLE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the various Property Service
Businesses for the three and nine months ended September 30, 1996 and 1995 were
as follows:
11
<PAGE>
<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 (2,338) (1,944) (6,833) (5,777)
-------- -------- -------- --------
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 (1,122) (1,122) (3,473) (3,592)
-------- -------- -------- --------
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 (9,480) (9,292) (28,154) (27,318)
-------- -------- -------- --------
Income before depreciation
and amortization $ 1,032 $ 870 $ 2,537 $ 2,441
======== ======== ======== ========
Financing Services
Revenues $ 332 $ 574 $ 1,721 $ 1,614
Expenses (223) (150) (809) (840)
-------- -------- -------- --------
Income before depreciation
and amortization $ 109 $ 424 $ 912 $ 774
======== ======== ======== ========
Total Property Services
Revenues $ 15,279 $ 14,827 $ 44,937 $ 42,653
Expenses (13,163) (12,508) (39,269) (37,527)
Depreciation and
amortization (319) (325) (879) (985)
-------- -------- -------- --------
Income from Property
Service Businesses $ 1,797 $ 1,994 $ 4,789 $ 4,141
======== ======== ======== ========
</TABLE>
12
<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 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 Operating Partnership 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 (including depreciation) increased
$2.7 million, or 12.7%, from $21.3 million during the three months ended
September 30, 1995 to $24.0 million during
13
<PAGE>
the three months ended September 30, 1996 due primarily to the larger
acquisition and development portfolio which contributed $2.3 million, or 85%, 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 Operating Partnership 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. Income from 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. 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 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, 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 expenses and
18.6% in 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 HVAC operations and preventive
maintenance.
14
<PAGE>
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. Corporate 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 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 corporate 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.
15
<PAGE>
Expenses from rental operations (including depreciation) increased
$9.8 million, or 16.2%, from $60.3 million for the nine months ended
September 30, 1995, to $70.1 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 $7.3 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 2,566 units.
Property Service Businesses. Income from 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.
The increase in revenue and 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 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.
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. Corporate general and administrative expenses increased $0.2
million, or 8.5%, due primarily 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.
16
<PAGE>
Funds from Operations. Funds from Operations (FFO) is defined under
the revised definition adopted by the National Association of Real Estate
Investment Trusts (NAREIT) as net income (loss) (computed in accordance with
generally accepted accounting principles) excluding gains (or losses) from debt
restructuring, plus depreciation/amortization of assets unique to the real
estate industry. Depreciation/amortization of assets not unique to the industry,
such as amortization of deferred financing costs and non-real estate assets, is
not added back. FFO does not represent cash flow from operating activities in
accordance with generally accepted accounting principles (which, unlike Funds
from Operations, generally reflects all cash effects of transactions and other
events in the determination of net income) and should not be considered an
alternative to net income as an indication of the Operating Partnership's
performance or to cash flow as a measure of liquidity or ability to make
distributions. The Operating Partnership considers FFO a meaningful, additional
measure of operating performance because it primarily excludes the assumption
that the value of real estate assets diminishes predictably over time, and
because industry analysts have accepted it as a performance measure. Comparison
of the Operating Partnership's presentation of FFO, using the NAREIT definition,
to similarly titled measures for other REITs may not necessarily be meaningful
due to possible differences in the application of the NAREIT definition used by
such REITs.
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 of the
Operating Partnership $13,539 $12,172 $37,259 $33,620
======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Summary. Net cash flow provided by operating activities increased $1.8
million from $35.6 million for the nine months ended September 30, 1995 to $37.4
million for the nine months ended September 30, 1996. The increase is primarily
the result of the increase in net income of the Operating Partnership.
17
<PAGE>
Net cash flow used by the Operating Partnership in investing
activities was $71.1 million for the nine months ended September 30, 1996 versus
$52.2 million for the nine months ended September 30, 1995. The increase was due
primarily to the increase of $23.9 million in acquisition and development of
rental properties.
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. These properties bring the Operating Partnership's
total acquisitions to eleven properties with over 3,000 units acquired since
mid-1994.
Net cash flows provided by financing activities was $27.8 million for
the nine months ended September 30, 1996 primarily as a result of net draws of
$59.5 million on the lines of credit (used for acquiring property as discussed
above) net of $32.2 million in distributions, 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.
Debt
As of September 30, 1996, the Operating Partnership had mortgage
indebtedness and other borrowings, which carried a weighted average interest
rate of 7.8%, 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 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 partnership 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.
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.
Other Operating Partnership Unitholders' Interest
The limited partnership units of the Other Operating Partnership
Unitholders may be redeemed at the unitholder's discretion. The Company, as the
general partner of the Operating Partnership, has the option to make the
redemption for cash, at the then fair value of the Company's stock, or for
shares of common stock of the Company on a one-for-one basis. During the nine
months ended September 30, 1996, 235,388 units were redeemed for shares of
common stock of the Company. It has been, and continues to be, the Company's
preference to satisfy redemption requests with stock.
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
- ---------------- ------- -------------- ------------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Installations/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 portfolio $3,124.0 $ 251
======== ======
</TABLE>
20
<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: February 7, 1997 By: /s/ Charles R. Hagen
--------------------------------------------
Charles R. Hagen
Chief Accounting Officer of Charles E. Smith
Residential Realty, Inc
(on behalf of the Registrant and
as Chief Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-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
290,850
<COMMON> 0
<OTHER-SE> (328,288)
<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>
