<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-24497
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AIMCO PROPERTIES, L.P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1275621
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1873 S. BELLAIRE STREET, SUITE 1700, 80222-4348
DENVER, COLORADO
(Address of principal executive offices) (Zip Code)
</TABLE>
(303) 757-8101
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal year,
if changed since last report)
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 [ ]
------------------
The number of shares of Partnership Common Units outstanding as of October
31, 1999: 72,274,886
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<PAGE> 2
AIMCO PROPERTIES, L.P.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998......................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and 1998 (unaudited)...... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (unaudited)............. 5
Notes to Consolidated Financial Statements (unaudited)...... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 22
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................ 23
Signatures........................................................... 24
</TABLE>
2
<PAGE> 3
AIMCO PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate, net of accumulated depreciation of $319,250 and
$228,155.................................................... $2,757,723 $2,515,710
Property held for sale...................................... 4,146 27,304
Investments in unconsolidated real estate partnerships...... 1,066,266 615,206
Investments in unconsolidated subsidiaries.................. 46,781 62,244
IPLP exchange and assumption receivable..................... -- 346,352
Notes receivable from unconsolidated real estate
partnerships.............................................. 105,925 103,979
Notes receivable from and advances to unconsolidated
subsidiaries.............................................. 140,588 136,173
Cash and cash equivalents................................... 56,203 52,832
Restricted cash............................................. 54,098 53,703
Notes receivable............................................ 19,429 --
Other assets................................................ 255,309 273,261
---------- ----------
Total assets...................................... $4,506,468 $4,186,764
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Secured notes payable....................................... $1,189,187 $ 819,331
Secured tax-exempt bond financing........................... 392,001 394,077
Unsecured short-term financing.............................. 111,700 280,300
Secured short-term financing................................ -- 108,022
---------- ----------
Total indebtedness................................ 1,692,888 1,601,730
Accounts payable, accrued and other liabilities............. 142,207 195,296
Resident security deposits and prepaid rents................ 13,461 12,654
---------- ----------
Total liabilities................................. 1,848,556 1,809,680
---------- ----------
Commitments and contingencies............................... -- --
Partnership-obligated mandatory redeemable convertible
preferred securities of a subsidiary trust................ 149,500 149,500
Minority interest........................................... 79,699 74,249
Partners' capital
Preferred Units........................................... 642,436 642,120
General Partner and Special Limited Partner............... 1,598,659 1,036,002
Limited Partners.......................................... 211,118 500,213
---------- ----------
2,452,213 2,178,335
Less: Investment in AIMCO preferred stock................... 23,500 25,000
---------- ----------
Total partners' capital........................... 2,428,713 2,153,335
---------- ----------
Total liabilities and partners' capital........... $4,506,468 $4,186,764
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
RENTAL PROPERTY OPERATIONS:
Rental and other property revenues... $120,398 $104,436 $ 347,187 $ 265,700
Property operating expenses.......... (48,366) (41,957) (135,897) (101,600)
Owned property management expense.... (3,437) (3,033) (10,332) (7,746)
Depreciation......................... (28,139) (25,503) (82,582) (59,792)
-------- -------- --------- ---------
Income from property operations...... 40,456 33,943 118,376 96,562
-------- -------- --------- ---------
SERVICE COMPANY BUSINESS:
Management fees and other income..... 10,280 4,406 25,794 13,968
Management and other expenses........ (14,595) (2,631) (25,883) (8,300)
-------- -------- --------- ---------
Income (loss) from service company
business.......................... (4,315) 1,775 (89) 5,668
-------- -------- --------- ---------
General and administrative expenses.... (3,772) (3,341) (9,226) (7,444)
Interest expense....................... (31,322) (21,978) (91,416) (56,756)
Interest income........................ 18,445 6,894 39,848 18,244
Equity in earnings (losses) of
unconsolidated real estate
partnerships......................... 1,606 (396) 7,264 (5,078)
Equity in earnings of unconsolidated
subsidiaries......................... 416 2,804 2,247 8,413
Loss from IPLP exchange and
assumption........................... -- -- (684) --
Minority interest...................... 2 (536) (2,078) (1,052)
Amortization........................... (1,942) (1,677) (5,826) (5,071)
-------- -------- --------- ---------
Income from operations................. 19,574 17,488 58,416 53,486
Gain on disposition of properties...... 315 257 330 2,783
-------- -------- --------- ---------
Net income............................. $ 19,889 $ 17,745 $ 58,746 $ 56,269
======== ======== ========= =========
Net income attributable to preferred
unitholders.......................... $ 14,636 $ 7,670 $ 41,571 $ 16,320
-------- -------- --------- ---------
Net income attributable to common
unitholders.......................... $ 5,253 $ 10,075 $ 17,175 $ 39,949
======== ======== ========= =========
Basic earnings per common unit......... $ 0.08 $ 0.19 $ 0.25 $ 0.80
======== ======== ========= =========
Diluted earnings per common unit....... $ 0.07 $ 0.19 $ 0.25 $ 0.79
======== ======== ========= =========
Weighted average common units
outstanding.......................... 69,925 52,896 67,597 50,420
======== ======== ========= =========
Weighted average common units and
common unit equivalents
outstanding.......................... 71,006 53,523 68,776 50,544
======== ======== ========= =========
Dividends paid per common unit......... $ 0.625 $ 0.5625 $ 1.875 $ 1.6875
======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 58,746 $ 56,269
--------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 100,570 67,344
Gain on disposition of properties....................... (330) (2,783)
Minority interest....................................... 2,078 1,052
Equity in (earnings) losses of unconsolidated real
estate partnerships.................................... (7,264) 5,078
Equity in earnings of unconsolidated subsidiaries....... (2,247) (8,413)
Loss from IPLP exchange and assumption.................. 684 --
Changes in operating assets and operating liabilities... 11,615 (67,722)
--------- ---------
Total adjustments.................................. 105,106 (5,444)
--------- ---------
Net cash provided by operating activities.......... 163,852 50,825
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate................................... (87,287) (63,839)
Additions to real estate.................................. (75,399) (49,864)
Proceeds from sale of property held for sale.............. 41,204 19,627
Purchase of notes receivable, general and limited
partnership interests and other assets.................. (111,127) (27,016)
Purchase of/additions to notes receivable................. (38,368) (72,445)
Proceeds from repayment of notes receivable............... 22,433 21,562
Cash received in connection with acquisitions............. 22,677 4,492
Cash paid for merger related costs........................ (17,949) --
Distributions received from investments in real estate
partnerships............................................ 58,297 513
Distributions from (contributions to) investments in
unconsolidated subsidiaries............................. 33,985 (13,032)
Purchase of investments held for sale..................... -- (4,935)
Redemption of common OP units............................. -- (516)
--------- ---------
Net cash used in investing activities.............. (151,534) (185,453)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured notes payable borrowings............ 248,126 44,252
Principal repayments on secured notes payable............. (24,555) (56,262)
Proceeds from secured tax-exempt bond financing........... 20,731 --
Principal repayments on secured tax-exempt bond
financing............................................... (38,527) (1,436)
Repayments on secured short-term financing................ (4,522) (30,693)
Net borrowings (paydowns) on revolving credit
facilities.............................................. (263,600) 33,237
Payment of loan costs, including proceeds and costs from
interest rate hedge..................................... (13,360) (5,727)
Proceeds from issuance of common OP units and preferred
units, exercise of options/warrants..................... 291,188 255,227
Principal repayments received on notes due from officers
on common OP unit purchases............................. 4,444 (2,888)
Payment of distributions to minority interest............. (12,606) --
Payment of distributions to General Partner and Special
Limited Partner......................................... (113,371) (74,871)
Payment of distributions to Limited Partners.............. (18,357) (8,702)
Payment of preferred unit distribution.................... (84,538) (10,916)
--------- ---------
Net cash provided by (used in) financing
activities........................................ (8,947) 141,221
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 3,371 6,593
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 52,832 37,088
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 56,203 $ 43,681
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1 -- ORGANIZATION
AIMCO Properties, L.P., a Delaware limited partnership (together with its
subsidiaries and other controlled entities, the "Partnership" (and together with
entities in which the Partnership has a controlling financial interest, the
"Company")), was formed on May 16, 1994 to conduct the business of acquiring,
developing, leasing, and managing multi-family apartment communities. The
Partnership's securities include Partnership Common Units ("Common OP Units"),
Partnership Preferred Units ("Preferred Units", together with Common OP Units,
the "OP Units"), and High Performance Units. Apartment and Investment Management
Company ("AIMCO") is the owner of the General Partner and Special Limited
Partner, as defined in the Third Amended and Restated Agreement of Limited
Partnership of AIMCO Properties, L.P. (the "Partnership Agreement"), of the
Partnership. The General Partner and Special Limited Partner hold Common OP
Units of the Partnership. In addition, AIMCO is the primary holder of all
Preferred Units outstanding in the Partnership. The Limited Partners of the
Partnership are individuals or entities that own Common OP Units other than
AIMCO. After holding the Common OP Units for one year, the Limited Partners have
the right to redeem their Common OP Units for cash, subject to the prior right
of the Partnership to elect to acquire some or all of the Common OP Units
tendered for redemption for cash or in exchange for shares of AIMCO Class A
Common Stock, on a one-for-one ratio.
The Partnership, through its operating divisions and subsidiaries, was
formed to hold and conduct substantially all of AIMCO's operations and manages
the daily operations of AIMCO's business and assets. All employees of the
Company are employees of the Partnership; AIMCO has no employees.
According to the terms of the Partnership Agreement, the capital structure
of the Partnership, in terms of the Common OP Units owned by the General
Partner, the Special Limited Partner and the Preferred Units outstanding, is
generally required to mirror the capital structure of AIMCO, with the only
difference being that the Partnership has additional Common OP Units outstanding
which are owned by the Limited Partners. Therefore, AIMCO is required to
contribute to the Partnership all proceeds from offerings of the AIMCO Class A
Common Stock, preferred stock, or any other equity offerings. In addition,
substantially all of AIMCO's assets must be owned through the Partnership;
therefore, AIMCO is generally required to contribute to the Partnership all
assets acquired. In exchange for the contribution of offering proceeds or
assets, AIMCO receives additional interests in the Partnership with similar
terms (i.e., if AIMCO contributes proceeds of a preferred stock offering, AIMCO
receives Preferred Units).
AIMCO frequently consummates transactions for the benefit of the
Partnership. For legal, tax or other business reasons, AIMCO may hold title or
ownership of certain assets until they can be transferred to the Partnership.
However, the Partnership has a controlling financial interest in all of AIMCO's
assets in the process of transfer to the Partnership.
At September 30, 1999 the Partnership had 72,263,302 Common OP Units
outstanding and 23,740,000 Preferred Units outstanding.
As of September 30, 1999, the Company:
- owned or controlled 65,546 units in 240 apartment properties;
- held an equity interest in 167,165 units in 880 apartment properties; and
- managed 130,107 units in 865 apartment properties for third party owners
and affiliates.
6
<PAGE> 7
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Partnership and subsidiaries and limited partnerships in which the
Partnership has a controlling financial interest. Pursuant to a Management and
Contribution Agreement between the Partnership and AIMCO, the Partnership has
acquired, in exchange for interests in the Partnership, the economic benefits of
subsidiaries of AIMCO in which the Partnership does not have an interest, and
AIMCO has granted the Partnership a right of first refusal to acquire such
subsidiaries' assets for no additional consideration. Pursuant to the agreement,
AIMCO has also granted the Partnership certain rights with respect to assets of
such subsidiaries. Interests held by limited partners in real estate
partnerships controlled by the Company are reflected as minority interests. The
assets of property owning partnerships and limited liability companies owned or
controlled by AIMCO or the Partnership are generally not available to pay
creditors or secure the obligations of AIMCO or the Partnership.
The accompanying unaudited consolidated financial statements of the
Partnership as of September 30, 1999 and for the three and nine months ended
September 30, 1999 and 1998 have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included and all such adjustments are of a recurring nature. The following
notes to consolidated financial statements highlight significant changes to the
notes included in the Annual Report on Form 10-K and present interim disclosures
as required by the Securities and Exchange Commission ("SEC"). In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and all such adjustments are of a recurring nature.
The consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Annual Report on Form 10-K for the year ended December 31, 1998. It should be
understood that accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. The results of operations for
the interim periods presented are not necessarily indicative of the results for
the entire year. Certain reclassifications have been made to prior period
financial statements to conform to the current period presentation.
As of September 30, 1999 and 1998, respectively, Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") had no
impact on the Partnership's net income or partners' capital.
NOTE 3 -- IPT MERGER
As a result of its merger with Insignia Financial Group, Inc. on October 1,
1998, AIMCO acquired approximately 51% of the outstanding shares of beneficial
interest of Insignia Properties Trust ("IPT"). On February 26, 1999, AIMCO
acquired, through a merger, the remaining 49% of IPT. Pursuant to the merger,
each of the outstanding shares of IPT that were not held by AIMCO were converted
into the right to receive 0.3601 shares of Class A Common Stock for each share
of IPT common stock, resulting in the issuance of approximately 4.3 million
shares of AIMCO Class A Common Stock (with a recorded value of approximately
$158.8 million). Concurrently with the IPT merger, all the assets and
liabilities of IPT were contributed by AIMCO to the Partnership in exchange for
approximately 8.9 million Common OP Units (valued at approximately $318.2
million). Also in connection with the IPT Merger, the IPLP Exchange and
Assumption was unwound and the approximately 10.2 million Common OP Units issued
in connection with the IPLP Exchange and Assumption Agreement were canceled.
7
<PAGE> 8
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- ACQUISITIONS
During the nine months ended September 30, 1999, in addition to the IPT
Merger (see Note 3), the Company purchased twelve apartment communities
containing a total of 4,452 apartment units for a total purchase price of $166.7
million.
<TABLE>
<CAPTION>
NUMBER PURCHASE
DATE ACQUIRED PROPERTY LOCATION OF UNITS PRICE
- ------------- -------- -------- -------- --------------
<S> <C> <C> <C> <C>
May 1999........................ Beach Lake Durham, NC 345 $ 15.0 million
May 1999........................ Briarwood Fayetteville, NC 274 8.3 million
May 1999........................ Hunters Creek Cincinnati, OH 146 4.4 million
May 1999........................ Somerset Lakes Indianapolis, IN 360 23.5 million
May 1999........................ Steeplechase Loveland, OH 272 11.0 million
May 1999........................ Walden Village Clarkson, GA 372 13.4 million
May 1999........................ Windgate Place Charlotte, NC 196 6.9 million
May 1999........................ Woodfield Gardens Charlotte, NC 132 3.5 million
May 1999........................ Lake Castleton Indianapolis, IN 1,265 34.6 million
July 1999....................... Marbella Miami, FL 504 19.4 million
July 1999....................... Bellavista Miami, FL 352 15.3 million
August 1999..................... Cameron Villas Orlando, FL 234 11.4 million
----- --------------
4,452 $166.7 million
===== ==============
</TABLE>
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Legal
The Company is a party to various legal actions resulting from its
operating activities. These actions are routine litigation and administrative
proceedings arising in the ordinary course of business, some of which are
covered by liability insurance, and none of which are expected to have a
material adverse effect on the consolidated financial condition or results of
operations of the Company and its subsidiaries taken as a whole.
In connection with the Company's offers to purchase interests in limited
partnerships that own properties, the Company and its affiliates are sometimes
subject to legal actions, including allegations that such activities may involve
breaches of fiduciary duties to the limited partners of such partnerships or
violations of the relevant partnership agreements. The Company believes it
complies with its fiduciary obligations and relevant partnership agreements, and
does not expect such legal actions to have a material adverse effect on the
consolidated financial condition or results of operations of the Company and its
subsidiaries taken as a whole.
Pending Investigations of HUD Management Arrangements
In July 1999, NHP received a grand jury subpoena requesting documents
relating to NHP's management of HUD-assisted or HUD-insured multi-family
projects and NHP's operation of a group purchasing program created by NHP, known
as Buyers Access. The subpoena relates to the same subject matter as subpoenas
NHP received in October and December of 1997 from the HUD Inspector General. To
date, neither the HUD Inspector General nor the grand jury has initiated any
action against NHP or the Company or, to NHP's or the Company's knowledge, any
owner of a HUD property managed by NHP. The Company believes that NHP's
operations and programs are in compliance, in all material respects, with all
laws, rules and regulations relating to HUD-assisted or HUD-insured properties.
The Company does not believe that the investigations will result in a material
adverse impact on its operations. However, as with any similar investigation,
there can be no assurance that these will not result in material fines,
penalties or other costs.
8
<PAGE> 9
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Environmental
Various Federal, state and local laws subject property owners or operators
to liability for the costs of removal or remediation of certain hazardous
substances present on a property. Such laws often impose liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of the hazardous substances. The presence of, or the failure to properly
remediate, hazardous substances may adversely affect occupancy at contaminated
apartment communities and our ability to sell or borrow against contaminated
properties. In addition to the costs associated with investigation and
remediation actions brought by governmental agencies, the presence of hazardous
wastes on a property could result in personal injury or similar claims by
private plaintiffs. Various laws also impose liability for the cost of removal
or remediation of hazardous substances at the disposal or treatment facility.
Anyone who arranges for the disposal or treatment of hazardous or toxic
substances is potentially liable under such laws. These laws often impose
liability whether or not the person arranging for the disposal ever owned or
operated the disposal facility. In connection with the ownership, operation and
management of our properties, we could potentially be liable for environmental
liabilities or costs associated with our properties or properties we may acquire
or manage in the future.
NOTE 6 -- INTEREST INCOME RECOGNITION FOR NOTES RECEIVABLE
The Company recognizes interest income earned from its investments in notes
receivable based upon whether the collectibility of such amounts is both
probable and estimable. The notes receivable were either extended by the Company
and are carried at the face amount plus accrued interest ("par value notes") or
were made by predecessors whose positions have been acquired by the Company at a
discount and are carried at the acquisition amount using the cost recovery
method ("discounted notes").
As of September 30, 1999, the Company held $193.1 million of par value
notes, including accrued interest, for which management believes the
collectibility of such amounts is both probable and estimable. As such, interest
income from the par value notes is generally recognized as it is earned.
Interest income from such notes for the three and nine months ended September
30, 1999, totaled $4.2 million and $12.5 million, respectively.
As of September 30, 1999, the Company held discounted notes, including
accrued interest, with a carrying value of $57.0 million. The total face value
plus accrued interest of these notes was $159.2 million. In general, interest
income from the discounted notes is not recognized as it is earned because the
timing and amounts of cash flows are not probable and estimable.
Under the cost recovery method, the discounted notes are carried at the
acquisition amount, less subsequent cash collections, until such time as
collectibility is probable and the timing and amounts are estimable. Based upon
closed or pending transactions (including sales activity), market conditions,
and improved operations of the obligor, among other things, certain notes and
the related discounts have been determined to be collectible. Accordingly,
interest income that had previously been deferred and portions of the related
discounts were recognized as interest income during the period. For the three
and nine months ended September 30, 1999, the Company recognized deferred
interest income and discounts of approximately $10.8 million ($0.15 per basic
and diluted unit) and $15.1 million ($0.22 per basic and diluted unit),
respectively.
NOTE 7 -- DEBT
In February 1999, the Partnership terminated its $50 million secured credit
facility with Washington Mortgage Financial Group, Ltd. and repaid all
outstanding borrowings with proceeds from new long-term, fully amortizing notes
payable totaling $58.2 million secured by certain properties that previously
secured the credit facility.
9
<PAGE> 10
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the nine months ended September 30, 1999, the Company closed $181.5
million of long-term fixed rate, fully amortizing notes payable with a weighted
average interest rate of 6.9%. Each of the notes is individually secured by one
of twenty-six properties with no cross-collateralization. The Company used the
net proceeds totaling $176.3 million after transaction costs to repay existing
debt. During the nine months ended September 30, 1999, the Company has also
assumed $55.7 million of long-term fixed rate, fully amortizing notes payables
with a weighted average interest rate of 7.8% in connection with the acquisition
of properties. Each of the notes is individually secured by one of three
properties with no cross-collateralization.
In August 1999, AIMCO and the Partnership closed a $300 million revolving
credit facility arranged by Bank of America, N.A. BankBoston, N.A. and First
Union National Bank comprised of a total of nine lender participants. The
Partnership is the borrower under the credit agreement, but all obligations
thereunder are guaranteed by AIMCO and certain of its subsidiaries. The
obligations under the new credit facility are secured by certain non-real estate
assets of the Partnership. The existing lines of credit were terminated. The
credit facility is used for general corporate purposes and has a two-year term
with two one-year extensions. The annual interest rate under the new credit
facility is based on either LIBOR or a base rate which is the higher of Bank of
America's reference rate or 0.5% over the federal funds rate, plus, in either
case, an applicable margin. The margin ranges between 2.05% and 2.55%, in the
case of LIBOR-based loans, and between 0.55% and 1.05%, in the case of base rate
loans, based upon a fixed charge coverage ratio. The weighted average interest
rate at September 30, 1999 was 7.95%. The amount available under the credit
facility at September 30, 1999 was $188.3 million.
NOTE 8 -- PARTNERS' CAPITAL
Preferred Units
All classes of Preferred Units are on equal parity and are senior to Common
OP Units. None of the classes of Preferred Units have any voting rights, except
the right to approve certain changes to the Partnership Agreement that would
adversely affect holders of such class of units.
Holders of the Class B Cumulative Convertible Preferred Units (the "Class B
Preferred Units") are entitled to receive, when, as and if declared by the
General Partner, quarterly cash distributions per share equal to the greater of
$1.78125 or the cash distributions declared on the number of Common OP Units
into which one Class B Preferred Unit is convertible. Each Class B Preferred
Unit is convertible at the option of the holder, beginning August 1998, into
3.28407 Common OP Units, subject to certain anti-dilution adjustments.
Holders of Class C, D, G and H Preferred Units are entitled to receive,
when, as and if declared by the Board of Directors of the General Partner,
distributions at the following rates per annum:
<TABLE>
<S> <C>
Class C Cumulative Preferred Units.......................... 9.000%
Class D Cumulative Preferred Units.......................... 8.750%
Class G Cumulative Preferred Units.......................... 9.375%
Class H Cumulative Preferred Units.......................... 9.500%
</TABLE>
Holders of Class J Cumulative Convertible Preferred Units (the "Class J
Preferred Units") were entitled to receive cash distributions at the rate of 7%
per annum of the $100 liquidation preference (equivalent to $7 per annum per
unit) for the period beginning on November 6, 1998 and lasting until November
15, 1998, and 8% per annum of the $100 liquidation preference (equivalent to $8
per annum per unit) for the period beginning on and including November 15, 1998
and lasting until November 15, 1999.
The Company had the option to convert any or all of the Class J Preferred
Units into Common OP Units at a conversion rate of 2.5 Common OP Units for each
Class J Preferred Unit, plus unpaid distributions accrued on the units redeemed
(a) on or after November 6, 2002, if the market price of the AIMCO Class A
10
<PAGE> 11
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock in the five most recent trading days, as defined, was equal to or
greater than $40 or; (b) at any time on or prior to November 6, 2002, if the
internal rate of return, as defined, exceeded 12.5%. In May 1999, AIMCO notified
the holders of the Class J Cumulative Convertible Preferred Stock that the
internal rate of return threshold had been met, and AIMCO exercised its right to
convert all of the Class J Preferred Stock into 2.5 million shares of Class A
Common Stock. Concurrently, 1 million convertible preferred units were converted
into 2.5 million Common OP Units.
In connection with the acquisition of Calhoun Beach Club, the Partnership
issued 90,000 Preferred Units, with an initial liquidation value of $9.0
million. Holders of these Preferred Units are entitled to receive, when and as
declared by the General Partner, cash distributions at the rate of 8% per annum.
After December 30, 1999, a holder of these Preferred Units may redeem these
Preferred Units, at the option of the Partnership, for cash or Common OP Units.
The Class E Cumulative Convertible Preferred Units (the "Class E Preferred
Units") were issued in connection with the merger with Insignia Financial Group,
Inc. Holders of Class E Preferred Units were entitled to receive the same cash
distributions per unit as holders of Common OP Units. In addition, on January
15, 1999, holders of Class E Preferred Units received a special dividend in an
aggregate amount of approximately $50 million, and all outstanding Class E
Preferred Units automatically converted into an equal number of Common OP Units.
On February 18, 1999, AIMCO issued 5,000,000 shares of newly created Class
K Convertible Cumulative Preferred Stock, par value $.01 per share ("Class K
Preferred Stock") in a public offering. The net proceeds of $120.6 million were
contributed by AIMCO to the Partnership in exchange for 5,000,000 Class K
Preferred Units and were used to repay certain indebtedness and for working
capital. For three years, holders of the Class K Preferred Units are entitled to
receive, when, as and if declared by the General Partner, annual cash
distributions in an amount per unit equal to the greater of (i) $2.00 per year
(equivalent to 8% of the liquidation preference), or (ii) the cash distributions
payable on the number of Common OP Units into which a Class K Preferred Unit is
convertible. Beginning with the third anniversary of the date of original
issuance, holders of Class K Preferred Units will be entitled to receive an
amount per Class K Preferred Unit equal to the greater of (i) $2.50 per year
(equivalent to 10% of the liquidation preference), or (ii) the cash
distributions payable on the number of Common OP Units into which a Class K
Preferred Unit is convertible. The Class K Preferred Units are senior to the
Common OP Units as to distributions and liquidation. Upon any liquidation,
dissolution or winding up of the Partnership, before payment or distributions by
the Partnership shall be made to any holders of Common OP Units, the holders of
the Class K Preferred Units shall be entitled to receive a liquidation
preference of $25 per share/unit, plus accumulated, accrued and unpaid
distributions.
In May 1999, AIMCO issued 5,000,000 shares of newly created Class L
Convertible Cumulative Preferred Stock, par value $.01 per share ("Class L
Preferred Stock"), in a private offering. The proceeds of $125.0 million were
contributed by AIMCO to the Partnership in exchange for 5,000,000 Class L
Preferred Units and were used to repay certain indebtedness and for working
capital. For three years, the holder of the Class L Preferred Units is entitled
to receive, when, as and if declared by the General Partner, annual cash
distributions in an amount per Unit equal to the greater of (i) $2.025 per year
(equivalent to 8.1% of the liquidation preference), or (ii) the cash
distributions payable on the number of Common OP Units into which a Class L
Preferred Unit is convertible. Beginning with the third anniversary of the date
of original issuance, the holder of Class L Preferred Units will be entitled to
receive an amount per Class L Preferred Unit equal to the greater of (i) $2.50
per year (equivalent to 10% of the liquidation preference), or (ii) the cash
distribution payable on the number of Common OP Units into which a Class L
Preferred Unit is convertible. The Class L Preferred Units are senior to the
Common OP Units as to distribution and liquidation. Upon any liquidation,
dissolution or winding up of AIMCO, before payments or distributions by the
Partnership shall be made to
11
<PAGE> 12
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any holders of Common OP Units, the holder of the Class L Preferred Units is
entitled to receive a liquidation preference of $25 per share/unit, plus
accumulated, accrued and unpaid distributions.
Common OP Units
Common OP Units are redeemable by Common OP Unitholders (other than the
General Partner and Special Limited Partner) at their option, subject to certain
restrictions, on the basis of one Common OP Unit for either one share of AIMCO
Class A Common Stock or cash equal to the fair value of one share of AIMCO Class
A Common Stock at the time of redemption. The Company has the option to deliver
shares of AIMCO Class A Common Stock in exchange for all or any portion of the
cash requested. When a Limited Partner redeems a Common OP Unit for AIMCO Class
A Common Stock, Limited Partner's capital is reduced and the Special Limited
Partners' capital is increased.
On September 15, 1999, AIMCO completed a direct placement of 1,382,580
shares of Class A Common Stock at a net price of $39.50 per share to five
institutional investors who are existing shareholders. The net proceeds of
approximately $54.6 million were contributed by AIMCO to the Partnership in
exchange for 1,382,580 Common OP Units and were used to repay outstanding
indebtedness under the new credit facility.
NOTE 9 -- EARNINGS PER COMMON OP UNITS
The following tables illustrate the calculation of basic and diluted
earnings per Common OP Unit for the nine and three months ended September 30,
1999 and 1998 (in thousands, except per unit data):
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
NUMERATOR:
Net income................................ $ 58,746 $ 56,269
Preferred unit distributions.............. (41,571) (16,320)
-------- --------
Numerator for basic and diluted earnings
per common unit -- income attributable
to common unitholders.................. $ 17,175 $ 39,949
======== ========
DENOMINATOR:
Denominator for basic earnings per common
unit -- weighted average number of
common units outstanding............... 67,597 50,420
Effect of dilutive securities:
Dilutive potential common units,
options and warrants................. 1,179 124
-------- --------
Denominator for dilutive earnings per
common unit.......................... 68,776 50,544
======== ========
Basic earnings per common unit:
Operations............................. $ 0.25 $ 0.74
Gain on disposition of properties...... -- 0.06
-------- --------
Total............................. $ 0.25 $ 0.80
======== ========
Diluted earnings per common unit:
Operations............................. $ 0.25 $ 0.73
Gain on disposition of properties...... -- 0.06
-------- --------
Total............................. $ 0.25 $ 0.79
======== ========
</TABLE>
12
<PAGE> 13
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
NUMERATOR:
Net income................................ $19 ,889 $17,745
Preferred unit distributions.............. (14,636) (7,670)
-------- -------
Numerator for basic and diluted earnings
per common unit -- income attributable
to common unitholders.................. $ 5,253 $10,075
======== =======
DENOMINATOR:
Denominator for basic earnings per common
unit -- weighted average number of
common units outstanding............... 69,925 52,896
Effect of dilutive securities:
Dilutive potential common units,
options and warrants................. 1,081 627
-------- -------
Denominator for dilutive earnings per
common unit.......................... 71,006 53,523
======== =======
Basic earnings per common unit:
Operations............................. $ 0.07 $ 0.18
Gain on disposition of properties...... 0.01 0.01
-------- -------
Total............................. $ 0.08 $ 0.19
======== =======
Diluted earnings per common unit:
Operations............................. $ 0.07 $ 0.19
Gain on disposition of properties...... -- --
-------- -------
Total............................. $ 0.07 $ 0.19
======== =======
</TABLE>
NOTE 10 -- INDUSTRY SEGMENTS
The Company owns and operates multi-family apartment communities throughout
the United States and Puerto Rico, which generate rental and other
property-related income through the leasing of apartment units. The Company
separately evaluates the performance of each of its apartment communities.
However, because the apartment communities have similar economic
characteristics, facilities, services and tenants, the apartment communities
have been aggregated into a single apartment communities segment. All segment
disclosures are included in or can be derived from the Partnership's
consolidated financial statements.
All revenues are from external customers and no revenues are generated from
transactions with other segments. There are no tenants who contributed 10% or
more of the Partnership's total revenues during the three months ended September
30, 1999 or September 30, 1998.
13
<PAGE> 14
AIMCO PROPERTIES, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
As of September 30, 1999, the Company owned or managed 362,818 apartment
units, comprised of 65,546 units in 240 apartment communities owned or
controlled by the Company (the "Owned Properties"), 167,165 units in 880
apartment communities in which the Company has an equity interest (the "Equity
Properties") and 130,107 units in 865 apartment communities which the Company
manages for third parties and affiliates (the "Managed Properties" and together
with the Owned Properties and the Equity Properties, the "AIMCO Properties").
The apartment communities are located in 48 states, the District of Columbia and
Puerto Rico.
The following discussion contains forward-looking statements that are
subject to significant risks and uncertainties. There are several important
factors that could cause actual results to differ materially from the results
anticipated by the forward-looking statements contained in the following
discussion. Such factors and risks include, but are not limited to: financing
risks, including the risk that the Company's cash flow from operations may be
insufficient to meet required payments of principal and interest on its debt;
real estate risks, including variations of real estate values and the general
economic climate in local markets and competition for tenants in such markets;
acquisition and development risks, including the failure of acquisitions to
perform in accordance with projections; and possible environmental liabilities,
including costs which may be incurred due to necessary remediation of
contamination of properties presently owned or previously owned by the Company.
Readers should carefully review the financial statements and the notes thereto,
as well as the risk factors described in documents the Company files from time
to time with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Comparison of the Nine Months Ended September 30, 1999 to the Nine Months
Ended September 30, 1998
NET INCOME
The Company recognized net income of $58.7 million for the nine months
ended September 30, 1999, compared to $56.3 million for the nine months ended
September 30, 1998. The increase in net income of $2.4 million, or 4.3%, was
primarily the result of the acquisition of Insignia Financial Group, Inc.
("Insignia"), Ambassador Apartments, Inc. ("Ambassador") and Insignia Properties
Trust ("IPT"), and the purchase of thirty properties during 1998 and nine
properties during 1999.
CONSOLIDATED RENTAL PROPERTY OPERATIONS
Rental and other property revenues from the consolidated Owned Properties
totaled $347.2 million for the nine months ended September 30, 1999, compared to
$265.7 million for the nine months ended September 30, 1998, an increase of
$81.5 million, or 30.7%. The increase in rental and other property revenues was
primarily due to the acquisitions of Ambassador, Insignia and IPT, and the
purchase of thirty properties during 1998 and nine properties during 1999.
Property operating expenses for the consolidated Owned Properties,
consisting of on-site payroll costs, utilities (net of reimbursements received
from tenants), contract services, turnover costs, repairs and maintenance,
advertising and marketing, property taxes and insurance, totaled $135.9 million
for the nine months ended September 30, 1999, compared to $101.6 million for the
nine months ended September 30, 1998, an increase of $34.3 million or 33.8%. The
increase in property operating expenses was primarily due to the acquisitions of
Ambassador, Insignia and IPT, and the purchase of thirty properties during 1998
and nine properties during 1999.
14
<PAGE> 15
SERVICE COMPANY BUSINESS
Loss from the service company business was $0.1 million for the nine months
ended September 30, 1999, compared to income of $5.7 million for the nine months
ended September 30, 1998. The decrease in service company business income of
$5.8 million was primarily due to the acquisitions of Insignia and IPT and a
change in the allocation of management contracts expense between the
consolidated service company and the unconsolidated subsidiaries.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $7.4 million for the
nine months ended September 30, 1998 to $9.2 million for the nine months ended
September 30, 1999, a 24.3% increase. The increase of $1.8 million is primarily
due to additional corporate costs and additional employee salaries associated
with the merger with Ambassador in May 1998, the merger with Insignia in October
1998 and the merger with IPT in February 1999. In addition, due to the growth of
the Company, several new departments have been added, including legal, tax and
tender coordination, as well as increased levels of personnel in the accounting
and finance departments.
INTEREST EXPENSE
Interest expense, which includes the amortization of deferred financing
costs, totaled $91.4 million for the nine months ended September 30, 1999,
compared to $56.8 million for the nine months ended September 30, 1998, an
increase of $34.6 million, or 60.9%. The increase was primarily due to interest
expense incurred in connection with the acquisitions of Ambassador, Insignia and
IPT, and interest expense incurred in connection with 1998 and 1999
acquisitions.
INTEREST INCOME
Interest income totaled $39.8 million for the nine months ended September
30, 1999, compared to $18.2 million for the nine months ended September 30,
1998, an increase of $21.6 million. The Company holds investments in notes
receivable which were either extended by the Company and are carried at the face
amount plus accrued interest ("par value notes") or were made by predecessors
whose positions have been acquired by the Company at a discount and are carried
at the acquisition amount using the cost recovery method ("discounted notes").
$15.1 million of the increase in interest income is due to the recognition of
interest income that had previously been deferred and portions of the related
discount for certain discounted notes. Based upon closed or pending
transactions, market conditions, and improved operations of the obligor, the
collectibility of such notes is now believed to be probable and the amounts and
timing of collections are estimable. The remaining increase is primarily related
to other interest earned on both the par value and discounted notes made by the
Company to partnerships in which the Company acts as the general partner and
interest earned on notes receivable acquired in the merger with Insignia and
IPT.
Comparison of the Three Months Ended September 30, 1999 to the Three Months
Ended September 30, 1998
NET INCOME
The Company recognized net income of $19.9 million for the three months
ended September 30, 1999, compared to $17.7 million for the three months ended
September 30, 1998. The increase in net income of $2.2 million, or 12.4%, was
primarily the result of the acquisitions of Insignia, Ambassador, and IPT, and
the purchase of thirty properties during 1998 and twelve properties during 1999.
CONSOLIDATED RENTAL PROPERTY OPERATIONS
Rental and other property revenues from the consolidated Owned Properties
totaled $120.4 million for the three months ended September 30, 1999, compared
to $104.4 million for the three months ended
15
<PAGE> 16
September 30, 1998, an increase of $16.0 million, or 15.3%. The increase in
rental and other property revenues was primarily due to the acquisitions of
Insignia and IPT.
Property operating expenses for the consolidated Owned Properties,
consisting of on-site payroll costs, utilities (net of reimbursements received
from tenants), contract services, turnover costs, repairs and maintenance,
advertising and marketing, property taxes and insurance, totaled $48.4 million
for the three months ended September 30, 1999, compared to $42.0 million for the
three months ended September 30, 1998, an increase of $6.4 million or 15.2%. The
increase in property operating expenses was primarily due to the acquisitions of
Insignia and IPT.
SERVICE COMPANY BUSINESS
Loss from the service company business was $4.3 million for the three
months ended September 30, 1999, compared to income of $1.8 million for the
three months ended September 30, 1998. The decrease in service company business
of $6.1 million was primarily due to the acquisitions of Insignia and IPT and a
change in the allocation of management contracts expense between the
consolidated service company and the unconsolidated subsidiaries.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $3.3 million for the
three months ended September 30, 1998 to $3.8 million for the three months ended
September 30, 1999, a 15.2% increase. The increase is primarily due to
additional corporate costs and additional employee salaries associated with the
merger with Ambassador in May 1998, the merger with Insignia in October 1998,
and the merger with IPT in February 1999. In addition, due to the growth of the
Company, several new departments have been added, including legal, tax and
tender coordination, as well as increased levels of personnel in the accounting
and finance departments.
INTEREST EXPENSE
Interest expense, which includes the amortization of deferred financing
costs, totaled $31.3 million for the three months ended September 30, 1999,
compared to $22.0 million for the three months ended September 30, 1998, an
increase of $9.3 million, or 42.3%. The increase was primarily due to interest
expense incurred in connection with the acquisitions of Ambassador, Insignia and
IPT, and interest expense incurred in connection with 1998 and 1999
acquisitions.
INTEREST INCOME
Interest income totaled $18.4 million for the three months ended September
30, 1999, compared to $6.9 million for the three months ended September 30,
1998, an increase of $11.5 million. The Company holds investments in notes
receivable which were either extended by the Company and are carried at the face
amount plus accrued interest ("par value notes") or were made by predecessors
whose positions have been acquired by the Company at a discount and are carried
at the acquisition amount using the cost recovery method ("discounted notes").
$10.8 million of the increase in interest income is due to the recognition of
interest income that had previously been deferred and portions of the related
discount for certain discounted notes. Based upon closed or pending
transactions, market conditions, and improved operations of the obligor, the
collectibility of such notes is now believed to be probable and the amounts and
timing of collections are estimable. The remaining increase is primarily related
to other interest earned on both the par value and discounted notes made by the
Company to partnerships in which the Company acts as the general partner and
interest earned on notes receivable acquired in the merger with Insignia and
IPT.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its short-term liquidity requirements,
including property acquisitions, tender offers and refinancing of short-term
debt with long-term, fixed rate, fully amortizing debt, secured or
16
<PAGE> 17
unsecured short-term debt, the issuance of debt or equity securities in public
offerings or private placements, and cash generated from operations.
In August 1998, AIMCO and the Partnership filed a shelf registration
statement with the SEC with respect to an aggregate of $1,268 million of debt
and equity securities of AIMCO (of which $268 million was carried forward from
AIMCO's 1997 shelf registration statement) and $500 million of debt securities
of the Partnership. The registration statement was declared effective by the SEC
on December 10, 1998. As of September 30, 1999, AIMCO had $1,088 million of
securities available and the Partnership had $500 million of securities
available from this registration statement.
In August 1999, AIMCO and the Partnership closed a $300 million revolving
credit facility arranged by Bank of America, N.A. BankBoston, N.A. and First
Union National Bank comprised of a total of nine lender participants. The
Partnership is the borrower under the credit agreement, but all obligations
thereunder are guaranteed by AIMCO and certain of its subsidiaries. The
obligations under the new credit facility are secured by certain non-real estate
assets of the Partnership. The existing lines of credit were terminated. The
credit facility is used for general corporate purposes and has a two-year term
with two one-year extensions. The annual interest rate under the new credit
facility is based on either LIBOR or a base rate which is the higher of Bank of
America's reference rate or 0.5% over the federal funds rate, plus, in either
case, an applicable margin. The margin ranges between 2.05% and 2.55%, in the
case of LIBOR-based loans, and between 0.55% and 1.05%, in the case of base rate
loans, based upon a fixed charge coverage ratio. The weighted average interest
rate at September 30, 1999 was 7.95%. The amount available under the credit
facility at September 30, 1999 was $188.3 million.
On September 15, 1999, AIMCO completed a direct placement of 1,382,580
shares of Class A Common Stock at a net price of $39.50 per share to five
institutional investors who are existing shareholders. The net proceeds of
approximately $54.6 million were contributed by AIMCO to the Partnership in
exchange for 1,382,580 Common OP Units and were used to repay outstanding
indebtedness under the new credit facility.
At September 30, 1999, the Company had $56.2 million in cash and cash
equivalents. In addition, the Company had $54.1 million of restricted cash,
primarily consisting of reserves and impounds held by lenders for capital
expenditures, property taxes and insurance. The Company's principal demands for
liquidity include normal operating activities, payments of principal and
interest on outstanding debt, capital improvements, acquisitions of or
investments in properties, and payments of distributions. The Company considers
its cash provided by operating activities, and funds available under its credit
facilities, to be adequate to meet short-term liquidity demands. The Company
utilizes its revolving credit facility for general corporate purposes and to
fund investments on an interim basis.
From time to time, the Company has offered to acquire and, in the future,
may offer to acquire the interests held by third party investors in certain
limited partnerships for which the Company acts as general partner. Any such
acquisitions will require funds to pay the cash purchase price for such
interests. During the nine months ended September 30, 1999, the Company made
separate offers to the limited partners of 484 partnerships to acquire their
limited partnership interests. The Company purchased approximately $140.6
million (including transaction costs) of limited partnership interests.
In connection with the settlement of certain litigation, the Company has
undertaken to commence two rounds of tender offers relating to limited
partnership interests in 49 partnerships. The Company is obligated to pay not
more than $50 million in cash to purchase limited partnership interests in
either round of tender offers.
CAPITAL EXPENDITURES
For the nine months ended September 30, 1999, the Company spent $30.2
million for Capital Replacements (expenditures for routine maintenance of a
property), $9.9 million for Initial Capital Expenditures or "ICE" (expenditures
at a property that have been identified, at the time the property is acquired,
as expenditures to be incurred within one year of the acquisition), and $35.3
million for construction and capital enhancements (amenities that add a material
new feature or revenue source at a property). These expenditures were funded by
borrowings under the Company's primary credit facility, working capital reserves
17
<PAGE> 18
and net cash provided by operating activities. During 1999, the Company will
provide an allowance for capital replacements of $300 per apartment unit. ICE
and capital enhancements will primarily be funded by cash from operating
activities and borrowings under the Company's credit facility.
FUNDS FROM OPERATIONS
The Company measures its economic profitability based on funds from
operations ("FFO"), less a reserve for Capital Replacements of $300 per
apartment unit. The Company's management believes that FFO, less such a reserve,
provides investors with an understanding of the Company's ability to incur and
service debt and make capital expenditures. The Board of Governors of the
National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as
net income (loss), computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains and losses from debt restructuring and
sales of property, plus real estate related depreciation and amortization
(excluding amortization of financing costs), and after adjustments for
unconsolidated partnerships and joint ventures. The Company calculates FFO based
on the NAREIT definition, as adjusted for amortization of goodwill, the non-cash
deferred portion of the income tax provision for unconsolidated subsidiaries and
less the payment of dividends on preferred stock. FFO should not be considered
an alternative to net income or net cash flows from operating activities, as
calculated in accordance with GAAP, as an indication of the Company's
performance or as a measure of liquidity. FFO is not necessarily indicative of
cash available to fund future cash needs. In addition, there can be no assurance
that the Company's basis for computing FFO is comparable with that of other real
estate investment trusts.
For the three months and nine months ended September 30, 1999 and 1998, the
Company's FFO was as follows (dollars in thousands):
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income............................ $19,889 $17,745 $ 58,746 $ 56,269
Gain on disposition of properties..... (315) (257) (330) (2,783)
Real estate depreciation, net of
minority interest................... 27,152 24,477 78,960 56,900
Real estate depreciation related to
unconsolidated entities............. 29,204 8,248 73,950 17,379
Amortization of goodwill.............. 2,455 2,350 7,366 7,077
Amortization of recoverable amount of
management contracts................ 11,330 1,113 32,126 4,201
Deferred taxes benefit................ 1,305 1,843 3,102 6,134
Preferred unit distributions.......... (7,208) (6,285) (26,735) (12,296)
TOPR's interest expense............... 2,429 -- 2,429 --
------- ------- -------- --------
Funds From Operations (FFO)........... $86,241 $49,234 $229,614 $132,881
======= ======= ======== ========
Weighted average number of units and
common units equivalents
outstanding:
Common units and common units
equivalents...................... 77,691 49,866 69,204 47,248
Preferred units convertible into
common units..................... 5,555 6,120 7,259 5,759
------- ------- -------- --------
83,246 55,986 76,463 53,007
======= ======= ======== ========
</TABLE>
18
<PAGE> 19
For the nine months ended September 30, 1999 and 1998, net cash flows were
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash flow provided by operating activities............ $ 163,852 $ 50,825
Cash flow used in investing activities................ (151,534) (185,453)
Cash flow provided by (used in) financing
activities.......................................... (8,947) 141,221
</TABLE>
LITIGATION
The Company is a party to various legal actions resulting from its
operating activities. These actions are routine litigation and administrative
proceedings arising in the ordinary course of business, some of which are
covered by liability insurance, and none of which are expected to have a
material adverse effect on the consolidated financial condition or results of
operations of the Company and its subsidiaries taken as a whole.
In connection with the Company's offers to purchase interests in limited
partnerships that own properties, the Company and its affiliates are sometimes
subject to legal actions, including allegations that such activities may involve
breaches of fiduciary duties to the limited partners of such partnerships or
violations of the relevant partnership agreements. The Company believes it
complies with its fiduciary obligations and relevant partnership agreements, and
does not expect such legal actions to have a material adverse effect on the
consolidated financial condition or results of operations of the Company and its
subsidiaries taken as a whole.
CONTINGENCIES
Pending Investigations of HUD Management Arrangements
In July 1999, NHP received a grand jury subpoena requesting documents
relating to NHP's management of HUD-assisted or HUD-insured multi-family
projects and NHP's operation of a group purchasing program created by NHP, known
as Buyers Access. The subpoena relates to the same subject matter as subpoenas
NHP received in October and December of 1997 from the HUD Inspector General. To
date, neither the HUD Inspector General nor the grand jury has initiated any
action against NHP or the Company or, to NHP's or the Company's knowledge, any
owner of a HUD property managed by NHP. The Company believes that NHP's
operations and programs are in compliance, in all material respects, with all
laws, rules and regulations relating to HUD-assisted or HUD-insured properties.
The Company does not believe that the investigations will result in a material
adverse impact on its operations. However, as with any similar investigation,
there can be no assurance that these will not result in material fines,
penalties or other costs.
Environmental
Various Federal, state and local laws subject property owners or operators
to liability for the costs of removal or remediation of certain hazardous
substances present on a property. Such laws often impose liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of the hazardous substances. The presence of, or the failure to properly
remediate, hazardous substances may adversely affect occupancy at contaminated
apartment communities and our ability to sell or borrow against contaminated
properties. In addition to the costs associated with investigation and
remediation actions brought by governmental agencies, the presence of hazardous
wastes on a property could result in personal injury or similar claims by
private plaintiffs. Various laws also impose liability for the cost of removal
or remediation of hazardous substances at the disposal or treatment facility.
Anyone who arranges for the disposal or treatment of hazardous or toxic
substances is potentially liable under such laws. These laws often impose
liability whether or not the person arranging for the disposal ever owned or
operated the disposal facility. In connection with the ownership, operation and
management of our properties, we could potentially be liable for environmental
liabilities or costs associated with our properties or properties we may acquire
or manage in the future.
19
<PAGE> 20
YEAR 2000 READINESS DISCLOSURE
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Over the past two years, the Company has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed in time, the Year 2000 issue could have a material impact on the
operations of the Company.
The Company's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Company has
fully completed its assessment of all information systems that could be
significantly affected by the Year 2000, and has begun the remediation, testing
and implementation phases on both hardware and software systems. Assessments are
continuing in regards to embedded systems. The status of each is detailed below.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE
Computer Hardware
During 1997 and 1998, AIMCO identified all of the computer systems at risk
and formulated a plan to repair or replace each of the affected systems. During
1997, when the Company merged with NHP, the mainframe system used by NHP was
Year 2000 compliant. In August 1998, the Year 2000 compliant system became fully
functional for the entire Company.
In October 1998, the Company merged with Insignia. In April 1999, the
Company embarked on a data center consolidation project that unifies the
Company's and Insignia's core financial systems under one Year 2000 compliant
system. The completion date for this project is October 1999.
In connection with the data center consolidation, PC-based network servers,
routers and desktop PCs were analyzed for compliance. The Company has begun to
replace each of the non-compliant network connections and desktop PCs and, as of
September 30, 1999, had virtually completed this effort.
The total cost to replace the PC-based network servers, routers and desktop
PCs was expected to be approximately $1.5 million, of which $1.3 million has
been incurred to date.
Computer Software
The Company utilizes a combination of off-the-shelf, commercially available
software programs as well as custom-written programs that are designed to fit
specific needs. Both of these types of programs were studied, and implementation
plans written and executed with the intent of repairing or replacing any non-
compliant software programs.
In 1997, when the Company merged with NHP, the core financial system used
by NHP was Year 2000 compliant. During 1998, the Company integrated all of its
core financial systems to this compliant system for general ledger and financial
reporting purposes.
The data center consolidation project will also unify the core computer
software applications of the Company and those acquired in the merger with
Insignia.
20
<PAGE> 21
In 1997, the Company determined that the software used for property
management and rent collection was not Year 2000 compliant. During 1998, the
Company implemented a Year 2000 compliant system at each of its owned or managed
properties, at a cost of $1.5 million. During 1998, the Company acquired 82
properties and acquired the Insignia multi-family business. Insignia owned or
managed 1,100 properties. As properties are acquired, the Company converts the
existing property management and rent collection systems to the Company's Year
2000 compliant systems. The estimated additional costs to convert such systems
at all recently acquired properties, including those acquired from Insignia, is
$0.2 million, and the implementation and testing process was completed in June,
1999.
The final software area is the office software and server operating
systems. The Company has upgraded all non-compliant office software systems on
each PC and has upgraded virtually all of the server operating systems.
Operating Equipment
The Company has operating equipment, primarily at the property sites, which
is being evaluated for Year 2000 compliance. In September 1997, the Company
began taking a census and inventory of embedded systems (including those devices
that use time to control systems and machines at specific properties, for
example, elevators, heating, ventilating and air conditioning systems, security
and alarm systems, etc.). The Company has chosen to focus its attention mainly
upon security systems, elevators, heating, ventilating and air conditioning
systems, telephone systems and switches, and sprinkler systems. While this area
is the most difficult to fully research adequately, management has not yet found
any major non-compliance issues that put the Company at risk financially or
operationally.
A pre-assessment of the Company's properties has indicated no Year 2000
issues. A complete, formal assessment of all properties was completed in
September 1999. Any operating equipment that is found non-compliant will be
repaired or replaced.
The total cost incurred, as of September 30, 1999 to replace or repair the
operating equipment was approximately $0.1 million. The Company estimates the
cost to replace or repair any remaining operating equipment is nominal. The
assessment of operating equipment at each of our managed property sites was
virtually completed as of September 30, 1999.
The Company continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within the enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Company has banking relationships with three major financial
institutions, all of which have designated their compliance as of September 30,
1999. The Company has updated data transmission standards with all of our
financial institutions.
The Company does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems with the Company (external agents). To date, the Company is
not aware of any external agent with a Year 2000 compliance issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 compliant.
Management does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Company. However, the effect of non-compliance by external agents is not readily
determinable.
Costs to Address Year 2000
The total cost of the Company's Year 2000 project is estimated at $3.3
million and is being funded from operating cash flows. To date, the Company has
incurred approximately $3.1 million ($0.8 million expensed
21
<PAGE> 22
and $2.3 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.2 million is attributable to the purchase of new software and
operating equipment, which will be capitalized.
Risks Associated with the Year 2000
Management believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Company does not complete any additional phases, certain worst case scenarios
could occur. The worst case scenarios include failure of operation of elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such an event would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Company. The Company could be subject to
litigation for, among other things, computer system failures, equipment
shutdowns or a failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual workarounds and selecting new relationships for such activities
as banking relationships and elevator operating systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure relates to changes in interest
rates. The Company is not subject to any foreign currency exchange rate risk or
commodity price risk, or any other material market rate or price risks. The
Company uses predominantly long-term, fixed-rate and self-amortizing
non-recourse debt in order to avoid the refunding or repricing risks of
short-term borrowings. The Company uses short-term debt financing and working
capital primarily to fund acquisitions and generally expects to refinance such
borrowings with proceeds from equity offerings or long term debt financings.
The Company had $143.4 million of variable rate debt outstanding at
September 30, 1999, which represents 8.5% of the Company's total outstanding
debt. Based on this level of debt, an increase in interest rates of 1% would
result in the Company's income and cash flows being reduced by $1.4 million on
an annual basis.
The estimated aggregate fair value of the Company's cash and cash
equivalents, receivables, payables and short-term secured and unsecured debt as
of September 30, 1999 is assumed to approximate their carrying value due to
their relatively short terms. Management further believes that, after
consideration of interest rate agreements, the fair market value of the
Company's secured tax-exempt bond debt and secured long-term debt approximates
their carrying value, based on market comparisons to similar types of debt
instruments having similar maturities.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with this report (1):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 -- Seventh Amendment to the Third Amended and Restated
Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of September 27, 1999 (Exhibit 10.1 To
Apartment Investment and Management Company's Quarterly
Report on Form 10-Q for the quarterly period ending
September 30, 1999, is incorporated herein by this
reference)
10.2 -- Credit Agreement (Secured Revolving Credit Facility),
dated as of August 16, 1999, among AIMCO Properties,
L.P., Bank of America, Bank Boston, N.A., and First Union
National Bank (Exhibit 10.1 to the Current Report on Form
8-K of Apartment Investment and Management Company, dated
August 16, 1999, is incorporated herein by this
reference)
10.3 -- Borrower Pledge Agreement, dated as of August 16, 1999,
between AIMCO Properties, L.P. and Bank of America
(Exhibit 10.2 to the Current Report on Form 8-K of
Apartment Investment and Management Company, dated August
16, 1999, is incorporated herein by this reference)
10.4 -- Form of Committed Loan Note, issued by AIMCO Properties,
L.P., to Bank of America, BankBoston, N.A., and First
Union National Bank (Exhibit 10.3 to the Current Report
on Form 8-K of Apartment Investment and Management
Company, dated August 16, 1999, is incorporated herein by
this reference)
10.5 -- Form of Swing Line Note, issued by AIMCO Properties, L.P.
to Bank of America, BankBoston, N.A., and First Union
National Bank (Exhibit 10.4 to the Current Report on Form
8-K of Apartment Investment and Management Company, dated
August 16, 1999, is incorporated herein by this
reference)
27.1 -- Financial Data Schedule
99.1 -- Agreement re: disclosure of long-term debt instruments
</TABLE>
(b) Reports on Form 8-K
Current Report on Form 8-K, dated August 16, 1999, relating to AIMCO Properties,
L.P.'s entering into a new secured $300 million revolving credit facility with a
syndicate of banks led by Bank of America, BankBoston, N.A., and First Union
National Bank.
23
<PAGE> 24
AIMCO PROPERTIES, L.P.
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.
AIMCO PROPERTIES, L.P.
By: AIMCO-GP, Inc., its General
Partner
/s/ PAUL J. MCAULIFFE
------------------------------------
Paul J. McAuliffe
Executive Vice President,
Chief Financial Officer
(duly authorized officer and
principal financial officer)
Date: November 15, 1999
24
<PAGE> 25
EXHIBIT INDEX(1)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 -- Seventh Amendment to the Third Amended and Restated
Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of September 27, 1999 (Exhibit 10.1 To
Apartment Investment and Management Company's Quarterly
Report on Form 10-Q for the quarterly period ending
September 30, 1999, is incorporated herein by this
reference)
10.2 -- Credit Agreement (Secured Revolving Credit Facility),
dated as of August 16, 1999, among AIMCO Properties,
L.P., Bank of America, Bank Boston, N.A., and First Union
National Bank (Exhibit 10.1 to the Current Report on Form
8-K of Apartment Investment and Management Company, dated
August 16, 1999, is incorporated herein by this
reference)
10.3 -- Borrower Pledge Agreement, dated as of August 16, 1999,
between AIMCO Properties, L.P. and Bank of America
(Exhibit 10.2 to the Current Report on Form 8-K of
Apartment Investment and Management Company, dated August
16, 1999, is incorporated herein by this reference)
10.4 -- Form of Committed Loan Note, issued by AIMCO Properties,
L.P., to Bank of America, BankBoston, N.A., and First
Union National Bank (Exhibit 10.3 to the Current Report
on Form 8-K of Apartment Investment and Management
Company, dated August 16, 1999, is incorporated herein by
this reference)
10.5 -- Form of Swing Line Note, issued by AIMCO Properties, L.P.
to Bank of America, BankBoston, N.A., and First Union
National Bank (Exhibit 10.4 to the Current Report on Form
8-K of Apartment Investment and Management Company, dated
August 16, 1999, is incorporated herein by this
reference)
27.1 -- Financial Data Schedule
99.1 -- Agreement re: disclosure of long-term debt instruments
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 110,301
<SECURITIES> 0
<RECEIVABLES> 19,429
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,076,973
<DEPRECIATION> (319,250)
<TOTAL-ASSETS> 4,506,468
<CURRENT-LIABILITIES> 111,700
<BONDS> 1,581,188
149,500
642,436
<COMMON> 0
<OTHER-SE> 1,786,277
<TOTAL-LIABILITY-AND-EQUITY> 4,506,468
<SALES> 372,981
<TOTAL-REVENUES> 412,829
<CGS> 254,694
<TOTAL-COSTS> 269,776
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,416
<INCOME-PRETAX> 58,746
<INCOME-TAX> 0
<INCOME-CONTINUING> 58,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,746
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
</TABLE>
<PAGE> 1
EXHIBIT 99.1
AGREEMENT REGARDING DISCLOSURE OF LONG-TERM DEBT INSTRUMENTS
In reliance upon Item 601(b)(4)(iii)(A), of Regulation S-K, AIMCO
Properties, L.P., a Delaware limited partnership (the "Partnership")has not
filed as an exhibit to its Quarterly Report on Form 10-Q for the quarterly
period ending September 30, 1999, any instrument with respect to long-term debt
not being registered where the total amount of securities authorized thereunder
does not exceed 10 percent of the total assets of the Partnership and its
subsidiaries on a consolidated basis. Pursuant to Item 601(b)(4)(iii)(A), of
Regulation S-K, the Partnership hereby agrees to furnish a copy of any such
agreement to the Securities Exchange Commission upon request.
AIMCO PROPERTIES, L.P.
By: AIMCO-GP, INC.
By: /s/ PETER KOMPANIEZ
---------------------------
Peter Kompaniez
President
