<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
--- of the Securities Exchange Act of 1934
For the quarter ended September 30, 2000
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 Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of October 31, 2000 there were 35,431,918 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> <C>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Charles E. Smith Residential Realty L.P. Financial
Statements as of September 30, 2000 and December 31, 1999,
Filed as a Part of This Report
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Partner's 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 16
PART II: OTHER INFORMATION 29
SIGNATURES 30
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, net $ 1,667,107 $ 1,369,416
Rental property under development 57,461 169,626
Cash - 10,557
Escrow funds 7,175 18,309
Investment in and advances to Property Service Businesses 102,749 70,282
Investment in unconsolidated properties 32,169 22,338
Deferred charges, net 17,124 16,727
Security deposits 8,379 4,058
Other assets 20,118 23,465
------------------ -----------------
$ 1,912,282 $ 1,704,778
================== =================
LIABILITIES AND EQUITY
Liabilities
Mortgage loans and notes payable:
Mortgage loans $ 1,038,545 $ 817,278
Construction loans 76,414 80,045
Line of credit 6,000 72,000
------------------ -----------------
Total mortgage loans and notes payable 1,120,959 969,323
Accounts payable and accrued expenses 55,346 44,480
Security deposits 8,379 4,058
------------------ -----------------
Total liabilities 1,184,684 1,017,861
------------------ -----------------
Commitments and contingencies
Other Limited Partners' Interest
Preferred units 45,000 45,000
Common units - 13,599,855 and 13,855,404 units issued and outstanding
at September 30, 2000 and December 31, 1999, respectively,
at redemption value 617,093 490,135
------------------ -----------------
662,093 535,135
------------------ -----------------
Partner's Equity
Preferred units 251,500 251,500
Common units - 21,808,230 and 20,673,039 units issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively (185,995) (99,718)
------------------ -----------------
Total partner's equity 65,505 151,782
------------------ -----------------
$ 1,912,282 $ 1,704,778
================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Unit Data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Rental Properties:
Revenues $ 98,742 $ 79,194 $ 282,312 $ 218,749
Expenses
Operating costs (30,058) (26,759) (85,039) (70,189)
Real estate taxes (8,896) (5,950) (24,498) (16,678)
Depreciation and amortization (11,531) (8,363) (32,993) (24,304)
--------------- ---------------- -------------- ----------------
Total expenses (50,485) (41,072) (142,530) (111,171)
Equity in income of unconsolidated properties 524 347 1,849 677
Equity in income of Property Service Businesses 2,890 2,127 5,045 3,255
Corporate general and administrative expenses (2,810) (2,156) (8,507) (6,785)
Interest income 38 239 182 336
Interest expense (19,306) (15,421) (57,291) (42,040)
--------------- ---------------- -------------- ----------------
Income before gain on sales and extraordinary item 29,593 23,258 81,060 63,021
Gain on sales - 5,214 4,161 7,065
--------------- --------------- -------------- ----------------
Income before extraordinary item 29,593 28,472 85,221 70,086
Extraordinary item - loss on extinguishment of debt - - - (359)
--------------- ---------------- -------------- ----------------
Net income 29,593 28,472 85,221 69,727
Less: Income attributable to preferred units (5,925) (3,272) (17,776) (8,028)
--------------- ---------------- -------------- ----------------
Net income attributable to common units $ 23,668 $ 25,200 $ 67,445 $ 61,699
=============== ================ ============== ================
Earnings per common unit - basic
Income before extraordinary item $ 0.67 $ 0.75 $ 1.93 $ 1.90
Extraordinary item - - - (0.01)
--------------- ---------------- -------------- ----------------
Net income $ 0.67 $ 0.75 $ 1.93 $ 1.89
=============== ================ ============== ================
Earnings per common unit - diluted
Income before extraordinary item $ 0.65 $ 0.73 $ 1.89 $ 1.86
Extraordinary item - - - (0.01)
--------------- --------------- -------------- ---------------
Net income $ 0.65 $ 0.73 $ 1.89 $ 1.85
=============== ================ ============== ================
</TABLE>
The accompanying notes are an intergral part of these statements.
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF PARTNER'S EQUITY AND OTHER LIMITED PARTNERS' INTEREST
(Dollars in Thousands)
<TABLE>
<CAPTION>
General Partner's General and
Limited Interest
------------------------------------------
Preferred Common
Units Units
------------------ -------------------
<S> <C> <C>
Balance, December 31, 1998 $ 141,867 $ (198,543)
Units exchanged for acquisitions - -
Adjustment for grants - -
Net income - 95,278
Contribution by Charles E. Smith Residential Realty, Inc. 130,000 30,625
Proceeds from issuance of Preferred units - -
Conversion of Preferred units to Common units (20,367) 20,367
Offering costs - (4,837)
Distributions - (56,247)
Other - 3,596
Adjustment to reflect Other Limited Partners' Interest
at redemption value - 10,043
------------------ -------------------
Balance, December 31, 1999 $ 251,500 $ (99,718)
Units exchanged for acquisitions - -
Amortization of grants - -
Net income - 55,967
Contribution by Charles E. Smith Residential Realty, Inc. - 21,638
Distributions - (52,491)
Exercise of options - 6,939
Other - (31)
Adjustment to reflect Other Limited Partners' Interest
at redemption value - (118,299)
------------------ -------------------
Balance, September 30, 2000 (Unaudited) $ 251,500 $ (185,995)
================== ===================
Units issued and outstanding at September 30, 2000 6,833,449 21,808,230
================== ===================
Units issued and outstanding at December 31, 1999 6,833,449 20,673,039
================== ===================
<CAPTION>
Other Limited
Partners' Interest
------------------------------------------
Series H
Common Preferred
Units Units
------------------ -------------------
<S> <C> <C>
Balance, December 31, 1998 $ 426,258 $ -
Units exchanged for acquisitions 42,426 -
Adjustment for grants 762 -
Net income 58,536 -
Contribution by Charles E. Smith Residential Realty, Inc. - -
Proceeds from issuance of Preferred units - 45,000
Conversion of Preferred units to Common units - -
Offering costs - -
Distributions (28,637) -
Other 833 -
Adjustment to reflect Other Limited Partners' Interest
at redemption value (10,043) -
------------------ -------------------
Balance, December 31, 1999 $ 490,135 $ 45,000
Units exchanged for acquisitions 1,270 -
Amortization of grants 761 -
Net income 29,254 -
Contribution by Charles E. Smith Residential Realty, Inc. - -
Distributions (22,626) -
Exercise of options - -
Other - -
Adjustment to reflect Other Limited Partners' Interest
at redemption value 118,299 -
------------------ -------------------
Balance, September 30, 2000 (Unaudited) $ 617,093 $ 45,000
================== ===================
Units issued and outstanding at September 30, 2000 13,599,855 1,800,000
================== ===================
Units issued and outstanding at December 31, 1999 13,855,404 1,800,000
================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 133,472 $ 110,590
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (146,695) (236,106)
Additions to rental property (42,633) (14,703)
Disposition of rental property - 75,666
Increase in investment in and advances to Property Service Businesses (32,467) (12,861)
Increase in investment in unconsolidated properties (9,921) (4,448)
Acquisition deposits and other (4,160) (15,194)
--------------- ----------------
Net cash used in investing activities (235,876) (207,646)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in deferred charges (2,986) 920
Proceeds from sale of preferred stock and units, net - 121,367
Proceeds from sale of common stock, net 21,638 -
Mortgage loans, net 211,034 88,787
Lines of credit, net (66,000) (66,512)
Construction loans, net (3,631) 9,902
Prepayment penalties - (1,038)
Dividends and distributions - Common (57,484) (51,539)
Dividends and distributions - Preferred (17,632) (8,744)
Other, net 6,908 3,913
--------------- ----------------
Net cash provided by financing activities 91,847 97,056
--------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,557) -
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -
--------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ (10,557) $ -
=============== ================
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 59,557 $ 47,215
Capitalized interest 3,518 6,247
Purchase of property in exchange for Operating Partnership units 1,270 34,321
Purchase of property in exchange for assumption of debt 10,233 73,586
Proceeds from sale of rental property held in escrow 40,997 17,712
Purchase of property with escrow proceeds 40,124 17,712
Purchase of joint venture interest in exchange for Operating Partnership units - 6,088
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial statements include all of the accounts
of Charles E. Smith Residential Realty L.P. (the "Operating Partnership") and
its subsidiary financing partnerships. (As used herein, the term "Company" may
also be used to mean Charles E. Smith Residential Realty L.P., or its sole
general partner, Charles E. Smith Residential Realty, Inc., or both, unless the
context indicates otherwise.) All significant intercompany balances and
transactions have been eliminated. The financial information furnished is
unaudited, and in management's opinion, includes all adjustments (consisting
only of normal, recurring adjustments), that are necessary for a fair
presentation of financial position as of September 30, 2000 and the results of
operations for the interim periods ended September 30, 2000 and 1999. 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
Company's Annual Report on Form 10-K.
The Operating Partnership is engaged in the ownership, operation,
management, leasing, acquisition, and development of real estate properties,
primarily residential multifamily properties. As of September 30, 2000, the
Operating Partnership owned 57 operating multifamily properties containing
26,687 apartment units (the "Properties"), had 480 units under construction at
one owned site, had 226 units under construction at one site for which the
Company owned substantially all of the economic interest, and had agreements to
purchase 843 units at three additional sites. The Operating Partnership also had
interests in three operating multifamily properties totaling 1,267 apartment
units and in one property under construction totaling 630 units. In addition,
the Operating Partnership owned one freestanding community retail shopping
center aggregating 205,000 square feet. The Operating Partnership also owns
substantially all of the economic interest in entities that provide multifamily
property management and leasing, furnished corporate apartments, interior
construction and construction management services, and engineering and technical
services (collectively the "Property Service Businesses"). The Operating
Partnership uses the equity method of accounting for its non-voting interest in
the Property Service Businesses.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. ACQUISITIONS AND DISPOSITIONS
In April 2000, the Company acquired Dearborn Place, a 185-unit, 27-story
property, built in 1987 and located in downtown Chicago. The $25.4 million
transaction was funded through a combination of approximately 36,000 Operating
Partnership units valued at $1.3 million, $13.9
7
<PAGE>
million in cash, and $10.2 million in assumed debt bearing an interest rate of
9.25%. The assumed debt was paid off with funds drawn on the Company's line of
credit.
In June 2000, the Company acquired Reston Landing, a newly developed
400-unit property, located in Reston, Virginia. The $43.7 million cash
transaction was primarily funded with proceeds from the tax deferred sale of
Worldgate Centre, a retail center located in Herndon, Virginia, for
approximately $41 million. The Company recognized a gain on the sale of $4.2
million.
3. DEBT
In February 2000, the Company drew $49.4 million on its Fannie Mae credit
facility at 8.0% for ten years. The Company used $37 million of the proceeds to
repay a portion of its line of credit with the balance used for working capital
needs. Ocean View at Aventura was added to the collateral pool in connection
with this draw.
In May 2000, the Company obtained a ten-year, $300 million secured line of
credit from Freddie Mac. Borrowings under the line bear interest at a spread of
63 to 161 basis points over LIBOR depending on the Company's interest coverage
ratio. Initial availability under the agreement was approximately $125 million,
which can increase to $300 million with appreciation in value of the properties
collateralizing the borrowings and/or with the addition of properties to the
collateral pool. Loan costs of $0.9 million were capitalized in connection with
this agreement. The Company made an initial draw of $60 million substantially
all of which was used to repay a portion of its $185 million line of credit. The
outstanding balance at September 30, 2000 was $6 million at an average interest
rate of 7.25%.
In June 2000, the Company decreased the commitment on its $185 million line
of credit to $100 million, and decreased the commitment on its $100 million line
of credit to $50 million.
In June 2000, the Company also closed on four mortgage loans totaling $53.5
million. Each of the loans has a fixed interest rate of 7.92%. The loans require
monthly payments of interest only through July 2010, at which time principal
amortization begins using a 20-year amortization with a balloon payment due June
28, 2012. The loans are collateralized by four properties.
In September 2000, the Company closed on three mortgage loans totaling
$60.8 million. The loans each have a fixed interest rate of 7.61% and a 15-year
term. The loans require payments of interest only for a minimum of ten years
with a balloon payment due September 2015. All three loans are cross-defaulted
and cross-collateralized.
In September 2000, the Company converted $61.8 million of its $300 million
line of credit to mortgage debt. The new mortgage has a fixed interest rate of
7.66% and a 14-year term. Payments of interest only are required for a minimum
of ten years with a balloon payment due September 2014. The loan is
collateralized by one property. With the conversion of this portion of the line
of credit, the availability under the line decreased from $125.3 million to
$63.5 million.
8
<PAGE>
4. INVESTMENT IN AND ADVANCES TO PROPERTY SERVICE BUSINESSES
In June 2000, Consolidated Engineering Services, Inc. ("CES"), the
Company's engineering and technical services unit, obtained a 6-month, $50
million acquisition line of credit from a bank group. The line, which is
guaranteed by the Operating Partnership, bears interest at a selected London
Interbank Offered Rate ("LIBOR") plus 75-to-120 basis points, depending upon the
Operating Partnership's leverage ratio. As of September 30, 2000, CES had drawn
$50.0 million on the line at an average interest rate of 7.69% to fund
acquisition activities.
Also in June 2000, CES acquired Illingworth Corporation, a privately owned
mechanical services company in Milwaukee, Wisconsin. The acquisition builds
CES's presence in the Midwest and adds new services, such as installation and
maintenance of industrial piping and medical gas systems, to CES's product line.
The purchase price of $11.0 million was funded using a combination of 93,275
shares of the Company's common stock (purchased by CES from the Company for
approximately $3.5 million), and cash drawn on CES's line of credit.
In July 2000, CES acquired Hayes Mechanical, Inc., a privately held,
full-service mechanical services company in Chicago, Illinois. The $18.6 million
purchase price consisted of 211,268 shares of the Company's common stock
(purchased by CES from the Company for approximately $7.5 million), assumed debt
of $0.7 million and $10.4 million of cash. CES funded the transaction through
the Operating Partnership in exchange for a promissory note.
In July 2000, CES purchased Betlem Service Corporation, a mechanical
services company located in Rochester, New York. The purchase price of $4.6
million consisted of 35,898 shares of the Company's common stock (purchased by
CES from the Company for $1.4 million) and cash of $3.2 million. CES funded the
transaction through the Operating Partnership in exchange for a promissory note.
In September 2000, CES purchased Aircond Corporation, the largest
independent commercial and industrial heating, ventilating, and air conditioning
company in the Southeast, headquartered in Atlanta, Georgia. The $25.4 million
purchase price consisted of 219,361 shares of the Company's common stock
(purchased by CES from the Company for approximately $9.2 million), and $16.2
million of cash. CES funded the transaction through the Operating Partnership in
exchange for a promissory note and cash drawn on CES's line of credit.
5. INVESTMENT IN UNCONSOLIDATED PROPERTIES
In connection with the development of Stoneridge at University Center in
Loudoun County, Virginia, SPH University Center LLC obtained a $31.0 million
interest-only construction loan in May 2000 with interest at LIBOR plus 125
basis points, payable monthly, due May 10, 2003. As of September 30, 2000, the
outstanding balance was $4.4 million.
9
<PAGE>
6. PREFERRED UNITS
The following table reflects the Operating Partnership's issued and
outstanding preferred units:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- ---------------
(in thousands)
<S>
Series A Cumulative Convertible Redeemable Preferred Units, <C> <C>
$0.01 par value; 2,640,325 units authorized; liquidation
preference of $27.08; 2,640,325 units issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively $ 71,500 $ 71,500
Series C Cumulative Redeemable Preferred Units, $0.01 par value;
500 units authorized; liquidation preference of $100,000;
500 units issued and outstanding at September 30, 2000
and December 31, 1999, respectively 50,000 50,000
Series E Cumulative Convertible Redeemable Preferred Units,
$0.01 par value; 684,931 units authorized; liquidation
preference of $36.50; 684,931 units issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 25,000 25,000
Series F Cumulative Convertible Redeemable Preferred Units,
$0.01 par value; 666,667 units authorized; liquidation
preference of $37.50; 666,667 units issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 25,000 25,000
Series G Cumulative Convertible Redeemable Preferred Units,
$0.01 par value; 641,026 units authorized; liquidation
preference of $39.00; 641,026 units issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 25,000 25,000
Series H Cumulative Convertible Redeemable Preferred Units,
$0.01 par value; 4,040,404 units authorized; liquidation
preference of $25.00; 2,200,000 units issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 100,000 100,000
----------- -----------
$ 296,500 $ 296,500
=========== ===========
</TABLE>
10
<PAGE>
7. PER UNIT DATA
Earnings per common unit of the Company for the three and nine months ended
September 30, 2000 and 1999 is computed based on weighted average common units
outstanding during the periods as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------
2000 1999
--------------------- --------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Weighted Average Common Operating 35.2 38.6 33.4 36.3
Partnership Units
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------
2000 1999
--------------------- ---------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Weighted Average Common Operating
Partnership Units 34.9 38.0 32.6 35.8
</TABLE>
A reconciliation of income (before extraordinary item) and units used to
calculate basic and diluted earnings per unit for the three months ended
September 30, 2000 and 1999 and nine months ended September 30, 2000 and 1999
follows:
11
<PAGE>
<TABLE>
<CAPTION>
Weighted Per Unit
Income Average Units Amount
-------------- -------------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C>
Three Months Ended September 30, 2000:
-------------------------------------
Income before extraordinary item $ 29,593
Income attributable to Preferred Units (5,925)
-----------
Earnings per unit - Basic
Income attributable to common unitholders
before extraordinary item $ 23,668 35,176 $ 0.67
Effect of dilutive securities:
Preferred units - Series A 1,452 2,640 (0.01)
Options - 771 (0.01)
----------- -------- -------
Earnings per unit - Diluted $ 25,120 38,587 $ 0.65
=========== ======== =======
Nine Months Ended September 30, 2000:
------------------------------------
Income before extraordinary item $ 85,221
Income attributable to Preferred Units (17,776)
-----------
Earnings per unit - Basic
Income attributable to common unitholders
before extraordinary item $ 67,445 34,859 $ 1.93
Effect of dilutive securities:
Preferred units - Series A 4,357 2,640 (0.02)
Options - 526 (0.02)
----------- -------- -------
Earnings per unit - Diluted $ 71,802 38,025 $ 1.89
=========== ======== ========
Three Months Ended September 30, 1999:
-------------------------------------
Income before extraordinary item $ 28,472
Income attributable to Preferred Units (3,272)
-----------
Earnings per unit - Basic
Income attributable to common unitholders
before extraordinary item $ 25,200 33,413 $ 0.75
Effect of dilutive securities:
Preferred units - Series A 1,452 2,640 (0.02)
Options - 288 (0.00)
----------- -------- -------
Earnings per unit - Diluted $ 26,652 36,341 $ 0.73
=========== ======== =======
Nine Months Ended September 30, 1999:
------------------------------------
Income before extraordinary item $ 70,086
Income attributable to Preferred Units (8,028)
-----------
Earnings per unit - Basic
Income attributable to common unitholders
before extraordinary item $ 62,058 32,569 $ 1.90
Effect of dilutive securities:
Preferred units - Series A and B 4,593 2,979 (0.04)
Options - 207 (0.00)
----------- -------- -------
Earnings per unit - Diluted $ 66,651 35,755 $ 1.86
=========== ======== =======
</TABLE>
12
<PAGE>
8. SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
senior management in deciding how to allocate resources and in assessing
performance.
Property Segments
The Company's primary business is the ownership and operation of
multifamily residential real estate. As such, the residential rental properties
constitute the three primary operating segments -- Core, Acquisition/Disposition
and Development portfolios -- depending upon the maturity of each property. Core
consists of all multifamily properties which have been owned more than one full
calendar year. Therefore, the 2000 Core represents properties owned as of
December 31, 1998. Acquisition/Disposition consists of purchased properties
which have not yet reflected one full calendar year of operations and disposed
residential properties. Development consists of properties which the Company has
constructed or is in the process of constructing which have not yet had a full
calendar year of stabilized operating results. On the first of January each
year, Acquisition and Development properties that meet the one-year requirement
are transferred to the Core portfolio.
The Company's fourth property segment is the Retail portfolio, which
reflects results for the one free standing retail property owned as of September
30, 2000 and Worldgate Centre, which was sold in June 2000.
The Company evaluates performance for the Property Segments based on Net
Operating Income ("NOI") which is the difference between Rental Revenue and
Operating Expenses, (which primarily excludes interest expense, general and
administrative costs and depreciation).
Property Service Business Segment
The Company also evaluates the separate financial information of its equity
investment in the Property Service Businesses. These businesses provide
professional services such as property management, furnished corporate apartment
rentals, engineering and technical consulting, and construction management to
both Company-owned properties and properties owned by third parties. Given the
similarities in the nature of services, customers and distribution methods, the
Company considers the Property Service Businesses to be one segment. The Company
evaluates performance for the Property Service Business segment based on Funds
from Operations ("FFO"), which is defined using 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, goodwill and non-real estate
assets, is not added back.
The accounting policies for all segments are the same as those described in
the summary of significant accounting policies in the Company's Annual Report on
Form 10-K.
13
<PAGE>
Information concerning operations by segment for the three and nine months
ended September 30, 2000 and 1999 was as follows (in thousands):
Property Segments
<TABLE>
<CAPTION>
Three Months Ended Nine Months ended
September 30, September 30,
-------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Operating Income
--------------------
Core Portfolio $ 40,421 $ 36,266 $ 119,782 $ 108,875
Acquisition/Disposition Portfolio 13,846 7,328 36,398 14,929
Development Portfolio 5,097 1,288 13,012 2,999
Retail Portfolio 424 1,603 3,583 5,079
------------ --------- ----------- ----------
Consolidated Total 59,788 46,485 172,775 131,882
Depreciation and Amortization (11,531) (8,363) (32,993) (24,304)
Equity in Income of Unconsolidated Properties 524 347 1,849 677
Equity in Income of Property Service
Businesses 2,890 2,127 5,045 3,255
Corporate General and Administrative Expenses (2,810) (2,156) (8,507) (6,785)
Net interest expense (19,268) (15,182) (57,109) (41,704)
----------- --------- ----------- ----------
Income before Gain on Sale and
Extraordinary Item $ 29,593 $ 23,258 $ 81,060 $ 63,021
=========== ========= ============ ==========
Revenues
--------
Core Portfolio $ 66,227 $ 61,260 $ 192,063 $ 178,891
Acquisition/Disposition Portfolio 23,300 12,428 63,685 25,884
Development Portfolio 8,424 3,049 20,997 6,421
Retail Portfolio 791 2,457 5,567 7,553
----------- --------- ----------- ----------
Consolidated Total $ 98,742 $ 79,194 $ 282,312 $ 218,749
=========== ========= =========== ==========
Real Estate Assets, gross
-------------------------
Core Portfolio $ 1,098,345 $ 902,902
Acquisition/Disposition Portfolio 600,340 435,494
Development Portfolio 272,924 216,617
Retail Portfolio 15,148 60,051
----------- ----------
Subtotal 1,986,757 1,615,064
Accumulated depreciation (262,189) (249,788)
----------- ----------
Consolidated Total, Net $ 1,724,568 $1,365,276
=========== ==========
</TABLE>
14
<PAGE>
Property Service Business Segment
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Funds from Operations $ 2,918 $ 2,233 $ 5,288 $ 3,577
Revenues 74,971 37,462 182,897 96,157
Depreciation/Amortization 1,486 645 4,326 1,604
</TABLE>
9. SUBSEQUENT EVENTS
On October 25, 2000, the Company acquired Harbour House, an 804-unit,
high-rise apartment property located on a 10.6 acre, oceanfront site in
Southeast Florida. The property consists of two 14-story towers constructed in
1962 and 1964, respectively, with luxury amenities and direct beachfront access.
The purchase price of $94.3 million was funded through draws on the Company's
line of credit. The Company plans to invest an additional $25 to $45 million
over the next several years, depending upon the incremental return on
investment, to upgrade and reposition the property.
In October 2000, the Company purchased an ownership interest in Broadband
Residential, Inc., a telecommunications company managed and owned by a
consortium of multifamily real estate companies and focused on developing
high-speed data, video and voice solutions for the multifamily industry. The
Company also agreed to provide Broadband Residential with access and exclusive
marketing and licensing rights for data, video and voice communications to
29,046 of the Company's apartment units, subject to present contractual
obligations.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
accompanying financial statements and notes thereto. The results of operations
for the three and nine months ended September 30, 2000 and 1999 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. (As used herein, the
term "Company" may also be used to mean Charles E. Smith Residential Realty
L.P., or its sole general partner, Charles E. Smith Residential Realty, Inc., or
both, unless the context indicates otherwise.)
FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes," "anticipates," "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., southeast Florida, Chicago,
and Boston metropolitan areas; the Company's ability to identify and secure
additional properties and sites that meet its criteria for acquisition or
development; the acceptance of the Company'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
Company'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 Company's core multifamily
properties increased approximately 8.1% in the third quarter of 2000 as compared
with 1999.
A schedule of portfolio statistics follows:
16
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY LP
--------------------------------------------------------------------------------
Residential Portfolio Statistics
For the Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
Average
Apartment Sq. Ft. GOI
Property Type Units Per Unit QTD 00
-------- ---- ----- -------- ---------
(in 000s)
<S> <C> <C> <C> <C>
CORE RESIDENTIAL PORTFOLIO
Washington, D.C.
1841 Columbia Road Mid-rise 115 635 $ 392
2501 Porter Street High-rise 202 757 1,093
Albemarle High-rise 235 1,122 1,040
Calvert-Woodley High-rise 136 909 572
Car Barn Garden 196 959 621
Cleveland House High-rise 216 897 915
Connecticut Heights High-rise 519 656 1,720
Corcoran House High-rise 138 528 441
Statesman High-rise 281 593 835
Van Ness South High-rise 625 957 2,459
The Kenmore High-rise 376 715 1,066
Tunlaw Gardens Garden 167 850 494
Tunlaw Park Mid-rise 120 855 485
--------- --------- ---------
3,326 808 $ 12,133
Northern Virginia
Crystal City
------------
The Bennington High-rise 348 798 1,227
Crystal House I High-rise 426 896 1,491
Crystal House II High-rise 402 896 1,343
Crystal Square High-rise 378 1,080 1,516
Crystal Place High-rise 180 915 790
Gateway Place High-rise 162 828 1,021
Water Park Towers High-rise 360 959 1,771
Crystal Plaza High-rise 540 1,124 2,288
Crystal Towers High-rise 912 1,118 3,579
Parc Vista High-rise 299 770 1,381
--------- --------- ---------
4,007 980 $ 16,407
Rosslyn/Ballston
----------------
Courthouse Plaza High-rise 396 838 1,845
Lincoln Towers High-rise 714 878 3,376
--------- --------- ---------
1,110 864 $ 5,221
Tysons/Dulles
-------------
Charter Oak Garden 262 1,098 876
Oaks of Tysons Garden 218 967 860
Bedford Village Garden 752 1,098 2,498
Patriot Village Garden 1,065 1,149 3,362
Westerly at Worldgate Garden 320 921 1,276
--------- --------- ---------
2,617 1,086 $ 8,872
Other
-----
Arlington Overlook Mid-rise 711 877 2,061
Berkeley Mid-rise 138 809 345
Boulevard of Old Town Garden 159 672 456
Columbia Crossing Garden 247 977 980
Concord Village Garden 531 925 1,503
Newport Village Garden 937 1,060 2,904
Orleans Village Garden 851 1,015 2,437
Skyline Towers High-rise 940 1,107 3,154
--------- --------- ---------
4,514 991 $ 13,840
Boston/Chicago
2000 Commonwealth High-rise 188 862 1,096
One East Delaware High-rise 306 704 2,021
McClurg Court High-rise 1,075 732 4,754
Cronin's Landing Mid-rise 281 1,062 1,883
--------- --------- ---------
1,850 791 $ 9,754
--------- --------- ---------
17,424 938 $ 66,227
--------- --------- ---------
<CAPTION>
Monthly % %
GOI Change Change
Per Unit From Occupancy From
Property QTD 00 QTD 99 QTD 00 QTD 99
-------- --------- ------ ------ ------
<S> <C> <C> <C> <C>
CORE RESIDENTIAL PORTFOLIO
Washington, D.C.
1841 Columbia Road $ 1,137 5.4% 99.6% -0.2%
2501 Porter Street 1,804 9.0% 97.3% -2.6%
Albemarle 1,476 12.1% 97.1% 0.7%
Calvert-Woodley 1,403 8.1% 97.9% -1.1%
Car Barn 1,056 10.4% 98.0% -1.3%
Cleveland House 1,412 11.1% 96.0% -1.7%
Connecticut Heights 1,105 12.7% 97.6% 0.8%
Corcoran House 1,066 17.5% 98.6% 1.0%
Statesman 990 15.7% 98.4% 3.5%
Van Ness South 1,311 9.4% 98.1% -0.4%
The Kenmore 945 11.9% 98.9% 0.4%
Tunlaw Gardens 985 13.9% 97.2% 0.1%
Tunlaw Park 1,347 12.7% 98.4% 1.6%
-------- -------- -------- --------
$ 1,216 11.3% 97.8% -0.1%
Northern Virginia
Crystal City
------------
The Bennington 1,175 3.1% 97.5% 0.6%
Crystal House I 1,167 4.9% 96.7% -1.4%
Crystal House II 1,114 5.3% 96.8% -1.6%
Crystal Square 1,337 6.5% 99.0% -0.3%
Crystal Place 1,464 5.0% 99.1% 1.2%
Gateway Place 2,102 19.2% 88.5% -4.5%
Water Park Towers 1,640 7.2% 96.0% 0.1%
Crystal Plaza 1,412 5.9% 98.6% -0.3%
Crystal Towers 1,308 6.3% 98.2% -0.7%
Parc Vista 1,539 1.5% 92.5% -5.4%
-------- -------- -------- --------
$ 1,365 6.1% 96.9% -1.1%
Rosslyn/Ballston
----------------
Courthouse Plaza 1,553 9.5% 94.0% -6.0%
Lincoln Towers 1,576 10.2% 97.1% -0.6%
-------- -------- -------- --------
$ 1,568 9.9% 96.0% -2.9%
Tysons/Dulles
-------------
Charter Oak 1,115 7.6% 96.0% -0.6%
Oaks of Tysons 1,316 21.6% 96.2% 0.1%
Bedford Village 1,107 9.7% 97.0% -0.7%
Patriot Village 1,052 7.6% 97.4% -0.8%
Westerly at Worldgate 1,328 9.6% 96.8% -0.8%
-------- -------- -------- --------
$ 1,130 9.7% 97.0% -0.4%
Other
-----
Arlington Overlook 966 9.4% 96.4% -1.1%
Berkeley 834 7.0% 98.4% 2.1%
Boulevard of Old Town 955 5.3% 96.6% 0.0%
Columbia Crossing 1,322 9.6% 98.9% 0.5%
Concord Village 943 6.6% 97.4% 0.6%
Newport Village 1,033 6.1% 97.6% -0.9%
Orleans Village 954 6.0% 98.6% 1.4%
Skyline Towers 1,118 4.8% 98.0% 0.8%
-------- -------- -------- --------
$ 1,022 6.5% 97.7% 0.2%
Boston/Chicago
2000 Commonwealth 1,944 6.7% 98.3% 1.7%
One East Delaware 2,201 7.9% 98.1% -0.6%
McClurg Court 1,474 7.0% 97.4% 1.2%
Cronin's Landing 2,234 7.5% 98.6% -0.1%
-------- -------- -------- --------
$ 1,758 7.3% 97.9% 0.7%
-------- -------- -------- --------
$ 1,267 8.1% 97.3% -0.4%
-------- -------- -------- --------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Monthly
Average GOI
Apartment Sq. Ft. GOI Per Unit
Property Type Units Per Unit QTD 00 QTD 00
-------- ---- ----- -------- --------- ---------
(in 000s)
<S> <C> <C> <C> <C> <C>
ACQUISITION PORTFOLIO
1999
----
Buchanan House (Crystal City, VA) High-rise 442 1,173 $ 2,159 $ 1,628
Park Lincoln (Chicago, IL) High-rise 139 581 527 1,264
Terrace (Chicago, IL) Garden 427 814 1,122 876
The Consulate (Washington, DC) High-rise 269 828 1,117 1,384
Countryside (Chicago, IL) Garden 720 872 2,084 965
Stonegate (Chicago, IL) Garden 1,158 581 2,532 729
Forte Towers (S.E. Florida) High-rise 1,339 772 3,335 830
Ocean View at Aventura (S.E. Florida) High-rise 1,199 1,080 3,404 946
2000
----
Ocean View at Sunset Pointe-North
(S.E. Florida) High-rise 527 987 1,520 961
Ocean View at Sunset Pointe-South
(S.E. Florida) High-rise 943 995 2,754 973
Dearborn Place (Chicago, IL) High-rise 185 706 1,022 1,841
Reston Landing (Tysons/Dulles, VA) Garden 400 995 1,672 1,394
---------- -------- -----------
7,748 876 $ 23,248
DEVELOPMENT PORTFOLIO
Courthouse Place (Rosslyn/Ballston, VA) High-rise 564 850 $ 2,528 $ 1,494
One Superior Place (Chicago, IL) High-rise 809 729 5,083 2,094
Park Connecticut (Washington, DC) High-rise 142 915 813 N/A
Alban Towers (Washington, DC)(1) Mid-rise 226 N/A N/A N/A
Park Millennium (Chicago, IL)(1) High-rise 480 N/A N/A N/A
---------- -----------
2,221 $ 8,424
---------- -----------
ALL RESIDENTIAL PROPERTIES 27,393 $ 97,899
========== ===========
PARTIALLY-OWNED PORTFOLIO
-------------------------
Renaissance (25% owned) High-rise 330 984 $ 1,335 $ 1,348
Springfield Station (48% owned) Garden/Mid-rise 631 909 2,230 1,178
Brandywine (25% owned) High-rise 306 1,009 1,264 1,277
Stoneridge at University Center
(40% owned)(1) Garden 630 N/A 188 N/A
---------- -----------
1,897 $ 5,017
========== ===========
<CAPTION>
% %
Change Change
From Occupancy From
Property QTD 99 QTD 00 QTD 99
-------- ------ ------ ------
<S> <C> <C> <C>
ACQUISITION PORTFOLIO
1999
----
Buchanan House (Crystal City, VA) N/A 98.5% N/A
Park Lincoln (Chicago, IL) N/A 98.0% N/A
Terrace (Chicago, IL) N/A 94.9% N/A
The Consulate (Washington, DC) N/A 96.3% N/A
Countryside (Chicago, IL) N/A 94.3% N/A
Stonegate (Chicago, IL) N/A 92.9% N/A
Forte Towers (S.E. Florida) N/A 95.1% N/A
Ocean View at Aventura (S.E. Florida) N/A 94.5% N/A
2000
----
Ocean View at Sunset Pointe-North
(S.E. Florida) N/A 92.5% N/A
Ocean View at Sunset Pointe-South
(S.E. Florida) N/A 93.2% N/A
Dearborn Place (Chicago, IL) N/A 98.2% N/A
Reston Landing (Tysons/Dulles, VA) N/A 98.2% N/A
DEVELOPMENT PORTFOLIO
Courthouse Place (Rosslyn/Ballston, VA) N/A 99.1% N/A
One Superior Place (Chicago, IL) N/A 99.9% N/A
Park Connecticut (Washington, DC) N/A N/A N/A
Alban Towers (Washington, DC)(1) N/A N/A N/A
Park Millennium (Chicago, IL)(1) N/A N/A N/A
ALL RESIDENTIAL PROPERTIES
PARTIALLY-OWNED PORTFOLIO
-------------------------
Renaissance (25% owned) 8.6% 98.7% 0.3%
Springfield Station (48% owned) N/A 97.4% N/A
Brandywine (25% owned) N/A 98.5% N/A
Stoneridge at University Center
(40% owned)(1) N/A N/A N/A
</TABLE>
(1) Property is currently under construction.
18
<PAGE>
RENTAL PROPERTIES
Revenues, expenses and income from the multifamily and retail properties
for the three and nine months ended September 30, 2000 and 1999 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
2000 1999(2) 2000 1999(2)
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Core Portfolio(1)
Revenues $ 66,227 $ 61,260 $ 192,063 $ 178,891
Expenses (25,806) (24,994) (72,281) (70,016)
----------- ----------- ---------- -----------
Income before depreciation $ 40,421 $ 36,266 $ 119,782 $ 108,875
=========== =========== ========== ===========
Acquisitions/Disposition Portfolio
Revenues $ 23,300 $ 12,428 $ 63,685 $ 25,884
Expenses (9,454) (5,100) (27,287) (10,955)
----------- ----------- ---------- -----------
Income before depreciation $ 13,846 $ 7,328 $ 36,398 $ 14,929
=========== =========== ========== ===========
Development Portfolio
Revenues $ 8,424 $ 3,049 $ 20,997 $ 6,421
Expenses (3,327) (1,761) (7,985) (3,422)
----------- ----------- ---------- -----------
Income before depreciation $ 5,097 $ 1,288 $ 13,012 $ 2,999
=========== =========== ========== ===========
Retail Portfolio
Revenues $ 791 $ 2,457 $ 5,567 $ 7,553
Expenses (367) (854) (1,984) (2,474)
------------ ----------- ----------- ------------
Income before depreciation $ 424 $ 1,603 $ 3,583 $ 5,079
=========== =========== =========== ===========
Total Rental Properties
Revenues $ 98,742 $ 79,194 $ 282,312 $ 218,749
Expenses (38,954) (32,709) (109,537) (86,867)
Depreciation (11,531) (8,363) (32,993) (24,304)
----------- ----------- ---------- -----------
Income from Rental Properties $ 48,257 $ 38,122 $ 139,782 $ 107,578
=========== =========== ========== ===========
</TABLE>
(1) Represents properties owned as of December 31, 1998.
(2) Prior year amounts have been reclassified to conform with current year
presentation.
19
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the Property Service Businesses for the
three and nine months ended September 30, 2000 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
2000 1999 2000 1999
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Total Property Service Businesses
Revenues $ 74,971 $ 37,462 $ 182,897 $ 96,157
Expenses (70,595) (34,690) (173,526) (91,298)
Depreciation/Amortization (1,486) (645) (4,326) (1,604)
----------- ----------- ---------- -------------
Income from Property Service Businesses $ 2,890 $ 2,127 $ 5,045 $ 3,255
=========== =========== ========== =============
</TABLE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 2000 to Three Months Ended
September 30, 1999.
Summary. Net income of the Operating Partnership increased $0.2 million, or
3.9%, from $28.5 million for the three months ended September 30, 1999 to $29.6
million for the three months ended September 30, 2000. Funds from Operations
("FFO") of the Operating Partnership increased $10.4 million, or 34.4%, from
$30.1 million to $40.5 million during the same period. The increases in FFO are
primarily attributable to net operating income growth of 11.5% on the core
portfolio and contributions from acquired and developed properties.
Rental Properties. Revenue from all rental properties increased $19.5
million, or 24.7%, from $79.2 million for the three months ended September 30,
1999 to $98.7 million for the three months ended September 30, 2000. Operating
expenses from all rental operations increased $6.3 million, or 19.1%, from $32.7
million during the third quarter of 1999 to $39.0 million during the current
quarter.
Core Portfolio. Revenue from the core portfolio increased $5.0 million, or
8.1%, over the prior year period resulting in average monthly revenue per
apartment unit of $1,267. This was primarily due to continued strong demand in
all submarkets, which allowed management to continue to aggressively raise
rents. In addition, the Company has been actively pursuing a selective kitchen
and/or bath renovation program, particularly in the Washington, D.C. submarket,
which has significantly enhanced its ability to increase rents. Management
estimates the return on such investments at a minimum of 15%. Overall, rent
potential increased 7.8% during the quarter as compared to prior years. However,
this was partly offset by a slight decrease in occupancy. Average economic
occupancy for the core portfolio was 97.3% for the three months ended September
30,
20
<PAGE>
2000 compared to 97.7% for the comparable prior year. Expenses for the core
portfolio increased $0.8 million, or 3.2%, due primarily to higher real estate
taxes and wages partly offset by lower utility costs due to a mild summer.
Acquisition/Disposition Portfolio. The acquisition properties (defined as
properties acquired subsequent to December 31, 1998) and the residential
disposition properties contributed approximately 56%, or $10.9 million, of the
total rental revenue increase and approximately $4.4 million of the total rental
expense increase. Results for the third quarter of 1999 reflect six acquisitions
and six disposition properties totaling 5,010 apartment units. Results for the
third quarter of 2000 reflect twelve acquisition properties and no dispositions
totaling 7,748 apartment units.
Development Portfolio. Courthouse Place reached stabilized occupancy in
September 1999 and produced net operating income of $1.8 million for the current
quarter, compared to $1.5 million in the prior year quarter.
One Superior Place reached stabilized occupancy in June 2000 and produced
net operating income of $2.9 million for the current quarter compared to a $0.2
million loss in the prior year quarter.
Park Connecticut reached stabilized occupancy in October 2000 and produced
net operating income of $0.3 million for the period. The property was not
operational during the prior year quarter.
Property Service Businesses. The Company uses the equity method of
accounting for its non-voting interest in the Property Service Businesses.
Income from Property Service Businesses increased $0.8 million in the third
quarter of 2000 compared to the prior year quarter. This was primarily due to
Consolidated Engineering Services, Inc. and affiliates as a result of both
internal growth and the acquisition of four businesses in late 1999 and four
businesses during 2000.
Other. Corporate general and administrative expenses increased 30.3% over
the prior year quarter due primarily to higher management costs associated with
geographic expansion as well as higher incentive compensation costs associated
with the Company's results for the quarter. Net interest expense increased $4.1
million during the quarter, or 26.9%, due to additional debt related to
acquisitions, lower capitalized interest on development properties and an
increase of 30 basis points in the Company's weighted average borrowing rate as
compared to the prior year.
21
<PAGE>
Comparison of Nine Months Ended September 30, 2000 to Nine Months Ended
September 30, 1999.
Summary. Net income of the Operating Partnership increased $15.5 million,
or 22.2%, from $69.7 million for the nine months ended September 30, 1999 to
$85.2 million for the nine months ended September 30, 2000. Funds from
Operations ("FFO") of the Operating Partnership increased $20.4 million, or
24.3%, from $84.2 million to $104.6 million during the same period
Rental Properties. Revenue from all rental properties increased $63.6
million, or 29.1%, from $218.7 million for the nine months ended September 30,
1999 to $282.3 million for the nine months ended September 30, 2000. Operating
expenses from all rental operations increased $22.6 million, or 26.1% from $86.9
million during the first nine months of 1999 to $109.5 million during the
current period.
Core Portfolio. Revenue from the core portfolio increased $13.2 million, or
7.4%, over the prior year period resulting in average monthly revenue per
apartment unit of $1,225. This was primarily due to continued strong demand in
all submarkets, particularly northwest Washington, D.C. Approximately 13% of
this growth is attributable to the Company's kitchen and bath renovation
program. Average economic occupancy for the core portfolio was 97.5% for the
nine months ended September 30, 2000 compared to 97.2% for the comparable prior
year. Expenses for the core portfolio increased $2.3 million, or 3.2%, due
primarily to expected increases in real estate taxes and higher wages due to
additional staffing at the properties, offset by utility savings due to mild
weather during the year.
Acquisition/Disposition Portfolio. The acquisition properties (defined as
properties acquired subsequent to December 31, 1998) and disposition properties
contributed approximately 60%, or $37.8 million, of the total rental revenue
increase and approximately $16.3 million of the total rental expense increase.
Development Portfolio. In June 1999, Courthouse Place completed delivery of
its 564 units. The property reached stabilized occupancy in September 1999 and
produced net operating income of $5.5 million for the current period, compared
to $2.5 million in the prior year period.
In June 2000, One Superior Place completed delivery of its 809 units. The
property reached stabilized occupancy in June 2000 and produced net operating
income of $7.4 million for the current period compared to a $0.2 million loss in
the prior year period.
Park Connecticut delivered initial units in March 2000 with final delivery
of its 142 units as of June 30, 2000. The property reached stabilized occupancy
in October 2000 and produced net operating income of $0.2 million for the
period.
Property Service Businesses. The Company uses the equity method of
accounting for its non-voting interest in the Property Service Businesses.
22
<PAGE>
Income from Property Service Businesses increased $1.8 million in the first
nine months of 2000 compared to the prior year period. This was primarily due to
contributions from Smith Management Construction and Consolidated Engineering
Services, Inc. ("CES") of $0.5 million and $2.3 million, respectively. CES's
growth is primarily due to internal and external acquisitions and expansion.
These increases were partially offset by a decrease of $0.8 million for Smith
Realty Company and Smith Corporate Living. This is primarily due to increased
personnel costs and the sale in 1999 of the retail management business for Smith
Realty Company, as well as weakness in the Chicago corporate furnished apartment
business for Smith Corporate Living.
Partially-Owned Portfolio. The Company's share of income from the
partially-owned portfolio totaled $1.9 million and $0.7 million for the nine
months ended September 30, 2000 and 1999, respectively. The increase is
primarily due to the fact that three of the properties were acquired as joint
venture interests in mid-1999.
Other. Corporate general and administrative expenses increased 25.4%
compared to the prior year period due primarily to higher personnel and
technology related costs particularly related to geographic expansion. Net
interest expense increased $15.4 million during the period, or 36.9%, primarily
due to additional debt related to acquisitions and development as well as higher
borrowing rates.
LIQUIDITY AND CAPITAL RESOURCES
Summary. Net cash flow provided by operating activities increased $22.9
million from $110.6 million for the nine months ended September 30, 1999 to
$133.5 million for the nine months ended September 30, 2000. That increase was
due primarily to an increase of $27.7 million in property operating income.
Net cash flow of $235.9 million was used by investment activities during
the nine months ended September 30, 2000 compared to $207.6 million during the
comparable prior year period. Approximately $27.9 million of the increase is due
to an increase in capital expenditures. Although cash acquisition and
development activity decreased $69.4 million during the current year, this was
offset by two cash property sales in which contributed $75.7 million in net cash
flows in 1999.
Net cash flows provided by financing activities were $91.8 million for the
nine months ended September 30, 2000, primarily comprised of $141.4 million of
net borrowings against the properties, lines of credit, and construction loans,
and $21.6 million of net cash proceeds from the sale of common stock, offset by
a $75.1 million cash outflow for dividends and distributions. The Company
declared a dividend of $0.585 per share for the third quarter of 2000; an
increase of 6.4% over the $0.55 per share dividend paid for each of the first
two quarters of 2000. On an annualized basis, the Company's dividend is now
$2.34 per share. Net cash flows provided by financing activities of $97.1
million in the comparable prior year period primarily consisted of $121.4
million of net cash proceeds from the sale of preferred stock and units, offset
by a $60.3 million cash outflow for dividends and distributions.
23
<PAGE>
Funds from Operations
FFO is defined by the National Association of Real Estate Investment Trusts
(NAREIT) as net income (loss), computed in accordance with Generally Accepted
Accounting Principles ("GAAP"), excluding gains (or losses) from debt
restructuring and property sales, plus depreciation/amortization of assets
unique to the real estate industry. FFO does not represent cash flow from
operating activities in accordance with GAAP (which, unlike FFO, 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 Company's performance or to cash flow as a measure of
liquidity or ability to make distributions. The Company considers FFO a
meaningful, additional measure of operating performance primarily because it
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 Company's presentation of FFO, using the
NAREIT definition, to similarly titled measures for other REITs may not
necessarily be meaningful due to possible differences in the application of the
NAREIT definition used by such REITs.
Funds from Operations for the three and nine months ended September 30,
2000 and 1999 are computed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Income of the Operating Partnership $ 29,593 $ 28,472 $ 85,221 $ 69,727
Preferred dividends (989) (1,820) (10,513) (3,808)
Depreciation of real property 11,531 8,363 32,993 24,304
Depreciation from unconsolidated properties 240 205 718 328
Amortization of goodwill 110 106 325 322
Gain on sale of property -- (5,214) (4,161) (7,065)
Extraordinary item -- -- -- 359
----------- ----------- ---------- -----------
Funds from Operations of the Operating
Partnership $ 40,485 $ 30,112 $ 104,583 $ 84,167
=========== =========== ========== ===========
</TABLE>
Property Acquisitions and Dispositions
In January 2000, the Company acquired two properties in southeast Florida,
Ocean View at Sunset Pointe-North, and Ocean View at Sunset Pointe-South, adding
1,470 units to the Acquisition Portfolio. The total capitalized cost of $102.9
million consisted of $8.1 million in proceeds from the December 1999 sale of one
multifamily property, with the balance drawn on the Company's line of credit.
24
<PAGE>
In April 2000, the Company acquired Dearborn Place, a 185-unit, 27-story
property, built in 1987 and located in downtown Chicago, one block from the
Company's One East Delaware property and three blocks from One Superior Place.
The $25.4 million transaction was funded through a combination of approximately
36,000 Operating Partnership units valued at $1.3 million, $13.9 million in
cash, and $10.2 million in assumed debt bearing an interest rate of 9.25%. The
assumed debt was paid off with funds drawn on the Company's line of credit.
In June 2000, the Company acquired Reston Landing, a newly developed
400-unit property, located in Reston, Virginia. The $43.7 million cash
transaction was primarily funded with proceeds from the tax deferred sale of
Worldgate Centre, a retail center located in Herndon, Virginia, for
approximately $41 million. The Company recognized a gain on the sale of $4.2
million.
On October 25, 2000, the Company acquired Harbour House, an 804-unit,
high-rise apartment property located on a 10.6 acre, oceanfront site in
Southeast Florida. The property consists of two 14-story towers constructed in
1962 and 1964, respectively, with luxury amenities and direct beachfront access.
The purchase price of $94.3 million was funded through draws on the Company's
line of credit. The Company plans to invest an additional $25 to $45 million
over the next several years, depending upon the incremental return on
investment, to upgrade and reposition the property.
Development
As of September 30, 2000, the Company had the following properties under
construction:
<TABLE>
<CAPTION>
Number Units Initial Estimated Estimated Estimated
of Units Delivered Delivery Completion Stabilization Cost
-------- --------- -------- ---------- ------------- ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Stoneridge at
University Center
(Tysons/Dulles)(1) 630 110 June 2000 Q3, 2001 Q1, 2002 $ 66
Alban Towers
(Washington, DC)(2) 226 N/A Q2, 2001 Q3, 2001 Q4, 2001 58
Park Millennium
(Chicago, IL) 480 N/A Q2, 2002 Q4, 2002 Q1, 2003 106
------ ---- ----------
1,336 110 $ 230
====== ==== ==========
</TABLE>
(1) The Company has a 40% ownership interest.
(2) The Company owns substantially all of the economic interest.
25
<PAGE>
Commitments
As of September 30, 2000, the Company had executed contracts to purchase
multifamily properties under construction as follows:
<TABLE>
<CAPTION>
Number Estimated Purchase Estimated
of Units Completion Date Cost
--------- ---------- ------------ ------------
(in millions)
<S> <C> <C> <C> <C>
New River Village
(Ft. Lauderdale, FL) 240 Q4, 2000 Q4, 2000 $ 34
Wilson Boulevard
(Rosslyn/Ballston) 220 Q4, 2000 Q4, 2000 30
Ballston Place
(Rosslyn/Ballston) 383 Q2, 2001 Q4, 2001 54
----- -------
843 $ 118
===== =======
</TABLE>
These contracts are contingent upon satisfactory completion of construction
and attainment of final certificates of occupancy by the owners. As of September
30, 2000, the Company had posted two letters-of-credit totaling $10.8 million in
accordance with two of the contracts each to be drawn only in the event the
Company defaults on its contractual obligation to purchase the completed asset.
Debt
In February 2000, the Company drew $49.4 million on its Fannie Mae credit
facility at 8.0% for ten years. The Company used $37 million of the proceeds to
repay a portion of its line of credit with the balance used for working capital
needs. Ocean View at Aventura was added to the collateral pool in connection
with this draw.
In May 2000, the Company obtained a ten-year, $300 million secured line of
credit from Freddie Mac. Initial availability under the agreement is
approximately $125 million, which can increase to $300 million with appreciation
in value of the properties collateralizing the borrowings and/or with the
addition of properties to the collateral pool. Loan costs of $0.9 million were
capitalized in connection with this agreement. The Company made an initial draw
of $60 million; substantially all of which was used to pay down debt on the
Company's $185 million line of credit.
In June 2000, the Company decreased the commitment on its $185 million line
of credit to $100 million and decreased the commitment on its $100 million line
to $50 million.
In June 2000, the Company closed on four mortgage loans totaling $53.5
million. Each of the loans has a fixed interest rate of 7.92%. The loans require
monthly payments of interest only through July 2010, at which time principal
amortization begins using a 20-year amortization with a balloon payment due June
28, 2012. The loans are collateralized by four properties.
In September 2000, the Company closed on three mortgage loans totaling
$60.8 million. The loans each have a fixed interest rate of 7.61% and a 15-year
term. The loans require payments of
26
<PAGE>
interest only for a minimum of ten years with a balloon payment due September
2015. All three loans are cross-defaulted and cross-collateralized.
In September 2000, the Company converted $61.8 million of its $300 million
line of credit to mortgage debt. The new mortgage has a fixed interest rate of
7.66% and a 14-year term. Payments of interest only are required for a minimum
of ten years with a balloon payment due September 2014. The loan is
collateralized by one property. With the conversion of this portion of the line
of credit, the availability under the line decreased from $125.3 million to
$63.5 million.
As of September 30, 2000, the Company had mortgage indebtedness and other
borrowings, which carried a weighted average interest rate of 7.33%, as follows:
Dollars in % of
Thousands Total
--------- -----
Fixed Rate Debt:
Mortgages $ 1,038,545 92.6%
Variable Rate Debt:
$300M Line of Credit 6,000 0.5%
$100M Line of Credit -- 0.0%
$50M Line of Credit -- 0.0%
Construction Loans 76,414 6.9%
----------- ------
$ 1,120,959 100.0%
=========== ======
As of September 30, 2000, the Company had $228.6 million of unused
borrowing capacity on lines of credit and construction loans. (Unused borrowing
capacity includes $57.5 million from the $300 million line, which reflects the
borrowing capacity currently available under the line of $63.5 million, less $6
million used at September 30, 2000.) Amounts outstanding under lines of credit
averaged $108.4 million for the nine months ended September 30, 2000 compared to
$84.6 million for the nine months ended September 30, 1999.
In connection with the development of Stoneridge at University Center in
Loudoun County, Virginia (a 40%-owned property), SPH University Center LLC
obtained a $31.0 million interest-only construction loan in May 2000 with
interest at LIBOR plus 125 basis points, payable monthly, due May 10, 2003. As
of September 30, 2000, the outstanding balance on the loan was $4.4 million.
As of September 30, 2000, the Company's Debt to Total Market Capitalization
Ratio was 36.1% (based on 21.8 million common shares, 7.2 million convertible
preferred shares and units, and 13.6 million partnership units outstanding at a
common stock price of $45.375, and $50 million of perpetual preferred stock)
versus 38.6% as of December 31, 1999 and 38.8% as of September 30, 1999.
The Company's Interest Coverage Ratio, excluding gains on sales and
extraordinary items, for the nine months ended September 30, 2000 was 3.32 to 1
compared to 3.18 to 1 for the comparable prior year period.
27
<PAGE>
Capital Expenditures
For the nine months ended September 30, 2000, total capital improvements
were $42.6 million, of which $25.3 million were for the core portfolio.
Approximately 63% of the capital expenditures on the core portfolio in 2000 are
considered by management to be non-recurring, repositioning improvements which
directly result in higher revenues. These expenditures are primarily for the
kitchen and bath renovation program which management estimates generates a 15%
return. The remaining capital expenditures on the core portfolio indirectly
influence the Company's ability to generate revenues and are considered more
recurring in nature and non-discretionary. A summary of core capital
expenditures for the period follows:
<TABLE>
<CAPTION>
Number Average
Total $ of Cost
Spent Units Per Unit
-------------- -------- ----------
(In Thousands)
Expenditure Type
----------------
<S> <C> <C> <C>
Core Repositioning
Kitchen/Bath $ 15,006 1,261 $ 11,892
Washer/Dryer 885 276 3,206
---------
Total Core Repositioning $ 15,891
Recurring Improvements 9,421 17,424 $ 541
---------
Total Capital Expenditures - Core Portfolio $ 25,312
=========
</TABLE>
Year 2000
The Company did not experience any malfunctions or errors in its operating
or business systems when the date changed from 1999 to 2000. Based on operations
since January 1, 2000, the Company does not expect any significant impact on its
on-going business as a result of the "Year 2000 Issue".
28
<PAGE>
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On September 14, 2000, the Company issued 219,361 unregistered
shares of Class A Common Stock of the Company for $9,200,000 or
$41.94 per share, to CES pursuant to a Common Stock Purchase
Agreement between CES and the Company dated September 14, 2000.
CES subsequently transferred these shares in exchange for shares
of Aircond Corporation, a Georgia corporation, in a cash and
securities acquisition of a 100% interest in that corporation.
The Company believes that the shares described above were exempt
from registration under the Securities Act of 1933, as amended
(the "Securities Act") by virtue of Section 4(2) of the Securities
Act and the provisions of Rule 506 of Regulation D.
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on form 8-K:
A Form 8-K dated October 25, 2000 was filed on November 9,
2000 to report the Company's acquisition of Harbour House
located in Southeast Florida.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
November 13, 2000 By: Charles E. Smith Residential Realty, Inc.,
its General Partner
By: /s/ W. D. Minami
-----------------------------
W. D. Minami
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
Charles E. Smith Residential Realty L.P.
(on behalf of the Registrant and as Principal
Financial Officer)
By: /s/ Steven E. Gulley
-----------------------------
Steven E. Gulley
Chief Accounting Officer
Charles E. Smith Residential Realty, Inc.
30
