<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 30, 1997
ERP OPERATING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Charter)
Maryland 0-24920 36-3894853
(State or other (Commission File Number) (IRS Employer Identification No.)
Jurisdiction of
Incorporation)
Two North Riverside Plaza, Suite 400, Chicago, Illinois 60606
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (312) 474-1300
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
================================================================================
<PAGE>
Item 5. Other Events
On August 27, 1997, ERP Operating Limited Partnership, an Illinois
limited partnership ("ERP") and Evans Withycombe Residential, L.P., a Delaware
limited partnership ("EWRP"), entered into an Asset Contribution Agreement dated
as of August 27, 1997 (the "Asset Contribution Agreement") pursuant to which
EWRP agreed to contribute all of its assets to ERP (the "Contribution") in
exchange for units of limited partnership interest in ERP ("ERP Units"). The
Asset Contribution Agreement was entered into in connection with the
contemplated merger ("Merger") of Evans Withycombe Residential, Inc., a Maryland
corporation and sole general partner of EWRP ("EWR"), with and into Equity
Residential Properties Trust, a Maryland real estate investment trust and sole
general partner of ERP ("EQR"), pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") entered into between EQR and EWR on August 27, 1997. The
number of ERP Units to be received by EWRP in consideration for the Contribution
shall equal the number of units of limited partnership interest in EWRP ("EWRP
Units") outstanding immediately prior to the Contribution multiplied by 0.50
(the "Exchange Ratio"). The Contribution shall occur upon ERP giving notice to
EWRP at any time following the first to occur of (i) the date twelve months
after the consummation of the Merger, (ii) the date on which EQR receives an
opinion of a nationally recognized tax counsel satisfactory to it or a ruling
from the Internal Revenue Service that the Contribution may be effected without
adversely affecting the qualification of the Merger as a tax-free reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code") or (iii) the date on which regulations are promulgated by
the Department of the Treasury which, in the opinion of a nationally recognized
tax counsel satisfactory to EQR, would permit the Contribution to occur without
adversely affecting the qualification of the Merger as a tax-free reorganization
within the meaning of Section 368 of the Code. If ERP fails to give such notice
by December 31, 1999, the Asset Contribution Agreement shall terminate and EWRP
shall have no further obligations thereunder. The Contribution is also subject
to the approval of the limited partners of EWRP.
The Asset Contribution Agreement and the transactions related thereto
were reported by ERP in a Current Report on Form 8-K filed on September 10,
1997. ERP is filing the information contained herein from ERWP's Quarterly
Report on Form 10-Q for the period ended September 30, 1997 in order to provide
investors with additional information relating to EWRP.
2
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Real Estate:
Land........................................... $129,278 $121,915
Buildings and improvements..................... 606,882 543,839
Furniture and fixtures......................... 34,780 29,567
Construction-in-progress....................... 35,568 66,229
-------- --------
806,508 761,550
Less accumulated depreciation.................. (54,409) (38,331)
-------- --------
752,099 723,219
Cash and cash equivalents........................ 2,488 2,568
Restricted cash.................................. 15,305 1,622
Accounts and notes receivable.................... 1,849 2,702
Mortgage notes receivable........................ 7,188 --
Deferred costs, net of accumulated amortization
of $1,841 and $1,265 at September 30, 1997 and
December 31, 1996, respectively................. 4,503 3,838
Other assets..................................... 3,135 1,518
-------- --------
Total assets..................................... $786,567 $735,467
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage and notes payable....................... $442,156 $436,172
Accounts payable and other liabilities........... 8,945 7,782
Distributions payable............................ 9,480 --
Accrued interest................................. 5,327 1,417
Accrued property taxes........................... 5,306 2,912
Resident security deposits....................... 2,617 1,818
Prepaid rent..................................... 838 585
-------- --------
Total liabilities................................ 474,669 450,686
Minority interest................................ 799 827
Partners' capital................................ 311,099 283,954
-------- --------
Total liabilities and partners' capital.......... $786,567 $735,467
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except for number of units and per unit amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental.......................................... $ 28,417 $ 24,351 $ 83,282 $ 68,565
Third party management fees..................... 381 103 611 1,054
Interest income - investment in mortgage notes.. 194 -- 201 --
Interest and other.............................. 2,249 1,484 5,747 4,565
----------- ----------- ----------- -----------
Total revenues.................................... 31,241 25,938 89,841 74,184
Expenses:
Property and maintenance........................ 7,709 7,367 22,143 18,759
Real estate taxes and insurance................. 2,552 1,847 7,287 5,574
Property management............................. 788 721 2,328 2,429
General and administrative...................... 305 329 978 1,126
Depreciation.................................... 6,701 5,437 19,338 15,077
Interest:
Expense incurred, net of amounts capitalized.. 7,587 6,077 22,534 16,693
Amortization of deferred financing costs...... 286 174 741 451
----------- ----------- ----------- -----------
Total expenses.................................... 25,928 21,952 75,349 60,109
----------- ----------- ----------- -----------
Income before minority interest, gain on sale of
real estate assets and extraordinary item....... 5,313 3,986 14,492 14,075
Gain on sale of real estate assets................ 2,278 -- 7,531 --
Minority interest................................. (15) (15) (45) (54)
----------- ----------- ----------- -----------
Income before extraordinary item.................. 7,576 3,971 21,978 14,021
Extraordinary item-
loss on early extinguishment of debt............ -- -- (1,500) --
----------- ----------- ----------- -----------
Net income........................................ $ 7,576 $ 3,971 $ 20,478 $ 14,021
----------- ----------- ----------- -----------
Earnings per unit before extraordinary item....... $ 0.30 $ 0.17 $ 0.89 $ 0.64
----------- ----------- ----------- -----------
Earnings per unit................................. $ 0.30 $ 0.17 $ 0.83 $ 0.64
----------- ----------- ----------- -----------
Weighted average units outstanding................ 24,915,866 23,038,163 24,583,939 21,897,381
----------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(Amounts in thousands, except for number of units and per unit amounts)
(Unaudited)
<TABLE>
<CAPTION>
UNAMORTIZED
EVANS OTHER EMPLOYEE
WITHYCOMBE LIMITED RESTRICTED
NUMBER OF RESIDENTIAL PARTNERS STOCK
UNITS INC. CAPITAL COMPENSATION TOTAL
----------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Partners' capital, December 31, 1996.............. 23,044,712 $ 226,301 $ 58,118 $ (465) $283,954
Net income...................................... -- 16,755 3,723 -- 20,478
Distributions ($1.19 per unit).................. -- (24,199) (5,445) -- (29,644)
Proceeds of third offering, net of underwriting
discount and offering costs of $406........... 1,800,000 35,415 -- -- 35,415
Conversion of units to common stock............. -- 3,235 (3,235) -- --
Exercise of stock options....................... 36,500 731 -- -- 731
Issuance of restricted stock.................... 69,775 1,435 -- (1,435) --
Forfeiture of restricted stock.................. (3,506) (44) -- -- (44)
Amortization of deferred compensation........... -- -- -- 209 209
----------- ---------- -------- -------- --------
Partners' capital, September 30 1997..... 24,947,481 $259,629 $53,161 $(1,691) $311,099
----------- ---------- -------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $ 20,478 $ 14,021
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 19,338 15,077
Amortization of deferred financing costs and
bond discount................................. 807 495
Amortization of deferred comp................... 255 360
Minority interest............................... 45 54
Net gain on sale of real estate assets.......... (7,531) --
Write-off of development and acquisition costs.. 402 107
Write-off of deferred loan costs................ 294 --
Decrease (increase) in assets:
Restricted cash................................. (13,683) (371)
Accounts and notes receivable................... 744 (1,386)
Other assets.................................... (1,548) (160)
(Decrease) increase in liabilities:
Accounts payable and other liabilities.......... 1,129 (425)
Accrued interest................................ 3,910 141
Accrued property taxes.......................... 2,394 2,201
Resident security deposits...................... 799 158
Prepaid rent.................................... 253 341
--------- ---------
Net cash provided by operating activities........... 28,086 30,613
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate assets...................... (54,431) (103,443)
Sale of real estate assets.......................... 24,383 --
--------- ---------
Net cash used in investing activities............... (30,048) (103,443)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Third Public Offering, net of
expenses........................................ 35,415 --
Proceeds from Second Public Offering, net of
expenses........................................ -- 40,891
Proceeds from exercise of options................. 731 234
Proceeds from mortgage notes and revolving
credit facility................................. 209,306 235,028
Principal payments on mortgage notes.............. (221,706) (178,748)
Payment for loan costs............................ (1,700) (1,758)
Dividends paid.................................... (20,091) (24,963)
Minority interest distributions................... (73) (96)
--------- ---------
Net cash provided by financing activities......... 1,882 70,588
--------- ---------
Net decrease in cash and cash equivalents......... (80) (2,242)
Cash and cash equivalents, beginning of period.... 2,568 3,634
--------- ---------
Cash and cash equivalents, end of period.......... $ 2,488 $ 1,392
========= =========
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest.......... $ 18,624 $ 16,500
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Assumption of debt related to the acquisition of
apartment communities........................... $ 18,318 $ 22,650
========= =========
Origination of carryback mortgage notes arising
from sale of apartment communities.............. $ 7,188 $ --
========= =========
Issuance of stock under restricted stock
incentive plan.................................. $ 89 $ 66
========= =========
Conversion of units to common stock............... $ 3,234 $ 888
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT FOR APARTMENT DATA, NUMBER OF UNITS OR SHARES AND
PER UNIT AMOUNTS)
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Evans Withycombe Residential, L.P. (the "Operating Partnership") is one of the
largest developers and managers of upscale apartment communities in Arizona and
is expanding its operations into selected sub-markets in Southern California.
The Operating Partnership owns and manages 51 stabilized multifamily apartment
communities containing 14,747 units, of which 44 stabilized multifamily
apartment communities are located in Phoenix and Tucson, Arizona, containing a
total of 12,349 units and seven stabilized multifamily apartment communities are
located in the Southern California market containing a total of 2,398 units. The
Operating Partnership is also in the process of developing or expanding four
multifamily apartment communities comprising 953 units in its Phoenix market.
The Operating Partnership is fully integrated with expertise in development,
acquisitions, construction and management of apartment communities. The
Operating Partnership had approximately 600 employees at September 30, 1997.
The Operating Partnership was formed in June 1994 to develop, acquire, own
and manage upscale multifamily apartment communities for Evans Withycombe
Residential, Inc. On August 17, 1994, Evans Withycombe Residential, Inc.
(the "Company") completed an Initial Public Offering and engaged in various
formation transactions designed to transfer ownership of the communities and
other assets of the predecessor company to the Operating Partnership or Evans
Withycombe Finance Partnership, L.P. (the "Financing Partnership"). The
Operating Partnership owns 99.0 percent of Evans Withycombe Finance, L.P. and
has a 99.0 percent economic interest in Evans Withycombe Management, Inc.
(the "Management Company"). Evans Withycombe Residential, Inc. is the sole
general partner of and owned a 81.9 percent and 79.3 percent interest in the
Operating Partnership at September 30, 1997 and 1996, respectively.
In the second quarter of 1996, the Company completed the Second Public
Offering. The net proceeds of $40,891 from the sale of 2,088,889 shares of
common stock from the Second Public Offering were used to purchase 2,088,889
units in the Operating Partnership. The Operating Partnership used the
proceeds to repay a portion of the $150 million unsecured Revolving Credit
Facility (Revolving Credit Facility).
In the first quarter of 1997, the Company completed the Third Public
Offering. The net proceeds of $35,415 from the sale of 1,800,000 shares of
common stock from the Third Public Offering were used to purchase 1,800,000
units in the Operating Partnership. The Operating Partnership use the
proceeds to repay a portion of the Revolving Credit Facility.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Evans Withycombe
Residential, L.P. include the consolidated accounts of the Operating
Partnership, the Financing Partnership and the Management Company.
The accompanying unaudited consolidated financial statements have been presented
by the Operating Partnership's management in accordance with generally accepted
accounting principles for interim financial information and the rules and
regulations of the Securities and Exchange Commission (SEC). Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
significant intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting of
normally recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the nine month period ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997.
<PAGE>
2. BASIS OF PRESENTATION (CONTINUED)
These consolidated financial statements should be read in conjunction with
the Operating Partnership's December 31, 1996 audited consolidated financial
statements and accompanying notes in the Evans Withycombe Residential, L.P.
Annual Report on Form 10/A.
RECLASSIFICATION
Certain amounts in the consolidated statements of income for 1996 have been
reclassified to conform to the 1997 presentation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE ASSETS AND DEPRECIATION
The Operating Partnership records its real estate assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of".
SFAS No. 121 requires that long-lived assets such as real estate assets, be
reviewed whenever events or changes in circumstances indicate that the book
value of the asset may not be recoverable. If the sum of the estimated future
net cash flows (undiscounted and without interest charges) from an asset to be
held and used is less than the book value of the asset, an impairment loss must
be recognized in the amount of the difference between book value and fair value
as opposed to the difference between book value and net realizable value under
the previous accounting standard. For long-term assets like apartment
communities, the determination of whether there is an impairment loss is
dependent primarily on the Operating Partnership's estimates on occupancy, rent
and expense increases, which involves numerous assumptions and judgments as to
future events over a period of many years. At September 30, 1997 the Operating
Partnership does not hold any assets that meet the impairment criteria of SFAS
No. 121.
Costs related directly to the acquisition and improvement of real estate are
capitalized. Interest costs incurred during construction of a new property
are capitalized until completion of construction on a building-by-building
basis. Interest capitalized was $509 and $1,479 and $608 and $2,072, for the
three and the nine months ended September 30, 1997 and 1996, respectively.
Ordinary repairs, maintenance and costs incurred in connection with resident
turnover such as unit cleaning, painting, and carpet cleaning are expensed as
incurred; major replacements and betterments are capitalized and depreciated
over their estimated useful lives. Depreciation is computed on a
straight-line basis over the expected useful lives of depreciable property,
which ranges from 10 to 40 years for buildings and improvements and five to
eight years for furnishings and equipment.
The Operating Partnership reports developments and lease-up properties as
construction-in-progress until construction on the apartment community has
been completed and the apartment community has reached stabilized occupancy.
The Operating Partnership also reports land relating to
construction-in-progress as land on its balance sheet. Land associated with
construction-in-progress was $8,272 and $12,060 at September 30, 1997 and
December 31, 1996, respectively.
REVENUE RECOGNITION
Rental income attributable to residential leases is recorded when due from
residents. Leases are for periods of up to one year, with rental payments due
monthly.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash and cash equivalent investments
with original maturities of three months or less, primarily consisting of
demand deposits in banks.
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH
Restricted cash includes restricted deposits held by third party
intermediaries for the purpose of completing an IRS Section 1031 tax free
exchange, sinking fund accounts related to tax exempt bonds, property taxes
and escrow accounts.
DEFERRED COSTS
Costs incurred in obtaining long-term financing are deferred. These costs are
amortized on the effective interest method over the terms of the related debt
agreements.
INCOME TAXES
The Operating Partnership has made an election to be taxed as a Partnership
and accordingly, no federal or state income taxes have been provided in the
accompanying consolidated financial statements.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
EARNINGS PER UNIT
Earnings per unit has been computed by dividing net income for the three and
the nine months ended September 30, 1997 and 1996, respectively, by the
weighted average number of units outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" which is required to be adopted on December 31,
1997. At that time, the Operating Partnership will be required to change the
method currently used to compute earnings per unit and to restate all prior
periods presented. Under the new requirements for calculating basic earnings
per unit, the dilutive effect of stock options will be excluded. The impact
of SFAS No. 128 is not expected to be material.
4. MORTGAGE NOTES RECEIVABLE
The Operating Partnership's mortgage notes receivable consists of a $7.2
million mortgage note receivable at a fixed rate of 8.0 percent secured by a
first mortgage lien on The Pines Apartments, matures November 1, 1997. The
mortgage note receivable maturity date can be extended 30 days to December 1,
1997 at the option of the borrower.
<PAGE>
5. MORTGAGE AND NOTES PAYABLE
The Operating Partnership's mortgage notes and notes payable consists of the
following:
<TABLE>
<CAPTION> SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
CONVENTIONAL MORTGAGE LOANS:
Mortgage note payable at a fixed interest rate of 8.0 percent, monthly $ -- $ 5,380
principal and interest payments. The unpaid principal balance was repaid on
January 9, 1997.
Mortgage note payable at a fixed interest rate of 8.0 percent, monthly -- 4,340
principal and interest payments. The unpaid principal balance was repaid on
January 9, 1997.
Mortgage note payable at a fixed interest rate of 8.0 percent, monthly -- 8,951
principal and interest payments. The unpaid principal balance was repaid on
January 9, 1997.
Mortgage note payable at a fixed interest rate of 8.28 percent, monthly -- 6,225
principal and interest payments. The unpaid principal balance was repaid on
January 31, 1997.
Mortgage note payable at a fixed interest rate of 9.95 percent, monthly -- 12,065
principal and interest payments. The unpaid principal balance was repaid on
July 15, 1997.
Mortgage note payable at a fixed interest rate of 9.3 percent, monthly -- 3,182
principal and interest payments. The unpaid principal balance was repaid on
July 15, 1997.
Mortgage note payable at fixed interest rates ranging from 6.5 percent to 9.0 18,219 --
percent, monthly principal and interest payments through August 17, 2004,
remaining balance due August 17, 2004. Interest rate increases 0.25 percent
annually each September. Secured by a first mortgage lien on one apartment
community. The mortgage note can be repaid at any time at the Operating
Partnership's option without prepayment penalty.
$50 million securitized debt at a fixed interest rate of 7.17 percent, monthly 49,117 49,509
principal and interest payments through January 1, 2006, remaining balance due
January 1, 2006. Secured by first mortgage liens on 5 apartment communities. ------- -------
67,336 89,652
MORTGAGE LOAN CERTIFICATES:
Securitized debt at a fixed stated interest rate of 7.98 percent, with an 130,586 130,520
effective interest rate of 8.05 percent, monthly interest payments only through
August 1, 2001. Secured by first mortgage liens on 21 communities. The face
amount of $131 million is due August 1, 2001. The balance is net of
unamortized discount of $414 and $480 at September 30, 1997 and December 31,
1996, respectively.
SENIOR UNSECURED NOTES:
$75 million senior unsecured notes with a fixed coupon rate of 7.50 percent. 74,610 --
Semiannual interest only payments due April 15 and October 15 commencing
October 15, 1997. Face amount of $75 million is due April 15, 2004. The
balance is net of an unamortized discount of $390 at September 30, 1997. The
effective interest rate inclusive of the benefit of a treasury lock
transaction is 7.18 percent.
$50 million senior unsecured notes with a fixed coupon rate of 7.625 percent. 49,624 --
Semiannual interest only payments due April 15 and October 15 commencing
October 15, 1997. Face amount of $50 million is due April 15, 2007. The
balance is net of an unamortized discount of $375 at September 30, 1997. The
effective interest rate inclusive of the benefit of a treasury lock ------- -------
transaction is 7.36 percent. 124,234 --
</TABLE>
<PAGE>
5. MORTGAGE AND NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
TAX EXEMPT BONDS:
$17.3 million tax exempt bonds with a floating interest rate based on the tax $17,300 $17,300
exempt note rate set by the remarketing agent, or at the option of the
Operating Partnership can convert to a fixed rate as determined by the
remarketing agent. Secured by a $17.5 million direct pay letter of credit,
interest payments only, matures December 1, 2007 (Effective interest rate of
5.61 percent at September 30, 1997).
$22.6 million tax exempt bonds with a floating interest rate based on the tax 22,650 22,650
exempt note rate set by the remarketing agent, interest payments
only. Secured by a $22.8 million direct pay letter of credit, matures February
1, 2016. (Effective interest rate of 5.58 percent at September 30, 1997).
$24.05 million tax exempt bonds with a floating interest rate based on the tax 24,050 24,050
exempt note rate set by the remarketing agent, interest payments
only. Secured by a $24.4 million direct pay letter of credit, matures August
1, 2005. (Effective interest rate of 5.29 percent at September 30, 1997).
-------- --------
64,000 64,000
REVOLVING CREDIT FACILITY:
$150 million unsecured Revolving Credit Facility with floating interest rate 56,000 152,000
based on LIBOR plus 1.15 percent or at the option of the Operating Partnership
at prime rate, interest payments only. Matures September 24, 1999 (Effective
interest rate of 6.92 percent at September 30, 1997).
-------- --------
$436,172 $442,156
======== ========
</TABLE>
Scheduled principal payments on debt, assuming that the Operating Partnership
exercises its options to extend the maturity date on the Revolving Credit
Facility, are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
MORTGAGE MORTGAGE SENIOR REVOLVING
NOTES LOAN UNSECURED TAX-EXEMPT CREDIT
PAYABLE CERTIFICATES NOTES BONDS FACILITY TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 154 $ -- $ -- $ -- $ -- $ 154
1998 784 -- -- -- -- 784
1999 831 -- -- -- 56,000 56,831
2000 882 -- -- -- -- 882
2001 937 130,586 -- -- -- 131,523
Thereafter 63,748 -- 124,234 64,000 -- 251,982
- ----------------------------------------------------------------------------------------
Total $67,336 $130,586 $124,234 $64,000 $56,000 $442,156
- ----------------------------------------------------------------------------------------
</TABLE>
On June 13, 1997, the Operating Partnership amended its existing $225 million
Revolving Credit Facility with a bank group to decrease the commitment amount
from $225 million to $150 million and decrease the interest rate from LIBOR
plus 1.50 percent to LIBOR plus 1.15 percent. The Revolving Credit Facility
provides funding for working capital, construction activities and
acquisitions.
The Operating Partnership has three direct pay letters of credit of $17,500,
$22,800 and $24,400 which serve as a credit enhancement for the tax exempt
bonds. The letters of credit are secured by a first mortgage lien on four
apartment communities.
In January 1997, the Operating Partnership extinguished the debt on four
mortgages with unpaid principal balances of approximately $25,000 with
proceeds from the Revolving Credit Facility. As a result, the Operating
Partnership incurred a loss from the early extinguishment of debt of
approximately $1,500.
<PAGE>
6. DISTRIBUTIONS
On October 15, 1997, the Operating Partnership paid a distribution of $0.38 per
unit ($9,480) to unitholders of record as of September 30, 1997.
7. MANAGEMENT FEES
The Operating Partnership, through the Management Company, performs management
services for certain unaffiliated communities. Management fees received from
managed communities were $380 and $102 for the three months ended September 30,
1997 and 1996 and $610 and $1,053 for the nine months ended September 30, 1997
and 1996, respectively. The nine months ended September 30, 1997 and 1996
balance includes a one time non-recurring $250 and $500 termination fee received
from the sale of management contracts, respectively.
8. STOCK INCENTIVE PLAN
STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Proforma information regarding net income and earnings per share is required by
SFAS No. 123 and is provided by the Company in its annual report.
Initially 1,830,000 shares of the Company's common stock were reserved for
issuance under the plan. Information with respect to stock options granted
during the nine months ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Shares Per Share
------ ---------
<S> <C> <C>
Options outstanding at December 31, 1996 908,850 $20.63
Exercised (36,500) 20.02
Granted 266,500 20.58
Forfeited (33,588) 20.81
--------- ------
Options outstanding at September 30, 1997 1,105,262 $20.70
========= ======
Options exercisable:
December 31, 1996 357,700 $19.98
September 30, 1997 601,664 $20.40
</TABLE>
Options to purchase 724,738 and 901,650 shares of common stock were available
for grant under the plan at September 30, 1997 and December 31, 1996,
respectively.
EXECUTIVE STOCK INCENTIVE PLAN
Prior to the Initial Public Offering, the Company's predecessor Evans
Withycombe, Inc. had in place an Executive Incentive Deferred Compensation Plan
(the "Executive Plan"). Pursuant to the Executive Plan, certain executives of
Evans Withycombe, Inc. (the "Participants") were granted an aggregate of 98,500
shares of restricted stock from the Company one year following the Initial
Public Offering if they remained employees of the Company during such period.
One-third of the shares vest on each of the second, third and fourth
anniversaries of the Initial Public Offering based on an offering price per
share of $20. The expense is being amortized ratably over the
<PAGE>
periods in which the shares vest and an expense of $35 and $48 and $95 and $360
for the three and nine months ended September 30, 1997 and 1996, respectively,
is included in general and administrative expense. Information with respect to
the executive restricted stock incentive plan is as follows:
Shares
------
Restricted stock, net of forfeitures, at December 31, 1996 74,346
Forfeited (1,174)
------
Restricted stock at September 30, 1997 73,172
======
Number of shares vested at September 30, 1997 53,325
RESTRICTED STOCK PROGRAM
The Company has awarded 45,220 shares, net of forfeitures, of restricted stock
to certain employees of the Company under its 1994 Stock Incentive Plan. The
restricted stock vests ratably over periods ranging from one to seven years from
the date of the award and are based on the price of the stock at the award date
which ranges from $19.13 to $22.25. The related expense will be amortized
ratably over the periods in which the shares vest and an expense of $92 and $34
and $168 and $66, for the three and nine months ended September 30, 1997 and
1996, respectively, is included in general and administrative expense.
The Company uses the proceeds from the exercise of stock options and the
issuance of restricted stock to acquire a similar number of units in the
Operating Partnership.
9. MINORITY INTEREST
Evans Withycombe Finance, Inc., a wholly owned subsidiary of Evans Withycombe
Residential, Inc., owns a one percent interest in the Financing Partnership at
September 30, 1997 as follows:
Dollars
-------
Balance at December 31, 1996 $827
Allocation of net income 45
Distributions paid (73)
------
Balance at September 30, 1997 $799
======
10. MERGER AND RECENT DEVELOPMENTS
The Operating Partnership has entered into an Asset Contribution Agreement,
dated as of August 27, 1997 (the "Agreement"), with Equity Residential Operating
Partnership ("EROP") pursuant to which Operating Partnership agreed, subject to
certain conditions, to contribute all of its assets to EROP in exchange for
units of limited partnership interest in EROP following the Merger (as defined
below) The Asset Contribution Agreement was entered into in connection with the
contemplated merger ("Merger") of the Company, the sole general partner of
Operating Partnership, with and into Equity Residential Property Trust ("EQR"),
a Maryland real estate investment trust and sole general partner of EROP,
pursuant to an Agreement and Plan of Merger between the Company and EQR dated
August 27, 1997. The Asset Contribution Agreement provides for the exchange of
all outstanding limited partnership units in the Operating Partnership for
limited partnership units in EROP, at an exchange ratio of 0.50 units of EROP
for each unit of the Operating Partnership.
The Merger is subject to the approval of the shareholders of both EQR and the
Company and the Asset Contribution Agreement is subject to the approval of the
Operating Partnership's limited partners.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except apartment data and number of shares and
units)
The following discussion, which is based primarily on the consolidated financial
statements of Evans Withycombe Residential, L.P. should be read in conjunction
with the consolidated financial statements appearing elsewhere in this report.
The consolidated financial statements of the Operating Partnership consist of
the Operating Partnership, the Financing Partnership, and the Management
Company.
OVERVIEW
When used in the following discussion, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected, including,
but not limited to, the actual timing of the Operating Partnership's planned
acquisitions and developments, the strength of the local economies in the sub-
markets in which the Operating Partnership operates, the Operating Partnership's
ability to successfully manage its planned expansion into Southern California
and the culmination of its pending merger with EROP. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Operating Partnership undertakes no obligation to
publicly release any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS - CONSOLIDATED FINANCIAL STATEMENTS
The results of operations for the three and the nine months ended September 30,
1997 and 1996, respectively, were significantly affected by acquisitions,
developments and expansions.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- ---------------------
SEPTEMBER 30, SEPTEMBER 30,
----------------------- PERCENTAGE --------------------- PERCENTAGE
1997 1996 CHANGE 1997 1996 CHANGE
-------- -------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rental income $ 28,417 $ 24,351 16.7% $ 83,282 $ 68,565 21.5%
Third party management fees 381 103 269.9 611 1,054 (42.0)
Interest income - investment
in mortgage notes 194 -- N/A 201 -- N/A
Interest and other 2,249 1,484 51.5 5,747 4,565 25.9
-------- -------- ----- --------- -------- ------
Total revenues 31,241 25,938 20.4 89,841 74,184 21.1
Property operating and
maintenance (1) 10,261 9,214 11.4 29,430 24,333 20.9
Property management 788 721 9.3 2,328 2,429 (4.2)
General and administrative 305 329 (7.3) 978 1,126 (13.3)
Interest 7,873 6,251 25.9 23,275 17,144 35.8
Depreciation and amortization 6,701 5,437 23.2 19,338 15,077 28.3
-------- -------- ----- -------- -------- ------
Total expenses 25,928 21,952 18.1 75,349 60,109 25.4
-------- -------- ----- -------- -------- ------
Income before minority
interest, gain on sale
of real estate assets and
extraordinary item $ 5,313 $ 3,986 33.9% $14,492 $ 14,075 3.0%
======== ======== ===== ======= ======== ======
Weighted average monthly
rental revenue per unit,
net of concessions $ 697 $ 664 $682 $ 678
======== ======== ===== ======= ========= ======
Weighted average number of
apartments 14,927 13,325 14,989 12,519
======== ======== ====== ======= ======== ======
Economic occupancy (2) 92.2% 89.3% 89.1% 90.0%
======== ======== ===== ======= ======== ======
</TABLE>
<PAGE>
(1) The Operating Partnership defines property operating and maintenance
expense as property and maintenance, real estate taxes and insurance.
(2) Stabilized properties only.
Rental revenues increased by $4,066 and $14,717 or 16.7 percent and 21.5 percent
for the three and nine months ended September 30, 1997 as compared to the
similar period in 1996 as a result of increases in the weighted average number
of apartments and the weighted average monthly revenue per occupied apartment,
and a change in economic occupancy. The Operating Partnership believes that the
increase in rental income was largely attributable to the acquisitions and
stabilization of properties developed by the Operating Partnership in its rental
markets.
Third party management fees increased $278 or 269.9 percent for the three months
ended September 30, 1997 as a result of a $250 gain on the sale of a management
contract and decreased $442 or 42.0 percent for the nine months ended September
30, 1997 due to the sale of several properties in the management portfolio in
1996 including a $500 one time termination fee for the sale of management
contracts received in the second quarter of 1996.
Interest and other income for the three and nine months ended September 30, 1997
increased $765 and $1,182 or 51.5 percent and 25.9 percent as compared to the
similar period in 1996 as a result of an increase in ancillary income related to
the weighted average number of units, additional interest income from funds held
by third party intermediaries, and cable revenue sharing.
Property operating and maintenance expense increased due to the increase in the
weighted average number of apartments for the three and the nine months ended
September 30, 1997 as compared to the same period in 1996, respectively.
Interest expense increased due to an increase in debt resulting from
acquisitions and the increase in weighted average number of units in the
portfolio. The Operating Partnership capitalized $509 and $1,479 of interest for
the three and nine months ended September 30, 1997 compared to $608 and $2,072
for the same periods in 1996 due to a decrease in construction activity.
Interest costs incurred during construction of a new property are capitalized
until completion of construction on a building-by-building basis.
"SAME STORE" PORTFOLIO
The Operating Partnership defines same store portfolio as those communities that
reached stabilized occupancy prior to January 1, 1996. Same store portfolio
consists of 38 stabilized properties containing 10,319 apartment units that were
owned by the Operating Partnership for the three months and nine months ended
September 30, 1997 and 1996. Same store portfolio was adjusted to reflect the
sale of Deer Creek Village, The Pines and Los Arboles apartment communities.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- PERCENTAGE ------------------- PERCENTAGE
1997 1996 CHANGE 1997 1996 CHANGE
--------- -------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rental income $19,038 $18,561 2.6% $55,763 $56,082 (0.6)%
Other income 1,110 1,044 6.3 3,203 2,973 7.7
------- ------- --- ------- ------- ----
20,148 19,605 2.8 58,966 59,055 (0.2)
Property operating and maintenance 7,080 7,053 0.4 20,208 19,725 2.4
------- ------- --- ------- ------- ----
Property net operating income $13,068 $12,552 4.1% $38,758 $39,330 (1.5)%
======= ======= === ======= ======= ====
Weighted average monthly rental
revenue per unit, net of concessions $ 668 $ 667 $ 674 $ 670
======= ======= ======= =======
Economic occupancy 92.2% 89.3% 89.1% 90.0%
======= ======= ======= =======
</TABLE>
<PAGE>
Rental income for the three months ended September 30, 1997 increased $477 and
decreased $319 for the nine months ended September 30, 1997 as compared to the
same period in 1996 as a result of a change in the average economic occupancy.
Other income for the three and nine months ended September 30, 1997 increased as
a result of higher ancillary income such as redecoration and application fees,
and lease termination fees.
COMMUNITIES STABILIZED LESS THAN TWO YEARS
Communities stabilized less than two years consist of the development of four
new apartment communities and the expansion of four existing apartment
communities by the Operating Partnership, containing an aggregate of 1,444 new
apartment units that reached stabilized occupancy during the year ended December
31, 1996. Increases in the three and nine month periods ended September 30, 1997
as compared to the three and nine month periods ended September 30, 1996 are the
result of the increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Rental income $3,020 $2,768 $9,017 $6,948
Other income 183 180 479 442
------ ------ ------ ------
3,203 2,948 9,496 7,390
Property operating and maintenance 1,052 873 2,969 2,295
------ ------ ------ ------
Property net operating income $2,151 $2,075 $6,527 $5,095
====== ====== ====== ======
Weighted average number of apartments 1,444 1,354 1,444 1,136
====== ====== ====== ======
</TABLE>
DEVELOPMENT AND LEASE UP COMMUNITIES
Development and lease up communities consist of the development of six new
apartment communities and the expansion of two existing apartment communities
containing an aggregate of 2,031 apartment units that were in the
"construction," "development," or "lease up" stage during 1997 and therefore,
not considered to have achieved stabilized occupancy for all of the periods
presented. Increases in the three and the nine month periods ended September 30,
1997 as compared to the three and the nine month periods ended September 30,
1996 are the result of an increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------ ------ ------ -----
<S> <C> <C> <C> <C>
Rental income $2,041 $ 410 $5,090 $ 513
Other income 150 79 404 104
------ ------ ------ ------
2,191 489 5,494 617
Property operating and maintenance 649 295 1,696 420
------ ------ ------ ------
Property net operating income $1,542 $ 194 $3,798 $ 197
====== ====== ====== ======
Weighted average number of
apartments in lease up 1,026 251 806 107
====== ====== ====== ======
</TABLE>
<PAGE>
ACQUISITIONS
Acquisitions consist of six properties containing 1,906 apartment units, which
have been acquired by the Operating Partnership since January 1, 1996. The
Operating Partnership acquired three apartment communities containing 912
apartment units during the third quarter of 1996. There were no acquisitions of
apartment communities during the third quarter of 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Rental income $3,908 $1,400 $10,647 $1,418
Other income 193 35 404 35
------ ------ ------- ------
4,101 1,435 11,051 1,453
Property operating and maintenance 1,321 513 3,585 515
------ ------ ------- ------
Property net operating income $2,780 $ 922 $ 7,466 $ 938
====== ====== ======= ======
Weighted average number of apartments 1,906 667 1,795 222
====== ====== ======= ======
</TABLE>
DISPOSITIONS
Dispositions consist of three properties containing 734 apartment units, which
were sold by the Operating Partnership in 1997. The Operating Partnership sold
one apartment community, containing 232 units, in the third quarter of 1997 and
two apartment communities, containing 502 units, in the second quarter of 1997.
There were no dispositions of apartment communities during 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
----- ------ ------ -------
<S> <C> <C> <C> <C>
Rental income $ 410 $1,212 $2,766 $3,604
Other income 14 57 127 155
----- ------ ------ ------
424 1,269 2,893 3,759
Property operating and maintenance 159 480 973 1,378
----- ------ ------ ------
Property net operating income $ 265 $ 789 $1,920 $2,381
===== ====== ====== ======
Weighted average number of apartments 232 734 567 734
===== ====== ====== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Operating Partnership's net cash provided by operating activities of $30.6
million for the nine months ended September 30, 1996 decreased to $28.1 million
for the nine months ended September 30, 1997 as a result of cash related to the
sale of apartment communities being held by a third party intermediary in order
to complete a tax free exchange. Net cash used in investing activities decreased
from $103.4 million for the nine months ended September 30, 1996 to $30.0
million for the nine months ended September 30, 1997. The decrease is the result
of a reduction in construction activity for the first nine months of 1997 of
$32.5 million as compared to $66 million for the first nine months of 1996 and a
decrease in cash used to fund the Operating Partnership's acquisition activity
from $34.9 million to $17.5 million in the first nine months of 1996 as compared
to the first nine months of 1997 and the proceeds received from the sale of
three apartment communities. Net cash provided by financing activities decreased
from $70.6 million for the nine months ended September 30, 1996 to $1.9 million
for the nine months ended September 30, 1997 due to less borrowings under the
Revolving Credit Facility as a result of the reduction in construction and
acquisition activity.
<PAGE>
The Operating Partnership expects to meet its short-term liquidity requirements,
including capital expenditures relating to maintaining Stabilized Communities,
generally through its net cash provided by operations and borrowings under its
credit arrangements and anticipates meeting long-term liquidity requirements,
such as scheduled debt maturities, financing of construction and development
activities and possible acquisitions through long-term unsecured borrowings,
issuance of additional equity securities of the Operating Partnership or debt
securities of the Operating Partnership, or, possibly in connection with
acquisitions of land or existing properties, issuance of Units of the Operating
Partnership. The Operating Partnership believes that its net cash provided by
operations will be adequate and anticipates that it will continue to be adequate
to meet both operating requirements and payment of dividends by the Operating
Partnership in accordance with the Company's REIT requirements in both the short
and the long term.
The information in the immediately preceding paragraph is forward looking and
involves risks and uncertainties that could significantly impact the Operating
Partnership's expected liquidity requirements in the short and long term. While
it is impossible to itemize the many factors and specific events that could
affect the Operating Partnership's outlook for its liquidity requirements, such
factors would include the actual timing of the Operating Partnership's planned
development of new, and expansion of existing, communities; acquisitions of
existing apartment communities; the actual costs associated with such
developments and acquisitions; the strength of the local economies in the sub-
markets in which the Operating Partnership operates and the culmination of its
pending merger with EROP. The Operating Partnership is further subject to risks
relating to the limited geographic area in which it operates and its ability to
successfully manage its planned expansion into Southern California, a market in
which it did not have any operating history prior to 1995. Higher than expected
costs, delays in development of communities, a downturn in the local economies
and/or the lack of growth of such economies could reduce the Operating
Partnership's revenues and increase its expenses, resulting in a greater burden
on the Operating Partnership's liquidity than that which the Operating
Partnership has described above.
CAPITAL RESOURCES
At September 30, 1997, the Operating Partnership's total debt was approximately
$442.2 million and the Operating Partnership's debt to total market
capitalization (Market Equity plus Debt) was approximately 40.2 percent. The
Operating Partnership received an investment grade security rating of "BBB-"
from Standard & Poor's Corporation, "Baa3" from Moody's Investors Service, Inc.,
and " BBB-" from Fitch Investors Service, L.P. in December 1996 with respect to
prospective issuances of senior unsecured debt.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization, and each rating should be evaluated independently of any other
rating. A rating of (a) BBB- from Standard & Poor's Corporation indicates that
the obligations of the Operating Partnership are in the lower range of those
obligations that exhibit adequate protection parameters, (b) Baa3 from Moody's
Investors Service, Inc. indicates that the obligations of the Operating
Partnership are considered to be in the lower range of medium-grade obligations,
which are not considered to be highly protected or poorly secured and (c) BBB-
from Fitch Investors Service, L.P. indicates that the obligations of the
Operating Partnership are considered to be in the lower range of obligations
considered to be of investment grade and of satisfactory credit quality and that
its ability to pay interest and to repay principal is considered to be adequate.
CONVENTIONAL MORTGAGE LOANS
Conventional mortgage loans are comprised of one fixed rate loan at September
30, 1997 which is collateralized by a first mortgage lien on an apartment
community included in real estate assets. The mortgage is payable in monthly
installments of principal and interest and matures on August 17, 2004. The
conventional mortgage loan aggregated $18.2 million at September 30, 1997 with
an interest rate of 6.5 percent. In January 1997, the Operating Partnership
extinguished the debt on four mortgages with unpaid principal balances of
approximately $25.0 million with proceeds from the Revolving Credit Facility. As
a result, the Operating Partnership incurred a loss from the early
extinguishment of debt of approximately $1.5 million. On July 15, 1997, the
Operating Partnership repaid two additional mortgages with unpaid principal
balances of approximately $15.2 million with proceeds from the Revolving Credit
Facility. There were no prepayment penalties associated with the repayment of
these two mortgages.
<PAGE>
In December 1995, the Operating Partnership entered into a ten year $50 million
fixed rate loan from an insurance company that bears interest at 7.17 percent,
with principal and interest due monthly based on a 25-year amortization schedule
beginning January 1, 1996 through January 1, 2006, and the remaining unpaid
principal balance due January 1, 2006. The loan is secured by a first deed of
trust on five apartment communities. Proceeds from the loan were used to pay
down the outstanding balances on the Revolving Credit Facility. The outstanding
debt was $49.1 million at September 30, 1997. The loan is convertible to
unsecured upon the Operating Partnership achieving an investment grade rating of
BBB or better.
MORTGAGE LOAN CERTIFICATES
The Operating Partnership, through the Financing Partnership, borrowed $102.0
million under a securitized loan in August 1994. During January 1995, the
Operating Partnership borrowed the balance of $29.0 million (increasing the
total to $131.0 million). The loan is secured by the first mortgage liens on 21
Communities. The $102.0 million was issued at 99.97 percent of its face amount
and the $29.0 million was issued at 97.9375 percent of its face amount and will
mature on August 1, 2001. Although both amounts bear interest at 7.98 percent,
the $29.0 million has an effective interest rate of 8.40 percent due to the
discount. The weighted average effective interest rate of the total $131 million
loan is 8.05 percent. The bonds have been rated "AA" by Standard & Poor's.
In March 1997, the Operating Partnership substituted two apartment communities,
Sonoran and The Heritage, as collateral for the securitized loan in exchange for
releasing the liens on three apartment communities, The Pines and Deer Creek
Village, which were sold in June 1997, and La Valencia.
SENIOR UNSECURED NOTES
On April 2, 1997, the Operating Partnership completed the sale of $75 million
senior unsecured notes priced at 99.44 percent of par with a coupon rate of 7.50
percent due April 15, 2004 and $50 million senior unsecured notes priced at
99.21 percent of par with a coupon rate of 7.625 percent due April 15, 2007.
Proceeds to the Operating Partnership from the sale of the notes, net of
underwriter's discount and out-of-pocket costs, was approximately $122.8
million. In anticipation of the Offering, the Operating Partnership entered into
two forward treasury lock agreements on February 25, 1997. The treasury lock
agreements were settled concurrently with the completion of the sale of the
senior unsecured notes on April 2, 1997, and the Operating Partnership received
proceeds from the settlement of the treasury lock agreements of approximately $3
million. The Operating Partnership is amortizing the gain on the settlement of
the treasury lock transaction as a reduction in interest expense on the notes
using the effective interest rate method. The effective interest rates on the
senior unsecured notes inclusive of the benefit from the settlement of the
treasury lock transaction is 7.18 percent and 7.36 percent, respectively. The
Operating Partnership used the proceeds from the sale of the notes and
settlement of the treasury lock transaction to pay down its Revolving Credit
Facility.
TAX EXEMPT BONDS
Tax exempt bonds were comprised of three floating rate bonds based on the tax
exempt note rate set by the respective remarketing agents (or, at the option of
the Operating Partnership at a fixed rate determined by the remarketing agents).
The bonds are secured by letters of credit which are secured by first mortgage
liens on four apartment communities. The tax exempt bonds have monthly interest
only payments and mature at various dates through 2016. The tax exempt bonds
aggregated $64.0 million at September 30, 1997 with interest rates ranging from
5.29 percent to 5.61 percent.
REVOLVING CREDIT FACILITY
On June 13, 1997, the Operating Partnership amended its existing $225 million
unsecured Revolving Credit Facility with a bank group to decrease the commitment
amount from $225 million to $150 million and decrease the interest rate from a
floating rate of London Inter Bank Offered Rate (LIBOR ) plus 150 basis points
(100 basis points equals one percent) to 115 basis points (or, at the option of
the Operating Partnership, at the prime rate announced by the banks). The
Revolving Credit Facility has a term of three years which expires in September
1999, with an option to extend for one year and provides for monthly payments of
interest only. It will be used to
<PAGE>
finance acquisitions, to fund construction and development and renovation costs,
and for working capital purposes. At September 30, 1997, there was $56.0 million
outstanding on the Revolving Credit Facility, with an effective interest rate of
6.92 percent. The Revolving Credit Facility contains customary representations,
covenants and events of default, including a limitation which restricts
dividends to 95 percent of Funds From Operations, as defined. The Operating
Partnership does not expect that the covenants will affect its ability to pay
dividends in accordance with its current dividend policy or the Company's
ability to maintain a REIT status.
The table below outlines the Operating Partnership's debt structure as of
September 30, 1997.
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED AVERAGE
BALANCE INTEREST RATE
<S> <C> <C>
FIXED RATE DEBT:
Mortgage Debt:
Conventional................ $ 67,336 6.98%
Mortgage Loan Certificates.. 130,586 8.05
Unsecured:
$75 million senior notes.... 74,610 7.18
$50 million senior notes.... 49,624 7.36
-------- ----
Total Fixed Rate Debt..... 322,156 7.51
VARIABLE RATE DEBT:
Tax Exempt Bonds.............. 64,000 5.38
Revolving Credit Facility..... 56,000 6.92
-------- ----
Total Variable Rate Debt.. 120,000 6.10
-------- ----
Total Debt................ $442,156 7.12%
======== ====
</TABLE>
The Operating Partnership had 6,164 unencumbered apartment units related to the
Stabilized Communities and 953 unencumbered apartment units related to the
Communities Under Construction and in Lease-Up at September 30, 1997.
SUBSEQUENT OFFERINGS
On May 28, 1996, the Company completed the Second Public Offering of 4,500,000
shares of its Common Stock of which 2,000,000 shares were sold by the Company
and an aggregate of 2,500,000 were sold by two institutional stockholders. On
June 25, 1996, the underwriters exercised their over-allotment option for
200,000 shares and the Company issued an additional 88,889 shares of its Common
Stock and the institutional stockholders sold an additional 111,111 shares
pursuant to a partial exercise of the over-allotment option granted to the
underwriters. Net proceeds to the Company from the Second Public Offering were
approximately $40,891,000. The Company used the proceeds from the sale of Common
Stock to purchase 2,088,889 units in the Operating Partnership. The Operating
Partnership used the proceeds to pay down its Revolving Credit Facility.
In January 1997, the Company filed a shelf registration statement with the SEC
for up to $125 million of common stock, preferred stock and warrants issuable by
the Company and $200 million of debt securities issuable by the Operating
Partnership. The registration statement, which has been declared effective by
the SEC includes $125 million of available securities under the September 1995
registration statement. These registration statements provide the Company with
the ability to issue and sell a portion of such securities from time to time.
On February 14, 1997, the Company completed the Third Public Offering of
1,800,000 shares of its Common Stock. Net proceeds to the Company from the
February 1997 Offering were approximately $35,415,000. The Company used the
proceeds from the sale of Common Stock to purchase 1,800,000 units in the
Operating Partnership. The Operating Partnership used the proceeds to pay down
its Revolving Credit Facility.
<PAGE>
INFLATION
Most of the leases at the communities are for a term of one year or less, which
may enable the Operating Partnership to seek increased rents upon renewal of
existing leases or commencement of new leases. The short-term nature of the
leases generally serves to reduce the risk to the Operating Partnership of the
adverse effects of inflation.
FUNDS FROM OPERATIONS
The Operating Partnership and industry analysts consider Funds from Operations
("FFO") to be an appropriate measure of the performance of an equity REIT
because it is predicated on cash flow analyses. The Operating Partnership
computes FFO in accordance with standards established by the National
Association of Real Estate Investment Trusts ("NAREIT"). FFO is defined as net
income (loss) determined in accordance with GAAP, excluding gains (or losses)
from debt restructuring and sales of property plus depreciation and
amortization, excluding depreciation on non-real estate assets and amortization
of deferred financing costs. Funds from Operations should not be considered as
an alternative to net income (determined in accordance with GAAP) as an
indicator of the Operating Partnership's financial performance or to cash flow
from operating activities (determined in accordance with GAAP) as a measure of
the Operating Partnership's needs. The Operating Partnership believes that in
order to facilitate a clear understanding of the consolidated historical
operating results of the Operating Partnership, FFO should be examined in
conjunction with net income, as presented in the consolidated financial
statements and elsewhere in this document.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Income before minority interest,
gain on sale of real estate assets
and extraordinary item $ 5,313 $3,986 $14,492 $14,075
Depreciation and amortization, net of
corporate depreciation 6,603 5,390 19,101 14,951
Amortization of executive deferred
compensation expense 35 48 95 360
------- ------ ------- -------
Funds from Operations $11,951 $9,424 $33,688 $29,386
======= ====== ======= =======
</TABLE>
NUMBER OF UNITS
The Operating Partnership had 24,915,866 and 24,583,939 weighted average number
of units for the three and the nine months ended September 30, 1997 and
23,038,163 and 21,897,381 for the three and the nine months ended September 30,
1996, respectively.
CAPITALIZATION OF FIXED ASSETS AND COMMUNITY IMPROVEMENTS.
The Operating Partnership has established a policy of capitalizing those
expenditures relating to acquiring new assets, materially enhancing the value of
an existing asset, or substantially extending the useful life of an existing
asset. All expenditures necessary to maintain a community in ordinary operating
condition are expensed as incurred.
<PAGE>
Acquisition of assets and community expenditures are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
New community development $10,556 $20,143 $32,881 $ 66,314
Acquisitions -- 44,193 34,800 57,211
Nonrecurring capital expenditures:
Vehicle access control gates 712 154 1,437 154
Computer upgrade 195 148 347 199
Recurring capital expenditures:
Community additions and improvements 930 746 2,972 2,075
Corporate additions and improvements 13 21 59 21
------- ------- ------- --------
$12,406 $65,405 $72,496 $125,974
======= ======= ======= ========
</TABLE>
DEVELOPMENT AND CONSTRUCTION ACTIVITY
The apartment communities under construction and in lease-up are listed below:
<TABLE>
<CAPTION>
AVERAGE ESTIMATED ACTUAL ACTUAL OR ESTIMATED
UNIT CONSTRUCTION DATE OF ESTIMATED DATE OF
TOTAL SIZE COST CONSTRUCTION COMMENCEMENT STABILIZED
NAME CITY UNITS (SQ. FT.) (MILLIONS) COMMENCEMENT OF LEASE-UP OCCUPANCY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
QUARTER
PHOENIX
Montierra Scottsdale 249 1,052 $ 21 3:97 2:98 1:99
The Retreat Phase I Phoenix 240 973 14 1:97 3:97 2:98
The Retreat Phase II Phoenix 240 973 17 3:97 2:98 1:99
Vista Grove Mesa 224 911 14 1:97 3:97 2:98
--- ----
TOTAL 953 $ 66
=== ====
</TABLE>
The information set forth in the table above is based upon a number of estimates
and assumptions that are inherently subject to business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Operating Partnership's control. The actual development cost, completion date
and stabilization date of any project will be dependent upon a variety of
factors beyond the control of the Operating Partnership including, for example,
labor and other personnel costs, material costs, weather conditions, government
fees and leasing rates.
DISPOSITION ACTIVITY
During the second quarter of 1997, the Operating Partnership sold two
properties, Deer Creek Village and The Pines, containing 502 apartment units.
The aggregate sales price was approximately $22.4 million resulting in a gain
from the sale of approximately $5.2 million. The Operating Partnership received
cash of approximately $7.3 million and two carryback mortgage notes of
approximately $15.1 million. The $7.9 million mortgage note on Deer Creek
Village was paid off on July 23, 1997. The mortgage note is secured by a first
deed of trust on The Pines property and matures in November 1997. The buyer may
repay the remaining mortgage note at anytime without prepayment penalties. The
mortgage note receivable maturity date can be extended 30 days to December 1,
1997 at the option of the borrower.
<PAGE>
On September 30, 1997, the Operating Partnership sold Los Arboles Apartments, a
232 unit apartment community located in Chandler, Arizona. The aggregate
proceeds were approximately $12.5 million resulting in a gain from the sale of
approximately $2.3 million. In connection with the sale, the Operating
Partnership sold the management contract on an adjoining apartment community,
Los Arboles II and received payment of the unpaid principal balance and accrued
interest on the mortgage note on that property.
APARTMENT COMMUNITIES
The following sets forth certain information regarding the current apartment
communities at September 30, 1997. All of the communities are owned 100 percent
in fee by the Operating Partnership.
<TABLE>
<CAPTION>
YEAR
DEVELOPED
NUMBER OF DEVELOPED/ OR
APARTMENT COMMUNITIES CITY APARTMENTS ACQUIRED ACQUIRED
- --------------------- ---- ---------- -------- --------
SAME STORE
ARIZONA
- -------
<S> <C> <C> <C> <C>
PHOENIX:
Acacia Creek Scottsdale 508 Acquired 1995
Bayside at the Islands Gilbert 272 Developed 1988
Country Brook Chandler 276 Acq/Dev 1991/1993
Gateway Villas Phoenix 180 Developed 1995
Greenwood Village Tempe 270 Acquired 1993
Heritage Point Mesa 148 Acquired 1994
La Mariposa Mesa 222 Acquired 1990
La Valencia Mesa 361 Acquired 1990
Little Cottonwoods Tempe 379 Acq/Acq/Dev 1989/89/90
Miramonte Scottsdale 151 Developed 1983
Morningside Scottsdale 160 Acquired 1992
Mountain Park Ranch Phoenix 240 Developed 1995
Park Meadow Gilbert 156 Acquired 1992
Preserve at Squaw Peak Phoenix 108 Acquired 1991
Promontory Pointe Phoenix 304 Acquired 1988
Rancho Murietta Tempe 292 Acquired 1995
Scottsdale Courtyards Scottsdale 274 Developed 1993
Scottsdale Meadows Scottsdale 168 Developed 1984
Shadow Brook Phoenix 224 Acquired 1993
Shores at Andersen Springs Chandler 299 Developed 1989/1993
Silver Creek Phoenix 174 Acquired 1991
Sonoran Phoenix 429 Developed 1995
Sun Creek Glendale 175 Acquired 1993
Superstition Vista Mesa 316 Acquired 1995
The Enclave Tempe 204 Developed 1995
The Heritage Phoenix 204 Developed 1995
The Meadows Mesa 306 Acquired 1987
The Palms Phoenix 132 Developed 1990
Towne Square Chandler 468 Acq/Dev 1992/1995
Villa Encanto Phoenix 382 Developed 1983
Village at Lakewood Phoenix 240 Developed 1988
------
8,022
TUCSON:
Harrison Park Tucson 172 Acquired 1991
La Reserve Oro Valley 240 Developed 1988
Orange Grove Village Tucson 256 Acquired 1991
Suntree Village Oro Valley 424 Acquired 1992
The Arboretum Tucson 496 Acq/Dev 1992/1995
Village at Tanque Verde Tucson 217 Acq/Dev 1990/1994
------
1,805
CALIFORNIA:
- -----------
The Ashton Corona Hills 492 Acquired 1995
------
492
------
Total Same Store 10,319
======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR
DEVELOPED
NUMBER OF DEVELOPED/ OR
APARTMENT COMMUNITIES CITY APARTMENTS ACQUIRED ACQUIRED
- --------------------- ---- ---------- ---------- ---------
COMMUNITIES STABILIZED LESS THAN TWO YEARS
ARIZONA
- -------
<S> <C> <C> <C> <C>
PHOENIX:
Country Brook Expansion Phase III Chandler 120 Developed 1995/96
Ingleside Phoenix 120 Developed 1995/96
Ladera Phoenix 248 Developed 1995/96
Mirador Phoenix 316 Developed 1995/96
Park Meadow Expansion Phase II Gilbert 68 Developed 1995/96
Towne Square Expansion Phase III Chandler 116 Developed 1995/96
------
988
TUCSON:
The Legends Tucson 312 Developed 1995/96
Orange Grove Expansion Phase II Tucson 144 Developed 1995/96
------
456
------
Total Communities Stabilized Less than Two Years 1,444
======
DEVELOPMENTS AND LEASE-UP PROPERTIES
ARIZONA
- -------
PHOENIX:
The Hawthorne (1) Phoenix 276 Developed 1995/96
The Retreat Phase I (2) Phoenix 240 Developed 1996/97
The Retreat Phase II Phoenix 240 Developed 1997
Vista Grove (2) Mesa 224 Developed 1996/97
The Isle at Arrowhead Ranch (4) Glendale 256 Developed 1996
Promontory Pointe Expansion Phase II (1) Phoenix 120 Developed 1995/96
Montierra Scottsdale 249 Developed 1997
------
1,605
TUCSON:
Bear Canyon (3) Tucson 238 Developed 1995/96
Harrison Park Expansion Phase II (3) Tucson 188 Developed 1995/96
------
426
------
Total Developments and Lease-Up Properties 2,031
======
ACQUISITIONS
CALIFORNIA
- ----------
Canyon Crest Views Riverside 178 Acquired 1996
Canyon Ridge San Diego 162 Acquired 1997
Marquessa Corona Hills 336 Acquired 1997
Portofino Chino Hills 176 Acquired 1996
Parkview Terrace Club Redlands 558 Acquired 1996
Redlands Lawn & Tennis Club Redlands 496 Acquired 1996
------
1,906
------
Total 15,700
======
DISPOSITIONS
ARIZONA
- -------
Deer Creek Village Phoenix 308 Acquired 1991
The Pines Mesa 194 Acquired 1992
Los Arboles Chandler 232 Developed 1985
------
734
======
</TABLE>
(1) Community reached stabilized occupancy in the first quarter 1997
(2) Community is in lease-up
(3) Community reached stabilized occupancy in the second quarter 1997
(4) Community reached stabilized occupancy in the third quarter 1997
<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 hereunto duly authorized.
ERP OPERATING LIMITED PARTNERSHIP
By: EQUITY RESIDENTIAL PROPERTIES
TRUST, its General Partner
By: /s/ Bruce C. Strohm
-----------------------------
Bruce C. Strohm
Secretary, Executive Vice President and
General Counsel
Dated: November 14, 1997
