<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 JUNE 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: 0-25968
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1681657
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2345 CRYSTAL DRIVE
CRYSTAL CITY, VA 22202
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (703) 920-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A UNITS OF LIMITED PARTNERSHIP
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 3, 1998, there were 31,059,103 Common Units of 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 June 30, 1998 (unaudited) 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 26
SIGNATURES 28
</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>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, net $ 880,162 $ 751,230
Rental property under construction 88,835 53,093
Cash and cash equivalents - -
Tenants' security deposits 2,509 2,453
Escrow funds 10,379 7,606
Investment in and advances to Property Service Businesses 31,925 14,141
Deferred charges, net 14,618 16,047
Other assets 16,026 20,936
---------- ---------
$1,044,454 $ 865,506
========== =========
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 453,440 $ 500,435
Lines of credit 221,500 105,000
Construction loans 18,808 5,536
Accounts payable and accrued expenses 26,799 13,732
Tenants' security deposits 2,509 2,453
---------- ---------
Total liabilities 723,056 627,156
========== =========
Commitments and contingencies
Other Limited Partners' Interest
13,739,288 and 14,161,102 common units issued and outstanding
at June 30, 1998 and December 31, 1997, respectively, at
redemption value 439,657 502,719
---------- ---------
Partner's 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 June 30, 1998 and December 31,
1997, respectively 71,500 45,000
Preferred units -- Series B Cumulative Convertible
Redeemable Preferred Units, 1,125,199 and 1,216,666 units
issued and outstanding at June 30, 1998 and December 31,
1997, respectively 32,068 34,675
Preferred units -- Series C Cumulative Redeemable Preferred
Units, 500 units issued and outstanding 50,000 -
Common units -- 15,820,722 and 14,942,429 units issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively (271,827) (344,044)
---------- ---------
Total partner's equity (118,259) (264,369)
---------- ---------
$1,044,454 $ 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 Amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Rental Properties:
Revenues $ 61,757 $ 49,483 $117,427 $ 94,259
Expenses
Operating costs (20,540) (17,332) (39,181) (33,766)
Real estate taxes (4,584) (3,081) (8,241) (5,998)
Depreciation (7,088) (5,295) (13,475) (10,146)
------------- ------------ ------------ ------------
Total expenses (32,212) (25,708) (60,897) (49,910)
Equity in income of Property Service Businesses 2,227 896 2,891 1,705
Corporate general and administrative expenses (2,203) (1,648) (4,228) (3,039)
Interest income 306 301 467 532
Interest expense (11,601) (11,256) (22,489) (22,683)
------------- ------------ ------------ ------------
Income before gain on sale and extraordinary item 18,274 12,068 33,171 20,864
Gain on sale of property - - 3,120 -
------------- ------------ ------------ ------------
Income before extraordinary item 18,274 12,068 36,291 20,864
Extraordinary item - loss on extinguishment of debt - - (4,702) -
------------- ------------ ------------ ------------
Net income 18,274 12,068 31,589 20,864
Less: Income attributable to preferred units (3,580) - (5,070) -
------------- ------------ ------------ ------------
Net income attributable to common units $ 14,694 $ 12,068 $ 26,519 $ 20,864
============= ============ ============ ============
Earnings per common unit - basic $ 0.50 $ 0.45 $ 0.90 $ 0.82
============= ============ ============ ============
Earnings per common unit - diluted $ 0.50 $ 0.45 $ 0.90 $ 0.82
============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY AND OTHER
LIMITED PARTNERS' INTEREST
(Dollars in Thousands)
<TABLE>
<CAPTION>
Other
General Partner's General and Limited Partners'
Limited Interest Interest
------------------------------------------------- -----------------
Series A Series B Series C
Preferred Preferred Preferred Common Common
Units Units Units Units 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 - - - - 8,820
Adjustment for grants - - - - 382
Net income - - - 18,046 13,543
Contribution by Charles E. Smith Residential Realty, Inc. 26,500 - 50,000 - -
Conversion of Preferred units to Common units - (2,607) - 2,607 -
Offering costs - - - (1,461) -
Repurchase and cancellation of Operating
Partnership Units - - - - (594)
Distributions - - - (20,260) (14,501)
Other - - - 124 2,449
Adjustment to reflect Other Limited Partners' Interest
at redemption value - - - 73,161 (73,161)
---------- ---------- --------- ----------- -----------
Balance, June 30, 1998 (unaudited) $ 71,500 $ 32,068 $ 50,000 $ (271,827) $ 439,657
========== ========== ========= =========== ===========
Units issued and outstanding at June 30, 1998 (unaudited) 2,640,325 1,125,199 500 15,820,722 13,739,288
========== ========== ========= =========== ===========
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 on intergral 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 Six Months
Ended June 30,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 64,990 $ 30,509
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (157,229) (14,552)
Additions to rental property (8,848) (4,453)
Increase in investment in and advances
to Property Service Businesses (17,784) (3,566)
Acquisition deposits and other (2,002) 940
--------------- -----------
Net cash used by investing activities (185,863) (21,631)
--------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions by Charles E. Smith Residential
Realty Inc:
Common units - 82,860
Preferred units 75,039 19,772
Mortgages, net (46,995) (9,630)
Lines of credit, net 116,500 (56,050)
Construction loans, net 13,272 (17,686)
Prepayment penalties (3,025) -
Distributions (34,761) (24,149)
Other, net 843 (603)
--------------- -----------
Net cash provided (used) by financing activities 120,873 (5,486)
--------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS - 3,392
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 3,898
--------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $- $7,290
=============== ============
SUPPLEMENTAL INFORMATION:
Capitalized interest $ 2,638 $ 173
Purchase of property in exchange for
Operating Partnership units 8,820 47,129
Purchase of property in exchange for
assumption of debt - 80,164
</TABLE>
The accompanying notes are an intergral 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 June 30, 1998 and the results of
operations for the interim periods ended June 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, is engaged in the ownership,
operation, management, leasing, acquisition, and development of real estate
properties, primarily residential multifamily properties. As of June 30, 1998,
the Operating Partnership owned 48 operating multifamily properties containing
19,670 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
In January 1998, 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>
In March 1998, the Operating Partnership 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.
In April 1998, 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 in April 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 acquired 0.75 acres of
undeveloped land in northwest Washington, D.C. for approximately $3.2 million
and began construction of an 11-story, 142-unit high rise. 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.
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 June 30,
1998, the weighted average interest rate on outstanding draws was 6.61%. 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. In conjunction with 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.
8
<PAGE>
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 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.
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.
6. PER UNIT DATA
Earnings per common unit of the Operating Partnership for the three and six
months ended June 30, 1998 and 1997 is computed based on weighted average common
units outstanding during the period as follows (in millions):
9
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30,
------------------------------
1998 1997
-------------- --------------
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Weighted Average Common Units 29.5 29.6 26.8 26.9
<CAPTION>
Six months ended June 30,
------------------------------
1998 1997
-------------- --------------
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Weighted Average Common Units 29.4 29.6 25.4 25.5
</TABLE>
Dilutive securities had no effect on earnings for the three and six
months ended June 30, 1998 June 30, 1997.
<PAGE>
Options to purchase 808,750 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 June 30, 1998, the Operating Partnership had executed three contracts
to purchase to-be-constructed multifamily properties totaling approximately
1,000 apartment units. The maximum aggregate contract purchase price totals $130
million with projected closing dates between June 2000 and March 2001. The
contracts are contingent upon satisfactory completion of construction and
attainment of final certificates of occupancy by the owners. At June 30, 1998,
the Operating Partnership had posted two letters-of-credit totaling $5.7 million
in accordance with two of the contracts to be drawn upon only if the Operating
Partnership defaults on its contractual obligations to purchase the completed
assets.
At June 30, 1998, the Operating Partnership held a treasury lock contract
for $50 million (of notional value) to reduce its exposure to anticipated
financing transactions. The Operating Partnership does not hold or issue
derivative financial instruments for speculative or trading purposes. The
forward contract, which is an over-the-counter instrument, is non-leveraged. The
contract has a fair value representing an unrealized loss of approximately $0.8
million. Realized gains or losses on forward contracts will be deferred and
reported in income when the related transactions being hedged are recognized.
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. 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 June 30, 1998,
approximately 17.9 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
partner's equity reflect the Other Limited Partners' Interest in the Operating
Partnership, measured at redemption value. Such interest is deducted from
partner's equity.
10. 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.
11
<PAGE>
11. SUBSEQUENT EVENTS
In July 1998, the Operating Partnership acquired a newly-constructed 281-unit
mid-rise multifamily property in Boston, Massachusetts. The total capitalized
cost of approximately $62.4 million was comprised of $26.8 million cash, $3l.5
million in assumed debt, a fair value adjustment to debt of $1.1 million, and
92,793 Operating Partnership units valued at $3.0 million.
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 Partnerhsip will use the proceeds of approximately
$45.6 million to retire outstanding debt.
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. At the Operating Partnership's option,
maturity may be extended up to two years. The loan is collateralized by the
property.
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 six months ended June 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 4.5% in the second 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 June 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 $ 942 99.8%
2501 Porter Street High-rise 202 760 1,504 99.2%
Albemarle High-rise 235 1,097 1,197 96.9%
Calvert-Woodley High-rise 136 1,001 1,151 99.6%
Cleveland House High-rise 216 894 1,130 99.6%
Connecticut Heights High-rise 519 536 886 95.6%
Corcoran House High-rise 138 464 831 99.2%
Statesman High-rise 281 593 785 98.1%
Van Ness South High-rise 625 956 1,093 98.3%
--------- ---------- --------- -------- ----------
2,467 778 1,043 98.0%
Other NE & SE Washington, D.C.
Car Barn Garden 196 1,311 890 94.9%
Fort Chaplin Garden 549 983 661 97.8%
Marbury Plaza High-rise 672 997 664 95.8%
--------- ---------- --------- -------- ----------
1,417 1,035 694 96.4%
Other Northern Virginia - Inside Beltway
Crystal City
------------
The Bennington High-rise 348 804 1,078 96.6%
Crystal House I High-rise 426 917 979 95.7%
Crystal House II High-rise 402 938 965 95.3%
Crystal Square High-rise 378 1,121 1,165 98.5%
Crystal Place High-rise 180 894 1,307 98.3%
Gateway Place High-rise 162 826 1,981 99.3%
Water Park Towers High-rise 360 881 1,453 93.7%
--------- ---------- --------- -------- ----------
2,256 923 1,197 96.4%
Rosslyn/Ballston
----------------
Courthouse Plaza High-rise 396 772 1,300 97.6%
Other
-----
Arlington Overlook Mid-rise 711 877 775 95.6%
Bedford Village Garden 752 1,070 899 93.3%
Berkeley Mid-rise 138 891 733 96.7%
Boulevard of Old Town Garden 159 603 1,140 98.4%
Columbia Crossing Garden 247 976 1,139 95.9%
Columbian Stratford Mid-rise 227 942 777 99.5%
Concord Village Garden 531 1,025 805 94.4%
Newport Village Garden 937 1,115 885 95.6%
Orleans Village Garden 851 1,061 815 93.4%
Patriot Village Garden 1,065 1,162 901 96.0%
Skyline Towers High-rise 940 1,221 974 94.8%
Windsor Towers Mid-rise 280 1,025 810 98.3%
--------- ---------- --------- -------- ----------
6,838 1,063 880 95.3%
Other Northern Virginia - Outside Beltway
Charter Oak Garden 262 1,097 971 97.3%
Oakwood Garden 218 968 1,040 95.4%
Potomac View Garden 192 965 777 97.8%
Westerly at Worldgate Garden 320 921 1,139 95.1%
--------- ---------- --------- -------- ----------
992 986 1,003 96.2%
Suburban Maryland
The Manor Garden 435 999 766 96.1%
Suburban Tower High-rise 172 677 804 96.7%
--------- ---------- --------- -------- ----------
607 908 777 96.3%
--------- ---------- --------- -------- ----------
Subtotal/Average 14,973 973 952 96.2%
--------- ---------- --------- -------- ----------
</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 376 725 757 98.1%
Crystal Plaza (Crystal City) High-rise 540 1,129 1,241 98.0%
Crystal Towers (Crystal City) High-rise 912 1,107 1,110 95.8%
Lincoln Towers (Rosslyn/Ballston) High-rise 714 879 1,345 97.3%
2000 Commonwealth (Boston, MA) High-rise 188 878 1,597 94.7%
One East Delaware (Chicago, IL) High-rise 306 704 1,837 98.0%
Tunlaw Gardens (NW Washington, D.C.) Garden 167 850 764 96.8%
Tunlaw Park (NW Washington, D.C.) Mid-rise 120 856 1,088 96.6%
Parc Vista (Crystal City) High-rise 299 770 N/A N/A
McClurg Court (Chicago, IL) High-rise 1,075 688 N/A N/A
--------- ---------- --------- -------- ----------
Sub-Total/Average 4,697 876 N/A N/A
--------- ---------- --------- -------- ----------
All Residential Properties 19,670 950 N/A N/A
========== ========= ======== ==========
</TABLE>
15
<PAGE>
RENTAL PROPERTIES
Revenues, expenses and income from the multifamily and retail properties
for the three and six months ended June 30, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Multifamily Properties - Core/(1)/
Revenues $ 42,769 $ 40,914 $ 84,076 $ 80,678
Expenses (17,346) (16,875) (34,370) (34,220)
-------- --------- -------- ---------
Income before depreciation $ 25,423 $ 24,039 $ 49,706 $ 46,458
======== ========= ======== =========
Multifamily Properties-
Acquisitions and Development/(2)/
Revenues $ 16,588 $ 6,021 $ 28,488 $ 8,731
Expenses (6,939) (2,641) (11,417) (3,809)
-------- --------- -------- ---------
Income before depreciation $ 9,649 $ 3,380 $ 17,071 $ 4,922
======== ========= ======== =========
Retail Properties
Revenues $ 2,400 $ 2,548 $ 4,863 $ 4,850
Expenses (839) (897) (1,635) (1,735)
-------- --------- -------- ---------
Income before depreciation $ 1,561 $ 1,651 $ 3,228 $ 3,115
======== ========= ======== =========
Total Rental Properties
Revenues $ 61,757 $ 49,483 $117,427 $ 94,259
Expenses (25,124) (20,413) (47,422) (39,764)
Depreciation (7,088) (5,295) (13,475) (10,146)
-------- --------- -------- ---------
Income from Rental Properties $ 29,545 $ 23,775 $ 56,530 $ 44,349
======== ========= ======== =========
</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 six months ended June 30, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ------------------
June 30, June 30,
-------------------- ------------------
1998 1997 1998 1997
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Multifamily & Retail Property
Management Services/(1)/
Revenues $ 5,086 $ 2,713 $ 7,843 $ 5,274
Expenses (4,809) (2,528) (7,478) (4,932)
-------- --------- -------- ---------
Income before depreciation $ 277 $ 185 $ 365 $ 342
======== ========= ======== =========
Interior Construction and Renovation
Services
Net Fee Revenues $ 1,762 $ 1,275 $ 3,045 $ 2,626
Expenses (1,744) (1,393) (3,046) (2,616)
-------- --------- -------- ---------
Income before depreciation $ 18 $ (118) $ (1) $ 10
======== ========= ======== =========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 16,291 $ 11,630 $ 31,138 $ 23,931
Expenses (15,288) (10,674) (29,402) (21,947)
-------- --------- -------- ---------
Income before depreciation $ 1,003 $ 956 $ 1,736 $ 1,984
======== ========= ======== =========
Financing Services
Revenues $ 1,416 $ 292 $ 1,881 $ 292
Expenses (361) (128) (596) (371)
-------- --------- -------- ---------
Income before depreciation $ 1,055 $ 164 $ 1,285 $ (79)
======== ========= ======== =========
Total Property Service Businesses
Revenues $ 24,555 $ 15,910 $ 43,907 $ 32,123
Expenses (22,202) (14,723) (40,522) (29,866)
Depreciation (126) (291) (494) (552)
-------- --------- -------- ---------
Income from Property Service Businesses $ 2,227 $ 896 $ 2,891 $ 1,705
======== ========= ======== =========
</TABLE>
/(1)/ Includes May 1998 purchase of Presidential Villas.
17
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED JUNE 30,
1997.
SUMMARY. Net income of the Operating Partnership increased $6.2 million, or
51.4%, from $12.1 million for the three months ended June 30, 1997 to $18.3
million for the three months ended June 30, 1998. Funds from Operations ("FFO")
of the Operating Partnership increased $7.0 million, or 40.3%, from $17.4
million to $24.4 million during the same period. The increases in both net
income and FFO are primarily attributable to the acquisition of ten properties
totaling 4,697 apartment units during 1997 and the first half of 1998. In
addition, income before depreciation from the core portfolio increased 5.8% over
the prior year period due primarily to increased rents and revenue initiatives.
RENTAL PROPERTIES. Revenue from all rental properties increased $12.3
million, or 24.8%, from $49.5 million for the three months ended June 30, 1997
to $61.8 million for the three months ended June 30, 1998. The ten acquisition
properties (defined as properties acquired subsequent to December 31, 1996) and
one development property contributed approximately 86%, or $10.6 million, of
the total rental revenue increase. Six of the acquisition properties (comprising
3,036 apartment units) were acquired during 1997 and four (comprising 1,661
units) were acquired in the first half of 1998. The one operational development
property, Springfield Station, delivered 80 units during the second quarter of
its 630 expected units. The core portfolio revenue increased $1.9 million, or
4.5%, over the prior year period.
Average economic occupancy for the core portfolio decreased to 96.2 % for the
three months ended June 30, 1998 compared to 97.2% for the comparable prior year
quarter due primarily to management's continued emphasis on maximizing rents.
Average monthly revenue per core apartment unit increased from $911 during the
first quarter of 1997 to $952 during the second quarter of 1998 despite the
higher vacancy.
Expenses (including depreciation) from all rental operations increased $6.5
million, or 25.3%, from $25.7 million during the second quarter of 1997 to
$32.2 million during the current quarter. Approximately $6.4 million of the
increase, including an increase in depreciation expense of $2.1 million,
resulted from the eleven properties in the acquisition/development portfolio.
Expenses for the core portfolio increased $0.2 million or 0.7%, including a
decrease of $0.3 million in depreciation expense, due primarily to temporary
personnel needs as well as anticipated repair and maintenance projects carried
over from the first quarter of 1998.
PROPERTY SERVICE BUSINESSES. The Operating Partnership uses the equity
method of accounting for its 99% non-voting interest in the Property Service
Businesses.
18
<PAGE>
Income from the Property Service Businesses increased from $0.9 million in
the second quarter of 1997 to $2.2 million in the second quarter of 1998.
Income before depreciation for Multifamily and Retail Property Management
Services increased $0.1 million during the second quarter of 1998 as compared to
the prior year quarter due primarily to the acquisition of Presidential Villas
during the second quarter.
Income before depreciation for Engineering and Technical Services was
essentially flat, despite a 40% increase in revenues related to additional
facilities management contracts, particularly with government agencies. This
was due to a decline in higher margin HVAC repair and replacement projects
partly due to a mild spring which reduced demand for mechanical repairs.
Revenue for Financing Services increased $1.1 million during the quarter due
to fees earned on $169 million of debt refinancings arranged for commercial
office properties owned by Charles E. Smith Commercial Realty L.P. ("CESCR").
The fees were earned in accordance with the Operating Partnership's one-year
financing services agreement with CESCR.
OTHER. Corporate general and administrative expenses increased 33.7%
compared to the prior year quarter due primarily to additional personnel added
in mid-1997 to expand the Operating Partnership's acquisition and development
program outside of the Washington, D.C. metropolitan area to other U.S. cities
with strong urban multifamily markets. Interest expense increased $0.3 million
during the quarter, or 3.1%, 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 SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997.
SUMMARY. Net income of the Operating Partnership increased $10.7 million, or
51.4%, from $20.9 million for the six months ended June 30, 1997 to $31.6
million for the six months ended June 30, 1998. FFO of the Operating Partnership
increased $14.0 million, or 45.2%, from $31.0 million to $45.0 million during
the same period. The increase in both net income and FFO are primarily
attributable to the acquisition of ten properties totaling 4,697 apartment units
during 1997 and the first half of 1998. In addition, income before depreciation
from the core portfolio increased 7.0% over the prior year period due primarily
to increased rents and revenue initiatives as well as expense savings.
RENTAL PROPERTIES. Revenue from all rental properties increased $23.1
million, or 24.6%, from $94.3 million for the six months ended June 30, 1997 to
$117.4 million for the six months ended June 30, 1998. The eleven acquisition
and development properties (defined as properties acquired or developed
subsequent to December 31, 1996) contributed approximately 86%, or $19.8
million, of the total rental revenue increase. The core portfolio revenue
increased $3.4 million, or 4.2%, over the prior year period.
19
<PAGE>
Average economic occupancy for the core portfolio decreased to 95.5% for the
six months ended June 30, 1998 compared to 96.6% for the comparable prior year
period. However, average monthly revenue per core apartment unit increased 4.2%
from $898 during the first six months of 1997 to $936 during the first six
months of 1998. The decreases in economic occupancy were primarily attributable
to the Northern Virginia garden apartment portfolio as well as two properties
in Crystal City. All but one property, however, reflected increased 1998
revenues. Management continues to evaluate these and all other Operating
Partnership properties for selective capital enhancements, repositioning or
disposition based upon expected future performance relative to other potential
returns on invested capital.
Expenses (including depreciation) from all rental operations increased $11.0
million, or 22.0%, from $49.9 million to $60.9 million during the six months
ended June 30, 1997 and 1998, respectively. The majority of the increase,
including depreciation expense of $3.4 million, resulted from the ten properties
in the acquisition portfolio and one development property. Expenses on the core
portfolio were relatively flat for the six months ended June 30, 1998 compared
to the prior year period. This was primarily due to utility savings related to
a mild winter and lower repair and maintenance costs which were offset by
increased costs associated with temporary personnel needs at the properties.
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 5% of total rental property and
Property Service Business income. Income from the Property Service Businesses
increased from $1.7 million during the six months ended June 30, 1997 to $2.9
million in the six months ended June 30, 1998.
Income before depreciation for Multifamily and Retail Property Management
Services was unchanged during the six months ended June 30, 1998 as compared to
the prior year period due primarily to a decrease in third party management fees
related to acquired properties previously managed by the Operating Partnership
which was offset by income from the Presidential Villas acquisition.
Income before depreciation for Engineering and Technical Services decreased
$0.2 million, despite a 30.1% increase in revenues primarily due to significant
additional facilities management contracts. 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 six months
ended June 30, 1998 due to fees earned on $257 million of 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.
20
<PAGE>
OTHER. Corporate general and administrative expenses increased 39.1%
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. Interest expense decreased $0.2 million during the period, or 0.9%,
primarily due to the Operating Partnership's deleveraging in late 1997 through
the issuance of equity to finance acquisition and development activities.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY. Net cash flow provided by operating activities increased $34.5
million from $30.5 million for the six months ended June 30, 1997 to $65.0
million for the six months ended June 30, 1998. The increase is primarily a
result of higher cash flow contributed by the core and acquisition portfolios
and an increase of $13.1 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 $164.2 million during
the six months ended June 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 $120.9 million for the
six months ended June 30, 1998 , primarily comprised of $75.0 million of net
cash inflow from the placement of preferred units and $82.8 million of net
borrowings less $3 million of prepayment penalties and $34.8 million of
distributions. Net cash flows used by financing activities of $5.5 million in
the comparable prior year period primarily consisted of $83.4 million of debt
repayments and $24.1 million of distributions partially offset by $82.9 million
of cash inflow from the sale of common units and $19.8 million of cash inflow
from the issuance of preferred units.
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 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.
21
<PAGE>
Funds from Operations for the three and six months ended June 30, 1998 and
1997 are computed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ------------------
June 30, June 30,
-------------------- ------------------
1998 1997 1998 1997
-------- --------- ------- --------
<S> <C> <C> <C> <C>
Net Income of the Operating Partnership $ 18,274 $12,068 $ 31,589 $ 20,864
Perpetual preferred distributions (1,000) -- (1,626) --
Depreciation of real property 7,088 5,295 13,475 10,146
Gain on sale of property -- -- (3,120) --
Extraordinary item -- -- 4,702 --
-------- ------- ------- --------
Funds from Operations $ 24,362 $17,363 $45,020 $ 31,010
======== ======= ======= ========
</TABLE>
DEBT
During the first six months of 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.
22
<PAGE>
. 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 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.
. At June 30, 1998, the Operating Partnership held a treasury lock contract
for $50 million (of notional value) to reduce its exposure to anticipated
financing transactions. The Operating Partnership does not hold or issue
derivative financial instruments for speculative or trading purposes. The
forward contract, which is an over-the-counter instrument, is non-leveraged
and involves little complexity.
The contract has a fair value representing an unrealized loss of
approximately $0.8 million. Realized gains or losses on forward contracts
will be deferred and reported in income when the related transactions being
hedged are recognized.
. 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.
As of June 30, 1998 , the Operating Partnership had mortgage indebtedness and
other borrowings, which carried a weighted average interest rate of 7.4%, as
follows:
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
---------- -----
<S> <C> <C>
Fixed rate debt:
Mortgages $440,265 63.5%
$83M line of credit 30,000 4.3%
Variable rate debt:
Mortgages 13,175 1.9%
$275M line of credit 191,500 27.6%
Construction Loan 18,808 2.7%
---------- -----
$693,748 100%
========== =====
</TABLE>
As of June 30, 1998, the Operating Partnership had executed three contracts
to purchase to-be-constructed multifamily properties totaling approximately
1,000 apartment units. The maximum aggregate contract purchase price totals $130
million with projected closing dates between June 2000 and March 2001. The
contracts are contingent upon satisfactory completion of construction and
attainment of final certificates of occupancy by the owners. At June 30, 1998,
the Operating Partnership had posted two letters-of-credit totaling $5.7 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 .
23
<PAGE>
As of June 30, 1998, the Operating Partnership had $136.5 million of unused
borrowing capacity available on lines of credit. Amounts outstanding under lines
of credit averaged $180.9 million for the six months ended June 30, 1998
compared to $75.2 million for the six months ended June 30, 1997.
As of June 30, 1998 , the Operating Partnership's Debt to Total Market
Capitalization Ratio was 38.3% (based on 15.8 million common units, 3.8 million
convertible preferred units and 13.7 million partnership units outstanding at
the Company's stock price of $32.00) versus 35.0% as of December 31, 1997 and
40.7% as of June 30, 1997.
The Operating Partnership's Interest Coverage Ratio for the six months ended
June 30, 1998 was 3.16 to 1 compared to 2.54 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.
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 will use the proceeds of approximately
$45.6 million to retire outstanding debt.
24
<PAGE>
CAPITAL EXPENDITURES
For the six months ended June 30, 1998, total capital improvements were $8.8
million, of which $7.1 million were for the core portfolio ($476 per unit).
Approximately 55% 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:
Appliances $ 584 $ 39
Carpet 800 53
Other 116 8
Water saving devices 1,093 73
Renovations:
Kitchen 450 30
Bath 907 61
------ ------
Total NOI generating
improvements 3,950 264
Non-NOI generating
improvements 3,171 212
------ ------
Total capital expenditures -
core portfolio $7,121 $ 476
------ ------
</TABLE>
25
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES.
In April 1998, the Company sold the remaining 978,581 shares of Series A
Cumulative Convertible Redeemable Preferred Stock 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.
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
26
<PAGE>
ITEM 5. OTHER INFORMATION.
On July 29, 1998, the Company completed the issuance and sale of 1,400,000
shares of common stock, par value $.01 per share (the "Common Stock") to Morgan
Stanley Asset Management and ABKB/LaSalle Securities, acting on behalf of their
clients, pursuant to an Agreement to Purchase Securities dated July 22, 1998.
The price of the Common Stock was $32.625 per share, resulting in aggregate
proceeds to the Company of $45,675,000 before the payment of expenses (including
broker commissions) by the Company. The net proceeds of approximately
$45,654,000 will be used to retire outstanding debt. The Common Stock was taken
from an existing Registration Statement of the Company on Form S-3 (File No.
333-39513) which became effective on November 25,1997. In connection with the
completion of the sale a Prospectus Supplement was filed with the U.S.
Securities and Exchange Commission on July 28, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 First Amendment to Third Amended and Restated Credit Agreement
between the Operating Partnership and PNC Bank, National
Association, et. al.
99.2 Second Amendment to Third Amended and Restated Credit Agreement
between the Operating Partnership and PNC Bank, National
Association, et. al.
(b) Reports on Form 8-K:
A Form 8-K was filed on July 2, 1998 to report the Operating Partnership's
acquisition of Cronin's Landing.
27
<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
August 14, 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.
28
<PAGE>
EXHIBIT 99.1
FIRST AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment") is made as of the 31/st/ day of March, 1998, by and among Charles
E. Smith Residential Realty L.P., a Delaware limited partnership (the
"Borrower"), PNC Bank, National Association, as Administrative Agent and as a
Bank, NationsBank, N.A., as Syndication Agent and as a Bank, and U.S. Bank
National Association, as Documentation Agent and as a Bank.
W I T N E S S E T H:
WHEREAS, as of February 26, 1998, the above-referenced parties entered into
the Third Amended and Restated Credit Agreement (the "Agreement") which provides
for a $250,000,000 unsecured revolving line of credit to be made available by
the Banks to the Borrower; and
WHEREAS, the parties have agreed to amend the Agreement to reflect certain
matters which have been agreed to by the parties, including, without limitation,
an increase in the amount of the Commitments (as hereinafter defined) to
$300,000,000, and an increase in the amount of the Commitment of PNC Bank,
National Association, from $150,000,000 to $200,000,000.
NOW, THEREFORE, the parties hereto, for good and valuable consideration,
the receipt and sufficiency thereof being hereby acknowledged, and intending to
be legally bound hereby, covenant and agree as follows:
1. All capitalized terms employed herein shall have the meanings ascribed
thereto in the Agreement unless defined to the contrary herein.
2. The definition of the term "Applicable Margin" is hereby amended to
provide in full as follows:
"Applicable Margin" means, with respect to each Loan during any period
-----------------
when neither CESRRI nor Borrower maintains the Investment Grade Ratings, the
respective percentages per annum determined, based on the range into which
Borrower's Leverage Ratio then falls, in accordance with the table set forth
below. Any change in Borrower's Leverage Ratio causing it to move to a
different range on the table shall effect a change in the Applicable Margin,
effective on the earlier of (i) the date of the Compliance Certificate
reflecting such change in the Leverage Ratio, or (ii) the last day on which a
Compliance Certificate is required to be delivered to the Administrative Agent
in accordance with the provisions hereof:
<PAGE>
<TABLE>
<CAPTION>
Applicable
Margin for Applicable
Range of Base Rate Margin for Euro-
Borrower's Loans Dollar Loans
Leverage Ratio (% per annum) (% per annum)
- -------------- ------------- -------------
<S> <C> <C>
Less than 25% 0.0 0.75
Greater than or
equal to 25%
and less than 35% 0.0 0.85
Greater than or
equal to 35%
and less than 45% 0.0 0.95
Greater than or
equal to 45%
and less than 55% 0.0 1.10
</TABLE>
During any period when either CESRRI or Borrower shall maintain the
Investment Grade Ratings, "Applicable Margin" shall mean, with respect to each
Loan, the respective percentages per annum, determined, at any time, based on
the Credit Ratings then applicable, in accordance with the table set forth
below.
<TABLE>
<CAPTION>
Applicable
Margin for Applicable
Credit Rating Base Rate Margin for Euro-
(S&P/Moody's Loans Dollar Loans
Ratings) (% per annum) (% per annum)
- ----------------- ------------- -------------
<S> <C> <C>
A-/A3 or higher 0.0 0.60
BBB+/Baa1 0.0 0.70
BBB/Baa2 0.0 0.80
BBB-/Baa3 0.0 0.90
</TABLE>
If Borrower or CESRRI, as applicable, shall maintain two (2) Credit Ratings, and
such ratings are not equivalent, Applicable Margin shall be based upon the lower
of the two ratings. In the event that Borrower or CESRRI, as applicable,
receives more than two (2) Credit Ratings, and such ratings are not equivalent,
the Applicable Margin shall be determined by the lower of the two (2) highest
ratings, provided that at least one (1) of such highest ratings shall be a
Credit Rating from S&P or Moody's. In the event that at least one (1) of the
two (2) highest ratings shall not be a Credit Rating from S&P or Moody's, then
the Applicable Margin shall be determined by the lowest of the ratings. In the
event that only one of the Rating Agencies shall have set Borrower's or CESRRI's
Credit Rating, or Borrower or CESRRI, as applicable, shall not maintain the
Investment Grade Ratings, then the Applicable Margin shall be based on
Borrower's Leverage Ratio as set forth above. Notwithstanding anything
contained to the contrary, the Borrower shall always have the right to elect
that the Applicable Margin be determined based upon its Leverage Ratio by
written notice to the Administrative Agent with such election to become
effective upon the next Domestic Business Day following receipt of such notice
by Administrative Agent. Any change in the Applicable Margin resulting from a
change in a Credit Rating shall become effective on the effective date of the
change in the applicable Credit Rating.
2
<PAGE>
3. The definition of the term "Budgeted Project Costs" is hereby amended
to provide in full as follows:
"Budgeted Project Costs" means with respect to Properties under
----------------------
Development, the budgeted cost of completion of such Properties under
Development, provided that the budgeted costs shall include projected operating
deficits through completion and the projected date of occupancy of seventy-five
percent (75%) of the dwelling units and provided further that, for Properties
under Development by Investment Affiliates, the Budgeted Project Costs shall be
the Borrower's share of the budgeted costs of completion (based on the greater
of (x) the Borrower's percentage equity interest in the Investment Affiliates or
(y) the Borrower's obligation to provide funds to the Investment Affiliates,
which could include, for example, completion guaranties).
4. The definition of the term "Cash and Cash Equivalents" is hereby
amended to provide in full as follows:
"Cash and Cash Equivalents" shall mean (i) cash, (ii) direct
-------------------------
obligations of the United States Government, including without limitation,
treasury bills, notes and bonds, (iii) interest bearing or discounted
obligations of Federal agencies and Federal government-sponsored entities or
pools of such instruments offered by Approved Banks and dealers, including
without limitation, Federal Home Loan Mortgage Corporation participation sale
certificates, Government National Mortgage Association modified pass through
certificates, Federal National Mortgage Association bonds and notes, and Federal
Farm Credit System securities, (iv) time deposits, Domestic and Euro-Dollar
certificates of deposit, bankers acceptances, commercial paper rated at least
A-1 by S&P and P-1 by Moody's and/or guaranteed by a Person maintaining an Aa2
rating by Moody's, an AA rating by S&P or better rated credit, floating rate
notes, other money market instruments and letters of credit each issued by
Approved Banks (provided that the same shall cease to be a "Cash or Cash
Equivalent" if at any time any such bank shall cease to be an Approved Bank),
(v) obligations of domestic corporations, including, without limitation,
commercial paper, bonds, debentures and loan participations, each of which is
rated at least AA by S&P and/or Aa2 by Moody's and/or guaranteed by a Person
maintaining an Aa2 rating by Moody' s, an AA rating by S&P or better rated
credit, (vi) obligations issued by state and local governments or their
agencies, rated at least MIG-1 by Moody's and/or SP-1 by S&P and/or guaranteed
by an irrevocable letter of credit of an Approved Bank (provided that the same
shall cease to be a "Cash or Cash Equivalent" if at any time any such bank shall
cease to be an Approved Bank), and (vii) repurchase agreements with Approved
Banks and primary government security dealers fully secured by the U.S.
Government or agency collateral equal to or exceeding the principal amount on a
daily basis and held in safekeeping.
5. The definition of the term "Closing Date" is hereby amended to provide
in full as follows:
"Closing Date" means March 2, 1998.
3
<PAGE>
6. The definition of the term "Commitment" is hereby amended to provide
in full as follows:
"Commitment" means, with respect to each Bank, the amount set forth
----------
opposite the name of such Bank on Schedule I hereto (and, for each Bank which is
an Assignee, the amount set forth in the Assignment and Assumption Agreement
entered into pursuant to Section 9.6(c) as the Assignee's commitment), as such
amount may be reduced or increased from time to time pursuant to the provisions
hereof, which Commitments, on the Effective Date, aggregate the sum of Three
Hundred Million Dollars ($300,000,000).
7. Subparagraph h of the definition of the term "Permitted Liens" is
hereby amended to provide in full as follows:
h. Liens in favor of the Borrower or any Consolidated Subsidiary
against any Property of any other Consolidated Subsidiary of the Borrower,
provided that (i) the Property is located in the District of Columbia, (ii) the
amount secured by all such Liens does not exceed twenty percent (20%) of the
Unencumbered Asset Value, (iii) if the secured indebtedness is held by a
Consolidated Subsidiary, such Consolidated Subsidiary shall execute and deliver
a Guaranty to the Administrative Agent, (iv) the Administrative Agent on behalf
of the Banks shall be granted a first-lien security interest in the Lien and the
documents evidencing the indebtedness secured thereby upon terms and conditions
reasonably acceptable to the Administrative Agent, and (v) the Borrower shall
deliver to the Administrative Agent such due diligence materials and opinion
letters concerning the execution of such security documents as the
Administrative Agent reasonably shall request.
8. The definition of the term "Qualifying Unencumbered Property" is
hereby amended to provide in full as follows:
"Qualifying Unencumbered Property" means any Property from time to
--------------------------------
time which (i) is an operating and primarily multifamily residential Property
wholly-owned in fee simple absolute by Borrower, or a Consolidated Subsidiary,
provided that (A) the ownership interest in any such Property may be held
pursuant to a Qualifying Ground Lease, (B) the Worldgate Retail Property may
qualify as a Qualifying Unencumbered Property even though it is not a multi-
family residential Property as long as it satisfies the other requirements
hereof, and (C) any Property owned by a Consolidated Subsidiary that is not
wholly-owned by the Borrower and CESRRI may be included as a Qualifying
Unencumbered Property as long as all such Properties which are owned by
Subsidiaries which are not wholly-owned by the Borrower and CESRRI in the
aggregate do not exceed twenty-five percent (25%) of Unencumbered Asset Value,
(ii) is not subject (nor are any equity interests in such Property subject) to a
Lien which secures Indebtedness of any Person other than Permitted Liens, or to
any agreement which, with the passage of time or the occurrence of any
condition, would result in a Lien which secures Indebtedness of any Person other
than Permitted Liens, (iii) is not subject (nor are any equity
4
<PAGE>
interests in such Property subject) to any covenant, condition, or other
restriction which prohibits or limits the sale of, or the creation or assumption
of any Lien upon such Property, except for any Restricted Asset as long as the
Restricted Asset Penalties do not exceed the limitations set forth in (x) below,
and also provided that a general limitation on the amount of Secured Debt which
may be incurred or certain ratios relating to Secured Debt shall not be
construed to constitute a covenant, condition or other restriction which
prohibits or limits the creation or assumption of any Lien on such Property,
(iv) shall be an institutional-class Property, (v) shall have been substantially
completed, shall be free from all material structural and title defects and
shall not be subject to any material renovation project, as certified in writing
by the Borrower to the Administrative Agent, (vi) shall be free from any
Materials of Environmental Concern, in violation of any Environmental Laws, as
certified in writing by the Borrower to the Administrative Agent and as verified
by an environmental assessment report, unless such verification shall be waived
by Administrative Agent in writing, (vii) is occupied by tenants under bona fide
leases occupying at least eighty-five percent (85%) of the residential units,
provided that Properties which are less than eighty-five percent (85%) occupied
may be included as Qualifying Unencumbered Properties, as long as such
Properties do not exceed thirty percent (30%) of Unencumbered Asset Value,
(viii) does not, in the case of any single Property, represent more than twenty
percent (20%) of the Unencumbered Asset Value, except for the Lincoln Towers
Property and any other Property approved by the Required Banks, (ix) is located
in an Approved CMSA, provided that Properties located in Approved CMSA's other
than the Washington/Baltimore CMSA shall not exceed fifty-percent (50%) of
Unencumbered Asset Value, and (x) may constitute a Restricted Asset, provided,
however, a Property shall not constitute a Qualifying Unencumbered Property to
the extent that the addition of such Property to the Qualifying Unencumbered
Properties would cause the Restricted Asset Penalties to exceed seven and one-
half percent (7.5%) of the Unencumbered Asset Value. Notwithstanding the
foregoing limitations, any other Property shall constitute a Qualifying
Unencumbered Property if it has been so approved by the Required Banks in their
sole and absolute discretion.
8. The definition of the term "Syndication Period" is hereby amended to
provide in full as follows:
"Syndication Period" means the period beginning on the Effective Date
------------------
and ending on the earlier of (i) the date which is one-hundred twenty days
following the Effective Date or (ii) the date on which PNC shall have reduced
its Commitment to a maximum of $55,000,000.
9. Section 2.1(b) is hereby amended to provide in full as follows:
(b) If at any time the outstanding principal balance of the Loans and
the Letter of Credit Usage exceeds the Loan Availability, Borrower shall submit
to the Administrative Agent, not later than fifteen (15) days following written
notice from the Administrative Agent to Borrower (which notice Administrative
Agent shall send to the Borrower promptly following receipt of a Compliance
Certificate reflecting such excess borrowing condition, and copy of which notice
shall be sent promptly by the Administrative Agent to each Bank) of the
existence of such
5
<PAGE>
excess borrowing condition, a written plan pursuant to which Borrower shall
cause such excess borrowing condition to be eliminated not later than thirty
(30) days following such notice from the Administrative Agent to the Borrower,
through one or both of the following means: Borrower shall (A) pay to the
Administrative Agent such amounts and/or (B) designate to the Administrative
Agent such additional Qualifying Unencumbered Properties as may be acceptable
under Section 5.14 as are necessary so that the outstanding principal balance of
the Loans and the Letter of Credit Usage does not exceed the Loan Availability.
Failure by Borrower to have complied with the foregoing in a timely manner shall
constitute an Event of Default without further notice or grace period hereunder.
No further Borrowings shall be permitted, and the Borrower shall not cause or
allow any existing Qualifying Unencumbered Property to no longer be a Qualifying
Unencumbered Property, so long as such excess borrowing condition shall continue
to exist. Nothing in this Section 2.1(b) shall excuse Borrower's compliance with
all terms, conditions, covenants and other obligations imposed upon it under the
Loan Documents during the period of such excess borrowing, nor in any manner
condition or impair the Banks' rights thereunder in respect of any such breach
thereof by Borrower.
10. Section 2.3(a) is hereby amended to provide in full as follows:
SECTION 2.3. Money Market Borrowings.
-----------------------
(a) The Money Market Option. From time to time during the Term
-----------------------
following the end of the Syndication Period, and provided that at such time
either Borrower or CESRRI maintains the Investment Grade Ratings, the Borrower
may, as set forth in this Section 2.3, request the Banks during the Term to make
offers to make Money Market Loans to the Borrower, provided that the aggregate
amount of Money Market Loans shall not exceed, at any time, the lesser of (i)
$150,000,000 in the aggregate outstanding, and (ii) (A) the lesser of (I) the
aggregate Commitments or (II) Loan Availability, minus (B) all other Loans then
outstanding and Letter of Credit Usage, and (iii) fifty percent (50%) of the
lesser of (A) the aggregate Commitments or (B) Loan Availability. Subject to
the provisions of this Agreement, the Borrower may repay any outstanding Money
Market Loan only on the last day of the Interest Period applicable thereto and
any amounts so repaid may be reborrowed, up to the amount available under this
Section 2.3 or under Section 2.1, as applicable, at the time of such Borrowing,
until the Domestic Business Day next preceding the Maturity Date. The Banks
may, but shall have no obligation to, make such offers and the Borrower may, but
shall have no obligation to, accept any such offers in the manner set forth in
this Section 2.3.
11. Section 2.5(a) is hereby amended to provide in full as follows:
SECTION 2.5. Notes.
-----
(a) The Base Rate Loans and the Euro-Dollar Loans of each Bank shall
be evidenced by a single Revolving Credit Note in the amount of its Commitment
payable to the order of such Bank for the account of its Applicable Lending
Office. The Money Market Loans
6
<PAGE>
of each Bank, including each Designated Lender, shall be evidenced by a single
Bid Rate Note in the amount of up to $150,000,000, payable to the order of such
Bank for the account of its Applicable Lending Office.
12. Section 2.8(a) is hereby amended to provide in full as follows:
SECTION 2.8. Fees.
----
(a) Facility Fee. At any time while the Investment Grade Ratings are
------------
not maintained, the Borrower shall pay to the Administrative Agent for the
account of the Banks ratably in proportion to their respective Commitments a
facility fee (the "Facility Fee") on the aggregate Commitments at the respective
percentages per annum based upon the range into which the Borrower's Leverage
Ratio then falls, in accordance with the following table. Any change in
Borrower's Leverage Ratio causing it to move to a different range on the table
shall effect an immediate change in the Facility Fee, effective on the earlier
of (i) the date of the Compliance Certificate reflecting such change in the
Leverage Ratio, or (ii) the last day on which a Compliance Certificate is
required to be delivered in accordance with the provisions hereof:
<TABLE>
<CAPTION>
Facility Fee
Leverage Ratio (% per annum)
- -------------- -------------
<S> <C>
Less than 25% 0.15
Greater than or equal to 25%
and less than 35% 0.15
Greater than or equal to 35%
and less than 45% 0.20
Greater than or equal to 45%
and less than 55% 0.20
</TABLE>
During any time when either CESRRI or Borrower shall maintain the
Investment Grade Ratings, "Facility Fee" shall mean a facility fee on the
aggregate Commitments at the respective percentages per annum based upon the
Credit Ratings then applicable in accordance with the following table.
<TABLE>
<CAPTION>
Credit Rating Facility Fee
(S&P/Moody's Ratings) (% per annum)
--------------------- -------------
<S> <C>
A-/A3 or higher 0.125
BBB+/Baa1 0.15
BBB/Baa2 0.15
BBB-/Baa3 0.20
</TABLE>
7
<PAGE>
Any change in Credit Rating causing it to move into a different range on the
table shall effect an immediate change in the applicable percentage per annum.
If CESRRI or Borrower shall maintain two (2) Credit Ratings, and such ratings
are not equivalent, the Facility Fee shall be based upon the lower of such
Credit Ratings. In the event that CESRRI or Borrower receives more than two (2)
Credit Ratings, and such ratings are not equivalent, the Facility Fee shall be
determined by the lower of the two (2) highest ratings, provided that at least
one of such highest Credit Ratings shall be from S&P or Moody's. In the event
that at least one of the two (2) highest ratings shall not be a Credit Rating
from S&P or Moody's, then the applicable percentage per annum shall be
determined by the lowest of the ratings. In the event that only one (1) Rating
Agency has set the Borrower's or CESRRI's Credit Rating, or CESRRI or Borrower
does not maintain the Investment Grade Ratings, then the Facility Fee shall be
based on Borrower's Leverage Ratio as set forth above. Notwithstanding anything
herein contained to the contrary, the Borrower shall always have the right to
elect that the Facility Fee be determined based upon its Leverage Ratio by
written notice to Administrative Agent, with such election to become effective
upon the next Domestic Business Day following receipt of such notice by the
Administrative Agent. Any change in the Facility Fee resulting from a change in
a Credit Rating shall become effective on the effective date of the change in
the applicable Credit Rating. The Facility Fee shall be payable quarterly in
arrears on each January 1, April 1, July 1 and October 1 during the Term. The
Facility Fee for any partial calendar quarter shall be prorated as provided in
Section 2.14.
13. Section 5.13(b) is hereby amended to provide in full as follows:
(b) Indebtedness. (i) CESRRI shall not directly or indirectly,
------------
create, incur, assume or otherwise become or remain directly or indirectly
liable with respect to, any Indebtedness, including, without limitation, any
Contingent Obligation.
(ii) CESRRI shall not permit any of its subsidiaries, the Borrower
or any of the Borrower's Subsidiaries to, directly or indirectly, create, incur,
assume or otherwise become or remain directly or indirectly liable with respect
to, any Indebtedness, including, without limitation, any Contingent Obligation,
except:
(A) the Obligations; and
(B) Indebtedness which, after giving effect thereto, may be
incurred or may remain outstanding without giving rise to an Event of Default or
Default under any provision of this Article V.
14. Section 5.14(d) is hereby amended to provide in full as follows:
(d) A Property shall cease to be included in the calculation of
Unencumbered Asset Value and its Net Operating Income shall cease to be included
in the calculation of Unencumbered NOI if it shall cease to be a Qualifying
Unencumbered Property.
8
<PAGE>
15. Section 9.5 is hereby amended to provide in full as follows:
SECTION 9.5. Amendments and Waivers.
----------------------
Any provision of this Agreement or the Notes, the Letters of Credit or
other Loan Documents may be amended or waived or consented to if, but only if,
such amendment, waiver or consent is in writing and is signed by the Borrower,
the Administrative Agent, and the Required Banks provided that no such
amendment, waiver or consent with respect to this Agreement, the Notes, the
Letters of Credit or any other Loan Documents shall, unless signed by all the
Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable
decrease in the Commitments of all Banks) or subject any Bank to any additional
obligation, (ii) reduce the principal of or rate of interest on any Loan or any
fees hereunder, (iii) postpone the date fixed for any payment of principal of or
interest on any Loan or any fees hereunder or for any reduction or termination
of any Commitment, (iv) change the percentage of the Commitments or of the
aggregate unpaid principal amount of the Notes, or the number of Banks, which
shall be required for the Banks or any of them to take any action under this
Section 9.5 or any other provision of this Agreement, (v) release the
Guaranties, or (vi) modify the provisions of this Section 9.5.
16. Section 9.6(b) is hereby amended to provide in full as follows:
(b) Any Bank may at any time grant (i) prior to the occurrence of an
Event of Default, to an existing Bank, one or more banks, finance companies,
insurance companies or other financial institutions in minimum amounts of not
less than $10,000,000 (or any lesser amount in the case of participations to an
existing Bank or in the case of participations with respect to Money Market
Loans only) and (ii) after the occurrence and during the continuance of an Event
of Default, to any Person in any amount (in each case, a "Participant"),
participating interests in its Commitment or any or all of its Loans. Any
participation made during the continuation of an Event of Default shall not be
affected by the subsequent cure of such Event of Default. In the event of any
such grant by a Bank of a participating interest to a Participant, whether or
not upon notice to the Borrower and the Administrative Agent, such Bank shall
remain responsible for the performance of its obligations hereunder, and the
Borrower and the Administrative Agent shall continue to deal solely and directly
with such Bank in connection with such Bank's rights and obligations under this
Agreement. Any agreement pursuant to which any Bank may grant such a
participating interest shall provide that such Bank shall retain the sole right
and responsibility to enforce the Obligations of the Borrower hereunder
including, without limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement; provided that such participation
--------
agreement may provide that such Bank will not agree to any modification,
amendment or waiver of this Agreement described in clause (i), (ii), (iii), (iv)
or (v) of Section 9.5 without the consent of the Participant. The Borrower
agrees that each Participant shall, to the extent provided in its participation
agreement, be entitled to the benefits of Article VIII with respect to its
participating interest. An assignment or other transfer which is not permitted
by subsection (c) or (d) below shall be given effect for purposes of this
Agreement only to the extent
9
<PAGE>
of, and subject to the restrictions with respect to, a participating interest
granted in accordance with this subsection (b).
17. Section 9.6(c) is hereby amended to provide in full as follows:
(c) Any Bank may at any time assign to (i) prior to the occurrence of
an Event of Default, an existing Bank or one or more banks, finance companies,
insurance or other financial institutions in minimum amounts of not less than
Ten Million Dollars ($10,000,000) (or any lesser amount in the case of
assignments to an existing Bank) and (ii) after the occurrence and during the
continuance of an Event of Default, to any Person in any amount (in each case,
an "Assignee"), all or a proportionate part of all, of its rights and
obligations under this Agreement, the Notes and the other Loan Documents, and,
in either case, such Assignee shall assume such rights and obligations, pursuant
to an Assignment and Assumption Agreement in substantially the form of Exhibit
"E" hereto executed by such Assignee and such transferor Bank, , provided that,
as long as no Event of Default shall have occurred and be continuing, any such
assignment shall be subject to the prior written consent of the Administrative
Agent and the Borrower, which consent of the Borrower shall not be unreasonably
withheld or delayed; provided that if an Assignee is an affiliate of such
transferor Bank or was a Bank immediately prior to such assignment, no such
consent shall be required; and provided further that such assignment may, but
need not, include rights of the transferor Bank in respect of outstanding Money
Market Loans. Upon its receipt of an Assignment and Assumption Agreement
executed by a transferor Bank and an Assignee, Administrative Agent shall, if
such Assignment and Assumption Agreement has been properly completed and is in
substantially the form of Exhibit E, (i) accept such Assignment and Assumption
Agreement, (ii) record the information contained therein in the Administrative
Agent's records, and (iii) give prompt notice thereof to Borrower. Upon
execution and delivery of such instrument and payment by such Assignee to such
transferor Bank of an amount equal to the purchase price agreed between such
transferor Bank and such Assignee, such Assignee shall be a Bank party to this
Agreement and shall have all the rights and obligations of a Bank with a
Commitment as set forth in such instrument of assumption, and no further consent
or action by any party shall be required and the transferor Bank shall be
released from its obligations hereunder to a corresponding extent. Upon the
consummation of any assignment pursuant to this subsection (c), the transferor
Bank, the Administrative Agent and the Borrower shall make appropriate
arrangements so that, if required, new Notes are issued to the Assignee, and,
if necessary, to the transferor Bank. Upon execution and delivery of such
replacement Notes, the original Notes evidencing all or the portion of the
Commitment being assigned shall be canceled and returned to Borrower. In
connection with any such assignment, the transferor Bank shall pay to the
Administrative Agent an administrative fee for processing such assignment in the
amount of $3,000. If the Assignee is not incorporated under the laws of the
United States of America or a state thereof, it shall deliver to the Borrower
and the Administrative Agent certification as to exemption from deduction or
withholding of any United States federal income taxes in accordance with Section
8.4. Any assignment made during the continuation of an Event of Default shall
not be affected by any subsequent cure of such Event of Default.
10
<PAGE>
18. Section 9.6 is hereby amended by the addition of the following as
subsection (h):
(h) Anything in this Section 9.6 to the contrary notwithstanding, no
Bank may assign or participate any interest in any Loan held by it hereunder to
Borrower, CESRRI or any of their respective affiliates or Subsidiaries.
19. Exhibit F to the Agreement is hereby deleted and Exhibit F attached
hereto shall be substituted therefor.
20. Schedule I to the Agreement is hereby deleted and Schedule I attached
hereto shall be substituted therefor.
21. Except as specifically modified herein, the Agreement is hereby
ratified and confirmed and shall remain in full force and effect.
22. This Amendment may be executed by the parties hereto in multiple
counterparts, and, when so executed by all of the parties, such multiple
counterparts shall be deemed to constitute a single, integrated agreement.
23. This Amendment shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as
of the day and year first above written.
CHARLES E. SMITH RESIDENTIAL REALTY L.P.,
By: Charles E. Smith Residential Realty, Inc., a
Maryland corporation, its general partner
By: W.D. Minami,
--------------------------------
W.D. Minami,
Senior Vice President,
Chief Financial Officer, and
Treasurer
PNC BANK, NATIONAL ASSOCIATION, as
Administrative Agent and as a Bank
By: W R Lynch III
--------------------------------
Name: W R Lynch III
-------------------------
Title: Vice President
-------------------------
NATIONSBANK, N.A, as Syndication Agent and as a
Bank
By:
--------------------------------
Name:
-------------------------
Title:
-------------------------
U.S. BANK NATIONAL ASSOCIATION, as
Documentation Agent and as a Bank
By:
--------------------------------
Name:
-------------------------
Title:
-------------------------
12
<PAGE>
CONSENT
The undersigned, having executed and delivered the Guaranties as defined in
the Credit Agreement referenced in the foregoing First Amendment to Third
Amended and Restated Credit Agreement, hereby consent to the First Amendment to
Third Amended and Restated Credit Agreement and to the amendments to the Credit
Agreement contained therein, and hereby ratify and confirm the undersigned's
obligations under the Guaranties. All references in the respective Guaranties
executed by the undersigned to defined terms in the Credit Agreement are hereby
amended in accordance with the First Amendment to Third Amended and Restated
Credit Agreement and all references in the respective Guaranties executed by the
undersigned to the Credit Agreement shall be deemed to refer to the Credit
Agreement as amended by the First Amendment to Third Amended and Restated Credit
Agreement.
METROPOLITAN ACQUISITION FINANCE L.P., a
Delaware limited partnership
By: SMITH SEVEN, INC., a Delaware
corporation, its general partner
By: W.D. Minami
--------------------------------
W.D. Minami
Vice President and
Treasurer
FIRST HERNDON ASSOCIATES L.P., a Virginia limited
partnership
By: SMITH FIVE, INC., a Delaware
corporation, its general partner
By: W.D. Minami
--------------------------------
Vice President and
Treasurer
13
<PAGE>
SMITH PROPERTY HOLDINGS VAN NESS L.P.,
a Delaware limited partnership
By: SMITH SIX, INC., a Delaware
corporation, its general partner
By: W.D. Minami
--------------------------------
W.D. Minami
Vice President and
Treasurer
SMITH PROPERTY HOLDINGS FIVE (D.C.) L.P., a Delaware
limited partnership
By: SMITH FIVE, INC., a Delaware
corporation, its general partner
By: W.D. Minami
--------------------------------
W.D. Minami
Vice President and
Treasurer
SMITH PROPERTY HOLDINGS FIVE L.P., a Delaware limited
partnership
By: SMITH FIVE, INC., a Delaware
corporation, its general partner
By: W.D. Minami
--------------------------------
W.D. Minami
Vice President and
Treasurer
14
<PAGE>
SMITH PROPERTY HOLDINGS LINCOLN TOWERS L.L.C., a
Virginia limited liability company
By: CHARLES E. SMITH RESIDENTIAL REALTY
L.P., a Delaware limited
partnership
By: Charles E. Smith Residential Realty,
Inc., a Maryland corporation, its general
partner
By: W.D. Minami
--------------------------------
W.D. Minami
Senior Vice President,
Chief Financial Officer and
Treasurer
SMITH PROPERTY HOLDINGS ONE EAST DELAWARE L.L.C., a
Delaware limited liability company
By: CHARLES E. SMITH RESIDENTIAL REALTY
L.P., a Delaware limited
partnership
By: Charles E. Smith Residential Realty,
Inc., a Maryland corporation, its general partner
By: W.D. Minami
----------------------------------
Name: W.D. Minami
--------------------------------
Title: Senior Vice President and CFO
-------------------------------
15
<PAGE>
EXHIBIT F
Qualifying Unencumbered Properties
----------------------------------
1. One East Delaware
2. Lincoln Towers
3. Westerly at Worldgate
4. Boulevard of Old Town/Governor Spotswood Manor
5. Van Ness South
6. Suburban Towers
7. Hunington
8. Manor
9. Worldgate (Retail)
10. Albemarle
16
<PAGE>
SCHEDULE I
COMMITMENTS OF BANKS
<TABLE>
<CAPTION>
PERCENTAGE
OF
BANK COMMITMENT COMMITMENT
---- ------------ -----------
<S> <C> <C>
PNC BANK, NATIONAL
ASSOCIATION $200,000,000 66 2/3%
U.S. BANK NATIONAL
ASSOCIATION $ 50,000,000 16 2/3%
NATIONSBANK, N.A. $ 50,000,000 16 2/3%
</TABLE>
17
<PAGE>
CONSENT
The undersigned, having executed and delivered the Joinder attached to the
Credit Agreement referenced in the foregoing First Amendment to Third Amended
and Restated Credit Agreement, hereby consents to the First Amendment to Third
Amended and Restated Credit Agreement and to the amendments to the Credit
Agreement contained therein, and hereby ratifies and confirms the undersigned's
obligations under the Joinder.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
a Maryland corporation
By: W.D. Minami
----------------------------------------
Name: W.D. Minami
--------------------------------------
Title: Senior Vice President and CFO
-------------------------------------
18
<PAGE>
EXHIBIT 99.2
SECOND AMENDMENT TO THIRD AMENDED
AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (the
"Second Amendment") is made as of the 7/th/ day of April, 1998, by and among
Charles E. Smith Residential Realty L.P., a Delaware limited partnership (the
"Borrower"), PNC Bank, National Association, as Administrative Agent and as a
Bank, NationsBank, N.A., as Syndication Agent and as a Bank, U.S. Bank National
Association, as Documentation Agent and as a Bank, and the other Banks joining
in the execution of this Second Amendment.
W I T N E S S E T H:
WHEREAS, as of February 26, 1998, the above-referenced parties entered into
the Third Amended and Restated Credit Agreement (the "Agreement") which provided
for a $250,000,000 unsecured revolving line of credit to be made available by
the Banks to the Borrower;
WHEREAS, as of March 31, 1998, the above-referenced parties entered into
the First Amendment to Third Amended and Restated Credit Agreement (the "First
Amendment") (all references to the Agreement shall include the Agreement as
amended by the First Amendment) wherein the parties agreed, among other things,
to increase the amount of the Commitments (as hereinafter defined) to
$300,000,000; and
WHEREAS, the parties have agreed to further amend the Agreement to reflect
certain matters which have been agreed to by the parties, including, without
limitation, a decrease in the amount of the Commitments to $275,000,000.
NOW, THEREFORE, the parties hereto, for good and valuable consideration,
the receipt and sufficiency thereof being hereby acknowledged, and intending to
be legally bound hereby, covenant and agree as follows:
1. All capitalized terms employed herein shall have the meanings ascribed
thereto in the Agreement unless defined to the contrary herein.
2. The definition of the term "Commitment" is hereby amended to provide
in full as follows:
"Commitment" means, with respect to each Bank, the amount set forth
----------
opposite
<PAGE>
the name of such Bank on Schedule I hereto (and, for each Bank which is
an Assignee, the amount set forth in the Assignment and Assumption Agreement
entered into pursuant to Section 9.6(c) as the Assignee's commitment), as such
amount may be reduced or increased from time to time pursuant to the provisions
hereof, which Commitments, effective on April 7/th/, 1998, aggregate the sum of
Two Hundred Seventy-Five Million Dollars ($275,000,000).
3. Section 2.3(a) is hereby amended to provide in full as follows:
SECTION 2.3. Money Market Borrowings.
-----------------------
(a) The Money Market Option. From time to time during the Term
-----------------------
following the end of the Syndication Period, and provided that at such time
either Borrower or CESRRI maintains the Investment Grade Ratings, the Borrower
may, as set forth in this Section 2.3, request the Banks during the Term to make
offers to make Money Market Loans to the Borrower, provided that the aggregate
amount of Money Market Loans shall not exceed, at any time, the lesser of (i)
$137,500,000 in the aggregate outstanding, and (ii) (A) the lesser of (I) the
aggregate Commitments or (II) Loan Availability, minus (B) all other Loans then
outstanding and Letter of Credit Usage, and (iii) fifty percent (50%) of the
lesser of (A) the aggregate Commitments or (B) Loan Availability. Subject to
the provisions of this Agreement, the Borrower may repay any outstanding Money
Market Loan only on the last day of the Interest Period applicable thereto and
any amounts so repaid may be reborrowed, up to the amount available under this
Section 2.3 or under Section 2.1, as applicable, at the time of such Borrowing,
until the Domestic Business Day next preceding the Maturity Date. The Banks
may, but shall have no obligation to, make such offers and the Borrower may, but
shall have no obligation to, accept any such offers in the manner set forth in
this Section 2.3.
4. Section 2.5(a) is hereby amended to provide in full as follows:
SECTION 2.5. Notes.
-----
(a) The Base Rate Loans and the Euro-Dollar Loans of each Bank shall
be evidenced by a single Revolving Credit Note in the amount of its Commitment
payable to the order of such Bank for the account of its Applicable Lending
Office. The Money Market Loans of each Bank, including each Designated Lender,
shall be evidenced by a single Bid Rate Note in the amount of up to
$137,500,000, payable to the order of such Bank for the account of its
Applicable Lending Office.
5. Schedule I to the Agreement is hereby deleted and Schedule I attached
hereto shall be substituted therefor.
6. Notwithstanding any provision of the Agreement to the contrary, the
reduction in the Commitments to be made pursuant to this Second Amendment shall
be allocated entirely to the Commitment of PNC, and not prorata to the
Commitments of all of the Banks.
2
<PAGE>
7. The Borrower represents and warrants that no Default and no Event of
Default has occurred and is continuing or exists under the Agreement.
8. The Borrower hereby certifies to the Banks that the representations
and warranties contained in Article IV of the Agreement are true and correct
with the same effect as though such representations and warranties had been made
on the date hereof (except to the extent that any such representation or
warranty relates solely to an earlier date).
9. Except as specifically modified herein, the Agreement is hereby
ratified and confirmed and shall remain in full force and effect.
10. This Second Amendment may be executed by the parties hereto in
multiple counterparts, and, when so executed by all of the parties, such
multiple counterparts shall be deemed to constitute a single, integrated
agreement.
11. This Second Amendment shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Second
Amendment as of the day and year first above written.
CHARLES E. SMITH RESIDENTIAL REALTY L.P.,
a Delaware limited partnership
By: Charles E. Smith Residential Realty, Inc., a
Maryland corporation, its general partner
By: /s/ W.D. Minami
--------------------------------------
W.D. Minami,
Senior Vice President and
Chief Financial Officer
PNC BANK, NATIONAL ASSOCIATION, as
Administrative Agent and as a Bank
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
NATIONSBANK, N.A, as Syndication Agent and as a Bank
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
U.S.BANK NATIONAL ASSOCIATION, as
Documentation Agent and as a Bank
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
4
<PAGE>
FLEET NATIONAL BANK, a national banking association,
as a Bank
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
THE CHASE MANHATTAN BANK.
as a Bank
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
COMMERZBANK AKTIENGESELLSCHAFT
NEW YORK BRANCH, as a Bank
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
CRESTAR BANK, as a Bank
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
FIRST UNION NATIONAL BANK, a national
banking association, as a Bank
By:
----------------------------------
Name:
----------------------------
Title:
----------------------------
5
<PAGE>
CONSENT
The undersigned, having executed and delivered the Guaranties as defined in
the Agreement referenced in the foregoing Second Amendment to Third Amended and
Restated Credit Agreement, hereby consent to the Second Amendment to Third
Amended and Restated Credit Agreement and to the amendments to the Agreement
contained therein, and hereby ratify and confirm the undersigned's obligations
under the Guaranties. All references in the respective Guaranties executed by
the undersigned to defined terms in the Agreement are hereby amended in
accordance with the Second Amendment to Third Amended and Restated Credit
Agreement and all references in the respective Guaranties executed by the
undersigned to the Agreement shall be deemed to refer to the Agreement as
amended by the Second Amendment to Third Amended and Restated Credit Agreement.
METROPOLITAN ACQUISITION FINANCE L.P., a
Delaware limited partnership
By: SMITH SEVEN, INC., a Delaware
corporation, its general partner
By: /s/ W.D. Minami
----------------------------------
W.D. Minami
Vice President and
Treasurer
FIRST HERNDON ASSOCIATES L.P., a Virginia limited
partnership
By: SMITH FIVE, INC., a Delaware
corporation, its general partner
By: /s/ W.D. Minami
----------------------------------
W.D. Minami
Vice President and
Treasurer
6
<PAGE>
SMITH PROPERTY HOLDINGS VAN NESS L.P., a Delaware
limited partnership
By: SMITH SIX, INC., a Delaware
corporation, its general partner
By: /s/ W.D. Minami
---------------------------------
W.D. Minami
Vice President and
Treasurer
SMITH PROPERTY HOLDINGS FIVE (D.C.) L.P., a Delaware
limited partnership
By: SMITH FIVE, INC., a Delaware
corporation, its general partner
By: /s/ W.D. Minami
---------------------------------
W.D. Minami
Vice President and
Treasurer
SMITH PROPERTY HOLDINGS FIVE L.P., a Delaware limited
partnership
By: SMITH FIVE, INC., a Delaware
corporation, its general partner
By: /s/ W.D. Minami
---------------------------------
W.D. Minami
Vice President and
Treasurer
7
<PAGE>
SMITH PROPERTY HOLDINGS LINCOLN TOWERS L.L.C., a
Virginia limited liability company
By: CHARLES E. SMITH RESIDENTIAL
REALTY L.P., a Delaware limited
partnership
By: Charles E. Smith Residential Realty,
Inc., a Maryland corporation, its general partner
By: /s/ W.D. Minami
---------------------------------
W.D. Minami
Senior Vice President and
Chief Financial Officer
SMITH PROPERTY HOLDINGS ONE EAST DELAWARE
L.L.C., a Delaware limited liability company
By: CHARLES E. SMITH RESIDENTIAL REALTY
L.P., a Delaware limited
partnership
By: Charles E. Smith Residential Realty,
Inc., a Maryland corporation, its general partner
By: /s/ W.D. Minami
---------------------------------
W.D. Minami
Senior Vice President and
Chief Financial Officer
8
<PAGE>
CONSENT
The undersigned, having executed and delivered the Joinder attached to the
Agreement referenced in the foregoing Second Amendment to Third Amended and
Restated Credit Agreement, hereby consents to the Second Amendment to Third
Amended and Restated Credit Agreement and to the amendments to the Agreement
contained therein, and hereby ratifies and confirms the undersigned's
obligations under the Joinder.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.,
a Maryland corporation
By: /s/ W.D. Minami
-----------------------------------
Name: W.D. Minami
Title: Senior Vice President and
Chief Financial Officer
9
<PAGE>
SCHEDULE I
COMMITMENTS OF BANKS
<TABLE>
<CAPTION>
PERCENTAGE
OF
BANK COMMITMENT COMMITMENT
----------- ----------- ----------
<S> <C> <C>
PNC BANK, NATIONAL
ASSOCIATION $55,000,000 20%
U.S. BANK NATIONAL
ASSOCIATION $50,000,000 18 2/11%
NATIONSBANK, N.A. $50,000,000 18 2/11%
FLEET NATIONAL BANK $25,000,000 9 1/11%
FIRST UNION NATIONAL $25,000,000 9 1/11%
BANK
COMMERZBANK $25,000,000 9 1/11%
AKTIENGESELLSCHAFT,
NEW YORK BRANCH
CRESTAR BANK $20,000,000 7 3/11%
THE CHASE MANHATTAN $25,000,000 9 1/11%
BANK
</TABLE>
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,888
<PP&E> 1,190,210
<DEPRECIATION> (221,213)
<TOTAL-ASSETS> 1,044,454
<CURRENT-LIABILITIES> 29,308
<BONDS> 693,748
0
153,568
<COMMON> (271,827)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,044,454
<SALES> 0
<TOTAL-REVENUES> 117,427
<CGS> 0
<TOTAL-COSTS> 60,897
<OTHER-EXPENSES> 4,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,022
<INCOME-PRETAX> 36,291
<INCOME-TAX> 0
<INCOME-CONTINUING> 36,291
<DISCONTINUED> 0
<EXTRAORDINARY> 4,702
<CHANGES> 0
<NET-INCOME> 31,589
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
