<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 March 31, 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 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 May 2, 1997, there were 26,778,052 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> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Charles E. Smith Residential Realty L.P. Financial
Statements as of March 31, 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
and Other Limited 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
PART II - OTHER INFORMATION 18
SIGNATURES 20
</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>
March 31, 1997 December 31, 1996
------------------- ---------------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, at predecessor cost net $ 265,261 $ 267,658
Rental property, acquired and developed, net 330,847 202,435
Cash and cash equivalents 1,221 3,898
Tenants' security deposits 3,515 3,521
Escrow funds 8,761 6,087
Investment in and advances to Property Service Businesses
and other 16,099 10,756
Deferred charges, net 17,268 17,646
Other assets 9,310 10,210
------------------ ------------------
$ 652,282 $ 522,211
================== ==================
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 487,778 $ 416,808
Notes payable 57,650 129,736
Accounts payable and accrued expenses 12,772 9,525
Tenants' security deposits 3,515 3,521
------------------ ------------------
Total liabilities 561,715 559,590
------------------ ------------------
Commitments and contingencies
Other Limited Partners' Interest
13,545,099 and 12,029,857 units issued and outstanding
at March 31, 1997 and December 31, 1996, respectively, at 367,411 351,873
redemption value -------------------- ------------------
Partner's Equity
General Partner's General and Limited Partnership Interest
13,232,953 and 9,969,607 units issued and outstanding
at March 31, 1997 and December 31, 1996 respectively (276,844) (389,252)
-------------------- ------------------
$ 652,282 $ 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 Data)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------------------
(Unaudited)
1997 1996
----------------- ----------------
<S> <C> <C>
Rental Properties:
Revenues $ 44,776 $ 38,837
Expenses
Operating costs 16,434 15,426
Real estate taxes 2,917 2,442
Depreciation and amortization 4,851 4,392
----------------- ----------------
Total expenses 24,202 22,260
Property Service Businesses:
Equity in income of Property
Service Businesses 809 1,548
Corporate general and administrative
expenses (1,391) (1,287)
Interest expense (11,427) (10,411)
Interest income 231 269
----------------- ----------------
Net income $ 8,796 $ 6,696
================= ================
Net income per unit $ 0.36 $ 0.31
================= ================
</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>
General Partner's Other
General and Limited Limited Partners'
Interest Interest
--------------------- --------------------
<S> <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 - 134
Net income 4,183 4,613
Contribution by Charles E. Smith Residential Reality, Inc. 82,968 -
Distributions ($0.505 per unit) (5,080) (6,035)
Other - 34
Adjustment to reflect Other Limited Partners' interest
at redemption value 30,337 (30,337)
--------------------- --------------------
Balance, March 31, 1997 (unaudited) $ (276,844) $ 367,411
===================== ====================
Units issued and outstanding at March 31, 1997 13,232,953 13,545,099
===================== ====================
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>
For the Three Months
Ended March 31,
------------------------------
(Unaudited)
1997 1996
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,796 $ 6,696
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 5,629 5,164
Increase in escrow funds (2,674) (1,664)
Decrease (increase) in other assets 875 (98)
Increase (decrease) in accounts payable and accrued expenses 3,247 (982)
------------ ------------
Net cash provided by operating activities 15,873 9,116
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (1,811) (17,131)
Additions to rental property (1,696) (824)
Decrease in related party payables:
Property Service Businesses - (589)
Predecessor - (625)
Increase in investment in and advances to Property Service
Businesses and other (5,309) (2,682)
Other 25 (1,000)
------------ ------------
Net cash used in investing activities (8,791) (22,851)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to deferred charges (332) (771)
Mortgages:
Proceeds - -
Repayments (9,194) (174)
Notes payable:
Proceeds - 31,032
Repayments (72,086) (13,000)
Capital contribution by Charles E. Smith
Residential Realty, Inc. 82,968 0
Distributions (11,115) (10,725)
------------ ------------
Net cash (used in) provided by financing activities (9,759) 6,262
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,677) (7,473)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,898 9,478
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD. $ 1,221 $ 2,005
============ ============
SUPPLEMENTAL INFORMATION:
Purchase of properties in exchange for Operating Partnership units $ 47,129 $ 513
Assumptions of debt on acquisition 80,164 -
</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. 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 March 31, 1997 and the results of
operations for the interim periods ended March 31, 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 March 31, 1997, the Operating Partnership owned 44 existing
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
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 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 an unaffiliated third party.
A 912-unit building 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 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.
3. STOCK OFFERING
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 (the
Offering) at $28.375 per share totaling $83.0 million, net of underwriting
discounts and other expenses totaling $5.1 million. The Company contributed the
net proceeds from the Offering to the Operating Partnership in exchange for 3.1
million 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.
4. PER UNIT DATA
Earnings per unit of the Operating Partnership for the three months ended
March 31, 1997 and 1996 is computed based on 24.1 million and 21.9 million
units, respectively, which represents the weighted average number of units
outstanding during the periods.
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 during the first quarter of 1997, both current and prior period
earnings per unit would have been unchanged. Management does not expect this
standard to have any significant impact upon implementation.
The FASB also issued Statement of Financial Accounting Standard No. 129,
"Disclosure of Information About Capital Structure" which expands the number of
companies subject to existing disclosure requirements for securities other than
common stock. The standard will have no impact on the Operating Partnership
since it already complies with such disclosure requirements.
8
<PAGE>
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 March 31, 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 $0.5 million for each of
the periods ended March 31, 1997 and 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 value of the Company's stock, or for shares
of common stock of the Company on a one-for-one basis. As of March 31, 1997,
approximately 18.9 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.
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 months ended March 31, 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 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 months ended March 31, 1997 and 1996 were as follows (in
thousands):
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1997 1996/(1)/
---- ----
<S> <C> <C>
Multifamily Properties - Core/(2)/
Revenues $ 37,210 $ 36,298
Expenses (16,265) (16,882)
-------- --------
Income before depreciation $ 20,945 $ 19,416
======== ========
Multifamily Properties -
Acquisitions and Development
Revenues $ 5,124 $ 97
Expenses (2,238) (38)
-------- --------
Income before depreciation $ 2,886 $ 59
======== ========
Retail Properties
Revenues $ 2,442 $ 2,442
Expenses (848) (948)
-------- --------
Income before depreciation $ 1,594 $ 1,494
======== ========
Total Rental Properties
Revenues $ 44,776 $ 38,837
Expenses (19,351) (17,868)
Depreciation and amortization (4,851) (4,392)
-------- --------
Income from Rental Properties $ 20,574 $ 16,577
======== ========
</TABLE>
/(1)/ Reclassified for comparison purposes. See Note 6 to the Financial
Statements.
/(2)/ Represents properties owned as of December 31, 1995.
11
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the various Property Service
Businesses for the three months ended March 31, 1997 and 1996 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Multifamily and Retail Property
Management Services
Revenues $ 2,561 $ 3,107
Expenses (2,404) (2,192)
-------- --------
Income before depreciation
and amortization $ 157 $ 915
======== ========
Interior Construction and Renovation
Services
Net fee revenues $ 1,351 $ 1,031
Expenses (1,223) (1,167)
-------- --------
Income before depreciation
and amortization $ 128 $ (136)
======== ========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 12,301 $ 9,679
Expenses (11,273) (9,026)
-------- --------
Income before depreciation
and amortization $ 1,028 $ 653
======== ========
Financing Services
Revenues $ 0 $ 669
Expenses (243) (287)
-------- --------
Income before depreciation
and amortization $ (243) $ 382
======== ========
Total Property Services
Revenues $ 16,213 $ 14,486
Expenses (15,143) (12,672)
Depreciation and amortization (261) (266)
-------- --------
Income from Property
Service Businesses $ 809 $ 1,548
======== ========
</TABLE>
12
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1997 to Three Months Ended March 31,
1996.
Summary. Net income of the Operating Partnership increased $2.1
million, or 31.4%, from $6.7 million for the three months ended March 31, 1996
to $8.8 million for the three months ended March 31, 1997. Funds from Operations
("FFO") of the Operating Partnership increased $2.6 million, or 23.1%, from
$11.0 million to $13.6 million during the same period. The increases in both net
income and FFO are primarily attributable to the acquisition of six apartment
properties during 1996 and the first quarter of 1997. In addition, income from
the core portfolio increased nearly 8% over the prior year period due to both
increased rents and expense savings. These increases in income were partially
offset by higher interest expense related to the acquisitions as well as
decreased income from the Property Service Businesses.
Rental Properties. Revenue from all rental properties increased $5.9
million, or 15.3%, from $38.8 million for the three months ended March 31, 1996
to $44.7 million for the three months ended March 31, 1997. The six acquisition
and development properties (defined as properties acquired or developed
subsequent to December 31, 1995) contributed approximately 85%, or $5.0 million,
of the total rental revenue increase. Three of the acquisitions (comprising
1,002 apartment units) were completed during 1996 and three (comprising 1,828
units) were completed in the first quarter of 1997. The core portfolio
contributed the remaining increase in revenue of $0.9 million, a 2.5% increase
over the prior year period.
Average monthly revenue per core apartment increased from $852 during
the first quarter of 1996 to $874 per unit during the current quarter. The
increase results primarily from rent increases initiated during 1996. In
addition, revenue-enhancing initiatives such as the premium for month-to-month
leases and the non-refundable move-in fee generated approximately $0.3 million
in revenue over the comparable prior year period. However, these increases were
partially offset by higher than expected vacancies during January and February,
particularly for furnished apartments at Gateway Place. As a result, net
revenues from furnished apartments were flat and average economic occupancy for
the core portfolio was down to 95.9% for the three months ended March 31, 1997
compared to 96.5% for the comparable prior year quarter. However, aggressive
efforts by management brought occupancy back up to 96.4% in March with
substantial improvement in leasing of furnished apartments.
Retail revenues during the three months ended March 31, 1997 were
unchanged compared to the prior year period primarily due to vacancies which
offset rent increases. Unamortized deferred rents were written off for one
tenant at Skyline Mall and three tenants at Worldgate Centre who either vacated
or declared bankruptcy during the quarter. Although average occupancy for
Skyline Mall was essentially unchanged compared to the prior year's first
quarter, occupancy at Worldgate Centre declined from 100% to 97.4%,
respectively, for the three months ended March 31, 1996 and 1997.
13
<PAGE>
Expenses from all rental operations (including depreciation) increased
$1.9 million, or 8.7%, from $22.3 million during the first quarter of 1996 to
$24.2 million during the current quarter. The six properties in the
acquisition/development portfolio contributed additional depreciation expense of
$0.5 million and other property operating expenses of $2.2 million. These
increases were offset by expense reductions in both the core and retail
portfolios of $0.6 million (3.7%) and $0.1 million (10.6%), respectively. Core
expenses decreased primarily due to a much milder winter in 1997 compared to
1996 resulting in savings of $0.7 million in utility costs which were partially
offset by higher real estate taxes in 1997. Retail expenses at Skyline Mall
decreased in 1997 due to a large maintenance project in 1996 which could not be
passed through to the tenants.
Property Service Businesses. Income from the Property Service
Businesses decreased from $1.5 million during the first quarter of 1996 to $0.8
million for the first quarter of 1997. The decrease was primarily due to the
fact that no financing services fees were earned during the quarter. Also, 1996
results reflect a non-recurring fee of $0.6 million related to the termination
of a management agreement with a hotel owned by a related party. These decreases
were partially offset by higher income for both Engineering and Technical
Services and Interior Construction and Renovation Services. The Operating
Partnership uses the equity method of accounting for investments in the Property
Service Businesses.
During the three months ended March 31, 1997, Interior Construction
and Renovation Services' net fee revenue increased $0.3 million, or 31.0%, with
no significant increase in expenses compared to the prior year quarter. The
revenue increase was due primarily to the addition of several large general
contracting projects for third party clients during the first quarter of 1997
compared to the prior year. Expenses remained relatively unchanged due
partially to the prior year's severe winter weather which resulted in project
delays and higher than usual unbillable labor.
Revenues for Multifamily and Retail Property Management decreased $0.5
million, or 17.6%, during the first quarter of 1997 as compared to the
comparable prior year quarter 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.
Engineering and Technical Services revenue increased $2.6 million, or
27.1%, during the first quarter with resulting increases of 24.9% in expenses
and 57.4% in income. Two new contracts for HVAC operations and maintenance as
well as significant additional work under existing contracts contributed
approximately $1.5 million of the increased revenues. Typically, contract
extras earn higher margins than base contract work. The balance of the revenue
increase was generated by several large repair and replacement projects for
affiliated partnerships.
Other. Corporate general and administrative expenses increased 8.1%,
due primarily to write-offs of capitalized costs for terminated acquisition
projects. Interest expense increased $1.0 million, or 9.8%, due to additional
borrowings for completed acquisitions and development.
14
<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 months ended March 31, 1997 and
1996 are computed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Net Income $ 8,796 $ 6,696
Depreciation of Real Property 4,851 4,392
--------- ---------
Funds from Operations $ 13,647 $ 11,088
========= =========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Summary. Net cash flow provided by operating activities increased $6.8
million from $9.1 million for the three months ended March 31, 1996 to $15.9
million for the three months ended March 31, 1997. The increase is a result of
an additional $2.6 million of FFO and an increase of $4.2 million in accounts
payable due primarily to property acquisitions and accrued real estate taxes.
Net cash flow used by the Operating Partnership in investing
activities was $8.8 million for the three months ended March 31, 1997 versus
$22.9 million for the three months ended March 31, 1996. The decrease of $14.1
million was due primarily to cash acquisitions made during the first quarter of
1996 versus unit swap acquisitions during the first quarter of 1997. Partially
offsetting the decrease was additional investments and advances to the Property
Service Businesses of $2.6 million.
15
<PAGE>
Net cash flows used by financing activities was $9.8 million for the
three months ended March 31, 1997 compared to $6.2 million provided by financing
activities in the first quarter of 1996 for a net decrease of $16 million.
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 (the
"Offering") at $28.375 per share totaling $83.0 million, net of underwriting
discounts and other expenses totaling $5.1 million. The Company contributed the
net proceeds from the Offering to the Operating Partnership in exchange for 3.1
million 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. During the three months ended March 31,
1996, however, the Operating Partnership had net borrowings on the line of
credit of $18 million to fund the acquisitions made during that quarter. During
the three months ended March 31, 1997 and 1996, the Operating Partnership paid
distributions of $11.1 million and $10.7 million, respectively, or $ 0.505 and
$0.49 per share/unit.
Debt
The Operating Partnership completed the acquisition of three
multifamily properties during the quarter totaling 1,828 apartment units, for a
total cost of $129.1 million consisting of Operating Partnership Units valued at
$47.1 million, assumed debt of $80.2 million and cash of approximately $1.8
million. One of the properties is subject to a 5.1% net profits interest in
favor of an unaffiliated third party.
As of March 31, 1997, the Operating Partnership had mortgage
indebtedness and other borrowings, which carried a weighted average interest
rate of 8%, as follows:
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
----------- ------
<S> <C> <C>
Long-term mortgage debt
(maturities greater than 1 year)
Fixed rate $479,579 87.9%
Short-term mortgage debt
(maturities less than 1 year)
Variable rate 8,199 1.5%
$100M Acquisition Line of Credit 27,650 5.1%
$83M Acquisition Line of Credit 30,000 5.5%
-------- ----
$545,428 100.0%
======== ======
</TABLE>
The Operating Partnership had $125.4 million of unused borrowing
capacity available on lines of credit as of March 31, 1997. Amounts outstanding
under lines of credit averaged $90.2 million for the three months ended March
31, 1997 compared to $60.0 million for the three months ended March
16
<PAGE>
31, 1996. 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 March 31, 1997, the Operating Partnership's Debt to Total Market
Capitalization Ratio was 42.9%, based on 26.8 million partnership units
outstanding at a market price of $27.125. The Operating Partnership's Debt
Coverage Ratio for the three months ended March 31, 1997 was 2.36 to 1.
Capital Expenditures
For the three months ended March 31, 1997, total capital improvements
were $1.7 million, of which $1.5 million, or $106 per core apartment unit, were
for the core portfolio. Approximately 50% of the capital expenditures on the
core portfolio 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:
<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 $ 172 298 $ 577 $ 12
Carpet 389 245 1,588 28
Other 27 21 1,286 2
Renovations:
Kitchen 45 21 2,143 3
Bath 116 131 885 8
------ ------
Total revenue generating
improvements 749 53
Non-revenue generating
improvements 755 53
------ ------
Total capital expenditures
- core portfolio $1,504 $ 106
====== ======
</TABLE>
17
<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.
May 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)
20
<PAGE>
PART II
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
The Registrant has issued Units for the purpose of acquiring all or a
part of an ownership interest in a real estate property on three
occasions during the first quarter of 1997, as set forth in the chart
below. The recipients of these Units have been the partners of
partnerships owning such property, who have swapped their ownership
interest for Units, cash, the assumption of debt, or some combination
thereof. These Units were offered on a private placement basis, and the
offerings were completed without an underwriter or the payment of sales
commissions or discounts. The Registrant believes that such offerings
and sales were 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
promulgated thereunder, the conclusion of the Registrant, after
diligent investigation, that fewer than 35 offerees were not either
"accredited investors" as defined in Rule 501 or within the other
requirements of Registration D, the delivery to each prospective
Unitholder of appropriate written materials, and the execution by each
person receiving Units of a qualifying subscription agreement.
Unregistered Unit Issuances
<TABLE>
<CAPTION>
Implied Unit
Issue Date # of Units Issued Consideration Value Redeemable
---------- ----------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
2/20/97 307,000 interest in Crystal $ 8,722,637.50 after one year
Towers Apartments ($24.4125/Unit)
2/20/97 842,500 interest in Crystal $23,937,531.25 after one year
Plaza Apartments ($24.4125/Unit)
3/1/97 510,700 interest in Kenmore $13,278,200 after one year
Apartments ($26.00/Unit)
</TABLE>
[Note: Unit Values in each instance were established by negotiation between the
parties, resulting in a contract formula determining the number of Units to be
issued in the transaction.]
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<PAGE>
In addition, the Registrant issued a total of 3,105,000 Units to its
general partner, Charles E. Smith Residential Realty, Inc., on February
19 and March 19, 1997, in return for $83,477,375 in cash, the total
proceeds of an offering by the general partner of 3,105,000 shares of
Common Stock, net of underwriting discounts. These Units were offered
on a private placement basis, and the offerings were completed without
an underwriter or the payment of sales commissions or discounts. The
Registrant believes that such offering and sale were exempt from
registration by virtue of Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K
A Current Report of the Registrant on Form 8-K was filed on February 7,
1997, describing and providing certain financial statements for three
real estate properties to be acquired by the Registrant.
19
