<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, 1998
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: O-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 16, 1998, there were 31,212,035 Common Units of the Limited
Partnership 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, 1998 and December 31, 1997,
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
Condensed 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 13
PART II - OTHER INFORMATION 29
SIGNATURES 30
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, net $ 952,063 $ 751,230
Rental property under construction 106,562 53,093
Cash and cash equivalents 13,116 -
Tenants' security deposits 2,649 2,453
Escrow funds 10,650 7,606
Investment in and advances to Property Service Businesses 26,392 14,141
Deferred charges, net 14,956 16,047
Other assets 16,387 20,936
----------------- -----------------
$ 1,142,775 $ 865,506
================= =================
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 482,476 $ 500,435
Lines of credit 244,500 105,000
Construction loans 25,572 5,536
Accounts payable and accrued expenses 22,650 13,732
Tenants' security deposits 2,649 2,453
----------------- -----------------
Total liabilities 777,847 627,156
----------------- -----------------
Commitments and contingencies
Other Limited Partners' Interest
13,738,628 and 14,161,102 common units issued and outstanding
at September 30, 1998 and December 31, 1997, respectively, at
redemption value 417,311 502,719
----------------- -----------------
Partners' Equity
General Partner's General and Limited Partnership Interest
Preferred units - Series A Cumulative Convertible
Redeemable Preferred Units, 2,640,325 and 1,661,744 units
issued and outstanding at September 30, 1998
and December 31, 1997, respectively 71,500 45,000
Preferred units - Series B Cumulative Convertible
Redeemable Preferred Units, 973,933 and 1,216,666 units
issued and outstanding at September 30, 1998
and December 31, 1997, respectively 27,757 34,675
Preferred units - Series C Cumulative Redeemable Preferred
Units, 500 units issued and outstanding 50,000 -
Common units - 17,471,741 and 14,942,429 units issued and
outstanding at September 30, 1998 and December 31, 1997,
respectively (201,640) (344,044)
----------------- -----------------
Total partners' equity (52,383) (264,369)
----------------- -----------------
$ 1,142,775 $ 865,506
================= =================
</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)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Rental Properties:
Revenues $ 66,061 $ 50,829 $ 183,488 $ 145,088
Expenses
Operating costs (23,301) (18,296) (62,482) (52,062)
Real estate taxes (4,481) (3,098) (12,722) (9,096)
Depreciation (7,970) (5,294) (21,445) (15,440)
------------- ----------- ------------ -----------
Total expenses (35,752) (26,688) (96,649) (76,598)
Equity in income of Property Service
Businesses 2,693 1,931 5,584 3,636
Corporate general and administrative
expenses (2,177) (1,544) (6,405) (4,583)
Interest income 388 236 855 768
Interest expense (12,582) (10,981) (35,071) (33,664)
------------- ----------- ------------ -----------
Income before gain on sale, loss on unused
treasury lock, and extraordinary item 18,631 13,783 51,802 34,647
Gain on sale of property - - 3,120 -
Loss on unused treasury lock (4,923) - (4,923) -
------------- ----------- ------------ -----------
Income before extraordinary item 13,708 13,783 49,999 34,647
Extraordinary item - loss on extinguishment
of debt - - (4,702) -
------------- ----------- ------------ -----------
Net income 13,708 13,783 45,297 34,647
Less: Income attributable to
preferred units (2,868) (384) (7,938) (384)
------------- ----------- ------------ -----------
Net income attributable to common units $ 10,840 $ 13,399 $ 37,359 $ 34,263
============= =========== ============ ===========
Earnings per common unit - basic
Income before extraordinary item $ 0.35 $ 0.50 $ 1.41 $ 1.32
Extraordinary item - - (0.16) -
------------- ----------- ------------ -----------
Net income $ 0.35 $ 0.50 $ 1.25 $ 1.32
============= =========== ============ ===========
Earnings per common unit - diluted
Income before extraordinary item $ 0.35 $ 0.50 $ 1.40 $ 1.32
Extraordinary item - - (0.16) -
------------- ----------- ------------ -----------
Net income $ 0.35 $ 0.50 $ 1.24 $ 1.32
============= =========== ============ ===========
</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)
<TABLE>
<CAPTION>
Other
Limited
General Partner's General and Partners'
Limited Interest Interest
--------------------------------------------------------------------------- --------------
Series A Preferred Series B Preferred Series C Preferred
Units Units Units Common Units Common Units
------------------ ------------------ ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ - $ - $ - $ (389,252) $ 351,873
Units exchanged for acquisitions - - - - 75,019
Adjustment for unit grants - - - - 579
Net income - - - 26,593 25,617
Contribution by Charles E. Smith
Residential Realty, Inc. 45,000 34,675 - 124,180 -
Offering costs - - - (562) -
Repurchase and cancellation of
Operating Partnership units - - - - (2,206)
Distributions - - - (27,151) (26,369)
Other - - - 244 110
Adjustment to reflect Other
Limited Partners' interest
at redemption value - - - (78,096) 78,096
--------------- -------------- -------------- ------------ --------------
Balance, December 31, 1997 45,000 34,675 - (344,044) 502,719
Units exchanged for acquisitions - - - - 11,820
Adjustment for grants - - - - 460
Net income - - - 26,320 18,977
Contribution by Charles E. Smith
Residential Realty, Inc. 26,500 - 50,000 45,654 -
Conversion of Preferred units to
Common units - (6,918) - 6,918 -
Offering costs - - - (1,461) -
Repurchase and cancellation of
Operating Partnership units - - - - (594)
Distributions - - - (32,199) (21,620)
Other - - - 121 2,600
Adjustment to reflect Other
Limited Partners' interest
at redemption value - - - 97,051 (97,051)
--------------- -------------- -------------- ------------ --------------
Balance, September 30, 1998
(unaudited) $ 71,500 $ 27,757 $ 50,000 $ (201,640) $ 417,311
=============== ============== ============== ============ ==============
Units issued and outstanding at
September 30, 1998 (unaudited) 2,640,325 973,933 500 17,471,741 13,738,628
=============== ============== ============== ============ ==============
Units issued and outstanding at
December 31, 1997 1,661,744 1,216,666 - 14,942,429 14,161,102
=============== ============== ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 84,337 $ 50,593
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (213,957) (16,518)
Additions to rental property (13,170) (8,177)
Increase in investment in and advances
to Property Service Businesses (12,251) (5,813)
Decrease (increase) in acquisition deposits and other 280 (11,248)
---------- ----------
Net cash used by investing activities (239,098) (41,756)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions by Charles E. Smith Residential Realty Inc.:
Common units 45,654 82,855
Preferred units 75,039 19,772
Mortgages, net (51,416) (10,030)
Lines of credit, net 139,500 (44,050)
Construction loans, net 20,036 (17,686)
Prepayment penalties (3,025) -
Termination of unused treasury lock (4,923) -
Distributions (53,819) (37,687)
Other, net 831 (693)
---------- ----------
Net cash provided (used) by financing activities 167,877 (7,519)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,116 1,318
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 3,898
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,116 $ 5,216
========== ==========
SUPPLEMENTAL INFORMATION:
Capitalized interest $ 4,382 $ 436
Purchase of property in exchange for Operating Partnership units 11,820 47,129
Purchase of property in exchange for assumption of debt 33,456 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. 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, 1998 and the results of
operations for the interim periods ended September 30, 1998 and 1997. 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, and development of real estate
properties, primarily residential multifamily properties. As of September 30,
1998, the Operating Partnership owned 49 operating multifamily properties
containing 19,951 apartment units, two retail shopping centers aggregating
436,000 square feet, and four development sites with approximately 2,100 units
under construction. The Operating Partnership also owns substantially all of
the economic interest in entities which provide multifamily and retail property
management and leasing, construction and construction management services,
engineering and technical services, and financial advisory services
(collectively the "Property Service Businesses"). The Operating Partnership
uses the equity method of accounting for its 99% non-voting interest in the
Property Service Businesses.
Certain amounts from the prior year have been reclassified to conform to the
current year's presentation.
2. ACQUISITIONS AND DISPOSITIONS
During the first quarter, the Operating Partnership completed the
acquisition of two multifamily properties in northwest Washington, D.C. totaling
287 apartment units. The total cost of approximately $13.8 million was
comprised of 254,000 Operating Partnership units valued at approximately
$8.8 million, $3.2 million cash and approximately $1.8 million of initial
capital improvements. One of the properties was an affiliate in which the
Operating Partnership previously owned a minority interest. Both properties
were previously managed by the Operating Partnership.
7
<PAGE>
During the first quarter, the Operating Partnership also sold Oxford Manor,
a 227-unit multifamily property located in southeast Washington, D.C., for
$4.4 million. The Operating Partnership recognized a gain on the sale of
$3.1 million.
During the second quarter, the Operating Partnership acquired a 1,075-unit
multifamily property in Chicago, Illinois. The cost of approximately $70
million cash was funded from the line of credit and proceeds from the sale of
Series A Preferred Units totaling $26.5 million. The total capitalized cost of
approximately $74 million reflects $4 million of planned initial capital
improvements. The Operating Partnership also acquired a 299-unit multifamily
property in Arlington, Virginia for approximately $39 million cash funded from
the line of credit. The property had been managed by the Operating Partnership
since January 1, 1998.
During the second quarter, the Operating Partnership also began construction
of an 11-story, 142-unit high rise in northwest Washington, D.C. Total cost
is expected to be approximately $25 million, which will be funded from the
Operating Partnership's line of credit, and initial occupancy is expected in
late 1999.
During the third quarter, the Operating Partnership acquired a newly-
constructed 281-unit mid-rise multifamily property in Boston, Massachusetts.
The total capitalized cost of approximately $63.3 million was comprised of
$26.8 million cash, $31.5 million in assumed debt, a fair value adjustment to
debt of $2.0 million, and 92,793 Operating Partnership units valued at
$3.0 million.
3. LOANS
The $110.1 million principal balance of Mortgage Pool One was partially
repaid on February 28, 1998, in conjunction with the sale of Oxford Manor, and
fully repaid on March 31, 1998.
The Operating Partnership terminated its $100 million line of credit in 1998
and entered into a new $275 million, unsecured line of credit with PNC Bank,
NationsBank, and U.S. Bank, as agents, which matures in March 2001. Draws upon
the new line are subject to certain unencumbered asset requirements and bear
interest at a selected London Interbank Offer Rate (LIBOR) plus 75 to 110 basis
points based on the leverage ratio of the Operating Partnership. As of
September 30, 1998, the weighted average interest rate on outstanding draws
was 6.65%. If the Operating Partnership receives an investment grade rating
on its unsecured debt, the interest rate will decrease to 60 to 90 basis
points over LIBOR based on the rating.
During the second quarter, the Operating Partnership obtained a $53 million,
ten year secured loan from Prudential at a fixed coupon rate of 6.88%. The
loan is secured by two of the multifamily properties and, under certain
conditions, may be converted to an unsecured loan. In conjunction with this
loan,
8
<PAGE>
the Operating Partnership terminated a $20 million (notional value) treasury
lock contract at a gain of $0.4 million which will be amortized over the term
of the new loan.
During the third quarter, the Operating Partnership obtained a $90 million
interest-only construction loan in connection with the development of One
Superior Place in Chicago, Illinois, with interest at LIBOR plus 135 basis
points, payable monthly, due July 1, 2001. At the Operating Partnership's
option, maturity may be extended up to two years. The loan is collateralized
by the property.
During the third quarter, the Operating Partnership assumed a $31.5 million
mortgage loan in connection with an acquisition. The loan has a fixed interest
rate of 7.78% with principal amortized using a 25-year amortization schedule
and a final payment due June 2009.
During the third quarter, the Operating Partnership terminated a $50 million
(notional value) treasury lock contract at a loss of $4.9 million. The
treasury lock was put in place in the first quarter of 1998 in anticipation of
a planned 10-year, unsecured financing which ultimately did not occur and is
not anticipated to occur in the near future. Therefore, this amount has been
charged to current period earnings.
4. INVESTMENT IN PROPERTY SERVICE BUSINESSES
During the second quarter, Smith Realty Company ("SRC"), one of the Property
Service Businesses, acquired Noel Enterprises, Inc. ("Presidential Villas"), a
provider of furnished corporate apartments in Chicago, Illinois. A portion of
the total purchase price of $8.5 million is contingent upon achievement by
Presidential Villas of certain earnings targets over the next two years. The
Operating Partnership lent to SRC the initial payment of $6.75 million in
exchange for a five year note.
5. CAPITAL CONTRIBUTIONS
In January 1998, Charles E. Smith Residential Realty, Inc. (the "Company"),
which is the general partner of the Operating Partnership, sold 500 shares of
Series C Cumulative Redeemable Preferred Stock ("Series C Preferred Shares"),
$0.01 par value, for $48.8 million, which is net of offering costs of
$1.2 million. The Company contributed the proceeds to the Operating
Partnership in exchange for 500 Series C Cumulative Redeemable Preferred Units
("Series C Preferred Units"), created by an amendment to the Agreement of
Limited Partnership designating and establishing the rights and privileges of
the Series C Unitholders which include certain distribution and liquidation
preferences over the common unitholders. The Series C Preferred Units have a
liquidation preference of $100,000 per unit and an initial annual distribution
rate of $7,910 per unit. If the Series C Preferred Units or an equivalent
security of the Company receives an investment grade rating, the annual
distribution rate will decrease by $250 per unit. Distributions are cumulative
and are payable quarterly. The Operating Partnership may redeem Series C
Preferred Units after February 1, 2028, at the liquidation price plus accrued
distributions.
In April 1998, the Company sold the remaining 978,581 shares of Series A
Preferred Shares under its agreement with Security Capital Group, Inc. for
$26.2 million, which is net of offering costs of $0.3 million. The Company
contributed the proceeds to the Operating Partnership in exchange for 978,581
units of Series A Preferred Units.
In June 1998, 91,467 units of Series B Cumulative Convertible Redeemable
Preferred Units were converted to common units on a one-for-one basis.
9
<PAGE>
In July 1998, the Company completed the sale of 1.4 million shares of common
stock (par value $0.01 per share) under its existing shelf registration
statement at a net purchase price of $32.625 per share. The Company contributed
the net proceeds to the Operating Partnership in exchange for 1.4 million common
units. The net proceeds of approximately $45.7 million have been used to retire
outstanding debt and for working capital needs.
In September 1998, 151,266 units of Series B Preferred Units were converted
to common units on a one-for-one basis.
6. PER UNIT DATA
Earnings per common unit of the Operating Partnership for the three and nine
months ended September 30, 1998 and 1997 is computed based on weighted average
common units outstanding during the period as follows (in millions):
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------
1998 1997
--------------- --------------
Basic Diluted Basic Diluted
------ ------- ----- -------
<S> <C> <C> <C> <C>
Weighted Average Common Units 30.6 30.8 26.8 27.0
Nine months ended September 30,
--------------- --------------
1998 1997
--------------- --------------
Basic Diluted Basic Diluted
------ ------- ----- -------
Weighted Average Common Units 29.8 30.0 25.9 26.0
</TABLE>
10
<PAGE>
Reconciliations of income and units used to calculate basic and diluted
earnings per unit for the nine months ended September 30, 1998 follow (dilutive
securities had no effect on earnings for the three months ended September 30,
1998 and the three and nine months ended September 30, 1997):
<TABLE>
<CAPTION>
Weighted Per Unit
Income Average Units Amount
------ -------------- --------
Nine Months Ended September 30, 1998 (In Thousands) (In Thousands)
- - ------------------------------------
<S> <C> <C> <C>
Income before extraordinary item $ 49,999
Income Attributable to Preferred Units (7,938)
--------
Earnings per unit - Basic
Income attributable to common
unitholders before extraordinary item $ 42,061 29,832 $ 1.41
Effect of Dilutive Securities
Options 178 (0.01)
-------- ------ ------
Earnings per unit - Diluted $ 42,061 30,010 $ 1.40
======== ====== ======
</TABLE>
Options to purchase 0.8 million shares of the Company's common stock, the
proceeds of which would be contributed by the Company to the Operating
Partnership for Common Units, were not included in the computation of diluted
earnings per unit because the options' exercise price was higher than the
average price of the Company's common shares. All convertible preferred units
were also excluded from the calculation of diluted earnings per unit since the
preferred distributions paid per unit exceeded basic earnings per unit.
7. COMMITMENTS AND CONTINGENCIES
As of September 30, 1998, the Operating Partnership had executed four
contracts to purchase to-be-constructed multifamily properties totaling
approximately 1,200 apartment units. The maximum aggregate contract purchase
price totals $151 million with projected closing dates between June 2000
11
<PAGE>
and May 2001. The contracts are contingent upon satisfactory completion of
construction and attainment of final certificates of occupancy by the owners.
At September 30, 1998, the Operating Partnership had posted three letters-of-
credit totaling $7.7 million in accordance with three of the contracts to be
drawn upon only if the Operating Partnership defaults on its contractual
obligations to purchase the completed assets.
8. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Operating Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which
had no effect on current reporting or disclosure. The Operating Partnership
will adopt SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information" during 1998 which is not expected to significantly impact
the Operating Partnership's current reporting or disclosure.
9. EXTRAORDINARY ITEM
The Operating Partnership recognized an extraordinary loss of $4.7 million
in connection with debt extinguishments in 1998. A $4.1 million loss was
recognized in connection with the repayment of Mortgage Pool One and consisted
of a $2.9 million yield maintenance premium and a $1.2 million non-cash write-
off of unamortized loan fees. A loss of $0.6 million was recognized due to the
write-off of unamortized loan fees associated with the termination of the
$100 million line of credit and the refinancing of $9.2 million of mortgage
loans.
10. SUBSEQUENT EVENTS
In October 1998, the Operating Partnership established a standby credit
facility of up to $300 million with Fannie Mae which provides for non-recourse,
long-term debt for up to fifteen years. The initial draw on this facility was
$140 million at 6.75% for fifteen years. The bulk of the proceeds were used
to retire Mortgage Pool Two of $125.2 million and the associated prepayment
penalty of $9.5 million. Terms and rates of subsequent draws on this facility
will be determined at the time of use.
12
<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, 1998 and 1997 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 REVENUE
Average revenue per apartment unit for the Operating Partnership's core
multifamily properties increased approximately 4.8% in the third quarter of
1998 as compared with 1997.
A schedule of portfolio statistics follows:
13
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
- - --------------------------------------------------------------------------------
Residential Portfolio Statistics for the Three Months Ended September 30, 1998
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Units Per Unit Per Unit Occupancy
- - --------------------------- -------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
CORE RESIDENTIAL PORTFOLIO
NW Washington, D.C.
1841 Columbia Road High-rise 115 634 986 98.2%
2501 Porter Street High-rise 202 760 1,512 99.6%
Albemarle High-rise 235 1,097 1,245 99.8%
Calvert-Woodley High-rise 136 1,001 1,183 98.7%
Cleveland House High-rise 216 894 1,157 98.9%
Connecticut Heights High-rise 519 536 908 95.8%
Corcoran House High-rise 138 464 842 99.6%
Statesman High-rise 281 593 827 99.0%
Van Ness South High-rise 625 956 1,129 99.3%
----- ----- ----- ----
2,467 778 1,073 98.6%
Other NE & SE Washington, D.C.
Car Barn Garden 196 1,311 917 97.9%
Fort Chaplin Garden 549 983 690 98.9%
Marbury Plaza High-rise 672 997 663 96.3%
----- ----- ----- ----
1,417 1,035 708 97.6%
Other Northern Virginia - Inside Beltway
Crystal City
------------
The Bennington High-rise 348 804 1,091 97.3%
Crystal House I High-rise 426 917 1,040 99.1%
Crystal House II High-rise 402 938 1,020 99.1%
Crystal Square High-rise 378 1,121 1,198 99.3%
Crystal Place High-rise 180 894 1,337 99.1%
Gateway Place High-rise 162 826 1,720 97.4%
Water Park Towers High-rise 360 881 1,510 96.4%
------ ----- ----- ----
2,256 923 1,218 98.2%
Rosslyn/Ballston
----------------
Courthouse Plaza High-rise 396 772 1,347 98.2%
Other
-----
Arlington Overlook Mid-rise 711 877 809 97.5%
Bedford Village Garden 752 1,070 931 96.7%
Berkeley Mid-rise 138 891 746 98.2%
Boulevard of Old Town Garden 159 603 872 98.2%
Columbia Crossing Garden 247 976 1,157 98.0%
Columbian Stratford Mid-rise 227 942 781 99.0%
Concord Village Garden 531 1,025 842 98.0%
Newport Village Garden 937 1,115 929 97.5%
Orleans Village Garden 851 1,061 853 96.4%
Patriot Village Garden 1,065 1,162 942 98.3%
Skyline Towers High-rise 940 1,221 1,010 96.1%
Windsor Towers Mid-rise 280 1,025 824 99.0%
------ ----- ----- -----
6,838 1,063 908 97.4%
Other Northern Virginia - Outside Beltway
Charter Oak Garden 262 1,097 971 98.3%
Oaks of Tysons Garden 218 968 1,089 99.2%
Potomac View Garden 192 965 809 98.3%
Westerly at Worldgate Garden 320 921 1,122 96.2%
------ ----- ----- -----
992 986 1,014 97.8%
Suburban Maryland
The Manor Garden 435 999 787 97.7%
Suburban Tower High-rise 172 677 847 99.1%
------ ----- ----- -----
607 908 804 98.1%
------ ----- ----- -----
Subtotal/Average 14,973 973 977 97.8%
------ ----- ----- -----
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Units Per Unit Per Unit Occupancy
- - --------------------------- -------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ACQUISITION PORTFOLIO
The Kenmore (NW Washington, D.C.) High-rise 376 725 759 96.9%
Crystal Plaza (Crystal City) High-rise 540 1,129 1,279 98.6%
Crystal Towers (Crystal City) High-rise 912 1,107 1,170 98.9%
Lincoln Towers (Rosslyn/Ballston) High-rise 714 879 1,297 94.6%
2000 Commonwealth (Boston, MA) High-rise 188 878 1,681 95.8%
One East Delaware (Chicago, IL) High-rise 306 704 1,938 98.9%
Tunlaw Gardens (NW Washington, D.C.) Garden 167 850 793 98.3%
Tunlaw Park (NW Washington, D.C.) Mid-rise 120 856 1,143 99.5%
Parc Vista (Crystal City) High-rise 299 770 1,397 99.7%
McClurg Court (Chicago, IL) High-rise 1,075 688 1,349 95.5%
Cronin's Landing (Waltham, MA) Mid-rise 281 1,129 N/A N/A
------ ----- ----- -----
Sub-Total/Average 4,978 890 N/A N/A
------ ----- ----- -----
DEVELOPMENT PORTFOLIO
Springfield Station
(Other Northern Virginia) Mid-rise/
Garden 631
Courthouse Place (Rosslyn/Ballston) High-rise 564
One Superior Place (Chicago) High-rise 809
Park Connecticut (NW Washington, D.C.) High-rise 142
-----
Sub-Total/Average 2,146
------
All Residential Properties 22,097
======
</TABLE>
15
<PAGE>
RENTAL PROPERTIES
Revenues, expenses and income from the multifamily and retail properties
for the three and nine months ended September 30, 1998 and 1997 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- -----------------------
September 30, September 30,
-------------------- -----------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Multifamily Properties - Core/(1)/
Revenues $ 43,906 $ 41,891 $ 127,982 $ 122,569
Expenses (18,900) (17,887) (53,270) (52,107)
-------- -------- --------- ---------
Income before depreciation $ 25,006 $ 24,004 $ 74,712 $ 70,462
======== ======== ========= =========
Multifamily Properties-
Acquisitions and Dispositions/(2)/
Revenues $ 19,325 $ 6,306 $ 47,726 $ 15,037
Expenses (7,859) (2,648) (18,872) $ (6,457)
-------- -------- --------- ---------
Income before depreciation $ 11,466 $ 3,658 $ 28,854 $ 8,580
======== ======== ========= =========
Multifamily Properties-
Development
Revenues $ 387 $ 0 $ 474 $ 0
Expenses (261) (14) (665) (14)
-------- -------- --------- ---------
Income before depreciation $ 126 $ (14) $ (191) $ (14)
======== ======== ========= =========
Retail Properties
Revenues $ 2,443 $ 2,632 $ 7,306 $ 7,482
Expenses (762) (845) (2,397) (2,580)
-------- -------- --------- ---------
Income before depreciation $ 1,681 $ 1,787 $ 4,909 $ 4,902
======== ======== ========= =========
Total Rental Properties
Revenues $ 66,061 $ 50,829 $ 183,488 $ 145,088
Expenses (27,782) (21,394) (75,204) (61,158)
Depreciation (7,970) (5,294) (21,445) (15,440)
-------- -------- --------- ---------
Income from Rental Properties $ 30,309 $ 24,141 $ 86,839 $ 68,490
======== ======== ========= =========
</TABLE>
/(1)/ Represents properties owned as of December 31, 1996.
/(2)/ Includes operations of Oxford Manor which was sold in February 1998.
16
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the various Property Service Businesses
for the three and nine months ended September 30, 1998 and 1997 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- -----------------------
September 30, September 30,
-------------------- -----------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Multifamily & Retail Property
Management Services/(1)/
Revenues $ 10,648 $ 2,489 $ 18,493 $ 7,763
Expenses (10,024) (2,227) (17,503) (7,159)
-------- -------- -------- --------
Income before depreciation $ 624 $ 262 $ 990 $ 604
======== ======== ======== ========
Interior Construction and Renovation
Services
Net Fee Revenues $ 2,516 $ 2,000 $ 5,561 $ 4,626
Expenses (1,569) (1,433) (4,614) (4,049)
-------- -------- -------- --------
Income before depreciation $ 947 $ 567 $ 947 $ 577
======== ======== ======== ========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 18,014 $ 12,982 $ 49,153 $ 36,913
Expenses (16,899) (12,060) (46,302) (34,007)
-------- -------- -------- --------
Income before depreciation $ 1,115 $ 922 $ 2,851 $ 2,906
======== ======== ======== ========
Financing Services
Revenues $ 742 $ 704 $ 2,623 $ 996
Expenses (169) (206) (766) (577)
-------- -------- -------- --------
Income before depreciation $ 573 $ 498 $ 1,857 419
======== ======== ======== ========
Total Property Service Businesses
Revenues $ 31,920 $ 18,175 $ 75,830 $ 50,298
Expenses (28,661) (15,926) (69,185) (45,792)
Depreciation (566) (318) (1,061) (870)
-------- -------- -------- --------
Income from Property
Service Businesses $ 2,693 $ 1,931 $ 5,584 $ 3,636
======== ======== ======== ========
</TABLE>
/(1)/ Includes May 1998 purchase of Presidential Villas.
17
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
SUMMARY. Net income of the Operating Partnership decreased $0.1 million,
or 0.5%, from $13.8 million for the three months ended September 30, 1997 to
$13.7 million for the three months ended September 30, 1998 due primarily to a
$4.9 million loss in connection with the termination of an unused treasury
lock. Funds from Operations ("FFO") of the Operating Partnership increased
$6.7 million, or 35.3%, from $19.1 million to $25.8 million during the same
period. The increases in FFO are primarily attributable to revenue growth of
4.8% on the core portfolio and the performance of acquired properties.
RENTAL PROPERTIES. Revenue from all rental properties increased
$15.3 million, or 30.0%, from $50.8 million for the three months ended
September 30, 1997 to $66.1 million for the three months ended September 30,
1998. Expenses (including depreciation) from all rental operations increased
$9.1 million, or 34.1% from $26.7 million during the third quarter of 1997 to
$35.8 million during the current quarter.
CORE PORTFOLIO. Revenue from the core portfolio increased $2.0 million, or
4.8%, over the prior year period resulting in average monthly revenue per
apartment unit of $977. This was primarily due to continued strong demand in
all submarkets, particularly Northwest Washington, D.C. Management
successfully increased rents during the quarter and improved vacancy levels.
Average economic occupancy for the core portfolio was at its high for the year
at 97.8% for the three months ended September 30, 1998 compared to 97.3% for the
comparable prior year. Expenses for the core portfolio increased $1.5 million
or 6.8% including an increase of $0.5 million in depreciation expense, due
primarily to higher than expected costs of selected outsourcing as well as
anticipated repair and maintenance projects carried over from the first half of
1998.
ACQUISITION PORTFOLIO. The eleven acquisition properties (defined as
properties acquired subsequent to December 31, 1996) contributed approximately
85%, or $13.0 million, of the total rental revenue increase and approximately
$7.3 million of the total rental expense including an increase in depreciation
expense of $2.0 million. Six of the acquisition properties (comprising 3,036
apartment units) were acquired during 1997 and five (comprising 1,942 units)
were acquired during 1998.
DEVELOPMENT PORTFOLIO. Springfield Station, currently the only operational
development property, delivered 120 units during the quarter for a total of
200 units delivered as of September 30, 1998. The project provided net
operating income of $0.1 million for the quarter.
The leasing center for Courthouse Place was delivered in the third
quarter in anticipation of initial unit deliveries expected to occur in
December 1998.
18
<PAGE>
Initial deliveries on the remaining two projects under construction, The Park
Connecticut and One Superior Place, are expected in late 1999.
PROPERTY SERVICE BUSINESSES. The Operating Partnership uses the equity
method of accounting for its 99% non-voting interest in the Property Service
Businesses.
Income from the Property Service Businesses increased from $1.9 million in
the third quarter of 1997 to $2.7 million in the third quarter of 1998.
Income before depreciation for Multifamily and Retail Property Management
Services increased $0.4 million during the third quarter of 1998 as compared to
the prior year quarter due primarily to the acquisition in the second quarter of
Presidential Villas, a furnished apartment business in Chicago.
Income before depreciation for Interior Construction and Renovation Services
increased $0.4 million during the three months ended September 30, 1998 as
compared to the prior year period due primarily to an increase in the volume of
projects completed on behalf of Affiliated commercial office property
partnerships.
Income before depreciation for Engineering and Technical Services increased
$0.2 million due to a 67% increase in revenue from new facilities management
contracts, particularly with government agencies. This increase was partially
offset by a 16% decline in higher margin HVAC repair and replacement projects
and professional service engagements.
Revenue for Financing Services was flat for the third quarter of 1998
compared to the prior year period. The Operating Partnership earned a fee on
a $75 million debt financing arranged for a commercial office property owned by
Charles E. Smith Commercial Realty L.P. ("CESCR"). The fee was earned in
accordance with the Operating Partnership's financing services agreement with
CESCR.
OTHER. Corporate general and administrative expenses increased 41.0%
compared to the prior year quarter due primarily to additional personnel added
in 1997 in connection with the Operating Partnership's national acquisition
program as well as the write-off of certain capitalized development costs on
terminated projects. Interest expense increased $1.4 million during the
quarter, or 13.5%, primarily due to additional debt related to acquisitions
and development in late 1997 and 1998 partially offset by lower interest rates
on the line of credit and the refinancing of Mortgage Pool One.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997.
SUMMARY. Net income of the Operating Partnership increased $10.7 million, or
30.7%, from $34.6 million for the nine months ended September 30, 1997 to
$45.3 million for the nine months ended September 30, 1998. Funds from
Operations ("FFO") of the Operating Partnership increased $20.7 million, or
41.4%, from $50.1 million to $70.8 million during the same period.
19
<PAGE>
The increases in both net income and FFO are primarily attributable to rent
growth on core properties, expense control and the performance of acquired
properties.
RENTAL PROPERTIES. Revenue from all rental properties increased
$38.4 million, or 26.5%, from $145.1 million for the nine months ended
September 30, 1997 to $183.5 million for the nine months ended September 30,
1998. Expenses (including depreciation) from all rental operations increased
$20.0 million, or 26.2%, from $76.6 million to $96.6 million during the nine
months ended September 30, 1997 and 1998, respectively
CORE PORTFOLIO. Revenue from the core portfolio revenue increased
$5.4 million, or 4.4% over the prior year period. Average economic occupancy for
the core portfolio decreased to 96.3% for the nine months ended September 30,
1998 compared to 96.9% for the comparable prior year period which primarily
reflects the higher vacancy experienced during the first two quarters. Despite
the higher vacancy, average monthly revenue per core apartment unit increased
4.4% from $910 during the first nine months of 1997 to $950 during the first
nine months of 1998. Operating expenses on the core portfolio increased 2.2%
year-to - date over the prior year period. This was primarily due to higher
personnel costs (including outsourcing ) and real estate tax expenses partially
offset by utility savings related to a mild winter and lower repair and
maintenance costs.
ACQUISITION PORTFOLIO. The eleven acquisition properties (defined as
properties acquired subsequent to December 31, 1996) contributed approximately
86%, or $32.7 million, of the total rental revenue increase and $12.4 million of
the increase in expenses resulting in a contribution to net operating income of
$20.3 million.
DEVELOPMENT PORTFOLIO. Springfield Station, currently the only
operational development property delivered initial units in May 1998 and has a
total of 200 units delivered as of September 30, 1998. Estimated completion
and stabilization is expected in late 1999.
PROPERTY SERVICE BUSINESSES. The Operating Partnership uses the equity
method of accounting for its 99% non-voting interest in the Property Service
Businesses which comprised approximately 6% of total rental property and
Property Service Business income. Income from the Property Service Businesses
increased from $3.6 million during the nine months ended September 30, 1997 to
$5.6 million in the nine months ended September 30, 1998.
Income before depreciation for Multifamily and Retail Property Management
Services increased $0.4 million during the nine months ended September 30, 1998
as compared to the prior year period due primarily to income from the
Presidential Villas acquisition partially offset by a decrease in third party
management fees related to acquired properties previously managed by the
Operating Partnership.
Income before depreciation for Interior Construction and Renovation Services
increased $0.4 million during the nine months ended September 30, 1998 as
compared to the prior year period. This was due primarily to an increase in the
volume of projects completed on behalf of Affiliated commercial office property
partnerships, partially offset by a loss incurred during the first quarter of
20
<PAGE>
1998 associated with cost overruns and unrecovered owner change orders on a
large outside contract. The Operating Partnership is currently pursuing an
arbitration claim which may result in a partial recovery of the loss.
Despite a 33.2% increase in revenues primarily due to significant additional
facilities management contracts, income before depreciation for Engineering and
Technical Services decreased $0.1 million. This was primarily due to a decrease
in higher margin HVAC repair and replacement projects.
Revenue for Financing Services increased $1.6 million for the nine months
ended September 30, 1998 due to the timing of fees earned on debt refinancings
arranged for commercial office properties owned or managed by Charles E. Smith
Commercial Realty L.P. ("CESCR"). The fees on properties owned by CESCR were
earned in accordance with the Operating Partnership's one-year financing
services agreement with CESCR while fees on managed properties were separately
negotiated.
OTHER. Corporate general and administrative expenses increased 39.8%
compared to the prior year period due primarily to additional personnel added in
mid-1997 to expand the Operating Partnership's acquisition and development
program and write-offs of capitalized costs on terminated acquisition and
development projects. Interest expense increased $1.3 million during the
period, or 4.0%, primarily due to the Operating Partnership's financing of
acquisition and development activities.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY. Net cash flow provided by operating activities increased
$33.7 million from $50.6 million for the nine months ended September 30, 1997 to
$84.3 million for the nine months ended September 30, 1998. The increase is
primarily a result of higher cash flow contributed by the core and acquisition
portfolios and an increase of $ 8.9 million in accrued costs related primarily
to real estate taxes and initial capital improvements on acquisition properties.
Net cash flows used by investing activities increased $197.3 million during
the nine months ended September 30, 1998 due primarily to acquisitions and
investments in projects under construction. In addition, a $6.75 million term
loan was made to SRC for the acquisition of Presidential Villas.
Net cash flows provided by financing activities was $167.9 million for the
nine months ended September 30, 1998, primarily comprised of $75.0 million of
net cash inflow from the placement of preferred units, $45.7 million of cash
inflow from the sale of common stock, and $108.1 million of net borrowings less
$3.0 million of prepayment penalties, a $4.9 million loss on termination of an
unused treasury lock contract and $53.8 million of distributions. Net cash flows
used by financing activities of $7.5 million in the comparable prior year period
primarily consisted of $71.8 million of debt repayments and $37.7 million of
distributions partially offset by $82.9 million of cash inflow from the sale of
common stock and $19.8 million of cash inflow from the issuance of preferred
units.
21
<PAGE>
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,
unused treasury lock and sale of property, 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.
22
<PAGE>
Funds from Operations for the three and nine months ended September 30, 1998
and 1997 are computed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- ---------------------
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 13,708 $13,783 $ 45,297 $ 34,647
Perpetual preferred distributions (1,011) -- (2,637) --
Depreciation of real property 7,970 5,294 21,445 15,440
Amortization of goodwill 228 -- 228 --
Gain on sale of property -- -- (3,120) --
Loss on unused treasury lock 4,923 -- 4,923 --
Extraordinary item - loss on debt
extinguishment -- -- 4,702 --
-------- ------- -------- --------
Funds from Operations $ 25,818 $19,077 $ 70,838 $ 50,087
======== ======= ======== ========
</TABLE>
DEBT
During 1998, the Operating Partnership completed several debt financing
transactions as follows:
. The Operating Partnership terminated its existing $100 million line of
credit and entered into a new $275 million, unsecured line of credit with
PNC Bank, NationsBank, and U.S. Bank which matures in March 2001. The
Operating Partnership repaid the balance outstanding under the $100 million
line and recognized an extraordinary loss of $0.3 million related to the
extinguishment of such debt.
. The Operating Partnership repaid $110.1 million outstanding on Mortgage
Pool One by drawing on the new line of credit. The Operating Partnership
recognized an extraordinary loss of $4.1 million related to the repayment.
. The Operating Partnership repaid mortgage loans totaling $9.2 million and
recognized an extraordinary loss of $0.3 million due to extinguishment of
debt.
. The Operating Partnership obtained a $53 million, ten year secured loan
from Prudential at a fixed coupon rate of 6.88%. The loan is secured by
two of the multifamily properties. In conjunction with
23
<PAGE>
this loan, the Operating Partnership terminated a $20 million (notional
value) treasury lock contract at a gain of $0.4 million which will be
amortized over the term of the new loan.
. In connection with the development of One Superior Place in Chicago,
Illinois, the Operating Partnership obtained a $90 million interest-only
construction loan in July 1998 with interest at LIBOR plus 135 basis points,
payable monthly, due July 1, 2001. The loan is collateralized by the
property.
. The Operating Partnership assumed a $31.5 million mortgage loan in
connection with the Cronin's Landing acquisition in July 1998. The loan
has a fixed interest rate of 7.78% with principal amortized using a 25-year
amortization schedule and a final payment due June 2009. A fair value
adjustment of $2.0 million was recorded upon assumption of this loan.
. In September 1998, the Operating Partnership terminated a $50 million
(notional value) treasury lock contract at a loss of $4.9 million. The
treasury lock was put in place in the first quarter of 1998 to hedge
interest rate risk associated with an anticipated 10-year, unsecured
financing which ultimately did not occur. Therefore, this amount has been
charged to current period earnings.
. In October 1998, the Operating Partnership announced a standby credit
facility of up to $300 million with Fannie Mae which provides for non-
recourse, long-term debt for up to fifteen years. The initial draw on this
facility will be $140 million at 6.75% for fifteen years. The bulk of the
proceeds will be used to retire Mortgage Pool Two of $125.2 million and the
associated prepayment penalty of $9.5 million. Terms and rates of subsequent
draws on this facility will be determined at the time of use.
24
<PAGE>
As of September 30, 1998, the Operating Partnership had mortgage
indebtedness and other borrowings, which carried a weighted average interest
rate of 7.32%, as follows:
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
---------- ------
<S> <C> <C>
Fixed rate debt:
Mortgages $473,317 62.9%
$83M line of credit 30,000 4.0%
Variable rate debt:
Mortgages 9,159 1.2%
$275M line of credit 214,500 28.5%
Construction Loans 25,572 3.4%
-------- ----
$752,548 100%
======== ====
</TABLE>
As of September 30, 1998, the Operating Partnership had $224.2 million of
unused borrowing capacity available on lines of credit and construction loans.
Amounts outstanding under lines of credit averaged $195.1 million for the nine
months ended September 30, 1998 compared to $69.0 million for the nine months
ended September 30, 1997.
As of September 30, 1998, the Operating Partnership's Debt to Total Market
Capitalization Ratio was 40.5% (based on 17.5 million common units, 3.6 million
convertible preferred units and 13.7 million partnership units outstanding at
the Company's stock price of $30.375) versus 35.0% as of December 31, 1997 and
37.2% as of September 30, 1997.
The Operating Partnership's Interest Coverage Ratio for the nine months
ended September 30, 1998 was 3.06 to 1 compared to 2.66 for the comparable
prior year period.
EQUITY
In January 1998, Charles E. Smith Residential Realty, Inc. the ("Company"),
which is the general partner of the Operating Partnership, sold 500 shares of
Series C Cumulative Redeemable Preferred Stock ("Series C Preferred Shares"),
$0.01 par value, for $48.8 million, which is net of offering costs of
$1.2 million. The Company contributed the proceeds to the Operating Partnership
in exchange for 500 Series C Cumulative Redeemable Preferred Units ("Series C
Preferred Units"), created by an amendment to the Agreement of Limited
Partnership designating and establishing the rights and privileges of the Series
C Preferred Unitholders which include certain distribution and liquidation
preferences over the common unitholders. The Series C Preferred Units have a
liquidation preference of $100,000 per unit and an initial annual distribution
rate of $7,910 per unit. If the Series C Preferred Units or an equivalent
security of the Company receives an investment grade rating, the annual
distribution rate will decrease by $250 per unit. Distributions are cumulative
and are payable quarterly. The Operating Partnership may redeem Series C
Preferred Units after February 1, 2028, at the liquidation price plus accrued
distributions.
In April 1998, the Company sold the remaining 978,581 shares of Series A
Preferred Shares under its agreement with Security Capital Group, Inc. for
$26.2 million, which is net of offering costs of $0.3 million. The Company
contributed the proceeds to the Operating Partnership in exchange for 978,581
units of Series A Preferred Units.
25
<PAGE>
In July 1998, the Company completed the sale of 1.4 million shares of common
stock (par value $0.01 per share) under its existing shelf registration
statement at a net purchase price of $32.625 per share. The proceeds were
contributed to the Operating Partnership in exchange for 1.4 million units of
common units. The Operating Partnership used the net proceeds of approximately
$45.7 million to retire outstanding debt and for working capital purposes.
DEVELOPMENT
The Operating Partnership's development pipeline as of September 30, 1998
consists of the following projects:
<TABLE>
<CAPTION>
Projected
Number of Units Initial Estimated Estimated Estimated
of Units Delivered Delivery Completion Stabilization Cost
--------- --------- ------------ ------------ ------------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Springfield Station
(Northern Virginia) 631 200 May, 1998 Spring, 1999 Spring, 2000 $ 60
Courthouse Place
(Rosslyn/Ballston) 564 n/a Winter, 1998 Spring, 1999 Spring, 2000 $ 68
One Superior Place
(Chicago) 809 n/a Fall, 1999 Winter, 1999 Spring, 2001 $115
Park Connecticut
(N.W. Washington, D.C) 142 n/a Fall, 1999 Fall, 1999 Fall, 2000 $ 26
----- ----- ----
2,146 200 $269
===== ===== ====
</TABLE>
COMMITMENTS
As of September 30, 1998, the Operating Partnership had executed four
contracts to purchase to-be-constructed multifamily properties as follows:
<TABLE>
<CAPTION>
Estimated
Number of Units Estimated Purchase Purchase
of Units Delivered Completion Date Price
--------- --------- ------------ ------------ --------
(in millions)
<S> <C> <C> <C> <C> <C>
New River Village
(Ft. Lauderdale, FL.) 240 n/a Spring, 2000 Fall, 2000 $32
Wilson Boulevard
(Rosslyn/Ballston) 220 n/a Spring, 2000 Fall, 2000 $28
Pollard Gardens
(Rosslyn/Ballston) 383 n/a Winter, 2000 Spring, 2001 $47
Reston Landing
(Reston, VA.) 400 n/a Winter, 1999 Summer, 2000 $ 44
----- ----
1,243 $151
===== ====
</TABLE>
These contracts are contingent upon satisfactory completion of construction
and attainment of final certificates of occupancy by the owners. At
September 30, 1998, the Operating Partnership had posted three letters-of-
credit totaling $7.7 million in accordance with three of the contracts to be
drawn upon only
26
<PAGE>
in the event the Operating Partnership defaults on its contractual obligations
to purchase the completed assets.
CAPITAL EXPENDITURES
For the nine months ended September 30, 1998, total capital improvements were
$13.2 million, of which $10.9 million were for the core portfolio ($726 per
unit). Approximately 53% of the capital expenditures on the core portfolio in
1998 are considered by management to generate net operating income ("NOI") by
increasing revenue or decreasing expenses ("NOI generating"). The remaining
capital expenditures on the core portfolio indirectly influence the Operating
Partnership's ability to generate NOI ("non-NOI generating"). A summary of
core capital expenditures follows:
<TABLE>
<CAPTION>
Total $
Spent Average $ Per
Expenditure Type (In Thousands) Core Unit
- - ---------------------------- -------------- -------------
<S> <C> <C>
Installations $ 2,425 $ $162
Water saving devices 1,147 77
Renovations 1,615 108
Other 534 36
---------- ---------
Total NOI generating
improvements 5,721 383
Non-NOI generating
improvements 5,141 343
---------- ---------
Total capital expenditures -
core portfolio $10,862 $726
========== =========
</TABLE>
YEAR 2000
In 1997, the Operating Partnership began a comprehensive review of its year
2000 compliance issues utilizing an overlapping, three-phased approach.
Phase I involves assessments of building infrastructure and internal computer
systems including both hardware and software to identify possible compliance
failures. Phase II involves vendor compliance and actual testing of hardware
and software applications including significant electronic interfaces.
Phase III involves identifying remaining company-wide risks and development of
contingency plans. The Operating Partnership expects to complete Phases I and
II of its Year 2000 review in mid-1999. Phase III is expected to run from
March 1999 through December 1999. Based on the review plan as well as the
expected success of remediation efforts currently underway, management believes
the Operating Partnership has no material risks related to the ability of its
hardware and software to recognize the year 2000 and beyond as valid dates.
27
<PAGE>
The Operating Partnership's primary financial and operational software
programs are purchased from outside vendors who have already resolved year 2000
issues. The Operating Partnership has received letters from these vendors
indicating that their software is Year 2000 compliant. The Operating
Partnership is in the process of replacing one computer system, however, which
is not currently year 2000 compliant at an estimated cost of approximately
$1.6 million. The new system is expected to be operational in early 1999 and
the related cost will be depreciated over its estimated useful life.
As part of Phase II, the Operating Partnership has initiated steps to
identify and contact key vendors whose inability to provide service in the
year 2000 could have a material adverse effect on the Operating Partnership's
business operations. With the exception of utility services, the Operating
Partnership believes that there are no other critical suppliers whose inability
to provide service would materially affect business operations. This is due
primarily to the physical nature of the Operating Partnership's product as well
as the availability of multiple suppliers of property services. The Operating
Partnership does not have a contingency plan to address the possibility that
utility services may not be available. However, management believes that this
is a very unlikely scenario. Readers are cautioned that these conclusions
involve numerous subjective assumptions and there can be no assurances that
management has adequately identified or addressed all possible contingencies.
Excluding the replacement system, the Operating Partnership's Year 2000
compliance efforts have been primarily conducted with internal staff.
Accordingly, the costs have been immaterial and are expensed as incurred.
28
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES.
The Registrant issued 92,793 Units valued at $3M on July 1, 1998 for the
purpose of acquiring all or a part of an ownership interest in a real estate
property during the third quarter of 1998. These Units are redeemable for cash
or shares of the Company's Common Stock after one year. The recipients of these
Units were the partners of partnerships owning such property, who 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>
interest in a
7/1/98 92,793 real estate property $3,000,000 after one year
</TABLE>
In September 1998, 151,266 units of Series B Cumulative Convertible
Redeemable Preferred Units were converted to common units on a one-for-one
basis.
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION.
As of September 30, 1998, the Operating Partnership had executed four
contracts to purchase to-be-constructed multifamily properties totaling
approximately 1,200 apartment units. The maximum aggregate contract purchase
price totals $151 million with projected closing dates between June 2000 and
May 2001. The contracts are contingent upon satisfactory completion of
construction and attainment of final certificates of occupancy by the owners.
At September 30, 1998, the Operating Partnership had posted three letters-of-
credit totaling $7.7 million in accordance with two of the contracts to be
drawn upon only in the event the Operating Partnership defaults on its
contractual obligations to purchase the completed assets.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
29
<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
November 16, 1998 By: /s/ W. D. Minami
------------------------------------
W. D. Minami
Senior Vice President and Chief Financial Officer
of Charles E. Smith Residential Realty, Inc.
(on behalf of the Registrant and as Principal
Financial Officer)
By: /s/ Steven E. Gulley
------------------------------------
Steven E. Gulley
Vice President and Chief Accounting Officer
of Charles E. Smith Residential Realty, Inc.
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,116
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,415
<PP&E> 1,286,792
<DEPRECIATION> (228,167)
<TOTAL-ASSETS> 1,142,775
<CURRENT-LIABILITIES> 25,299
<BONDS> 752,548
0
149,257
<COMMON> (201,640)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,142,775
<SALES> 0
<TOTAL-REVENUES> 183,488
<CGS> 0
<TOTAL-COSTS> 96,649
<OTHER-EXPENSES> 6,405
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,216
<INCOME-PRETAX> 49,999
<INCOME-TAX> 0
<INCOME-CONTINUING> 49,999
<DISCONTINUED> 0
<EXTRAORDINARY> 4,702
<CHANGES> 0
<NET-INCOME> 37,359
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.24
</TABLE>
