<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, 1997
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 of 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
(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 7, 1997, there were 28,703,864 shares of Common 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>
Pages
-----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Charles E. Smith Residential Realty L.P. Financial
Statements as of September 30, 1997 and December 31, 1996,
Filed as a Part of This Report
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Partners' Equity 5
And Other Limited Partners' Interest
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 11
PART II - OTHER INFORMATION 22
SIGNATURES 24
</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, 1997 December 31, 1996
-------------------- -------------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, at predecessor cost, net $ 262,808 $ 267,658
Rental property, acquired and developed, net 329,338 202,435
Rental property under development 14,708 -
Cash and cash equivalents 5,216 3,898
Tenants' security deposits 2,379 3,521
Escrow funds 8,297 6,087
Investment in and advances to Property Service Businesses
and other 16,603 10,756
Deferred charges, net 16,216 17,646
Other assets 23,903 10,210
------------ ------------
$ 679,468 $ 522,211
============ ============
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 486,942 $ 416,808
Notes payable 68,000 129,736
Accounts payable and accrued expenses 12,079 9,525
Tenants' security deposits 2,379 3,521
------------ ------------
Total liabilities 569,400 559,590
------------ ------------
Other Limited Partners' Interest
13,360,288 and 12,029,857 common units issued and outstanding
at September 30, 1997 and December 31, 1996,
respectively, at redemption value 454,250 351,873
------------ ------------
Partner's Equity
General Partner's General and Limited Partnership Interest
Preferred units - Series A Cumulative Convertible
Redeemable Preferred Units, 738,553 units issued
and outstanding 19,772 -
Common units - 13,422,076 and 9,969,607 units issued and
outstanding at September 30, 1997 and December 31, 1996,
respectively (363,954) (389,252)
------------ ------------
Total partner's equity (344,182) (389,252)
------------ ------------
$ 679,468 $ 522,211
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Unit Amounts)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
RENTAL PROPERTIES
Revenues $ 50,829 $ 42,157 $ 145,088 $ 121,109
Expenses
Operating costs 18,296 15,506 52,062 45,485
Real estate taxes 3,098 2,658 9,096 7,765
Depreciation and amortization 5,294 4,748 15,440 13,476
------------ ------------- ------------ -----------
Total expenses 26,688 22,912 76,598 66,726
PROPERTY SERVICE BUSINESSES
Equity in income of Property Service Businesses 1,931 1,797 3,636 4,789
Corporate general and administrative expenses (1,544) (1,237) (4,583) (3,867)
Interest expense (10,981) (11,206) (33,664) (32,248)
Interest income 236 192 768 726
------------ ------------- ------------ -----------
Net income 13,783 8,791 34,647 23,783
Less income attributable to Series A preferred units 384 - 384 -
------------ ------------- ------------ -----------
Net income attributable to common units $ 13,399 $ 8,791 $ 34,263 $ 23,783
============ ============= ============ ===========
Net income per common unit 0.49 0.40 1.32 1.09
============ ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF PARTNER'S EQUITY AND OTHER LIMITED PARTNERS' INTEREST
(Dollars in Thousands, Except Per Unit Data)
<TABLE>
<CAPTION>
Other
General Partner's General and Limited Partners'
Limited Interest Interest
-------------------------------------- -------------------
Series A Preferred
Units Common Units Common Units
------------------ ---------------- -------------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ - $ (320,286) $ 288,663
Units exchanged for acquisitions - - 2,403
Adjustment for unit grants - - 333
Net income - 15,755 19,062
Distributions ($1.975 per unit) - (19,469) (23,840)
Adjustment to reflect Other Limited Partners' interest
at redemption value - (65,252) 65,252
------------------ ---------------- -------------------
Balance, December 31, 1996 - (389,252) 351,873
Units exchanged for acquisitions - - 47,129
Adjustment for unit grants - - 417
Net income - 17,212 17,435
Contribution by Charles E. Smith Residential Realty, Inc. 19,772 82,855 -
Distributions ($1.515 per unit) - (18,504) (19,183)
Other - 240 74
Adjustment to reflect Other Limited Partners' interest
at redemption value - (56,505) 56,505
------------------ ---------------- -------------------
Balance, September 30, 1997 (unaudited) $ 19,772 $ (363,954) $ 454,250
================== ================ ===================
Units issued and outstanding at September 30, 1997 738,553 13,442,076 13,360,288
================== ================ ===================
Units issued and outstanding at December 31, 1996 - 9,969,607 12,029,857
================== ================ ===================
</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,
-------------------------------------
1997 1996
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,647 $ 23,783
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 17,611 15,834
Increase in escrow funds (2,210) (1,078)
(Increase) decrease in other assets (2,009) 8
Increase (decrease) in accounts payable and accrued expenses 2,554 (2,207)
---------------- -----------------
Net cash provided by operating activities 50,593 36,340
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (16,518) (60,103)
Additions to rental property (8,177) (4,044)
Decrease in related party payables:
Property Service Businesses - (635)
Affiliates - (468)
Predecessor - (51)
Increase in investment in and advances
to Property Service Businesses and other (5,813) (3,016)
Other (11,248) (780)
---------------- -----------------
Net cash used by investing activities (41,756) (69,097)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITES:
Increase in deferred charges (973) (939)
Mortgage repayments (10,030) (322)
Notes payable:
Proceeds from draws 30,350 73,632
Repayments (92,086) (13,100)
Capital contributions by Charles E. Smith Residential Realty, Inc,:
Common units 82,855 -
Preferred units 19,772 -
Distributions (37,687) (32,214)
Other 280 (192)
---------------- -----------------
Net cash (used by) provided by financing activities (7,519) 26,865
---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,318 (5,892)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,898 9,478
---------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,216 $ 3,586
================ =================
SUPPLEMENTAL INFORMATION:
Purchase of properties in exchange for Operating Partnership units $ 47,129 $ 2,403
Assumed debt on acquisitions 80,164 3,260
Capitalized interest 436 -
</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, 1997 and the results of
operations for the interim periods ended September 30, 1997 and 1996. 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.
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, 1997, the Operating Partnership owned 44
multifamily properties containing 17,028 apartment units, and two 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 AND DEVELOPMENT
The Operating Partnership acquired 1,452 apartment units in February 1997
through the purchase of two high-rise properties in Crystal City, Virginia. A
540-unit building (Crystal Plaza) was acquired for a total cost of approximately
$43.0 million consisting of 307,000 limited partnership units of the Operating
Partnership valued at $8.7 million, assumed debt of $34.0 million (at fair
market value) and acquisition related costs of approximately $0.3 million. This
property is subject to a 5.1% net profits interest in favor of a third party. A
912-unit building (Crystal Towers) was purchased for a total cost of
approximately $69.8 million consisting of 842,500 limited partnership units of
the Operating Partnership valued at $23.9 million, assumed debt of $45.0 million
(at fair market value) and cash of $0.9 million.
7
<PAGE>
In March 1997, the Operating Partnership acquired a 376-unit property
(the Kenmore) in northwest Washington, D.C. for a total cost of approximately
$16.3 million consisting of 510,700 limited partnership units of the Operating
Partnership valued at $14.5 million, assumed debt of $1.2 million, and
acquisition related costs of approximately $0.6 million.
During the second quarter of 1997, the Operating Partnership purchased
for $9.1 million approximately 17 acres of land and began construction of a
630-unit mid-rise and garden multifamily property (Springfield Station) in
Springfield, Virginia. The total expected cost of the project is approximately
$60 million with delivery of apartment units beginning in spring 1998 and final
delivery by spring 1999.
3. CAPITAL CONTRIBUTIONS
During the first quarter of 1997, Charles E. Smith Residential Realty,
Inc. (the Company), the Operating Partnership's sole general partner, completed
a follow-on equity offering and issued 3.1 million shares of common stock at
$28.375 per share totaling $82.9 million, net of underwriting discounts and
other expenses totaling $5.2 million. The Company contributed the net proceeds
to the Operating Partnership in exchange for 3.1 million common limited
partnership units. The Operating Partnership used the resulting proceeds to
repay $72.1 million of notes payable and $9 million of mortgage debt and to fund
the property acquisitions.
On May 15, 1997, the Company entered into an agreement with Security
Capital Preferred Growth Inc. (Security Capital) to sell 2.6 million shares of
Series A Cumulative Convertible Redeemable Preferred Stock (Series A Preferred
Shares), $0.01 par value (liquidation preference of $27.08 per share), at $27.08
per share for a total of $71.5 million. On June 30, 1997, the Company sold 0.7
million Series A Preferred Shares for proceeds of $19.8 million, net of $0.2
million in offering costs. The remainder of the Series A Preferred Shares will
be issued and sold in amounts determined by the Company on or before May 14,
1998. The Company contributed the net proceeds to the Operating Partnership in
exchange for 0.7 million Series A Cumulative Redeemable Preferred Units (the
Series A Preferred Units).
Distributions on the Series A Preferred Units are cumulative from the
date of original issue and are payable quarterly at the greater of $2.02 per
unit or the rate declared on the common units. The Series A Preferred Units are
not redeemable prior to May 15, 2003. On or after May 15, 2003, the Operating
Partnership, at its option, may redeem the Series A Preferred Units for cash at
a redemption price of $27.08 per unit, plus accrued and unpaid distributions.
Under certain circumstances, the Operating Partnership may elect to make such
redemption with common units at the then market price of the Company's common
stock. On or after January 31, 1999, the Company may convert the Series A
Preferred Units into common units on a one-for-one basis subject to certain
limitations. Prior to January 31, 1999, the Series A Preferred Units will not be
convertible unless the Company undergoes a change in control, as defined by the
agreement, or fails to qualify as a REIT for tax purposes.
8
<PAGE>
4. PER UNIT DATA
Earnings per common unit of the Operating Partnership for the three and
nine months ended September 30, 1997 is computed based on 27.7 million and 26.3
million units, respectively, which represents the weighted average number of
common units outstanding during the periods. Each of the comparable prior year
periods is based on 21.9 million common units.
5. NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS
128) which requires entities to exclude the effect of potentially dilutive
securities in the calculation of primary earnings per share. The standard will
be effective for interim and annual periods ending after December 15, 1997 and
will require restatement of comparative prior-period data. Had the standard been
implemented January 1, 1997, earnings per common unit for the three and nine
months ended September 30, 1997 would have been $0.50 and $1.33 per unit,
respectively. Prior period earnings per common unit would have been unchanged.
Management does not expect this standard to have a material impact upon
implementation.
During 1997, the FASB also issued several additional standards including
SFAS 129, "Disclosure of Information About Capital Structure", SFAS 130,
"Reporting Comprehensive Income" and SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information". All of the standards are effective for
interim and annual reporting periods ending after December 15, 1997 and none are
expected to have any significant impact on current reporting or disclosure since
the Operating Partnership either already complies with the requirements or the
standard is not applicable.
6. RECLASSIFICATIONS
The Operating Partnership changed the classification of certain senior
management payroll costs from property operating expenses to corporate general
and administrative expense. Management believes this reclassification more
accurately reflects property operations and is consistent with industry
practice. Amounts for the period ended September 30, 1996 have been reclassified
to conform to the current year's presentation. Had this reclassification not
been made, property operating expenses would have been higher and corporate
general and administrative expenses would have been lower by $0.6 million and
$1.7 million for each of the three and nine month periods ended September 30,
1996.
Certain other reclassifications have also been made to the prior year
amounts to conform to the current year's presentation.
7. OTHER LIMITED PARTNERS' INTEREST
Limited partnership units of the Other Limited Partners may be redeemed
at the unitholders' discretion. At the option of the Company, such redemption
may be made for cash, at the then fair
9
<PAGE>
value of the Company's stock, or for shares of common stock of the Company on a
one-for-one basis. As of September 30, 1997, approximately 18.7 million shares
of the Company's authorized common stock had been reserved for possible issuance
upon redemption of limited partnership units.
In accordance with generally accepted accounting principles, the Other
Limited Partners' redemption rights are not included in partners' equity.
Consequently, the accompanying consolidated balance sheets and statements of
partners' equity reflect the Other Limited Partners' Interest in the Operating
Partnership, measured at redemption value. Such interest is deducted from
partners' equity.
8. SUBSEQUENT EVENTS
On October 3, 1997, the Operating Partnership acquired a 714-unit, luxury
high-rise property located in Ballston, Virginia (Lincoln Towers) for a total
cost of approximately $88.7 million in cash. Lincoln Towers was built in 1992
and consists of twin 22-story towers above a three level parking garage. The
acquisition was funded in part by the sale of 1.45 million shares of common
stock and 1.22 million shares of preferred stock to the Prudential Insurance
Company of America (Prudential) for approximately $76 million. The Company
contributed the net proceeds to the Operating Partnership in exchange for 1.45
million common units and 1.22 million Series B Cumulative Convertible Redeemable
Preferred Units (Series B Preferred Units). Rights of Series B Preferred
Unitholders include certain voting, dristribution and liquidation preferences
over the common unitholders. The Series B Preferred Units have a liquidation
preference of $28.50 per unit. Distributions are cumulative and are payable
quarterly at the greater of $2.02 per unit or the rate declared on the shares of
Common stock of the Company. Prudential may convert the Series B Preferred
Shares into shares of common stock on a one-for-one basis, subject to certain
adjustments and limitations related to its ownership of Common Stock of the
Company. The Company may redeem Series B Preferred Shares at any time for common
shares, plus accrued and unpaid dividends.
On October 7, 1997, the Operating Partnership acquired a 306-unit luxury
high-rise property in downtown Chicago, Illinois (One East Delaware) for
approximately $42.5 million in cash. Built in 1989, the property consists of a
36-story tower over an enclosed parking garage. The Operating Partnership
funded the acquisition with proceeds from its line of credit.
On October 10, 1997, the Operating Partnership acquired a 188-unit,
luxury high-rise property in Boston, Massachusetts (2000 Commonwealth) for
approximately $27.6 million consisting of approximately 465,000 Operating
Partnership units valued at $14.1 million, assumed debt of $13.3 million, and
acquisition related costs of approximately $0.2 million. Built in 1986, the
property is a 16-story, brick structure over below grade parking.
On October 8, 1997, the Operating Partnership acquired a 564-unit, luxury
high-rise property under construction in Arlington, Virginia (Courthouse Hill)
for $17.5 million consisting of $3.6 million cash and approximately 450,000
Operating Partnership units valued at $13.9 million. Total expected project cost
is approximately $65 million. The balance of construction costs is expected to
be funded through a construction loan. Management expects to initially deliver
apartment units in October 1998, with completion in the fall of 1999.
In October 1997, the Operating Partnership finalized a contract to
purchase a 167-unit, garden property in northwest Washington, D.C. (Tunlaw
Gardens) for $6.9 million consisting of $2.5 million cash and approximately
130,000 Operating Partnership units valued at $4.4 million. The property is
currently managed by the Operating Partnership and the acquisition is scheduled
to close in December 1997.
10
<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, 1997 and 1996 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, 1997 and 1996 were as follows
(in thousands):
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
1997 1996/(1)/ 1997 1996/(1)/
---- ---- ---- ----
<S> <C> <C> <C> <C>
Multifamily Properties - Core/(2)/
Revenues $ 39,232 $ 37,452 $ 114,770 $ 110,725
Expenses (16,832) (16,216) (49,004) (49,078)
----------- ----------- ----------- -----------
Income before depreciation $ 22,400 $ 21,236 $ 65,766 $ 61,647
=========== =========== =========== ===========
Multifamily Properties -
Acquisitions and Development
Revenues $ 8,785 $ 2,074 $ 22,369 $ 2,827
Expenses (3,693) (970) (9,528) (1,313)
----------- ----------- ----------- -----------
Income before depreciation $ 5,092 $ 1,104 $ 12,841 $ 1,514
=========== =========== =========== ===========
Retail Properties
Revenues $ 2,812 $ 2,631 $ 7,949 $ 7,557
Expenses (869) (978) (2,626) (2,859)
----------- ----------- ----------- -----------
Income before depreciation $ 1,943 $ 1,653 $ 5,323 $ 4,698
=========== =========== =========== ===========
Total Rental Properties
Revenues $ 50,829 $ 42,157 $ 145,088 $ 121,109
Expenses (21,394) (18,164) (61,158) (53,250)
Depreciation and amortization (5,294) (4,748) (15,440) (13,476)
----------- ----------- ----------- -----------
Income from Rental Properties $ 24,141 $ 19,245 $ 68,490 $ 54,383
=========== =========== =========== ===========
</TABLE>
/(1)/ Reclassified for comparison purposes. See Note 6 to the Financial
Statements.
/(2)/ Represents properties owned as of December 31, 1995.
12
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the various Property Service Businesses
for the three and nine months ended September 30, 1997 and 1996 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Multifamily and Retail Property
Management Services
Revenues $ 2,489 $ 2,942 $ 7,763 $ 8,737
Expenses (2,227) (2,338) (7,159) (6,833)
----------- ----------- ----------- -----------
Income before depreciation
and amortization $ 262 $ 604 $ 604 $ 1,904
=========== =========== =========== ===========
Interior Construction and Renovation
Services
Net fee revenues $ 2,000 $ 1,493 $ 4,626 $ 3,788
Expenses (1,433) (1,122) (4,049) (3,473)
----------- ----------- ----------- -----------
Income before depreciation
and amortization $ 567 $ 371 $ 577 $ 315
=========== =========== =========== ===========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 12,982 $ 10,512 $ 36,913 $ 30,691
Expenses (12,060) (9,480) (34,007) (28,154)
----------- ----------- ----------- -----------
Income before depreciation
and amortization $ 922 $ 1,032 $ 2,906 $ 2,537
=========== =========== =========== ===========
Financing Services
Revenues $ 704 $ 332 $ 996 $ 1,721
Expenses (206) (223) (577) (809)
----------- ----------- ----------- -----------
Income before depreciation
and amortization $ 498 $ 109 $ 419 $ 912
=========== =========== =========== ===========
Total Property Service Businesses
Revenues $ 18,175 $ 15,279 $ 50,298 $ 44,937
Expenses (15,926) (13,163) (45,792) (39,269)
Depreciation and amortization (318) (319) (870) (879)
----------- ----------- ----------- -----------
Income from Property
Service Businesses $ 1,931 $ 1,797 $ 3,636 $ 4,789
=========== =========== =========== ===========
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
SUMMARY. Net income of the Operating Partnership increased $5.0 million, or
56.8%, from $8.8 million for the three months ended September 30, 1996 to $13.8
million for the three months ended September 30, 1997. Funds from Operations
("FFO") of the Operating Partnership increased $5.6 million, or 40.9%, from
$13.5 million to $19.1 million during the same period. The increases in both net
income and FFO are primarily attributable to the acquisition of six properties
totaling 2,830 apartment units during 1996 and the first quarter of 1997. In
addition, income from the core portfolio increased 5.5% over the prior year
period due primarily to increased rents and revenue initiatives.
RENTAL PROPERTIES. Revenue from all rental properties increased $8.6
million, or 20.6%, from $42.2 million for the three months ended September 30,
1996 to $50.8 million for the three months ended September 30, 1997. The six
acquisition and development properties (defined as properties acquired or
developed subsequent to December 31, 1995) contributed approximately 77%, or
$6.7 million, of the total rental revenue increase. Three of the acquisition
properties (comprising 1,002 apartment units) were acquired during 1996 and
three (comprising 1,828 units) were acquired in the first quarter of 1997. The
core portfolio revenue increased $1.8 million, or 4.8%, over the prior year
period. The retail portfolio revenue increased $0.2 million, or 6.9%, over the
prior year period.
Average monthly revenue per core apartment unit increased from $879 during
the third quarter of 1996 to $921 per unit during the third quarter of 1997
primarily due to rent increases. In addition, revenue-enhancing initiatives such
as the premium for month-to-month leases and the non-refundable move-in fee
generated approximately $0.4 million in revenue over the comparable prior year
period. Average economic occupancy for the core portfolio was 97.3% for the
three months ended September 30, 1997 compared to 97.2% for the comparable prior
year quarter.
Expenses (including depreciation) from all rental operations increased $3.8
million, or 16.5%, from $22.9 million during the third quarter of 1996 to $26.7
million during the current quarter. Approximately $3.4 million of the increase,
including depreciation expense of $0.7 million, resulted from the six properties
in the acquisition/development portfolio. Expenses for the core portfolio
increased $0.4 million, net of a $0.2 million decrease in depreciation expense,
due primarily to unusually low utility expenses in 1996 related to an
unseasonably cool summer.
PROPERTY SERVICE BUSINESSES. The Operating Partnership uses the equity
method of accounting for investments in the Property Service Businesses.
14
<PAGE>
Income from the Property Service Businesses increased from $1.8 million in
the third quarter of 1996 to $1.9 million in the third quarter of 1997. This was
primarily due to 1) increased Financing Services revenue as a result of debt
refinancings during the quarter, 2) higher volume for Interior Construction and
Renovation Services partially offset by 3) lower management fees related to the
two properties acquired in February, 1997.
During the three months ended September 30, 1997, Interior Construction and
Renovation Services' net fee revenue increased $0.5 million while expenses
increased $0.3 million. The increase in fee revenue was due to the addition of
several higher margin tenant renovation projects during the quarter. The
increase in expenses was consistent with planned increases, primarily for
employee wages and benefits, to support revenue growth.
Revenues for Multifamily and Retail Property Management decreased $0.5
million during the third quarter of 1997 as compared to the comparable prior
year quarter. Multifamily management fee revenue declined $0.3 million due
primarily to the February 1997 acquisition of two properties previously managed
by the Operating Partnership as well as the Operating Partnership's decision to
terminate a third-party management contract in January 1997. Retail services
revenue decreased $0.2 million over the prior year due to the high level of
leasing fees earned in 1996 on a third-party development project.
Engineering and Technical Services revenue increased $2.5 million, or
23.5%, during the quarter while expenses increased $2.6 million, or 27.2%,
primarily due to new contracts for HVAC operations and maintenance. The
decreased margin in the current quarter is attributable to start-up costs
associated with a large new contract and higher marketing and promotion expenses
during the quarter.
OTHER. Corporate general and administrative expenses increased 24.8%
compared to the prior year quarter due primarily to the addition in 1997 of
acquisition personnel dedicated to the expansion of the Operating Partnership's
acquisition and development program outside of the Washington, D.C. metropolitan
area to other U.S. cities with strong urban multifamily markets. Interest
expense decreased $0.2 million during the quarter, or 2.0%, primarily due to
capitalization of interest associated with the Springfield Station development
which is currently funded with equity other than debt.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
SUMMARY. Net income of the Operating Partnership increased $10.8 million,
or 45.7%, from $23.8 million for the nine months ended September 30, 1996 to
$34.6 million for the nine months ended September 30, 1997. Funds from
Operations ("FFO") of the Operating Partnership increased $12.8 million, or
34.4%, from $ 37.3 million to $50.1 million during the same period. The
increases in both net income and FFO are primarily attributable to the
acquisition of three apartment properties during 1996 and three in the first
quarter of 1997. In addition, income from
15
<PAGE>
the core portfolio increased 6.7% over the prior year period due to rent
increases as well as expense savings. Higher interest expense and decreased
income from the Property Service Businesses partially offset these increases.
RENTAL PROPERTIES. Revenue from all rental properties increased $24.0
million, or 19.8%, from $121.1 million for the nine months ended September 30,
1996 to $145.1 million for the nine months ended September 30, 1997. The six
acquisition and development properties (defined as properties acquired or
developed subsequent to December 31, 1995) contributed approximately 81%, or
$19.5 million, of the total rental revenue increase. The core portfolio
contributed $4.0 million of the increase in revenue, a 3.7% increase over the
prior year period.
Average monthly revenue per core apartment unit increased from $867 during
the first nine months of 1996 to $898 during the nine months ended September 30,
1997. Revenue-enhancing initiatives on core properties such as the premium for
month-to-month leases and the non-refundable move-in fee generated approximately
$1.0 million in revenue over the comparable prior year period. However, these
increases were partially offset by slightly lower occupancy during the first
quarter, particularly for furnished apartments at Gateway Place. Average
economic occupancy for the core portfolio was 96.8% for the nine months ended
September 30, 1997 compared to 97.0% for the comparable prior year period.
Expenses (including depreciation) from all rental operations increased $9.9
million, or 14.8%, from $66.7 million to $76.6 million during the nine months
ended September 30, 1996 and 1997, respectively. The six properties in the
acquisition/development portfolio contributed additional property operating
expenses of $8.2 million and depreciation expense of $2.3 million. Core expenses
were essentially unchanged due to a much milder winter in 1997 compared to 1996
which reduced repair and maintenance expenses.
PROPERTY SERVICE BUSINESSES. Income from the Property Service Businesses
decreased from $4.8 million during the nine months ended September 30, 1996 to
$3.6 million for the nine months ended September 30, 1997 due primarily to a
$0.7 million decrease in Financing Services revenue as well as a non-recurring
fee in 1996 of $0.6 million related to the termination of a management agreement
with a hotel owned by a related party. The decreases in 1997 were partially
offset by higher income for both Engineering and Technical Services and Interior
Construction and Renovation Services.
Revenues for Multifamily and Retail Property Management decreased $1.0
million, or 11.1%, during the first nine months of 1997 compared to the prior
year period due primarily to the non-recurring fee of $0.6 million earned in
1996 in connection with the termination of a management agreement with a hotel
owned by a related party. In addition, revenue decreased due to the February
1997 acquisition of two properties previously managed by the Operating
Partnership.
During the nine months ended September 30, 1997, Interior Construction and
Renovation Services' net fee revenue increased $0.8 million, or 22% while
expenses increased 16.6% compared to the prior year period. The revenue increase
was due primarily to additional projects
16
<PAGE>
for affiliated partnerships as well as several large general contracting
projects for third party clients. Expenses increased primarily due to planned
increases in personnel and related costs.
Engineering and Technical Services revenue increased $6.2 million, or
20.3%, during the nine months ended September 30, 1997 with resulting increases
over the prior year period of 20.8% in expenses and 14.5% in income. New
contracts for HVAC operations and maintenance as well as significant additional
work under existing contracts contributed the majority of the increase.
OTHER. Corporate general and administrative expenses increased 18.5%, due
primarily to write-offs of capitalized costs for terminated acquisition projects
as well as the addition of acquisition personnel during the year. Interest
expense increased $1.4 million, or 4.4%, due to additional borrowings to fund
acquisitions and development.
FUNDS FROM OPERATIONS. Funds from Operations 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,
1997 and 1996 are computed as follows (in thousands):
17
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 13,783 $ 8,791 $ 34,647 $ 23,783
Depreciation of Real Property 5,294 4,748 15,440 13,476
----------- ------------ ----------- -----------
Funds from Operations $ 19,077 $ 13,539 $ 50,087 $ 37,259
=========== ============ =========== ===========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY. Net cash flow provided by operating activities increased $14.3
million from $36.3 million for the nine months ended September 30, 1996 to $50.6
million for the nine months ended September 30, 1997. The increase is a result
of an additional $12.8 million of FFO of the Operating Partnership and an
increase of $2.6 million in accounts payable due primarily to property
acquisitions and accrued real estate taxes.
Despite an increase of approximately $80 million in acquisition and
development activity during the nine months ended September 30, 1997 versus the
prior year period, net cash flows used by investing activities decreased $27.3
million. A decrease of $39 million due to the funding of a substantial portion
of the 1997 property acquisitions through Operating Partnership unit exchanges
and debt assumption was partially offset by a $12 million increase related to
acquisition deposits and a short-term loan on a potential development project.
Net cash flows used by financing activities was $7.5 million for the nine
months ended September 30, 1997, comprised of $102.6 million of cash inflow from
the issuance of common and preferred units less $71.8 million of debt repayments
and $37.7 million of distributions ($1.515 per/unit). Net cash flows provided by
financing activities of $26.9 million in the comparable prior year period
primarily consisted of $60.2 million in borrowings less $32.2 million of
distributions ($1.47 per/unit).
During the first quarter of 1997, the Company issued 3.1 million shares of
common stock in an equity offering at $28.375 per share resulting in proceeds of
$82.9 million, net of underwriting discounts and other expenses totaling $5.2
million. The Company contributed the net proceeds from the offering to the
Operating Partnership in exchange for 3.1 million common limited partnership
units. The Operating Partnership used the resulting proceeds to repay $72.1
million on the line of credit and $9.0 million of mortgage debt and to fund
three property acquisitions.
In May 1997, the Company entered into an agreement with a private investor
to sell 2.6 million shares of Series A preferred stock for $71.5 million. On
June 30, 1997, the Company issued 0.7 million shares of Series A preferred stock
at $27.08 per share resulting in proceeds of $19.8 million, net of underwriting
discounts and other expenses
18
<PAGE>
totaling $0.2 million. The Company contributed the net proceeds from the
offering to the Operating Partnership in exchange for 0.7 million Series A
Cumulative Convertible Redeemable Preferred Units (Series A Preferred Units). In
conjunction with the issuance of the Series A Preferred Units, the Operating
Partnership repaid approximately $20 million on the line of credit.
In October 1997, the Company issued 1.45 million shares of common stock and
1.22 million shares of Series B preferred stock to a private investor for $76
million. The Company contributed the net proceeds from the offering to the
Operating Partnership in exchange for 1,450,000 common units and 1,216,666
Series B cumulative Convertible Redeemable Preferred Units (Series B Preferred
Units). The Operating Partnership used the proceeds from issuance of Operating
Partnership units to fund acquisitions. The Operating Partnership also acquired
four multi-family properties in October 1997 - three existing properties (1,208
apartment units) and one property under construction (564 apartment units). The
cost of the three existing properties totaled $158.8 million and was comprised
of Operating Partnership units ($14.1 million), assumed debt ($13.3 million) and
cash ($131.4 million). The $17.5 million cost of the property under development
was comprised of Operating Partnership units ($13.9 million) and cash ($3.6
million). Management expects to secure a construction loan to fund the estimated
$47.5 million balance of construction costs on this property.
DEBT
During the first quarter, the Operating Partnership completed the
acquisition of three multifamily properties totaling 1,828 apartment units for a
total cost of $129.1 million comprised of Operating Partnership Units ($47.1
million), assumed debt ($80.2 million) and cash ($1.8 million). One of the
properties is subject to a 5.1% net profits interest in favor of an unaffiliated
third party.
During the second quarter of 1997, the Operating Partnership purchased for
$9.1 million approximately 17 acres of land and began construction of a 630-unit
mid-rise and garden property in Springfield, Virginia. The total expected cost
of the project is approximately $60 million. Total capitalized cost as of
September 30, 1997, was approximately $14.7 million. Management expects to fund
the remaining development costs from either the line of credit or the preferred
stock agreement. Initial deliveries are scheduled for spring 1998 with final
completion expected by spring 1999.
In April 1997, the Operating Partnership renegotiated the terms of its
existing $100 million line of credit. The revised line reduces by 38 to 65 basis
points the current spread over the London Interbank Offering Rate (LIBOR), based
on the outstanding balance and the value of the collateral. In addition, the
maturity has been extended until June 30, 2000 and several covenants in the
agreement were modified to provide the Operating Partnership greater
flexibility.
As of September 30, 1997, the Operating Partnership had mortgage
indebtedness and other borrowings, which carried a weighted average interest
rate of 8%, as follows:
19
<PAGE>
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
--------- -----
<S> <C> <C>
Mortgage debt:
Fixed rate $ 478,839 86.3%
Variable rate 8,103 1.5%
$100M Line of Credit (variable) 38,000 6.8%
$83M Line of Credit (fixed) 30,000 5.4%
---------- ----
$ 554,942 100.0%
========== ======
</TABLE>
As of September 30, 1997, the Operating Partnership had $115 million of
unused borrowing capacity available on lines of credit and $51.5 million
available under its preferred stock agreement. Amounts outstanding under lines
of credit averaged $69.0 million for the nine months ended September 30, 1997
compared to $78.1 million for the nine months ended September 30, 1996.
As of September 30, 1997, the Operating Partnership's Debt to Total Market
Capitalization Ratio was 37.2% (based on 26.8 million common partnership units
and 0.7 million preferred partnership units outstanding at the Company's stock
price of $34) versus 45.9% as of December 31, 1996 and 50.7% as of September 30,
1996. The decreases are attributable to the 1997 equity offering, acquisitions
funded via Operating Partnership unit exchanges, and an increasing stock price.
The Company's Debt Coverage Ratio for the nine months ended September 30, 1997
was 2.66 to 1 compared to 2.33 for the comparable prior year period.
CAPITAL EXPENDITURES
For the nine months ended September 30, 1997, total capital improvements
were $8.2 million, of which $6.9 million were for the core portfolio ($483 per
unit). Core portfolio capital expenditures per unit of $247 for the prior year
period were unusually low due to timing of projects, many of which were
completed in the fourth quarter of 1996. Approximately 30.0% of the capital
expenditures on the core portfolio in 1997 are considered by management to be
revenue generating or economic improvements, as shown below, which the Operating
Partnership believes directly affect its ability to increase rents. The
remaining capital expenditures on the core portfolio indirectly influence the
Operating Partnership's ability to increase rents and are considered non-revenue
generating. A summary of core capital expenditures follows:
20
<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 $ 593 1,085 $ 547 $ 42
Carpet 90 73 1,233 6
Security gating 321 711 451 23
Other 100 122 820 7
Renovations:
Kitchen 636 154 4,130 44
Bath 321 270 1,189 23
-------- --------
Total revenue generating
improvements 2,061 145
Non-revenue generating
improvements 4,794 338
-------- --------
Total capital expenditures
- core portfolio $ 6,855 $ 483
======== ========
</TABLE>
21
<PAGE>
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities.
The Company amended the Articles of Incorporation (see exhibit 4.1 in the
Report on Form 8-K dated October 3, 1997 and filed October 20, 1997) and
the Operating Partnership amended the Agreement of Limited Partnership to
designate and establish the rights and privileges of the Series B
Cumulative Convertible Redeemable Preferred Stock ("Preferred Shares") and
Series B Cumulative Convertible Redeemable Preferred Units ("Preferred
Units"), respectively. Rights of Preferred Shareholders include voting,
dividend and liquidation preferences over the common shareholders. Rights
of Preferred Unitholders include distribution and liquidation preferences
over the common unitholders.
On October 3, 1997, the Company issued 1,450,000 common shares and
1,216,666 shares of Series B Cumulative Convertible Redeemable Preferred
Stock (Preferred Shares), $0.01 par value (liquidation preference of $28.50
per share) for a total of $76 million which, in turn, was contributed to
the Operating Partnership in exchange for 1,450,000 common units and
1,216,666 Preferred Units.
Distributions on the Preferred Units are cumulative and are payable
quarterly at the greater of $2.02 per unit or the rate declared on the
common units. No distributions will be declared or paid on any class of
common or other junior unit to the extent that distributions on Preferred
Units have not been declared and/or paid. The Operating Partnership, at its
option, may redeem the Preferred Units for Common Units. The Company may
convert the Preferred Units into units of Common Unit on a one-for-one
basis, subject to certain adjustments and limitations.
The Company believes that such offering and sale was exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act") by virtue of Section 4(2) of the Securities Act and the provisions of
Rule 506 of Regulation D.
Item 3. Defaults on Senior Securities.
None
22
<PAGE>
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:
Reports on Form 8-K and Form 8-K/A dated October 3, 1997 were filed on
November 10, 1997 to report the Operating Partnership's acquisition of
four apartment properties and the issuance of $76 million of common and
preferred units. Historical and pro forma financial statements for three of
the acquired properties were included in the filings.
23
<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.
November 14, 1997 By: /s/ W. D. Minami
--------------------------------
W. D. Minami
Senior Vice President and Chief Financial Officer
of Charles E. Smith Residential Realty L.P.
(on behalf of the Registrant and as Principal
Financial Officer)
/s/ Steven E. Gulley
--------------------------------
Steven E. Gulley
Vice President and Chief Accounting Officer
of Charles E. Smith Residential Realty L.P.
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,216
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,892
<PP&E> 606,854
<DEPRECIATION> 0
<TOTAL-ASSETS> 679,468
<CURRENT-LIABILITIES> 14,458
<BONDS> 554,942
0
19,772
<COMMON> (363,954)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 679,468
<SALES> 0
<TOTAL-REVENUES> 145,088
<CGS> 0
<TOTAL-COSTS> 76,598
<OTHER-EXPENSES> 4,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,896
<INCOME-PRETAX> 34,647
<INCOME-TAX> 0
<INCOME-CONTINUING> 34,647
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,263
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
</TABLE>
