<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, 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 August 4, 2000, there were 35,153,248 Common Units of Limited
Partnership of the Registrant issued and outstanding.
<PAGE>
FORM 10-Q
INDEX
Pages
-----
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Charles E. Smith Residential Realty L.P. Financial
Statements as of June 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 28
SIGNATURES 31
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>
June 30, 2000 December 31, 1999
---------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, net $ 1,652,981 $ 1,369,416
Rental property under development 51,662 169,626
Cash - 10,557
Escrow funds 6,641 18,309
Investment in and advances to Property Service Businesses 61,230 70,282
Investment in unconsolidated properties 29,649 22,338
Deferred charges, net 16,545 16,727
Security deposits 8,219 4,058
Other assets 12,468 23,465
---------------- ---------------
$ 1,839,395 $ 1,704,778
================ ===============
LIABILITIES AND EQUITY
Liabilities
Mortgage loans and notes payable:
Mortgage loans $ 917,527 $ 817,278
Construction loans 86,306 80,045
Line of credit 74,000 72,000
---------------- ---------------
Total mortgage loans and notes payable 1,077,833 969,323
Accounts payable and accrued expenses 50,619 44,480
Security deposits 8,219 4,058
---------------- ---------------
Total liabilities 1,136,671 1,017,861
---------------- ---------------
Commitments and contingencies
Other Limited Partners' Interest
Preferred units - Series H Cumulative Convertible Redeemable
Preferred Units, 1,800,000 units issued and outstanding at
June 30, 2000 and December 31, 1999 45,000 45,000
Common units - 13,610,460 and 13,855,404 units issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively, at redemption value 517,197 490,135
---------------- ---------------
562,197 535,135
---------------- ---------------
Partner's Equity
Preferred units 251,500 251,500
Common units - 21,268,954 and 20,673,039 units issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively (110,973) (99,718)
---------------- ---------------
Total partner's equity 140,527 151,782
---------------- ---------------
$ 1,839,395 $ 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 Six Months
Ended June 30, Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Rental Properties:
Revenues $ 94,716 $ 70,522 $ 183,570 $ 139,555
Expenses
Operating costs (27,048) (21,276) (54,981) (43,430)
Real estate taxes (8,036) (5,324) (15,602) (10,728)
Depreciation and amortization (10,895) (7,713) (21,462) (15,941)
------------- ------------ ------------ ------------
Total expenses (45,979) (34,313) (92,045) (70,099)
Equity in income of unconsolidated properties 542 214 1,325 330
Equity in income of Property Service Businesses 1,636 1,126 2,155 1,128
Corporate general and administrative expenses (3,002) (2,420) (5,697) (4,629)
Interest income 81 53 144 97
Interest expense (20,129) (13,471) (37,985) (26,619)
------------- ------------ ------------ ------------
Income before gain on sales and extraordinary item 27,865 21,711 51,467 39,763
Gain (loss) on sales 4,161 (7) 4,161 1,851
------------- ------------ ------------ ------------
Income before extraordinary item 32,026 21,704 55,628 41,614
Extraordinary item - loss on extinguishment of debt - - - (359)
------------- ------------ ------------ ------------
Net income 32,026 21,704 55,628 41,255
Less: Income attributable to preferred units (5,926) (2,401) (11,851) (4,755)
------------- ------------ ------------ ------------
Net income attributable to common units $ 26,100 $ 19,303 $ 43,777 $ 36,500
============= ============ ============ ============
Earnings per common unit - basic
Income before extraordinary item $ 0.75 $ 0.60 $ 1.26 $ 1.15
Extraordinary item - - - (0.01)
------------- ------------ ------------ ------------
Net income $ 0.75 $ 0.60 $ 1.26 $ 1.14
============= ============ ============ ============
Earnings per common unit - diluted
Income before extraordinary item $ 0.73 $ 0.59 $ 1.24 $ 1.14
Extraordinary item - - - (0.01)
------------- ------------ ------------ ------------
Net income $ 0.73 $ 0.59 $ 1.24 $ 1.13
============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF PARTNER'S EQUITY AND OTHER LIMITED PARTNERS' INTEREST
(Dollars in Thousands)
<TABLE>
<CAPTION>
General Partner's General and Other Limited
Limited Interest Partners' Interest
----------------------------- ----------------------------
Series H
Preferred Common Common Preferred
Units Units Units Units
------------ ------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ 141,867 $ (198,543) $ 426,258 $ -
Units exchanged for acquisitions - - 42,426 -
Adjustment for grants - - 762 -
Net income - 95,278 58,536 -
Contribution by Charles E. Smith Residential Realty, Inc. 130,000 30,625 - -
Proceeds from issuance of Preferred units - - - 45,000
Conversion of Preferred units to Common units (20,367) 20,367 - -
Offering costs - (4,837) - -
Distributions - (56,247) (28,637) -
Other - 3,596 833 -
Adjustment to reflect Other Limited Partners' Interest
at redemption value - 10,043 (10,043) -
------------ ------------ ------------ ------------
Balance, December 31, 1999 $ 251,500 $ (99,718) $ 490,135 $ 45,000
Units exchanged for acquisitions - - 1,270 -
Amortization of grants - - 435 -
Net income - 36,451 19,177 -
Contribution by Charles E. Smith Residential Realty, Inc. - 3,538 - -
Distributions - (34,717) (15,141) -
Exercise of options - 4,825 - -
Other - (31) - -
Adjustment to reflect Other Limited Partners' Interest
at redemption value - (21,321) 21,321 -
------------ ------------ ------------ ------------
Balance, June 30, 2000 (Unaudited) $ 251,500 $ (110,973) $ 517,197 $ 45,000
============ ============ ============ ============
Units issued and outstanding at June 30, 2000 6,833,449 21,268,954 13,610,460 1,800,000
============ ============ ============ ============
Units issued and outstanding at December 31, 1999 6,833,449 20,673,039 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 Six Months
Ended June 30,
----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 100,726 $ 58,867
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (133,228) (120,789)
Additions to rental property (24,711) (8,368)
Disposition of rental property - 75,666
Decrease (increase) in investment in and advances to Property
Service Businesses 9,052 (5,428)
Increase in investment in unconsolidated properties (7,371) (3,857)
Acquisition deposits and other (8,023) 2,076
------------- -------------
Net cash used in investing activities (164,281) (60,700)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in deferred charges (3,753) 296
Mortgage loans, net 90,016 60,626
Lines of credit, net 2,000 (53,000)
Construction loans, net 6,261 37,810
Prepayment penalties - (1,038)
Dividends and distributions - Common (39,142) (34,040)
Dividends and distributions - Preferred (10,716) (5,512)
Other, net 8,332 1,696
------------- -------------
Net cash provided by financing activities 52,998 6,838
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,557) 5,005
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,557 -
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ 5,005
============= =============
SUPPLEMENTAL INFORMATION:
Capitalized interest $ 4,784 $ 4,175
Purchase of property in exchange for Operating Partnership units 1,270 14,406
Purchase of property in exchange for assumption of debt 10,233 28,169
Proceeds from sale of rental property held in escrow 40,997 17,712
Purchase of property with escrow proceeds 49,124 17,712
Purchase of joint venture interest in exchange for Operating
Partnership units - 679
</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 June 30, 2000 and the results of
operations for the interim periods ended June 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 June 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 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.
7
<PAGE>
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 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 repay a portion of its $185 million line of credit.
The outstanding balance at June 30, 2000 was $69 million at an average interest
rate of 7.38%.
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 June 2000, with the new capacity from the Freddie Mac facility in place,
the Company elected to decrease the commitment on its $185 million line of
credit to $100 million, and decrease the commitment on its $100 million line of
credit to $50 million.
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 line of
credit from a bank group, which is guaranteed by the Operating Partnership.
Draws on the line bear 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 June 30, 2000, CES had drawn $36.1 million on the line at
an average interest rate of 7.75% to fund acquisition activities and repay
intercompany debt.
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
8
<PAGE>
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.
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 June 30, 2000, no draws
had been made on the loan.
9
<PAGE>
6. PREFERRED UNITS
The following table sets forth the Company's issued and outstanding
preferred units:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(in thousands)
<S> <C> <C>
Series A Cumulative Convertible Redeemable Preferred Units,
$0.01 par value; 2,640,325 units authorized; liquidation
preference of $27.08; 2,640,325 units issued and
outstanding at June 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 June 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 June 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 June 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 June 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; 4,000,000 units issued and outstanding
at June 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 six months ended
June 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 June 30,
---------------------------------------------------------
2000 1999
-------------------------- ------------------------
Basic Diluted Basic Diluted
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Weighted Average Common Operating
Partnership Units 34.8 39.3 32.4 32.6
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------
2000 1999
-------------------------- ------------------------
Basic Diluted Basic Diluted
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Weighted Average Common Operating
Partnership Units 34.7 37.7 32.1 32.3
</TABLE>
A reconciliation of income (before extraordinary item) and units used to
calculate basic and diluted earnings per unit follows:
11
<PAGE>
<TABLE>
<CAPTION>
Weighted Per Unit
Income Average Units Amount
-------------- -------------- ---------
(In Thousands) (In Thousands)
<S> <C> <C> <C>
Three Months Ended June 30, 2000:
--------------------------------
Income before extraordinary item $ 32,026
Income attributable to Preferred Units (5,926)
--------
Earnings per unit - Basic
Income attributable to common unitholders
before extraordinary item 26,100 34,772 $ 0.75
Effect of dilutive securities:
Preferred units - Series A, E, & F 2,422 3,992 (0.01)
Options -- 499 (0.01)
-------- ------ ------
Earnings per unit - Diluted $ 28,522 39,263 $ 0.73
======== ====== ======
Six Months Ended June 30, 2000:
------------------------------
Income before extraordinary item $ 55,628
Income attributable to Preferred Units (11,851)
--------
Earnings per unit - Basic
Income attributable to common unitholders
before extraordinary item 43,777 34,699 $ 1.26
Effect of dilutive securities:
Preferred units - Series A 2,905 2,640 (0.01)
Options -- 399 (0.01)
-------- ------ ------
Earnings per unit - Diluted $ 46,682 37,738 $ 1.24
======== ====== ======
Three Months Ended June 30, 1999:
--------------------------------
Income before extraordinary item $ 21,704
Income attributable to Preferred Units (2,401)
--------
Income attributable to common unitholders
before extraordinary item 19,303 32,378 $ 0.60
Effect of dilutive securities:
Options -- 254 (0.01)
-------- ------ ------
Earnings per unit - Diluted $ 19,303 32,632 $ 0.59
======== ====== ======
Six Months Ended June 30, 1999:
------------------------------
Income before extraordinary item $ 41,614
Income attributable to Preferred Units (4,755)
--------
Income attributable to common unitholders
before extraordinary item 36,859 32,139 $ 1.15
Effect of dilutive securities:
Options -- 179 (0.01)
-------- ------ ------
Earnings per unit - Diluted $ 36,859 32,318 $ 1.14
======== ====== ======
</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 June 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 six months
ended June 30, 2000 and 1999 was as follows (in thousands):
Property Segments
<TABLE>
<CAPTION>
Three Months Ended Six Months ended
June 30, June 30,
--------------------- ------------------------
2000 1999 2000 1999
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Net Operating Income
--------------------
Core Portfolio $ 41,269 $ 37,266 $ 79,361 $ 72,609
Acquisition/Disposition Portfolio 12,208 3,867 22,552 7,601
Development Portfolio 4,633 1,025 7,915 1,711
Retail Portfolio 1,522 1,764 3,159 3,476
-------- -------- ---------- ----------
Consolidated Total 59,632 43,922 112,987 85,397
Depreciation and Amortization (10,895) (7,713) (21,462) (15,941)
Equity in Income of Unconsolidated Properties 542 214 1,325 330
Equity in Income of Property Service
Businesses 1,636 1,126 2,155 1,128
Corporate General and Administrative Expenses (3,002) (2,420) (5,697) (4,629)
Net interest expense (20,048) (13,418) (37,841) (26,522)
-------- -------- ---------- ----------
Income before Gain on Sale and
Extraordinary Item $ 27,865 $ 21,711 $ 51,467 $ 39,763
======== ======== ========== ==========
Revenues
--------
Core Portfolio $ 64,249 $ 59,445 $ 125,836 $ 117,631
Acquisition/Disposition Portfolio 21,255 6,730 40,385 13,456
Development Portfolio 6,883 1,805 12,573 3,372
Retail Portfolio 2,329 2,542 4,776 5,096
-------- -------- ---------- ----------
Consolidated Total $ 94,716 $ 70,522 $ 183,570 $ 139,555
======== ======== ========== ==========
Real Estate Assets, gross
-------------------------
Core Portfolio $1,088,078 $1,054,161
Acquisition/Disposition Portfolio 592,015 142,553
Development Portfolio 260,131 169,671
Retail Portfolio 15,144 60,083
---------- ----------
Subtotal 1,955,368 1,426,468
Accumulated depreciation (250,725) (241,556)
---------- ----------
Consolidated Total, Net $1,704,643 $1,184,912
========== ==========
</TABLE>
Property Service Business Segment
<TABLE>
<CAPTION>
Three Months Ended Six Months ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Funds from Operations $ 1,744 $ 1,234 $ 2,370 $ 1,343
Revenues 58,025 31,301 107,926 58,695
Depreciation 1,444 525 2,840 960
</TABLE>
14
<PAGE>
9. SUBSEQUENT EVENTS
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 addition, CES purchased Betlem Service Corporation in July 2000, 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.
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 six months ended June 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 second quarter of 2000 as
compared with 1999.
A schedule of portfolio statistics follows:
16
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
Residential Portfolio Statistics
For the Quarter Ended June 30, 2000
<TABLE>
<CAPTION>
Monthly % %
Average GOI Change Change
Apartment Sq. Ft. GOI Per Unit From Occupancy From
Property Type Units Per Unit QTD 00 QTD 00 QTD 99 QTD 00 QTD 99
-------- ---- ----- -------- -------- -------- ------ ------ ------
(in 000s)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CORE RESIDENTIAL PORTFOLIO
Washington, D.C.
1841 Columbia Road Mid-rise 115 635 $ 387 $ 1,122 11.0% 99.8% 0.4%
2501 Porter Street High-rise 202 757 1,040 1,715 4.1% 97.8% -1.9%
Albemarle High-rise 235 1,122 1,009 1,431 11.2% 97.9% -0.3%
Calvert-Woodley High-rise 136 909 557 1,365 9.5% 98.9% -0.2%
Car Barn Garden 196 959 608 1,035 9.1% 99.1% 0.2%
Cleveland House High-rise 216 897 889 1,372 14.1% 97.8% 0.3%
Connecticut Heights High-rise 519 656 1,660 1,066 10.7% 98.1% -0.2%
Corcoran House High-rise 138 528 391 944 9.0% 96.3% -3.4%
Statesman High-rise 281 593 796 945 6.8% 97.6% -2.4%
Van Ness South High-rise 625 957 2,385 1,272 8.4% 98.2% -0.9%
The Kenmore High-rise 376 715 1,016 901 11.2% 97.0% -1.1%
Tunlaw Gardens Garden 167 850 474 947 15.5% 97.8% 1.4%
Tunlaw Park Mid-rise 120 855 459 1,276 14.6% 97.9% 2.6%
---------- --------- ---------- --------- -------- ----------- -------
3,326 808 $11,671 $ 1,170 9.8% 98.0% -0.7%
Northern Virginia
Crystal City
------------
The Bennington High-rise 348 798 1,212 1,161 3.1% 97.8% 0.8%
Crystal House I High-rise 426 896 1,480 1,158 9.2% 98.6% 1.4%
Crystal House II High-rise 402 896 1,332 1,105 7.9% 98.7% 1.2%
Crystal Square High-rise 378 1,080 1,477 1,302 7.6% 98.9% 0.5%
Crystal Place High-rise 180 915 765 1,417 4.7% 98.2% 2.1%
Gateway Place High-rise 162 828 980 2,017 12.9% 96.9% 5.9%
Water Park Towers High-rise 360 959 1,753 1,623 7.3% 97.0% 2.6%
Crystal Plaza High-rise 540 1,124 2,277 1,405 7.9% 99.3% 0.3%
Crystal Towers High-rise 912 1,118 3,508 1,282 6.1% 98.5% -0.3%
Parc Vista High-rise 299 770 1,372 1,529 17.4% 95.2% -1.7%
---------- --------- ---------- --------- -------- ----------- -------
4,007 980 $16,156 $ 1,344 8.0% 98.1% 0.8%
Rosslyn/Ballston
----------------
Courthouse Plaza High-rise 396 838 1,795 1,511 11.5% 100.0% 5.1%
Lincoln Towers High-rise 714 878 3,157 1,474 8.4% 95.7% 2.0%
---------- --------- ---------- --------- -------- ----------- -------
1,110 864 $ 4,952 $ 1,487 9.5% 97.7% 3.1%
Tysons/Dulles
-------------
Charter Oak Garden 262 1,098 836 1,064 3.1% 97.1% -1.1%
Oaks of Tysons Garden 218 967 723 1,106 -0.9% 97.0% 0.1%
Bedford Village Garden 752 1,098 2,405 1,066 8.3% 97.9% 0.2%
Patriot Village Garden 1,065 1,149 3,321 1,039 10.1% 98.8% 2.5%
Westerly at Worldgate Garden 320 921 1,189 1,239 1.1% 97.6% -0.8%
---------- --------- ---------- --------- -------- ----------- -------
2,617 1,086 $ 8,474 $ 1,079 6.5% 98.0% 0.8%
Other
-----
Arlington Overlook Mid-rise 711 877 1,960 919 10.9% 96.2% 1.4%
Berkeley Mid-rise 138 809 338 817 8.8% 98.6% 3.3%
Boulevard of Old Town Garden 159 672 445 933 4.9% 97.9% 0.1%
Columbia Crossing Garden 247 977 958 1,293 8.3% 99.3% 1.0%
Concord Village Garden 531 925 1,475 926 8.7% 97.6% 2.0%
Newport Village Garden 937 1,060 2,840 1,010 6.9% 98.2% 0.7%
Orleans Village Garden 851 1,015 2,398 939 6.2% 98.8% 1.4%
Skyline Towers High-rise 940 1,107 3,108 1,102 6.9% 98.3% 2.0%
---------- --------- ---------- --------- -------- ----------- -------
4,514 991 $13,522 $ 999 7.6% 98.0% 1.4%
Boston/Chicago
2000 Commonwealth High-rise 188 862 1,095 1,942 7.4% 99.0% 1.4%
One East Delaware High-rise 306 704 2,014 2,193 11.4% 98.1% 0.0%
McClurg Court High-rise 1,075 732 4,556 1,413 5.4% 96.1% 0.5%
Cronin's Landing Mid-rise 281 1,062 1,809 2,146 9.6% 99.0% 3.0%
---------- --------- ---------- --------- -------- ----------- -------
1,850 791 $ 9,474 $ 1,707 7.6% 97.3% 1.0%
---------- --------- ---------- --------- -------- ----------- -------
17,424 938 $64,249 $ 1,229 8.1% 97.9% 0.9%
---------- --------- ---------- --------- -------- ----------- -------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Monthly % %
Average GOI Change Change
Apartment Sq. Ft. GOI Per Unit From Occupancy From
Property Type Units Per Unit QTD 00 QTD 00 QTD 99 QTD 00 QTD 99
-------- ---- ----- -------- -------- -------- ------ ------ ------
(in 000s)
ACQUISITION PORTFOLIO
1999
----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Buchanan House (Crystal City, VA) High-rise 442 1,173 $ 2,102 $1,585 N/A 97.8% N/A
Park Lincoln (Chicago, IL) High-rise 139 581 501 1,201 N/A 95.4% N/A
Terrace (Chicago, IL) Garden 427 814 1,114 870 N/A 95.9% N/A
The Consulate (Washington, DC) High-rise 269 828 1,043 1,292 N/A 96.1% N/A
Countryside (Chicago, IL) Garden 720 872 2,047 947 N/A 94.1% N/A
Stonegate (Chicago, IL) Garden 1,158 581 2,505 721 N/A 92.6% N/A
Forte Towers (S.E. Florida) High-rise 1,339 772 3,212 800 N/A 94.8% N/A
Ocean View at Aventura (S.E. Florida) High-rise 1,199 1,080 3,489 970 N/A 95.1% N/A
2000
----
Ocean View at Sunset Pointe-North
(S.E. Florida) High-rise 527 987 1,556 984 N/A 92.8% N/A
Ocean View at Sunset Pointe-South
(S.E. Florida) High-rise 943 995 2,819 996 N/A 93.3% N/A
Dearborn Place (Chicago, IL) High-rise 185 706 747 N/A N/A N/A N/A
Reston Landing (Tysons/Dulles, VA) Garden 400 995 N/A N/A N/A N/A N/A
---------- -------- ----------
7,748 876 $ 21,135
DEVELOPMENT PORTFOLIO
Courthouse Place (Rosslyn/Ballston, VA) High-rise 564 850 $ 2,465 $1,457 N/A 98.9% N/A
One Superior Place (Chicago, IL) High-rise 809 729 4,090 1,685 N/A 99.5% N/A
Park Connecticut (Washington, DC) High-rise 142 915 328 N/A N/A N/A N/A
Alban Towers (Washington, DC)(1) Mid-rise 226 N/A N/A N/A N/A N/A N/A
Park Millenium (Chicago, IL)(1) High-rise 480 N/A N/A N/A N/A N/A N/A
---------- ----------
2,221 6,883
ALL RESIDENTIAL PROPERTIES 27,393 $ 92,267
========== ==========
PARTIALLY-OWNED PORTFOLIO
-------------------------
Renaissance (25% owned) High-rise 330 984 $ 1,286 N/A N/A N/A N/A
Springfield Station (48% owned) Garden/Mid-rise 631 909 2,180 N/A N/A N/A N/A
Brandywine (25% owned) High-rise 306 1,009 1,239 N/A N/A N/A N/A
Stoneridge at University Center
(40% owned)(1) Garden 630 N/A N/A N/A N/A N/A N/A
---------- ----------
1,897 $ 4,705
========== ==========
</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 six months ended June 30, 2000 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
2000 1999(2) 2000 1999(2)
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Core Portfolio(1)
Revenues $ 64,249 $ 59,445 $ 125,836 $117,631
Expenses (22,980) (22,179) (46,475) (45,022)
-------- -------- ------- ---------
Income before depreciation $ 41,269 $ 37,266 $79,361 $ 72,609
======== ======== ======= =========
Acquisitions/Disposition Portfolio
Revenues $ 21,255 $ 6,730 $40,385 $ 13,456
Expenses (9,047) (2,863) (17,833) (5,855)
-------- -------- ------- ---------
Income before depreciation $ 12,208 $ 3,867 $22,552 $ 7,601
======== ======== ======= =========
Development Portfolio
Revenues $ 6,883 $ 1,805 $12,573 $ 3,372
Expenses (2,250) (780) (4,658) (1,661)
-------- -------- ------- ---------
Income before depreciation $ 4,633 $ 1,025 $ 7,915 $ 1,711
======== ======== ======= =========
Retail Portfolio
Revenues $ 2,329 $ 2,542 $ 4,776 $ 5,096
Expenses (807) (778) (1,617) (1,620)
-------- -------- ------- ---------
Income before depreciation $ 1,522 $ 1,764 $ 3,159 $ 3,476
======== ======== ======= =========
Total Rental Properties
Revenues $ 94,716 $ 70,522 $ 183,570 $139,555
Expenses (35,084) (26,600) (70,583) (54,158)
Depreciation (10,895) (7,713) (21,462) (15,941)
-------- -------- ------- ---------
Income from Rental Properties $ 48,737 $ 36,209 $91,525 $ 69,456
======== ======== ======= =========
</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 six months ended June 30, 2000 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Total Property Service Businesses
Revenues $ 58,025 $ 31,301 $ 107,926 $ 58,695
Expenses (54,945) (29,650) (102,931) (56,607)
Depreciation (1,444) (525) (2,840) (960)
-------- -------- --------- --------
Income from Property Service Businesses $ 1,636 $ 1,126 $ 2,155 $ 1,128
======== ======== ========= ========
</TABLE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 2000 to Three Months Ended June 30,
1999.
Summary. Net income of the Operating Partnership increased $10.3 million,
or 47.6%, from $21.7 million for the three months ended June 30, 1999 to $32.0
million for the three months ended June 30, 2000. Funds from Operations ("FFO")
of the Operating Partnership increased $7.0 million, or 24.3%, from $28.6
million to $35.6 million during the same period. The increases in FFO and net
income are primarily attributable to net operating income growth of 10.7% on the
core portfolio and contributions from acquired and developed properties.
Rental Properties. Revenue from all rental properties increased $24.2
million, or 34.3%, from $70.5 million for the three months ended June 30, 1999
to $94.7 million for the three months ended June 30, 2000. Operating expenses
from all rental operations increased $8.5 million, or 31.9%, from $26.6 million
during the second quarter of 1999 to $35.1 million during the current quarter.
Core Portfolio. Revenue from the core portfolio increased $4.8 million, or
8.1%, over the prior year period resulting in average monthly revenue per
apartment unit of $1,229. This was primarily due to continued strong demand in
all submarkets. Management successfully increased rents during the quarter and
improved occupancy levels. Average economic occupancy for the core portfolio
was 97.9% for the three months ended June 30, 2000 compared to 97.0% for the
comparable prior year. Expenses for the core portfolio increased $0.8 million,
or 3.6%, due primarily to higher real estate taxes and utility costs.
Acquisition/Disposition Portfolio. The acquisition properties (defined as
properties acquired subsequent to December 31, 1998) and the residential
disposition properties contributed approximately 60.0%, or $14.5 million, of the
total rental revenue increase and approximately $6.1 million of the total rental
expense increase. Results for the second
20
<PAGE>
quarter of 1999 reflect three acquisitions and six disposition properties
totaling 2,863 apartment units. Results for the second quarter of 2000 reflect
eleven acquisition properties and no dispositions totaling 7,748 apartment
units.
Development Portfolio. In June 1999, Courthouse Place completed delivery
of its 564 units. The project provided net operating income of $1.8 million for
the current quarter, and $0.8 million in the prior year quarter.
One Superior Place delivered initial units in July 1999 and had all 809
units delivered as of June 30, 2000. The project provided net operating income
of $2.8 million for the period. As of June 30, 2000, the property was
stabilized.
Park Connecticut delivered initial units in March 2000 and had all 142
units delivered as of June 30, 2000. The project provided net operating income
of $0.1 million for the period. As of June 30, 2000, the property was 74%
leased and 56% occupied. Stabilization is expected in the third quarter of 2000.
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 $0.5 million in the
second 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 during the second
half of 1999.
Other. Corporate general and administrative expenses increased 24% over
the prior year quarter due primarily to higher management costs associated with
geographic expansion. Net interest expense increased $6.6 million during the
quarter, or 49.4%, due to additional debt related to acquisitions, lower
capitalized interest on development properties and an increase of 40 basis
points in the Company's weighted average borrowing rate.
Comparison of Six Months Ended June 30, 2000 to Six Months Ended June 30, 1999.
Summary. Net income of the Operating Partnership increased $14.3 million,
or 34.8%, from $41.3 million for the six months ended June 30, 1999 to $55.6
million for the six months ended June 30, 2000. Funds from Operations ("FFO")
of the Operating Partnership increased $10.6 million, or 19.7%, from $54.1
million to $64.7 million during the same period.
Rental Properties. Revenue from all rental properties increased $44.0
million, or 31.5%, from $139.6 million for the six months ended June 30, 1999 to
$183.6 million for the six months ended June 30, 2000. Operating expenses from
all rental operations increased $16.4 million, or 30.3% from $54.2 million
during the first half of 1999 to $70.6 million during the current period.
Core Portfolio. Revenue from the core portfolio increased $8.2 million, or
7.0%, over the prior year period resulting in average monthly revenue per
apartment unit of $1,204. This was
21
<PAGE>
primarily due to continued strong demand in all submarkets, particularly
northwest Washington, D.C. Average economic occupancy for the core portfolio was
97.6% for the six months ended June 30, 1999 compared to 96.9% for the
comparable prior year. Expenses for the core portfolio increased $1.5 million,
or 3.2%, due primarily to expected increases in real estate taxes, and higher
wages due to additional staffing at the properties.
Acquisition/Disposition Portfolio. The acquisition properties (defined as
properties acquired subsequent to December 31, 1998) and disposition properties
contributed approximately 62.0%, or $26.9 million, of the total rental revenue
increase and approximately $12.0 million of the total rental expense increase.
Development Portfolio. In June 1999, Courthouse Place completed delivery
of its 564 units. The project provided net operating income of $1.1 million for
the first six months of 1999 and $3.6 million for the same period in 2000.
One Superior Place delivered initial units in July 1999 and had all 809
units delivered as of June 30, 2000. The project provided a net operating income
of $4.5 million for the period. As of June 30, 2000, the property was
stabilized.
Park Connecticut delivered initial units in March 2000 and had all 142
units delivered as of June 30, 2000. Stabilization is expected by the third
quarter of 2000. As of June 30, 2000, the property was 74% leased and 56%
occupied.
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 $1.0 million in the first
half of 2000 compared to the prior year period. This was primarily due to
contributions from Smith Management Construction and Consolidated Engineering
Services, Inc. of $0.6 million and $1.5 million, respectively. CES growth is
primarily due to internal and external acquisitions and expansion. These
increases were partially offset by a decrease of $1.0 million for Smith Realty
Company and Smith Corporate Living. This is primarily due to the sale in 1999 of
the retail management business, as well as increased personnel costs, and
weakness in the Chicago corporate furnished apartment business.
Joint Ventures. The Company entered into three joint ventures during the
first half of 1999. The Company's share of income from the joint ventures
totaled $1.3 million and $0.3 million for the six months ended June 30, 2000 and
1999, respectively.
Other. Corporate general and administrative expenses increased 23.1%
compared to the prior year period due primarily to higher personnel and
technology related costs. Net interest expense increased $11.3 million during
the period, or 42.7%, primarily due to additional debt related to acquisitions
and development as well as higher borrowing rates.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Summary. Net cash flow provided by operating activities increased $41.8
million from $58.9 million for the six months ended June 30, 1999 to $100.7
million for the six months ended June 30, 2000. The increase was due primarily
to an increase of $20.0 million in property operating income. In addition, a
decrease in other assets related to the use of escrow proceeds provided an
additional $16.2 million.
Net cash flow of $164.3 million was used by investment activities during
the six months ended June 30, 2000 compared to $60.7 million during the
comparable prior year period. Approximately $28.8 million of the increase is due
to acquisition and development activity. In addition, two cash property sales
in 1999 contributed $75.7 million in net cash flows in 1999.
Net cash flows provided by financing activities were $53.0 million for the
six months ended June 30, 2000, primarily comprised of $98.3 million of net
borrowings against the properties, lines of credit, and construction loans,
offset by a $49.9 million cash outflow for dividends and distributions. Net
cash flows provided by financing activities of $6.8 million in the comparable
prior year period primarily consisted of $45.4 million of net cash inflow from
borrowings less $39.6 million of dividends/distributions.
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 six months ended June 30, 2000 and
1999 are computed as follows (in thousands):
23
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income of the Operating Partnership $32,026 $21,704 $55,628 $41,255
Preferred dividends (3,504) (999) (8,946) (1,988)
Depreciation of real property 10,895 7,713 21,462 15,941
Depreciation from unconsolidated properties 239 114 478 122
Amortization of goodwill 108 108 215 215
Loss (gain) on sale of property (4,161) 7 (4,161) (1,851)
Extraordinary item -- -- -- 359
------- ------ ------- -------
Funds from Operations of the Operating
Partnership $35,603 $28,647 $64,676 $54,053
======= ======= ======= =======
</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.
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.
24
<PAGE>
Development
As of June 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>
Alban Towers
(Washington, DC)(2) 226 N/A Q2, 2001 Q3, 2001 Q4, 2001 $ 53
Stoneridge at
University Center
(Tysons/Dulles)(1) 630 26 June 2000 Q3, 2001 Q1, 2002 66
Park Millennium
(Chicago, IL) 480 N/A Q2, 2002 Q4, 2002 Q1, 2003 106
----- --- ----
1,336 26 $225
===== === ====
</TABLE>
(1) The Company has a 40% ownership interest.
(2) The Company owns substantially all of the economic interest.
Commitments
As of June 30, 2000, the Company had executed contracts to purchase
multifamily properties under construction as follows:
Number Estimated Purchase Estimated
of Units Completion Date Cost
-------- ---------- -------- ----------
(in millions)
New River Village
(Ft. Lauderdale, FL) 240 Q3, 2000 Q4, 2000 $ 34
Wilson Boulevard
(Rosslyn/Ballston) 220 Q4, 2000 Q4, 2000 29
Ballston Place
(Rosslyn/Ballston) 383 Q2, 2001 Q3, 2001 52
--- ----
843 $115
=== ====
These contracts are contingent upon satisfactory completion of construction
and attainment of final certificates of occupancy by the owners. As of June 30,
2000, the Company had posted two letters-of-credit totaling $7.5 million in
accordance with three 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 8.00% 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.
25
<PAGE>
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 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 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.
As of June 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 $ 917,527 85.1%
Variable Rate Debt:
$300M Line of Credit 69,000 6.4%
$100M Line of Credit 5,000 0.5%
$50M Line of Credit -- 0.0%
Construction Loans 86,306 8.0%
---------- -----
$1,077,833 100.0%
========== =====
As of June 30, 2000, the Company had $237.0 million of unused borrowing
capacity on lines of credit and construction loans. (Unused borrowing capacity
includes $56 million from the $300 million line, which reflects the borrowing
capacity currently available under the line of $125 million, less $69 million
used at June 30, 2000.) Amounts outstanding under lines of credit averaged
$117.8 million for the six months ended June 30, 2000 compared to $99.9 million
for the six months ended June 30, 1999.
In connection with the development of Stoneridge at University Center in
Loudoun County, Virginia (a partially-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 June 30, 2000, no draws had been made on the loan.
As of June 30, 2000, the Company's Debt to Total Market Capitalization
Ratio was 39.5% (based on 21.3 million common shares, 4.0 million preferred
shares, and 13.6 million partnership units outstanding at a common stock price
of $38.00, $50 million of perpetual preferred stock, $80
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million of convertible preferred shares, and $45 million of convertible
preferred partnership units) versus 38.6% as of December 31, 1999 and 40.9% as
of June 30, 1999.
The Company's Interest Coverage Ratio, excluding gains on sales and
extraordinary items, for the six months ended June 30, 2000 was 3.10 to 1
compared to 3.22 to 1 for the comparable prior year period.
Capital Expenditures
For the six months ended June 30, 2000, total capital improvements were
$24.9 million, of which $15.0 million were for the core portfolio.
Approximately 66% of the capital expenditures on the core portfolio in 2000 are
considered by management to be non-recurring, repositioning improvements which
directly result in higher revenues. The remaining capital expenditures on the
core portfolio indirectly influence the Company's ability to generate revenues
and are considered more recurring in nature and non-discretionary. A summary of
core capital expenditures for the period follows:
Number Average
Total$ of Cost
Spent Units Per Unit
-------------- ------- --------
Expenditure Type (In Thousands)
----------------
Core Repositioning
Kitchen/Bath $9,372
Washer/Dryer 510
-------
Total Core Repositioning 9,882 852 $11,599
Recurring Improvements 5,163 17,424 $ 297
-------
Total Capital Expenditures - Core Portfolio $15,045
=======
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".
The Company expended approximately $2.0 million in 1999 on a new computer
system, to replace one which was not Year 2000 compliant. The new system is
being depreciated over its useful life of five years. Excluding this
replacement system, the Company's Year 2000 compliance efforts have been
primarily conducted with internal staff. Accordingly, the costs have been
immaterial and have been expensed as incurred.
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PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
(A)
On June 14, 2000, the Company issued 93,275 unregistered shares of Class
A Common Stock of the Company for $3,537,921 or approximately $37.93 per
share, to Consolidated Engineering Services, Inc., an affiliated Maryland
corporation ("CES") pursuant to a Common Stock Purchase Agreement between
CES and the Company dated July 14, 2000. CES subsequently transferred
these shares in exchange for shares of Illingworth Corporation, a
Wisconsin corporation, in a cash and securities acquisition of a 100%
interest in that corporation.
On July 10, 2000, the Company issued 211,268 unregistered shares of Class
A Common Stock of the Company for $7,500,014 or $35.50 per share, to CES
pursuant to a Common Stock Purchase Agreement between CES and the Company
dated July 10, 2000. CES subsequently transferred these shares in
exchange for shares of Hayes Mechanical Services, Inc., a Connecticut
corporation, in a cash and securities acquisition of a 100% interest in
that corporation.
On July 18, 2000, the Company issued 35,898 unregistered shares of Class
A Common Stock of the Company for $1,400,022 or $39.00 per share, to CES
pursuant to a Common Stock Purchase Agreement between CES and the Company
dated July 18, 2000. CES subsequently transferred these shares in
exchange for shares of Betlem Service Corporation, a New York
corporation, in a cash and securities acquisition of a 100% interest in
that corporation.
Following each of the transactions with CES described above, the Company
contributed the net proceeds from the issuance of Common Stock to the
Operating Partnership in exchange for Common Units. In each case, the
Common Units received by the Company were equal to the number of shares
of Common Stock issued. A registration statement supporting the resale of
504,543 shares of Common Stock of the Company (including an aggregate of
304,543 of the above-referenced shares issued on June 14 and July 10,
2000) was filed with the Securities and Exchange Commission on July 17,
2000, and it became effective on July 28, 2000.
(B)
On April 7, 2000, the Operating Partnership issued 35,898 Common Units
valued at $1.3 million for the purpose of acquiring a complete ownership
interest in a real estate property. The units are redeemable for cash or
shares of the Company's Common Stock on the same terms as all other
Common Units of the Company. The recipients of this issuance were the
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owners of property or partners of partnerships owning such property, who
swapped their ownership interest for Units, cash, the assumption of debt,
or some combination thereof, or entities that used the Units to purchase
a property in a similar manner.
All of the Class A Common Stock and units described above were offered on
a private placement basis, and the offerings were completed without an
underwriter or the payment of sales commissions or discounts. The
Registrant believes that such offerings and sales were exempt from
registration under the Securities Act of 1933, as amended (the
"Securities Act") by virtue of Section 4(2) of the Securities Act and the
provisions of Rule 506 of Regulation D promulgated thereunder, the
conclusion of the Registrant, after diligent investigation, that fewer
than 35 offerees were not either "accredited investors" as defined in
Rule 501 or within the other requirements of Registration D, the delivery
to each prospective Unitholder of appropriate written materials, and the
execution by each person receiving Units of a qualifying subscription
agreement.
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The regular Annual Meeting of the Registrant was held on May 24, 2000.
At this Annual Meeting, incumbent Director Robert H. Smith was re-elected
to the Board of Directors for a term ending in 2003. New Directors Roger
J. Kiley, Jr. and Karen Hastie Williams were elected for terms ending in
2003. Directors Ernest A. Gerardi, Jr., Charles B. Gill, Robert P.
Kogod, R. Michael McCullough, and L. Ronald Scheman continued their terms
in office. The shareholders also voted at this Annual Meeting to ratify
the Board of Directors' appointment of Arthur Andersen LLP as the
independent auditor of the Registrant for the fiscal year ending December
31, 2000. The votes cast at this Annual Meeting were as follows:
Election of Roger J. Kiley, Jr. FOR -- 16,984,545
WITHHELD -- 17,951
Election of Robert H. Smith FOR -- 16,984,545
WITHHELD -- 17,951
Election of Karen Hastie Williams FOR -- 16,985,515
WITHHELD -- 16,981
Ratification of Appointment of FOR -- 16,723,501
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Arthur Andersen LLP AGAINST -- 8,219
ABSTAINING -- 270,775
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Credit Agreement By and Among Smith Property Holdings
Lincoln Towers LLC and Smith Property Holdings McClurg Court
LLC, as Borrower and Columbia National Real Estate Finance,
Inc., as Lender
99.2 First Amendment to Credit Agreement between the Operating
Partnership and PNC Bank, National Association, et al.
99.3 First Amendment to Fourth Amended and Restated Credit
Agreement between the Operating Partnership and PNC Bank,
National Association, et al.
(b) Reports on form 8-K:
None.
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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, 2000 By: /s/ W. D. Minami
--------------------------------------
W. D. Minami
Executive Vice President and Chief Financial
Officer Charles E. Smith Residential Realty, Inc.
(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.
31
