ITEM 1. BUSINESS
GENERAL
Equity Residential Properties Trust ("EQR") is a self-administered and self-managed equity real estate investment trust ("REIT"). EQR was organized in March 1993 and commenced operations on August 18, 1993 upon completion of its initial public offering (the "EQR IPO") of 13,225,000 common shares of beneficial interest, $0.01 par value per share ("Common Shares"). EQR was formed to continue the multifamily property business objectives and acquisition strategies of certain affiliated entities controlled by Mr. Samuel Zell, Chairman of the Board of Trustees of EQR. These entities had been engaged in the acquisition, ownership and operation of multifamily residential properties since 1969. As used herein, the term "Company" includes EQR and those entities owned or controlled by it, 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"), Merry Land & Investment Company, Inc. ("MRY") (the "MRY Merger") and Lexford Residential Trust ("LFT") ("the LFT Merger") (collectively, the "Mergers").
The Company has formed a series of partnerships (the "Financing Partnerships") which beneficially own certain Properties (see definition below) that may be encumbered by mortgage indebtedness. In general, these are structured so that ERP Operating Limited Partnership (the "Operating Partnership"), a subsidiary of EQR, owns a 1% limited partner interest and a 98% general partner interest in each, with the remaining 1% general partner interest in each Financing Partnership owned by various qualified REIT subsidiaries wholly owned by the Company (each a "QRS Corporation"). Rental income from the Properties that are beneficially owned by a Financing Partnership is used first to service the applicable mortgage debt and pay other operating expenses and any excess is then distributed 1% to the applicable QRS Corporation, as the general partner of such Financing Partnership, and 99% to the Operating Partnership, as the sole 1% limited partner and as the 98% general partner. The Company has also formed a series of limited liability companies that own certain Properties (collectively, the "LLCs"). The Operating Partnership is a 99% managing member of each LLC and a QRS Corporation is a 1% member of each LLC.
The Company's subsidiaries include the Operating Partnership, a series of management limited partnerships and companies (collectively, the "Management Partnerships" or the "Management Companies"), the Financing Partnerships, the LLC's and certain other entities.
As of December 31, 1999, the Company owned or had interests in 1,062 multifamily properties containing 225,708 units, of which it wholly-owned a portfolio of 983 multifamily properties (individually, a "Property" and collectively, the "Properties") containing 214,060 units. The remaining 79 properties represent investments in partnership interests and/or subordinated mortgages containing 11,648 units. The Company's Properties are located in 35 states throughout the United States. The Company is one of the largest publicly traded REIT's (based on the aggregate market value of its outstanding Common Shares) and is the largest publicly traded REIT owner of multifamily properties (based on the number of apartment units wholly owned and total revenues earned).
Since the EQR IPO and through December 31, 1999, the Company, through the Operating Partnership, has acquired direct interests in 988 properties containing 209,975 units in the aggregate for a total purchase price of approximately $12 billion, including the assumption of approximately $3.2 billion of mortgage indebtedness and $848.2 million of unsecured notes. Since the EQR IPO and through December 31, 1999, the Company has disposed of 74 properties, containing 17,640 units for a total sales price of approximately $654.2 million.
PART I The Company's corporate headquarters and executive offices are located in Chicago, Illinois. In addition, the Company has 31 management offices in the following cities:
- Scottsdale and Tucson, Arizona; - Irvine, Sacramento and San Francisco, California; - Denver, Colorado; - Tampa, Jacksonville, Ft. Lauderdale and Orlando, Florida; - Atlanta and Augusta, Georgia; - Chicago, Illinois; - Kansas City, Kansas; - Louisville, Kentucky; - Bethesda, Maryland; - Ypsilanti, Michigan; - Minneapolis, Minnesota; - Las Vegas, Nevada; - Charlotte and Raleigh, North Carolina; - Reynoldsburg, Ohio - Tulsa, Oklahoma; - Portland, Oregon; - Nashville and Memphis, Tennessee. - Dallas, Houston and San Antonio, Texas; and - Seattle and Redmond, Washington
The Company has approximately 6,700 employees. An on-site manager, who supervises the on-site employees and is responsible for the day-to-day operations of the Property, directs each of the Company's Properties. A leasing administrator and/or property administrator generally assists the manager. In addition, a maintenance director at each Property supervises a maintenance staff whose responsibilities include a variety of tasks, including responding to service requests, preparing vacant apartments for the next resident and performing preventive maintenance procedures year-round.
BUSINESS OBJECTIVES AND OPERATING STRATEGIES
The Company seeks to maximize both current income and long-term growth in income, thereby increasing:
- the value of the Properties; - distributions on a per Common Share basis; and - shareholders' value.
The Company's strategies for accomplishing these objectives are:
- maintaining and increasing Property occupancy while increasing rental rates;
- controlling expenses, providing regular preventive maintenance, making periodic renovations and enhancing amenities;
- maintaining a ratio of consolidated debt-to-total market capitalization of less than 50%;
- strategically acquiring and disposing of properties; and
- purchasing newly developed, as well as co-investing in the development of, multifamily communities.
The Company is committed to tenant satisfaction by striving to anticipate industry trends and implementing strategies and policies consistent with providing quality tenant services. In addition, the
PART I
Company continuously surveys rental rates of competing properties and conducts satisfaction surveys of residents to determine the factors they consider most important in choosing a particular apartment unit.
ACQUISITION STRATEGIES
The Company anticipates that future property acquisitions will be located in the continental United States. Management will continue to use market information to evaluate acquisition opportunities. The Company's market database allows it to review the primary economic indicators of the markets where the Company currently manages Properties and where it expects to expand its operations. Acquisitions may be financed from various sources of capital, which may include retained cash flow, issuance of additional equity securities, sales of Properties and collateralized and uncollateralized borrowings. In addition, the Company may acquire additional multifamily properties in transactions that include the issuance of limited partnership interests in the Operating Partnership ("OP Units") as consideration for the acquired properties. Such transactions may, in certain circumstances, partially defer the sellers' tax consequences.
When evaluating potential acquisitions, the Company will consider:
- the geographic area and type of community;
- the location, construction quality, condition and design of the property;
- the current and projected cash flow of the property and the ability to increase cash flow;
- the potential for capital appreciation of the property;
- the terms of resident leases, including the potential for rent increases;
- the potential for economic growth and the tax and regulatory environment of the community in which the property is located;
- the occupancy and demand by residents for properties of a similar type in the vicinity (the overall market and submarket);
- the prospects for liquidity through sale, financing or refinancing of the property;
- the benefits of integration into existing operations; and
- competition from existing multifamily properties and the potential for the construction of new multifamily properties in the area.
The Company expects to purchase multifamily properties with physical and market characteristics similar to the Properties.
DEVELOPMENT STRATEGIES
The Company seeks to acquire newly constructed properties and make investments towards the development of properties in markets where it discerns strong demand, which the Company believes will enable it to achieve superior rates of return. The Company's current communities under development and future developments are in markets or will be in markets where certain market demographics justify the development of high quality multifamily communities. In evaluating whether to develop an apartment community in a particular location, the Company analyzes relevant demographic, economic and financial data. Specifically, the Company considers the following factors, among others, in determining the viability of a potential new apartment community:
- income levels and employment growth trends in the relevant market;
- uniqueness of location;
- household growth and net migration of the relevant market's population;
- supply/demand ratio, competitive housing alternatives, sub-market occupancy and rent levels;
- barriers to entry that would limit competition; and
- purchase prices and yields of available existing stabilized communities, if any.
PART I
DISPOSITION STRATEGIES
Management will use market information to evaluate dispositions. Factors the Company considers in deciding whether to dispose of its Properties include the following:
- potential increases in new construction;
- areas where the economy is expected to decline substantially; and
- markets where the Company does not intend to establish long-term concentrations.
The Company will reinvest the proceeds received from property dispositions primarily to fund property acquisitions as well as fund development activities. In addition, when feasible the Company may structure these transactions as tax deferred exchanges.
FINANCING STRATEGIES
The Company intends to maintain a ratio of consolidated debt-to-total market capitalization of 50% or less. At December 31, 1999, the Company had a ratio of approximately 42.75% based on the market value of equity equal to the closing price of the Company's Common Shares on the New York Stock Exchange and assuming conversion of all OP Units plus the liquidation preference of the Company's preferred shares of beneficial interest, $0.01 par value per share ("Preferred Shares") and the Operating Partnership's preference units and interests. It is the Company's policy that EQR shall not incur indebtedness other than short-term trade, employee compensation, dividends payable or similar indebtedness that will be paid in the ordinary course of business, and that indebtedness shall instead be incurred by the Operating Partnership to the extent necessary to fund the business activities conducted by the Operating Partnership and its subsidiaries.
EQUITY OFFERINGS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
During 1997, the Company issued 84,183 Common Shares pursuant to the Employee Share Purchase Plan at net prices which ranged from $35.63 per share to $42.08 per share and raised approximately $3.2 million in connection therewith.
In March 1997, the Company completed three separate public offerings relating to an aggregate of 1,921,000 publicly registered Common Shares, which were sold to the public at a price of $46 per share. The Company received net proceeds of approximately $88.3 million therefrom.
In May 1997, the Company sold 7,000,000 depositary shares (the "Series D Depositary Shares"). Each Series D Depositary Share represents a 1/10 fractional interest in a 8.60% Series D Cumulative Redeemable Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series D Preferred Shares"). The liquidation preference of each of the Series D Preferred shares is $250.00 (equivalent to $25 per Series D Depositary Share). The Company received net proceeds of approximately $169.5 million from this offering (the "Series D Preferred Share Offering").
In June 1997, the Company completed five separate public offerings comprising an aggregate of 8,992,023 publicly registered Common Shares, which were sold to the public at prices ranging from $44.06 to $45.88 per share. The Company received net proceeds of approximately $398.9 million therefrom.
In September 1997, the Company completed the sale of 498,000 publicly registered Common Shares, which were sold to the public at a price of $51.125 per share. The Company received net proceeds of approximately $24.2 million in connection with this offering.
PART I
In September 1997, the Company sold 11,000,000 depositary shares (the "Series G Depositary Shares"). Each Series G Depositary Share represents a 1/10 fractional interest in a 7 1/4% Series G Convertible Cumulative Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series G Preferred Shares"). Series G Depositary Shares representing Series G Preferred Shares are convertible at the option of the holder thereof at any time into Common Shares at a conversion price of $58.58 per Common Share (equivalent to a conversion rate of approximately .4268 Common Shares for each Series G Depositary Share). The liquidation preference of each of the Series G Preferred Shares is $250.00 per share (equivalent to $25 per Series G Depositary Share). The Company received net proceeds of approximately $264 million from this offering (the "Series G Preferred Share Offering"). In addition, in October 1997, the Company sold 1,650,000 additional Series G Depositary Shares pursuant to an over-allotment option granted to the underwriters and received net proceeds of approximately $39.6 million therefrom.
In October 1997, in connection with the acquisition of a portfolio of Properties, the Company issued 3,315,500 publicly registered Common Shares, which were issued at a price of $45.25 per share with a value of approximately $150 million.
On November 3, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register 7,000,000 Common Shares pursuant to a Distribution Reinvestment and Share Purchase Plan. This registration statement was declared effective on November 25, 1997. The Distribution Reinvestment and Share Purchase Plan (the "DRIP Plan") of the Company provides holders of record and beneficial owners of Common Shares, Preferred Shares, and limited partnership interests in the Operating Partnership with a simple and convenient method of investing cash distributions in additional Common Shares (which is referred to herein as the "Dividend Reinvestment - DRIP Plan"). Common Shares may also be purchased on a monthly basis with optional cash payments made by participants in the Plan and interested new investors, not currently shareholders of the Company, at the market price of the Common Shares less a discount ranging between 0% and 5%, as determined in accordance with the DRIP Plan (which is referred to herein as the "Share Purchase - DRIP Plan").
In December 1997, in connection with an acquisition of a Property, the Company issued 736,296 publicly registered Common Shares, which were issued at a price of $48.85 per share with a value of approximately $36 million.
Also in December 1997, the Company completed the sale of 467,722 publicly registered Common Shares, which were sold at a price of $51.3125 per share. The Company received net proceeds of approximately $22.8 million in connection with this offering.
During 1998, the Company issued 93,521 Common Shares pursuant to the Employee Share Purchase Plan and received net proceeds of approximately $3.7 million.
During 1998, the Company issued 1,023,184 Common Shares pursuant to the Share Purchase - DRIP Plan and received net proceeds of approximately $50.7 million.
During 1998, the Company issued 10,230 Common Shares pursuant to the Dividend Reinvestment - DRIP Plan and received net proceeds of approximately $0.4 million.
On January 27, 1998, the Company completed an offering of 4,000,000 publicly registered Common Shares, which were sold to the public at a price of $50.4375 per share. The Company received net proceeds of approximately $195.3 million in connection therewith.
On February 3, 1998, the Company filed with the SEC a Form S-3 Registration Statement to register $1 billion of equity securities. The SEC declared this registration statement effective on February
PART I
27, 1998. In addition, the Company carried over $272 million related to the registration statement effective on August 4, 1997. As of December 31, 1999, $1.1 billion remained outstanding under this registration statement.
On February 18, 1998, the Company completed two offerings of 988,340 publicly registered Common Shares, which were sold to the public at a price of $50.625 per share. On February 23, 1998, the Company completed an offering of 1,000,000 publicly registered Common Shares, which were sold to the public at a price of $48 per share. The Company received net proceeds from these offerings of approximately $95 million.
On March 30, 1998, the Company completed an offering of 495,663 publicly registered Common Shares, which were sold at a price of $47.9156 per share. The Company received net proceeds of approximately $23.7 million in connection therewith.
On April 29, 1998, the Company completed an offering of 946,565 publicly registered Common Shares, which were sold at a price of $46.5459 per share. The Company received net proceeds of approximately $44.1 million in connection therewith.
On September 20, 1998, the Company completed its repurchase of 2,367,400 of its Common Shares of beneficial interest, on the open market, for an average price of $40 per share. The purchases were made between August 5 and September 17, 1998. The Company paid approximately $94.7 million in connection therewith. These shares were subsequently retired.
During 1999, the Company issued 147,885 Common Shares pursuant to the Employee Share Purchase Plan and received net proceeds of approximately $5.2 million.
During 1999, the Company issued 22,534 Common Shares pursuant to the Share Purchase - DRIP Plan and received net proceeds of approximately $1.0 million.
During 1999, the Company issued 36,132 Common Shares pursuant to the Dividend Reinvestment - DRIP Plan and received net proceeds of approximately $1.5 million.
On October 12, 1999, the Company repurchased and retired 148,453 Common Shares previously issued in connection with the LFT Merger. These Common Shares were owned by various LFT employees and trustees. The Company paid approximately $6.3 million in connection therewith.
DEBT OFFERINGS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
In October 1997, the Operating Partnership issued $150 million of unsecured fixed rate notes (the "2017 Notes") in a public debt offering. The 2017 Notes are due on October 15, 2017 and bear interest at 7.125%, which is payable semiannually in arrears on April 15 and October 15, commencing April 15, 1998. The 2017 Notes are redeemable at any time by the Operating Partnership pursuant to the terms thereof. The Operating Partnership received net proceeds of approximately $147.4 million in connection with this issuance.
In November 1997, the Operating Partnership issued $200 million of unsecured fixed rate notes in a public debt offering. Of the $200 million issued, $150 million of these notes are due November 15, 2001 (the "2001 Notes") and bear interest at a rate of 6.55%, which is payable semiannually in arrears on May 15 and November 15, commencing on May 15, 1998. The remaining $50 million of these notes are due November 15, 2003 (the "2003 Notes") and bear interest at a rate of 6.65%, which is payable semiannually
PART I
in arrears on May 15 and November 15, commencing on May 15, 1998. The Operating Partnership received net proceeds of approximately $198.5 million in connection with the 2001 Notes and the 2003 Notes.
On February 3, 1998, the Operating Partnership filed a Form S-3 Registration Statement to register $1 billion of debt securities. The SEC declared this registration statement effective on February 27, 1998. As of December 31, 1999, $430 million remained outstanding under this registration statement.
In April 1998, the Operating Partnership issued $300 million of unsecured fixed rate notes (the "2015 Notes") in a public debt offering. The 2015 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis. The 2015 Notes are due April 13, 2015. The annual interest rate on the 2015 Notes to April 13, 2005 (the "Remarketing Date") is 6.63%, which is payable semi-annually in arrears on October 13 and April 13, commencing October 13, 1998. The 2015 Notes are subject to mandatory tender to the remarketing agent on the Remarketing Date, at the election of the remarketing dealer and subject to certain limitations. If the remarketing dealer, initially Salomon Brothers Inc., does not purchase all tendered 2015 Notes on the Remarketing Date, or in certain other limited circumstances, the Operating Partnership will be required to repurchase the 2015 Notes at 100% of their principal amount plus accrued interest. If the 2015 Notes are remarketed, the 2015 Notes will bear interest at the rate determined by the remarketing dealer on and after the Remarketing Date. The Operating Partnership received net proceeds of approximately $298.1 million in connection with this issuance. The Operating Partnership also received approximately $8.1 million from the sale of the option to remarket the 2015 Notes on the Remarketing Date, which is being amortized over the term of the 2015 Notes. Prior to the issuance of the 2015 Notes, the Operating Partnership entered into an interest rate protection agreement to effectively fix the interest rate cost of such issuance at the Remarketing Date. The Operating Partnership received a one-time settlement payment from this transaction, which was approximately $0.6 million and is being amortized over seven years.
In August 1998, the Operating Partnership issued $100 million of Remarketed Reset Notes (the "August 2003 Notes") in a public debt offering. The August 2003 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis. The August 2003 Notes are due August 21, 2003. During the period from and including August 21, 1998 to but excluding August 23, 1999 (the "Initial Spread Period") the interest rate on the August 2003 Notes was LIBOR plus 0.45%. The current interest rate for the period from August 23, 1999 to August 22, 2000 is LIBOR plus 0.75%. Beginning August 23, 1999, the Operating Partnership is entitled to redeem the August 2003 Notes on certain dates and in certain circumstances. The Operating Partnership received net proceeds of approximately $99.7 million in connection with this issuance.
In September 1998, the Operating Partnership issued $145 million of unsecured fixed rate notes (the "2000 Notes") in a public debt offering. The 2000 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis. The 2000 Notes are due September 15, 2000. The annual interest rate on the 2000 Notes is 6.15%, which is payable semi-annually in arrears on March 15 and September 15, commencing March 15, 1999. The Operating Partnership received net proceeds of approximately $144.5 million in connection with this issuance.
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 June 2004 Notes were issued at a discount, which is being amortized over the life of the 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 December 23, 1999. The Operating Partnership received net proceeds of approximately $298.0 million in connection with this issuance.
PART I
CREDIT FACILITY
On August 12, 1999 the Company 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 Company's $500 million unsecured revolving credit facility, as well as the $120 million unsecured revolving credit facility which the Company 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. Advances under the credit facility bear interest at variable rates based upon LIBOR available at various interest periods, plus a certain spread dependent upon the Company's credit rating. As of March 7, 2000, $110 million was outstanding under this new facility bearing interest at a weighted average rate of 6.28%.
BUSINESS COMBINATIONS
On May 30, 1997, the Company completed the acquisition of the multifamily property business of Wellsford through the Wellsford Merger. The transaction was valued at approximately $1 billion and included 72 Properties of Wellsford containing 19,004 units. The purchase price consisted of:
- 10.8 million Common Shares issued by the Company with a market value, at the date of closing, of $443.7 million;
- liquidation value of $157.5 million for the following:
a) Wellsford Series A Cumulative Convertible Preferred Shares of Beneficial Interest;
b) Wellsford Series B Cumulative Redeemable Preferred Shares of Beneficial Interest;
- assumption of mortgage indebtedness and unsecured notes in the amount of $345 million;
- assumption of other liabilities of approximately $33.5 million; and
- other merger related costs of approximately $23.4 million.
In the Wellsford Merger, each outstanding common share of beneficial interest of Wellsford was converted into .625 of a Common Share. In addition, Wellsford Series A Cumulative Convertible Preferred Shares of Beneficial Interest were redesignated as the Company's 3,999,800 Series E Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series E Preferred Shares") and Wellsford's Series B Cumulative Redeemable Preferred Shares of Beneficial Interest were redesignated as the Company's 2,300,000 9.65% Series F Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series F Preferred Shares").
On December 23, 1997, the Company completed the acquisition of the multifamily property business of EWR through the EWR Merger. The transaction was valued at approximately $1.2 billion and included 53 Properties of EWR containing 15,331 units and three Properties under construction or expansion containing 953 units. The purchase price consisted of:
- 10.3 million Common Shares issued by the Company with a market value, at the date of closing, of approximately $501.6 million;
- assumption of EWR's minority interest with a market value of approximately $107.3 million;
- assumption of mortgage indebtedness and unsecured notes in the amount of $498 million;
- assumption of other liabilities of approximately $28.2 million; and
- other merger related costs of approximately $16.7 million.
PART I
In the EWR Merger, each outstanding common share of beneficial interest of EWR was converted into .50 of a Common Share.
On October 19, 1998, the Company completed the acquisition of the multifamily property business of MRY through the MRY Merger. The transaction was valued at approximately $2.2 billion and included 108 Properties containing 32,315 units, three Properties under construction and/or expansion anticipated to contain 872 units and six Additional Properties containing 1,297 units that were contributed to six joint ventures. The purchase price consisted of:
- 21.8 million Common Shares issued by the Company with a market value, at the date of closing, of approximately $1 billion;
- liquidation value of $369.1 million for the following:
a) MRY Series A Cumulative Convertible Preferred Shares of Beneficial Interest; b) MRY Series B Cumulative Convertible Preferred Shares of Beneficial Interest; c) MRY Series C Cumulative Convertible Preferred Shares of Beneficial Interest; d) MRY Series D Cumulative Redeemable Preferred Shares of Beneficial Interest; e) MRY Series E Cumulative Redeemable Preferred Shares of Beneficial Interest;
- assumption of MRY's minority interest with a market value of approximately $40.2 million.
- assumption of mortgage indebtedness, unsecured notes and the outstanding balance under a line of credit in the amount of $723.5 million;
- assumption of other liabilities of approximately $46.5 million; and
- other merger related costs of approximately $51.9 million.
In the MRY Merger, each outstanding common share of beneficial interest of MRY was converted into .53 of a Common Share. In addition, MRY spun-off certain assets and liabilities to Merry Land Properties, Inc. ("MRYP Spinco"). In connection with this spin-off, each holder of MRY common shares received one share of MRYP Spinco for each twenty shares of MRY common held. As partial consideration for the transfer, the Company extended a $25 million, one year, non-revolving loan to MRYP Spinco pursuant to a Senior Debt Agreement. As additional consideration, the Company extended an additional $20 million of indebtedness to MRYP Spinco under a 15-year Subordinated Debt Agreement, bearing interest payable quarterly. The Company also entered into the Preferred Stock Agreement and received 5,000 shares of MRYP Spinco Preferred Stock with a liquidation preference of $1,000 per share. In June 1999, MRYP Spinco repaid the entire outstanding Senior Note balance of $18.3 million and the Subordinated Debt Agreement balance of $20.0 million and repurchased all 5,000 shares of the preferred stock for $2.7 million. There is no further obligation by either party in connection with these agreements.
In addition, MRY Series A Cumulative Convertible Preferred Shares of Beneficial Interest were redesignated as the Company's 164,951 Series H Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series H Preferred Shares"), the MRY Series B Cumulative Convertible Preferred Shares of Beneficial Interest were redesignated as the Company's 4,000,000 Series I Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series I Preferred Shares"), the MRY Series C Cumulative Convertible Preferred Shares of Beneficial Interest were redesignated as the Company's 4,599,400 Series J Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series J Preferred Shares"), the MRY Series D Cumulative Redeemable Preferred Shares of Beneficial Interest were redesignated as the Company's 1,000,000 Series K Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series K Preferred Shares") and the MRY Series E Cumulative Redeemable Preferred Shares of Beneficial Interest were redesignated as the Company's 4,000,000 Series L Cumulative Redeemable Preferred Shares of
PART I
Beneficial Interest, $0.01 par value per share (the "Series L Preferred Shares"). During 1999, all of the Series I Preferred Shares were converted into 2,566,797 Common Shares of the Company.
On August 23, 1999, the Company sold its entire interest in the six joint venture properties to MRYP Spinco and received $54.1 million. There is no further obligation by either party in connection with the joint venture agreements.
On October 1, 1999, the Company completed the acquisition of the multifamily property business of LFT through the LFT Merger. The transaction was valued at approximately $738 million and included 402 Properties of LFT containing 36,609 units. The purchase price consisted of:
- 4.0 million Common Shares issued by the Company with a market value, at the date of closing, of approximately $181.1 million;
- assumption of mortgage indebtedness and unsecured notes in the amount of $528.3 million;
- acquisition of other assets of approximately $40.9 million and assumption of other liabilities of approximately $25.3 million; and
- other merger related costs of approximately $24.5 million.
In the LFT Merger, each outstanding common share of beneficial interest of LFT was converted into .463 of a Common Share.
RECENT TRANSACTIONS
On January 14, 2000, the Company entered into an agreement to acquire, in an all cash and debt transaction, Globe Business Resources, Inc. ("Globe"), one of the nation's largest providers of temporary corporate housing and furniture rental. The shareholders of Globe will receive $13.00 per share upon closing and up to an additional $0.50 per share post closing, upon final determination of costs, if any, relating to any potential breaches of certain representations and covenants. At full funding of $13.50 per share, the Company would pay approximately $64.8 million in cash for Globe. In addition, the Company will assume approximately $69.4 million in debt. The acquisition, which is expected to close during the second quarter of 2000, requires Globe shareholder approval.
From January 1, 2000 through March 3, 2000, the Company acquired Windmont Apartments, a 178-unit property located in Atlanta, GA from an unaffiliated party for a total purchase price of approximately $10.3 million.
From January 1, 2000 through March 3, 2000, the Company disposed of six Properties for a total sales price of $46.7 million.
On March 3, 2000, Lexford Properties, L.P., a wholly-owned subsidiary of the Operating Partnership, issued 1.1 million units of 8.50% Series B Cumulative Convertible Redeemable Preference Units with an equity value of $55.0 million. Lexford Properties, L.P. received $53.6 million in net proceeds from this transaction. The liquidation value of these units is $50 per unit. The 1.1 million units are exchangeable into 1.1 million shares of 8.50% Series M-1 Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company. The Series M-1 Preferred Shares are not convertible to EQR Common Shares. Dividends for the Series B Preference Units or the Series M-1 Preferred Shares are payable quarterly at the rate of $4.25 per unit/share per year. The net proceeds received from this transaction will be used for scheduled mortgage and line of credit repayments.
PART I
COMPETITION
All of the Properties are located in developed areas that include other multifamily properties. The number of competitive multifamily properties in a particular area could have a material effect on the Company's ability to lease units at the Properties or at any newly acquired properties and on the rents charged. The Company may be competing with other entities that have greater resources than the Company and whose managers have more experience than the Company's officers and trustees. In addition, other forms of multifamily properties, including multifamily properties and manufactured housing controlled by Mr. Zell, and single-family housing, provide housing alternatives to potential residents of multifamily properties.
RISK FACTORS
THE FOLLOWING RISK FACTORS OMIT THE USE OF DEFINED TERMS USED ELSEWHERE HEREIN AND CONTAIN DEFINED TERMS THAT ARE DIFFERENT FROM THOSE USED IN THE OTHER SECTIONS OF THIS REPORT. UNLESS OTHERWISE INDICATED, WHEN USED IN THIS SECTION, THE TERMS "WE" AND "US" REFER TO EQUITY RESIDENTIAL PROPERTIES TRUST AND ITS SUBSIDIARIES, INCLUDING ERP OPERATING LIMITED PARTNERSHIP.
Set forth below are the risks that we believe are important to investors who purchase or own our common shares of beneficial interest or preferred shares of beneficial interest (which we refer to collectively as "Shares") or units of limited partnership interest ("Units") of ERP Operating Limited Partnership, our operating partnership, which are redeemable on a one-for-one basis for common shares or their cash equivalent. In this section, we refer to the Shares and the Units together as our "securities," and the investors who own Shares and/or Units as our "security holders."
DEBT FINANCING AND PREFERRED SHARES COULD ADVERSELY AFFECT OUR PERFORMANCE
GENERAL
As of December 31, 1999, certain of our multifamily properties were subject to approximately $2.9 billion of mortgage indebtedness and our total debt equaled approximately $5.5 billion. Of our total debt outstanding, $700.9 million (including the balance of $300 million outstanding on our $700 million unsecured line of credit) was floating rate debt, and $965.8 million was issued at tax exempt rates. In addition to debt, we have issued preferred shares of beneficial interest. Our use of debt and preferred equity financing creates certain risks, including the following.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
In the future, our cash flow could be insufficient to meet required payments of principal and interest or to pay distributions on our securities at expected levels. We may not be able to refinance existing debt (which in virtually all cases requires substantial principal payments at maturity) and, if we can, the terms of such refinancing might not be as favorable as the terms of existing indebtedness. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt. As a result, we may be forced to postpone capital expenditures necessary for the maintenance of our properties and may have to dispose of one or more properties on terms that would otherwise be unacceptable to us.
FINANCIAL COVENANTS COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL CONDITION
If a property we own is mortgaged to secure payment of indebtedness and we are unable to meet
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the mortgage payments, the holder of the mortgage could foreclose on the property, resulting in loss of income and asset value. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations. A foreclosure could also result in our recognition of taxable income without our actually receiving cash proceeds from the disposition of the property with which to pay the tax. This could adversely affect our cash flow and could make it more difficult for us to meet our distribution requirements as a real estate investment trust (a "REIT").
The mortgages on our properties contain customary negative covenants that, among other things, limit our ability, without the prior consent of the lender, to further mortgage the property and to discontinue insurance coverage. In addition, our credit facilities contain certain customary restrictions, requirements and other limitations on our ability to incur indebtedness. The indentures under which a substantial portion of our debt was issued contain certain financial and operating covenants including, among other things, maintenance of certain financial ratios, as well as limitations on our ability to incur secured and unsecured indebtedness (including acquisition financing), sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these restrictions, our ability to acquire additional properties may be limited. If we are unable to acquire additional properties, our ability to increase the distributions to security holders, as we have done in the past, will be limited to management's ability to increase funds from operations, and thereby cash available for distributions, from the existing properties in our portfolio at such time.
Some of the properties were financed with tax-exempt bonds that contain certain restrictive covenants or deed restrictions. We have retained an independent outside consultant to monitor compliance with the restrictive covenants and deed restrictions that affect these properties. If these bond compliance requirements require us to lower our rental rates to attract low or moderate income tenants, or eligible/qualified tenants, then our income from these properties may be limited.
OUR DEGREE OF LEVERAGE COULD LIMIT OUR ABILITY TO OBTAIN ADDITIONAL FINANCING
Our debt to market capitalization ratio (total debt as a percentage of total debt plus the market value of the outstanding common and preferred shares and units) was approximately 42.75% as of December 31, 1999. We have a policy of incurring indebtedness for borrowed money only through the Operating Partnership and its subsidiaries and only if upon such incurrence our debt to market capitalization ratio would be approximately 50% or less. Our degree of leverage could have important consequences to security holders. For example, the degree of leverage could affect our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes, making us more vulnerable to a downturn in business or the economy generally.
RISING INTEREST RATES COULD ADVERSELY AFFECT CASH FLOW
Advances under our credit facility bear interest at variable rates based upon LIBOR available at various interest periods, plus a certain spread dependent upon the Company's credit rating. Certain of our senior unsecured debt instruments also, from time to time, bear interest at floating rates. We may also borrow additional money with variable interest rates in the future. Increases in interest rates would increase our interest expenses under these debt instruments and would increase the costs of refinancing existing indebtedness and of issuing new debt. Accordingly, higher interest rates would adversely affect cash flow and our ability to service our debt and to make distributions to security holders.
PART I
CONTROL AND INFLUENCE BY SIGNIFICANT SHAREHOLDERS COULD BE EXERCISED IN A MANNER ADVERSE TO OTHER SHAREHOLDERS
GENERAL
As of March 1, 2000, (1) Samuel Zell and certain of the current holders of Units issued to affiliates of Mr. Zell, who contributed 33 properties to us at the time of our initial public offering, owned in the aggregate approximately 2.85% of our common shares (Mr. Zell and these affiliates are described herein as the "Zell Original Owners"); (2) certain entities controlled by Starwood Capital Partners LP ("Starwood") and its affiliates, who contributed 23 properties to us at the time of our initial public offering, owned less than 1% of our common shares; and (3) our executive officers and trustees, excluding Mr. Zell (see disclosure above), owned approximately 4.37% of our common shares. These percentages assume all options are exercised for common shares and all Units are converted to common shares. In addition, the consent of certain affiliates of Mr. Zell and Starwood is required for certain amendments to the Fifth Amended and Restated ERP Operating Limited Partnership Agreement of Limited Partnership (the "Partnership Agreement"). As a result of their security ownership and rights concerning amendments to the Partnership Agreement, Mr. Zell and the Starwood owners may have substantial influence over the Company. Although these security holders have not agreed to act together on any matter, they would be in a position to exercise even more influence over the Company's affairs if they were to act together in the future. This influence might be exercised in a manner that is inconsistent with the interests of other security holders.
MR. ZELL AND OTHERS ARE EXEMPT FROM THE 5% OWNERSHIP LIMIT GENERALLY APPLICABLE TO SECURITIES HOLDERS
In order to maintain its qualification as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), not more than 50% of the value of the outstanding Shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities). To assure compliance with this test, our Declaration of Trust restricts the ownership of more than 5% of the lesser of the number or value of the outstanding Shares by any single security holder, subject to certain exceptions. These restrictions do not apply to the ownership of common shares that may be acquired by the holders of Units issued to the Zell Original Owners and the Starwood owners. Additionally, our Declaration of Trust exempts any transferees of such common shares from the 5% ownership limit, provided such transfers do not result in an increased concentration in the ownership.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY
Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at such property. The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site.
Environmental laws also govern the presence, maintenance and removal of asbestos. These laws require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, that they notify and train those who may come into contact with asbestos and that they
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undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.
Substantially all of our properties have been the subject of environmental assessments completed by qualified independent environmental consultant companies. These environmental assessments have not revealed, nor are we aware of, any environmental liability that our management believes would have a material adverse effect on our business, results of operations, financial condition or liquidity.
We cannot assure you that existing environmental assessments of our properties reveal all environmental liabilities, that any prior owner of any of our properties did not create a material environmental condition not known to us, or that a material environmental condition does not otherwise exist as to any one or more of our properties.
OUR PERFORMANCE AND SHARE VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY
GENERAL
Real property investments are subject to varying degrees of risk and are relatively illiquid. Several factors may adversely affect the economic performance and value of our properties. These factors include changes in the national, regional and local economic climate, local conditions such as an oversupply of multifamily properties or a reduction in demand for our multifamily properties, the attractiveness of our properties to tenants, competition from other available multifamily property owners and changes in market rental rates. Our performance also depends on our ability to collect rent from tenants and to pay for adequate maintenance, insurance and other operating costs, including real estate taxes, which could increase over time. Also, the expenses of owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE
When our tenants decide not to renew their leases upon expiration, we may not be able to relet their space. Even if the tenants do renew or we can relet the space, the terms of renewal or reletting may be less favorable than current lease terms. If we are unable to promptly renew the leases or relet the space, or if the rental rates upon renewal or reletting are significantly lower than expected rates, then our results of operations and financial condition will be adversely affected. Consequently, our cash flow and ability to service debt and make distributions to security holders would be reduced.
NEW ACQUISITIONS OR DEVELOPMENTS MAY FAIL TO PERFORM AS EXPECTED AND COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED PRICES FOR PROPERTIES
We intend to continue to actively acquire or develop multifamily properties. Newly acquired or developed properties may fail to perform as expected. We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position or to develop a property. Additionally, we expect that other major real estate investors with significant capital will compete with us for attractive investment opportunities. This competition has increased prices for multifamily properties. We may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms.
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BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID, WE MAY NOT BE ABLE TO SELL PROPERTIES WHEN APPROPRIATE
Real estate investments generally cannot be sold quickly. We may not be able to vary our portfolio promptly in response to economic or other conditions. This inability to respond promptly to changes in the performance of our investments could adversely affect our financial condition and ability to make distributions to our security holders.
CHANGES IN LAWS COULD AFFECT OUR BUSINESS
We are generally not able to pass through to our tenants under existing leases increases in real estate taxes, income taxes and service or other taxes. Consequently, any such increases may adversely affect our financial condition and limit our ability to make distributions to our security holders. Similarly, changes that increase our potential liability under environmental laws or our expenditures on environmental compliance would adversely affect our cash flow and ability to make distributions on our securities.
SHAREHOLDERS' ABILITY TO EFFECT CHANGES IN CONTROL OF THE COMPANY IS LIMITED
PROVISIONS OF OUR DECLARATION OF TRUST AND BYLAWS COULD INHIBIT CHANGES IN CONTROL
Certain provisions of our Declaration of Trust and Bylaws may delay or prevent a change in control of the Company or other transactions that could provide the security holders with a premium over the then-prevailing market price of their securities or which might otherwise be in the best interest of our security holders. These include a staggered Board of Trustees and the 5% Ownership Limit described below. See "--We Have a Share Ownership Limit for REIT Tax Purposes." Also, any future series of preferred shares of beneficial interest may have certain voting provisions that could delay or prevent a change of control or other transactions that might otherwise be in the interest of our security holders.
WE HAVE A SHARE OWNERSHIP LIMIT FOR REIT TAX PURPOSES
To remain qualified as a REIT for federal income tax purposes, not more than 50% in value of our outstanding Shares may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of any year. To facilitate maintenance of our REIT qualification, our Declaration of Trust, subject to certain exceptions, prohibits ownership by any single shareholder of more than 5% of the lesser of the number or value of the outstanding class of common or preferred shares. See "--Control and Influence by Significant Shareholders--Mr. Zell and Others are Exempt from the 5% Ownership Limit Generally Applicable to Securities Holders." We refer to this restriction as the "Ownership Limit." Absent any exemption or waiver, securities acquired or held in violation of the Ownership Limit will be transferred to a trust for the exclusive benefit of a designated charitable beneficiary, and the security holder's rights to distributions and to vote would terminate. A transfer of Shares may be void if it causes a person to violate the Ownership Limit. The Ownership Limit could delay or prevent a change in control and, therefore, could adversely affect our security holders' ability to realize a premium over the then-prevailing market price for their Shares.
OUR PREFERRED SHARES OF BENEFICIAL INTEREST MAY AFFECT CHANGES IN CONTROL
Our Declaration of Trust authorizes the Board of Trustees to issue up to 100 million preferred shares of beneficial interest, and to establish the preferences and rights (including the right to vote and the right to convert into common shares) of any preferred shares issued. The Board of Trustees may use its powers to issue preferred shares and to set the terms of such securities to delay or prevent a change in control of the Company, even if a change in
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control were in the interest of security holders. As of December 31, 1999, 25,085,652 preferred shares were issued and outstanding.
INAPPLICABILITY OF MARYLAND LAW LIMITING CERTAIN CHANGES IN CONTROL
Certain provisions of Maryland law applicable to real estate investment trusts prohibit "business combinations" (including certain issuances of equity securities) with any person who beneficially owns ten percent or more of the voting power of outstanding securities, or with an affiliate who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the trust's outstanding voting securities (an "Interested Shareholder"), or with an affiliate of an Interested Shareholder. These prohibitions last for five years after the most recent date on which the Interested Shareholder became an Interested Shareholder. After the five-year period, a business combination with an Interested Shareholder must be approved by two super-majority shareholder votes unless, among other conditions, the trust's holders of common shares receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Shareholder for its common shares. As permitted by Maryland law, however, the Board of Trustees of the Company has opted out of these restrictions with respect to any business combination involving the Zell Original Owners and persons acting in concert with any of the Zell Original Owners. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to a business combination involving us and any of them. Such business combinations may not be in the best interest of our security holders.
OUR SUCCESS AS A REIT IS DEPENDENT ON COMPLIANCE WITH FEDERAL INCOME TAX REQUIREMENTS
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE CONSEQUENCES TO OUR SECURITY HOLDERS
We believe that we have qualified for taxation as a REIT for federal income tax purposes since our taxable year ended December 31, 1992. We plan to continue to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. We cannot, therefore, guarantee that we have qualified or will qualify in the future as a REIT. The determination that we are a REIT requires an analysis of various factual matters that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must come from sources that are itemized in the REIT tax laws. We are also required to distribute to security holders at least 95% of our REIT taxable income excluding capital gains. The fact that we hold our assets through ERP Operating Limited Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT. We do not believe, however, that any pending or proposed tax law changes would jeopardize our REIT status.
If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates. Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first failed to qualify. If we fail to qualify as a REIT, we would have to pay significant income taxes. We, therefore, would have less money available for investments or for distributions to security holders. This would likely have a significant adverse affect on the value of our securities. In addition, we would no longer be required to make any distributions to security holders.
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WE COULD BE DISQUALIFIED AS A REIT OR HAVE TO PAY TAXES IF OUR MERGER PARTNERS DID NOT QUALIFY AS REIT'S
If any of our recent merger partners had failed to qualify as a REIT throughout the duration of their existence, then they might have had undistributed "C corporation earnings and profits" at the time of their merger with us. If that was the case and we did not distribute those earnings and profits prior to the end of the year in which the merger took place, we might not qualify as a REIT. We believe that each of our merger partners qualified as a REIT and that, in any event, none of them had any undistributed "C corporation earnings and profits" at the time of their merger with us. If any of our merger partners failed to qualify as a REIT, an additional concern would be that they would have recognized taxable gain at the time they were merged with us. We would be liable for the tax on such gain. In this event, we would have to pay corporate income tax on any gain existing at the time of the applicable merger on assets acquired in the merger if the assets are sold within ten years of the merger. Finally, we could be precluded from electing REIT status for up to four years after the year in which the predecessor entity failed to qualify for REIT status.
OTHER TAX LIABILITIES
Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our income and property. In addition, our third-party management operations, which are conducted through subsidiaries, generally will be subject to federal income tax at regular corporate rates.
WE DEPEND ON OUR KEY PERSONNEL
We depend on the efforts of the Chairman of our Board of Trustees, Samuel Zell, and our executive officers, particularly Douglas Crocker II and Gerald A. Spector. If they resign, our operations could be temporarily adversely effected. Mr. Crocker and Mr. Spector have entered into Deferred Compensation Agreements with the Company which provide both with a salary benefit after their respective termination of employment with the Company. In addition, Mr. Zell, Mr. Crocker and Mr. Spector have entered into Noncompetition Agreements with the Company.
COMPLIANCE WITH REIT DISTRIBUTION REQUIREMENTS MAY AFFECT OUR FINANCIAL CONDITION
DISTRIBUTION REQUIREMENTS MAY INCREASE THE INDEBTEDNESS OF THE COMPANY
We may be required from time to time, under certain circumstances, to accrue as income for tax purposes interest and rent earned but not yet received. In such event, or upon our repayment of principal on debt, we could have taxable income without sufficient cash to enable us to meet the distribution requirements of a REIT. Accordingly, we could be required to borrow funds or liquidate investments on adverse terms in order to meet these distribution requirements.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
Because of our annual REIT distribution requirements, we may not be able to fund all future capital needs, including for acquisitions and developments, from income generated by operations and the disposition of certain assets. We therefore may have to rely on third-party sources of capital, which may or may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of things, including the market's perception of our growth potential and our current and potential future earnings. Moreover, additional equity offerings, if pursued, may result in dilution of security holders' interests, and additional debt financing may increase our leverage.
PART I
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes all of the federal income tax considerations material to a holder of common shares. It is not exhaustive of all possible tax considerations. For example, it does not give a detailed discussion of any state, local or foreign tax considerations. The following discussion also does not address all tax matters that may be relevant to prospective shareholders in light of their particular circumstances. Moreover, it does not address all tax matters that may be relevant to shareholders who are subject to special treatment under the tax laws, such as insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations and persons who are not citizens or residents of the United States.
The specific tax attributes of a particular shareholder could have a material impact on the tax considerations associated with the purchase, ownership and disposition of common shares. Therefore, it is essential that each prospective shareholder consult with his or her own tax advisors with regard to the application of the federal income tax laws to the shareholder's personal tax situation, as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.
OUR TAXATION
We elected REIT status beginning with the year that ended December 31, 1992. In any year in which we qualify as a REIT, we generally will not be subject to federal income tax on the portion of our REIT taxable income or capital gain that we distribute to our shareholders. This treatment substantially eliminates the double taxation that applies to most corporations, which pay a tax on their income and then distribute dividends to shareholders who are in turn taxed on the amount they receive. However, we will be subject to federal income tax at regular corporate rates upon our REIT taxable income or capital gain that we do not distribute to our shareholders. We also may be subject to the corporate "alternate minimum tax" on items of preference under this alternative tax regime. In addition, we will be subject to a 4% excise tax if we do not satisfy specific REIT distribution requirements. Moreover, we may be subject to taxes in certain situations and on certain transactions that we do not presently contemplate.
If we fail to qualify for taxation as a REIT in any taxable year, we will be subject to tax on our taxable income at regular corporate rates. We also may be subject to the corporate "alternate minimum tax." As a result, our failure to qualify as a REIT would significantly reduce the cash we have available to distribute to our shareholders. Unless entitled to statutory relief, we would be disqualified from qualification as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether we would be entitled to statutory relief.
Our qualification and taxation as a REIT depend on our ability to satisfy various requirements under the Internal Revenue Code. We are required to satisfy these requirements on a continuing basis through actual annual operating and other results. These requirements relate to the sources of our gross income, the composition of our assets, the amount of dividends we pay to shareholders, the diversity of our share ownership, and other aspects of our operations. The purpose of these requirements is to allow the tax benefit of REIT status only to companies that:
(a) primarily own, and primarily derive income from, real estate-related assets and certain other assets which are passive in nature, and
(b) distribute 95% of the taxable income, computed without regard to net capital gain, to shareholders.
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On December 17, 1999, as part of a larger bill, the President signed into law the REIT Modernization Act ("RMA"). Effective beginning January 1, 2001, the RMA will amend the tax rules relating to the composition of a REIT's assets. Under current law, a REIT is precluded from owning more than 10% of the outstanding voting securities of any one issuer, other than a wholly owned subsidiary or another REIT. Beginning in 2001, a REIT will remain subject to the current restriction and be precluded from owning more than 10% of the value of all classes of any one issuer.
There is an exception to this prohibition. A REIT will be allowed to own up to 100% of the securities of a taxable REIT subsidiary ("TRS") that can provide services to REIT tenants and others without disqualifying the rents that a REIT receives from its tenants. However, no more than 20% of the value of a REIT's total assets can be represented by securities of one or more TRS. The amount of debt and rental payments from a TRS to a REIT will be limited to ensure that a TRS is subject to an appropriate level of corporate tax. The new 10% asset test will not apply to certain arrangements (including third party subsidiaries) in place on July 12, 1999, provided that a subsidiary does not engage in a "substantial" new line of business, its existing business does not increase, and a REIT does not acquire any new securities in the subsidiary. Under the RMA, a third party subsidiary will be able to convert tax free into a TRS.
In addition to the above legislative changes, effective January 1, 2001, the distribution of taxable income requirement of a REIT will be reduced from 95% to 90%. Further, effective January 1, 2001, the 15% personal property test (which generally requires that the adjusted basis of a REIT's personal property not exceed 15% of its real and personal property in order for income to be considered rents from real property) will be based on fair market values instead of adjusted tax basis.
We believe that we have qualified as a REIT for all of our taxable years beginning with 1992. We also believe that our current structure and method of operation is such that we will continue to qualify as a REIT. However, we cannot guarantee that the actual results of our operations have satisfied or will satisfy the requirements under the Internal Revenue Code.
Piper, Marbury, Rudnick & Wolfe, our special tax counsel, will provide an opinion to the effect that we were organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code for each of our taxable years beginning in 1992. The opinion will also provide that our current organization and method of operation should enable us to continue to meet the requirements for qualification and taxation as a REIT. It must be emphasized that the opinion will be based on various assumptions and factual representations relating to our organization and our prior and expected operations. In each case, these representations include representations about our predecessors. Piper, Marbury, Rudnick & Wolfe will not review our compliance with these requirements on a continuing basis.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
General. If we qualify as a REIT, distributions made to our taxable domestic shareholders with respect to their common shares, other than capital gain distributions, will be treated as ordinary income to the extent that the distributions come out of earnings and profits. These distributions will not be eligible for the dividends received deduction for shareholders that are corporations. In determining whether distributions are out of earnings and profits, we will allocate our earnings and profits first to preferred shares and second to the common shares. We cannot guarantee that we will have sufficient earnings and profits to cover distributions on the preferred shares.
To the extent we make distributions to our taxable domestic shareholders in excess of our earnings and profits, such distributions will be considered a return of capital. Such distributions will be
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treated as a tax free distribution and will reduce the tax basis of a shareholder's common shares by the amount of the distribution so treated. To the extent that such distributions cumulatively exceed a taxable domestic shareholder's tax basis, such distributions are taxable as a gain from the sale of his shares. Shareholders may not include in their individual income tax returns any of our net operating losses or capital losses.
Distributions made by us that we properly designate as capital gain dividends will be taxable to taxable domestic shareholders as gain from the sale or exchange of a capital asset held for more than one year. This treatment applies only to the extent that the designated distributions do not exceed our actual net capital gain for the taxable year. It applies regardless of the period for which a domestic shareholder has held his or her common shares. Despite this general rule, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income.
Generally, we will classify a portion of our designated capital gains dividend as a 20% rate gain distribution and the remaining portion as an unrecaptured Section 1250 gain distribution. As the names suggest, a 20% rate gain distribution would be taxable to taxable domestic shareholders that are individuals, estates or trusts at a maximum rate of 20%. An unrecaptured Section 1250 gain distribution would be taxable to taxable domestic shareholders that are individuals, estates or trusts at a maximum rate of 25%.
If, for any taxable year, we elect to designate as capital gain dividends any portion of the dividends paid or made available for the year to holders of all classes of shares of beneficial interest, then the portion of the capital gains dividends that will be allocable to the holders of common shares will be the total capital gain dividends multiplied by a fraction. The numerator of the fraction will be the total dividends paid or made available to the holders of the common shares for the year. The denominator of the fraction will be the total dividends paid or made available to holders of all classes of shares of beneficial interest.
In general, a shareholder will recognize gain or loss for federal income tax purposes on the sale or other disposition of common shares in an amount equal to the difference between:
(a) the amount of cash and the fair market value of any property received in the sale or other disposition, and
(b) the shareholder's adjusted tax basis in the common shares.
The gain or loss will be capital gain or loss if the common shares were held as a capital asset. Generally, the capital gain or loss will be long-term capital gain or loss if the common shares were held for more than one year. The Taxpayer Relief Act of 1997 allows the IRS to issue regulations relating to the manner in which capital gain rates will apply to sales of capital assets by REIT's and to sales of interests in REIT's. The IRS has not issued these regulations. However, if the IRS does issue these regulations, they could affect the taxation of gain and loss realized on the disposition of common shares. Shareholders are urged to consult with their own tax advisors with respect to the rules contained in the Taxpayer Relief Act.
In general, a loss recognized by a shareholder upon the sale of common shares that were held for six months or less, determined after applying certain holding period rules, will be treated as long-term capital loss to the extent that the shareholder received distributions that were treated as long-term capital gains. For shareholders who are individuals, trusts and estates, the long-term capital loss will be apportioned among the applicable long-term capital gain rates to the extent that distributions received by the shareholder were previously so treated.
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We may elect to retain (rather than distribute as is generally required) net capital gain for a taxable year and pay the income tax on that gain. If we make this election, shareholders must include in income, as long-term capital gain, their proportionate share of the undistributed net capital gain. Shareholders will be treated as having paid their proportionate share of the tax paid by us on these gains. Accordingly, they will receive a credit or refund for the amount. Shareholders will increase the basis in their common shares by the difference between the amount of capital gain included in their income and the amount of the tax they are treated as having paid. Our earnings and profits will be adjusted appropriately.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt organizations are not subject to federal income tax except to the extent of their unrelated business taxable income, which is often referred to as UBIT. Unless a tax-exempt shareholder holds its common shares as debt financed property or uses the common shares in an unrelated trade or business, distributions to the shareholder should not constitute UBIT. Similarly, if a tax-exempt shareholder sells common shares, the income from the sale should not constitute UBIT unless the shareholder held the shares as debt financed property or used the shares in a trade or business.
However, for tax-exempt shareholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans, income from owning or selling common shares will constitute UBIT unless the organization is able to properly deduct amounts set aside or placed in reserve so as to offset the income generated by its investment in common shares. These shareholders should consult their own tax advisors concerning these set aside and reserve requirements which are set forth in the Internal Revenue Code.
In addition, certain pension trusts that own more than 10% of a pension-held REIT must report a portion of the distributions that they receive from the REIT as UBIT. We have not been and do not expect to be treated as a pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN SHAREHOLDERS
The following is a discussion of certain anticipated United States federal income tax consequences of the ownership and disposition of common shares applicable to a foreign shareholder. It is based on current law and is for general information only. A "foreign shareholder" is any person other than:
(a) a citizen or resident of the United States,
(b) a corporation or partnership created or organized in the United States or under the laws of the United States or of any state thereof, or
(c) an estate or trust whose income is includable in gross income for United States federal income tax purposes regardless of its source.
Distributions by Us. Distributions by us to a foreign shareholder that are neither attributable to gain from sales or exchanges by us of United States real property interests nor designated by us as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of our earnings and profits. These distributions ordinarily will be subject to withholding of United States federal income tax on a gross basis at a 30% rate, or a lower treaty rate, unless the dividends are treated as effectively connected with the conduct by the foreign shareholder of a United States trade or business. Please note that under certain treaties lower withholding rates generally applicable to dividends do not apply to dividends from REIT's. Dividends that are effectively connected with a United States trade or business will be subject to tax on a net basis at graduated rates, and are generally not subject to
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withholding. Certification and disclosure requirements must be satisfied before a dividend is exempt from withholding under this exemption. A foreign shareholder that is a corporation also may be subject to an additional branch profits tax at a 30% rate or a lower treaty rate.
We expect to withhold United States income tax at the rate of 30% on any distributions made to a foreign shareholder unless:
(a) a lower treaty rate applies and any required form or certification evidencing eligibility for that reduced rate is filed with us, or
(b) the foreign shareholder files an IRS Form 4224 with us claiming that the distribution is effectively connected income.
A distribution in excess of our current or accumulated earnings and profits will not be taxable to a foreign shareholder to the extent that the distribution does not exceed the adjusted basis of the shareholder's common shares. Instead, the distribution will reduce the adjusted basis of the common shares. To the extent that the distribution exceeds the adjusted basis of the common shares, it will give rise to gain from the sale or exchange of the shareholder's common shares. The tax treatment of this gain is described below.
As a result of a legislative change made by the Small Business Job Protection Act of 1996, it appears that we will be required to withhold 10% of any distribution in excess of our earnings and profits. Consequently, although we intend to withhold at a rate of 30%, or a lower applicable treaty rate, on the entire amount of any distribution, to the extent that we do not do so, distributions will be subject to withholding at a rate of 10%. However, a foreign shareholder may seek a refund of the withheld amount from the IRS if it subsequently determined that the distribution was, in fact, in excess of our earnings and profits, and the amount withheld exceeded the foreign shareholder's United States tax liability with respect to the distribution.
Distributions to a foreign shareholder that we designate at the time of the distributions as capital gain dividends, other than those arising from the disposition of a United States real property interest, generally will not be subject to United States federal income taxation unless:
(a) the investment in the common shares is effectively connected with the foreign shareholder's United States trade or business, in which case the foreign shareholder will be subject to the same treatment as domestic shareholders, except that a shareholder that is a foreign corporation may also be subject to the branch profits tax, as discussed above, or
(b) the foreign shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains.
Under the Foreign Investment in Real Property Tax Act, which is known as FIRPTA, distributions to a foreign shareholder that are attributable to gain from sales or exchanges of United States real property interests will cause the foreign shareholder to be treated as recognizing the gain as income effectively connected with a United States trade or business. This rule applies whether or not a distribution is designated as a capital gain dividend. Accordingly, foreign shareholders generally would be taxed on these distributions at the same rates applicable to U.S. shareholders, subject to a special alternative minimum tax in the case of nonresident alien individuals. In addition, a foreign corporate shareholder might be subject to the branch profits tax discussed above. We are required to withhold 35% of these distributions. The withheld amount can be credited against the foreign shareholder's United States federal income tax liability.
PART I
Although the law is not entirely clear on the matter, it appears that amounts we designate as undistributed capital gains in respect of the common shares held by U.S. shareholders would be treated with respect to foreign shareholders in the same manner as actual distributions of capital gain dividends. Under that approach, foreign shareholders would be able to offset as a credit against the United States federal income tax liability their proportionate share of the tax paid by us on these undistributed capital gains. In addition, foreign shareholders would be able to receive from the IRS a refund to the extent their proportionate share of the tax paid by us were to exceed their actual United States federal income tax liability.
SALES OF COMMON SHARES. Gain recognized by a foreign shareholder upon the sale or exchange of common shares generally will not be subject to United States taxation unless the shares constitute a "United States real property interest" within the meaning of FIRPTA. The common shares will not constitute a United States real property interest so long as we are a domestically controlled REIT. A domestically controlled REIT is a REIT in which at all times during a specified testing period less than 50% in value of its stock is held directly or indirectly by foreign shareholders. We believe that we are a domestically controlled REIT. Therefore, we believe that the sale of common shares will not be subject to taxation under FIRPTA. However, because common shares and preferred shares are publicly traded, we cannot guarantee that we will continue to be a domestically controlled REIT. In any event, gain from the sale or exchange of common shares not otherwise subject to FIRPTA will be taxable to a foreign shareholder if either:
(a) the investment in the common shares is effectively connected with the foreign shareholder's United States trade or business, in which case the foreign shareholder will be subject to the same treatment as domestic shareholders with respect to the gain, or
(b) the foreign shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a tax home in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains.
Even if we do not qualify as or cease to be a domestically controlled REIT, gain arising from the sale or exchange by a foreign shareholder of common shares still would not be subject to United States taxation under FIRPTA as a sale of a United States real property interest if:
(a) the class or series of shares being sold is "regularly traded," as defined by applicable IRS regulations, on an established securities market such as the New York Stock Exchange, and
(b) the selling foreign shareholder owned 5% or less of the value of the outstanding class or series of shares being sold throughout the five-year period ending on the date of the sale or exchange.
If gain on the sale or exchange of common shares were subject to taxation under FIRPTA, the foreign shareholder would be subject to regular United States income tax with respect to the gain in the same manner as a taxable U.S. shareholder, subject to any applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals and the possible application of the branch profits tax in the case of foreign corporations. The purchaser of the common shares would be required to withhold and remit to the IRS 10% of the purchase price.
OTHER TAX CONSIDERATIONS
CLINTON ADMINISTRATION PROPOSAL. The Clinton Administration's fiscal year 2001 budget proposal was announced on February 1, 2000. One part of the proposed budget would amend the tax rules relating to the distribution of a REIT's income. Under current law, a REIT is required to distribute
PART I
at least 85% of its ordinary income and 95% of its capital gains during a taxable year in order to avoid a 4% excise tax on the undistributed amount. Under the Clinton Administration proposal, a REIT would be required to distribute 98% of both ordinary income and capital gain net income to avoid the excise tax. If this proposal were enacted, it would be effective for calendar years beginning after December 31, 2000.
As in previous Clinton Administration proposals, the administration proposes a "closely held REIT" ownership test, under which no "person" (i.e., a corporation, partnership or trust, including a pension or profit sharing trust) could own stock of a REIT possessing 50% or more of the total combined voting power of all classes of voting stock or 50% or more of the total value of shares of all classes of stock. This 2001 proposal contains an exception for REIT's owning more than 50% of another REIT. Further, there is a newly proposed "limited look-through rule" for partnerships that own REIT's. There is no exception for publicly traded REIT's. This proposal, if enacted, would be effective for entities electing REIT status for taxable years beginning on or after the date of first committee action (an entity that has elected REIT status prior to this date will avoid these restrictions so long as it has sufficient business assets or activities as of such date). It is presently uncertain whether these REIT proposals, or any other proposals regarding REIT's, will be enacted.
OUR MANAGEMENT COMPANY AND OTHER SUBSIDIARIES. A small portion of the cash to be used by the Operating Partnership to fund distributions to us is expected to come from payments of dividends on non-voting stock of management companies and other companies held by the Operating Partnership. These companies pay federal and state income tax at the full applicable corporate rates. They will attempt to minimize the amount of these taxes, but we cannot guarantee whether or the extent to, which measures taken to minimize these taxes, will be successful. To the extent that these companies are required to pay taxes, the cash available for distribution from these management companies by us to shareholders will be reduced accordingly.
STATE AND LOCAL TAXES. We and our shareholders may be subject to state or local taxation in various jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of us and our shareholders may not conform to the federal income tax consequence discussed above. Consequently, prospective shareholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in common shares.
PART I
ITEM 2.
ITEM 2. THE PROPERTIES
As of December 31, 1999, the Company owned or had interests in a portfolio of 1,062 multifamily Properties located in 35 states containing 225,708 apartment units. The Company has:
Tenant leases are generally year-to-year and require security deposits. The garden-style properties are generally defined as properties with two and/or three floors while the mid-rise/high-rise properties are defined as properties greater than three floors. These two property types typically provide residents with amenities, which may include a clubhouse, swimming pool, laundry facilities and cable television access. Certain of these properties offer additional amenities such as saunas, whirlpools, spas, sports courts and exercise rooms. The ranch-style properties, which are defined as single story properties, generally do not provide additional amenities for its residents.
It is management's role to monitor compliance with Property policies and to provide preventive maintenance of the Properties including common areas, facilities and amenities. The Company holds periodic meetings of its Property management personnel for training and implementation of the Company's strategies. The Company believes that, due in part to this strategy, the Properties historically have had high occupancy rates.
The distribution of the Properties throughout the United States reflects the Company's belief that geographic diversification helps insulate the portfolio from regional and economic influences. At the same time, the Company has sought to create clusters of Properties within each of its primary markets in order to achieve economies of scale in management and operation; however, the Company may acquire additional multifamily properties located anywhere in the United States.
The Company beneficially owns fee simple title to 976 of the 983 controlled properties and holds a 99-year leasehold interest with respect to one Property (Mallgate). In addition, with respect to two Properties, the Company owns the debt collateralized by such Properties and with respect to four Properties, the Company owns an interest in the debt collateralized by the Properties. The remaining 79 properties represent investments in partnership interests and/or subordinated mortgages containing 11,648 units.
Direct fee simple title for certain of the Properties is owned by single-purpose nominee corporations, LLC's or land trusts that engage in no business other than holding title to the Property for the benefit of the Company. Holding title in such a manner is expected to make it less costly to transfer such Property in the future in the event of a sale and should facilitate financing, since lenders often require title to a Property to be held in a single purpose entity in order to isolate that Property from potential liabilities of other Properties. Direct fee simple title for certain other Properties is owned by a single LLC.
The Company also leases (under operating leases) various management, regional and corporate offices throughout the United States. See Item 1 for the locations of these offices.
The following table sets forth certain information by type and by state relating to the Properties owned by the Company or in which the Company had a direct equity or mortgage interest at December 31, 1999.
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PART I
PART I
The properties currently under development (see discussion in Item 7) are included in the following table.
(1) The Company's funding of Lincoln Property Company Joint Venture and Legacy Partners Joint Venture Projects is limited to 25% of the total development cost.
(2) Town Center II was substantially completed and acquired on December 22, 1999 and is included in the outstanding property and unit counts as of that date.
(3) Estimated development cost does not include the cost of land previously acquired by the Company.
PART I
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Only ordinary routine litigation incidental to the business, which is not deemed material, was initiated during the year ended December 31, 1999. As of December 31, 1999, the Company does not believe there is any other litigation threatened against the Company 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 Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table sets forth, for the periods indicated, the high and low sales prices for and the distributions paid on the Company's Common Shares which trade on the New York Stock Exchange under the trading symbol EQR.
In addition, on February 17, 2000, the Company declared a $0.76 distribution per Common Share payable on April 14, 2000 to shareholders of record on March 20, 2000.
The number of beneficial holders of Common Shares at March 1, 2000, was approximately 61,000. The number of outstanding Common Shares as of March 1, 2000 was 127,911,989.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information on a historical basis for the Company. The following information should be read in conjunction with all of the financial statements and notes thereto included elsewhere in this Form 10-K. The historical operating and balance sheet data for the year ended December 31, 1995 have been derived from the historical Financial Statements of the Company. The historical operating and balance sheet data for the years ended December 31, 1999, 1998, 1997 and 1996 have been derived from the historical Financial Statements of the Company audited by Ernst & Young LLP, independent auditors. Certain capitalized terms as used herein, are defined in the Notes to the Consolidated Financial Statements.
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PART II
ITEM 6. SELECTED FINANCIAL DATA (CONSOLIDATED HISTORICAL (CONTINUED))
(1) Includes approximately $18.0 million and $96.3 million of construction in progress as of December 31, 1999 and 1998, respectively.
(2) Totals exclude properties which the Company had investments in partnership interests and/or subordinated mortgages. As of December 31, 1999, this represented 79 properties containing 11,648 units. As of December 31, 1998, this represented 27 properties containing 5,193 units. As of December 31, 1997, this represented 26 properties containing 5,267 units.
(3) The Company generally considers funds from operations ("FFO") to be one measure of the performance of real estate companies, including an equity REIT. The definition of FFO adopted in March 1995 by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income (loss) (computed in accordance with generally accepted accounting principles ("GAAP")), excluding gains (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 Company believes that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company 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 Company'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 Company's calculation of FFO represents net income available to Common Shares, excluding gains on dispositions of properties, gains on early extinguishment of debt, and write-off of unamortized costs on refinanced debt, plus depreciation on real estate assets, income allocated to Minority Interests and amortization of deferred financing costs related to the Predecessor Business. The Company's calculation of FFO may differ from the methodology for calculating FFO utilized by other REIT's and, accordingly, may not be comparable to such other REIT's. The Company's calculation of FFO for 1995 has been restated to reflect the effects of the definition as mentioned above. The Company will adopt, effective January 1, 2000, NAREIT's updated recommended definition of FFO as approved in the fourth quarter of 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7.
ITEM 7. OVERVIEW
The following discussion and analysis of the results of operations and financial condition of the Company should be read in connection with the Consolidated Financial Statements and Notes thereto. Due to the Company's ability to control the Operating Partnership, the Management Partnerships and Management Companies, the Financing Partnerships, the LLC's and certain other entities, each entity has been consolidated with the Company for financial reporting purposes. Capitalized terms used herein and not defined are as defined elsewhere in this Annual Report on Form 10-K for the year ended December 31, 1999.
Forward-looking statements in this Item 7 as well as Item 1 of this Annual Report on Form 10-K are intended to be 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 Company 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:
- alternative sources of capital to the Company are higher than anticipated;
- occupancy levels and market rents may be adversely affected by local economic and market conditions, which are beyond the Company's control; and
- additional factors as discussed in Part I of the Annual Report 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 Company 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 Company from the date of each acquisition or the closing dates of the Mergers. The following table summarizes the number of Acquired and Disposed Properties and related units for the prior three years:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
In addition, during the year ended December 31, 1999, the Company also sold its entire interest in six MRY joint venture properties (to MRYP Spinco) containing 1,297 units for approximately $54.1 million.
The Company's overall results of operations for the year ended December 31, 1999 and 1998 have been significantly impacted by the Company'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 Company owned for all of both 1999 and 1998 (the "1999 Same Store Properties"), which represented 121,490 units, impacted the Company's results of operations. Properties that the Company owned for all of both 1998 and 1997 (the "1998 Same Store Properties"), which represented 63,243 units, also impacted the Company's results of operations. Both the 1999 Same Store Properties and 1998 Same Store Properties are discussed in the following paragraphs.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1999, income before gain on disposition of properties, net, extraordinary item and allocation to Minority Interests increased by $75.3 million when compared to the year ended December 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 1999 Same Store Properties, total revenues increased by approximately $35.8 million to $1.1 billion or 3.48% 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, increased approximately $0.1 million or 0.03%. This increase was primarily the result of higher expenses for on-site compensation costs and an increase in real estate taxes on certain properties, but was partially offset by lower leasing and advertising, administrative, maintenance and property management costs.
Property management represents expenses associated with the self-management of the Company's Properties. These expenses increased by approximately $8.5 million primarily due to the continued expansion of the Company's property management business. During 1999, the Company assumed a management office in Reynoldsburg, Ohio related to the LFT Merger.
Fee and asset management revenues and fee and asset management expenses are associated with the management of properties not owned by the Company that are managed for affiliates. These revenues and expenses decreased due to the Company acquiring certain of these properties that were formerly fee-managed.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Interest expense, including amortization of deferred financing costs, increased by approximately $91.9 million. This increase was primarily the result of an increase in the Company's average indebtedness outstanding which increased by $1.3 billion. However, the Company's effective interest costs decreased from 7.10% for the year ended December 31, 1998 to 7.05% for the year ended December 31, 1999.
General and administrative expenses, which include corporate operating expenses, increased approximately $1.7 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 1.27% for the year ended December 31, 1999 compared to 1.54% of total revenues for the year ended December 31, 1998.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998, income before gain on disposition of properties, net, extraordinary item and allocation to Minority Interests increased by $79 million when compared to the year ended December 31, 1997. This increase was primarily due to 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 1998 Same Store Properties rental income increased by approximately $23.1 million to $527.3 million or 4.59% primarily as a result of higher rental rates charged to new tenants and tenant renewals, a 1.01% increase in average economic occupancy levels and an 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 $5.3 million or 2.65%. This increase was primarily the result of higher compensation costs, leasing and advertising costs, utilities, and maintenance charges.
Property management represents expenses associated with the self-management of the Company's Properties. These expenses increased by approximately $26.3 million primarily due to the continued expansion of the Company's property management business. The 1998 amounts include a full year effect of the various offices the Company opened in 1997, including the Scottsdale Office, which had a significant expansion resulting from the EWR Merger. During 1998, the Company opened new management offices in Jacksonville and Orlando, Florida and the Company assumed a management office in Augusta, Georgia related to the MRY Merger.
Fee and asset management revenues and fee and asset management expenses are associated with the management of properties not owned by the Company that are managed for affiliates. These net revenues decreased due to the disposition of certain of these properties, resulting in the Company no longer providing fee and asset management services to such properties.
Interest expense, including amortization of deferred financing costs, increased by approximately $125.5 million. This increase was primarily the result of an increase in the Company's average indebtedness outstanding which increased by $1.9 billion. However, the Company's effective interest costs decreased from 7.50% for the year ended December 31, 1997 to 7.10% for the year ended December 31, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
General and administrative expenses, which include corporate operating expenses, increased approximately $5.8 million between the periods under comparison. This increase was primarily due to the addition of corporate personnel in the Company's Human Resources, Accounting, Legal and Management 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 1.54% for the year ended December 31, 1998 compared to 1.98% of total revenues for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 1999
As of January 1, 1999, the Company 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 Company's cash and cash equivalents balance at December 31, 1999 was approximately $29.1 million and the amount available on the Company's line of credit was $400 million, of which $65.8 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 provided by (used for) financing activities, all of which are presented in the Company's Statements of Cash Flows.
Part of the Company's strategy in funding the purchase of multifamily properties, funding its Properties in the development stage and the funding of the Company's investment in two joint ventures with multifamily real estate developers is to utilize its line of credit and to subsequently repay the line of credit from the issuance of additional equity or debt securities or the disposition of Properties. Utilizing this strategy during 1999, the Company:
- issued the June 2004 Notes and received net proceeds of $298.0 million;
- refinanced seven Properties and received additional proceeds of $78.5 million;
- obtained new mortgage financing on eleven previously unencumbered properties and received net proceeds of $126.5 million;
- disposed of forty-two properties (including the sale of the Company's interest in six MRY joint venture properties) and received net proceeds of $383 million;
- issued approximately 1.2 million Common Shares and received net proceeds of $38.5 million; and
- issued 800,000 8.00% Series A Cumulative Convertible Redeemable Preference Interests of EQR-Mosaic, L.L.C. 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 line of credit and mortgage indebtedness on certain Properties.
With respect to the 1999 Acquired Properties, the Company assumed and/or entered into new mortgage indebtedness of approximately $69.9 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 $1.4 billion.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Subsequent to December 31, 1999 and through March 3, 2000, the Company acquired one additional property containing 178 units for a total purchase price of approximately $10.3 million.
Subsequent to December 31, 1999 and through March 3, 2000, the Company disposed of six properties for a total sales price of $46.7 million. These proceeds will be utilized to purchase additional properties. The Company anticipates that it will continue to sell certain Properties in the portfolio.
On March 3, 2000, Lexford Properties, L.P., a wholly-owned subsidiary of the Operating Partnership, issued 1.1 million units of 8.50% Series B Cumulative Convertible Redeemable Preference Units with an equity value of $55.0 million. Lexford Properties, L.P. received $53.6 million in net proceeds from this transaction. The liquidation value of these units is $50 per unit. The 1.1 million units are exchangeable into 1.1 million shares of 8.50% Series M-1 Cumulative Redeemable Preferred Shares of Beneficial Interest of the Company. The Series M-1 Preferred Shares are not convertible to EQR Common Shares. Dividends for the Series B Preference Units or the Series M-1 Preferred Shares are payable quarterly at the rate of $4.25 per unit/share per year. The net proceeds received from this transaction will be used for scheduled mortgage and line of credit repayments.
In regard to the joint venture agreements with two multifamily residential real estate developers during the year ended December 31, 1999, the Company funded a total of $88.6 million and during 2000 the Company expects to fund approximately $32.7 million in connection with these agreements. In connection with the first agreement, the Company has an obligation to fund up to an additional $20 million to guarantee third party construction financing.
In regard to certain other properties that were under development and/or expansion during the year ended December 31, 1999, the Company funded $47.5 million. During 2000, the Company expects to fund $44.9 million related to the continued development and/or expansion of as many as three Properties.
In regard to certain properties that were under earnout/development agreements, during the year ended December 31, 1999, the Company 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.
Subsequent to December 31, 1999, the Company funded $2.3 million for an initial earnout payment to the developer of Rosecliff Apartments. During 2000, the Company expects to fund $33.4 million related to the continued earnout/development of one Property.
In May 1999, the Company repaid its 1999 Notes that matured on May 15, 1999. The $125 million repayment was initially funded from borrowings under the Company's lines of credit.
In November 1999, the Company repaid the 1999-A Notes that matured on November 24, 1999. The $25 million repayment was initially funded from borrowings under the Company's line of credit.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During 1999, the Company repaid approximately $60.8 million of mortgage indebtedness on 31 Properties. These repayments were funded from the Company's line of credit and/or certain proceeds from dispositions.
In addition, the Company refinanced the debt on six existing properties totaling $45.0 million with new mortgage indebtedness totaling $65.7 million.
As of December 31, 1999, the Company had total indebtedness of approximately $5.5 billion, which included mortgage indebtedness of $2.9 billion (including premiums of $2.1 million), of which $838 million represented tax-exempt bond indebtedness, and unsecured debt of $2.3 billion (including net discounts and premiums in the amount of $2.5 million), of which $127.8 million represented tax-exempt bond indebtedness.
Subsequent to December 31, 1999, the Company settled on a $100 million interest rate protection agreement and received approximately $7.0 million in connection therewith.
In the second quarter of 2000, the Company anticipates repaying mortgage indebtedness of approximately $85 million assumed in connection with the LFT Merger. These repayments will also be primarily funded from additional borrowings under the line of credit and/or additional mortgage borrowings.
The Company has, from time to time, entered into interest rate protection agreements (financial instruments) to reduce the potential impact of increases in interest rates but believes it has limited exposure to the extent of non-performance by the counterparties of each protection agreement since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance. No such financial instrument has been used for trading purposes.
In August 1996, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of the Company's 2026 Notes. The agreement was for a notional amount of $150 million with a locked in treasury rate of 7.57%.
In July 1997, the Company entered into two interest rate protection agreements to effectively fix the interest rate cost of the Company's 2001 Notes and 2003 Notes. One agreement was for a notional amount of $100 million with a locked in treasury rate of 6.134%. The second agreement was for a notional amount of $75 million with a locked in treasury rate of 6.287%.
In April 1998, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of the Company's 2015 Notes. The agreement was for a notional amount of $300 million with a locked in treasury rate of 6.63%.
In May 1998, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of the Evans Withycombe Financing Limited Partnership indebtedness to within a range of 5.6% to 6.0% upon its refinancing. The agreement was for a notional amount of $131 million with a settlement date of August 2001. There was no initial cost to the Company for entering into this agreement.
In August 1998, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of the Company's planned financing in the fourth quarter of 1998. This agreement was
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
canceled in November at a cost of approximately $3.7 million. This cost is being amortized over the life of the financing for the 15 previously unencumbered Properties that occurred in November 1998.
In August 1998, the Company entered into an interest rate swap agreement that fixed the Company's interest rate risk on a portion of the Operating Partnership's variable rate tax-exempt bond indebtedness at a rate of 3.65125%. This agreement was for a notional amount of $150 million with a termination date of August 2003.
In August 1998, the Company entered into an interest rate swap agreement that fixed the Company's interest rate risk on a portion of the Operating Partnership's variable rate tax-exempt bond indebtedness at a rate of 3.683%. This agreement was for a notional amount of $150 million with a termination date of August 2005.
The fair value of these instruments, discussed above, as of December 31, 1999 approximates their carrying or contract values.
The Company 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. Expenditures for in-the-unit 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 Company 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 Company's standards. In regard to replacement-type items described above, the Company generally expects to spend $250 per unit on an annual recurring basis.
During the year ended December 31, 1999, total capital expenditures for the Company approximated $141.9 million. Of this amount, approximately $34.5 million, or $427 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 Company's pre-EQR IPO properties and 1993, 1994, 1995 and 1996 Acquired Properties approximated $40.8 million, or $362 per unit. Capital spent for replacement-type items approximated $53.5 million, or $277 per unit. In addition, approximately $5.9 million was spent on four specific assets related to major renovations and repositioning of these assets. Also included in total capital expenditures was approximately $7.2 million expended for non-real estate additions such as computer software, computer equipment, and furniture and fixtures and leasehold improvements for the Company's property 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 2000 are budgeted to be approximately $110.0 million for all Properties.
Minority Interests as of December 31, 1999 increased by $25.6 million when compared to December 31, 1998. The primary factors that impacted this account during the year were:
- distributions declared to Minority Interests, which amounted to $37.4 million for 1999 (excluding preference unit/interest distributions);
- the allocation of income from operations in the amount of $29.5 million;
- the conversion of OP Units into Common Shares; and
- the issuance of Common Shares, OP Units, Preference Units and Preference Interests during 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Total distributions paid in 1999 amounted to $514.9 million, which included certain distributions declared in the fourth quarters of 1998 and 1999. The Company paid a $0.76 per Common Share distribution on December 31, 1999 for the quarter ended December 31, 1999 to Common Shareholders and Minority Interest holders of record as of December 20, 1999.
The Company expects to meet its short-term liquidity requirements, including capital expenditures related 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 line of credit. The Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The Company also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, 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 Company has certain uncollateralized Properties available for additional mortgage borrowings in the event that the public capital markets are unavailable to the Company or the cost of alternative sources of capital to the Company is too high.
On August 12, 1999 the Company 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 Company's $500 million unsecured revolving credit facility, as well as the $120 million unsecured revolving credit facility which the Company 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. Advances under the credit facility bear interest at variable rates based upon LIBOR at various interest periods, plus a certain spread dependent upon the Company's credit rating. As of March 7, 2000, $110 million was outstanding under this new facility bearing interest at a weighted average rate of 6.28%.
Pursuant to the LFT Merger, the Company assumed a line of credit that had an outstanding balance of approximately $26.4 million. On October 1, 1999, the Company repaid the outstanding balance and terminated this facility.
In connection with the Wellsford Merger, the Company has provided a $14.8 million credit enhancement with respect to certain tax-exempt 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 Company 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. These preferred shares would be convertible to WRP Newco common shares under certain circumstances. As of December 31, 1999, no shares of WRP Newco Series A Preferred had been acquired by the Company. The Company expects to fund this $25 million investment in April 2000.
In connection with the MRY Merger, the Company extended a $25 million, one year, non-revolving loan to MRYP Spinco pursuant to a Senior Debt Agreement. On June 24, 1999, MRYP Spinco repaid the entire outstanding Senior Note 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 Company entered into six joint venture
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
agreements with MRYP Spinco. The Company contributed six properties with an initial value of $52.7 million in return for an ownership interest in each joint venture. On August 23, 1999, the Company sold its entire interest in these six properties to MRYP Spinco and received $54.1 million. There is no further obligation by either party in connection with these agreements.
FOR THE YEAR ENDED DECEMBER 31, 1998
As of January 1, 1998, the Company had approximately $33.3 million of cash and cash equivalents and $265 million available on its line of credit of which $24.7 million was restricted. After taking into effect the various transactions discussed in the following paragraphs, cash and cash equivalents at December 31, 1998 were approximately $4 million and the amounts available on the Company's lines of credit were $330 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 provided by financing activities, all of which are presented in the Company's Consolidated Statements of Cash Flows.
Part of the Company's strategy in funding the purchase of multifamily properties, funding its Properties in the development stage and the funding of the Company's investment in a joint venture with a multifamily real estate developer, excluding those Properties acquired through the Mergers, is to utilize its line of credit and to subsequently repay the line of credit from the issuance of additional equity or debt securities or the disposition of Properties. Utilizing this strategy during 1998 the Company:
- issued a total of approximately 8.5 million Common Shares through various offerings and received total net proceeds of $412.5 million;
- issued the 2015 Notes, the August 2003 Notes and the 2000 Notes and received net proceeds of $542.3 million;
- mortgaged fifteen previously unencumbered Properties and received net proceeds of $223.5 million; and
- disposed of twenty properties, which generated net proceeds of approximately $177 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 1998 Acquired Properties, the Company issued 21.8 million Common Shares having a value of $1.0 billion and issued the following preferred shares having a combined liquidation value of $369.1 million:
- Series H Preferred Shares;
- Series I Preferred Shares;
- Series J Preferred Shares;
- Series K Preferred Shares; and
- Series L Preferred Shares.
The Company also assumed mortgage indebtedness, unsecured notes and a line of credit of approximately $1.2 billion, issued OP Units having a value of approximately $205.2 million and issued
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Junior Convertible Preference Units having a value of approximately $4.8 million. The cash portion of these acquisitions were primarily funded from amounts drawn on the Company's lines of credit and proceeds received in connection with the transactions mentioned in the previous paragraphs.
In December 1997, the Company entered into a joint venture agreement with a multifamily residential real estate developer whereby the Company will make investments in a limited partnership to fund its portion of the project cost. During 1998, the Company funded a total of $23.9 million in connection with this agreement.
In regards to certain other properties that were under development and/or expansion in 1998, the Company funded $31.6 million.
In regards to certain properties that were under earnout/development agreements in 1998, no amounts were funded.
As of December 31, 1998, the Company had total indebtedness of approximately $4.7 billion, which included mortgage indebtedness of $2.3 billion (including premiums of $4.5 million), of which $878.3 million represented tax-exempt bond indebtedness, and unsecured debt of $2.3 billion (net of a $5.3 million discount), of which $35.6 million represented tax-exempt bond indebtedness. During the year, the Company repaid an aggregate of $63.8 million of mortgage indebtedness on nine of its Properties. These repayments were funded from the Company's line of credit or from proceeds received from the various capital transactions mentioned in the previous paragraphs.
YEAR 2000 ISSUE
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $184,000 and $700,000 during 1999 and 1998, respectively, in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
FUNDS FROM OPERATIONS
Commencing in 1996, the Company implemented the definition of FFO adopted by the Board of Governors of NAREIT in March 1995. The definition primarily eliminates the amortization of deferring financing costs and depreciation of non-real estate assets as items added back to net income when calculating FFO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUNDS FROM OPERATIONS (CONTINUED)
The Company generally considers 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 Company 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 an understanding of the ability of the Company 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 Company'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 Company's calculation of FFO represents net income available to Common Shares, excluding gains on dispositions of properties and gains/losses on early extinguishment of debt, plus depreciation on real estate assets, income allocated to Minority Interests and amortization of deferred financing costs related to the Predecessor Business. The Company's calculation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies and, accordingly, may not be comparable to such other real estate companies.
The Company will adopt, effective January 1, 2000, NAREIT's updated recommended definition of FFO as approved in the fourth quarter of 1999.
For the year ended December 31, 1999, FFO increased $160.8 million representing a 35% increase when compared to the year ended December 31, 1998. For the year ended December 31, 1998, FFO increased by $188.1 million representing a 69.5% increase when compared to the year ended December 31, 1997.
The following is a reconciliation of net income available to Common Shares to FFO available to Common Shares and OP Units for the years ended December 31, 1999, 1998 and 1997 (amounts are in thousands):
* Includes $1,009,000 and $183,000 related to the Company's share of depreciation from unconsolidated joint ventures and limited partnerships for the years ended December 31, 1999 and 1998, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company manages its market risk by matching projected cash inflows from operating properties, financing activities and investing activities with projected cash outflows to fund debt payments, acquisitions, capital expenditures, distributions and other cash requirements. The Company also utilizes certain derivative financial instruments to limit market risk. Interest rate protection agreements are used to convert floating rate debt to a fixed rate basis. Derivatives are used for hedging purposes rather than speculation. The Company does not enter into financial instruments for trading purposes.
The Company has total outstanding debt of approximately $5.5 billion at December 31, 1999, of which approximately $700.9 million, or 12.8% is floating rate debt, including the effects of any interest rate protection agreements. If market rates of interest on the Company's floating rate debt increase by 55 basis points (a 10% increase), the increase in interest expense on the Company's floating rate debt would decrease future earnings and cash flows by approximately $3.9 million. If market rates of interest on the Company's floating rate debt decrease by 55 basis points (a 10% decrease), the decrease in interest expense on the Company's floating rate debt would increase future earnings and cash flows by approximately $3.9 million.
These amounts were determined by considering the impact of hypothetical interest rates and equity prices on the Company's financial instruments. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in the Company's financial structure.
PART II
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13.
TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
The information required by Item 10, Item 11, Item 12
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)
(1 & 2) See Index to Financial Statements and Schedules on page of this Form 10-K.
(3) Exhibits:
2.1# Agreement and Plan of Merger by and between Equity Residential Properties Trust and Wellsford Residential Property Trust dated as of January 16, 1997.
2.2## Articles of Merger by and between Equity Residential Properties Trust and Wellsford Residential Property Trust.
2.3### Agreement and Plan of Merger by and between Equity Residential Properties Trust and Evans Withycombe Residential, Inc. dated as of August 27, 1997.
2.4#### Articles of Merger by and between Equity Residential Properties Trust and Evans Withycombe Residential, Inc.
2.5^ Agreement and Plan of Merger and First Amendment Thereto by and between Equity Residential Properties Trust and Merry Land & Investment Company, Inc. dated as of July 8, 1998 and September 4, 1998, respectively.
2.6^^ Articles of Merger by and between Equity Residential Properties Trust and Merry Land & Investment Company, Inc.
2.7^^^ Agreement and Plan of Merger between Equity Residential Properties Trust and Lexford Residential Trust dated as of June 30, 1999.
2.8^^^^ Articles of Merger by and between Equity Residential Properties Trust and Lexford Residential Trust.
3.1+ Second Amended and Restated Declaration of Trust of Equity Residential Properties Trust dated May 30, 1997.
3.2++ Third Amended and Restated Bylaws of Equity Residential Properties Trust.
4.1* Indenture, dated as of May 16, 1994, by and among the Operating Partnership, as obligor, the Company, as guarantor and The First National Bank of Chicago, as trustee in connection with 8 1/2% senior notes due May 15, 1999.
4.2* Indenture, dated October 1, 1994, between the Operating Partnership, as obligor and The First National Bank of Chicago, as trustee.
10.1** Fifth Amended and Restated Agreement of Limited Partnership of ERP Operating Limited Partnership.
10.2*** Agreement of Limited Partnership of Equity Residential Properties Management Limited Partnership.
10.3**** Agreement of Limited Partnership of Equity Residential Properties Management Limited Partnership II.
10.4*** Noncompetition Agreement (Zell).
10.5*** Noncompetition Agreement (Crocker).
10.6*** Noncompetition Agreement (Spector).
10.7*** Form of Noncompetition Agreement (other officers).
10.8*** Services Agreement between Equity Residential Properties Trust and Equity Group Investments, Inc.
10.9*** Form of Property Management Agreement (REIT properties).
10.10* Form of Property Management Agreement (Non-REIT properties).
10.11+++ Amended and Restated Master Reimbursement Agreement, dated as of November 1, 1996 by and between Federal National Mortgage Association and EQR-Bond Partnership.
10.12 Revolving Credit Agreement dated as of August 12, 1999 among the Operating Partnership, the Banks listed therein, Bank of America, National Association, as administrative agent, The Chase Manhattan Bank, as syndication agent, Morgan Guaranty Trust Company of New York, as documentation agent, Bank of America Securities LLC, as joint lead arranger, and Chase Securities Inc., as joint lead arranger.
PART IV
10.13 First Amendment to Revolving Credit Agreement dated November 10, 1999 between the Operating Partnership, Bank of America, National Association, as administrative agent, The Chase Manhattan Bank, as syndication agent, Morgan Guaranty Trust Company of New York, as documentation agent and the Banks listed as signatories thereto.
10.14#### Employment Agreement dated August 27, 1997 between Equity Residential Properties Management Limited Partnership and Richard G. Berry.
10.15++++ Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Evans Withycombe Residential, LP.
10.16 Amended and Restated Limited Partnership Agreement of Lexford Properties, L.P.
12 Computation of Ratio of Earnings to Fixed Charges
21 List of Subsidiaries of Equity Residential Properties Trust
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney for James D. Harper, Jr. dated February 29,
24.2 Power of Attorney for Errol R. Halperin dated February 29,
24.3 Power of Attorney for John W. Alexander dated March 13, 2000
24.4 Power of Attorney for B. Joseph White dated March 9, 2000
24.5 Power of Attorney for Henry H. Goldberg dated March 1, 2000
24.6 Power of Attorney for Jeffrey H. Lynford dated March 1, 2000
24.7 Power of Attorney for Edward Lowenthal dated March 2, 2000
24.8 Power of Attorney for Stephen O. Evans dated March 2, 2000
24.9 Power of Attorney for Boone A. Knox dated February 29, 2000
24.10 Power of Attorney for Michael N. Thompson dated March 6, 2000 ________________________________
# Included as an exhibit to the Company's Form 8-K dated January 16, 1997, filed on January 17, 1997.
## Included as Appendix B in the Company's Form S-4 filed on April 29, 1997.
### Included as an exhibit to the Company's Form 8-K dated August 27, 1997, filed on August 29, 1997.
#### Included as Appendix B in the Company's Form S-4 filed on September 18, 1997.
^ Included as Appendix A in the Company's Form S-4 filed on September 14, 1998.
^^ Included as Appendix B in the Company's Form S-4 filed on September 14, 1998.
^^^ Included as Appendix A in the Company's Form S-4 filed on July 23, 1999.
^^^^ Included as an exhibit to the Company's Form 8-K dated October 1, 1999, filed on October 5, 1999.
+ Included as an exhibit to the Company's Form 8-K dated May 30, 1997, filed on June 5, 1997.
++ Included as an exhibit to the Company's Form 10-Q for the quarterly period ended June 30, 1999.
+++ Included as an exhibit to the Company's Form 10-K for the year ended December 31, 1996.
++++ Included as an exhibit to the Company's Form 10-K for the year ended December 31, 1997.
* Included as an exhibit to the Operating Partnership's Form 10/A, dated December 12, 1994, File No. 0-24920, and incorporated herein by reference.
** Included as an exhibit to the Operating Partnership's Form 8-K/A dated July 23, 1998, filed on August 18, 1998.
*** Included as an exhibit to the Company's Form S-11 Registration Statement, File No. 33-63158, and incorporated herein by reference.
**** Included as an exhibit to the Company's Form 10-K for the year ended December 31, 1994.
PART IV
(b) Reports on Form 8-K:
A Report on Form 8-K dated October 5, 1999, reporting the closing of the merger between Equity Residential Properties Trust and Lexford Residential Trust.
A Report on Form 8-K dated December 3, 1999, disclosing additional financial information of Lexford Residential Trust as of September 30, 1999.
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedules: See Index to Financial Statements attached hereto on page of this Form 10-K.
PART IV
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.
EQUITY RESIDENTIAL PROPERTIES TRUST
Date: MARCH 13, 2000 By: /S/ DOUGLAS CROCKER II -------------- -------------------------------------- Douglas Crocker II President, Chief Executive Officer, Trustee and *Attorney-in-Fact
Date: MARCH 13, 2000 By: /S/ DAVID J. NEITHERCUT -------------- -------------------------------------- David J. Neithercut Executive Vice President and Chief Financial Officer
Date: MARCH 13, 2000 By: /S/ MICHAEL J. MCHUGH -------------- -------------------------------------- Michael J. McHugh Executive Vice President, Chief Accounting Officer, Treasurer and *Attorney-in-fact
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: MARCH 13, 2000 By: /S/ SAMUEL ZELL --------------- --------------------------------------- Samuel Zell Chairman of the Board of Trustees
Date: MARCH 13, 2000 By: /S/ GERALD A. SPECTOR -------------- --------------------------------------- Gerald A. Spector Executive Vice President, Chief Operating Officer and Trustee
Date: MARCH 13, 2000 By: /S/ SHELI Z. ROSENBERG -------------- --------------------------------------- Sheli Z. Rosenberg Trustee
PART IV
SIGNATURES-CONTINUED
Date: MARCH 13, 2000 By: /S/ JAMES D. HARPER* -------------- -------------------------------------- James D. Harper Trustee
Date: MARCH 13, 2000 By: /S/ ERROL R. HALPERIN* -------------- -------------------------------------- Errol R. Halperin Trustee
Date: MARCH 13, 2000 By: /S/ JOHN W. ALEXANDER* -------------- -------------------------------------- John W. Alexander Trustee
Date: MARCH 13, 2000 By: /S/ B. JOSEPH WHITE* -------------- --------------------------------------- B. Joseph White Trustee
Date: MARCH 13, 2000 By: /S/ HENRY H. GOLDBERG* -------------- --------------------------------------- Henry H. Goldberg Trustee
Date: MARCH 13, 2000 By: /S/ JEFFREY H. LYNFORD* -------------- --------------------------------------- Jeffrey H. Lynford Trustee
Date: MARCH 13, 2000 By: /S/ EDWARD LOWENTHAL* -------------- --------------------------------------- Edward Lowenthal Trustee
Date: MARCH 13, 2000 By: /S/ STEPHEN O. EVANS* -------------- --------------------------------------- Stephen O. Evans Trustee
Date: MARCH 13, 2000 By: /S/ BOONE A. KNOX* -------------- --------------------------------------- Boone A. Knox Trustee
Date: MARCH 13, 2000 By: /S/ MICHAEL N. THOMPSON* -------------- ---------------------------------------- Michael N. Thompson Trustee
* By: /S/ MICHAEL J. MCHUGH OR DOUGLAS CROCKER II ---------------------------------------------------- Michael J. McHugh or Douglas Crocker II, as Attorney-in-fact
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
EQUITY RESIDENTIAL PROPERTIES TRUST
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders Equity Residential Properties Trust
We have audited the accompanying consolidated balance sheets of Equity Residential Properties Trust (the "Company") as of December 31, 1999 and 1998 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Equity Residential Properties Trust at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois February 16, 2000 except for Note 23, as to which the date is March 3, 2000
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (Amounts in thousands except for share amounts)
SEE ACOMPANYING NOTES
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
SEE ACCOMPANYING NOTES
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SEE ACCOMPANYING NOTES
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS)
SEE ACCOMPANYING NOTES
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS)
SEE ACCOMPANYING NOTES
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
SEE ACCOMPANYING NOTES
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED) (AMOUNTS IN THOUSANDS)
SEE ACCOMPANYING NOTES
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND FORMATION OF THE COMPANY
Equity Residential Properties Trust, formed in March 1993, ("EQR"), is a self-administered and self-managed equity real estate investment trust ("REIT"). 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"), Merry Land & Investment Company, Inc. ("MRY") (the "MRY Merger") and Lexford Residential Trust ("LFT") ("the LFT Merger") (see Note 4). The Company has elected to be taxed as a REIT under Section 856(c) of the Internal Revenue Code 1986, as amended (the "Code").
The Company is engaged in the acquisition, disposition, ownership, management and operation of multifamily properties. As of December 31, 1999, the Company owned or had interests in a portfolio of 1,062 multifamily properties containing 225,708 apartment units of which it controlled a portfolio of 983 multifamily properties containing 214,060 apartment units (individually a "Property" and collectively the "Properties"). The Company had an investment in partnership interests (equity investments) and/or an investment in subordinated mortgages collateralized by the remaining 79 Properties containing 11,648 units. These properties are located in 35 states throughout the United States.
The Company has formed a series of partnerships (the "Financing Partnerships") which beneficially own certain Properties that may be encumbered by mortgage indebtedness. In general, these are structured so that ERP Operating Limited Partnership (the "Operating Partnership"), a subsidiary of EQR, owns a 1% limited partner interest and a 98% general partner interest in each, with the remaining 1% general partner interest in each Financing Partnership owned by various qualified REIT subsidiaries wholly owned by the Company (each a "QRS Corporation"). Rental income from the Properties that are beneficially owned by a Financing Partnership is used first to service the applicable mortgage debt and pay other operating expenses and any excess is then distributed 1% to the applicable QRS Corporation, as the general partner of such Financing Partnership, and 99% to the Operating Partnership, as the sole 1% limited partner and as the 98% general partner. The Company has also formed a series of limited liability companies that own certain Properties (collectively, the "LLCs"). The Operating Partnership is a 99% managing member of each LLC and a QRS Corporation is a 1% member of each LLC.
2. BASIS OF PRESENTATION
The Wellsford Merger, the EWR Merger, the MRY Merger and the LFT Merger (collectively, the "Mergers") were treated as purchases in accordance with Accounting Principles Board Opinion No. 16. The fair value of the consideration given by the Company in the Mergers was used as the valuation basis for each of the combinations. The assets acquired and the liabilities assumed of Wellsford were recorded at their relative fair values as of May 30, 1997 (the "Wellsford Closing Date"). The assets acquired and the liabilities assumed of EWR were recorded at their relative fair values as of December 23, 1997 (the "EWR Closing Date"). The assets acquired and the liabilities assumed of MRY were recorded at their relative fair values as of October 19, 1998 (the "MRY Closing Date"). The assets acquired and the liabilities assumed of LFT were recorded at their relative fair values as of October 1, 1999 (the "LFT Closing Date"). The accompanying consolidated statements of operations and cash flows include the results of the Properties purchased through the Mergers from their respective closing dates.
Due to the Company's ability as general partner to control either through ownership or by contract the Operating Partnership, a series of management limited partnerships and companies (collectively, the "Management Partnerships" or the "Management Companies"), the Financing Partnerships, the LLCs, and certain other entities, each such entity has been consolidated with the Company for financial reporting
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purposes. In regard to the Management Companies, the Company 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REAL ESTATE ASSETS AND DEPRECIATION
Real estate is recorded at cost less accumulated depreciation less an adjustment, if any, for impairment. A land value is assigned based on the purchase price if acquired separately or based on market research if acquired in a merger or in a single or portfolio acquisition.
For real estate properties to be disposed of, an impairment loss is recognized when the fair value of the real estate, less the estimated cost to sell, is less than the carrying amount of the real estate measured at the time it is certain that the Company will sell the property. Real estate held for disposition is reported at the lower of its carrying amount or its estimated fair value, less its cost to sell.
Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. The Company uses a 30-year estimated life for buildings and a five-year estimated life for initial furniture, fixtures and equipment. Replacements inside a unit such as appliances and carpeting, are depreciated over a five-year estimated life. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred and significant renovations and improvements that improve and/or extend the useful life of the asset are capitalized over their estimated useful life, generally five to ten years. Initial direct leasing costs are expensed as incurred as such expense approximates the deferral and amortization of initial direct leasing costs over the lease terms. Property sales or dispositions are recorded when title transfers and sufficient consideration has been received by the Company. Upon disposition, the related costs and accumulated depreciation are removed from the respective accounts. Any gain or loss on sale of disposition is recognized in accordance with accounting principles generally accepted in the United States.
The Company classifies Properties under development and/or expansion and properties in the lease up phase as construction in progress until construction on the apartment community has been completed and all certificates of occupancy permits have been obtained. The Company also classifies land relating to construction in progress as land on its balance sheet. Land associated with construction in progress was $18.5 million and $19.4 million as of December 31, 1999 and 1998, respectively.
(b) CASH AND CASH EQUIVALENTS
The Company considers all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements purchased with a maturity of three months or less, at the date of purchase, to be cash equivalents. The Company maintains its cash and cash equivalents at financial institutions. The combined account balances at each institution periodically exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes that the risk is not significant, as the Company does not anticipate their non-performance.
(c) DEFERRED FINANCING COSTS
Deferred financing costs include fees and costs incurred to obtain the Company's line of credit,
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
long-term financing and costs for certain interest rate protection agreements. These costs are amortized over the terms of the related debt. Unamortized financing costs are written-off when debt is retired before the maturity date. The accumulated amortization of such deferred financing costs was $11.1 million and $8.2 million at December 31, 1999 and 1998, respectively.
(d) INTEREST RATE PROTECTION AGREEMENTS
The Company from time to time enters into interest rate protection agreements to effectively convert floating rate debt to a fixed rate basis, as well as to hedge anticipated financing transactions. Net amounts paid or received under these agreements are recognized as an adjustment to interest expense when such amounts are incurred or earned. Settlement amounts paid or received in connection with terminated interest rate protection agreements are deferred and amortized over the remaining term of the related financing transaction on the straight-line method. The Company believes it has limited exposure to the extent of non-performance by the counterparties of each protection agreement since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance.
(e) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("Statement No. 133"). Statement No. 133 requires recording all derivative instruments as assets or liabilities, measured at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The standard's effective date was deferred by FASB Statement No. 137 to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company is planning to adopt the standard once it is effective and does not anticipate that the adoption will have a material impact on the Company's financial condition and results of operations.
(f) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments, including cash and cash equivalents, mortgage notes payable, other notes payable, lines of credit and other financial instruments, approximate their carrying or contract values. With respect to the Company's investment in mortgage notes, the fair value as of December 31, 1999 and 1998 was estimated to be approximately $87.0 million and $91.8 million, respectively, compared to the Company's carrying value of $85 million and $88 million, respectively. The estimated fair value of the Company's investment in mortgage notes represents the estimated net present value based on the expected future property level cash flows and an estimated current market discount rate.
(g) REVENUE RECOGNITION
Rental income attributable to leases is recorded when due from tenants and is recognized monthly as it is earned, which is not materially different than on a straight-line basis. Interest income is recorded on an accrual basis.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(h) LEASE AGREEMENTS
The majority of the leases entered into between a tenant and a Property for the rental of an apartment unit are year-to-year, renewable upon consent of both parties on a year-to-year or month-to-month basis.
(i) INCOME TAXES
Due to the structure of the Company as a REIT and the nature of the operations of the Properties and Management Business, the results of operations contain no provision for Federal income taxes. However, the Company is subject to certain state and local income, excise or franchise taxes. The aggregate cost of land and depreciable property for Federal income tax purposes as of December 31, 1999 and 1998 was approximately $8.6 billion and $8.5 billion, respectively.
(j) MINORITY INTERESTS
Net income is allocated to the Minority Interests (as defined in Note 5) based on their respective ownership percentage of the Operating Partnership. Ownership percentage is represented by dividing the number of OP Units held by the Minority Interests by the total OP Units held by Minority Interests and EQR. Issuance of additional Common Shares or OP Units changes the ownership interests of both the Minority Interests and EQR. Such transactions and the proceeds therefrom are treated as capital transactions and result in an allocation between shareholders' equity and Minority Interests to account for the change in the respective percentage ownership of the underlying equity of the Operating Partnership.
(k) USE OF ESTIMATES
In preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
(l) REPORTABLE SEGMENTS
During the fourth quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("Statement No. 131"). Statement No. 131 superseded FASB Statement of Financial Accounting Standards No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE ("Statement No. 14"). Statement No. 131 establishes standards for the way that public business enterprises report information regarding reportable operating segments. The adoption of Statement No. 131 did not affect the Company's results of operations or financial position.
The Company has one primary reportable business segment, which consists of investment in rental real estate. The Company'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. The Company also 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 Company has a segment for third party management activity that is immaterial
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and does not meet the threshold requirements of Statement No. 131 as a reportable segment.
The Company evaluates performance and allocates resources primarily based on the rental and other income generated from each property less property and maintenance expenses, real estate taxes and insurance, and property management expenses, which is considered net operating income ("NOI"). However, all other segment measurements are disclosed in the Company's consolidated financial statements, and accordingly the accounting policies of the reportable segments are the same as those described elsewhere in the Summary of Significant Accounting Policies.
The Company also considers funds from operations ("FFO") to be a primary measure of the performance of real estate companies including an equity REIT. The Company believes that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors an understanding of the ability of the Company 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 accounting principles generally accepted in the United States ("GAAP") and therefore should not be considered an alternative to net income as an indication of the Company'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 Company's calculation of FFO represents net income available to Common Shares, excluding gains on dispositions of properties, gains on early extinguishment of debt, and write-off of unamortized costs on refinanced debt, plus depreciation on real estate assets, income allocated to Minority Interests and amortization of deferred financing costs related to the predecessor business. The Company's calculation of FFO may differ from the methodology for calculating FFO utilized by other REIT's and, accordingly, may not be comparable to such other REIT's. The Company will adopt, effective January 1, 2000, the National Association of Real Estate Investment Trust's ("NAREIT") updated recommended definition of FFO as approved in the fourth quarter of 1999.
All revenues are from external customers and no revenues are generated from transactions with other segments. There are no tenants who contributed 10% or more of the Company's total revenues during 1999, 1998 or 1997. Interest expense on debt is not allocated to individual Properties, even if the Properties secure such debt. Further, minority interest in consolidated subsidiaries is not allocated to the Properties. There is no provision for income taxes as the Company is organized as a REIT under the Internal Revenue Code.
4. BUSINESS COMBINATIONS
In connection with the Wellsford Merger each outstanding common share of beneficial interest of Wellsford was converted into .625 of a Common Share of the Company. In addition, Wellsford's Series A Cumulative Convertible Preferred Shares of Beneficial Interest were redesignated as the Company's 3,999,800 Series E Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series E Preferred Shares") and Wellsford's Series B Cumulative Redeemable Preferred Shares of Beneficial Interest were redesignated as the Company's 2,300,000 9.65% Series F Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series F Preferred Shares").
On the Wellsford Closing Date, 72 Properties containing 19,004 units and other related assets were acquired for a total purchase price of approximately $1 billion. The purchase price consisted of 10.8 million common shares of beneficial interest, $.01 par value per share ("Common Shares") issued by the Company with a market value of $443.7 million, the liquidation value of $157.5 million for the Series E Preferred
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Shares and the Series F Preferred Shares, the assumption of mortgage indebtedness and unsecured notes in the amount of $345 million, the assumption of other liabilities of approximately $33.5 million and other merger related costs of approximately $23.4 million.
On the EWR Closing Date, 53 Properties containing 15,331 units and three Properties under construction or expansion containing 953 units and other related assets were acquired for a total purchase price of approximately $1.2 billion. In connection with the EWR Merger, as of the EWR Closing Date, each outstanding common share of beneficial interest of EWR was converted into .50 of a Common Share of the Company. The purchase price consisted of 10.3 million Common Shares issued by the Company with a total market value of approximately $501.6 million, the assumption of EWR's minority interest with a market value of approximately $107.3 million, the assumption of mortgage indebtedness and unsecured notes in the amount of $498 million, the assumption of other liabilities of approximately $28.2 million and other EWR Merger related costs of approximately $16.7 million.
In connection with the MRY Merger, each outstanding common share of beneficial interest of MRY was converted into 0.53 of a Common Share of the Company. In addition, MRY spun-off certain assets and liabilities to Merry Land Properties, Inc. ("MRYP Spinco"). As partial consideration for the transfer, the Company extended a $25 million, one year, non-revolving loan to MRYP Spinco pursuant to a Senior Debt Agreement. As of December 31, 1999, the debt agreement was no longer outstanding.
In addition, MRY Series A Cumulative Convertible Preferred Shares of Beneficial Interest were redesignated as the Company's 164,951 Series H Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series H Preferred Shares"), the MRY Series B Cumulative Convertible Preferred Shares of Beneficial Interest were redesignated as the Company's 4,000,000 Series I Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series I Preferred Shares"), the MRY Series C Cumulative Convertible Preferred Shares of Beneficial Interest were redesignated as the Company's 4,599,400 Series J Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series J Preferred Shares"), the MRY Series D Cumulative Redeemable Preferred Shares of Beneficial Interest were redesignated as the Company's 1,000,000 Series K Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series K Preferred Shares") and the MRY Series E Cumulative Redeemable Preferred Shares of Beneficial Interest were redesignated as the Company's 4,000,000 Series L Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series L Preferred Shares").
On the MRY Closing Date, 108 Properties containing 32,315 units, three Properties under construction or expansion expected to contain 872 units, six Additional Properties that represent an investment in six joint ventures containing 1,297 units and other related assets were acquired for a total purchase price of approximately $2.2 billion. The purchase price consisted of 21.8 million Common Shares issued by the Company with a market value of $1 billion, the assumption of MRY's minority interest with a market value of approximately $40.2 million, the liquidation value of $369.1 million for the Series H Preferred Shares, the Series I Preferred Shares, the Series J Preferred Shares, the Series K Preferred Shares and the Series L Preferred Shares, the assumption of mortgage indebtedness, unsecured notes and a line of credit in the amount of $723.5 million, the assumption of other liabilities of approximately $46.5 million and other merger related costs of approximately $51.9 million.
On the LFT Closing Date, 402 Properties containing 36,609 units and other related assets were acquired for a total purchase price of approximately $738 million. In connection with the LFT Merger, each outstanding common share of beneficial interest of LFT was converted into 0.463 of a Common Share of the Company. The purchase price consisted of 4.0 million Common Shares issued by the Company with
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
a market value of $181.1 million, the assumption of mortgage indebtedness, a term loan and a line of credit in the amount of $528.3 million, the acquisition of other assets of approximately $40.9 million, the assumption of other liabilities of approximately $25.3 million and other merger related costs of approximately $24.5 million.
All of the amounts stated in the previous paragraph are based on management's current best estimates, which are subject to adjustment within one year of the respective closing dates.
5. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
The following table presents the changes in the Company's issued and outstanding Common Shares for the years ended December 31, 1999, 1998 and 1997:
On February 3, 1998, the Company filed with the SEC a Form S-3 Registration Statement to register $1 billion of equity securities. The SEC declared this registration statement effective on February 27, 1998. In addition, the Company carried over $272 million related to the registration statement effective on August 4, 1997. As of December 31, 1999, $1.1 billion remained outstanding under this registration statement.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for a partnership interest are collectively referred to as the "Minority Interests". As of December 31, 1999 and 1998, the Minority Interests held 12,483,742 and 13,187,929 OP Units, respectively. As a result, the Minority Interests had an 8.92% and 10.04% interest in the Operating Partnership at December 31, 1999 and 1998, respectively. Assuming conversion of all OP Units into Common Shares, total Common Shares outstanding at December 31, 1999 and 1998 would have been 139,934,540 and 131,417,938, respectively.
Net proceeds from the Company's Common Share and Preferred Share offerings are contributed by the Company to the Operating Partnership in return for an increased ownership percentage and are treated as capital transactions in the Company's Consolidated Financial Statements. As a result, the net offering proceeds from Common Shares are allocated between shareholders' equity and Minority Interests to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership.
On October 12, 1999, the Company repurchased and retired 148,453 Common Shares previously issued in connection with the LFT Merger. Various LFT employees and trustees owned these Common Shares. The Company paid approximately $6.3 million in connection therewith.
In connection with certain acquisitions during the year ended December 31, 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. The value of these preference units is included in Minority Interests in the Consolidated Balance Sheets and the distributions incurred are included in preferred distributions in the Consolidated Statements of Operations.
On September 27, 1999, EQR-Mosaic, L.L.C., a wholly-owned subsidiary of the Operating Partnership, 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 exchangeable 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 to 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/share per year. The value of these preference interests is included in Minority Interests in the Consolidated Balance Sheets and the distributions incurred are included in preferred distributions in the Consolidated Statements of Operations.
The declaration of trust of the Company provides that the Company may issue up to 100,000,000 Preferred Shares with specific rights, preferences and other attributes as the Board of Trustees may determine, which may include preferences, powers and rights that are senior to the rights of holders of the Company's Common Shares.
The following table presents the Company's issued and outstanding Preferred Shares as of December 31, 1999 and 1998:
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) On or after the redemption date, redeemable preferred shares (Series A, B, C, D, F, K and L) may be redeemed for cash at the option of the Company, in whole or in part, at a redemption price equal to the liquidation price per share, plus accrued and unpaid distributions, if any.
(2) On or after the redemption date, convertible preferred shares (Series E, G, H, I & J) may be redeemed under certain circumstances for cash or Common Shares at the option of the Company, in whole or in part, at various redemption prices per share based upon the contractual conversion rate, plus accrued and unpaid distributions, if any. The conversion rate listed for Series G is the Preferred Share rate and the equivalent Depositary Share rate is 0.4268.
(3) Dividends on all series of Preferred Shares are payable quarterly at various pay dates. Dividend rates listed for Series B, C, D and G are Preferred Share rates. The equivalent Depositary Share annual dividend rates are $2.281252, $2.281252, $2.15 and $1.8125 per Series B, C, D and G Depositary Share, respectively.
(4) During 1999, all of the Series I Preferred Shares were converted into 2,566,797 Common Shares of the Company.
6. REAL ESTATE
The following table summarizes the carrying amounts for investment in real estate as of December 31, 1999 and 1998 (AMOUNTS ARE IN THOUSANDS):
The following table summarizes the carrying amounts for the real estate held for disposition as of December 31, 1999 and 1998 (AMOUNTS ARE IN THOUSANDS):
In addition to the LFT Merger, during the year ended December 31, 1999, the Company acquired the twenty-two Properties listed below, of which fourteen were acquired from unaffiliated third parties and eight were acquired from an affiliated party. In connection with certain of the acquisitions listed below, the Company assumed and/or entered into new mortgage indebtedness of approximately $69.9 million, issued OP Units having a value of approximately $25.2 million and issued Junior Convertible Preference Units
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, working capital and the Company's line of credit.
* This acquisition also included approximately 264,000 square feet of office and retail space and two parking garages.
In addition to the MRY Merger, during the year ended December 31, 1998, the Company acquired 99 Properties, of which 96 were acquired from unaffiliated third parties and 3 were acquired from an affiliated party. In connection with certain of these acquisitions, the Company assumed and/or entered into mortgage indebtedness of approximately $459.8 million, issued OP Units having a value of approximately $165 million and issued Junior Convertible Preference Units having a value of approximately $4.8 million. The cash portion of these transactions was funded primarily from proceeds raised from the various capital transactions as disclosed in Note 5 of the Notes to Consolidated Financial Statements, the various debt offerings as disclosed in Note 12 of the Notes to Consolidated Financial Statements, the Company's line of credit, proceeds received from the disposition of certain Properties and working capital.
7. REAL ESTATE DISPOSITIONS
During the year ended December 31, 1999, the Company disposed of the thirty-six Properties listed below to unaffiliated third parties. The Company recognized a net gain for financial reporting purposes of
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
approximately $93.5 million. In connection with one of these dispositions, the purchaser assumed the Company's mortgage indebtedness of approximately $12.5 million.
In addition, during the year ended December 31, 1999, the Company also sold its entire interest in six MRY joint venture properties (to MRYP Spinco) containing 1,297 units for approximately $54.1 million.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS TO ACQUIRE/DISPOSE OF REAL ESTATE
As of December 31, 1999, in addition to the Property that was subsequently acquired as discussed in Note 23 of the Notes to Consolidated Financial Statements, the Company entered into separate agreements to acquire three multifamily properties containing 886 units from unaffiliated parties. The Company expects a combined purchase price of approximately $126 million.
As of December 31, 1999, in addition to the Properties that were subsequently disposed of as discussed in Note 23 of the Notes to Consolidated Financial Statements, the Company entered into separate agreements to dispose of fourteen multifamily properties containing 3,056 units to unaffiliated parties. The Company expects a combined disposition price of approximately $138.9 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 paragraphs.
9. INVESTMENT IN MORTGAGE NOTES, NET
In 1995, the Company made an $89 million investment in partnership interests and subordinated mortgages collateralized by 21 of the Properties. These 21 Properties consist of 3,896 units, located in California, Colorado, New Mexico and Oklahoma. This included an $87.1 million investment in second and third mortgages (net of an original discount of approximately $12.7 million to their face amount), $1.6 million represented a one time payment for an interest rate protection agreement and $0.3 million represented an investment for primarily a 49.5% limited partnership interest in the title-holding entities. As the Company does not control the general partners of the title-holding entities and substantially all of the Company's investment is in second and third mortgages (which are subordinate to first mortgages owned by third party unaffiliated entities), the $87.1 million investment is accounted for as an investment in mortgage notes. The $1.6 million payment made for the interest rate protection agreement is included in deferred financing costs and is being amortized over the term of the related debt.
As of December 31, 1999 and 1998, the second mortgage notes had a combined principal balance of approximately $17.5 million and $21.7 million, respectively, and currently accrue interest at a rate of 9.45% per annum, receive principal amortization from excess cash flow and have a stated maturity date of December 31, 2019. As of December 31, 1999 and 1998, the third mortgage notes had a combined principal balance of approximately $71.1 million and $71.1 million, respectively, and currently accrue interest at a rate of 6.15% per annum, plus up to an additional 3% per annum to the extent of available cash flow. Contingent interest on the third mortgage notes is recognized to the extent it is received. The third mortgage notes have a stated maturity of December 31, 2024. Receipt of principal and interest on the second and third mortgage notes is subordinated to the receipt of all interest on the first mortgage notes. With respect to the discount on these notes, the unamortized balance at December 31, 1999 and 1998 was $4.8 million and $6 million, respectively. During 1999, 1998 and 1997, the Company amortized $1.2 million, $3.0 million and $3.1 million, respectively, which is included in interest income-investment in mortgage notes in the consolidated statements of operations. This discount is being amortized utilizing the effective yield method based on the expected life of the investment.
10. DEPOSITS-RESTRICTED
Deposits-restricted as of December 31, 1999 primarily included the following:
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- 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; - approximately $48.9 million was held in third party escrow accounts, representing proceeds received in connection with the Company's disposition of three properties and earnest money deposits made for one additional acquisition; - approximately $29.9 million was for tenant security, utility deposits, and other deposits for certain of the Company's Properties; and - approximately $7.5 million of other deposits.
Deposits-restricted as of December 31, 1998 primarily included the following:
- 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; - approximately $22.2 million held in third party escrow accounts representing proceeds received in connection with the Company's disposition of four properties; - approximately $15.3 million for tenant security and utility deposits for certain of the Company's Properties; and - approximately $11.8 million of other deposits.
11. MORTGAGE NOTES PAYABLE
As of December 31, 1999, the Company had outstanding mortgage indebtedness of approximately $2.9 billion encumbering 545 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $416 million) was approximately $4.7 billion. The mortgage notes payables are generally due in monthly installments of principal and interest.
During the year ended December 31, 1999 the Company:
- as part of the LFT Merger, assumed the outstanding mortgage balances on 342 Properties in the aggregate amount of $499.7 million; - assumed the outstanding mortgage balances on eight additional properties acquired during 1999 in the aggregate amount of $69.9 million; - repaid the outstanding mortgage balances on 31 Properties in the aggregate amount of $60.8 million. In connection with the above transactions, the Company incurred prepayment penalties of $0.5 million, which have been classified as losses on early extinguishment of debt; - refinanced the debt on four existing properties totaling $44.9 million with new mortgage indebtedness totaling $62.9 million; - obtained new mortgage financing on eleven previously unencumbered properties in the amount of $126.5 million; - 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; - refinanced the debt on two existing properties and consequently sold its lender position to a third party, thus receiving additional net cash proceeds of approximately $2.6 million. The bond indebtedness on these two properties is now unsecured and is classified as notes, net at December 31, 1999; - refinanced the debt on one existing property and consequently sold its lender position to
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
a third party, thus receiving additional cash proceeds of approximately $13.7 million; and - sold the debt on one property totaling $12.5 million in conjunction with a real estate disposition.
As of December 31, 1999, scheduled maturities for the Company's outstanding mortgage indebtedness are at various dates through October 1, 2033. The interest rate range on the Company's mortgage debt was 4.00% to 10.13% at December 31, 1999. During the year ended December 31, 1999, the effective interest cost on all of the Company's debt was 7.05%.
Aggregate payments of principal on mortgage notes payable for each of the next five years and thereafter are as follows (amounts in thousands):
During the year ended December 31, 1998, the Company repaid the outstanding mortgage balances on nine Properties in the aggregate amount of $63.8 million.
As of December 31, 1998, the Company had outstanding mortgage indebtedness of approximately $2.3 billion encumbering 216 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $250 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 year ended December 31, 1998, including the effects of the MRY Merger, the Company assumed the outstanding mortgage balances on 58 Properties in the aggregate amount of $608.9 million, which includes a premium of approximately $1.5 million recorded in connection with the MRY Merger.
As of December 31, 1998, scheduled maturities for the Company's outstanding mortgage indebtedness are at various dates through October 1, 2033. The interest rate range on the Company's mortgage debt was 3.00% to 10.00% at December 31, 1998. During the year ended December 31, 1998, the effective interest cost on all of the Company's debt was 7.10%.
The Company has, from time to time, entered into interest rate protection agreements (financial instruments) to reduce the potential impact of increases in interest rates but believes it has limited exposure to the extent of non-performance by the counterparties of each protection agreement since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance. No such financial instrument has been used for trading purposes.
Concurrent with the refinancing of certain tax-exempt bonds and as a requirement of the credit provider of the bonds, the Financing Partnership, which owns certain of the Properties, entered into interest rate protection agreements, which were assigned to the credit provider as additional security. The Financing Partnership pays interest based on a fixed interest rate and the counterparty of the agreement pays interest to
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company at a floating rate that is calculated based on the Public Securities Association Index for municipal bonds ("PSA Municipal Index"). As of December 31, 1999, the aggregate notional amounts of these agreements were approximately $133.4 million, $27.7 million, $9.1 million. As of December 31, 1998, the aggregate notional amounts of these agreements were approximately $135.1 million, $28.0 million and $9.2 million. The fixed interest rates for these agreements were 4.81%, 4.528% and 4.90%. The termination dates are October 1, 2003, January 1, 2004 and April 1, 2004.
The Company simultaneously entered into substantially identical reverse interest rate protection agreements. Under these agreements the Company pays interest monthly at a floating rate based on the PSA Municipal Index and the counterparty pays interest to the Company based on a fixed interest rate. As of December 31, 1999, the aggregate notional amounts of these agreements were approximately $133.4 million, $27.7 million, $9.1 million. As of December 31, 1998, the aggregate notional amounts of these agreements were approximately $135.1 million, $28.0 million and $9.2 million. The fixed interest rates received by the Company in exchange for paying interest based on the PSA Municipal Index for these agreements were 4.74%, 4.458% and 4.83%. The termination dates are October 1, 2003, January 1, 2004 and April 1, 2004. Collectively, these agreements effectively cost the Company 0.07% per annum on the current outstanding aggregate notional amount.
The Company also has an interest rate swap agreement for a notional amount of $228 million, for which it will receive payments if the PSA index exceeds 8.00%, that terminates on December 1, 2000. Any payments by the counterparty under this agreement have been collaterally assigned to the provider of certain sureties related to the tax-exempt bonds secured by certain of its Properties. The Company has no payment obligations to the counterparty with respect to this agreement.
In May 1998, the Company entered into an interest rate protection agreement to effectively fix the interest rate upon its refinancing of the Evans Withycombe Financing Limited Partnership indebtedness to within a range of 5.6% to 6.0%. The agreement was for a notional amount of $131 million with a settlement date of August 2001. There was no initial cost to the Company for entering into this agreement.
In August 1998, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of the Company's planned financing in the fourth quarter of 1998. This agreement was canceled in November 1998 at a cost of approximately $3.7 million. This cost is being amortized over the life of the financing for the fifteen previously unencumbered Properties that occurred in November 1998.
In August 1998, the Company entered into an interest rate swap agreement that fixed the Company's interest rate risk on a portion of the Operating Partnership's variable rate tax-exempt bond indebtedness at a rate of 3.65125%. This agreement was for a notional amount of $150 million with a termination date of August 2003.
In August 1998, the Company entered into an interest rate swap agreement that fixed the Company's interest rate risk on a portion of the Operating Partnership's variable rate tax-exempt bond indebtedness at a rate of 3.683%. This agreement was for a notional amount of $150 million with a termination date of August 2005.
In October 1999, the Company settled on a $50 million treasury lock and received $1.38 million. This settlement is being amortized over the life of the financing for the eleven previously unencumbered Properties that occurred in July 1999.
The Company believes that it has limited exposure to the extent of non-performance by the
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
counterparties of the agreements, mentioned in the previous paragraphs, since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance.
The fair value of these instruments, discussed above, as of December 31, 1999 approximates their carrying or contract values.
12. NOTES
The following tables summarize the Company's unsecured note balances and certain interest rate and maturity date information as of and for the years ended December 31, 1999 and 1998, respectively:
(1) As of December 31, 1999, floating rate public notes consisted of one note. The interest rate on this note was LIBOR (reset quarterly) plus a spread equal to 0.75% at December 31, 1999 (reset annually in August).
(2) As of December 31, 1998, floating rate public notes consisted of two separate notes. The interest rate on the first note was LIBOR (reset quarterly) plus a spread equal to 0.45% at December 31, 1998 (reset annually in August). The interest rate on the second note was LIBOR (reset quarterly) plus a spread equal to 0.32% at December 31, 1998.
As of December 31, 1999, the Company had outstanding unsecured notes of approximately $2.3 billion net of a $4.6 million discount and including a $7.1 million premium.
As of December 31, 1998, the Company had outstanding unsecured notes of approximately $2.0 billion net of a $5.3 million discount and including a $9.2 million premium.
On February 3, 1998, the Operating Partnership filed a Form S-3 Registration Statement to register $1 billion of debt securities. The SEC declared this registration statement effective on February 27, 1998. As of December 31, 1999, $430 million remained outstanding under this registration statement.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 1999, the Company:
- 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 "Ninth Public Debt Offering"). The June 2004 Notes were issued at a discount, which is being amortized over the life of the notes on a straight-line basis. As of December 31, 1999, the unamortized discount balance was approximately $0.2 million. 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 December 23, 1999. The Operating Partnership received net proceeds of approximately $298.0 million in connection with this issuance; - repaid its $125 million fixed rate notes that matured on May 15, 1999 and its $25 million floating rate notes that matured on November 24, 1999; - refinanced the bond indebtedness collateralized by four existing properties. The bond indebtedness on all four properties totaling $75.8 million is now unsecured; - pursuant to the LFT Merger, assumed an unsecured term note in the approximate amount of $2.3 million and paid it off the same day; and - refinanced the bond indebtedness collateralized by two existing properties. The bond indebtedness on both properties totaling $16.4 million is now unsecured.
Aggregate payments of principal on unsecured notes payable for each of the next five years and thereafter are as follows (amounts in thousands):
As of December 31, 1999 and 1998, the remaining unamortized balance of deferred settlement receipts from treasury locks and interest rate protection agreements was $9.5 million and $8.8 million, respectively.
As of December 31, 1999 and 1998, the remaining unamortized balance of deferred settlement payments on treasury locks and interest rate protection agreements was $3.7 million and $5.4 million, respectively.
In regard to the interest rate protection agreements mentioned, the Company believes that it has limited exposure to the extent of non-performance by the counterparties of each agreement since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LINES OF CREDIT
On August 12, 1999 the Company 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 Company's $500 million unsecured revolving credit facility, as well as the $120 million unsecured revolving credit facility which the Company assumed in the MRY Merger. The prior existing revolving credit facilities were repaid in full and terminated upon the closing of the new facility. Advances under the credit facility bear interest at variable rates based upon LIBOR at various interest periods, plus a certain spread dependent upon the Company's credit rating. As of December 31, 1999 and 1998, $300 million and $290 million, respectively, was outstanding and $65.8 million and $12 million, respectively, was restricted on the lines of credit. During the years ended December 31, 1999 and 1998, the weighted average interest rate was 6.42% and 6.47%, respectively.
Pursuant to the LFT Merger, the Company assumed a line of credit that had an outstanding balance of approximately $26.4 million. On October 1, 1999, the Company repaid the outstanding balance and terminated this facility.
14. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE COMMON SHARE
The following tables set forth the computation of net income per share - - basic and net income per share - diluted.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR ADDITIONAL DISCLOSURES REGARDING THE EMPLOYEE SHARE OPTIONS, SEE NOTE 16.
CONVERTIBLE PREFERRED SHARES AND JUNIOR CONVERTIBLE PREFERENCE UNITS THAT COULD BE CONVERTED INTO 12,023,051, 8,739,688 AND 2,763,898 WEIGHTED COMMON SHARES FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, RESPECTIVELY, WERE OUTSTANDING BUT WERE NOT INCLUDED IN THE COMPUTATION OF DILUTED EARNINGS PER SHARE BECAUSE THE EFFECTS WOULD BE ANTI-DILUTIVE.
15. SUMMARIZED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
The following Summarized Pro Forma Condensed Statement of Operations has been prepared as if the following had occurred on January 1, 1999 (as described in Note 4, Note 5, Note 6, Note 7, Note 11 and Note 12 of Notes to Consolidated Financial Statements):
- the acquisition of the 402 LFT properties containing 36,609 units and other related assets for a total purchase price of approximately $738 million; - the acquisition of an additional 22 Properties, including the related assumption of $69.9 million of mortgage indebtedness, the issuance of Junior Convertible Preference Units with a value of $3.0 million and the issuance of OP Units with a value of $25.2 million; - the disposition of 36 properties; - the $300 million public debt offering in June 1999; - the repayment of the 1999 Notes totaling $125 million; - the repayment of the 1999-A Medium Term Notes totaling $25 million; - the repayment of LFT's unsecured term note and line of credit totaling $28.6 million; - the repayment of the outstanding mortgage balances on 31 properties totaling $60.8 million; - the mortgage financing of eleven previously unencumbered Properties for $126.5 million; - the mortgage refinancing of eight properties increasing mortgage indebtedness by $21.8 million (net);
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- the issuance of the 800,000 units of 8.00% Series A Cumulative Convertible Redeemable Preference Interests; and - the conversion of all of the Series I Preferred Shares to 2,566,797 Common Shares during 1999.
This would result in 126,417,761 Common Shares outstanding on January 1, 1999. In management's opinion, the Summarized Pro Forma Condensed Statement of Operations does not purport to present what actual results would have been had the above transactions occurred on January 1, 1999, or to project results for any future period. The amounts presented in the following statement are in thousands except for per share amounts:
16. SHARE OPTION AND SHARE AWARD PLAN
Pursuant to the Company's Fifth Amended and Restated 1993 Share Option and Share Award Plan (the "Fifth Amended Option and Award Plan"), officers, directors, key employees and consultants of the Company may be offered the opportunity to acquire Common Shares through the grant of share options ("Options") including non-qualified share options ("NQSOs"), incentive share options ("ISOs") and share appreciation rights ("SARs") or may be granted restricted or non-restricted shares. Additionally, under the Fifth Amended Option and Award Plan, officers and key employees of the Company may be awarded Common Shares, subject to conditions and restrictions as described in the Fifth Amended Option and Award Plan. Options and SARs are sometimes referred to herein as "Awards".
As to the Options that have been granted through December 31, 1999, generally, one-third are exercisable one year after the initial grant, one-third are exercisable two years following the date such Options were granted and the remaining one-third are exercisable three years following the date such Options were granted. As to the restricted shares that have been awarded through December 31, 1999, these shares fully vest three years from the award date. During the three year period of restriction, the employee receives quarterly dividend payments on their shares. If employment is terminated prior to the lapsing of the restriction, the shares are canceled.
The Company has reserved 12,500,000 Common Shares for issuance under the Fifth Amended Option and Award Plan. The Options generally are granted at the fair market value of the Company's
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Shares at the date of grant, vest over a three year period, are exercisable upon vesting and expire ten years from the date of grant. The exercise price for all Options under the Fifth Amended Option and Award Plan shall not be less than the fair market value of the underlying Common Shares at the time the Option is granted. The Fifth Amended Option and Award Plan will terminate at such time as no further Common Shares are available for issuance upon the exercise of Options and all outstanding Options have expired or been exercised. The Board of Trustees may at any time amend or terminate the Fifth Amended Option and Award Plan, but termination will not affect Awards previously granted. Any Options, which had vested prior to such a termination, would remain exercisable by the holder thereof.
Pursuant to the MRY Merger, the Company assumed MRY's Stock Option and Incentive Plan, which included existing options granted by MRY prior to the MRY Merger. As to the Options that have been granted through October 18, 1998, generally, one-fifth are exercisable one year after the initial grant, one-fifth are exercisable two years following the date such Options were granted, one-fifth are exercisable three years following the date such Options were granted, one-fifth are exercisable four years following the date such Options were granted and the remaining one-fifth are exercisable five years following the date such Options were granted.
The Company will not issue common shares under the MRY Stock Option and Incentive Plan. The Options already granted under the plan were assumed with the original grant dates. The number of original MRY Options and the original MRY grant prices were converted to the Company's equivalent using a conversion ratio of 0.54. They will vest over a five-year period, are exercisable upon vesting and expire ten years from the date of grant. The MRY Stock Option and Incentive Plan will terminate at such time all outstanding Options have expired or been exercised. Any Options, which had vested prior to such assumption, would remain exercisable by the holder thereof.
Pursuant to the LFT Merger, the Company assumed LFT's Incentive Equity Plan, which included existing options granted by LFT prior to the LFT Merger. As to the Options that were granted by LFT from January 1, 1999 through September 30, 1999, generally, one-third are exercisable one year after the initial grant, one-third are exercisable two years following the date such Options were granted and the remaining one-third are exercisable three years following the date such Options were granted.
The Company will not issue common shares under the LFT Incentive Equity Plan. The Options already granted under the plan were assumed with the original grant dates. The number of original LFT Options and the original LFT grant prices were converted to the Company's equivalent using a conversion ratio of 0.463. The Options granted through December 31, 1998 vested immediately upon closing of the LFT Merger and are exercisable and expire ten years from the date of grant. The LFT Incentive Equity Plan will terminate at such time all outstanding Options have expired or been exercised. Any Options, which had vested prior to such assumption, would remain exercisable by the holder thereof.
The Company has elected to apply the provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB No. 25"), in the computation of compensation expense. Under APB No. 25's intrinsic value method, compensation expense is determined by computing the excess of the market price of the shares over the exercise price on the measurement date. For the Company's share options, the intrinsic value on the measurement date (or grant date) is zero, and no compensation expense is recognized. FASB Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement No. 123"), requires the Company to disclose pro forma net income and income per share as if a fair value based accounting method had been used in the computation of compensation expense. The fair value of the options computed under Statement No. 123 would be recognized over the vesting period of the options. The fair value for the Company's options was estimated at the time the
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options were granted using the Black Scholes option pricing model with the following weighted-average assumptions for 1997, 1998 and 1999, respectively: risk-free interest rates of 6.33%, 5.37% and 5.84%; dividend yields of 5.32%, 5.98% and 6.89%; volatility factors of the expected market price of the Company's Common Shares of 0.218, 0.212 and 0.209; and a weighted-average expected life of the option of seven years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's Options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its Options.
For purposes of pro forma disclosures, the estimated fair value of the Options is amortized to expense over the Options' vesting period. The following is the pro forma information for the three years ended December 31, 1999, 1998 and 1997 (unaudited):
The table below summarizes the Option activity of the Fifth Amended Option and Award Plan, the MRY Stock Option and Incentive Plan and the LFT Stock Option Plan for the three years ended December 31, 1999, 1998 and 1997:
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1999, 1998 and 1997, 3,266,759 shares, 2,841,111 shares and 1,330,150 shares were exercisable, respectively. Exercise prices for Options outstanding as of December 31, 1999 ranged from $26 to $54.8125 for the Fifth Amended Option and Award Plan, $15.28 to $41.85 for the MRY Stock Option and Incentive Plan and $2.83 to $48.60 for the LFT Stock Option Plan. Expiration dates ranged from August 11, 2003 to November 8, 2009. The remaining weighted-average contractual life of those Options was 7.3 years. The weighted-average grant date fair value of Options granted during 1999, 1998 and 1997 was $4.43, $6.28 and $7.37, respectively.
17. EMPLOYEE SHARE PURCHASE PLAN
Under the Company's Employee Share Purchase Plan certain eligible officers, trustees and employees of the Company may annually acquire up to $100,000 of Common Shares of the Company. The aggregate number of Common Shares available under the Employee Share Purchase Plan shall not exceed 1,000,000, subject to adjustment by the Board of Trustees. The Common Shares may be purchased quarterly at a price equal to 85% of the lesser of: (a) the closing price for a share on the last day of such quarter; and (b) the greater of: (i) the closing price for a share on the first day of such quarter, and (ii) the average closing price for a share for all the business days in the quarter. During 1997, the Company issued 84,183 Common Shares at net prices that ranged from $35.63 per share to $42.08 per share and raised approximately $3.2 million in connection therewith. During 1998, the Company issued 93,521 Common Shares at net prices that ranged from $35.70 per share to $42.71 per share and raised approximately $3.7 million in connection therewith. During 1999, the Company issued 147,885 Common Shares at net prices that ranged from $34.37 per share to $36.71 per share and raised approximately $5.2 million in connection therewith.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DISTRIBUTION REINVESTMENT AND SHARE PURCHASE PLAN
On November 3, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register 7,000,000 Common Shares pursuant to a Distribution Reinvestment and Share Purchase Plan (the "DRIP Plan"). The registration statement was declared effective on November 25, 1997.
The DRIP Plan of the Company provides holders of record and beneficial owners of Common Shares, Preferred Shares, and limited partnership interests in the Operating Partnership with a simple and convenient method of investing cash distributions in additional Common Shares (which is referred to herein as the "Dividend Reinvestment - DRIP Plan"). Common Shares may also be purchased on a monthly basis with optional cash payments made by participants in the DRIP Plan and interested new investors, not currently shareholders of the Company, at the market price of the Common Shares less a discount ranging between 0% and 5%, as determined in accordance with the DRIP Plan (which is referred to herein as the "Share Purchase - DRIP Plan").
19. EMPLOYEE TRANSACTIONS
Douglas Crocker II, President and Chief Executive Officer of the Company, and three other officers had purchased an aggregate of 190,000 Common Shares at prices which range from $26 to $31.625 per Common Share. These purchases were financed by loans made by the Company in the aggregate amount of approximately $5.3 million. The employee notes accrue interest, payable in arrears, at rates that range from 6.15% per annum to 7.93% per annum. Scheduled maturities are at various dates through March 2005. The outstanding balance on these loans in the aggregate was $4.7 million and $4.9 million for the years ended December 31, 1999 and 1998, respectively. The employee notes are recourse to Mr. Crocker and the three other officers and are collateralized by pledges of the 190,000 Common Shares purchased.
In addition, as of December 31, 1999, the outstanding principal balance on additional notes issued to Mr. Crocker and three other officers was approximately $1.2 million. These notes accrue interest, payable in arrears, at one month LIBOR plus 2% per annum. Scheduled maturities are at various dates through March 2003. Subsequent to December 31, 1999, Mr. Crocker paid a principal installment on one of his notes in the amount of $80,570 and repaid another note in full in the amount of $100,000. The notes are recourse to Mr. Crocker and the three other officers and are collateralized by pledges of options and share awards.
Mr. Crocker and Gerald A. Spector, Executive Vice President and Chief Operating Officer of the Company, have entered into Deferred Compensation Agreements with the Company which provide both with a salary benefit after their respective termination of employment with the Company, under certain circumstances. In addition, Mr. Crocker also has entered into a Share Distributions Agreement with the Company whereby he was issued options to purchase 100,000 Common Shares under the terms of the Fifth Amended Option and Award Plan. Upon exercise of these options, Mr. Crocker will be entitled to receive dividends on these shares as if they had been outstanding from the grant date through the exercise date. The Company has recognized $1.1 million, $0.8 million and $0.7 million of compensation expense for the years ended December 31, 1999, 1998 and 1997, respectively, related to these agreements.
The Company has established a defined contribution plan (the "401(k) Plan") that provides retirement benefits for employees that meet minimum employment criteria. The Company contributes 100% of the first 4% of eligible compensation that a participant contributes to the 401(k) Plan. Participants are vested in the Company's contributions over five years. The Company made contributions in the amount of $1.4 million and $1.4 million for the years ended December 31, 1997 and 1998, respectively, and expects
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to make contributions in the amount of approximately $3.1 million for the year ended December 31, 1999.
20. TRANSACTIONS WITH RELATED PARTIES
In connection with the Wellsford Merger, Jeffrey H. Lynford and Edward Lowenthal (trustees of the Company) each executed a consulting agreement with the Company. Each consulting agreement has a term of five years from May 30, 1997, the closing date of the Wellsford Merger. Pursuant to the consulting agreements, each of Messrs. Lynford and Lowenthal will serve as a senior management consultant to the Company and will receive compensation at the rate of $200,000 per year plus reimbursement for reasonable out-of-pocket expenses.
In connection with the EWR Merger, in December 1997, Stephen O. Evans (a trustee of the Company) executed a consulting agreement with an affiliate of the Company. The consulting agreement had a term of two years and expired on December 31, 1999. Pursuant to the consulting agreement, Mr. Evans served as a senior management consultant to the Company and received compensation at the rate of $225,000 per year. Mr. Evans also received an option to purchase 115,500 Common Shares that will vest in three equal annual installments and will have an exercise price equal to $50.125 per Common Share. Mr. Evans was also eligible to participate in all of the Company's employee benefit plans in which persons in comparable positions participate, treating Mr. Evans as an employee.
In connection with the affiliated lease agreements for various offices as defined in Note 21, the Company paid Equity Office Holdings, L.L.C. ("EOH") $126,272, $114,539 and $145,511 in connection with the Chicago Office, $261,040, $194,506 and $177,793 in connection with the Tampa Office, $131,079, $83,485 and $55,149 in connection with the Southern California area office and $770,317, $772,320 and $632,693 in connection with the space occupied by the corporate headquarters for the years ended December 31, 1999, 1998 and 1997, respectively. Also, the Company paid EOH $166,328 and $55,117 in connection with the Atlanta Office for the year ended December 31, 1999 and 1998, respectively. Amounts due to EOH were $311,345, $136,000 and $59,675 as of December 31, 1999, 1998 and 1997, respectively.
Equity Group Investments, Inc. and certain of its subsidiaries, including, Equity Properties & Development, L.P. and Equity Properties Management Corp. (collectively, "EGI"), have provided certain services to the Company which include, but are not limited to, investor relations, corporate secretarial, real estate tax evaluation services and market consulting and research services. Fees paid to EGI for these services amounted to approximately $708,582, $1.1 million and $1.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. Amounts due to EGI were $175,662, $57,408 and $74,578 as of December 31, 1999, 1998 and 1997, respectively.
Artery Property Management, Inc., a real estate property management company ("APMI") in which Mr. Goldberg, a trustee of the Company, is a two-thirds owner and chairman of the board of directors, provided the Company consulting services with regard to property acquisitions and additional business opportunities. In connection with the acquisition of certain Properties from Mr. Goldberg and his affiliates during 1995, the Company made a loan to Mr. Goldberg and APMI of $15,212,000 evidenced by two notes and secured by 465,545 OP Units. At December 31, 1999, approximately $6.2 million was outstanding and 64,948 OP Units and 123,792 Common Shares secured this loan. In connection with the acquisition of certain Properties from Mr. Goldberg and his affiliates during 1998, the Company made a $12,000,000 revolving loan to Mr. Goldberg and his wife in September 1998. On October 1, 1999, this note was fully repaid.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1999, the Company acquired eight Properties and the related management agreements from affiliates of Mr. Goldberg for an aggregate purchase price of approximately $110.2 million, including the assumption of approximately $44.3 million of mortgage indebtedness. The purchase price also included the issuance of 28,795 Series A Junior Convertible Preference Units in the Operating Partnership which have a liquidation value of $100 per unit and are exchangeable for OP Units under certain circumstances. On June 29, 1999, Mr. Goldberg received 8,462 of these units with a liquidation value of approximately $0.8 million.
Certain related entities provided services to the Company. These included, but were not limited to, Rosenberg & Liebentritt, P.C., which provided legal services, and Arthur A. Greenberg, which provided tax advisory services. Fees paid to these related entities in the aggregate amounted to $1.3 million for the year ended December 31, 1997. In addition, The Riverside Agency, Inc., which provided insurance brokerage services, was paid fees and reimbursed premiums and loss claims in the amount of $0.3 million for the year ended December 31, 1997.
Piper, Marbury, Rudnick & Wolfe, a law firm in which Mr. Errol Halperin, a trustee of the Company, is a partner, provided legal services to the Company. Fees paid to this firm amounted to approximately $1.6 million, $2.2 million and $2.3 million for the years ended December 31, 1999, 1998 and 1997, respectively.
Seyfarth, Shaw, Fairweather & Geraldson, a law firm in which Ms. Sheli Rosenberg's (a trustee of the Company) husband is a partner, provided legal services to the Company. Fees paid to this firm amounted to $34,357 and $29,146, for the years ended December 31, 1999 and 1998, respectively.
In addition, the Company has provided acquisitions, asset and property management services to certain related entities for properties not owned by the Company. Fees received for providing such services were approximately $2.4 million, $3.5 million and $4.6 million for the years ended December 31, 1999, 1998 and 1997, respectively.
21. COMMITMENTS AND CONTINGENCIES
The Company, as an owner of real estate, is subject to various environmental laws of Federal and local governments. Compliance by the Company with existing laws has not had a material adverse effect on the Company's financial condition and results of operations. However, the Company 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 Company does not believe there is any litigation threatened against the Company 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 Company.
In regard to the joint venture agreements with two multifamily residential real estate developers during the year ended December 31, 1999, the Company funded a total of $88.6 million and during 2000 the Company expects to fund approximately $32.7 million in connection with these agreements. In connection with the first agreement, the Company has an obligation to fund up to an additional $20 million to guarantee third party construction financing.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In regard to certain other properties that were under development and/or expansion during the year ended December 31, 1999, the Company funded $47.5 million. During 2000, the Company expects to fund $44.9 million related to the continued development and/or expansion of as many as three Properties.
In regard to certain properties that were under earnout/development agreements, during the year ended December 31, 1999, the Company 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.
During 2000, the Company expects to fund $33.4 million related to the continued earnout/development of one Property.
In connection with the Wellsford Merger, the Company has provided a $14.8 million credit enhancement with respect to certain tax-exempt 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 Company 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. These preferred shares would be convertible to WRP Newco common shares under certain circumstances. As of December 31, 1999, no shares of WRP Newco Series A Preferred had been acquired by the Company.
In connection with the MRY Merger, the Company extended a $25 million, one year, non-revolving loan to MRYP Spinco pursuant to a Senior Debt Agreement. On June 24, 1999, MRYP Spinco repaid the entire outstanding Senior Note 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 Company entered into six joint venture agreements with MRYP Spinco, the entity spun-off in the MRY Merger. The Company contributed six properties with an initial value of $52.7 million in return for an ownership interest in each joint venture. On August 23, 1999, the Company sold its entire interest in these six properties to MRYP Spinco and there is no further obligation by either party in connection with these agreements.
The Company has lease agreements with an affiliated party covering office space occupied by the management offices located in Tampa, Florida (the "Tampa Office"), Atlanta, Georgia (the "Atlanta Office"); and Chicago, Illinois (the "Chicago Office"). The Company also has a lease agreement with an affiliated party covering office space occupied by an area office located in Southern California. The Tampa Office agreement expires on October 31, 2001, the Atlanta Office agreement expires on June 20, 2001, the Chicago Office agreement expires on July 11, 2000 and the Southern California agreement expires on July 31, 2000.
The Company also has seven additional lease agreements with unaffiliated parties covering space occupied by the management offices located in Dallas, Texas (the "Dallas Office"); Bethesda, Maryland (the "Bethesda Office"); Denver, Colorado (the "Denver Office"); Seattle, Washington (the "Seattle Office"); Scottsdale, Arizona (the "Scottsdale Office"), Charlotte, North Carolina (the "Charlotte Office") and Reynoldsburg, Ohio (the "Lexford Office"). The lease agreement for the Dallas Office expires on
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2005, the lease agreement for the Bethesda Office expires on February 1, 2004, the lease agreement for the Denver Office expires on December 31, 2002, the lease agreement for the Seattle Office expires on June 30, 2003, the lease agreement for the Scottsdale Office expires on July 31, 2004, the lease agreement for the Charlotte Office expires on May 31, 2004 and the lease agreement for the Lexford Office expires on December 31, 2004.
The Company also has a lease agreement with an affiliated party covering office space occupied by the corporate headquarters located in Chicago, Illinois. This agreement, as amended, expires on July 31, 2001. In addition, commencing June 15, 1998, the Company increased the office space occupied by its corporate personnel. The lease agreement covering the additional space expires on December 31, 2004.
During the years ended December 31, 1999, 1998 and 1997, total lease payments incurred, including a portion of real estate taxes, insurance, repairs and utilities, aggregated $3,271,513, $2,528,150 and $1,491,766, respectively.
The minimum basic aggregate rental commitment under the above described leases in years succeeding December 31, 1999 is as follows:
22. REPORTABLE SEGMENTS
The following tables set forth the reconciliation of net income and total assets for the Company's reportable segments for the years ended December 31, 1999, 1998 and 1997 (see also Note 3 for further discussion).
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) The Company has one primary reportable business segment, which consists of investment in rental real estate. The Company'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 Company 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 Company 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. Further, income allocated to Minority Interests is not allocated to the Properties.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. SUBSEQUENT EVENTS
On January 14, 2000, the Company announced it has entered into an agreement to acquire, in an all cash and debt transaction, Globe Business Resources, Inc. ("Globe"), one of the nation's largest providers of temporary corporate housing and furniture rental. Shareholders of Globe will receive $13.00 per share upon closing and up to an additional $0.50 per share post closing, upon final determination of costs, if any, relating to any potential breaches of certain representations and covenants. At full funding of $13.50 per share, the Company would pay approximately $64.8 million in cash (based on the 4.8 million Globe shares currently outstanding). In addition, the Company will assume approximately $69.4 million in debt. The acquisition, which is expected to close during the second quarter of 2000, does not require approval of the Company's shareholders but does require Globe shareholder approval.
On January 19, 2000, the Company acquired Windmont Apartments, a 178-unit multifamily property located in Atlanta, GA, from an unaffiliated third party for a purchase price of approximately $10.3 million.
On January 24, 2000, the Company funded $2.3 million for an initial earnout payment to the developer of Rosecliff Apartments.
On January 25, 2000, the Company settled on a $100 million forward starting swap and received $7.1 million in connection therewith. The amount received is expected to be amortized over the life of a future financing transaction that the Company expects to close in March 2000.
From January 1, 2000 through March 3, 2000, the Company repaid the outstanding mortgage balances on three properties in the aggregate amount of $12.8 million.
On February 4, 2000, the Company disposed of Lakeridge at the Moors Apartments, a 175-unit multifamily property located in Miami, FL, to an unaffiliated party for a total sales price of $10 million.
On February 9, 2000, the Company disposed of Sonnet Cove I&II Apartments, a 331-unit multifamily property located in Lexington, KY, to an unaffiliated party for a total sales price of $12.3 million.
On February 25, 2000, the Company disposed of Yuma Court Apartments, a 40-unit multifamily property located in Colorado Springs, CO, to an unaffiliated party for a total sales price of $2.4 million.
On February 25, 2000, the Company disposed of Oaks of Lakebridge Apartments, a 170-unit multifamily property located in Ormond Beach, FL, to an unaffiliated party for a total sales price of $7.8 million.
On February 25, 2000, the Company disposed of Indigo Plantation Apartments, a 304-unit multifamily property located in Daytona Beach, FL, to an unaffiliated party for a total sales price of $14.2 million.
On March 3, 2000, Lexford Properties, L.P., a wholly-owned subsidiary of the Operating Partnership, issued 1.1 million units of 8.50% Series B Cumulative Convertible Redeemable Preference Units with an equity value of $55.0 million. Lexford Properties, L.P. received $53.6 million in net proceeds from this transaction. The liquidation value of these units is $50 per unit. The 1.1 million units are exchangeable into 1.1 million shares of 8.50% Series M-1 Cumulative Redeemable Preferred Shares of
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Beneficial Interest of the Company. The Series M-1 Preferred Shares are not convertible to EQR Common Shares. Dividends for the Series B Preference Units or the Series M-1 Preferred Shares are payable quarterly at the rate of $4.25 per unit/share per year.
24. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following unaudited quarterly data has been prepared on the basis of a December 31 year-end. The 1999 and 1998 net income per weighted average Common Share amounts have been presented and, where appropriate, restated to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of net income per share and the impact of Statement No. 128, see Note 14 of Notes to Consolidated Financial Statements. Amounts are in thousands, except for per share amounts.
EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
S-1
S-2
EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
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EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
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EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
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SCHEDULE III
EQUITY RESIDENTIAL PROPERTIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
NOTES:
(A) The balance of furniture & fixtures included in the total investment in real estate amount was $404,259,561 as of December 31,1999. The balance of furniture & fixtures included in the total real estate held for disposition amount was $1,403,187 as of December 31, 1999. (B) The aggregate cost for Federal Income Tax purposes as of December 31, 1999 was approximately $8.5 billion. (C) The life to compute depreciation for furniture & fixtures is 5 years. (D) These two properties are encumbered by $14,438,632 in bonds. (E) These 17 properties are encumbered by $136,000,000 in bonds. (F) These four properties are encumbered by $15,500,000 in bonds. (G) This asset consists of various acquisition dates and largely represents furniture, fixtures and equipment owned by the Management Business. (H) This asset consists of various acquisition dates and represents furniture, fixtures and equipment owned by the Operating Partnership. (I) Improvements are net of write-off of fully depreciated assets which are no longer in service. (J) Formerly known as Oxford & Sussex (K) Formerly known as Post Place (L) Formerly known as The Vinings at Coral Springs (M) Formerly known as The Plantations (NC) (N) These five properties are pledged as additional collateral in connection with the tax-exempt bond refinancing of $177,570,000. (O) These 21 properties are encumbered by $132,203,864 in bonds. (P) These 5 properties are encumbered by a $48,722,302 note payable. (Q) These 5 properties are encumbered by $50,000,000 of mortgage debt. (R) These properties are currently under development and will be completed subsequent to December 31, 1999. (S) These ten properties are encumbered by $177,570,000 in bonds. (T) Includes Port Royale I, Port Royale II and Port Royale III. Port Royale III is encumbered by a third party mortgage. (U) These five properties are pledged as additional collateral in connection with a tax-exempt bond refinancing totaling $122,104,116.
* Four.Lakes was constructed in phases between 1968 & 1988. (#) The Lodge-Texas was struck by a tornado that destroyed most of the property. The property was reconstructed during 1989 & 1990. (x) Pines of Springdale was constructed in phases between 1985 & 1987.
SCHEDULE III
EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) (AMOUNTS IN THOUSANDS)
The changes in total real estate for the years ended December 31, 1999, 1998, and 1997 are as follows:
S-12