<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 MARCH 31, 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>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------------- ----------------
<S> <C> <C>
ASSETS
Investment in real estate
Land $ 1,351,360 $ 1,326,148
Depreciable property 9,647,811 9,519,579
Construction in progress 83,111 96,336
----------------- ----------------
11,082,282 10,942,063
Accumulated depreciation (814,330) (718,491)
----------------- ----------------
Investment in real estate, net of accumulated depreciation 10,267,952 10,223,572
Real estate held for disposition - 29,886
Cash and cash equivalents 10,738 3,965
Investment in mortgage notes, net 86,913 88,041
Rents receivable 1,765 4,758
Deposits - restricted 48,276 69,339
Escrow deposits - mortgage 66,737 68,725
Deferred financing costs, net 26,363 27,569
Other assets 193,217 184,405
----------------- ----------------
TOTAL ASSETS $ 10,701,961 $ 10,700,260
================= ================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgage notes payable $ 2,353,479 $ 2,341,011
Notes, net 2,049,183 2,049,516
Lines of credit 165,000 290,000
Accounts payable and accrued expenses 88,299 100,926
Accrued interest payable 60,685 46,176
Rents received in advance and other liabilities 64,240 54,616
Security deposits 37,013 37,439
Distributions payable 112,306 18,755
----------------- ----------------
TOTAL LIABILITIES 4,930,205 4,938,439
----------------- ----------------
Commitments and contingencies
Partners' capital:
Redeemable Preference Interests 4,833 4,833
----------------- ----------------
Cumulative Convertible or Redeemable Preference Units 1,410,414 1,410,574
----------------- ----------------
General Partner 3,926,943 3,919,873
Limited Partners 429,566 426,541
----------------- ----------------
Total General Partner and Limited Partners capital 4,356,509 4,346,414
----------------- ----------------
TOTAL PARTNERS' CAPITAL 5,771,756 5,761,821
----------------- ----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 10,701,761 $ 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>
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------------------
1999 1998
--------------------------------------
<S> <C> <C>
REVENUES
Rental income $ 406,062 $ 277,226
Fee and asset management 1,234 1,360
Interest income - investment in mortgage notes 2,895 4,931
Interest and other income 6,046 2,824
--------------- --------------
Total revenues 416,237 286,341
--------------- --------------
EXPENSES
Property and maintenance 97,047 66,713
Real estate taxes and insurance 42,048 27,443
Property management 14,201 11,579
Fee and asset management 867 1,052
Depreciation 96,901 64,390
Interest:
Expense incurred 79,197 50,254
Amortization of deferred financing costs 845 624
General and administrative 5,867 4,880
--------------- --------------
Total expenses 336,973 226,935
--------------- --------------
Income before gain on disposition of properties, net 79,264 59,406
Gain on disposition of properties, net 21,416 1,869
--------------- --------------
Net income $ 100,680 $ 61,275
=============== ==============
ALLOCATION OF NET INCOME:
Redeemable Preference Interests $ 66 $ -
=============== ==============
9 3/8% Series A Cumulative Redeemable Preference Units $ 3,586 $ 3,586
=============== ==============
9 1/8% Series B Cumulative Redeemable Preference Units $ 2,852 $ 2,852
=============== ==============
9 1/8% Series C Cumulative Redeemable Preference Units $ 2,623 $ 2,623
=============== ==============
8.60% Series D Cumulative Redeemable Preference Units $ 3,763 $ 3,763
=============== ==============
Series E Cumulative Convertible Preference Units $ 1,749 $ 1,749
=============== ==============
9.65% Series F Cumulative Redeemable Preference Units $ 1,387 $ 1,387
=============== ==============
7 1/4% Series G Convertible Cumulative Preference Units $ 5,732 $ 5,732
=============== ==============
7.00% Series H Cumulative Convertible Preference Units $ 66 $ -
=============== ==============
8.82% Series I Cumulative Convertible Preference Units $ 2,205 $ -
=============== ==============
8.60% Series J Cumulative Convertible Preference Units $ 2,472 $ -
=============== ==============
8.29% Series K Cumulative Redeemable Preference Units $ 1,036 $ -
=============== ==============
7.625% Series L Cumulative Redeemable Preference Units $ 1,906 $ -
=============== ==============
General Partner 64,177 35,895
Limited Partners 7,060 3,688
--------------- --------------
Net income available to OP Unit holders $ 71,237 $ 39,583
=============== ==============
Weighted average OP Units outstanding 132,066 102,948
=============== ==============
Net income per weighted average OP Unit outstanding $ 0.54 $ 0.38
=============== ==============
Net income per weighted average OP Unit outstanding -
assuming dilution $ 0.54 $ 0.38
=============== ==============
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 100,680 $ 61,275
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation 96,901 64,390
Amortization of deferred financing costs 845 624
Amortization of discounts and premiums on debt (608) (524)
Amortization of treasury locks and options on debt 257 398
Interest capitalized to real estate developments (609) -
Gain on disposition of properties, net (21,416) (1,869)
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in rents receivable 2,661 (496)
(Increase) decrease in deposits - restricted (3,465) 357
Decrease (increase) in other assets 4,362 (2,093)
(Decrease) in accounts payable and accrued expenses (12,627) (912)
Increase in accrued interest payable 14,509 7,466
(Decrease) increase in security deposits (531) 1,518
Increase in rents received in advance and other liabilities 12,687 3,600
------------ ------------
Net cash provided by operating activities 193,646 133,734
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate, net (107,058) (142,203)
Improvements to real estate (24,922) (14,091)
Additions to non-real estate property (2,450) (2,385)
Proceeds from disposition of real estate, net 75,997 16,665
Purchase of management contract rights (285) (119)
Decrease (increase) in mortgage deposits 1,864 (450)
Decrease (increase) in deposits on real estate acquisitions, net 24,527 (3,628)
Decrease in investment in mortgage notes 1,128 531
Investment in limited partnerships (15,847) (11,094)
Costs related to Mergers (2,612) (987)
Other investing activities (355) 20
------------ ------------
Net cash (used for) investing activities (50,013) (157,741)
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
------------------------------------
1999 1998
------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from General Partner 17,389 348,384
Distributions paid to partners (29,764) (23,547)
Principal receipts on employee notes 47 158
Principal receipts on pledged notes receivable 4,681 -
Proceeds from lines of credit 298,000 -
Repayments on lines of credit (423,000) (235,000)
Principal payments on mortgage notes payable (4,161) (20,542)
Loan and bond acquisition costs (52) (1,166)
------------- ------------
Net cash (used for) provided by financing activities (136,860) 68,287
------------- ------------
Net increase in cash and cash equivalents 6,773 44,280
Cash and cash equivalents, beginning of period 3,965 147,271
------------- ------------
Cash and cash equivalents, end of period $ 10,738 $ 191,551
============= ============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 65,297 $ 42,788
============= ============
Mortgage loans assumed and/or entered into through acquisitions of
real estate $ 16,903 $ 93,617
============= ============
Real estate contributed in exchange for OP Units or Preference
Interests, net $ 8,929 $ 50
============= ============
</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") and 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 March 31, 1999, the Operating Partnership
controlled a portfolio of 654 multifamily properties (individually a
"Property" and collectively the "Properties"). The Operating Partnership's
interest in six of the Properties at the time of acquisition thereof
consisted solely of ownership of the debt collateralized by such Properties.
The Operating Partnership also has an investment in partnership interests and
subordinated mortgages collateralized by 21 properties and an investment in
six joint ventures consisting of six properties (collectively, the
"Additional Properties").
2. BASIS OF PRESENTATION
The balance sheet and statements of operations and cash flows as of
and for the quarter ended March 31, 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 and Merry Land DownREIT I LP, 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
6
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
of the interim financial statements. All such adjustments are of a normal and
recurring nature.
3. PARTNERS' CAPITAL
The limited partners of the Operating Partnership as of March 31,
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 13,234,979 OP Units
which are exchangeable, subject to certain restrictions, on a one-for-one
basis into the Company's Common Shares (which amount includes Junior
Convertible Preference Units, which are convertible into 98,626 OP Units). As
of March 31, 1999, the Company (as the general partner) had an approximate
90.01% interest and the Limited Partners had an approximate 9.99% interest.
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 or Junior Convertible Preference Units) to
account for the change in their respective percentage ownership of the equity
of the Operating Partnership.
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 as of the record date of March 19, 1999
related to the quarter ended March 31, 1999:
7
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
DISTRIBUTION
AMOUNT DATE PAID
- --------------------------------------- ---------------- ---------------
<S> <C> <C>
Series A Preferred $0.5859380 04/15/99
Series B Depositary $0.5703130 04/15/99
Series C Depositary $0.5703130 04/15/99
Series D Depositary $0.5375000 04/15/99
Series E Preferred $0.4375000 04/01/99
Series F Preferred $0.6031250 04/15/99
Series G Depositary $0.4531250 04/15/99
Series H Depositary $0.4375000 03/31/99
Series I Depositary $0.5512500 03/31/99
Series J Depositary $0.5375000 03/31/99
Series K Depositary $1.0362500 03/31/99
Series L Depositary $0.4765625 03/31/99
OP Units $ 0.71 04/09/99
Junior Convertible Preference Units $ 0.67 04/09/99
</TABLE>
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 quarter ended March 31, 1999, the Operating Partnership
acquired the seven Properties listed below, of which three were acquired from
unaffiliated third parties and four were acquired from an affiliated party.
In connection with certain of the acquisitions listed below, the Operating
Partnership assumed mortgage indebtedness of approximately $16.9 million and
issued OP Units having a value of approximately $8.9 million. The cash
portion of these transactions was funded primarily from proceeds received
from the disposition of certain Properties and working capital.
8
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
=============== ===================== =========================== ============= =================
PURCHASE
DATE NUMBER PRICE
ACQUIRED PROPERTY LOCATION OF UNITS (IN THOUSANDS)
- --------------- --------------------- --------------------------- ------------- -----------------
<S> <C> <C> <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
- --------------- --------------------- --------------------------- ------------- -----------------
1,864 $124,540
=============== ===================== =========================== ============= =================
</TABLE>
5. REAL ESTATE DISPOSITIONS
During the quarter ended March 31, 1999, the Operating Partnership
disposed of the properties listed below. Each property was sold to an
unaffiliated third party. The Operating Partnership recognized a net gain for
financial reporting purposes of approximately $21.4 million on the
disposition of these seven Properties.
<TABLE>
<CAPTION>
=============== ============================= ======================= =============== =================
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
--------------- ----------------------------- ----------------------- --------------- -----------------
1,741 $76,525
=============== ============================= ======================= =============== =================
</TABLE>
6. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE
As of March 31, 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 separate
agreements to acquire five multifamily properties containing 1,254 units from
unaffiliated third parties. The expected combined purchase price is
approximately $75.9 million, which includes the assumption of mortgage
indebtedness of approximately $19.6 million.
As of March 31, 1999, in addition to the Property that was
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 nine multifamily properties containing 2,688 units
to unaffiliated third parties. The expected combined disposition price is
approximately $148.3 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
9
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
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.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
----------------------------------
1999 1998
----------------------------------
(Amounts in thousands except per
OP Unit amounts)
<S> <C> <C>
NUMERATOR:
Income before gain on disposition of properties, net
and allocation of income to Redeemable Preference
Interests and Redeemable Preference Units $ 79,264 $ 59,406
Income allocated to Redeemable Preference Interests (66) -
Income allocated to Redeemable Preference Units (29,377) (21,692)
----------------------------------
Income before gain on disposition of properties, net 49,821 37,714
Gain on disposition of properties, net 21,416 1,869
----------------------------------
Numerator for net income per weighted average
OP Unit outstanding 71,237 39,583
Effect of dilutive securities:
Cumulative Convertible Preference Units - -
----------------------------------
Numerator for net income per weighted average
OP Unit outstanding - assuming dilution $ 71,237 $ 39,583
==================================
DENOMINATOR:
Denominator for net income per weighted
average OP Unit outstanding 132,066 102,948
Effect of dilutive securities (1):
OP Units issuable upon exercise of the
Company's share options 568 1,152
----------------------------------
Denominator for net income per weighted average
OP Unit outstanding - assuming dilution 132,634 104,100
==================================
Net income per weighted average OP Unit
outstanding $ 0.54 $ 0.38
==================================
Net income per weighted average OP Unit
outstanding - assuming dilution $ 0.54 $ 0.38
==================================
</TABLE>
10
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
----------------------------------
1999 1998
----------------------------------
(Amounts in thousands except per
OP Unit amounts)
<S> <C> <C>
NET INCOME PER WEIGHTED AVERAGE OP UNIT
OUTSTANDING:
Income before gain on disposition of properties, net
per weighted average OP Unit outstanding $ 0.38 $ 0.36
Gain on disposition of properties, net 0.16 0.02
----------------------------------
Net income per weighted average OP Unit
outstanding $ 0.54 $ 0.38
==================================
NET INCOME PER WEIGHTED AVERAGE OP UNIT
OUTSTANDING - ASSUMING DILUTION:
Income before gain on disposition of properties, net
per weighted average OP Unit
outstanding - assuming dilution $ 0.38 $ 0.36
Gain on disposition of properties, net 0.16 0.02
----------------------------------
Net income per weighted average OP Unit
outstanding - assuming dilution $ 0.54 $ 0.38
==================================
</TABLE>
(1) Convertible Preference Units that could be converted into 13,123,062 and
7,623,745 weighted Common Shares (which would be contributed to the
Operating Partnership in exchange for OP Units) were outstanding for the
quarter ended March 31, 1999 and 1998, respectively, but were not
included in the computation of diluted earnings per OP Unit because the
effects would be anti-dilutive.
11
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
8. MORTGAGE NOTES PAYABLE
As of March 31, 1999, the Operating Partnership had outstanding
mortgage indebtedness of approximately $2.4 billion encumbering 218 of the
Properties. The carrying value of such Properties (net of accumulated
depreciation of $286.1 million) was approximately $3.8 billion. The mortgage
notes payables are generally due in monthly installments of principal and
interest. In connection with the Properties acquired during the quarter ended
March 31, 1999, the Operating Partnership assumed the outstanding mortgage
balances on two Properties in the aggregate amount of $16.9 million.
As of March 31, 1999, scheduled maturities for the Operating
Partnership's outstanding mortgage indebtedness are at various dates through
October 1, 2033. During the quarter ended March 31, 1999, the effective
interest cost calculated for all of the Operating Partnership's debt was
7.09%.
9. NOTES
As of March 31, 1999, the Operating Partnership had outstanding
unsecured notes of approximately $2.0 billion, net of a $5.0 million discount
and including a $8.6 million premium.
10. LINES OF CREDIT
The Operating Partnership has a revolving credit facility with
Morgan Guaranty Trust Operating Partnership of New York ("Morgan Guaranty")
and Bank of America Illinois ("Bank of America") as co-agents to provide the
Operating Partnership with potential borrowings of up to $500 million. As of
March 31, 1999, $125 million was outstanding under this facility, bearing
interest at a weighted average rate of 5.33%.
In connection with the MRY Merger, the Operating Partnership assumed
an additional credit facility with First Union Bank as agent with potential
borrowings of up to $120 million. As of March 31, 1999, $40 million was
outstanding under this facility, bearing interest at a weighted average rate
of 5.42%.
11. DEPOSITS - RESTRICTED
Deposits-restricted as of March 31, 1999 primarily included a
deposit in the amount of $20 million held in a third party escrow account to
provide collateral for third party construction financing in connection with
the Joint Venture Agreement. Also, approximately $2.7 million was held in
third party escrow accounts, representing proceeds received in connection
with the Operating Partnership's disposition of one property and earnest
money deposits made for additional acquisitions. In addition, approximately
$19.8 million was for tenant security, utility deposits, and other deposits
for certain of the Operating Partnership's Properties.
12
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
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 regards to the joint venture agreement with a multifamily
residential real estate developer during the quarter ended March 31, 1999,
the Operating Partnership funded a total of $15.9 million and during the
remainder of 1999 the Operating Partnership expects to fund approximately
$48.2 million in connection with this agreement.
In regards to certain other properties that were under development
and/or expansion during the quarter ended March 31, 1999, the Operating
Partnership funded $5.1 million. During the remainder of 1999, the Operating
Partnership expects to fund $52.9 million related to the continued
development and/or expansion of as many as five Properties.
In regards to certain properties that are under earnout/development
agreements, during the quarter ended March 31, 1999, $16.2 million was funded
relating to the completion/acquisition of Copper Canyon. In addition, the
Operating Partnership may be required to fund an additional $1 million
earnout payment to the developer of Copper Canyon if certain specified
operation levels are met. During the remainder of 1999, the Operating
Partnership expects to fund approximately $43.7 million related to other
earnout/development projects. Subsequent to March 31, 1999, the Operating
Partnership has funded $22.7 million relating to the completion/acquisition
of Skyview, which included a $1.0 million advance of the earnout payment to
the developer of Skyview.
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 March 31, 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. At March 31, 1999, approximately $18.3 million was outstanding,
bearing interest at LIBOR plus 250 basis points. The Operating Partnership
has a potential obligation to fund up to an additional $6.7 million under the
Senior Debt Agreement.
13
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
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
quarters ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
RENTAL REAL CORPORATE/
MARCH 31, 1999 (AMOUNTS IN THOUSANDS) ESTATE(1) OTHER(2) CONSOLIDATED
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental income $ 406,062 $ - $ 406,062
Property and maintenance expense (97,047) - (97,047)
Real estate tax and insurance expense (42,048) - (42,048)
Property management expense (14,201) - (14,201)
-----------------------------------------------------
Net operating income 252,766 - 252,766
Fee and asset management income - 1,234 1,234
Interest income - investment in mortgage notes - 2,895 2,895
Interest and other income - 6,046 6,046
Fee and asset management expense - (867) (867)
Depreciation expense on non-real estate assets - (1,705) (1,705)
Interest expense:
Expense incurred - (79,197) (79,197)
Amortization of deferred financing costs - (845) (845)
General and administrative expense - (5,867) (5,867)
Allocation of net income to Preference Unit holders - (29,377) (29,377)
Adjustment for depreciation expense related to
equity in unconsolidated joint ventures - 276 276
-----------------------------------------------------
Funds from operations available to OP Units 252,766 (107,407) 145,359
Depreciation expense on real estate assets (95,196) - (95,196)
Gain on disposition of properties, net 21,416 - 21,416
Allocation of net income to Preference Interest
holders - (66) (66)
Adjustment for depreciation expense related to
equity in unconsolidated joint ventures - (276) (276)
-----------------------------------------------------
Net income available to OP Unit holders $ 178,986 $ (107,749) $ 71,237
=====================================================
Investment in real estate, net of accumulated
depreciation $ 10,251,871 $ 16,081 $ 10,267,952
=====================================================
Total assets $ 10,251,871 $ 450,090 $ 10,701,961
=====================================================
</TABLE>
14
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
RENTAL REAL CORPORATE/
MARCH 31, 1998 (AMOUNTS IN THOUSANDS) ESTATE(1) OTHER(2) CONSOLIDATED
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rental income $ 277,226 $ - $ 277,226
Property and maintenance expense (66,713) - (66,713)
Real estate tax and insurance expense (27,443) - (27,443)
Property management expense (11,579) (11,579)
-----------------------------------------------------
Net operating income 171,491 - 171,491
Fee and asset management income - 1,360 1,360
Interest income - investment in mortgage notes - 4,931 4,931
Interest and other income - 2,824 2,824
Fee and asset management expense - (1,052) (1,052)
Depreciation expense on non-real estate assets - (1,165) (1,165)
Interest expense:
Expense incurred - (50,254) (50,254)
Amortization of deferred financing costs - (624) (624)
General and administrative expense - (4,880) (4,880)
Allocation of net income to Preference Unit holders - (21,692) (21,692)
Adjustment for amortization of deferred financing
costs related to predecessor business - 12 12
-----------------------------------------------------
Funds from operations available to OP Units 171,491 (70,540) 100,951
Depreciation expense on real estate assets (63,225) - (63,225)
Gain on disposition of properties, net 1,869 - 1,869
Adjustment for amortization of deferred financing
costs related to predecessor business - (12) (12)
-----------------------------------------------------
Net income available to OP Unit holders $ 110,135 $ (70,552) $ 39,583
=====================================================
Investment in real estate, net of
accumulated depreciation $ 6,843,693 $ 10,842 $ 6,854,535
=====================================================
Total assets $ 6,843,693 $ 485,649 $ 7,329,342
=====================================================
</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.
15
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
14. SUBSEQUENT EVENTS
On April 28, 1999, the Operating Partnership acquired Pine Tree Club
Apartments, a 150-unit multifamily property located in Wildwood, Missouri,
from an unaffiliated third party for a purchase price of approximately $8.0
million, which included the assumption of approximately $5.5 million of
mortgage indebtedness.
On April 28, 1999, the Operating Partnership acquired Westbrooke
Village I & II Apartments, a 252-unit multifamily property located in
Manchester, Missouri from an unaffiliated third party for a purchase price of
approximately $12.6 million, which included the assumption of approximately
$8.5 million of mortgage indebtedness.
On April 29, 1999, the Operating Partnership acquired Brookside
Apartments, a 228-unit multifamily property located in Frederick, Maryland,
from an affiliated party for a purchase price of approximately $10.8 million,
which included the assumption of approximately $8.3 million of mortgage
indebtedness.
On April 30, 1999, the Operating Partnership acquired Skyview
Apartments, a 260-unit multifamily property located in Rancho Santa
Margarita, California, from an unaffiliated third party for a purchase price
of approximately $21.8 million. In addition, the Operating Partnership funded
a $1.0 million advance of the earnout payment to the developer of Skyview.
In April 1999, the Company issued 1,936 Common Shares pursuant to
the Share Purchase - DRIP Plan. The Company contributed to the Operating
Partnership net proceeds of $88,168 in connection therewith.
On May 6, 1999, the Operating Partnership disposed of Sandstone at
Bear Creek Apartments, a 40-unit multifamily property located in Euless, TX,
to an unaffiliated third party for a total sales price of $2.1 million.
16
<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 and the LLCs, and Merry Land
DownREIT I LP, 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 quarter ended March 31, 1999, the
Operating Partnership acquired seven properties containing 1,864 units (the
"1999 Acquired Properties").
The Operating Partnership also disposed of twenty properties
containing 4,719 units during 1998 (the "1998 Disposed Properties"); and
seven properties containing 1,741 units during the quarter ended March 31,
1999 (the "1999 Disposed Properties").
17
<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
quarters ended March 31, 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. The impact of
the 1998 Acquired Properties and the 1999 Acquired Properties is discussed in
greater detail in the following paragraphs.
Properties that the Operating Partnership owned for all of the
quarter ended March 31, 1999 and March 31, 1998 (the "First Quarter 1999 Same
Store Properties"), which represented 127,514 units, also impacted the
Operating Partnership's results of operations and are discussed as well in
the following paragraphs.
COMPARISON OF QUARTER ENDED MARCH 31, 1999 TO QUARTER ENDED MARCH 31,
1998
For the quarter ended March 31, 1999, income before gain on
disposition of properties increased by $19.9 million when compared to the
quarter ended March 31, 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 First Quarter 1999 Same Store Properties, rental
revenues increased by approximately $10.9 million or 4.2% primarily as a
result of higher rental rates charged to new tenants and tenant renewals, a
0.26% increase in average economic occupancy levels and a 0.65% increase in
income from billing tenants for their share of utility costs. Overall,
property operating expenses which include property and maintenance, real
estate taxes and insurance and an allocation of property management expenses
increased approximately $1.3 million or 1.3%. This increase was primarily the
result of an increase in real estate taxes on certain properties, higher
on-site compensation costs, leasing and advertising costs and utility charges.
Property management represents expenses associated with the
self-management of the Operating Partnership's Properties. These expenses
increased by approximately $2.6 million primarily due to the continued
expansion of the Operating Partnership's property management business.
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.
18
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Interest expense, including amortization of deferred financing
costs, increased by approximately $29.2 million. This increase was primarily
the result of an increase in the Operating Partnership's average indebtedness
outstanding, which increased by $1.8 billion. However, the Operating
Partnership's effective interest costs decreased from 7.27% for the quarter
ended March 31, 1998 to 7.09% for the quarter ended March 31, 1999.
General and administrative expenses, which include corporate
operating expenses, increased approximately $1.0 million between the periods
under comparison. This increase was primarily due to the addition of
corporate personnel in the Operating Partnership's Human Resources,
Accounting, Legal and Information Systems groups as well as higher
compensation costs, shareholder reporting costs and professional fees.
However, by gaining certain economies of scale with a much larger operation,
these expenses as a percentage of total revenues were 1.41% for the quarter
ended March 31, 1999 compared to 1.70% of total revenues for the quarter
ended March 31, 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 March 31, 1999 was
approximately $10.7 million and the amount available on the Operating
Partnership's lines of credit was $455 million, of which $12 million was
restricted. The following discussion also explains the changes in net cash
provided by operating activities, net cash (used for) investing activities
and net cash (used for) financing activities, all of which are presented in
the Operating Partnership's Statements of Cash Flows.
With respect to Property acquisitions during the quarter, the
Operating Partnership purchased seven Properties containing 1,864 units for a
total purchase price of approximately $124.5 million, including the
assumption of mortgage indebtedness of approximately $16.9 million and the
issuance of OP Units with a value of $8.9 million. These acquisitions were
primarily funded from the disposition of certain properties and working
capital.
Subsequent to March 31, 1999 and through May 12, 1999, the Operating
Partnership acquired four additional properties containing 890 units for a
total purchase price of approximately $53.2 million and the assumption of
mortgage indebtedness of approximately $22.3 million. These acquisitions were
primarily funded with proceeds from the disposition of certain properties,
the lines of credit and working capital.
During the quarter ended March 31, 1999, the Operating Partnership
disposed of seven properties that generated net proceeds of $76 million.
These proceeds were or will be ultimately applied to purchase additional
properties.
19
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Subsequent to March 31, 1999 and through May 12, 1999, the Operating
Partnership disposed of one property for a total sales price of $2.1 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 regards to the joint venture agreement with a multifamily
residential real estate developer during the quarter ended March 31, 1999,
the Operating Partnership funded a total of $15.9 million and during the
remainder of 1999 the Operating Partnership expects to fund approximately
$48.2 million in connection with this agreement.
In regards to certain other properties that were under development
and/or expansion during the quarter ended March 31, 1999, the Operating
Partnership funded $5.1 million. During the remainder of 1999, the Operating
Partnership expects to fund $52.9 million related to the continued
development and/or expansion of as many as five Properties.
In regards to certain properties that are under earnout/development
agreements, during the quarter ended March 31, 1999, $16.2 million was funded
relating to the completion/acquisition of Copper Canyon. In addition, the
Operating Partnership may be required to fund an additional $1 million
earnout payment to the developer of Copper Canyon if certain specified
operation levels are met. During the remainder of 1999, the Operating
Partnership expects to fund approximately $43.7 million related to other
earnout/development projects. Subsequent to March 31, 1999, the Operating
Partnership has funded $22.7 million relating to the completion/acquisition
of Skyview, which included a $1.0 million advance of the earnout payment to
the developer of Skyview.
As of March 31, 1999, the Operating Partnership had total
indebtedness of approximately $4.6 billion, which included mortgage
indebtedness of $2.4 billion (including premiums of $4.2 million), of which
$930.4 million represented tax-exempt bond indebtedness, and unsecured debt
of $2.0 billion, including net discounts and premiums in the amount of
$3.6 million.
In May 1999, the Operating Partnership expects to repay its 1999
Notes that mature on May 15, 1999. The $125 million repayment will be
initially funded from borrowings under the Operating Partnership's lines of
credit. In addition, on June 1, 1999, the Operating Partnership anticipates
repaying the principal balance on one of its mortgage notes in the amount of
$8.0 million. This repayment will also be primarily funded from additional
borrowings under the lines of credit.
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 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
20
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 quarter ended March 31, 1999, total capital expenditures
for the Operating Partnership approximated $27.4 million. Of this amount,
approximately $8.8 million, or $73 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
$5.9 million, or $92 per unit. Capital spent for replacement-type items
approximated $10.2 million, or $55 per unit. Also included in total capital
expenditures was approximately $2.5 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 budgeted to be approximately $90 million.
Total distributions paid in April 1999 amounted to approximately
$115.2 million, which included distributions declared for the quarter ended
March 31, 1999.
In April 1999, the Company issued 1,936 Common Shares pursuant to
the Share Purchase - DRIP Plan. The Company contributed to the Operating
Partnership net proceeds of $88,168 in connection therewith.
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.
21
<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 has a revolving credit facility with
Morgan Guaranty and Bank of America as co-agents to provide the Operating
Partnership, with potential borrowings of up to $500 million. This credit
facility matures in November 1999 and will continue to be used to fund
property acquisitions and short term liquidity requirements. As of May 11,
1999, $175 million was outstanding under this facility.
In connection with the MRY Merger, the Operating Partnership assumed
a second revolving credit facility with First Union Bank as agent with
potential borrowings of up to $120 million. This credit facility matures in
September 2000 and will also be used to fund property acquisitions, costs for
certain Properties under development and short term liquidity requirements.
As of May 11, 1999, $27 million was outstanding under this 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 May 12, 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, 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. 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. At March 31,
1999 approximately $18.3 million was outstanding on the Senior Note, bearing
interest at LIBOR plus 250 basis points. The Operating Partnership has a
potential obligation to fund up to an additional $6.7 million under the
Senior Note.
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 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
22
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 is currently in the process of
testing and implementing the majority of its Year 2000 IT and non-IT system
projects with completion anticipated during the second or third quarter of
1999. The Operating Partnership has estimated that the total Year 2000
project cost will approximate $1 million, of which approximately 80% has been
incurred as of March 31, 1999. During the first quarter 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 $200,000 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
$150,000 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, there can be no assurances 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.
23
<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 company 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 quarter ended March 31, 1999, FFO increased $44.4 million,
representing a 44% increase when compared to the quarter ended March 31, 1998.
The following is a reconciliation of net income to FFO for the
quarters ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
3/31/99 3/31/98
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $100,680 $ 61,275
Adjustments:
Depreciation on real estate assets* 95,472 63,225
Amortization of deferred financing costs
related to predecessor business - 12
Allocation of net income to
Preference Unit holders (29,377) (21,692)
Gain on disposition of properties (21,416) (1,869)
- ------------------------------------------------------------------------------------------------
FFO $145,359 $100,951
-------- --------
- ------------------------------------------------------------------------------------------------
</TABLE>
* Includes $275,603 related to the Operating Partnership's share of depreciation
from unconsolidated joint ventures for the quarter ended March 31, 1999.
24
<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 Company's
Form 10-K for the year ended December 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(A) Exhibits:
12 Computation of Ratio of Earnings to Fixed Charges.
(B) Reports on Form 8-K:
None.
</TABLE>
25
<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: May 12, 1999 By: /s/ Bruce C. Strohm
------------ ------------------------------------------
Bruce C. Strohm
Executive Vice President, General Counsel
and Secretary
Date: May 12, 1999 By: /s/ Michael J. McHugh
------------ ------------------------------------------
Michael J. McHugh
Executive Vice President, Chief Accounting
Officer and Treasurer
26
<PAGE>
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED HISTORICAL
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS RATIO
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------------------
3/31/99 3/31/98 12/31/98 12/31/97
---------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 406,062 $ 277,226 $ 1,293,560 $ 707,733
Fee income - outside managed 1,234 1,360 5,622 5,697
Interest income - investment in mortgage notes 2,895 4,931 18,564 20,366
Interest and other income 6,046 2,824 19,703 13,525
------------- ------------- --------------- -------------
Total revenues 416,237 286,341 1,337,449 747,321
------------- ------------- --------------- -------------
EXPENSES
Property and maintenance 97,047 66,713 326,567 176,075
Real estate taxes and insurance 42,048 27,443 126,009 69,520
Property management 14,201 11,579 52,705 26,793
Property management -- non-recurring - - - -
Fee and asset management 867 1,052 4,207 3,364
Depreciation 96,901 64,390 301,869 156,644
Interest:
Expense incurred 79,197 50,254 246,585 121,324
Amortization of deferred financing costs 845 624 2,757 2,523
General and administrative 5,867 4,880 21,718 15,064
------------- ------------- --------------- -------------
Total expenses 336,973 226,935 1,082,417 571,307
------------- ------------- --------------- -------------
Income (loss) before extraordinary items $ 79,264 $ 59,406 $ 255,032 $ 176,014
============= ============= =============== =============
Combined Fixed Charges and Preferred Distributions:
Interest and other financing costs $ 79,197 $ 50,254 $ 246,585 $ 121,324
Amortization of deferred financing costs 845 624 2,757 2,523
Preferred distributions 29,377 21,692 92,917 59,012
------------- ------------- --------------- -------------
TOTAL COMBINED FIXED CHARGES
AND PREFERRED DISTRIBUTIONS $ 109,419 $ 72,570 $ 342,259 $ 182,859
============= ============= =============== =============
EARNINGS BEFORE COMBINED FIXED CHARGES
AND PREFERRED DISTRIBUTIONS $ 159,306 $ 110,284 $ 504,374 $ 299,861
============= ============= =============== =============
FUNDS FROM OPERATIONS BEFORE COMBINED FIXED
CHARGES AND PREFERRED DISTRIBUTIONS $ 256,207 $ 174,674 $ 806,243 $ 456,505
============= ============= =============== =============
RATIO OF EARNINGS BEFORE COMBINED FIXED CHARGES
AND PREFERRED DISTRIBUTIONS TO COMBINED FIXED CHARGES
AND PREFERRED DISTRIBUTIONS 1.46 1.52 1.47 1.64
============= ============= =============== =============
RATIO OF FUNDS FROM OPERATIONS BEFORE COMBINED FIXED
CHARGES AND PREFERRED DISTRIBUTIONS TO COMBINED FIXED
CHARGES AND PREFERRED DISTRIBUTIONS 2.34 2.41 2.36 2.50
============= ============= =============== =============
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED HISTORICAL
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS RATIO
HISTORICAL
--------------------------------------------
12/31/96 12/31/95 12/31/94
--------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C>
REVENUES
Rental income $ 454,412 $ 373,919 $ 220,727
Fee income - outside managed 6,749 7,030 4,739
Interest income - investment in mortgage notes 12,819 4,862 -
Interest and other income 4,405 4,573 5,568
------------- ------------- -------------
Total revenues 478,385 390,384 231,034
------------- ------------- -------------
EXPENSES
Property and maintenance 127,172 112,186 66,534
Real estate taxes and insurance 44,128 37,002 23,028
Property management 17,512 15,213 10,249
Property management -- non-recurring - - 879
Fee and asset management 3,837 3,887 2,056
Depreciation 93,253 72,410 37,273
Interest:
Expense incurred 81,351 78,375 37,044
Amortization of deferred financing costs 4,242 3,444 1,930
General and administrative 9,857 8,129 6,053
------------- ------------- -------------
Total expenses 381,352 330,646 185,046
------------- ------------- -------------
Income (loss) before extraordinary items $ 97,033 $ 59,738 $ 45,988
============= ============= =============
Combined Fixed Charges and Preferred Distributions:
Interest and other financing costs $ 81,351 $ 78,375 $ 37,044
Amortization of deferred financing costs 4,242 3,444 1,930
Preferred distributions 29,015 10,109 -
------------- ------------- -------------
TOTAL COMBINED FIXED CHARGES
AND PREFERRED DISTRIBUTIONS $ 114,608 $ 91,928 $ 38,974
============= ============= =============
EARNINGS BEFORE COMBINED FIXED CHARGES
AND PREFERRED DISTRIBUTIONS $ 182,626 $ 141,557 $ 84,962
============= ============= =============
FUNDS FROM OPERATIONS BEFORE COMBINED FIXED
CHARGES AND PREFERRED DISTRIBUTIONS $ 275,879 $ 213,967 $ 123,114
============= ============= =============
RATIO OF EARNINGS BEFORE COMBINED FIXED CHARGES
AND PREFERRED DISTRIBUTIONS TO COMBINED FIXED CHARGES
AND PREFERRED DISTRIBUTIONS 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 2.41 2.33 3.16
============= ============= =============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,738
<SECURITIES> 0
<RECEIVABLES> 1,765
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 298,820
<PP&E> 11,082,282
<DEPRECIATION> 814,330
<TOTAL-ASSETS> 10,701,961
<CURRENT-LIABILITIES> 362,543
<BONDS> 4,567,662
0
1,410,414
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,701,961
<SALES> 410,191
<TOTAL-REVENUES> 416,237
<CGS> 0
<TOTAL-COSTS> 154,163
<OTHER-EXPENSES> 5,867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,042
<INCOME-PRETAX> 79,264
<INCOME-TAX> 0
<INCOME-CONTINUING> 79,264
<DISCONTINUED> 21,416
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,303
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
