<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD FROM TO
COMMISSION FILE NUMBER: 1934 ACT FILE NUMBER: 1-13174
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 54-1681655
(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:
SHARES OF COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
As of May 1, 1998, there were 15,410,057 shares of Common Stock of the
Registrant issued and outstanding.
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Charles E. Smith Residential Realty, Inc. Financial
Statements as of March 31, 1998 and December 31, 1997,
Filed as a Part of This Report
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity 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 11
PART II - OTHER INFORMATION 19
SIGNATURES 21
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, net $761,217 $751,230
Rental property under development 70,276 53,093
Cash and cash equivalents 2,762 -
Tenants' security deposits 2,025 2,453
Escrow funds 11,893 7,606
Investment in and advances to Property Service Businesses
and other 26,674 15,905
Deferred charges, net 16,461 16,047
Other assets 17,493 19,172
-------- --------
$908,801 $865,506
======== ========
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $400,722 $500,435
Lines of credit 185,000 105,000
Construction loans 11,534 5,536
Accounts payable and accrued expenses 15,723 13,732
Tenants' security deposits 2,025 2,453
-------- --------
Total liabilities 615,004 627,156
-------- --------
Commitments and contingencies
Minority Interest 79,454 80,036
Shareholders' equity
Preferred stock - $0.01 par value; 2,640,325 shares authorized;
Series A Cumulative Convertible Redeemable Preferred
Stock, liquidation preference of $27.08; 1,661,744 shares
issued and outstanding 45,000 45,000
Preferred stock - $0.01 par value; 1,216,666 shares authorized;
Series B Cumulative Convertible Redeemable Preferred
Stock, liquidation preference of $28.50; 1,216,666 shares
issued and outstanding 34,675 34,675
Preferred stock - $0.01 par value; 500 shares authorized;
Series C Cumulative Redeemable Preferred Stock,
liquidation preference of $100,000; 500 shares issued
and outstanding 50,000 -
Common stock - $0.01 par value; 95,000,000 shares
authorized; 15,329,365 and 14,942,429 shares issued
and outstanding at March 31, 1998 and December 31, 1997,
respectively 154 150
Additional paid-in capital - includes contributed
deficit of $244,208 93,192 84,861
Retained deficit (8,678) (6,372)
-------- --------
Total shareholders' equity 214,343 158,314
-------- --------
$908,801 $865,506
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
For the Three Months
Ended March 31,
-----------------------
1998 1997
-------- --------
(Restated)
<S> <C> <C>
Rental Properties:
Revenues $ 55,670 $ 44,776
Expenses
Operating costs (18,641) (16,434)
Real estate taxes (3,657) (2,917)
Depreciation (6,387) (4,851)
-------- --------
Total expenses (28,685) (24,202)
Equity in income of Property Service Businesses 664 809
Corporate general and administrative expenses (2,025) (1,391)
Interest income 161 231
Interest expense (10,888) (11,427)
-------- --------
Income before gain on sale and extraordinary item 14,897 8,796
Gain on sale of property 3,120 -
-------- --------
Income before extraordinary item 18,017 8,796
Extraordinary item - loss on extinguishment of debt (4,702) -
-------- --------
Net income of the Operating Partnership 13,315 8,796
Minority Interest (5,871) (4,637)
-------- --------
Net income 7,444 4,159
Less: Income attributable to preferred shares (1,490) -
-------- --------
Net income attributable to common shares $ 5,954 $ 4,159
======== ========
Earnings per common share - basic $ 0.39 $ 0.37
======== ========
Earnings per common share - diluted $ 0.39 $ 0.36
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Common Series A Series B Series C Additional Retained
Stock Preferred Preferred Preferred Common Paid-in Earnings
Outstanding Stock Stock Stock Stock Capital (Deficit) Total
- ----------- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
9,969,607 Balance, December 31, 1996 $ - $ - $ - $100 $(23,852) $(13,627) $(37,379)
Operating Partnership equity exchanged
for acquisitions - - - - 75,019 - 75,019
Proceeds from issuance of Series A
Preferred Stock 45,000 - - - - - 45,000
Proceeds from issuance of Series B
Preferred Stock - 34,675 - - - - 34,675
Offering costs associated with Preferred Stock - - - - (562) - (562)
Proceeds from issuance of Common Stock,
4,555,000 net of offering costs of $5,249 - - - 46 124,134 - 124,180
Conversion of Operating Partnership units
407,822 to common stock - - - 4 (4) - -
Repurchase and cancellation of Operating
Partnership units - - - - (2,206) - (2,206)
Amortization of unit grants - - - - 579 - 579
Adjustment for Minority Interest - - - - (88,597) 7,813 (80,784)
10,000 Exercise of options - - - - 350 - 350
Net income - - - - - 26,593 26,593
Dividends - - - - - (27,151) (27,151)
- ---------- ------- ------- ------- ---- -------- -------- --------
14,942,429 Balance, December 31, 1997 45,000 34,675 - 150 84,861 (6,372) 158,314
Operating Partnership equity exchanged
for acquisitions - - - - 8,820 - 8,820
Proceeds from issuance of Series C
Preferred Stock - - 50,000 - - - 50,000
Offering costs associated with Preferred Stock - - - - (1,004) - (1,004)
Conversion of Operating Partnership units
360,936 to common stock - - - 4 (4) - -
Repurchase and cancellation of Operating
Partnership units - - - - (594) - (594
21,000 Stock grants awarded - - - - - - -
Amortization of grants - - - - 181 - 181
Adjustment for Minority Interest - - - - (752) - (752)
5,000 Exercise of options - - - - 1,684 - 1,684
Net income - - - - - 7,444 7,444
Dividends - - - - - (9,750) (9,750)
- ---------- ------- ------- ------- ---- -------- -------- --------
15,329,365 Balance, March 31, 1998 (unaudited) $45,000 $34,675 $50,000 $154 $ 93,192 $ (8,678) $214,343
========== ======= ======= ======= ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
For the Three Months
Ended March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 26,974 $ 15,873
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (22,234) (1,811)
Additions to rental property (3,647) (1,696)
Increase in investment in and advances
to Property Service Businesses and other (10,769) (5,309)
Acquisition deposits and other (2,516) (552)
-------- --------
Net cash used by investing activities (39,166) (9,368)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock - 82,968
Net proceeds from sale of preferred stock 48,996 -
Mortgages, net (99,713) (9,194)
Lines of credit, net 80,000 (54,400)
Construction loans, net 5,998 (17,686)
Prepayment penalties (3,025) -
Dividends and distributions (16,956) (11,115)
Other, net (346) 245
-------- --------
Net cash provided (used) by financing activities 14,954 (9,182)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,762 (2,677)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 3,898
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,762 $ 1,221
======== ========
SUPPLEMENTAL INFORMATION:
Capitalized interest $ 967 $ 8
Purchase of property in exchange for Operating Partnership units 8,820 47,129
Purchase of property in exchange for assumption of debt - 80,164
Proceeds held in escrow from sale of rental property 4,308 -
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
1. BASIS OF PRESENTATION
The accompanying interim financial statements include all of the accounts of
Charles E. Smith Residential Realty, Inc. (the "Company") and Charles E. Smith
Residential Realty L.P. (the "Operating Partnership") and its subsidiary
financing partnerships. The Company consolidates the Operating Partnership due
to the Company's control as sole general partner. 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 March 31, 1998 and the results of
operations for the interim periods ended March 31, 1998 and 1997. Such interim
results are not necessarily indicative of the operating results for a full year.
The accompanying financial statements should be read in conjunction with the
audited financial statements and related footnotes appearing in the Company's
Annual Report on Form 10-K.
The Company, through the Operating Partnership and its subsidiaries, is
engaged in the ownership, operation, management, leasing, acquisition, and
development of real estate properties, primarily residential multifamily
properties. As of March 31, 1998, the Operating Partnership owned 46 operating
multifamily properties containing 18,296 apartment units, and two retail
shopping centers aggregating 436,000 square feet. The Operating Partnership
also had approximately 2,000 units under construction at three additional sites.
The Operating Partnership also owns substantially all of the economic interest
in entities which provide multifamily and retail property management and
leasing, construction and construction management services, engineering and
technical services, and financial advisory services (collectively the "Property
Service Businesses"). The Operating Partnership uses the equity method of
accounting for its 99% non-voting interest in the Property Service Businesses.
2. ACQUISITIONS AND DISPOSITIONS
In January 1998, the Company completed the acquisition of two multifamily
properties in northwest Washington, D.C. totaling 287 apartment units. The
total cost of approximately $13.8 million was comprised of 254,000 Operating
Partnership units valued at approximately $8.8 million, $3.2 million cash and
approximately $1.8 million of initial capital improvements. One of the
properties was an affiliate in which the Company previously owned a minority
interest. Both properties were previously managed by the Company.
7
<PAGE>
In March 1998, the Company sold a 227-unit multifamily property located in
southeast Washington, D.C. for $4.4 million. The Company recognized a gain on
the sale of $3.1 million.
As a result of property acquisitions/dispositions, stock offerings and the
conversion of partnership units into common shares, the Company's ownership
percentage of the Operating Partnership increased from 49.4% as of March 31,
1997 to 56.4% as of March 31, 1998.
3. SHAREHOLDERS' EQUITY
In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value, for
$49.0 million, which is net of offering costs of $1.0 million. The Company
amended the Articles of Incorporation to designate and establish the rights and
privileges of the Series C Preferred Shareholders which include certain voting,
dividend and liquidation preferences over the common shareholders. The Series C
Preferred Shares have a liquidation preference of $100,000 per share and an
initial annual dividend rate of $7,910 per share. If the securities receive an
investment grade rating, the annual dividend rate will decrease by $250 per
share. Dividends are cumulative and are payable quarterly. The Company may
redeem Series C Preferred Shares after February 1, 2028, at the liquidation
price plus accrued dividends.
4. PER SHARE DATA
Earnings per common share of the Company for the three months ended March 31,
1998 and 1997 is computed based on weighted average common shares outstanding
during the period as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Basic Diluted Basic Diluted
------ -------- ------ --------
<S> <C> <C> <C> <C>
Weighted Average Common Shares 15.2 15.4 11.4 11.5
Weighted Average Operating Partnership
Units/1/ 14.2 14.2 12.7 12.7
</TABLE>
/1/ Represents Operating Partnership units not held by Company
Operating Partnership units not held by the Company may be redeemed at the
Unitholders' sole discretion. At the option of the Company, such redemption may
be made for cash at the then fair value of the Company's common stock, or for
shares of common stock of the Company on a one-for-one basis which does not have
a dilutive effect. During the three months ended March 31, 1998, 0.4 million
units were redeemed for shares of common stock.
8
<PAGE>
A reconciliation of income (before extraordinary item) and shares used to
calculate basic and diluted earnings per share for the three months ended March
31, 1997 follows (dilutive securities had no effect on earnings for the three
months ended March 31, 1998):
<TABLE>
<CAPTION>
Weighted Per Share
Income Average Shares Amount
------ -------------- ------
<S> <C> <C> <C>
(000's) (000's)
Income before extraordinary item $ 8,796
Minority Interest (4,637)
-------
Earnings per share - Basic
Income attributable to common
shareholders before extraordinary item $ 4,159 11,354 $ 0.37
Effect of Dilutive Securities
Options/1/ (24) 124 (.01)
------- ------ ------
Earnings per share - Diluted $ 4,183 11,478 $ 0.36
======= ====== ======
</TABLE>
/1/ Adjustment to numerator reflects change in the Minority Interest share
of income based on ownership calculation including common stock
equivalents.
Options to purchase 790,750 shares of common stock at $35 per share were not
included in the computation of diluted earnings per share because the options'
exercise price was higher than the average price of the common shares. All
convertible preferred shares were also excluded from the calculation of diluted
earnings per share since the preferred dividends paid per share exceeded basic
earnings per share.
5. FORWARD CONTRACTS
At March 31, 1998, the Company held two treasury lock contracts totaling $70
million (of notional value) to reduce its exposure to anticipated financing
transactions. The Company does not hold or issue derivative financial
instruments for speculative or trading purposes. The forward contracts, which
are over-the-counter instruments, are non-leveraged and involve little
complexity.
The contracts have a fair value representing an unrealized gain of
approximately $0.3 million. Realized gains or losses on forward contracts will
be deferred and reported in income when the related transactions being hedged
are recognized. There were no realized gains or losses at March 31, 1998.
6. NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" in 1998 which are not
expected to have a significant impact on the Company's reporting or disclosure.
9
<PAGE>
7. EXTRAORDINARY ITEM
The Company extinguished debt during the first quarter of 1998 and recognized
an extraordinary loss related to the payment of yield maintenance premiums as
well as write-offs of unamortized loan fees.
The $110.1 million principal balance of Mortgage Pool One was partially
repaid on February 28, 1998, in conjunction with the sale of Oxford Manor, and
fully repaid on March 31, 1998. The total extraordinary loss of $4.1 million
consisted of a $2.9 million payment of yield maintenance premium and a $1.2
million non-cash write-off of unamortized loan fees.
In February 1998, the Company terminated its existing $100 million line of
credit and entered into a new $250 million, unsecured line of credit with PNC
Bank, Nations Bank, and U.S. Bank which matures in March 2001. Draws upon the
new line are subject to certain unencumbered asset requirements and bear
interest at a selected London Interbank Offer Rate (LIBOR) plus 75 to 110
basis points based on the leverage ratio of the Company. If the Company
receives an investment grade rating, the interest rate will decrease to 60 to 90
basis points over LIBOR based on the rating. The Company repaid the balance
outstanding under the $100 million line and recognized an extraordinary loss of
$0.3 million for the write-off of unamortized loan fees.
During the quarter, the Company also recognized an extraordinary loss of $0.3
million due to the write-off of unamortized loan fees associated with refinanced
mortgage loans totaling $9.2 million.
8. SUBSEQUENT EVENTS
In April 1998, the Company acquired a 299-unit multifamily property in
Arlington, Virginia ("Parc Vista") for approximately $39 million cash which was
funded from the line of credit. The property had been managed by the Company as
of January 1, 1998.
In April 1998, the Company acquired a 1,075-unit multifamily property in
Chicago, Illinois ("McClurg Court") for approximately $70 million cash. The
acquisition was partially funded through the final draw of $26.5 million under
the Company's convertible preferred stock agreement with Security Capital Group,
Inc. The balance of the acquisition was funded from the line of credit.
In April 1998, the Company acquired 0.75 acres of undeveloped land in
northwest Washington, D.C. for approximately $3.2 million. The Company plans to
build a 160-unit luxury multifamily property on this site at an estimated cost
of $22.4 million.
In April 1998, the Company priced a $53 million, ten year secured loan from
Prudential at a fixed coupon rate of 6.88%. The Company also terminated a $20
million (notional value) treasury lock contract at a gain of $0.4 million which
will be amortized over the term of the
10
<PAGE>
Prudential loan. The Company also increased its new line of credit with PNC
Bank, NationsBank and U.S. Bank from $250 million to $275 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the accompanying
financial statements and notes thereto. The results of operations for the three
months ended March 31, 1998 and 1997 presented in the Consolidated Statements of
Operations and discussed below represent the operations of Charles E. Smith
Residential Realty, Inc. (the "Company"), Charles E. Smith Residential Realty
L.P. (the "Operating Partnership") and its subsidiary financing partnerships.
The Company consolidates the Operating Partnership due to its control as sole
general partner.
FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes", "anticipates", and
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements indicate that assumptions have been used that are
subject to a number of risks and uncertainties which could cause actual
financial results or management plans and objectives to differ materially from
those projected or expressed herein, including: the effect of national and
regional economic conditions, particularly with regard to the levels of
multifamily property occupancy and rental growth in the Washington, D.C.
metropolitan area; the registrant's ability to identify and secure additional
properties and sites that meet its criteria for acquisition or development; the
acceptance of the registrant's financing plans by the capital markets, and the
effect of prevailing market interest rates and the pricing of the Company's
stock; and other risks described from time to time in the registrant's filings
with the Securities and Exchange Commission. Given these uncertainties, readers
are cautioned not to place undue reliance on such statements. The registrant
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
11
<PAGE>
RENTAL PROPERTIES
Revenues, expenses and income from the multifamily and retail properties for
the three months ended March 31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Multifamily Properties - Core/(1)/
Revenues $ 41,307 $ 39,764
Expenses (17,024) (17,345)
-------- --------
Income before depreciation $ 24,283 $ 22,419
======== ========
Multifamily Properties -
Acquisitions and Development/(2)/
Revenues $ 11,900 $ 2,710
Expenses (4,478) (1,168)
-------- --------
Income before depreciation $ 7,422 $ 1,542
======== ========
Retail Properties
Revenues $ 2,463 $ 2,302
Expenses (796) (838)
-------- --------
Income before depreciation $ 1,667 $ 1,464
======== ========
Total Rental Properties
Revenues $ 55,670 $ 44,776
Expenses (22,298) (19,351)
Depreciation (6,387) (4,851)
-------- --------
Income from Rental Properties $ 26,985 $ 20,574
======== ========
</TABLE>
/(1)/ Represents properties owned as of December 31, 1996.
/(2)/ Includes operations of Oxford Manor which was sold in February 1998.
12
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the various Property Service Businesses for
the three months ended March 31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Multifamily and Retail Property
Management Services
Revenues $ 2,757 $ 2,561
Expenses (2,669) (2,404)
-------- --------
Income before depreciation $ 88 $ 157
======== ========
Interior Construction and Renovation
Services
Net fee revenues $ 1,283 $ 1,351
Expenses (1,302) (1,223)
-------- --------
Income before depreciation $ (19) $ 128
======== ========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 14,847 $ 12,301
Expenses (14,114) (11,273)
-------- --------
Income before depreciation $ 733 $ 1,028
======== ========
Financing Services
Revenues $ 465 $ -
Expenses (235) (243)
-------- --------
Income before depreciation $ 230 $ (243)
======== ========
Total Property Service Businesses
Revenues $ 19,352 $ 16,213
Expenses (18,320) (15,143)
Depreciation (368) (261)
-------- --------
Income from Property
Service Businesses $ 664 $ 809
======== ========
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO THREE MONTHS ENDED MARCH 31,
1997.
SUMMARY. Net income of the Operating Partnership increased $4.5 million, or
51.4%, from $8.8 million for the three months ended March 31, 1997 to $13.3
million for the three months ended March 31, 1998. Funds from Operations ("FFO")
of the Operating Partnership increased $7.1 million, or 51.4%, from $13.6
million to $20.7 million during the same period. Net income of the Company
increased from $4.2 million, or $0.36 per diluted common share, for the three
months ended March 31, 1997 to $6.0 million, or $0.39 per diluted common share,
for the three months ended March 31, 1998. FFO of the Company increased 79.0%,
from $6.5 million to $11.5 million during the same period. The increases in
both net income and FFO are primarily attributable to the acquisition of eight
properties totaling 3,323 apartment units during 1997 and the first quarter of
1998. In addition, income from the core portfolio increased 8.3% over the prior
year period due primarily to increased rents and revenue initiatives as well as
expense savings.
RENTAL PROPERTIES. Revenue from all rental properties increased $10.9
million, or 24.3%, from $44.8 million for the three months ended March 31, 1997
to $55.7 million for the three months ended March 31, 1998. The eight
acquisition properties (defined as properties acquired subsequent to December
31, 1996) contributed approximately 84%, or $9.2 million, of the total rental
revenue increase. Six of the acquisition properties (comprising 3,036 apartment
units) were acquired during 1997 and two (comprising 287 units) were acquired in
the first quarter of 1998. The core portfolio revenue increased $1.5 million, or
3.9%, over the prior year period. The retail portfolio revenue increased $0.2
million, or 7.0%, over the prior year period.
Average economic occupancy for the core portfolio decreased to 94.8 % for the
three months ended March 31, 1998 compared to 96.1% for the comparable prior
year quarter due to management's continued emphasis on maximizing rents. As a
result, average monthly revenue per core apartment unit increased from $885
during the first quarter of 1997 to $920 per unit during the first quarter of
1998.
Expenses (including depreciation) from all rental operations increased $4.5
million, or 18.5%, from $24.2 million during the first quarter of 1997 to $28.7
million during the current quarter. Approximately $4.7 million of the increase,
including depreciation expense of $1.4 million, resulted from the eight
properties in the acquisition portfolio. Expenses for the core portfolio
decreased $0.2 million, net of a $0.2 million increase in depreciation expense,
due primarily to utility savings related to a mild winter as well as timing of
certain repair and maintenance projects.
14
<PAGE>
PROPERTY SERVICE BUSINESSES. The Company uses the equity method of accounting
for its 99% non-voting interest in the Property Service Businesses.
Income from the Property Service Businesses decreased from $0.8 million in
the first quarter of 1997 to $0.7 million in the first quarter of 1998.
Interior Construction and Renovation Services reported a net loss for the
quarter primarily due to cost overruns and unrecovered owner change orders
incurred on a large outside contract. While losses have been fully reflected in
the operating results, the Company is currently pursuing an arbitration claim
which may result in the recovery of a portion of the owner change orders.
Income before depreciation for Multifamily and Retail Property Management
Services decreased $0.1 million during the first quarter of 1998 as compared to
the prior year quarter due primarily to a decrease in third party management
fees related to acquired properties which were previously managed by the
Company.
Income before depreciation for Engineering and Technical Services decreased
$0.3 million, despite a 20.7% increase in revenues, during the quarter due to a
decrease in high margin HVAC repair and replacement projects attributable to the
mild winter which reduced demand for mechanical repairs.
OTHER. Corporate general and administrative expenses increased 45.6% compared
to the prior year quarter due primarily to additional personnel added in mid-
1997 to expand the Company's acquisition and development program outside of the
Washington, D.C. metropolitan area to other U.S. cities with strong urban
multifamily markets. Interest expense decreased $0.5 million during the quarter,
or 4.7%, primarily due to the Company's deleveraging in 1997 through the
issuance of equity to finance acquisition and development activities. As a
result, the average debt outstanding during the first quarter of 1998 was
significantly lower than the prior year.
As a result of the follow-on equity offering completed during the first
quarter of 1997 (see LIQUIDITY AND CAPITAL RESOURCES), the original Minority
Interest deficit created at the initial public offering was eliminated.
Therefore, distributions to the Minority Interest which exceed allocated
earnings are no longer charged to the Company as General Partner of the
Operating Partnership but are charged directly against the Minority Interest.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY. Net cash flow provided by operating activities increased $11.1
million from $15.9 million for the three months ended March 31, 1997 to $27.0
million for the three months ended March 31, 1998. The increase is primarily a
result of higher cash flow contributed by the core and acquisition portfolios
and an increase of $2.0 million in accounts payable due primarily to property
acquisitions and accrued real estate taxes.
Net cash flows used by investing activities increased $29.8 million over the
comparable prior year period due primarily to investments in projects under
construction.
Net cash flows provided by financing activities was $15.0 million for the
three months ended March 31, 1998, primarily comprised of $49.0 million of cash
inflow from the placement of perpetual preferred stock at a 7.91% annual
dividend less $13.7 million of net debt repayments, $3.0 million of prepayment
penalties and $17.0 million of dividends/distributions. Net cash flows used by
financing activities of $9.2 million in the comparable prior year period
primarily consisted of $81.3 million of debt repayments plus $11.1 million of
dividends/distributions partially offset by $83.0 million of cash inflow from
the sale of common stock.
FUNDS FROM OPERATIONS. Funds from Operations is defined under the revised
definition adopted by the National Association of Real Estate Investment Trusts
(NAREIT) as net income (loss) (computed in accordance with generally accepted
accounting principles) excluding gains (or losses) from debt restructuring and
sale of property, and distributions in excess of earnings allocated to Minority
Interest, plus depreciation/amortization of assets unique to the real estate
industry. Depreciation/amortization of assets not unique to the industry, such
as amortization of deferred financing costs and non-real estate assets, is not
added back. FFO does not represent cash flow from operating activities in
accordance with generally accepted accounting principles (which, unlike Funds
from Operations, generally reflects all cash effects of transactions and other
events in the determination of net income) and should not be considered an
alternative to net income as an indication of the 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
because it primarily excludes the assumption that the value of real estate
assets diminishes predictably over time, and because industry analysts have
accepted it as a performance measure. Comparison of the Company's presentation
of FFO, using the NAREIT definition, to similarly titled measures for other
REITs may not necessarily be meaningful due to possible
16
<PAGE>
differences in the application of the NAREIT definition used by such REITs.
Funds from Operations for the three months ended March 31, 1998 and 1997 are
computed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Net Income of the
Operating Partnership $13,315 $ 8,796
Perpetual Preferred Dividends (626) -
Depreciation of Real Property 6,387 4,851
Gain on sale of property (3,120) -
Extraordinary Item 4,702 -
------- -------
Funds from Operations of the
Operating Partnership 20,658 13,647
Minority Interest (9,109) (7,194)
------- -------
Attributable to Shareholders $11,549 $ 6,453
======= =======
</TABLE>
DEBT
In February 1998, the Company terminated its existing $100 million line of
credit and entered into a new $250 million, unsecured line of credit with PNC
Bank, NationsBank, and U.S. Bank which matures in March 2001. The Company
repaid the balance outstanding under the $100 million line and recognized an
extraordinary loss of $0.3 million related to the extinguishment of such debt.
In April 1998, the new line was increased to $275 million.
In March 1998, the Company repaid $110.1 million of mortgage debt with
borrowings under the new line of credit. The Company recognized an extraordinary
loss of $4.1 million related to the payment of $2.9 million of yield maintenance
premium as well as the write-off of unamortized loan fees of $1.2 million.
During the first quarter, the Company repaid mortgage loans totaling $9.2
million and recognized an extraordinary loss of $0.3 million due to the write-
off of unamortized loan fees.
17
<PAGE>
As of March 31, 1998 , the Company had mortgage indebtedness and other
borrowings, which carried a weighted average interest rate of 7.45%, as follows:
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
---------- ------
<S> <C> <C>
Fixed rate debt:
Mortgages $387,502 64.9%
$83M line of credit 30,000 5.0%
Variable rate debt:
Mortgages 13,220 2.2%
$250M line of credit/ (1)/ 155,000 26.0%
Construction loan 11,534 1.9%
-------- -----
$597,256 100.0%
======== =====
</TABLE>
/(1)/ Increased to $275M in April 1998
As of March 31, 1998 , the Company had $148 million of unused borrowing
capacity available on lines of credit and $26.5 million available under its
convertible preferred stock agreement. Amounts outstanding under lines of credit
averaged $110.7 million for the three months ended March 31, 1998 compared to
$90.2 million for the three months ended March 31, 1997.
As of March 31, 1998 , the Company's Debt to Total Market Capitalization Ratio
was 34.7% (based on 15.3 million common shares, 2.9 million convertible
preferred shares and 14.1 million partnership units outstanding at a stock price
of $33.25) versus 35.0% as of December 31, 1997 and 42.9% as of March 31, 1997.
The decreases are attributable to the 1997 and 1998 equity offerings,
acquisitions funded via Operating Partnership unit exchanges, and a higher stock
price. The Company's Interest Coverage Ratio for the three months ended March
31, 1998 was 3.01 to 1 compared to 2.36 for the comparable prior year period.
CAPITAL EXPENDITURES
For the three months ended March 31, 1998 , total capital improvements were
$3.6 million, of which $3.1 million were for the core portfolio ($210 per unit).
Approximately 71% of the capital expenditures on the core portfolio in 1998 are
considered by management to generate net operating income (NOI) by increasing
revenue or decreasing expenses (NOI generating). The remaining capital
expenditures on the core portfolio indirectly influence the Company's ability to
generate NOI (non-NOI generating). A summary of core capital expenditures
follows:
18
<PAGE>
<TABLE>
<CAPTION>
Total $ Actual # of Average $ Per Average $ Per
Expenditure Type Spent Units Improved Unit Improved Core Unit
- ------------------------------ ------------- -------------- ------------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Installations/Replacements:
Appliances $ 286 449 $ 637 $ 19
Carpet 281 165 1,400 15
Other 71 1,815 39 5
Water saving devices 691 3,664 189 46
Renovations:
Kitchen 439 677 648 29
Bath 517 1,264 409 35
------ ----
Total NOI generating
improvements 2,235 149
Non-NOI generating
improvements 905 61
------ ----
Total capital expenditures
- core portfolio $3,140 $210
====== ====
</TABLE>
19
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES.
In January 1998, the Company sold 500 shares of Series C Cumulative Redeemable
Preferred Stock ("Series C Preferred Shares"), $0.01 par value, for $49.0
million, net of offering costs of $1.0 million. The Company amended the
Articles of Incorporation to designate and establish the rights and privileges
of the Series C Preferred Shareholders which include certain voting, dividend
and liquidation preferences over the common shareholders. The Series C Preferred
Shares have a liquidation preference of $100,000 per share and an initial annual
dividend rate of $7,910 per share. If the securities receive an investment
grade rating, the dividend rate will decrease by $250 per share. Dividends are
cumulative and are payable quarterly. The Company may redeem Series C Preferred
Shares after February 1, 2028, at the liquidation price plus accrued dividends.
The Series C Preferred Shares are registered securities which were offered and
sold under an effective registration statement of the Company.
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:
99.1 Fifteenth Amendment to First Amendment and Restated Agreement of
Limited Partnership of the Operating Partnership
(b) Reports on Form 8-K:
A Form 8-K dated April 17, 1998 was filed on April 22, 1998 to report the
Company's acquisition of McClurg Court. Historical and pro forma financial
information for this property were included in a Form 8-K/A dated April 17,
1998 which was filed on April 24, 1998.
20
<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, INC.
May 11, 1998 By: /s/ W. D. Minami
----------------------------------------------
W. D. Minami
Senior Vice President and Chief Financial Officer
of Charles E. Smith Residential Realty, Inc.
(on behalf of the Registrant and as Principal
Financial Officer)
By: /s/ Steven E. Gulley
---------------------------------------------
Steven E. Gulley
Vice President and Chief Accounting Officer
of Charles E. Smith Residential Realty, Inc.
21
<PAGE>
FIFTEENTH AMENDMENT TO
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
THIS FIFTEENTH AMENDMENT TO FIRST AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF CHARLES E. SMITH RESIDENTIAL REALTY L.P. (this "FIFTEENTH
AMENDMENT"), dated as of January 28, 1998, is entered into by Charles E. Smith
Residential Realty, Inc., a Maryland corporation, as general partner (the
"GENERAL PARTNER") of Charles E. Smith Residential Realty L.P. (the
"PARTNERSHIP"), for itself and on behalf of the limited partners of the
Partnership.
WHEREAS, the General Partner has entered into a Series C Cumulative
Redeemable Preferred Share Purchase Agreement dated as of January 28, 1998,
pursuant to which the General Partner has agreed to issue shares of a newly
created series of capital stock, designated Series C Cumulative Redeemable
Preferred Stock (the "SERIES C PREFERRED STOCK"); and
WHEREAS, pursuant to the authority granted to the General Partner
pursuant to Section 4.2 of the Partnership Agreement, the General Partner
desires to amend the Partnership Agreement (i) to establish a new class of
Units, to be entitled Series C Cumulative Redeemable Preferred Units (the
"SERIES C PREFERRED UNITS"), and to set forth the designations, rights, powers,
preferences and duties of such Series C Preferred Units, which are substantially
the same as those of the Series C Preferred Stock, and (ii) to make certain
other changes to the Partnership Agreement;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement, as
follows:
1. Section 4.2 of the Partnership Agreement is hereby amended by adding
after Section 4.2.E the following section:
F. Series C Preferred Units. Under the authority granted to
------------------------
it by Section 4.2.A. hereof, the General Partner hereby establishes an
additional class of Partnership Units entitled "Series C Cumulative
Redeemable Preferred Units" (the "SERIES C PREFERRED UNITS"). Series C
Preferred Units shall have the designations, preferences, rights, powers
and duties as set forth in Exhibit H hereto.
---------
2. Exhibits to Partnership Agreement.
---------------------------------
A. The General Partner shall maintain the information set
forth in Exhibit A to the Partnership Agreement, as such information shall
change from time to time, in such form as the General Partner deems appropriate
for the conduct of the Partnership's affairs, and Exhibit A shall be deemed
amended from time to time to reflect the information so maintained by the
General Partner, whether or not a formal amendment to the Partnership
<PAGE>
Agreement has been executed amending such Exhibit A. In addition to the
designation of Series C Preferred Units pursuant to this Fifteenth Amendment,
such information shall reflect (and Exhibit A shall be deemed amended from time
to time to reflect) the issuance of any additional Partnership Units to the
General Partner or any other Person, the transfer of Partnership Units and the
redemption of any Partnership Units, all as contemplated herein.
B. The Partnership Agreement is hereby amended by attaching thereto
as Exhibit H the Exhibit H attached hereto.
--------- ---------
3. Certain Capitalized Terms. All capitalized terms used in this
-------------------------
Fifteenth Amendment and not otherwise defined shall have the meanings assigned
in the Partnership Agreement or in the Articles Supplementary of the General
Partner. Except as modified herein, all terms and conditions of the Partnership
Agreement shall remain in full force and effect, which terms and conditions the
General Partner hereby ratifies and affirms.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
2
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Fifteenth Amendment
as of the date first set forth above.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.,
as General Partner of
Charles E. Smith Residential Realty L.P.
and on behalf of existing Limited Partners
By: /s/ Ernest A. Geradi Jr.
---------------------------------------------
Name: Ernest A. Geradi Jr.
-------------------------------------------
Title: President
------------------------------------------
3
<PAGE>
EXHIBIT H
DESIGNATION OF THE PREFERENCES AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS,
LIMITATIONS AS TO SERIES C PREFERRED UNITS
The Series C Preferred Units shall have the following designations,
preferences, rights, powers and duties:
(1) Certain Defined Terms. The following capitalized terms used in
---------------------
this Exhibit H shall have the respective meanings set forth below:
---------
"DISTRIBUTION DATE" means shall mean the 15th day (or if such day is
not a Business Day, the next Business Day thereafter) of February, May,
August and November of each year, commencing February 15, 1998.
"DISTRIBUTION PERIOD" means the periods commencing on, and including,
February 15, May 15, August 15, and November 15 of each year and ending on
the date prior to the next succeeding Distribution Date (other than the
initial Distribution Period, which shall commence on February 2, 1998 and
end on and include February 14, 1998, and other than the Distribution
Period during which any Series C Preferred Units shall be redeemed pursuant
to Section 5, which shall end on and include the date of such redemption).
"FULLY JUNIOR UNITS" shall mean the Common Units and any other class
or series of Partnership Units now or hereafter issued and outstanding over
which the Series C Preferred Units have a preference or priority in both
(i) the payment of dividends and (ii) the distribution of assets on any
liquidation, dissolution or winding up of the Partnership.
"JUNIOR UNITS" shall mean the Common Units and any other class or
series of Partnership Units now or hereafter issued and outstanding over
which the Series C Preferred Units have a preference or priority in the
payment of dividends or in the distribution of assets on any liquidation,
dissolution or winding up of the Partnership.
"PARITY UNITS" has the meaning ascribed thereto in Section 6(B).
(2) Distributions.
-------------
(A) The General Partner, in its capacity as the holder of the then
outstanding Series C Preferred Units, shall be entitled to receive out of
funds legally available therefor, when, as and if declared by the General
Partner, distributions payable in cash at the rate per Series C Preferred
Unit equal to (i) the initial distribution rate of $7,910 (the "INITIAL
DISTRIBUTION RATE") for all periods except when the reduced distribution
rate of $7,660 per Unit per annum (the "REDUCED DISTRIBUTION RATE"), the
increased distribution rate of $9,910 per Unit per annum (the "INCREASED
DISTRIBUTION RATE") or the additional
G-1
<PAGE>
distribution rate of $15,000 per Unit per annum (the "ADDITIONAL
DISTRIBUTION RATE") is in effect; or (ii) the Reduced Distribution Rate
from and including the date on which the Series C Preferred Units first
receive a public or shadow rating of BBB- or higher by Duff and Phelps
Credit Rating Company or its successor, or another rating agency acceptable
to holders of a majority of the outstanding Series C Preferred Units (the
"REDUCED DISTRIBUTION TRIGGER DATE"); or (iii) the Increased Distribution
Rate for any Distribution Period specified in Section 2(C)(iii) or
2(C)(iv)(A); or (iv) the Additional Distribution Rate for any Distribution
Period specified in Section 2(C)(v). Distributions shall begin to accrue
and shall be fully cumulative from February 2, 1998, whether or not in any
Distribution Period or Periods there shall be funds of the Partnership
legally available for the payment of such distributions, and shall be
payable quarterly, when, as and if declared by the General Partner, in
arrears on each Distribution Date. Accrued and unpaid distributions for
any past Distribution Periods may be declared and paid at any time and for
such interim periods, without reference to any regular Distribution Date,
to the General Partner, on such date as may be fixed by the General Partner
for payment of the corresponding dividend on the Series C Preferred Stock.
Any distribution made on the Series C Preferred Units shall first be
credited against the earliest accrued but unpaid distribution due with
respect to Series C Preferred Units which remains payable.
(B) The amount of distributions referred to in the first sentence of
Section 2(A) payable for each full Distribution Period relating to the
Series C Preferred Units shall be equal to the applicable distribution
rate. The initial Distribution Period will include a partial distribution
for the period from February 2, 1998 until February 14, 1998. The amount
of distribution for such period or any other period on the Series C
Preferred Units that represents less than a full quarter of a year shall be
computed on the basis of a 360-day year of twelve 30-day months. For any
Distribution Period in which a Reduced Distribution Trigger Date occurs,
the distribution amount for such Distribution Period shall be equal to the
sum of: (x) the product of (i) the Initial Distribution Rate divided by
four, times (ii) the number of days during the Distribution Period when
-----
the Reduced Distribution Rate is not in effect divided by (iii) the total
----------
number of days in the Distribution Period, plus (y) the product of (i) the
----
Reduced Distribution Rate divided by four times (ii) the number of days
-----
during the Distribution Period when the Initial Distribution Rate is not in
effect divided by (iii) the total number of days in the Distribution. The
----------
Reduced Distribution Rate shall remain in effect for all Distribution
Periods after the Reduced Distribution Trigger Date. No interest, or sum
of money in lieu of interest, shall be payable in respect of any
distribution payment or payments on the Series C Preferred Units that may
be in arrears.
(C) In the event a Trigger Event shall have occurred, the Distribution
Rate for any Distribution Period thereafter but prior to the Reduced
Distribution Trigger Date shall be determined as follows:
G-2
<PAGE>
(i) The Distribution Rate for the Distribution Period in which such
Trigger Event occurs and the immediately following two full
Distribution Periods shall be the same as the Distribution Rate
in effect immediately prior to the occurrence of such Trigger
Event.
(ii) In the event that such Trigger Event is no longer in effect as
of the end of the second full Distribution Period following the
occurrence of such Trigger Event, the provisions of this
Section 2(C) shall no longer apply with respect to such Trigger
Event.
(iii) In the event that such Trigger Event continues to be in effect
as of the end of the second full Distribution Period following
the occurrence of such Trigger Event, then the Distribution
Rate for the immediately following two full Distribution
Periods shall be the Increased Distribution Rate.
(iv) In the event that such Trigger Event is no longer in effect as
of the end of the fourth full Distribution Period following the
occurrence of such Trigger Event, then the Distribution Rate
for the immediately following Distribution Period shall be (A)
the Increased Distribution Rate if the Trigger Event was in
effect as of the immediately preceding Distribution Payment
Date or (B) if such Trigger Event shall not have been in effect
as of the immediately preceding Distribution Payment Date, the
Initial Distribution Rate, unless another Trigger Event shall
have occurred, in which case the Distribution Rate shall be
determined under this Section 2(C) with respect to such
additional Trigger Event.
(v) In the event that such Trigger Event continues to be in effect
as of the end of the fourth full Distribution Period following
the occurrence of such Trigger Event, then the Distribution
Rate for the immediately following Distribution Period shall be
the Additional Distribution Rate. The Distribution Rate shall
continue to be the Additional Distribution Rate until such time
as such Trigger Event shall not have been in effect for two
consecutive Distribution Payment Dates, in which event the
Distribution Rate for the Distribution Period ending on the
second of such Distribution Payment Dates shall equal the
Initial Distribution Rate, as applicable, unless another
Trigger Event shall have occurred, in which case the
Distribution Rate shall be determined under this Section 2(C)
with respect to such additional Trigger Event.
(vi) The provisions of this Section 2(C) shall not apply with
respect to any Distribution Period ending on or after the
Reduced Distribution Trigger Date.
(D) So long as any Series C Preferred Units are outstanding, no
distributions, except as described in the immediately following sentence,
shall be declared or paid or set apart for payment on any class or series
of Parity
G-3
<PAGE>
Units for any period unless full cumulative distributions have been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Series C
Preferred Units for all Distribution Periods terminating on or prior to the
distribution payment date for such class or series of Parity Units. When
distributions are not paid full or a sum sufficient for such payment is not
set apart, as aforesaid, all distributions declared upon Series C Preferred
Units and all distributions declared upon any other class or series of
Parity Units shall be declared ratably in proportion to the respective
amounts of distributions accumulated and unpaid on the Series C Preferred
Units and accumulated and unpaid on such Parity Units.
(E) So long as any Series C Preferred Units are outstanding, no
distributions (other than distributions paid solely in Fully Junior Units
or options, warrants or rights to subscribe for or purchase Fully Junior
Units) shall be declared or paid or set apart for payment or other
distribution shall be declared or made or set apart for payment upon Junior
Units, nor shall any Junior Units be redeemed, purchased or otherwise
acquired (other than a redemption, purchase or other acquisition of Class C
Units made for purposes of an employee incentive or benefit plan of the
General Partner or any subsidiary) for any consideration (or any moneys be
paid to or made available for a sinking fund for the redemption of any such
Junior Units) by the Partnership, directly or indirectly (except by
conversion into or exchange for Fully Junior Units), unless in each case
(i) the full cumulative distributions on all outstanding Series C Preferred
Units and any other Parity Units of the Partnership shall have been paid or
declared and set apart for payment for all past Distribution Periods with
respect to the Series C Preferred Units and all past distribution periods
with respect to such Parity Units and (ii) sufficient funds shall have been
paid or set apart for the payment of the distribution for the current
Distribution Period with respect to the Series C Preferred Units and the
current distribution period with respect to such Parity Units.
(F) No distributions on the Series C Preferred Units shall be declared
by the General Partner or paid or set apart for payment by the Partnership
at such time as the terms and provisions of any agreement of the General
Partner or the Partnership, including any agreement relating to
indebtedness of either of them, prohibits such declaration, payment, or
setting apart for payment or provides that such declaration, payment or
setting apart for payment would constitute a breach thereof or a default
thereunder, or if such declaration or payment shall be restricted or
prohibited by law.
(3) Liquidation Preference.
----------------------
(A) In the event of any liquidation, dissolution or winding up of the
Partnership, whether voluntary or involuntary, before any payment or
distribution of the assets of the Partnership shall be made to or set apart
for the holders of Junior Units, the General Partner, in its capacity as
holder of the Series C Preferred Units, shall be entitled to the sum of (i)
$100,000 per Series
G-4
<PAGE>
C Preferred Unit (the "SERIES C LIQUIDATION PREFERENCE") plus (ii) an
amount equal to all distributions (whether or not earned or declared)
accumulated, accrued and unpaid thereon to the date of final distribution
to the General Partner, in its capacity as such holder; but the General
Partner, in its capacity as the holder of Series C Preferred Units shall
not be entitled to any further payment. Until the holders of Series C
Preferred Units have been paid, the Series C Liquidation Preference in
full, no payment will be made to any holder of Junior Units upon the
liquidation, dissolution, or winding up of the General Partner. If, upon
any such liquidation, dissolution or winding up of the Partnership, the
assets of the Partnership, or proceeds thereof, distributable to the
General Partner, in its capacity as the holder of Series C Preferred Units,
shall be insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any other class or series of Parity Units, then
such assets, or the proceeds thereof, shall be distributed among the
General Partner, in its capacity as the holder of such Series C Preferred
Units, and the holders of such other Parity Units ratably in accordance
with the respective amounts that would be payable on such Series C
Preferred Units and such other Parity Units if all amounts payable thereon
were paid in full. For the purposes of this Section 3, (x) a consolidation
or merger of the Partnership with one or more partnerships, limited
liability companies, corporations, real estate investment trusts or other
entities and (y) a sale, lease or conveyance of all or substantially all of
the Partnership's property or business shall not be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary, of the
Partnership.
(B) Subject to the rights of the holders of Partnership Units of any
series or class or classes of shares of capital stock ranking on a parity
with or prior to the Series C Preferred Units upon any liquidation,
dissolution or winding up of the Partnership, after payment shall have been
made in full to the General Partner, in its capacity as the holder of the
Series C Preferred Units, as provided in this Section 3, any other series
or class or classes of Junior Units shall, subject to any respective terms
and provisions applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the General Partner, in its
capacity as the holder of the Series C Preferred Units, shall not be
entitled to share therein.
4. Redemption Right.
----------------
In the event that the General Partner is required to redeem or
repurchase any shares of Series C Preferred Stock pursuant to the terms
thereof, the Partnership shall redeem an equivalent number of Series C
Preferred Units for consideration equal to the consideration payable by the
General Partner upon redemption of such shares of Series C Preferred Stock.
5. Ranking. Any class or series of Partnership Units shall be deemed
-------
to rank:
G-5
<PAGE>
(A) prior to the Series C Preferred Units, as to the payment of
distributions and as to distribution of assets upon liquidation,
dissolution or winding up of the Partnership, if the holders of such class
or series of Partnership Units shall be entitled to the receipt of
distributions or of amounts distributable upon liquidation, dissolution or
winding up, as the case may be, in preference or priority to the holders of
Series C Preferred Units;
(B) on a parity with the Series C Preferred Units as to the payment of
distributions and as to the distribution of assets upon liquidation,
dissolution or winding up of the Partnership, whether or not the
distribution rates, distribution payment dates or redemption or liquidation
prices per Partnership Unit be different from those of the Series C
Preferred Units, if the holders of such class or series of Partnership
Units and the Series C Preferred Units shall be entitled to the receipt of
distributions and of amounts distributable upon liquidation, dissolution or
winding up in proportion to their respective amounts of accrued and unpaid
distributions per Partnership Unit or liquidation preferences, without
preference or priority one over the other ("PARITY UNITS"); the outstanding
Series A Cumulative Convertible Redeemable Preferred Units and Series B
Cumulative Convertible Redeemable Preferred Units of the General Partner
are Parity Units;
(C) junior to the Series C Preferred Units, as to the payment of
distributions or as to the distribution of assets upon liquidation,
dissolution or winding up of the Partnership, if such class or series of
Partnership Units shall be Junior Units; and
(D) junior to the Series C Preferred Units, as to the payment of
distributions and as to the distribution of assets upon liquidation,
dissolution or winding up of the Partnership, if such class or series of
Partnership Units shall be Fully Junior Units.
6. Voting. Except as required by law, the General Partner, in its
------
capacity as the holder of the Series C Preferred Units, shall not be
entitled to vote at any meeting of the Partners or for any other purpose or
otherwise to participate in any action taken by the Partnership or the
Partners, or to receive notice of any meeting of the Partners.
7. Restriction on Ownership. The Series C Preferred Units shall be
------------------------
owned and held solely by the General Partner.
8. General. The rights of the General Partner, in its capacity as
-------
the holder of the Series C Preferred Units, are in addition to and not in
limitation on any other rights or authority of the General Partner, in any
other capacity, under the Agreement. In addition, nothing contained in
this Exhibit H shall be deemed to limit or otherwise restrict any rights or
---------
authority of the General Partner under the Agreement, other than in its
capacity as the holder of the Series C Preferred Units.
* * * *
G-6
