<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[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
Commission File Number: 0-24920
ERP OPERATING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
ILLINOIS 36-3894853
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 474-1300
(Registrant's Telephone Number, Including Area Code)
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
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- -----------------
---------------- -----------------
<S> <C> <C>
ASSETS
Investment in real estate
Land $ 1,457,213 $ 1,326,148
Depreciable property 9,951,666 9,519,579
Construction in progress 32,563 96,336
================ =================
11,441,442 10,942,063
Accumulated depreciation (989,049) (718,491)
================ =================
Investment in real estate, net of accumulated depreciation 10,452,393 10,223,572
Real estate held for disposition 13,457 29,886
Cash and cash equivalents 62,805 3,965
Investment in mortgage notes, net 85,295 88,041
Rents receivable 1,602 4,758
Deposits - restricted 128,808 69,339
Escrow deposits - mortgage 73,236 68,725
Deferred financing costs, net 34,549 27,569
Other assets 196,965 184,405
================ =================
TOTAL ASSETS $ 11,049,110 $ 10,700,260
================ =================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgage notes payable $ 2,456,349 $ 2,341,011
Notes, net 2,299,197 2,049,516
Lines of credit 90,000 290,000
Accounts payable and accrued expenses 129,600 100,926
Accrued interest payable 62,615 46,176
Rents received in advance and other liabilities 59,795 54,616
Security deposits 35,715 37,439
Distributions payable 121,145 18,755
----------------- -----------------
TOTAL LIABILITIES 5,254,416 4,938,439
---------------- -----------------
Commitments and contingencies
Partners' capital:
Junior Convertible Preference Units 7,896 4,833
---------------- -----------------
Cumulative Convertible Redeemable Preference Interests 40,000 -
---------------- -----------------
Cumulative Convertible or Redeemable Preference Units 1,335,791 1,410,574
---------------- -----------------
---------------- -----------------
General Partner 3,998,440 3,919,873
Limited Partners 412,567 426,541
---------------- -----------------
Total General Partner and Limited Partners capital 4,411,007 4,346,414
---------------- -----------------
TOTAL PARTNERS' CAPITAL 5,794,694 5,761,821
---------------- -----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 11,049,110 $ 10,700,260
================ =================
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER OP UNIT DATA)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- -------------------------------
1999 1998 1999 1998
---------------------------------- -------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 1,243,958 $ 901,087 $ 424,780 $ 329,717
Fee and asset management 3,432 4,204 1,018 1,414
Interest income - investment in mortgage notes 8,502 14,405 2,858 4,184
Interest and other income 17,655 12,803 6,532 3,934
----------- ----------- ----------- -----------
Total revenues 1,273,547 932,499 435,188 339,249
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
EXPENSES
Property and maintenance 300,798 225,053 103,933 86,750
Real estate taxes and insurance 126,304 88,552 41,789 32,068
Property management 42,817 38,546 14,844 13,539
Fee and asset management 2,301 3,344 677 1,097
Depreciation 297,505 208,394 100,371 76,484
Interest:
Expense incurred 241,516 170,143 83,017 64,492
Amortization of deferred financing costs 2,773 1,962 1,112 687
General and administrative 15,736 14,488 5,022 4,655
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Total expenses 1,029,750 750,482 350,765 279,772
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income before gain on disposition of 243,797 182,017 84,423 59,477
properties, net and extraordinary item
Gain on disposition of properties, net 64,315 12,717 18,508 1,625
----------- ----------- ----------- -----------
Income before extraordinary item 308,112 194,734 102,931 61,102
Loss on early extinguishment of debt (451) - - -
=========== =========== =========== ===========
Net income $ 307,661 $ 194,734 $ 102,931 $ 61,102
=========== =========== =========== ===========
=========== =========== =========== ===========
ALLOCATION OF NET INCOME:
Junior Convertible Preference Units $ 240 $ - $ 240 $ -
=========== =========== =========== ===========
Cumulative Convertible Redeemable Preference
Interests $ 36 $ - $ 36 $ -
=========== =========== =========== ===========
Cumulative Convertible or Redeemable
Preference Units $ 84,842 $ 65,075 $ 27,731 $ 21,691
=========== =========== =========== ===========
General Partner $ 200,989 $ 116,819 $ 67,884 $ 34,881
Limited Partners 21,554 12,840 7,040 4,530
----------- ----------- ----------- -----------
Net income available to OP Unit holders $ 222,543 $ 129,659 $ 74,924 $ 39,411
=========== =========== =========== ===========
Weighted average OP Units outstanding 133,490 106,630 134,993 109,688
=========== =========== =========== ===========
Net income per weighted average OP Unit
outstanding $ 1.67 $ 1.22 $ 0.56 $ 0.36
=========== =========== =========== ===========
Net income per weighted average OP Unit
outstanding - assuming dilution $ 1.66 $ 1.21 $ 0.55 $ 0.36
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 307,661 $ 194,734
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation 297,505 208,394
Amortization of deferred financing costs 2,773 1,962
Amortization of discounts and premiums on debt (1,746) (1,505)
Amortization of treasury locks and options on debt 768 1,543
Amortization of discount on investment in mortgage notes - (1,900)
Gain on disposition of properties, net (64,315) (12,717)
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in rents receivable 2,480 (676)
(Increase) in deposits - restricted (4,344) (7,033)
Decrease (increase) in other assets 41,030 (24)
Increase in accounts payable and accrued expenses 32,010 29,626
Increase in accrued interest payable 16,439 20,436
Increase in rents received in advance and other liabilities 7,727 8,334
(Decrease) increase in security deposits (1,735) 8,365
----------- -----------
Net cash provided by operating activities 636,253 449,539
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate, net (469,585) (945,960)
Improvements to real estate (93,456) (60,614)
Additions to non-real estate property (5,922) (7,928)
Interest capitalized to real estate developments (1,157) (1,058)
Proceeds from disposition of real estate, net 197,125 75,976
Decrease in investment in mortgage notes 2,746 1,842
Increase in deposits on real estate acquisitions, net (55,201) (7,433)
Increase in mortgage deposits (4,750) (19,014)
Investment in limited partnerships (26,673) (21,708)
Decrease in mortgage receivables 7,150 -
Purchase of management contract rights (285) (119)
Costs related to Mergers (4,598) (4,528)
Other investing activities (15,075) (18,975)
----------- -----------
Net cash used by investing activities (469,681) (1,009,519)
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan and bond acquisition costs (8,423) (3,428)
MORTGAGE NOTES PAYABLE:
Proceeds 188,569 -
Lump sum payoffs (54,231) (46,901)
Monthly principal payments (13,041) (8,810)
NOTES, NET:
Proceeds 298,014 550,357
Payoffs (125,000) -
LINES OF CREDIT:
Proceeds 959,000 445,000
Payments (1,159,000) (370,000)
Capital contributions from General Partner, net 34,215 323,884
Proceeds from sale of preference interests, net 39,000 -
Distributions paid to partners (274,910) (209,638)
Principal receipts on employee notes 144 234
Principal receipts on pledged notes receivable 7,931 -
----------- -----------
Net cash (used by) provided by financing activities (107,732) 680,698
----------- -----------
Net increase in cash and cash equivalents 58,840 120,718
Cash and cash equivalents, beginning of period 3,965 33,295
----------- -----------
Cash and cash equivalents, end of period $ 62,805 $ 154,013
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 226,234 $ 149,707
=========== ===========
Mortgage loans assumed and/or entered into through
acquisitions of real estate $ 69,885 $ 433,492
=========== ===========
Real estate contributed in exchange for OP Units or
Junior Convertible Preference Units $ 28,232 $ 164,149
=========== ===========
Transfers to real estate held for disposition $ 13,457 $ -
=========== ===========
Refinancing of mortgage notes payable in favor of notes, net $ 75,790 $ -
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DEFINITION OF SPECIAL TERMS:
Capitalized terms used but not defined in this Quarterly Report on Form 10-Q are
as defined in the Operating Partnership's Annual Report on Form 10-K for the
year ended December 31, 1998 ("Form 10-K").
1. BUSINESS
ERP Operating Limited Partnership (the "Operating Partnership"), an
Illinois limited partnership, was formed to conduct the multifamily property
business of Equity Residential Properties Trust ("EQR"). EQR is a Maryland real
estate investment trust formed on March 31, 1993 and is the general partner of
the Operating Partnership. As used herein, the term "Company" means EQR, and its
subsidiaries, as the survivor of the mergers between EQR and each of Wellsford
Residential Property Trust ("Wellsford") (the "Wellsford Merger"), Evans
Withycombe Residential, Inc. ("EWR") (the "EWR Merger") and Merry Land &
Investment Company, Inc. ("MRY") (the "MRY Merger"). The Company conducts
substantially all of its operations through the Operating Partnership. As of
September 30, 1999, the Operating Partnership controlled a portfolio of 652
multifamily properties (individually a "Property" and collectively the
"Properties"). The Operating Partnership's interest in six of these Properties
consists solely of ownership of debt collateralized by such Properties. The
Operating Partnership also has an investment in partnership interests and
subordinated mortgages collateralized by 21 properties (the "Additional
Properties").
2. BASIS OF PRESENTATION
The balance sheet as of September 30, 1999, the statements of
operations for the nine months and the quarter ended September 30, 1999 and cash
flows for the nine months ended September 30, 1999 represent the consolidated
financial information of the Operating Partnership and its subsidiaries.
Due to the Operating Partnership's ability to control, either through
ownership or by contract, the Management Partnerships, the Financing
Partnerships, the LLCs, Merry Land DownREIT I LP and EQR-Mosaic LLC, each such
entity has been consolidated with the Operating Partnership for financial
reporting purposes. In regard to Management Corp., Management Corp. II, Evans
Withycombe Management, Inc. and ML Services, Inc., the Operating Partnership
does not have legal control; however, these entities are consolidated for
financial reporting purposes, the effects of which are immaterial. Certain
reclassifications have been made to the prior year's financial statements in
order to conform to the current year presentation.
These unaudited Consolidated Financial Statements of the Operating
Partnership have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations and should be read in conjunction with
the Financial Statements and Notes thereto included in the Operating
Partnership's Annual Report on Form 10-K. The following Notes to Consolidated
Financial Statements highlight significant changes to the notes included in the
Form 10-K and present interim disclosures as required by the SEC. The
accompanying Consolidated Financial Statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
6
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PARTNERS' CAPITAL
The limited partners of the Operating Partnership as of September 30,
1999 include various individuals and entities that contributed their properties
to the Operating Partnership in exchange for a partnership interest (the
"Limited Partners") and are represented by 12,754,820 OP Units. As of September
30, 1999, the Company (as the general partner) had an approximate 90.56%
interest and the Limited Partners had an approximate 9.44% interest.
In connection with certain acquisitions during the nine months ended
September 30, 1999, the Operating Partnership issued 28,795 Series A Junior
Convertible Preference Units and 7,367 Series B Junior Convertible Preference
Units having a combined value of approximately $3.0 million. These units
ultimately will convert to OP Units in accordance with the respective term sheet
agreements.
On September 27, 1999, the Operating Partnership, through a
wholly-owned entity called EQR-Mosaic LLC, issued 800,000 units of 8.00%
Series A Cumulative Convertible Redeemable Preference Interests with an
equity value of $40 million. EQR-Mosaic LLC received $39 million in net
proceeds from this transaction. The liquidation value of these units is $50
per unit. The 800,000 units are convertible into 800,000 shares of 8.00%
Series M Cumulative Redeemable Preferred Shares of Beneficial Interest of the
Company. The Series M Preferred Shares are not convertible into EQR Common
Shares. Dividends for the Series A Preference Interests or the Series M
Preferred Shares are payable quarterly at the rate of $4.00 per unit per year.
In regards to the General Partner, net proceeds from the various equity
offerings of the Company have been contributed by the Company to the Operating
Partnership in return for an increased ownership percentage. Due to the Limited
Partners' ability to convert their interest into an ownership interest in the
General Partner, the net offering proceeds are allocated between the Company (as
General Partner) and the Limited Partners (to the extent represented by OP
Units) to account for the change in their respective percentage ownership of the
equity of the Operating Partnership.
7
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table presents the Operating Partnership's allocation of
net income among Cumulative Convertible or Redeemable Preference Units for the
nine months and quarters ended September 30, 1999 and September 30, 1998
(amounts are in thousands):
<TABLE>
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------
1999 1998 1999 1998
----------------------- ---------------------------
<S> <C> <C> <C> <C>
ALLOCATION OF NET INCOME:
9 3/8% Series A Cumulative Redeemable
Preference Units $10,758 $10,758 $ 3,586 $ 3,586
9 1/8% Series B Cumulative Redeemable
Preference Units 8,555 8,555 2,852 2,851
9 1/8% Series C Cumulative Redeemable
Preference Units 7,870 7,870 2,623 2,623
8.60% Series D Cumulative Redeemable
Preference Units 11,288 11,288 3,762 3,763
Series E Cumulative Convertible
Preference Units 5,245 5,246 1,748 1,749
9.65% Series F Cumulative Redeemable
Preference Units 4,161 4,162 1,387 1,387
7 1/4% Series G Convertible Cumulative
Preference Units 17,196 17,196 5,732 5,732
7.00% Series H Cumulative Convertible
Preference Units 196 - 65 -
8.82% Series I Cumulative Convertible
Preference Units 3,329 - 562 -
8.60% Series J Cumulative Convertible
Preference Units 7,416 - 2,472 -
8.29% Series K Cumulative Redeemable
Preference Units 3,109 - 1,036 -
7.625% Series L Cumulative Redeemable
Preference Units 5,719 - 1,906 -
------- ------- ------- -------
Cumulative Convertible or
Redeemable Preference Units $84,842 $65,075 $27,731 $21,691
======= ======= ======= =======
</TABLE>
8
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table summarizes the distributions paid to OP Unit and
Junior Convertible Preference Unit holders and the Company as holder of the
various Preference Units listed below related to the nine months ended September
30, 1999:
<TABLE>
FOR THE
QUARTER OR RECORD DATE
DIVIDEND AMOUNT DATE PAID PERIOD ENDED
- --------------------------------------------------- ----------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Series A Cumulative Redeemable Preference Units $0.5859380 04/15/99 03/31/99 03/19/99
$0.5859370 07/15/99 06/30/99 06/18/99
$0.5859380 10/15/99 09/30/99 09/20/99
Series B Cumulative Redeemable Preference Units $0.5703130 04/15/99 03/31/99 03/19/99
$0.5703120 07/15/99 06/30/99 06/18/99
$0.5703130 10/15/99 09/30/99 09/20/99
Series C Cumulative Redeemable Preference Units $0.5703130 04/15/99 03/31/99 03/19/99
$0.5703120 07/15/99 06/30/99 06/18/99
$0.5703130 10/15/99 09/30/99 09/20/99
Series D Cumulative Redeemable Preference Units $0.5375000 04/15/99 03/31/99 03/19/99
$0.5375000 07/15/99 06/30/99 06/18/99
$0.5375000 10/15/99 09/30/99 09/20/99
Series E Cumulative Convertible Preference Units $0.4375000 04/01/99 03/31/99 03/19/99
$0.4375000 07/01/99 06/30/99 06/18/99
$0.4375000 10/01/99 09/30/99 09/20/99
Series F Cumulative Redeemable Preference Units $0.6031250 04/15/99 03/31/99 03/19/99
$0.6031250 07/15/99 06/30/99 06/18/99
$0.6031250 10/15/99 09/30/99 09/20/99
Series G Convertible Cumulative Preference Units $0.4531250 04/15/99 03/31/99 03/19/99
$0.4531250 07/15/99 06/30/99 06/18/99
$0.4531250 10/15/99 09/30/99 09/20/99
Series H Cumulative Convertible Preference Units $0.4375000 03/31/99 03/31/99 03/19/99
$0.4375000 06/30/99 06/30/99 06/18/99
$0.4375000 09/30/99 09/30/99 09/20/99
Series I Cumulative Convertible Preference Units $0.5512500 03/31/99 03/31/99 03/19/99
$0.5512500 06/30/99 06/30/99 06/18/99
$0.5512500 09/30/99 09/30/99 09/20/99
Series J Cumulative Convertible Preference Units $0.5375000 03/31/99 03/31/99 03/19/99
$0.5375000 06/30/99 06/30/99 06/18/99
$0.5375000 09/30/99 09/30/99 09/20/99
Series K Cumulative Redeemable Preference Units $1.0362500 03/31/99 03/31/99 03/19/99
$1.0362500 06/30/99 06/30/99 06/18/99
$1.0362500 09/30/99 09/30/99 09/20/99
Series L Cumulative Redeemable Preference Units $0.4765625 03/31/99 03/31/99 03/19/99
$0.4765625 06/30/99 06/30/99 06/18/99
$0.4765625 09/30/99 09/30/99 09/20/99
OP Units $0.71 04/09/99 03/31/99 03/19/99
$0.71 07/09/99 06/30/99 06/18/99
$0.76 10/08/99 09/30/99 09/20/99
Series A Junior Convertible Preference
Unit holders $1.367336 04/09/99 03/31/99 03/19/99
$1.367336 07/09/99 06/30/99 06/18/99
$1.367336 10/08/99 09/30/99 09/20/99
Series B Junior Convertible Preference Unit holders $0.50 10/08/99 09/30/99 09/20/99
</TABLE>
9
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Minority Interests represented by the Company's indirect 1% interest in
various Financing Partnerships and LLCs are immaterial and have not been
accounted for in the Consolidated Financial Statements. In addition, certain
amounts due from the Company for its 1% interest in the Financing Partnerships
has not been reflected in the Consolidated Balance Sheets since such amounts are
immaterial to the Consolidated Balance Sheets.
4. REAL ESTATE ACQUISITIONS
During the nine months ended September 30, 1999, the Operating
Partnership acquired the nineteen Properties listed below, of which eleven were
acquired from unaffiliated third parties and eight were acquired from an
affiliated party. In connection with certain of the acquisitions listed below,
the Operating Partnership assumed and/or entered into new mortgage indebtedness
of approximately $196.3 million, issued OP Units having a value of approximately
$25.2 million and issued Junior Convertible Preference Units having a value of
approximately $3.0 million. The cash portion of these transactions was funded
primarily from proceeds received from the disposition of certain Properties and
working capital.
<TABLE>
- --------------- ------------------------------- --------------------------------- ------------- ------------------
PURCHASE PRICE
DATE NUMBER (IN THOUSANDS)
ACQUIRED PROPERTY LOCATION OF UNITS
- --------------- ------------------------------- --------------------------------- ------------- ------------------
<S> <C> <C>
01/22/99 Fireside Park Rockville, MD 236 $14,279
01/22/99 Mill Pond Glen Burnie, MD 240 11,745
01/28/99 Aspen Crossing Wheaton, MD 192 11,386
02/24/99 Copper Canyon Highlands Ranch, CO 222 16,200
03/04/99 Siena Terrace Lake Forest, CA 356 33,000
03/23/99 Greenbriar Kirkwood, MO 218 12,033
03/24/99 Fairland Gardens Silver Spring, MD 400 25,897
04/28/99 Pine Tree Club Wildwood, MO 150 7,988
04/28/99 Westbrooke Village I & II Manchester, MO 252 12,642
04/29/99 Brookside Frederick, MD 228 10,809
04/30/99 Skyview Rancho Santa Margarita, CA 260 21,800
05/20/99 Lincoln at Defoors Atlanta, GA 300 25,500
05/25/99 Rosecliff Quincy, MA 156 18,263
05/25/99 Canyon Crest Santa Clarita, CA 158 12,500
06/29/99 Greentree I Glen Burnie, MD 350 15,625
06/29/99 Greentree III Glen Burnie, MD 207 9,598
07/14/99 Brookdale Village Naperville, IL 252 19,600
07/29/99 Longfellow Place* Boston, MA 710 237,000
07/30/99 Greentree II Glen Burnie, MD 239 10,907
- --------------- ------------------------------- --------------------------------- ------------- ------------------
5,126 $526,772
- --------------- ------------------------------- --------------------------------- ------------- ------------------
</TABLE>
* This acquisition also included approximately 264,000 square feet of office and
retail space and two parking garages.
5. REAL ESTATE DISPOSITIONS
During the nine months ended September 30, 1999, the Operating
Partnership disposed of the twenty-one Properties listed below to unaffiliated
third parties. The Operating Partnership recognized a net gain for financial
reporting purposes of approximately $64.3 million.
10
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
- --------------- --------------------------------- ----------------------- -------------- -----------------
DISPOSITION
DATE NUMBER PRICE
DISPOSED PROPERTY LOCATION OF UNITS (IN THOUSANDS)
- --------------- --------------------------------- ----------------------- -------------- -----------------
<S> <C> <C> <C> <C>
01/06/99 Fox Run Little Rock, AR 337 $10,623
01/06/99 Greenwood Forest Little Rock, AR 239 7,533
01/06/99 Walnut Ridge Little Rock, AR 252 7,943
01/06/99 Williamsburg Little Rock, AR 211 6,651
01/27/99 The Hawthorne Phoenix, AZ 276 20,500
03/02/99 The Atrium Durham, NC 208 10,750
03/24/99 Greenbriar Kirkwood, MO 218 12,525
05/06/99 Sandstone at Bear Creek Euless, TX 40 2,075
05/12/99 La Costa Brava/Cedar Cove Jacksonville, FL 464 17,650
05/18/99 Lands End Pacifica , CA 260 30,100
07/01/99 The Willows Knoxville, TN 250 11,950
07/26/99 Tivoli Lakes Club Deerfield Beach, FL 278 17,000
07/29/99 The Seasons Boise, ID 120 6,026
08/19/99 Kingswood Manor San Antonio, TX 129 3,800
08/19/99 Hampton Green San Antonio, TX 293 8,000
08/19/99 Trails End San Antonio, TX 308 9,100
08/19/99 Waterford San Antonio, TX 133 4,500
09/23/99 Southbank Mesa, AZ 113 4,550
09/30/99 Governor's Place Augusta, GA 190 5,500
09/30/99 Maxwell House Augusta, GA 216 3,500
- --------------- --------------------------------- ----------------------- -------------- -----------------
4,535 $200,276
- --------------- --------------------------------- ----------------------- -------------- -----------------
</TABLE>
6. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE
As of September 30, 1999, in addition to the Properties that were
subsequently acquired as discussed in Note 14 of the Notes to Consolidated
Financial Statements, the Operating Partnership entered into an agreement to
acquire one multifamily property containing 288 units from an unaffiliated third
party. The expected purchase price is approximately $15.5 million.
As of September 30, 1999, in addition to the Properties that were
subsequently disposed of as discussed in Note 14 of the Notes to Consolidated
Financial Statements, the Operating Partnership entered into separate agreements
to dispose of sixteen multifamily properties containing 4,992 units to
unaffiliated third parties. The expected combined disposition price is
approximately $253.6 million.
The closings of these pending transactions are subject to certain
contingencies and conditions; therefore, there can be no assurance that these
transactions will be consummated or that the final terms thereof will not differ
in material respects from those summarized in the preceding paragraph.
7. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE OP UNIT
The following tables set forth the computation of net income per
weighted average OP Unit outstanding and net income per weighted average OP Unit
outstanding - assuming dilution.
11
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------------------------- -------------------------------
(Amounts in thousands except per OP Unit amounts)
<S> <C> <C> <C> <C>
NUMERATOR:
Income before gain on disposition of properties, net,
extraordinary item and allocation of income to
Junior Convertible Preference Units, Cumulative
Convertible Redeemable Preference Interests and
Cumulative Convertible or Redeemable Preference Units $ 243,797 $ 182,017 $ 84,423 $ 59,477
Income allocated to Junior Convertible Preference Units (240) - (240) -
Income allocated to Cumulative Convertible Redeemable
Preference Interests (36) (36)
Income allocated to Cumulative Convertible or Redeemable
Preference Units (84,842) (65,075) (27,731) (21,691)
--------- --------- --------- ---------
Income before gain on disposition of properties, net
and extraordinary item 158,679 116,942 56,416 37,786
Gain on disposition of properties, net 64,315 12,717 18,508 1,625
Loss on early extinguishment of debt (451) - - -
--------- --------- --------- ---------
Numerator for net income per weighted average
OP Unit outstanding 222,543 129,659 74,924 39,411
Effect of dilutive securities - - - -
--------- --------- --------- ---------
Numerator for net income per weighted average
OP Unit outstanding - assuming dilution $ 222,543 $ 129,659 $ 74,924 $ 39,411
========= ========= ========= =========
DENOMINATOR:
Denominator for net income per weighted average OP
Unit outstanding 133,490 106,630 134,993 109,688
Effect of dilutive securities:
OP Units issuable upon exercise of the Company's
share options 714 922 660 628
--------- --------- --------- ---------
Denominator for net income per weighted average
OP Unit outstanding - assuming dilution 134,204 107,552 135,653 110,316
========= ========= ========= =========
Net income per weighted average OP Unit outstanding $ 1.67 $ 1.22 $ 0.56 $ 0.36
========= ========= ========= =========
Net income per weighted average OP Unit outstanding -
assuming dilution $ 1.66 $ 1.21 $ 0.55 $ 0.36
========= ========= ========= =========
</TABLE>
12
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
1999 1998 1999 1998
----------------------------- ------------------------------
(Amounts in thousands except per OP Unit amounts)
<S> <C> <C> <C> <C>
NET INCOME PER WEIGHTED AVERAGE OP UNIT OUTSTANDING:
Income before gain on disposition of properties, net and
extraordinary item per weighted average OP $1.19 $1.10 $0.42 $0.34
Unit outstanding
Gain on disposition of properties, net 0.48 0.12 0.14 0.02
Loss on early extinguishment of debt - - - -
-------------- ------------- -------------- -------------
Net income per weighted average OP Unit outstanding $1.67 $1.22 $0.56 $0.36
============== ============= ============== =============
NET INCOME PER WEIGHTED AVERAGE OP UNIT OUTSTANDING - ASSUMING DILUTION:
Income before gain on disposition of properties, net and
extraordinary item per weighted average OP Unit
outstanding - assuming dilution $1.18 $1.09 $0.42 $0.34
Gain on disposition of properties, net 0.48 0.12 0.13 0.02
Loss on early extinguishment of debt - - - -
-------------- ------------- -------------- -------------
Net income per weighted average OP Unit
outstanding - assuming dilution $1.66 $1.21 $0.55 $0.36
============== ============= ============== =============
</TABLE>
CONVERTIBLE PREFERENCE UNITS AND JUNIOR CONVERTIBLE PREFERENCE UNITS THAT COULD
BE CONVERTED INTO 12,357,124 AND 7,623,525 WEIGHTED COMMON SHARES (WHICH WOULD
BE CONTRIBUTED TO THE OPERATING PARTNERSHIP IN EXCHANGE FOR OP UNITS) FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998, RESPECTIVELY, AND 11,365,744 AND
7,623,326 WEIGHTED COMMON SHARES FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND
1998, RESPECTIVELY, WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF
DILUTED EARNINGS PER OP UNIT BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE.
13
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. MORTGAGE NOTES PAYABLE
On June 1, 1999, the Operating Partnership refinanced the debt on four
existing properties with a net increase in mortgage indebtedness of
approximately $18.0 million.
On July 29, 1999, the Operating Partnership obtained new mortgage
financing on eleven previously unencumbered properties in the amount of $126.5
million.
On August 31, 1999, the Operating Partnership refinanced the debt
totaling $120.8 million on ten existing properties. In addition, five previously
unencumbered properties cross-collateralize each of the new mortgage notes.
During the nine months ended September 30, 1999, the Operating
Partnership repaid the outstanding mortgage balances on two Properties in the
aggregate amount of $9.3 million. In connection with the above transactions, the
Operating Partnership incurred prepayment penalties of $0.5 million, which have
been classified as losses on early extinguishment of debt.
As of September 30, 1999, the Operating Partnership had outstanding
mortgage indebtedness of approximately $2.5 billion encumbering 234 of the
Properties. The carrying value of such Properties (net of accumulated
depreciation of $376 million) was approximately $4.0 billion. The mortgage notes
payables are generally due in monthly installments of principal and interest. In
connection with the Properties acquired during the nine months ended September
30, 1999, the Operating Partnership assumed the outstanding mortgage balances on
eight Properties in the aggregate amount of $69.9 million.
As of September 30, 1999, scheduled maturities for the Operating
Partnership's outstanding mortgage indebtedness are at various dates through
October 1, 2030. During the nine months ended September 30, 1999, the effective
interest cost calculated for all of the Operating Partnership's debt was 7.00%.
9. NOTES
On May 15, 1999, the Operating Partnership repaid the 1999 Notes.
On June 17, 1999, the Operating Partnership refinanced the bond
indebtedness collateralized by four existing properties. The bond indebtedness
on all four properties totaling $75.8 million is now unsecured.
In June 1999, the Operating Partnership issued $300 million of
redeemable unsecured fixed rate notes (the "June 2004 Notes") in connection with
the Debt Shelf Registration in a public debt offering (the "Seventh Public Debt
Offering"). The June 2004 Notes were issued at a discount, which is being
amortized over the life of the June 2004 Notes on a straight-line basis. The
June 2004 Notes are due June 23, 2004. The annual interest rate on the June 2004
Notes is 7.10%, which is payable semiannually in arrears on December 23 and June
23, commencing
14
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
December 23, 1999. The Operating Partnership received net proceeds of
approximately $298 million in connection with this issuance.
As of September 30, 1999, the Operating Partnership had outstanding
unsecured notes of approximately $2.3 billion, net of a $4.8 million discount
and including a $7.6 million premium.
10. LINES OF CREDIT
On August 12, 1999 the Operating Partnership obtained a new three year
$700 million unsecured revolving credit facility, with Bank of America
Securities LLC and Chase Securities Inc. acting as joint lead arrangers,
maturing August 11, 2002. The new line of credit replaced the Operating
Partnership's $500 million unsecured revolving credit facility, as well as the
$120 million unsecured revolving credit facility, which the Operating
Partnership assumed in the MRY Merger. The prior existing revolving credit
facilities were repaid in full and terminated upon the closing of the new
facility. As of September 30, 1999, $90 million was outstanding under this new
facility, bearing interest at a weighted average rate of 5.86%.
11. DEPOSITS - RESTRICTED
Deposits-restricted as of September 30, 1999 primarily included a
deposit in the amount of $25 million held in a third party escrow account to
provide collateral for third party construction financing in connection with two
separate joint venture agreements. Also, approximately $78.5 million was held in
third party escrow accounts, representing proceeds received in connection with
the Operating Partnership's disposition of thirteen properties and earnest money
deposits made for one additional acquisition. In addition, approximately $25.3
million was for tenant security, utility deposits, and other deposits for
certain of the Operating Partnership's Properties.
12. COMMITMENTS AND CONTINGENCIES
The Operating Partnership, as an owner of real estate, is subject to
various environmental laws of Federal and local governments. Compliance by the
Operating Partnership with existing laws has not had a material adverse effect
on the Operating Partnership's financial condition and results of operations.
However, the Operating Partnership cannot predict the impact of new or changed
laws or regulations on its current Properties or on properties that it may
acquire in the future.
The Operating Partnership does not believe there is any other
litigation, except as mentioned in the previous paragraph, threatened against
the Operating Partnership other than routine litigation arising out of the
ordinary course of business, some of which is expected to be covered by
liability insurance, none of which is expected to have a material adverse effect
on the consolidated financial statements of the Operating Partnership.
In regard to the joint venture agreements with two multifamily
residential real estate developers during the nine months ended September 30,
1999, the Operating Partnership funded a total of $81 million and during the
fourth quarter of 1999 the Operating Partnership expects to fund approximately
$24.6 million in connection with these agreements. Also in connection with these
15
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
two agreements, the Operating Partnership has an obligation to fund up to an
additional $55 million to guarantee third party construction financing.
In regard to certain other properties that were under development
and/or expansion during the nine months ended September 30, 1999, the Operating
Partnership funded $32.2 million. During the fourth quarter of 1999, the
Operating Partnership expects to fund $19.8 million related to the continued
development and/or expansion of as many as five Properties.
In regard to certain properties that are under earnout/development
agreements, during the nine months ended September 30, 1999, the Operating
Partnership funded the following:
- - $17.2 million relating to the acquisition of Copper Canyon Apartments,
which included a $1.0 million earnout payment to the developer;
- - $24.9 million relating to the acquisition of Skyview Apartments, which
included a $3.1 million earnout payment to the developer; and
- - $18.3 million relating to the acquisition of Rosecliff Apartments.
In connection with the Wellsford Merger, the Operating Partnership has
provided a $14.8 million credit enhancement with respect to bonds issued to
finance certain public improvements at a multifamily development project.
Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real
Properties, Inc. ("WRP Newco"), the Operating Partnership has agreed to purchase
up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per share on a
standby basis over a three-year period ending on May 30, 2000. As of September
30, 1999, no shares of WRP Newco Series A Preferred had been acquired by the
Operating Partnership.
In connection with the MRY Merger, the Operating Partnership extended a
$25 million, one year, non-revolving Senior Debt Agreement to MRYP Spinco. On
June 24, 1999, MRYP Spinco repaid the Senior Note outstanding balance of $18.3
million and there is no further obligation by either party in connection with
this agreement.
Also, in connection with the MRY Merger, the Operating Partnership
entered into six joint venture agreements with MRYP Spinco, the entity spun-off
in the MRY Merger. The Operating Partnership contributed six properties with an
initial value of $52.7 million in return for a 50% ownership interest in each
joint venture. On August 23, 1999, the Operating Partnership sold its interest
in these six properties to MRYP Spinco and there is no further obligation by
either party in connection with these agreements.
13. REPORTABLE SEGMENTS
The following tables set forth the reconciliation of net income and
total assets for the Operating Partnership's reportable segments for the nine
months and quarter ended September 30, 1999 and net income for the nine months
and quarter ended September 30, 1998.
16
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 RENTAL REAL CORPORATE/
(AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental income $ 1,243,958 $ - $ 1,243,958
Property and maintenance expense (300,798) - (300,798)
Real estate tax and insurance expense (126,304) - (126,304)
Property management expense (42,817) - (42,817)
------------ ------------ ------------
Net operating income 774,039 - 774,039
Fee and asset management income - 3,432 3,432
Interest income - investment in mortgage notes - 8,502 8,502
Interest and other income - 17,655 17,655
Fee and asset management expense - (2,301) (2,301)
Depreciation expense on non-real estate assets - (5,125) (5,125)
Interest expense:
Expense incurred - (241,516) (241,516)
Amortization of deferred financing costs - (2,773) (2,773)
General and administrative expense - (15,736) (15,736)
Allocation of net income to Preference Unit and Interest holders - (85,118) (85,118)
Adjustment for depreciation expense related
to equity in unconsolidated joint venture - 710 710
------------ ------------ ------------
Funds from operations available to OP Units 774,039 (322,270) 451,769
Depreciation expense on real estate assets (292,380) - (292,380)
Gain on disposition of properties, net 64,315 - 64,315
Loss on early extinguishment of debt - (451) (451)
Adjustment for depreciation expense related to - (710) (710)
equity in unconsolidated joint ventures
------------ ------------ ------------
Net income available to OP Unit holders $ 545,974 $ (323,431) $ 222,543
============ ============ ============
Investment in real estate, net of accumulated depreciation
as of September 30, 1999 $ 10,434,274 $ 18,119 $ 10,452,393
============ ============ ============
Total assets as of September 30, 1999 $ 10,447,731 $ 601,379 $ 11,049,110
============ ============ ============
</TABLE>
17
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 RENTAL REAL CORPORATE/
(AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental income $ 901,087 $ - $ 901,087
Property and maintenance expense (225,053) - (225,053)
Real estate tax and insurance expense (88,552) - (88,552)
Property management expense (38,546) - (38,546)
-------------------------------------------
Net operating income 548,936 - 548,936
Fee and asset management income - 4,204 4,204
Interest income - investment in mortgage notes - 14,405 14,405
Interest and other income - 12,803 12,803
Fee and asset management expense - (3,344) (3,344)
Depreciation expense on non-real estate assets - (3,993) (3,993)
Interest expense:
Expense incurred - (170,143) (170,143)
Amortization of deferred financing costs - (1,962) (1,962)
General and administrative expense - (14,488) (14,488)
Allocation of net income to Preference Unit and Interest holders - (65,075) (65,075)
Adjustment for amortization of deferred financing costs
related to predecessor business - 35 35
-------------------------------------------
Funds from operations available to OP Units 548,936 (227,558) 321,378
Depreciation expense on real estate assets (204,401) - (204,401)
Gain on disposition of properties, net 12,717 - 12,717
Adjustment for amortization of deferred financing costs
related to predecessor business - (35) (35)
-------------------------------------------
Net income available to OP Unit holders $ 357,252 $(227,593) $ 129,659
===========================================
</TABLE>
18
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
QUARTER ENDED SEPTEMBER 30, 1999 RENTAL REAL CORPORATE/
(AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rental income $ 424,780 $ - $ 424,780
Property and maintenance expense (103,933) - (103,933)
Real estate tax and insurance expense (41,789) - (41,789)
Property management expense (14,844) - (14,844)
------------------------------------------------------
Net operating income 264,214 - 264,214
Fee and asset management income - 1,018 1,018
Interest income - investment in mortgage notes - 2,858 2,858
Interest and other income - 6,532 6,532
Fee and asset management expense - (677) (677)
Depreciation expense on non-real estate assets - (1,702) (1,702)
Interest expense:
Expense incurred - (83,017) (83,017)
Amortization of deferred financing costs - (1,112) (1,112)
General and administrative expense - (5,022) (5,022)
Allocation of net income to Preference Unit and Interest holders - (28,007) (28,007)
Adjustment for depreciation expense related to
equity in unconsolidated joint ventures - 159 159
------------------------------------------------------
Funds from operations available to OP Units 264,214 (108,970) 155,244
Depreciation expense on real estate assets (98,669) - (98,669)
Gain on disposition of properties, net 18,508 - 18,508
Loss on early extinguishment of debt - - -
Adjustment for depreciation expense related to
equity in unconsolidated joint ventures - (159) (159)
------------------------------------------------------
Net income available to OP Unit holders $ 184,053 $ (109,129) $ 74,924
======================================================
Investment in real estate, net of accumulated depreciation
as of September 30, 1999 $ 10,434,274 $ 18,119 $ 10,452,393
======================================================
Total assets as of September 30, 1999 $ 10,447,731 $ 601,379 $ 11,049,110
======================================================
</TABLE>
19
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
QUARTER ENDED SEPTEMBER 30, 1998 RENTAL REAL CORPORATE/
(AMOUNTS IN THOUSANDS) ESTATE (1) OTHER (2) CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental income $ 329,717 $ - $ 329,717
Property and maintenance expense (86,750) - (86,750)
Real estate tax and insurance expense (32,068) - (32,068)
Property management expense (13,539) - (13,539)
---------------------------------------------
Net operating income 197,360 - 197,360
Fee and asset management income - 1,414 1,414
Interest income - investment in mortgage notes - 4,184 4,184
Interest and other income - 3,934 3,934
Fee and asset management expense - (1,097) (1,097)
Depreciation expense on non-real estate assets - (1,470) (1,470)
Interest expense:
Expense incurred - (64,492) (64,492)
Amortization of deferred financing costs - (687) (687)
General and administrative expense - (4,655) (4,655)
Allocation of net income to Preference Unit and Interest holders - (21,691) (21,691)
---------------------------------------------
Funds from operations available to OP Units 197,360 (84,560) 112,800
Depreciation expense on real estate assets (75,014) - (75,014)
Gain on disposition of properties, net 1,625 - 1,625
---------------------------------------------
Net income available to OP Unit holders $ 123,971 $ (84,560) $ 39,411
=============================================
</TABLE>
(1) The Operating Partnership has one primary reportable business segment,
which consists of investment in rental real estate. The Operating
Partnership's primary business is owning, managing, and operating
multifamily residential properties which includes the generation of rental
and other related income through the leasing of apartment units to tenants.
(2) The Operating Partnership has a segment for corporate level activity
including such items as interest income earned on short-term investments,
interest income earned on investment in mortgage notes, general and
administrative expenses, and interest expense on mortgage notes payable and
unsecured note issuances. In addition, the Operating Partnership has a
segment for third party management activity that is immaterial and does not
meet the threshold requirements of a reportable segment as provided for in
Statement No. 131. Interest expense on debt is not allocated to individual
Properties, even if the Properties secure such debt.
20
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
14. SUBSEQUENT EVENTS
On October 1, 1999, the Company merged with Lexford Residential Trust
("Lexford"). The Lexford portfolio of 402 properties consists of 36,609 units in
sixteen states. In the merger, each outstanding common share of beneficial
interest of Lexford was converted into .463 of a Common Share of the Company.
Pursuant to the tax-free merger, the Company issued approximately 3.9 million
new Common Shares with a value of $181 million and assumed approximately $530
million of debt. Upon the contribution of substantially all of Lexford's assets
by the Company to the Operating Partnership, the Operating Partnership issued
approximately 3.9 million OP Units to the Company. As of November 11, 1999,
Lexford's line of credit totaling $26.5 million, a term loan totaling $2.3
million and 22 separate Lexford mortgages totaling $22.8 million have been fully
repaid.
On October 14, 1999, the Operating Partnership disposed of Burn Brae
Apartments, a 282-unit multifamily property located in Irving, TX, from an
unaffiliated third party for a total sales price of $10.8 million.
On October 15, 1999, the Operating Partnership disposed of Casa Cordoba
Apartments, a 168-unit multifamily property and Casa Cortez, a 66-unit
multifamily property, both located in Tallahassee, FL, to an unaffiliated third
party for a total sales price of $7.9 million.
On October 15, 1999, the Company announced that it will redeem all of
its issued and outstanding Series I Cumulative Convertible Preferred Shares of
Beneficial Interest on November 15, 1999. At that time, the preferred shares
will be redeemed for such number of Common Shares as are issuable at a
conversion rate of 0.6417 of a Common Share of EQR for each Series I Preferred
Share.
On October 27, 1999, the Operating Partnership acquired Granada
Highlands Apartments, a 919-unit multifamily property located in Malden, MA,
from an unaffiliated third party for a purchase price of approximately $128
million.
21
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the results of operations and
financial condition of the Operating Partnership should be read in connection
with the Consolidated Financial Statements and Notes thereto. Due to the
Operating Partnership's ability to control the Management Partnerships, the
Financing Partnerships, the LLCs, Merry Land DownREIT I LP and EQR-Mosaic, LLC,
each entity has been consolidated with the Operating Partnership for financial
reporting purposes. Capitalized terms used herein and not defined are as defined
in the Operating Partnership's Annual Report on Form 10-K for the year ended
December 31, 1998.
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
words "believes", "expects" and "anticipates" and other similar expressions
which are predictions of or indicate future events and trends and which do not
relate solely to historical matters, identify forward-looking statements. Such
forward-looking statements are subject to risks and uncertainties, which could
cause actual results, performance, or achievements of the Operating Partnership
to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. Factors
that might cause such differences include, but are not limited to, the
following:
- the alternative sources of capital to the Operating Partnership
are too high;
- occupancy levels and market rents may be adversely affected by
local economic and market conditions, which are beyond the
Operating Partnership's control; and
- additional factors as discussed in Part I of the Annual Report
as filed on Form 10-K.
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
The acquired properties are presented in the Consolidated Financial
Statements of the Operating Partnership from the date of each acquisition or
the closing dates of the Mergers. During the year ended 1998, the Operating
Partnership acquired 207 properties containing 55,143 units and four
properties under development representing 1,378 units (the "1998 Acquired
Properties"). In addition, during the nine months ended September 30, 1999,
the Operating Partnership acquired nineteen properties containing 5,126 units
(the "1999 Acquired Properties").
The Operating Partnership also disposed of twenty properties containing
4,719 units during 1998 (the "1998 Disposed Properties"); and twenty-one
properties containing 4,535 units during the nine months ended September 30,
1999 (the "1999 Disposed Properties"). Also, the Operating Partnership sold its
interest in the six MRY joint venture properties containing 1,297 units.
22
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Operating Partnership's overall results of operations for the nine
months ended September 30, 1999 and 1998 have been significantly impacted by the
Operating Partnership's acquisition and disposition activity. The significant
changes in rental revenues, property and maintenance expenses, real estate taxes
and insurance, depreciation expense, property management and interest expense
can all primarily be attributed to the acquisition of the 1998 Acquired
Properties and the 1999 Acquired Properties, partially offset by the disposition
of the 1998 Disposed Properties and the 1999 Disposed Properties. The impact of
the 1998 Acquired Properties, the 1999 Acquired Properties, the 1998 Disposed
Properties and the 1999 Disposed Properties is discussed in greater detail in
the following paragraphs.
Properties that the Operating Partnership owned for all of both nine
month periods ended September 30, 1999 and September 30, 1998 (the "Nine-Month
1999 Same Store Properties"), which represented 125,165 units, impacted the
Operating Partnership's results of operations. Properties that the Operating
Partnership owned for all of both the quarters ended September 30, 1999 and
September 30, 1998 (the "Third-Quarter 1999 Same Store Properties"), which
represented 135,753 units, also impacted the Operating Partnership's results of
operations. Both the Nine-Month 1999 Same Store Properties and Third-Quarter
1999 Same Store Properties are discussed in the following paragraphs.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
For the nine months ended September 30, 1999, income before gain on
disposition of properties, net and extraordinary item increased by $61.8 million
when compared to the nine months ended September 30, 1998. This increase was
primarily due to the acquisition of the 1998 Acquired Properties and the 1999
Acquired Properties as well as increases in rental revenues net of increases in
property and maintenance expenses, real estate taxes and insurance, property
management expenses, depreciation expense, interest expense and general and
administrative expenses.
In regard to the Nine-Month 1999 Same Store Properties, total revenues
increased by approximately $27.8 million to $812.5 million or 3.54% primarily as
a result of higher rental rates charged to new tenants and tenant renewals and
an increase in income from billing tenants for their share of utility costs as
well as other ancillary services provided to tenants. Overall, property
operating expenses, which include property and maintenance, real estate taxes
and insurance and an allocation of property management expenses, decreased
approximately $0.8 million or 0.28%. This decrease was primarily the result of
lower expenses for leasing and advertising, administrative and maintenance
costs, but was partially offset by higher on-site compensation costs and an
increase in real estate taxes on certain properties.
Property management represents expenses associated with the
self-management of the Operating Partnership's Properties. These expenses
increased by approximately $4.3 million primarily due to the continued expansion
of the Operating Partnership's property management business.
23
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Fee and asset management revenues and fee and asset management expenses
are associated with the management of properties not owned by the Operating
Partnership that are managed for affiliates. These revenues and expenses
decreased due to the Operating Partnership acquiring certain of these properties
that were formerly only fee-managed.
Interest expense, including amortization of deferred financing costs,
increased by approximately $72.2 million. This increase was primarily the result
of an increase in the Operating Partnership's average indebtedness outstanding
which increased by $1.5 billion. However, the Operating Partnership's effective
interest costs decreased from 7.17% for the nine months ended September 30, 1998
to 7.00% for the nine months ended September 30, 1999.
General and administrative expenses, which include corporate operating
expenses, increased approximately $1.2 million between the periods under
comparison. This increase was primarily due to the addition of corporate
personnel. However, by gaining certain economies of scale with a much larger
operation these expenses as a percentage of total revenues were 1.24% for the
nine months ended September 30, 1999 compared to 1.55% of total revenues for the
nine months ended September 30, 1998.
COMPARISON OF QUARTER ENDED SEPTEMBER 30, 1999 TO QUARTER ENDED SEPTEMBER
30, 1998
For the quarter ended September 30, 1999, income before gain on
disposition of properties, net and extraordinary item increased by approximately
$24.9 million when compared to the quarter ended September 30, 1998. This
increase was primarily due to the acquisition of the 1998 Acquired Properties
and the 1999 Acquired Properties as well as increases in rental revenues net of
increases in property and maintenance expenses, real estate taxes and insurance,
property management expenses, depreciation expense, and interest expense.
In regard to the Third-Quarter 1999 Same Store Properties, total
revenues increased by approximately $9.6 million or 3.27% primarily as a result
of higher rental rates charged to new tenants and tenant renewals and an
increase in income from billing tenants for their share of utility costs as well
as other ancillary services provided to tenants. Overall, property operating
expenses, which include property and maintenance, real estate taxes and
insurance and an allocation of property management expenses, decreased
approximately $0.7 million or 0.58%. This decrease was primarily the result of
lower expenses for leasing and advertising, administrative and maintenance
costs, but was partially offset by higher on-site compensation costs and an
increase in real estate taxes on certain properties.
Property management represents expenses associated with the
self-management of the Operating Partnership's Properties. These expenses
increased by approximately $1.3 million primarily due to the continued expansion
of the Operating Partnership's property management business.
24
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Fee and asset management revenues and fee and asset management expenses
are associated with the management of properties not owned by the Operating
Partnership that are managed for affiliates. These revenues and expenses
decreased due to the Operating Partnership acquiring certain of these properties
that were formerly only fee-managed.
Interest expense, including amortization of deferred financing costs,
increased by approximately $18.9 million. This increase was primarily the result
of an increase in the Operating Partnership's average indebtedness outstanding
which increased by $1.1 billion. However, the Operating Partnership's effective
interest costs decreased from 6.99% for the quarter ended September 30, 1998 to
6.97% for the quarter ended September 30, 1999.
General and administrative expenses, which include corporate operating
expenses, increased approximately $0.4 million between the periods under
comparison. These expenses as a percentage of total revenues were 1.15% for the
quarter ended September 30, 1999 compared to 1.37% of total revenues for the
quarter ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of January 1, 1999, the Operating Partnership had approximately $4
million of cash and cash equivalents and $330 million available on its lines of
credit, of which $12 million was restricted. After taking into effect the
various transactions discussed in the following paragraphs, the Operating
Partnership's cash and cash equivalents balance at September 30, 1999 was
approximately $62.8 million and the amount available on the Operating
Partnership's line of credit was $610 million, of which $41.3 million was
restricted. The following discussion also explains the changes in net cash
provided by operating activities, net cash used by investing activities and net
cash provided by (used by) financing activities, all of which are presented in
the Operating Partnership's Statements of Cash Flows.
Part of the Operating Partnership's strategy in funding the purchase of
multifamily properties, funding its Properties in the development stage and the
funding of the Operating Partnership's investment in two joint ventures with
multifamily real estate developers is to utilize its lines of credit and to
subsequently repay the lines of credit from the issuance of additional equity or
debt securities or the disposition of Properties. Utilizing this strategy during
the first nine months of 1999, the Operating Partnership:
- - issued the June 2004 Notes and received net proceeds of $298 million;
- - refinanced four Properties and received additional net proceeds of $18
million;
- - obtained new mortgage financing on eleven previously unencumbered
properties and received net proceeds of $126.5 million;
25
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- - disposed of twenty-seven properties (including the sale of the Operating
Partnership's interest in six MRY joint venture properties) and received
net proceeds of $197.1 million;
- - issued approximately 1.0 million OP Units and received net proceeds of
$34.2 million; and
- - issued the 8.00% Series A Cumulative Convertible Redeemable Preference
Interests and received net proceeds of $39 million.
All of these proceeds were utilized to either:
- - purchase additional properties;
- - provide funding for properties in the development stage; and/or
- - repay the lines of credit and mortgage indebtedness on certain Properties.
With respect to the 1999 Acquired Properties, the Operating Partnership
assumed and/or entered into new mortgage indebtedness of approximately $196.3
million, issued OP Units with a value of $25.2 million and issued Junior
Convertible Preference Units with a value of $3.0 million. The total purchase
price of the 1999 Acquired Properties was approximately $526.8 million.
Subsequent to September 30, 1999, the Company closed its merger with
Lexford and through this merger acquired 402 multifamily properties containing
36,609 units. In the merger, each outstanding common share of beneficial
interest of Lexford was converted into .463 of a Common Share of the Company.
Pursuant to the merger, the Company issued approximately 3.9 million new Common
Shares with a value of $181 million and assumed approximately $530 million of
debt. Upon the contribution of substantially all of Lexford's assets by the
Company to the Operating Partnership, the Operating Partnership issued
approximately 3.9 million OP Units to the Company. As of November 11, 1999,
Lexford's line of credit totaling $26.5 million, a term loan totaling $2.3
million and 22 separate Lexford mortgages totaling $22.8 million have been fully
repaid.
Subsequent to September 30, 1999 and through November 11, 1999, the
Operating Partnership acquired one additional property containing 919 units for
a total purchase price of approximately $128 million.
Subsequent to September 30, 1999 and through November 11, 1999, the
Operating Partnership disposed of three properties for a total sales price of
$18.7 million. These proceeds will be utilized to purchase additional
properties. The Operating Partnership anticipates that it will continue to sell
certain Properties in the portfolio.
In regard to the joint venture agreements with two multifamily
residential real estate developers during the nine months ended September 30,
1999, the Operating Partnership funded a total of $81 million and during the
remainder of 1999 the Operating Partnership expects to fund approximately $24.6
million in connection with these agreements. Also in connection with these two
agreements, the Operating Partnership has an obligation to fund up to an
additional $55 million
26
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
to guarantee third party construction financing.
In regard to certain other properties that were under development
and/or expansion during the nine months ended September 30, 1999, the Operating
Partnership funded $32.2 million. During the remainder of 1999, the Operating
Partnership expects to fund $18.1 million related to the continued development
and/or expansion of as many as five Properties.
In regard to certain properties that were under
earnout/development agreements, during the nine months ended September 30, 1999,
the Operating Partnership funded the following:
- - $17.2 million relating to the acquisition of Copper Canyon Apartments,
which included a $1.0 million earnout payment to the developer;
- - $24.9 million relating to the acquisition of Skyview Apartments, which
included a $3.1 million earnout payment to the developer; and
- - $18.3 million relating to the acquisition of Rosecliff Apartments.
In May 1999, the Operating Partnership repaid its 1999 Notes that
matured on May 15, 1999. The $125 million repayment was funded from borrowings
under the Operating Partnership's lines of credit. In addition, during the first
nine months of 1999, the Operating Partnership repaid $9.3 million of mortgage
indebtedness on two of its Properties. These repayments were funded from the
Operating Partnership's lines of credit and/or from disposition proceeds.
In November 1999, the Operating Partnership expects to repay the 1999-A
Notes that mature on November 24, 1999. The $25 million repayment will be
initially funded from borrowings under the Operating Partnership's line of
credit. In addition, during the remainder of 1999, the Operating Partnership
anticipates repaying approximately $30 million of mortgage notes assumed in
connection with the Lexford merger. In April 2000, the Operating Partnership
anticipates repaying mortgage indebtedness of approximately $85 million assumed
in connection with the Lexford merger. These repayments will also be primarily
funded from additional borrowings under the line of credit.
As of September 30, 1999, the Operating Partnership had total
indebtedness of approximately $4.8 billion, which included mortgage indebtedness
of $2.5 billion (including premiums of $3.7 million), of which $851.6 million
represented tax-exempt bond indebtedness, and unsecured debt of $2.3 billion
(including net discounts and premiums in the amount of $2.8 million), of which
$111.4 million represented tax-exempt bond indebtedness.
Subsequent to September 30, 1999, the Operating Partnership settled on
a $50 million interest rate protection agreement and received approximately $1.4
million in connection therewith.
The Operating Partnership has a policy of capitalizing expenditures
made for new assets, including newly acquired properties and the costs
associated with placing these assets into
27
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
service. Expenditures for improvements and renovations that significantly
enhance the value of existing assets or substantially extend the useful life
of an asset are also capitalized. Capital spent for replacement-type items
such as appliances, draperies, carpeting and floor coverings, mechanical
equipment and certain furniture and fixtures is also capitalized.
Expenditures for ordinary maintenance and repairs are expensed to operations
as incurred. With respect to acquired properties, the Operating Partnership
has determined that it generally spends $1,000 per unit during its first
three years of ownership to fully improve and enhance these properties to
meet the Operating Partnership's standards. In regard to replacement-type
items described above, the Operating Partnership generally expects to spend
$250 per unit on an annual recurring basis.
During the nine months ended September 30, 1999, total capital
expenditures for the Operating Partnership approximated $99.4 million. Of this
amount, approximately $36 million, or $298 per unit, related to capital
improvements and major repairs for the 1997, 1998 and 1999 Acquired Properties.
Capital improvements and major repairs for all of the Operating Partnership's
pre-EQR IPO properties and 1993, 1994, 1995 and 1996 Acquired Properties
approximated $19.7 million, or $308 per unit. Capital spent for replacement-type
items approximated $37.8 million, or $204 per unit. Also included in total
capital expenditures was approximately $5.9 million expended for non-real estate
additions such as computer software, computer equipment, furniture and fixtures
and leasehold improvements for the Operating Partnership's management offices
and its corporate headquarters. Such capital expenditures were primarily funded
from working capital reserves and from net cash provided by operating
activities. Total capital expenditures for the remaining portion of 1999 are
estimated to be approximately $20 million.
Total distributions paid in October 1999 amounted to approximately
$124.4 million, which included distributions declared for the quarter ended
September 30, 1999.
The Operating Partnership expects to meet its short-term liquidity
requirements, including capital expenditures relating to maintaining its
existing Properties and certain scheduled unsecured note and mortgage note
repayments, generally through its working capital, net cash provided by
operating activities and borrowings under its lines of credit. The Operating
Partnership considers its cash provided by operating activities to be adequate
to meet operating requirements and payments of distributions. The Operating
Partnership also expects to meet its long-term liquidity requirements, such as
scheduled unsecured note and mortgage debt maturities, reduction of outstanding
amounts under its lines of credit, property acquisitions, financing of
construction and development activities and capital improvements through the
issuance of unsecured notes and equity securities including additional OP Units
as well as from undistributed FFO and proceeds received from the disposition of
certain properties. In addition, the Operating Partnership has certain
uncollateralized Properties available for additional mortgage borrowings in the
event that the public capital markets are unavailable to the Operating
Partnership or the cost of alternative sources of capital to the Operating
Partnership is too high.
28
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
On August 12, 1999 the Operating Partnership obtained a new three year
$700 million unsecured revolving credit facility, with Bank of America
Securities LLC and Chase Securities Inc. acting as joint lead arrangers. The new
line of credit replaced the Operating Partnership's $500 million unsecured
revolving credit facility, as well as the $120 million unsecured revolving
credit facility, which the Operating Partnership assumed in the MRY Merger. The
prior existing revolving credit facilities were repaid in full and terminated
upon the closing of the new facility. This new credit facility matures in August
2002 and will be used to fund property acquisitions, costs for certain
Properties under development and short term liquidity requirements. As of
November 11, 1999, $147 million was outstanding under this new facility.
In connection with the Wellsford Merger, the Operating Partnership
provided a $14.8 million credit enhancement with respect to bonds issued to
finance certain public improvements at a multifamily development project.
Pursuant to the terms of a Stock Purchase Agreement with Wellsford Real
Properties, Inc. ("WRP Newco"), the Operating Partnership has agreed to purchase
up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per share on a
standby basis over a three-year period ending on May 30, 2000. As of November
11, 1999, no shares of WRP Newco Series A Preferred had been acquired by the
Operating Partnership.
In conjunction with the MRY Merger in October 1998, in return for the
spin-off of certain assets and liabilities to MRYP Spinco, the Operating
Partnership received (from MRYP Spinco) a Subordinated Note receivable totaling
$20 million, a preferred stock investment with an initial value of $5 million
and a $25 million, one year, non-revolving Senior Note receivable with an
initial value of $18.3 million. On June 24, 1999, the Subordinated Note
receivable, the preferred stock investment and the Senior Note receivable were
all repaid by MRYP Spinco for a total amount of $41 million, which represented a
discount of $2.3 million on the combined outstanding balance of these
instruments. There is no further obligation by either party in connection
therewith.
Also, in connection with the MRY Merger, the Operating Partnership
entered into six joint venture agreements with MRYP Spinco, the entity spun-off
in the MRY Merger. The Operating Partnership contributed six properties with an
initial value of $52.7 million in return for a 50% ownership interest in each
joint venture. On August 23, 1999, the Operating Partnership sold its interest
in these six properties to MRYP Spinco and there is no further obligation by
either party in connection with these agreements.
YEAR 2000 ISSUE
The year 2000 issue ("Year 2000") is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Operating Partnership's computer programs that have time-sensitive
hardware and software 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
29
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
inability to process transactions, collect rents, or engage in similar normal
business activities.
The Operating Partnership believes that it has identified all of its
information technology ("IT") and non-IT systems to assess their Year 2000
readiness. Critical systems include, but are not limited to: accounts receivable
and rent collections, accounts payable and general ledger, human resources and
payroll (both property and corporate levels), cash management, fixed assets, all
IT hardware (such as desktop/laptop computers, data networking equipment,
telephone systems, fax machines, copy machines, etc.) and software, and property
environmental, health safety and security systems (such as elevators and alarm
systems).
The Operating Partnership anticipates that previously scheduled system
upgrades to many of its IT systems will remediate any existing Year 2000
problems. The Operating Partnership has completed testing and is currently in
the process of implementing the remaining Year 2000 IT and non-IT system
projects with completion anticipated during the fourth quarter of 1999. The
Operating Partnership has estimated that the total Year 2000 project cost will
approximate $1 million, of which approximately 90% has been incurred as of
September 30, 1999. During the first nine months of 1999, the primary focus of
the Year 2000 remediation efforts has been on implementing and testing the
previously scheduled upgrades and Year 2000 compliant versions of existing IT
systems as well as continuing the assessment of the Operating Partnership's
exposure regarding non-IT systems at property sites. Of the remaining $100,000
budgeted to complete the Operating Partnership's Year 2000 remediation project,
approximately $50,000 has been allocated to engage Year 2000 consultants to help
the Operating Partnership monitor its IT compliance progress and to complete
final IT testing and implementation. The remaining $50,000 has been allocated to
remediate non-IT systems at various property sites. The estimates are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, and there can be no guarantees that these estimates will be
achieved.
In some cases, various third party vendors have been queried on their
Year 2000 readiness. The Operating Partnership continues to query its
significant suppliers and vendors to determine the extent to which the Operating
Partnership's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 issues. To date, the Operating Partnership is
not aware of any significant suppliers or vendors with a Year 2000 issue that
would materially impact the Operating Partnership's results of operations,
liquidity, or capital resources. However, the Operating Partnership cannot
assure you that the systems of other companies, on which the Operating
Partnership's systems rely, will be timely converted and would not have an
adverse effect on the Operating Partnership's systems.
Management of the Operating Partnership believes it has an effective
program in place to resolve the Year 2000 issue in a timely manner. In addition,
the Operating Partnership is developing its contingency plans for critical
operational areas that might be affected by the Year 2000 issue if compliance by
the Operating Partnership is delayed. Aside from catastrophic failure of utility
companies, banks or governmental agencies, the Operating Partnership believes
that it could continue its normal business operations if compliance by the
Operating Partnership is delayed. The Operating Partnership does not believe
that the Year 2000 issue will materially impact its results of operations,
liquidity or capital resources.
30
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FUNDS FROM OPERATIONS
The Operating Partnership generally considers Funds From Operations
("FFO") to be one measure of the performance of real estate companies. The
resolution adopted by the Board of Governors of NAREIT defines FFO as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation on real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis. The Operating Partnership believes that FFO is
helpful to investors as a measure of the performance of a real estate Operating
Partnership because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors with an understanding
of the ability of the Operating Partnership to incur and service debt and to
make capital expenditures. FFO in and of itself does not represent cash
generated from operating activities in accordance with GAAP and therefore should
not be considered an alternative to net income as an indication of the Operating
Partnership's performance or to net cash flows from operating activities as
determined by GAAP as a measure of liquidity and is not necessarily indicative
of cash available to fund cash needs. The Operating Partnership's calculation of
FFO represents net income, excluding gains on dispositions of properties and
extraordinary items, plus depreciation on real estate assets, amortization of
deferred financing costs related to the Predecessor Business and the allocation
of net income to Cumulative Redeemable Preference Units. The Operating
Partnership's calculation of FFO may differ from the methodology for calculating
FFO utilized by other companies and, accordingly, may not be comparable to such
other companies.
For the nine months ended September 30, 1999, FFO increased by $130.4
million, representing a 40.6% increase when compared to the nine months ended
September 30, 1998. For the quarter ended September 30, 1999, FFO increased by
$42.4 million representing a 37.6% increase when compared to the quarter ended
September 30, 1998.
31
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The following is a reconciliation of net income to FFO available to OP
Units for the nine months and quarters ended September 30, 1999 and 1998
(amounts are in thousands):
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
Nine Nine
Months Months Quarter Quarter
Ended Ended Ended Ended
9/30/99 9/30/98 9/30/99 9/30/98
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 307,661 $ 194,734 $ 102,931 $ 61,102
Adjustments:
Depreciation on real estate assets* 293,090 204,401 98,828 75,014
Amortization of deferred financing
costs related to predecessor business - 35 - -
Allocation of net income to
Preference Unit and Interest holders (85,118) (65,075) (28,007) (21,691)
Loss on early extinguishment of debt 451 - - -
Gain on disposition of properties, net (64,315) (12,717) (18,508) (1,625)
- -------------------------------------------------------------------------------------------------------------------
FFO available to OP Units $ 451,769 $ 321,378 $ 155,244 $ 112,800
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes $710 and $159 related to the Operating Partnership's share of
depreciation from unconsolidated joint ventures for the nine months and quarter
ended September 30, 1999, respectively.
32
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no new or significant developments related to the legal
proceedings that were discussed in Part I, Item III of the Operating
Partnership's Form 10-K for the year ended December 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule Worksheet
(B) Reports on Form 8-K:
A Report on Form 8-K dated June 30, 1999 and filed on July 14, 1999, disclosing
certain historical financial information of Lexford.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ERP OPERATING LIMITED PARTNERSHIP
BY: EQUITY RESIDENTIAL PROPERTIES TRUST,
ITS GENERAL PARTNER
Date: November 12, 1999 By: /s/ Bruce C. Strohm
----------------- --------------------------------------
Bruce C. Strohm
Executive Vice President, General Counsel
and Secretary
Date: November 12, 1999 By: /s/ Michael J. McHugh
----------------- --------------------------------------
Michael J. McHugh
Executive Vice President, Chief Accounting
Officer and Treasurer
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED HISTORICAL
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS RATIO
<TABLE>
HISTORICAL
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
9/30/99 9/30/98 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income $1,243,958 $ 901,087 $1,293,560 $ 707,733 $ 454,412 $ 373,919 $ 220,727
Fee income - outside managed 3,432 4,204 5,622 5,697 6,749 7,030 4,739
Interest income - investment
in mortgage notes 8,502 14,405 18,564 20,366 12,819 4,862 -
Interest and other income 17,655 12,803 19,703 13,525 4,405 4,573 5,568
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 1,273,547 932,499 1,337,449 747,321 478,385 390,384 231,034
---------- ---------- ---------- ---------- ---------- ---------- ----------
EXPENSES
Property and maintenance 300,798 225,053 326,567 176,075 127,172 112,186 66,534
Real estate taxes and insurance 126,304 88,552 126,009 69,520 44,128 37,002 23,028
Property management 42,817 38,546 52,705 26,793 17,512 15,213 10,249
Property management - non-recurring - - - - - - 879
Fee and asset management 2,301 3,344 4,207 3,364 3,837 3,887 2,056
Depreciation 297,505 208,394 301,869 156,644 93,253 72,410 37,273
Interest:
Expense incurred 241,516 170,143 246,585 121,324 81,351 78,375 37,044
Amortization of deferred
financing costs 2,773 1,962 2,757 2,523 4,242 3,444 1,930
General and administrative 15,736 14,488 21,718 15,064 9,857 8,129 6,053
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 1,029,750 750,482 1,082,417 571,307 381,352 330,646 185,046
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary items $ 243,797 $ 182,017 $ 255,032 $ 176,014 $ 97,033 $ 59,738 $ 45,988
========== ========== ========== ========== ========== ========== ==========
Combined Fixed Charges and
Preferred Distributions:
Interest and other
financing costs $ 241,516 $ 170,143 $ 246,585 $ 121,324 $ 81,351 $ 78,375 $ 37,044
Amortization of deferred
financing costs 2,773 1,962 2,757 2,523 4,242 3,444 1,930
Preferred distributions 85,118 65,075 92,917 59,012 29,015 10,109 -
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL COMBINED FIXED
CHARGES AND PREFERRED
DISTRIBUTIONS $ 329,407 $ 237,180 $ 342,259 $ 182,859 $ 114,608 $ 91,928 $ 38,974
========== ========== ========== ========== ========== ========== ==========
EARNINGS BEFORE COMBINED
FIXED CHARGES AND
PREFERRED DISTRIBUTIONS $ 488,086 $ 354,122 $ 504,374 $ 299,861 $ 182,626 $ 141,557 $ 84,962
========== ========== ========== ========== ========== ========== ==========
FUNDS FROM OPERATIONS BEFORE
COMBINED FIXED
CHARGES AND PREFERRED
DISTRIBUTIONS $ 785,591 $ 562,516 $ 806,243 $ 456,505 $ 275,879 $ 213,967 $ 123,114
========== ========== ========== ========== ========== ========== ==========
RATIO OF EARNINGS BEFORE
COMBINED FIXED CHARGES AND
PREFERRED DISTRIBUTIONS TO
COMBINED FIXED CHARGES AND
PREFERRED DISTRIBUTIONS 1.48 1.49 1.47 1.64 1.59 1.54 2.18
========== ========== ========== ========== ========== ========== ==========
RATIO OF FUNDS FROM
OPERATIONS BEFORE COMBINED
FIXED CHARGES AND PREFERRED
DISTRIBUTIONS TO COMBINED
FIXED CHARGES AND
PREFERRED DISTRIBUTIONS 2.38 2.37 2.36 2.50 2.41 2.33 3.16
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<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> 62,805
<SECURITIES> 0
<RECEIVABLES> 1,602
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 369,157
<PP&E> 11,441,442
<DEPRECIATION> 989,049
<TOTAL-ASSETS> 11,049,110
<CURRENT-LIABILITIES> 408,870
<BONDS> 4,845,546
0
1,335,791
<COMMON> 0
<OTHER-SE> 47,896
<TOTAL-LIABILITY-AND-EQUITY> 11,049,110
<SALES> 1,255,892
<TOTAL-REVENUES> 1,273,547
<CGS> 0
<TOTAL-COSTS> 472,220
<OTHER-EXPENSES> 15,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244,289
<INCOME-PRETAX> 243,797
<INCOME-TAX> 0
<INCOME-CONTINUING> 243,797
<DISCONTINUED> 64,315
<EXTRAORDINARY> (451)
<CHANGES> 0
<NET-INCOME> 222,543
<EPS-BASIC> 1.67
<EPS-DILUTED> 1.66
</TABLE>
