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"). The Company 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 the Company. 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") and Evans Withycombe Residential, Inc. ("EWR") (the "EWR Merger").
The Company's subsidiaries include ERP Operating Limited Partnership (the "Operating Partnership"), Evans Withycombe Residential, L.P. (the "EWR Operating Partnership"), Equity Residential Properties Management Limited Partnership and Equity Residential Properties Management Limited Partnership II (collectively, the "Management Partnerships"), a series of partnerships (the "Financing Partnerships") and limited liability companies ("LLCs"), which beneficially own certain properties encumbered by mortgage indebtedness.
As of December 31, 1997, the Company owned or had interests in 489 multifamily properties, of which it controlled a portfolio of 463 multifamily properties (individually, a "Property" and collectively, the "Properties") containing 135,200 units. The remaining 26 properties represent an investment in partnership interests and subordinated mortgages collateralized by 21 properties and mortgage loans collateralized by five properties (collectively, the "Additional Properties") containing 5,267 units. Of the 5,267 units, 1,371 units are property managed by third party unaffiliated entities. The Company's Properties and the Additional Properties are located throughout the United States in the following states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin. In addition, Equity Residential Properties Management Corp. ("Management Corp.") and Equity Residential Properties Management Corp. II ("Management Corp. II") also provide residential property and asset management services to 29 properties containing 9,295 units owned by affiliated entities. The Company is, together with the Operating Partnership, one of the largest publicly traded REITs (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 owned and total revenues earned).
Since the EQR IPO and through December 31, 1997, the Company, through the Operating Partnership, has acquired direct or indirect interests in 412 properties (which included the debt
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collateralized by six Properties) containing 118,510 units in the aggregate for a total purchase price of approximately $6.5 billion, including the assumption of approximately $1.5 billion of mortgage indebtedness. The Company also made an $89 million investment in partnership interests and subordinated mortgages collateralized by 21 of the Additional Properties (its "$89 Million Mortgage Note Investment") and an $88 million investment in mortgage loans collateralized by 5 of the Additional Properties (its "$88 Million Mortgage Note Investment"). Since the EQR IPO through December 31, 1997, the Company has disposed of 18 properties, a portion of one Property, containing 5,035 units, and a vacant land parcel for a total sales price of approximately $129.8 million and the release of mortgage indebtedness in the amount of $20.5 million.
The Company's corporate headquarters and executive offices are located in Chicago, Illinois. In addition, the Company has 29 management offices in the following cities: Chicago, Illinois; Dallas, Houston and San Antonio, Texas; Denver, Colorado; Bethesda, Maryland; Atlanta, Georgia; Las Vegas, Nevada; Scottsdale and Tucson, Arizona; Portland, Oregon; Ypsilanti, Michigan; Charlotte and Raleigh, North Carolina; Tampa, Jacksonville and Ft. Lauderdale, Florida; Irvine, Pleasant Hill and Stockton, California; Kansas City, Kansas; Minneapolis, Minnesota; Louisville, Kentucky; Tulsa, Oklahoma; Boston, Massachusetts; Federal Way, Redmond and Seattle, Washington; and Nashville and Memphis, Tennessee. The Company has approximately 4,200 employees. Each of the Company's Properties is directed by an on-site manager, who supervises the on- site employees and is responsible for the day-to-day operations of the Property. The manager is generally assisted by a leasing administrator and/or property administrator. 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: (i) the value of the Properties; (ii) distributions on a per Common Share basis; and (iii) 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%; and
- - pursuing acquisitions that: (i) are available at prices below estimated replacement costs; (ii) have potential for rental rate and/or occupancy increases; (iii) have attractive locations in their respective markets; and (iv) provide anticipated total returns that will increase the Company's distributions per Common Share and the Shareholder's value.
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- - Purchasing newly developed as well as co-investing in the development of multifamily communities in the Company's existing target markets where the market conditions warrant such development.
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 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 data base 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 undistributed funds from operations ("FFO"), 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: (i) the geographic area and type of community; (ii) the location, construction quality, condition and design of the property; (iii) the current and projected cash flow of the property and the ability to increase cash flow; (iv) the potential for capital appreciation of the property; (v) the terms of resident leases, including the potential for rent increases; (vi) the potential for economic growth and the tax and regulatory environment of the community in which the property is located; (vii) the occupancy and demand by residents for properties of a similar type in the vicinity (the overall market and submarket); (viii) the prospects for liquidity through sale, financing or refinancing of the property; and (ix) 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,
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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: (i) income levels and employment growth trends in the relevant market, (ii) uniqueness of location, (iii) household growth and net migration of the relevant market's population, (iv) supply/demand ratio, competitive housing alternatives, sub- market occupancy and rent levels (v) barriers to entry that would limit competition, and (vi) the purchase price and yields of available existing stabilized communities, if any.
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: (i) potential increases in new construction; (ii) areas where the economy is expected to decline substantially; and (iii) markets where the Company does not intend to establish long-term concentrations. The Company will reinvest the proceeds received from property dispositions to fund property acquisitions. In addition, when feasible the Company will 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, 1997, the Company had a ratio of approximately 33% based on 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 non-voting preferred shares of beneficial interest, $0.01 par value per share ("Preferred Shares"). 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, 1996 and 1995 - ---------------------------------------------------------------------
In June 1995, the Company sold 6,120,000 of its 9 3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the "Series A Preferred Shares"), at $25 per share. The Company raised gross proceeds of $153 million from this offering. The liquidation preference of each of the Series A Preferred Shares is $25 per Series A Preferred Share.
In November 1995, the Company sold 5,000,000 depositary shares (the "Series B Depositary Shares"). Each Series B Depositary Share represents a 1/10 fractional interest in a 9 1/8% Series B Cumulative Redeemable Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series B Preferred Shares"). The liquidation preference of each of the Series B Preferred Shares is $250.00 (equivalent to $25 per Series B Depositary Share). The Company raised gross proceeds of approximately $125 million from the sale of the Series B Depositary Shares.
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In January 1996, the Company completed an offering of 1,725,000 registered Common Shares, which were sold at a net price of $29.375 per share (the "January 1996 Common Share Offering") and received net proceeds of approximately $50.7 million in connection therewith. In February 1996, the Company completed an offering of 2,300,000 registered Common Shares, which were sold at a net price of $29.50 per share (the "February 1996 Common Share Offering") and received net proceeds of approximately $67.8 million in connection therewith.
On May 21, 1996, the Company completed an offering of 2,300,000 publicly registered Common Shares, which were sold at a net price of $30.50 per share. On May 28, 1996 the Company completed the sale of 73,287 publicly registered Common Shares to employees of the Company and to employees of Equity Group Investments, Inc. ("EGI") and certain of their respective affiliates and consultants at a net price equal to $30.50 per share. On May 30, 1996, the Company completed an offering of 1,264,400 publicly registered Common Shares, which were sold at a net price of $30.75 per share. The Company received net proceeds of approximately $111.3 million in connection with the sale of the 3,637,687 Common Shares mentioned above (collectively, the "May 1996 Common Share Offerings").
In September 1996, the Company sold 4,600,000 depositary shares (the "Series C Depositary Shares"). Each Series C Depositary Share represents a 1/10 fractional interest in a 9 1/8% Series C Cumulative Redeemable Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series C Preferred Shares"). The liquidation preference of each of the Series C Preferred Shares is $250.00 (equivalent to $25 per Series C Depositary Share). The Company raised net proceeds of $111.4 million from this offering (the "Series C Preferred Share Offering").
Also in September 1996, the Company completed the sale of 2,272,728 publicly registered Common Shares which were sold at net price of $33 per share. The Company received net proceeds of approximately $75 million in connection with this offering (the "September 1996 Common Share Offering").
In November 1996, the Company issued 39,458 Common Shares pursuant to the 1996 Nonqualified Employee Share Purchase Plan (the "Employee Share Purchase Plan") at a net price of $30.44 and received net proceeds of approximately $1.2 million.
In December 1996, the Company completed offerings of 4,440,000 publicly registered Common Shares, which were sold to the public at a price of $41.25 per share (the "December 1996 Common Share Offerings"). The Company received net proceeds of approximately $177.4 million.
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 "March 1997 Common Share Offerings"). The Company received net proceeds of approximately $88.3 million therefrom.
On May 14, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register $500 million of equity securities (the "June 1997 Equity Shelf Registration"). The SEC declared this registration statement effective on June 5, 1997.
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In May 1997, the Company sold 7,000,000 depositary shares (the "Series D Depositary Shares") pursuant to the June 1997 Equity Shelf Registration. 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 "June 1997 Common Share Offerings"). The Company received net proceeds of approximately $398.9 million therefrom.
On July 28, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register $750 million of equity securities (the "August 1997 Equity Shelf Registration"). The SEC declared this registration statement effective on August 4, 1997.
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 (the "September 1997 Common Share Offering").
In September 1997, the Company sold 11,000,000 depositary shares (the "Series G Depositary Shares") pursuant to the August 1997 Equity Shelf Registration. 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 (the "October 1997 Common Share Offering").
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
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in the Operating Partnership with a simple and convenient method of investing cash distributions in additional Common Shares. 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).
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 (the "December 1997 Common Share Offering").
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.
Debt Offerings For the Years Ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------
In April 1995, the Operating Partnership issued $125 million of 7.95% unsecured fixed rate notes (the "2002 Notes") in a public debt offering (the "Second Public Debt Offering"). The Operating Partnership received net proceeds of approximately $123.1 million in connection with the Second Public Debt Offering.
In August 1996, the Operating Partnership issued $150 million of 7.57% unsecured fixed rate notes (the "2026 Notes") in a public debt offering (the "Third Public Debt Offering"). The Operating Partnership received net proceeds of approximately $149 million in connection with this issuance.
On September 18, 1996, the Operating Partnership filed with the SEC a Form S-3 Registration Statement to register $500 million of debt securities (the "1996 Debt Shelf Registration").
In October 1997, the Operating Partnership issued $150 million of unsecured fixed rate notes (the "2017 Notes") pursuant to the 1996 Debt Shelf Registration in a public debt offering (the "Fourth 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 pursuant to the 1996 Debt Shelf Registration in a public debt offering (the "Fifth Public Debt
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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 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.
CREDIT FACILITY
On November 15, 1996, the Company completed an agreement with Morgan Guaranty Trust Company of New York ("Morgan Guaranty") and Bank of America Illinois ("Bank of America") to provide the Operating Partnership a $250 million unsecured line of credit. In September 1997, this agreement was amended to increase the potential borrowings to $500 million. This line of credit matures in November 1999 and borrowings generally will bear interest at a per annum rate of one, two, three or six month LIBOR, plus a certain rate dependent upon the Company's credit rating, which rate is currently at 0.45%, and is subject to an annual facility fee of $750,000. As of December 31, 1997, $235 million of borrowings were outstanding on this line of credit, bearing interest at a weighted average rate of 6.46%.
BUSINESS COMBINATIONS
On May 30, 1997, the Company completed the acquisition of the multifamily property business of Wellsford through the tax-free 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 of $443.7 million, the liquidation value of $157.5 million for the Wellsford Series A Cumulative Convertible Preferred Shares of Beneficial Interest and the Wellsford Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, 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. 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 tax-free 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 expected to contain 953 units. The purchase price consisted of 10.3 million Common Shares issued by the Company with a total market value of approximately $501.6
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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 the EWR Merger, each outstanding common share of beneficial interest of EWR was converted into .50 of a Common Share.
RECENT TRANSACTIONS
From January 1, 1998 through March 13, 1998, the Company acquired 12 properties from unaffiliated third parties for a total purchase price of approximately $158.2 million, which included the assumption of mortgage indebtedness of approximately $50.8 million. These properties were Cityscape, a 156-unit property located in St. Louis Park, Minnesota; 740 River Drive, a 162-unit property located in St. Paul, Minnesota; Prospect Towers, a 157-unit property located in Hackensack, New Jersey; Park Westend, a 312-unit property located in Richmond, Virginia; Park Place, a 229-unit property located in Houston, Texas; Emerald Bay at Winter Park, a 431-unit property located in Winter Park, Florida; Farnham Park, a 216-unit property located in Houston, Texas; Plantation, a 232-unit property located in Houston, Texas; Balcones Club, a 312-unit property located in Austin, Texas; Coach Lantern, a 90-unit property located in Scarborough, Maine; Foxcroft, a 104-unit property located in Scarborough, Maine; and Yarmouth Woods, a 138- unit property located in Yarmouth, Maine.
In January 1998, the Company completed the sale 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 with this offering (the "January 1998 Common Share Offering").
In February 1998, the Company completed offerings in the aggregate of 1,988,340 publicly registered Common Shares which were sold to the public at prices ranging from $48 to $50.625 per share (the "February 1998 Common Share Offerings"). The Company received net proceeds of approximately $95 million therefrom.
Through February 1998, the Company sold approximately 639,000 Common Shares pursuant to the DRIP Plan and raised proceeds of approximately $31.7 million therefrom.
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.
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.
On March 12, 1998, the Company disposed of two Properties for a total sales price of $16.7 million.
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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.
TAX STATUS
The Company has elected to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company generally will not be subject to Federal income tax to the extent it distributes 95% of its taxable income to its shareholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any year, its taxable income may be subject to income tax at regular corporate rates (including any applicable alternative minimum tax). Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and excise taxes on its undistributed income.
RISK FACTORS
The Company's results of operations are subject to certain risks and uncertainties relating to the operations of its Properties. Investors should carefully consider, among other factors, the matters described below prior to making an investment decision regarding the securities of the Company.
Adverse Consequences of Debt Financing and Preferred Shares
General Risks. As of December 31, 1997, the Properties were subject to approximately $1.6 billion of mortgage indebtedness and the Company's total debt equaled approximately $2.9 billion. Of the total debt outstanding, $912.7 million, including the line of credit balance of $235 million, represented floating rate debt, of which approximately $611 million was issued at tax exempt rates. In addition, from June 1995 through October 1997, the Company issued Preferred Shares and Depositary Shares pursuant to offerings previously mentioned and utilized the proceeds to repay indebtedness and to acquire additional Properties. The Company is subject to the risks normally associated with debt or preferred equity financing, including the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest as well as Preferred Share distributions, the risk that existing indebtedness may not be refinanced or that the terms of such refinancing will not be as favorable as the terms of current indebtedness and the risk that necessary capital expenditures for such purposes as renovations and other improvements may not be financed on favorable terms or at all. If the Company were unable to refinance its indebtedness on acceptable terms, or at all, the Company might be forced to dispose of one or more of the Properties on disadvantageous terms, which might result in losses to the Company and might adversely affect the
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cash available for distributions to shareholders. If interest rates or other factors at the time of the refinancing result in higher interest rates upon refinancing, the Company's interest expense would increase, which would affect the Company's ability to make distributions to its shareholders. Furthermore, if a Property is mortgaged to secure payment of indebtedness and the Company is unable to meet mortgage payments, the mortgagee could foreclose upon the Property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of income and asset value to the Company. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering the Company's ability to meet the REIT distribution requirements of the Code.
Restrictions on the Company's Activities. A substantial portion of the Company's debt was issued pursuant to certain indentures (the "Indentures") which restrict the amount of indebtedness (including acquisition financing) the Company may incur. Accordingly, in the event that the Company is unable to raise additional equity or borrow money because of the debt restrictions in the Indentures, the Company's ability to acquire additional properties may be limited. If the Company is unable to acquire additional properties, its ability to increase the distributions with respect to Common Shares, as it has 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 the Company's portfolio at such time.
Bond Compliance Requirements. Certain of the Company's Properties are subject to restrictive covenants or deed restrictions relating to current or previous tax-exempt bond financing and owns the bonds collateralized by several additional Properties. The Company has retained an independent outside consultant to monitor compliance with the restrictive covenants and deed restrictions that affect these Properties. The bond compliance requirements may have the effect of limiting the Company's income from certain of these Properties if the Company is required to lower its rental rates to attract low or moderate income tenants, or eligible/qualified tenants.
CONTROL AND INFLUENCE BY SIGNIFICANT SHAREHOLDERS
As of March 13, 1998, Mr. Zell, certain of the current holders (the "Zell Holders") of certain OP Units ("Original OP Units") issued at the time of the EQR IPO to certain affiliates of Mr. Zell which contributed 33 of the Properties at the time of the EQR IPO (the "Zell Original Owners"), Equity Properties Management Corp. ("EPMC") and other affiliates of Mr. Zell owned in the aggregate approximately 4.4% of the Common Shares (assuming that all of the partnership interests in the Operating Partnership are exchanged for Common Shares), and certain entities controlled by Starwood Capital Partners L.P. ("Starwood") and its affiliates which contributed 23 of the Properties at the time of the EQR IPO (the "Starwood Original Owners") owned in the aggregate approximately 1.7% of the Common Shares (assuming that all of the OP Units are exchanged for Common Shares). The Starwood Original Owners, together with the Zell Original Owners, shall be referred to collectively as the "Original Owners." As of March 13, 1998, the Company had options outstanding to purchase approximately 5.6 million Common Shares (plus an additional 1.3 million options to purchase Common Shares which have been authorized by the Company for issuance subject to shareholder approval) which it has granted to certain officers, employees and trustees of the Company and consultants to the Company, some of whom are
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affiliated with Mr. Zell, representing in the aggregate approximately 6% of the Common Shares outstanding (assuming that all such options are exercised for Common Shares and all of the outstanding OP Units are exchanged for Common Shares). Further, the consent of affiliates of Mr. Zell who are Zell Holders and of the Starwood Original Owners is required for certain amendments to the Operating Partnership's Fourth Amended and Restated ERP Operating Limited Partnership Agreement of Limited Partnership (the "Partnership Agreement"). Accordingly, Mr. Zell and the Starwood Original Owners may continue to have substantial influence over the Company, which influence might not be consistent with the interests of other shareholders, and on the outcome of any matters submitted to the Company's shareholders for approval. In addition, although there is no current agreement, understanding or arrangement for these shareholders to act together on any matter, these shareholders would be in a position to exercise significant influence over the affairs of the Company if they were to act together in the future.
POTENTIAL ENVIRONMENTAL LIABILITY AFFECTING THE COMPANY
Under various federal, state and local environmental laws, ordinances and regulations, an owner of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. These laws often impose environmental liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure properly to remediate such substances, may adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company or the Subsidiaries, as the case may be, may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as for certain other related costs, including governmental fines and injuries to persons and property.
All of the Properties have been the subject of a Phase I, and in certain cases a supplemental, environmental assessment completed by qualified independent environmental consultant companies. The most recent environmental assessments for each of the Properties were conducted within the last five years. Environmental assessments were obtained prior to the acquisition by the Company of each of the Properties. These environmental assessments have not revealed, nor is the Company aware of, any environmental liability that the Company's management believes would have a material adverse effect on the Company's business, results of operations, financial condition or liquidity.
No assurance can be given that existing environmental assessments with respect to any of the Properties reveal all environmental liabilities, that any prior owner of a Property did not create any material environmental
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condition not known to the Company, or that a material environmental condition does not otherwise exist as to any one or more Properties.
GENERAL REAL ESTATE INVESTMENT CONSIDERATIONS; CHANGES IN LAWS
General. Real property investments are subject to varying degrees of risk and are relatively illiquid. Income from real property investments and the Company's resulting ability to make expected distributions to shareholders may be adversely affected by the general economic climate, local conditions such as oversupply of apartment units or a reduction in demand for apartment units in the area, the attractiveness of the Properties to tenants, zoning or other regulatory restrictions, the ability of the Company to provide adequate maintenance and insurance, and increased operating costs (including insurance premiums and real estate taxes). The Company's income would also be adversely affected if tenants were unable to pay rent or the Company were unable to rent apartment units on favorable terms. If the Company were unable to promptly relet units or renew the leases for a significant number of apartment units, or if the rental rates upon such renewal or reletting were significantly lower than expected rates, then the Company's funds from operations and ability to make expected distributions to shareholders may be adversely affected. In addition, certain expenditures associated with each equity investment (such as real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in income from the investment. The Company intends to purchase newly developed, as well as invest in the development of multifamily communities, including the expansion of existing multifamily communities. Such projects generally require the expenditure of capital, and consequently there can be no assurance that any of such projects will be completed or that such projects will prove to be profitable. The failure of the Company to complete or to profitably operate planned development projects may have an adverse affect on the Company's results of operations and financial position. Furthermore, real estate investments are relatively illiquid and, therefore, will tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions.
Changes in Laws. Increases in real estate taxes, income taxes and service or other taxes generally are not passed through to tenants under existing leases and may adversely affect the Company's FFO and its ability to make distributions to shareholders. Similarly, changes in laws increasing the potential liability for environmental conditions existing on Properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures, which would adversely affect the Company's FFO and its ability to make distributions to shareholders.
OWNERSHIP LIMIT AND LIMITS ON CHANGES IN CONTROL
5% Ownership Limit; Inapplicability to Mr. Zell and Others. In order to maintain its qualification as a REIT under the Code, not more than 50% of the value of the outstanding shares of beneficial interest of the Company may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities). Certain beneficial owners of the Zell Holders (i.e., beneficiaries of trusts established for the benefit of Mr. Zell and his family and trusts established for the benefit of the family of Mr. Robert Lurie, a deceased partner of Mr. Zell (the "Lurie Family Trusts")), EPMC, the Starwood Original Owners, Mr. Keith Withycombe and Mr.
PART I
Stephen Evans, a Trustee of the Company (through their potential ownership of Common Shares), together constitute five individuals for purposes of this test and, under the Internal Revenue Service's (the "Service") rules applicable to determining percentages of ownership, will be deemed to own approximately 4.8% of the value of the outstanding shares of beneficial interest of the Company. Due to such concentration of ownership of the Company, ownership of more than 5% or the lesser of the number or value of the outstanding shares of beneficial interest of the Company by any single shareholder has been restricted, with certain exceptions, for the purpose of maintaining the Company's qualification as a REIT under the Code. Such restrictions in the Company's Declaration of Trust do not apply to the ownership of the 5,499,403 Common Shares subject to acquisition by the holders of Original OP Units and EPMC through the exchange of Original OP Units. Additionally, the Company's Declaration of Trust allows certain transfers of such Common Shares without the transferees being subject to the 5% ownership limit, provided such transfers do not result in an increased concentration in the ownership of the Company. The Company's Board of Trustees, upon receipt of a ruling from the Service, an opinion of counsel or other evidence satisfactory to the Board of Trustees and upon such other conditions as the Board of Trustees may direct, may also exempt a proposed transferee from this restriction.
The 5% ownership limit, as well as the ability of the Company to issue additional Common Shares or other shares of beneficial interest (which may have rights and preferences senior to the Common Shares), may discourage a change of control of the Company and may also (i) deter tender offers for the Common Shares, which offers may be advantageous to shareholders, and (ii) limit the opportunity for shareholders to receive a premium for their Common Shares that might otherwise exist if an investor were attempting to assemble a block of Common Shares in excess of 5% of the outstanding shares of beneficial interest of the Company or otherwise effect a change of control of the Company.
Possible Adverse Consequences of Ownership Limit. To maintain its qualification as a REIT for federal income tax purposes, not more than 50% in value of the outstanding shares of beneficial interest of the Company may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code, to include certain entities). Certain beneficial owners of the Zell Holders (i.e., beneficiaries of trusts established for benefit of Mr. Zell and his family and the Lurie Family Trusts and EPMC, together with the Starwood Original Owners, Mr. Withycombe and Mr. Evans (through their potential ownership of Common Shares) together constitute five individuals for purposes of this test and, under the Service's rules applicable to determining percentages of ownership, are deemed to own approximately 4.8% of the value of the outstanding shares of beneficial interest of the Company. To facilitate maintenance of its qualification as a REIT for federal income tax purposes, the Company generally will prohibit ownership, directly or by virtue of the attribution provisions of the Code, by any single shareholder of more than 5% of the issued and outstanding Common Shares and generally will prohibit ownership, directly or by virtue of the attribution provisions of the Code, by any single shareholder of more than 5% of the issued and outstanding shares of any class or series of the Company's Preferred Shares (collectively, the "Ownership Limit"). The Board of Trustees may, in its reasonable discretion, waive or modify the Ownership Limit with respect to one or more persons who would not be treated as "individuals" for purposes of the Code if it is satisfied, based upon information required to be provided by the party seeking the waiver, that ownership in excess of this limit will not cause
PART I
a person who is an individual to be treated as owning Common Shares or Preferred Shares in excess of the Ownership Limit, applying the applicable constructive ownership rules, and will not otherwise jeopardize the Company's status as a REIT for federal income tax purposes. The Company's Declaration of Trust also exempts from the Ownership Limit certain of the beneficial owners of the Original Owners and EPMC, who would exceed the Ownership Limit as a result of the exchange of the OP Units for Common Shares, which OP Units were received by them at the time of the formation of EQR. Absent any such exemption or waiver, Common Shares or Preferred Shares acquired or held in violation of the Ownership Limit will be transferred to a trust for the benefit of a designated charitable beneficiary, with the person who acquired such Common Shares and/or Preferred Shares in violation of the Ownership Limit not entitled to receive any distributions thereon, to vote such Common Shares or Preferred Shares, or to receive any proceeds from the subsequent sale thereof in excess of the lesser of the price paid therefore or the amount realized from such sale. A transfer of Common Shares and/or Preferred Shares to a person who, as a result of the transfer, violates the Ownership Limit may be void under certain circumstances. The Ownership Limit may have the effect of delaying, deferring or preventing a change in control and, therefore, could adversely affect the shareholders' ability to realize a premium over the then-prevailing market price for the Common Shares in connection with such transaction.
Staggered Board. The Board of Trustees of the Company has been divided into three classes of trustees. As the term of each class expires, trustees for that class will be elected for a three-year term and the trustees in the other two classes will continue in office. The staggered terms for trustees may impede the shareholders' ability to change control of the Company even if a change in control were in the shareholders' interest.
Preferred Shares. The Company's Declaration of Trust authorizes the Board of Trustees to issue up to 100,000,000 preferred shares of beneficial interest, $.01 par value per share ("Preferred Shares"), 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 power to issue Preferred Shares could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the shareholders' interest. As of March 13, 1998, 15,343,500 Preferred Shares were issued and outstanding.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Taxation as a Corporation. The Company believes that it has qualified and will continue to qualify as a REIT under the Code, commencing with its taxable year ended December 31, 1992. However, no assurance can be given that the Company was organized and has been operated and will be able to operate in a manner so as to qualify or remain so qualified. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within the Company's control.
If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable
PART I
income at corporate rates. Moreover, unless entitled to relief under certain statutory provisions, the Company also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce the net earnings of the Company available for investment or distribution to shareholders because of the additional tax liability to the Company for the years involved. In addition, distributions to shareholders would no longer be required to be made.
Other Tax Liabilities. Even if the Company qualifies as a REIT, it will be subject to certain federal, state and local taxes on its income and property. In addition, the Company's management operations, which are conducted through the Management Partnerships, generally will be subject to federal income tax at regular corporate rates.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers. While the Company believes that it could find replacements for these key personnel, the loss of their services could have a temporary adverse effect on the operations of the Company. Only one of these officers has entered into an employment agreement with the Company.
DISTRIBUTION REQUIREMENTS POTENTIALLY INCREASING INDEBTEDNESS OF THE COMPANY
The Company 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 the repayment by the Company or its Subsidiaries of principal on debt, the Company could have taxable income without sufficient cash to enable the Company to meet the distribution requirements of a REIT. Accordingly, the Company could be required to borrow funds or liquidate investments on adverse terms in order to meet such distribution requirements.
EXEMPTIONS FOR MR. ZELL AND OTHERS FROM MARYLAND BUSINESS COMBINATION LAW WHICH TEND TO INHIBIT TAKEOVERS
Under the Maryland General Corporation Law, as amended ("MGCL"), certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland real estate investment trust and any person who beneficially owns 10% or more of the voting power of the trust's shares of beneficial interest or an affiliate of the trust who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the trust's shares of beneficial interest (an "Interested Shareholder"), or an affiliate of such Interested Shareholder, are prohibited for five years after the most recent date on which the Interested Shareholder becomes an Interested Shareholder. Thereafter, any such business combination must be recommended by the board of trustees of such trust and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding voting shares of beneficial interest of the trust and (b) two-thirds of the votes entitled to be cast by holders of voting shares of beneficial interest of the trust other than shares held by the Interested Shareholder with whom (or with whose affiliate) the business combination is to be effected,
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(unless, among other conditions, the holders of the common shares of the trust receive a minimum price (as defined in the MGCL) 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 the MGCL, the Company has exempted any business combination involving Mr. Zell, the Zell Original Owners, EPMC and their respective affiliates and associates, present or future, or any other person acting in concert or as a group with any of the foregoing persons and, consequently, the five- year prohibition and the super-majority vote requirements will not apply to a business combination between any of them and the Company. As a result, Mr. Zell, the Zell Original Owners, EPMC, any present or future affiliate or associate of theirs or any other person acting in concert or as a group with any of the foregoing persons may be able to enter into business combinations with the Company, which may not be in the best interest of the shareholders, without compliance by the Company with the super-majority vote requirements and other provisions of the MGCL.
ITEM 2.
ITEM 2. THE PROPERTIES
As of December 31, 1997, the Company controlled a portfolio of 463 multifamily Properties located in 34 states containing 135,200 apartment units. The average number of units per Property was approximately 293. The units are typically contained in a series of two-story buildings. The Properties contain an aggregate of 118.9 million rentable square feet, with an average unit size of 886 square feet. The average rent per unit was $696 and the average rent per square foot was $0.79.
As of December 31, 1997, the Properties had an average occupancy rate of 95%. Tenant leases are generally year-to-year and require security deposits. The Properties typically provide residents with attractive amenities, which may include a clubhouse, swimming pool, laundry facilities and cable television access. Certain Properties offer additional amenities such as saunas, whirlpools, spas, sports courts and exercise rooms.
The Company believes that the Properties provide amenities and common facilities that create an attractive residence for tenants. 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 456 of the Properties and holds a 73-year leasehold interest with respect to one Property (Mallgate). Direct fee simple title for certain of the Properties is owned by single-purpose nominee corporations 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 an LLC. 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. As of December 31, 1997, the Company had an investment in partnership interests and subordinated mortgages and mortgage loans collateralized by the Additional Properties. The Additional Properties contain 5,267 units, located in seven states.
The following two tables set forth certain information relating to the Properties and the Additional Properties:
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
ITEM 2. PROPERTIES PROPERTIES- CONTINUED
(1) Encumbered by a third party mortgage. (2) Includes La Costa Brava (JAX) and Cedar Cove. (3) Includes Fox Run, Greenwood Forest, Walnut Ridge, and Williamsburg. (4) Includes Port Royale I, Port Royale II, and Lincoln Harbor. Lincoln Harbor is encumbered by a third party mortgage. (5) Northwoods Village is encumbered by a third party mortgage. (6) Greenwich Woods is encumbered by a third party mortgage. (7) Acreage is for combined phases. (8) Includes Paces Station and Paces on the Green.
ITEM 2. PROPERTIES PROPERTIES- Continued Development and Construction Activity The apartment communities under construction and in lease up are listed below:
ITEM 2. PROPERTIES (continued) ADDITIONAL PROPERTIES
ITEM 2. PROPERTIES (continued) ADDITIONAL PROPERTIES
(9) All of these Additional Properties are encumbered by mortgages, of which the Company has an investment in the second and third mortgages (which are subordinate to first mortgages owned by third party unaffiliated entities).
(10) The Company has an investment in six mortgage loans collateralized by these Additional Properties.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Richard M. Perlman, a former employee of companies controlled by Mr. Zell, filed a legal proceeding against Mr. Zell and various partnerships and corporations controlled by Mr. Zell claiming, inter alia, that he had an ---------- interest in 20 of 46 of the Initial Properties (the "Zell Properties") and that he suffered damages when those Properties were transferred into the REIT. The proceeding was filed on July 21, 1995 (Richard M. Perlman et al. v. Samuel ----------------------------------- Zell, et al.) (United States District Court for the Northern District of - ------------ Illinois-Eastern Division, Case No. 95 C 4242). The Company is not a party to this lawsuit. This action has proceeded to a jury verdict and the Company has incurred no liability and will incur no losses in connection with such action.
In addition, only ordinary routine litigation incidental to the business which is not deemed material was initiated during the year ended December 31, 1997. The Company does not believe there is any other litigation, except as mentioned in the previous paragraph, 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
On December 23, 1997, a special meeting of shareholders was held whereby the shareholders were asked to approve the EWR Merger. Of the votes that were collected, there were 55,803,089 votes for the EWR Merger, 224,294 votes against the EWR Merger and 102,495 abstentions.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS 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 March 2, 1998, the Company declared a $0.67 distribution per Common Share payable on April 10, 1998 to shareholders of record on March 27, 1998.
The number of beneficial holders of Common Shares at December 31, 1997, was approximately 34,665. The number of outstanding Common Shares as of December 31, 1997 was 89,085,265.
PART II
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information on a historical basis for the Company and EQR's Predecessor Business. 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 data for the years ended December 31, 1995, 1994, and 1993 have been derived from the historical Financial Statements of the Company and EQR's Predecessor Business audited by Grant Thornton L.L.P., independent accountants. The historical operating data for the years ended December 31, 1997 and 1996 have been derived from the historical Financial Statements of the Company audited by Ernst & Young LLP, independent auditors. The net income per weighted average Common Share amounts have been presented and, where appropriate, restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For a further discussion of net income per weighted average Common Share and the impact of Statement No. 128, see Note 9 of Notes to the Consolidated Financial Statements as included elsewhere in this Form 10-K. Certain capitalized terms as used herein, are defined in the Notes to the Consolidated Financial Statements.
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED AND COMBINED HISTORICAL, INCLUDING EQR'S PREDECESSOR BUSINESS (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AND PROPERTY DATA)
PART II
ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION (COMBINED HISTORICAL (CONTINUED))
(1) Historical results for the year ended December 31, 1993 included combined results of EQR's Predecessor Business for the period January 1, 1993 through August 17, 1993.
(2) Includes approximately $36 million of construction in progress as of December 31, 1997.
(3) In August 1995 the Company also made its $89 million Mortgage Note Investment collateralized by 21 of the Additional Properties. In addition, in April 1997, the Company made its $88 million Mortgage Note Investment collateralized by five of the Additional Properties. The Additional Properties consist of 5,267 units.
(4) The Company generally considers FFO to be one measure of the performance of real estate companies, including an equity REIT. The new 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 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 REITs and, accordingly, may not be comparable to such other REITs. The Company's calculation of FFO for 1995 and 1994 has been restated to reflect the effects of the new definition as mentioned above. FFO for the year ended December 31, 1994 includes the effect of a one-time charge of approximately $879,000 for the relocation of the property management headquarters to Chicago. In addition, FFO for the year ended December 31, 1993 excludes the effect of refinancing costs of approximately $3.3 million which represented costs associated with the prepayment of certain mortgage loans.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 conjunction with "Selected Financial Data" and the historical Consolidated Financial Statements thereto appearing elsewhere in this Form 10-K. Due to the Company's ability to control the Operating Partnership, the EWR Operating Partnership, the Management Partnerships, the Financing Partnerships and the LLCs, each entity has been consolidated with the Company for financial reporting purposes.
Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "believes", "expects" and "anticipates" and other similar expressions which are predictions of or indicate future events and trends and which do not relate solely to historical matters, identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements of the 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: the alternative sources of capital to the Company are too high; 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 as filed on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The 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
Since EQR's IPO and through December 31, 1997, the Company has acquired direct or indirect interests in 412 properties (the "Acquired Properties"), containing 118,510 units in the aggregate for a total purchase price of approximately $6.5 billion, including the assumption of approximately $1.5 billion of mortgage indebtedness and $0.4 billion of unsecured notes. The Company's interest in six of the Acquired Properties at the time of acquisition thereof consisted solely of ownership of the debt collateralized by such Acquired Properties. The Company purchased ten of such Acquired Properties or 2,694 units between the IPO and December 31, 1993 (the "1993 Acquired Properties"); 84 of such Acquired Properties or 26,286 units in 1994 (the "1994 Acquired Properties"); 17 of such Acquired Properties or 5,035 units in 1995 (the "1995 Acquired Properties"); 49 of such Acquired Properties consisting of 15,665 units in 1996 (the "1996 Acquired Properties"); and 252 of such Acquired Properties consisting of 68,830 units in 1997 (the "1997 Acquired Properties"), which include the Properties acquired in connection with the Wellsford Merger and the EWR Merger (collectively, the "Mergers"). The Acquired Properties are presented in the Consolidated and Combined Financial Statements of the Company from the date of each acquisition or the closing dates of the Mergers. In addition, in August 1995, the Company made its $89 Million Mortgage Note Investment collateralized by 21 of the Additional Properties. Also in April 1997, the Company made its $88 Million Mortgage Note Investment
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
collateralized by five of the Additional Properties.
During 1995, the Company disposed of six properties containing 2,445 units (the "1995 Disposed Properties"). During 1996, the Company disposed of five properties containing 1,254 units (the "1996 Disposed Properties"). During 1997 the Company disposed of seven properties, a portion of one property and a vacant land parcel containing 1,336 units (the "1997 Disposed Properties").
The Company's overall results of operations for the three years ended December 31, 1997 have been significantly impacted by the Company's acquisition 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 Acquired Properties. The impact of the Acquired Properties is discussed in greater detail in the following paragraphs.
Properties that the Company owned for all of both 1997 and 1996 representing 49,805 units (the "1997 Same Store Properties") and Properties that the Company owned for all of both 1996 and 1995 representing 45,699 units (the "1996 Same Store Properties") also impacted the Company's results of operations and are discussed as well in the following paragraphs.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, income before gain on disposition of properties, extraordinary item and allocation to Minority Interests increased by $79 million when compared to the year ended December 31, 1996. 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, interest expense and general and administrative expenses. All of the increases in the various line item accounts mentioned above can be primarily attributed to the 1997 Acquired Properties and 1996 Acquired Properties. These increases were partially offset by the 1997 Disposed Properties and the 1996 Disposed Properties. The increase in interest income of $7.5 million earned on the Company's mortgage note investments is primarily attributable to its $88 Million Mortgage Note Investment as well as an increase in interest income earned on its $89 Million Mortgage Note Investment.
In regard to the 1997 Same Store Properties, rental revenues increased by approximately $11.9 million or 3.1% primarily as a result of higher rental rates charged to new tenants and tenant renewals. Overall property operating expenses which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses decreased approximately $1.5 million or 0.9%. This decrease was primarily the result of lower medical and health care insurance costs, which resulted in lower payroll costs. In addition, the Company was also successful in reducing its costs for leasing and advertising as well as building, maintenance and grounds costs by consolidating its vendor services in selected submarkets in order to obtain volume
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
pricing discounts and by consolidating its personnel in selected submarkets where Properties were centrally located. With respect to the lower medical and health care insurance costs, the Company believes this is not a sustainable trend but only benefited the 1997 results.
Property management represents expenses associated with the management of the Company's Properties. These expenses increased by approximately $9.3 million primarily due to the continued expansion of the Company's property management business to facilitate the management of the Company's additional properties. During 1997, the Company opened new management offices in Houston, Texas; Ypsilanti, Michigan; Kansas City, Kansas; Irvine, California; Minneapolis, Minnesota; Charlotte, North Carolina; and Louisville, Kentucky. In addition, the Company assumed a management office in Tulsa, Oklahoma, related to the Wellsford Merger and significantly expanded a management office in Scottsdale, Arizona related to the EWR 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 expenses decreased by $0.5 million 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 $38.3 million. This increase was primarily the result of an increase in the Company's average indebtedness outstanding which increased by $564.5 million, primarily due to the Wellsford Merger. However, the Company's effective interest costs decreased from 7.87% in 1996 to 7.5% in 1997.
General and administrative expenses, which include corporate operating expenses, increased approximately $5.2 million between the years under comparison. This increase was primarily due to adding corporate personnel, higher salary costs and shareholder reporting costs as well as an increase in professional fees. General and administrative expenses as a percentage of total revenues were 2.02% for the year ended December 31, 1997, which was a slight decrease from 2.06% in 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, income before gain on disposition of properties, extraordinary items and allocation to Minority Interests increased by $37.3 million when compared to the year ended December 31, 1995. 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, interest expense and general and administrative expenses. All of the increases in the various line item accounts mentioned above can be primarily attributed to the 1996 Acquired Properties and 1995 Acquired Properties. These increases were partially offset by the 1996 Disposed Properties and the 1995 Disposed Properties. Interest income
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
earned on the Company's mortgage note investment increased by approximately $8 million and was an additional factor that impacted the year to year change.
In regard to the 1996 Same Store Properties, rental revenues increased by approximately $15.9 million or 4.8% primarily as a result of higher rental rates charged to new tenants and tenant renewals and higher average occupancy levels. Overall property operating expenses which include property and maintenance, real estate taxes and insurance and an allocation of property management expenses increased approximately $1.7 million or 1.2%. This increase was primarily the result of higher payroll expenses and utility costs. For 1996 the Company also increased its per unit charge for property level insurance which increased insurance expense by approximately $0.7 million. In addition, real estate taxes increased due to reassessments on certain of the 1996 Same Store Properties.
Property management represents expenses associated with the management of the Company's Properties. These expenses increased by approximately $2.3 million primarily as a result of the expansion of the Company's property management business with the addition of a management office in Seattle, Washington and during the third quarter of 1996 the addition of two new management offices located in Raleigh, North Carolina and Ft. Lauderdale, Florida. Other factors that impacted this increase were higher payroll and travel costs and legal and professional fees.
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 decreased by $0.3 million primarily due to the disposition of certain of these properties.
Interest expense, including amortization of deferred financing costs, increased by approximately $3.8 million. This increase was primarily the result of an increase in the Company's average indebtedness outstanding which increased by $75.8 million. However, the Company's effective interest cost decreased from 8.09% in 1995 to 7.87% in 1996.
General and administrative expenses, which include corporate operating expenses, increased approximately $1.7 million between the years under comparison. This increase was primarily due to adding corporate personnel, higher salary costs and shareholder reporting costs as well as an increase in professional fees. General and administrative expenses as a percentage of total revenues were 2.06% for the year ended December 31, 1996, which was a slight decrease from 2.08% in 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
FOR THE YEAR ENDED DECEMBER 31, 1997
As of January 1, 1997, the Company had approximately $147.3 million of cash and cash equivalents and $250 million available on its line of credit. After taking into effect the various transactions discussed in the following paragraphs, cash and cash equivalents at December 31, 1997 were approximately $33.3 million and the amounts available on the Company's line of credit were $265 million, of which $24.7 million is restricted. In addition, the Company had $6.6 million of proceeds from a property sale included in deposits-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, 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. Continuing to employ this strategy, during 1997 the Company and/or the Operating Partnership: (i) issued a total of approximately 11.9 million Common Shares through various offerings, other than issuances in connection with the acquisitions of Properties and received total net proceeds of approximately $536.8 million, (ii) completed the offerings of the Series D Preferred Shares and the Series G Preferred Shares and received net proceeds of approximately $473.1 million and (iii) issued the 2017 Notes, the 2001 Notes and the 2003 Notes and received net proceeds of approximately $345.9 million. All of these proceeds have been or will be utilized to purchase additional properties and/or repay the line of credit and mortgage indebtedness on certain Properties.
With respect to Property acquisitions during the year, including the effects of the Mergers, the Company purchased 252 Properties containing 68,830 units for a total purchase price of approximately $4.1 billion, including the issuances of 25.1 million Common Shares, the assumption of EWR's minority interest with a market value of approximately $107.3 million, the liquidation value of $157.5 million for the Series E Preferred Shares and Series F Preferred Shares, the assumption of mortgage indebtedness and unsecured notes of approximately $1.3 billion and issuance of OP Units with a value of approximately $5.3 million. The cash portion of these acquisitions were primarily funded from amounts drawn on the Company's line of credit and proceeds received in connection with the transactions mentioned in the previous paragraph.
During the year ended December 31, 1997, the Company also disposed of seven properties, a portion of one Property and a vacant land parcel which generated net proceeds of approximately $35.8 million. Proceeds from the dispositions were ultimately applied to purchase additional Properties.
As of December 31, 1997, the Company had total indebtedness of approximately $2.9 billion, which included mortgage indebtedness of $1.6 billion (including premiums of $3.9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
million), of which $723 million represented tax exempt bond indebtedness, and unsecured debt of $1.4 billion (including net discounts and premiums in the amount of $5.7 million). During the year, the Company repaid an aggregate of $113.4 million of mortgage indebtedness on 29 of its Properties. In addition, the Floating Rate Notes were repaid at maturity on December 22, 1997. These repayments were funded from the Company's line of credit or from proceeds received from the various capital transactions mentioned in previous paragraphs.
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 February 1996, the Company entered into two interest rate protection agreements that were intended to hedge the Company's interest rate risk at maturity of $175 million of indebtedness. The first agreement hedged the interest rate risk of $50 million of mortgage loans scheduled to mature in September 1997 by locking the five year Treasury Rate, commencing October 1, 1997. This agreement was cancelled in July 1997, at no cost to the Company, in conjunction with a new interest rate agreement discussed below. The second agreement hedged the interest rate risk of the Operating Partnership's 1999 Notes by locking the effective four year Treasury Rate commencing May 15, 1999. There was no current cost to the Company for entering into these agreements. 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 at 6.134%. The second agreement was for a notional amount of $75 million with a locked in treasury rate of 6.287%. The fair value of these instruments as of December 31, 1997 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. Capital spent for replacement-type items such as appliances, draperies, carpeting and floor coverings, mechanical equipment and certain furniture and fixtures is also capitalized. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. With respect to acquired properties, the 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 $300 per unit on an annual recurring basis.
During the year ended December 31, 1997, total capital expenditures for the Company approximated $60 million. Of this amount, approximately $9.5 million related to capital improvements and major repairs for certain of the 1995, 1996 and 1997 Acquired Properties.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Capital improvements and major repairs for all of the Company's pre- EQR IPO properties and certain Acquired Properties approximated $19.4 million, or $217 per unit. Capital spent for replacement-type items approximated $21.4 million, or $239 per unit, which is in line with the Company's expected annual recurring per unit cost. Also included in total capital expenditures was approximately $9.7 million expended for non-real estate additions such as computer software, computer equipment, 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 1998 are budgeted to be approximately $94.5 million, which includes approximately $29.7 million related to capital improvements and major repairs for certain of the 1995, 1996 and 1997 Acquired Properties.
Minority Interests as of December 31, 1997 increased by $122.8 million when compared to December 31, 1996. The primary factors that impacted this account during the year were the assumption of the EWR minority interest having a market value of $107.3 million, distributions declared to Minority Interests, which amounted to $19.1 million for the year, the allocation of its income from operations in the amount of $13.3 million, the conversion of OP Units into Common Shares and issuances of Common Shares during the year.
Total distributions paid in 1997 amounted to $292.1 million, which included the distributions declared in the fourth quarter of 1996. The fourth quarter of 1997 distributions to Common Shares holders and Minority Interests were paid on December 30, 1997. On March 2, 1998, the Company declared a $0.67 distribution per Common Share, $0.585938 per Series A Preferred Share, $0.570313 per Series B Depositary Share and Series C Depositary Share, $0.5375 per Series D Depositary Share, $0.603125 per Series F Preferred Share and a $0.453125 per Series G Depositary Share payable to shareholders of record on March 27, 1998. The Common Share distributions will be paid on April 10, 1998 and the Preferred and Depositary Share distributions will be paid on April 15, 1998. Also on March 2, 1998, the Company declared a $0.4375 per Series E Preferred Share payable to shareholders of record on March 13, 1998. This Preferred Share distribution will be paid on April 1, 1998.
Subsequent to December 31, 1997 and through March 12, 1998, the Company acquired 12 additional properties representing 2,539 units for a total purchase price of approximately $158.2 million, including the assumption of approximately $50.8 million of mortgage indebtedness. These acquisitions were funded from proceeds of the January 1998 Common Share Offering. The Company is actively seeking to acquire additional multifamily properties with physical and market characteristics similar to the Properties. During the remainder of 1998, the Company expects to acquire between 10,000 to 15,000 multifamily units. However, there is no assurance that this level of property acquisitions can be achieved.
In January 1998, the Company received proceeds of approximately $195.3 million from the January 1998 Common Share Offering. These proceeds were utilized to repay a portion on
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
the line of credit, to purchase additional properties and/or repay mortgage indebtedness on one Property.
In February 1998, the Company received net proceeds of approximately $95 million from the February 1998 Common Share Offerings. These net proceeds were utilized to repay the remaining balance outstanding on the line of credit and to purchase additional properties.
Through February 1998, the Company sold approximately 639,000 Common Shares pursuant to the DRIP Plan and raised proceeds of approximately $31.7 million.
The Company anticipates that it may continue to sell certain Properties in the portfolio and may sell up to 2,500 multifamily units during 1998. However, there is no assurance that this level of property dispositions may be achieved.
In March 1998, the Company disposed of two Properties for a total sales price of $16.7 million. These proceeds will be utilized to purchase additional Properties.
The Company expects to meet its short-term liquidity requirements, including capital expenditures relating to maintaining its existing Properties, 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 mortgage debt maturities, reduction of outstanding amounts under its line of credit, property acquisitions, financing of construction and development activities and capital improvements through the issuance of unsecured notes and equity securities including additional OP Units as well as from undistributed FFO and proceeds received from the disposition of certain Properties. In addition, the 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.
In November 1996, the Company reached an agreement with Morgan Guaranty and Bank of America to provide the Operating Partnership, with a new credit facility with potential borrowings of up to $250 million. In September 1997, this agreement was amended whereby the potential borrowings were increased to $500 million. This line of credit matures in November 1999 and will continue to be used for property acquisitions and for any working capital needs. As of March 13, 1998, no amounts were outstanding under this facility.
In connection with the Wellsford Merger, the Company has provided a standby obligation in the amount of $30 million pursuant to an agreement entered into with Wellsford Real Properties, Inc., a Maryland corporation ("WRP"), for the construction financing for a multifamily development project located in Denver, Colorado. In addition, the Company has
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
provided a $14.8 million credit enhancement with respect to bonds issued to finance certain public improvements at the multifamily development project.
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. As of December 31, 1997, the Company funded approximately $6.9 million in connection with this agreement. In addition, the Company also funded $20 million to guarantee third party construction financing and will be obligated to fund an additional $20 million in 1998. Subsequent to December 31, 1997, the Company has also funded approximately $9.9 million and anticipates to fund up to an additional $85 million in 1998.
The Company has conducted a review of its computer operating systems and has identified those areas that could be affected by the "Year 2000" issue and has developed a plan to resolve this issue. The Company believes that by modifying certain existing hardware and software and, in other cases, converting to new application systems, the Year 2000 problem can be resolved without significant operational difficulties. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own year 2000 issues. The Company has also identified the cost of the Year 2000 issue and does not expect the financial impact to be material to the Company's results of operations or financial position.
FOR THE YEAR ENDED DECEMBER 31, 1996
As of January 1, 1996, the Company had approximately $13.4 million of cash and cash equivalents and $158 million available on its line of credit. After taking into effect the various transactions discussed in the following paragraphs, cash and cash equivalents at December 31, 1996 were approximately $147.3 million and the amounts available on the Company's line of credit were $250 million. In addition, the Company had $3.6 million of proceeds from a property sale included in deposits-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.
During 1996 the Company and/or the Operating Partnership: (i) issued a total of approximately 14.4 million Common Shares through various offerings and received total net proceeds of $483 million, (ii) completed the offering of the Series C Preferred Shares and received net proceeds of $111.4 million, (iii) issued the 2026 Notes and received net proceeds of $149 million and (iv) refinanced certain of its tax-exempt bonds in two separate transactions for a total of $112.2 million of net proceeds. All of these proceeds were utilized to purchase additional properties and/or repay the line of credit and mortgage indebtedness on certain
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Properties.
With respect to Property acquisitions during 1996, the Company purchased 49 Properties containing 15,665 units for a total acquisition cost of $778.2 million, which included the assumption of $142.2 million of mortgage indebtedness, the forgiveness of debt of $2.7 million and the issuance of OP Units having a value of approximately $0.4 million. These acquisitions were primarily funded from amounts drawn on the Company's line of credit and a portion of the proceeds received in connection with the transactions mentioned in the previous paragraph.
During the year ended December 31, 1996, the Company also disposed of five properties which generated net proceeds of approximately $40 million. Proceeds from the dispositions were ultimately applied to purchase additional Properties.
As of December 31, 1996, the Company had total indebtedness of approximately $1.3 billion, which included mortgage indebtedness of $755.4 million, of which $274 million represented tax exempt bond indebtedness, and unsecured debt of $498.8 million (net of a $1.2 million discount). During the year, the Company repaid an aggregate of $57 million of mortgage indebtedness on eight 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 previous paragraphs.
During the year ended December 31, 1996, total capital expenditures for the Company approximated $45.9 million. Of this amount, approximately $10.6 million related to capital improvements and major repairs for certain of the 1994, 1995 and 1996 Acquired Properties. Capital improvements and major repairs for all of the Company's pre-EQR IPO properties and certain Acquired Properties approximated $13.8 million, or $232 per unit. Capital spent for replacement-type items approximated $16.3 million, or $276 per unit, which is in line with the Company's expected annual recurring per unit cost. In regard to capital spent for upgrades at certain properties and tenant improvements with respect to the retail and commercial office space at one Property, the amount was approximately $2.9 million. Also included in total capital expenditures was approximately $2.3 million expended for non-real estate additions such as computer software, computer equipment, furniture and fixtures and leasehold improvements for the Company's management offices and its corporate headquarters. Such capital expenditures were primarily funded from working capital reserves and from net cash provided by operating activities.
Minority Interests as of December 31, 1996 decreased by $18.3 million when compared to December 31, 1995. The primary factors that impacted this account during the year were distributions declared to Minority Interests, which amounted to $20.5 million for the year, the allocation of its income from operations in the amount of $14.3 million, the conversion of OP Units into Common Shares and issuances of Common Shares during the year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FUNDS FROM OPERATIONS
Commencing in 1996, the Company implemented the new definition of FFO adopted by the Board of Governors of NAREIT in March 1995. The new 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.
The Company generally considers FFO to be one measure of the performance of real estate companies including an equity REIT. 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 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 REITs and, accordingly, may not be comparable to such other REITs.
For the year ended December 31, 1997, FFO increased $110.5 million representing a 69% increase when compared to the year ended December 31, 1996. For the year ended December 31, 1996, FFO increased by $39.3 million representing a 32.5% increase when compared to the year ended December 31, 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
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, 1997, 1996 and 1995:
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
On March 7, 1996, the Company filed a Current Report on Form 8-K, as amended, reporting the dismissal of Grant Thornton L.L.P. as its independent public accountants that is incorporated herein by reference.
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 and Item 13 are incorporated by reference to, and will be contained in, the Company's definitive proxy statement, which the Company anticipates will be filed no later than April 29, 1998, and thus these items have been omitted in accordance with General Instruction G(3) to Form 10-K.
PART IV
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.
3.1+++ Second Amended and Restated Declaration of Trust of Equity Residential Properties Trust dated May 30, 1997
3.2+++ Second 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 in connection with up to $500 million of debt securities
10.1*** Fourth 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++ Second Amended and Restated Revolving Credit Agreement, dated as of September 9, 1997 among the Operating Partnership and Morgan Guaranty Trust Company of New York, as lead agent, Bank of America National Trust and Savings Association, as co-lead agent, The First National Bank of Chicago, as co-agent, U.S. Bank National Association f/k/a and d/b/a First Bank National Association, as co-agent and NationsBank of Texas, N.A., as co-agent
PART IV
and NationsBank of Texas, N.A., as co-agent
10.13#### Consulting Agreement dated August 27, 1997 between Equity Residential Properties Management Limited Partnership and Stephen O. Evans
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, L.P.
12 Computation of Ratio of Earnings to Fixed Charges
21 List of Subsidiaries of Equity Residential Properties Trust
23.1 Consent of Grant Thornton L.L.P.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney for John W. Alexander dated March 2, 1998
24.2 Power of Attorney for James D. Harper, Jr. dated March 2, 1998
24.3 Power of Attorney for Errol R. Halperin dated March 2, 1998
24.4 Power of Attorney for B. Joseph White dated March 2, 1998
24.5 Power of Attorney for Barry S. Sternlicht dated March 4, 1998
24.6 Power of Attorney for Henry H. Goldberg dated March 2, 1998
24.7 Power of Attorney for Edward Lowenthal dated March 2, 1998
24.8 Power of Attorney for Jeffrey H. Lynford dated March 2, 1998
24.9 Power of Attorney for Stephen O. Evans dated March 2, 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 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 10-Q for the quarter ended September 30, 1995, dated November 7, 1995, and incorporated herein by reference. **** Included as an exhibit to the Company's Form 10-K for the year ended December 31, 1994. + 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 8-K dated September 10, 1997, filed on September 10, 1997. +++ 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 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 an exhibit to the Company's Form S-4 filed on September 18, 1997. (b) Reports on Form 8-K:
A Report on Form 8-K dated October 9, 1997, reporting information for property acquisitions.
A Report on Form 8-K/A dated October 9, 1997, reporting information for property acquisitions.
(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, 1998 By: /s/ Douglas Crocker II -------------- ------------------------------------------- Douglas Crocker II President, Chief Executive Officer, Trustee and *Attorney-in-Fact
Date: March 13, 1998 By: /s/ David J. Neithercut -------------- ------------------------------------------- David J. Neithercut Executive Vice-President and Chief Financial Officer
Date: March 13, 1998 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, 1998 By: /s/ Samuel Zell -------------- ------------------------------------------- Samuel Zell Chairman of the Board of Trustees
Date: March 13, 1998 By: /s/ Gerald A. Spector -------------- ------------------------------------------- Gerald A. Spector Executive Vice-President, Chief Operating Officer and Trustee
Date: March 13, 1998 By: /s/ Sheli Z. Rosenberg -------------- ------------------------------------------- Sheli Z. Rosenberg Trustee
PART IV
SIGNATURES-CONTINUED --------------------
Date: March 13, 1998 By: /s/ James D. Harper -------------- ------------------------------------------- James D. Harper Trustee
Date: March 13, 1998 By: /s/ Errol R. Halperin -------------- ------------------------------------------- Errol R. Halperin Trustee
Date: March 13, 1998 By: /s/ Barry S. Sternlicht -------------- ------------------------------------------- Barry S. Sternlicht Trustee
Date: March 13, 1998 By: /s/ John W. Alexander -------------- ------------------------------------------- John W. Alexander Trustee
Date: March 13, 1998 By: /s/ B. Joseph White -------------- ------------------------------------------- B. Joseph White Trustee
Date: March 13, 1998 By: /s/ Henry H. Goldberg -------------- ------------------------------------------- Henry H. Goldberg Trustee
Date: March 13, 1998 By: /s/ Jeffrey H. Lynford -------------- ------------------------------------------- Jeffrey H. Lynford Trustee
Date: March 13 1998 By: /s/ Edward Lowenthal -------------- ------------------------------------------- Edward Lowenthal Trustee
Date: March 13, 1998 By: /s/ Stephen O. Evans -------------- ------------------------------------------- Stephen O. Evans Trustee
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
EQUITY RESIDENTIAL PROPERTIES TRUST
PAGE FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
Report of Independent Auditors Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996 to
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 to
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements to
SCHEDULE FILED AS PART OF THIS REPORT
Report of Independent Accountants S-1
Schedule III - Real Estate and Accumulated Depreciation S-2 to S-12
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, 1997 and 1996 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. 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.
/s/ Ernst & Young LLP ----------------- ERNST & YOUNG LLP
Chicago, Illinois February 26, 1998 except for Note 24, as to which the date is March 12, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees Equity Residential Properties Trust
We have audited the accompanying consolidated statements of operations, changes in shareholders' equity and cash flows for the year ended December 31, 1995 of Equity Residential Properties Trust. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of its operations and its cash flows of Equity Residential Properties Trust for the year ended December 31, 1995, in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Chicago, Illinois February 14, 1996
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
See accompanying notes.
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
See accompanying notes.
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT FOR 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 CHANGES IN SHAREHOLDERS' EQUITY (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") and Evans Withycombe Residential, Inc. ("EWR") (the "EWR Merger"). The Company has elected to be taxed as a REIT under Section 856(c) of the Internal Revenue Code 1986, as amended (the "Code"). As a result, the Company generally will not be subject to Federal income tax to the extent it distributes 95% of its taxable income to its shareholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any year, its taxable income may be subject to income tax at regular corporate rates (including any applicable alternative minimum tax). Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and excise taxes on its undistributed income.
EQR is the successor to the multifamily property business of Equity Properties Management Corp. ("EPMC"), an entity controlled by Mr. Samuel Zell, Chairman of the Board of Trustees of the Company, and a series of other entities which owned 69 of the multifamily properties contributed to the Company at the time of the Company's initial public offering (the "Initial Properties"). Forty- six of the Initial Properties (the "Zell Properties") were contributed or sold by entities substantially controlled by Mr. Zell and primarily owned by Mr. Zell and trusts for the benefit of Mr. Robert Lurie, a deceased partner of Mr. Zell. The remaining 23 of the Initial Properties (the "Starwood Properties") were acquired from entities controlled by Starwood Capital Partners, L.P. ("Starwood") and its affiliates ("Starwood Original Owners"). Prior to the completion of the Company's initial public offering (the "EQR IPO") of 13,225,000 common shares of beneficial interest, $.01 par value per share ("Common Shares"), EPMC provided multifamily residential management services (the "Management Business") to the Zell Properties.
The Company is engaged in the acquisition, disposition, ownership, management and operation of multifamily properties. As of December 31, 1997, the Company controlled a portfolio of 463 multifamily properties (individually a "Property" and collectively the "Properties") containing 135,200 apartment units. The Company's interest in six of these Properties at the time of acquisition thereof consisted solely of ownership of debt collateralized by such Properties. The Company also has an investment in partnership interests and subordinated mortgages collateralized by 21 properties and mortgage loans collateralized by five properties (collectively, the "Additional Properties"). The Properties and Additional Properties are located throughout the United States in the following 35 states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In exchange for contributing 33 of the Zell Properties and the Management Business and the Starwood Properties, the 33 existing entities (the "Zell Original Owners"), and entities controlled by Starwood and EPMC received a total of 8,433,238 partnership interests ("OP Units") (including an additional 93,639 OP Units issued in August 1994 and 1,835 OP Units issued in September 1995) in ERP Operating Limited Partnership (the "Operating Partnership"). The OP Units are exchangeable on a one-for-one basis into Common Shares. The other 13 Zell Properties were acquired from 13 existing partnerships (the "Zell Sellers") for $43.5 million in cash. The Management Business, the Zell Original Owners and the Zell Sellers are collectively the "EQR's Predecessor Business".
The Company has formed a series of partnerships (the "Financing Partnerships") which beneficially own certain Properties encumbered by mortgage indebtedness. The Operating Partnership owns a 1% limited partner interest and a 98% general partner interest in each Financing Partnership. The remaining 1% general partner interest in each Financing Partnership is 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 (the "LLCs") which own certain Properties and one such LLC which has an investment in partnership interests and subordinated mortgages collateralized by 21 of the Additional Properties. The Operating Partnership is a 99% managing member of each LLC and a QRS Corporation is a 1% member of each LLC. In addition, the Company also owns a 1% general partner interest and a 81.1% limited partner interest in Evans Withycombe Residential, L. P. (the "EWR Operating Partnership") and the Operating Partnership owns a 16.1% limited partner interest and a 1% managing general partner interest in the EWR Operating Partnership.
As of December 31, 1997, 451 Properties were managed by either Equity Residential Properties Management Limited Partnership, the successor to the Management Business contributed by EPMC contemporaneously with the EQR IPO or Equity Residential Properties Management Limited Partnership II (collectively, the "Management Partnerships"). The Management Partnerships collect a property management fee consistent with a reasonable arms- length charge for the performance of such services. The sole general partner of the Management Partnerships with a 1% interest is the Operating Partnership. The sole limited partners of the Management Partnerships are Equity Residential Properties Management Corp. ("Management Corp.") and Equity Residential Properties Management Corp. II ("Management Corp. II"), respectively, and each has a 99% interest in the respective partnership.
2. BASIS OF PRESENTATION
The Wellsford Merger and the EWR Merger (collectively, the "Mergers") were treated as purchases in accordance with Accounting Principles Board Opinion No. 16. The fair value of the
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 accompanying consolidated statements of operations and cash flows include the results of both Wellsford and EWR 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, the Management Partnerships, the Financing Partnerships, the LLCs and the EWR Operating Partnership, each such entity has been consolidated with the Company for financial reporting purposes. In regard to Management Corp., Management Corp. II and Evans Withycombe Management, Inc., 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. 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 issued by the Company with a market value of $443.7 million, the liquidation value of $157.5 million for the Series E Preferred 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 expected to contain 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
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of approximately $16.7 million.
4. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
On September 11, 1995, the Company filed with the Securities and Exchange Commission (the "SEC") a Form S-3 Registration Statement to register up to $500 million of its non-voting preferred shares of beneficial interest, $0.01 par value per share ("Preferred Shares"), Common Shares and depositary shares, pursuant to a shelf offering (the "Second Shelf Registration").
In January 1996, the Company completed an offering of 1,725,000 registered Common Shares, which were sold at a net price of $29.375 per share (the "January 1996 Common Share Offering") and received net proceeds of approximately $50.7 million in connection therewith.
Also in January 1996, the Company filed with the SEC a Form S-3 Registration Statement to register 1,676,423 Common Shares which may be sold by the holders thereof or by holders of OP Units upon the issuance of Common Shares in exchange for such OP Units.
In February 1996, the Company completed an offering of 2,300,000 registered Common Shares, which were sold at a net price of $29.50 per share (the "February 1996 Common Share Offering") and received net proceeds of approximately $67.8 million in connection therewith.
On May 21, 1996, the Company completed an offering of 2,300,000 publicly registered Common Shares, which were sold at a net price of $30.50 per share. On May 28, 1996, the Company completed the sale of 73,287 publicly registered Common Shares to employees of the Company and to employees of Equity Group Investments, Inc. and certain of its subsidiaries ("EGI") and certain of their respective affiliates and consultants at a net price equal to $30.50 per share. On May 30, 1996, the Company completed an offering of 1,264,400 publicly registered Common Shares, which were sold at a net price of $30.75 per share. The Company received net proceeds of approximately $111.3 million in connection with the sale of the 3,637,687 Common Shares mentioned above (collectively, the "May 1996 Common Share Offerings").
On June 26, 1996, the Company filed with the SEC a Form S-3 Registration Statement to register 608,665 Common Shares which may be issued by the Company to holders of 608,665 OP Units. The SEC declared this Registration effective on September 6, 1996.
On September 18, 1996, the Company filed with the SEC a Form S-3 Registration Statement to register $500 million of equity securities (the "1996 Equity Shelf Registration"). The SEC declared this Registration effective on September 23, 1996.
In September 1996, the Company completed the sale of 2,272,728 publicly registered Common Shares, which were sold at a net price of $33 per share. The Company received net proceeds of approximately $75 million in connection with this offering (the "September 1996 Common Share Offering").
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On September 27, 1996, the Company filed with the SEC a Form S-3 Registration Statement to register 1,182,835 Common Shares which may be issued by the Company to holders of 1,182,835 OP Units. The SEC declared this Registration effective on October 3, 1996.
In December 1996, the Company completed offerings of 4,440,000 publicly registered Common Shares, which were sold to the public at a price of $41.25 per share (the "December 1996 Common Share Offerings"). The Company received net proceeds of approximately $177.4 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 "March 1997 Common Share Offerings"). The Company received net proceeds of approximately $88.3 million therefrom.
On May 14, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register $500 million of equity securities (the "June 1997 Equity Shelf Registration"). The SEC declared this registration statement effective on June 5, 1997.
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 "June 1997 Common Share Offerings"). The Company received net proceeds of approximately $398.9 million therefrom.
On July 28, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register $750 million of equity securities (the "August 1997 Equity Shelf Registration"). The SEC declared this registration statement effective on August 4, 1997.
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 (the "September 1997 Common Share Offering").
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 (the "October 1997 Common Share Offering").
On December 11, 1997, in connection with the acquisition of one 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. On December 23, 1997, the Company completed an offering of 467,722 publicly registered Common Shares, which were sold to the public at a price of $51.3125 per share and received net proceeds of approximately $22.8 million in connection therewith. The sale of the 1,204,018 Common Shares mentioned above is collectively, the "December 1997 Common Share Offerings".
The following table presents the changes in the Company's issued and outstanding
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Shares for the years ended December 31, 1997, 1996 and 1995 (excluding OP Units of 9,592,590, 7,858,228 and 8,208,882 outstanding at December 31, 1997, 1996 and 1995, respectively):
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Under certain circumstances, the issuance of Preferred Shares may require shareholder approval pursuant to the rules and the regulations of the New York Stock Exchange.
In June 1995, the Company sold 6,120,000 of its 9 3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (liquidation preference $25 per share) (the "Series A Preferred Shares"), pursuant to a $250 million shelf registration (the "Preferred Shelf Registration"), at $25 per share. The Company raised gross proceeds of $153 million from this offering (the "Series A Preferred Share Offering"). The net proceeds of approximately $148.2 million from the Series A Preferred Share Offering were contributed by the Company to the Operating Partnership in exchange for 6,120,000 of the Operating Partnership's 9 3/8% Series A cumulative redeemable preference units. The Series A Preferred Shares are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of January, April, July and October of each year, at the annual rate of 9 3/8% of the liquidation preference of $25 per share. The Series A Preferred Shares are not redeemable prior to June 1, 2000. On or after June 1, 2000, the Preferred Shares may be redeemed for cash at the option of the Company in whole or in part, at a redemption price of $25 per share, plus accrued and unpaid distributions, if any, thereon.
In November 1995, the Company sold 5,000,000 depositary shares (the "Series B Depositary Shares") pursuant to the Preferred Shelf Registration and the Second Shelf Registration. Each Series B Depositary Share represents a 1/10 fractional interest in a 9 1/8% Series B Cumulative Redeemable Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series B Preferred Shares"). The liquidation preference of each of the Series B Preferred Shares is $250.00 (equivalent to $25 per Series B Depositary Share). The Company raised gross proceeds of $125 million from this offering (the "Series B Preferred Share Offering"). The net proceeds of approximately $121 million from the Series B Preferred Share Offering were contributed by the Company to the Operating Partnership in exchange for 500,000 of the Operating Partnership's 9 1/8% Series B cumulative redeemable preference units. The Series B Preferred Shares are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of January, April, July and October of each year, commencing on January 15, 1996, at the annual rate of 91/8% of the liquidation preference of $25 per Depositary Share. The Series B Preferred Shares are not redeemable prior to October 15, 2005. On and after October 15, 2005, the Series B Preferred Shares may be redeemed for cash at the option of the Company, in whole or in part, at a redemption price of $250 per share (equivalent to $25 per Series B Depositary Share), plus accrued and unpaid distributions, if any, thereon.
In September 1996 the Company sold 4,600,000 depositary shares (the "Series C Depositary Shares") pursuant to the Second Shelf Registration. Each Series C Depositary Share
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
represents a 1/10 fractional interest in a 9 1/8% Series C Cumulative Redeemable Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series C Preferred Shares"). The liquidation preference of each of the Series C Preferred Shares is $250.00 (equivalent to $25 per Series C Depositary Share). The Company raised gross proceeds of $115 million from this offering (the "Series C Preferred Share Offering"). The Company contributed the net proceeds of approximately $111.4 million from the Series C Preferred Share Offering to the Operating Partnership in exchange for 460,000 of the Operating Partnership's 9 1/8% Series C cumulative redeemable preference units. The Series C Preferred Shares are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of January, April, July and October of each year, commencing on October 15, 1996, at the annual rate of 9 1/8% of the liquidation preference of $25 per Series C Depositary Share. The Series C Preferred Shares are not redeemable prior to September 9, 2006. On and after September 9, 2006, the Series C Preferred Shares may be redeemed for cash at the option of the Company, in whole or in part, at a redemption price of $250 per share (equivalent to $25 per Series C Depositary Share), plus accrued and unpaid distributions, if any, thereon.
In May 1997, the Company sold 7,000,000 depositary shares (the "Series D Depositary Shares") pursuant to the June 1997 Equity Shelf Registration. 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"). The Company contributed the net proceeds of approximately $169.5 million from the Series D Preferred Share Offering to the Operating Partnership in exchange for 700,000 of the Operating Partnership's 8.60% Series D cumulative redeemable preference units.
The Series E Preferred Shares are cumulative from the date of original issue and are payable quarterly on January 1, April 1, July 1 and October 1 in an amount equal to $1.75 per share per annum. Each Series E Preferred Share is convertible at the option of the holder thereof at any time into Common Shares at a conversion price of $44.93 per Common Share (equivalent to a conversion rate of approximately .5564 Common Share for each Series E Preferred Share). The Series E Preferred Shares are not redeemable prior to November 1, 1998. On and after November 1, 1998, the Series E Preferred Shares may be redeemed at the option of the Company, in whole or in part, initially at $25.875 per share and thereafter at prices declining to $25.00 per share on and after November 1, 2003, plus accrued and unpaid distributions, if any, thereon. In October 1997, 1,300 of the Series E Preferred Shares were converted into 723 Common Shares of the Company.
The Series F Preferred Shares are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of January, April, July and October of each year at the rate of 9.65% of the liquidation preference of $25 per share. The Series F Preferred Shares are not redeemable prior to August 24, 2000. On or after August 24, 2000, the Series F Preferred Shares may be redeemed for cash at the option of the Company, in whole or in part, at a redemption price
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of $25.00 per share, plus accrued and unpaid distributions, if any, thereon.
In September 1997, the Company sold 11,000,000 depositary shares (the "Series G Depositary Shares") pursuant to the August 1997 Equity Shelf Registration. 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. The Company contributed the net proceeds of approximately $303.6 million from the Series G Preferred Share Offering to the Operating Partnership in exchange for 1,265,000 of the Operating Partnership's 7 1/4% Series G convertible cumulative preference units.
Net proceeds from the Company's Common 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 are allocated between shareholders' equity and the equity position of the limited partners of the Operating Partnership (collectively, the "Minority Interests") (to the extent represented by OP Units), to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership.
Assuming conversion of all OP Units, total Common Shares outstanding at December 31, 1997 would have been 98,677,855. As of December 31, 1997, the Minority Interests held 9,592,590 OP Units, which represented a 9.72% interest in the Operating Partnership.
The Company paid a $0.625, $0.625, $0.625 and $0.67 per Common Share distribution on April 11, July 11, October 10 and December 30, 1997, respectively, for the quarters ended March 31, June 30, September 30 and December 31, 1997, to Common Share holders of record on March 28, June 27, September 26 and December 15, 1997, respectively.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the distributions paid to Preferred Share and Depositary Share holders related to the year ended December 31, 1997:
(A) Partial distribution of $0.3344 covers the period May 21 through July 15, 1997. (B) Partial distribution of $0.1108 covers the period September 24 through October 15, 1997.
5. 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. Real estate intended to be held and operated by the Company over their remaining useful life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the particular real estate may not be recoverable. If these events or changes in circumstances are present, the Company estimates the sum of the expected future cash flows
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(undiscounted) to result from the operations and eventual disposition of the particular real estate, and if less than the carrying amount of the real estate, the Company will recognize an impairment loss. Upon recognition of any impairment loss the Company measures that loss based on the amount by which the carrying amount of the real estate exceeds the estimated fair value of the real estate.
For rental 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 the Company has a commitment to sell the property and/or is actively marketing the property for sale. Real estate to be disposed of is reported at the lower of its carrying amount or its estimated fair value, less its cost to sell. Depreciation is not recorded during the period in which assets are held for disposal.
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, a 10-year estimated life for land improvements and up to a seven-year estimated life for furniture, fixtures and equipment. 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. Initial direct leasing costs are expensed as incurred and 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 deprecation are removed from the respective accounts. Any gain or loss on sale or disposition is recognized in accordance with generally accepted accounting principles.
The Company classifies developments and lease-up properties as construction-in-progress until construction on the apartment community has been completed and the apartment community has reached stabilized occupancy. The Company generally considers a property stabilized when it first reaches 93% physical occupancy. The Company also classifies land relating to construction- in-progress as land on its balance sheet. Land associated with construction-in-progress was $8.3 million as of December 31, 1997.
(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.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain the Company's lines of credit, 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. As of December 31, 1997 and 1996, the accumulated amortization of such deferred financing costs was $4.2 million and $3.8 million, 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) Fair Value of Financial Instruments
The fair values of the Company's financial instruments, including cash and cash equivalents, and 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, 1997 was estimated to be approximately $184.8 million compared to the Company's carrying value of $176.1 million. 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.
(f) 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.
(g) Lease Agreements
A substantial portion of the leases entered into between the tenant and a multifamily property for the rental of an apartment unit is month-to-month or year-to-year, renewable upon consent of both parties.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(h) 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 Company paid no Federal income taxes during the year ended December 31, 1997. The aggregate cost of land and depreciable property for Federal income tax purposes as of December 31, 1997 was approximately $6.2 billion.
(i) Income per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("Statement 128"). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All net income per weighted average Common Share and net income per weighted average Common Share - assuming dilution amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. The conversion of an OP Unit to a Common Share will have no effect on income per Common Share, either on a basic or diluted basis, since the allocation of earnings to an OP Unit is equivalent to a Common Share. The effect of a conversion of an OP Unit to a Common Share has been excluded from the basic earnings per share calculation due to certain restrictions.
(j) Minority Interests
Net income is allocated to the Minority Interests 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 the Company. Issuance of additional Common Shares or OP Units changes the ownership interests of both the Minority Interests and the Company. 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 generally accepted accounting principles, 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.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REAL ESTATE
The following summarizes the carrying amounts for the real estate as of December 31, 1997 and 1996:
In addition to the Mergers, during the year ended December 31, 1997, the Company acquired the 124 Properties listed below. Each Property was purchased from an unaffiliated third party, except for 12 of the Properties, which were purchased from affiliates of the Company, Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership ("Zell/Merrill I") and subsidiaries of Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership II ("Zell/Merrill II"). The total purchase price for the Properties acquired from Zell/Merrill I and Zell/Merrill II was approximately $162.2 million. In connection with certain of the acquisitions listed below, the Company assumed mortgage indebtedness of approximately $597.2 million and issued OP Units and Common Shares having a value of approximately $191.3 million. The cash portion of these transactions was funded primarily from proceeds raised from the March 1997 Common Share Offerings, the Series D Preferred Share Offering, the June 1997 Common Share Offerings, the September 1997 Common Share Offering, the Series G Preferred Share Offering, the October Common Share Offering, and the December Common Share Offerings as well as from proceeds raised from the issuances of debt securities as discussed in Note 13.
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)
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT IN LIMITED PARTNERSHIPS - DEVELOPMENT PROPERTIES
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 a portion of the total project development cost of new multifamily developments in certain of the Company's target markets (the "Joint Venture Agreement"). As of December 31, 1997, the Company has funded approximately $6.9 million in connection with this agreement. The amounts invested are included in other assets on the balance sheet.
8. REAL ESTATE DISPOSITIONS
During 1997, the Company disposed of the properties listed below. Each property was sold to an unaffiliated third party.
The Company recognized a total gain of approximately $13.8 million on the disposition of these seven Properties, the portion of one Property and the vacant land parcel.
During the year ended December 31, 1995, the Company recorded a $1 million loss, which represented the estimated impairment in connection with the potential sale of University Park, located in Toledo, Ohio. This Property had a net carrying amount as of December 31, 1995 of approximately $1.1 million after the impairment loss. The impairment loss on real estate to be disposed of is included in gain on disposition of properties on the statement of operations for the year ended December 31, 1995.
9. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE COMMON SHARE
The following tables sets forth the computation of net income per weighted average Common Share outstanding and net income per weighted average Common Share outstanding - assuming dilution.
For additional disclosures regarding the employee share options, see Note 18.
Convertible Preferred Shares that could be converted into 2,763,898 shares of common shares were outstanding at December 31, 1997 but were not included in the computation of diluted earnings per share because it would be anti-dilutive.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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 Additional Properties. These 21 Additional 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 value), $1.6 million represents a one time payment for an interest rate protection agreement and $0.3 million represents 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. The investment in limited partnership interests is accounted for under the equity method and is included in other assets on the balance sheet.
As of December 31, 1997 the second mortgage notes had a combined principal balance of approximately $25.5 million, 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. The third mortgage notes had a combined principal balance of approximately $71.1 million, 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 determined to be 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, 1997 was $9 million. During 1997 and 1996, the Company amortized $3.1 million and $0.6 million, respectively, which is included in interest income- investment in mortgage notes in the consolidated statement of operations. This discount is being amortized utilizing the effective yield method.
On April 28, 1997, the Company made an $88 million investment in six mortgage loans collateralized by five multifamily properties. These five multifamily properties are included in the Additional Properties. As of December 31, 1997, these six mortgage loans had a combined principal balance of approximately $88 million and accrue interest at a rate of 8.25%. These six mortgage loans are scheduled to mature on January 1, 2006.
11. MORTGAGE NOTES PAYABLE
As of December 31, 1997, the Company had outstanding mortgage indebtedness of approximately $1.6 billion encumbering 152 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $145.1 million) was approximately $2.6 billion. The mortgage notes payables are generally due in monthly installments of interest only. In connection
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with the Properties acquired during the year ended December 31, 1997, including the effects of the Mergers, the Company assumed the outstanding mortgage balances on 90 Properties in the aggregate amount of $931 million, which includes a premium of approximately $3.9 million recorded in connection with the EWR Merger.
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 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, 1997 and 1996, the aggregate notional amounts of these agreements were approximately $174.3 million and $166.8 million, respectively. 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, 1997 and 1996, the aggregate notional amount of these agreements was approximately $174.3 million and $166.8 million, respectively. 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 believes that it has limited exposure to the extent of non-performance by the counterparties of the agreements since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance. Furthermore, any non-performance by the counterparty is offset by non-performance by the Company.
The Company also has an interest rate cap agreement for a notional amount of $228,000,000, for which it will receive payments if the PSA index exceeds 5.75%, that terminates on December 1, 1999. 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 it's Properties. The Company has no payment obligations to the counterparty with respect to this agreement.
As of December 31, 1997, scheduled maturities for the Company's outstanding mortgage indebtedness are at various dates through October 1, 2030. During the year ended December 31, 1997, effective interest cost on these mortgage notes was 7.5%. During the year ended December 31, 1997, the Company repaid the outstanding mortgage balances on 29 Properties in the aggregate amount of $113.4 million. Subsequent to December 31, 1997, the Company repaid the outstanding mortgage balance on one Property in the amount of approximately $18.2 million. In February 1996, the Company entered into an interest rate protection agreement, which hedged the interest rate risk of $50 million of mortgage loans, scheduled to mature in September 1997 by locking the
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
five year Treasury Rate, commencing October 1, 1997 through October 1, 2002. This agreement was cancelled in July 1997, at no cost to the Company, in conjunction with the Company entering into another interest rate protection agreement to effectively fix the cost of the Company's unsecured notes issued in November 1997.
As of December 31, 1996, the Company had outstanding mortgage indebtedness of approximately $755.4 million encumbering 88 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $141.2 million) was approximately $1.1 billion. The mortgage notes payables are generally due in monthly installments of interest only. In connection with the Properties acquired during the year ended December 31, 1996, the Company assumed the outstanding mortgage balances on 14 Properties in the aggregate amount of $142.2 million. In addition, during 1996, in two separate transactions, certain indebtedness evidenced by tax-exempt bonds encumbering certain Properties was refinanced resulting in an increase in mortgage indebtedness affecting these Properties of approximately $112 million. In connection with one of these transactions, the Company also recorded an extraordinary loss in the amount of approximately $3.5 million, which represented the write-off of unamortized deferred financing costs from the early retirement of debt.
During the year ended December 31, 1996, the effective interest cost on these mortgage notes was 7.87%. During the year ended December 31, 1996, the Company repaid the outstanding mortgage balances on eight Properties in the aggregate amount of $57 million.
During 1996 the Company terminated two interest rate protection agreements that were initially entered into in connection with two mortgage loans with notional amounts totaling $64.2 million. These two agreements effectively converted these two mortgage loans to fixed rate instruments based on the London Interbank Offered Rate ("LIBOR"). Upon the termination of these agreements the Company received settlement payments of approximately $230,000.
Aggregate payments of principal on mortgage notes payable for each of the next five years and thereafter are as follows:
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LINES OF CREDIT
On November 15, 1996, the Company completed an agreement with Morgan Guaranty Trust Company of New York and Bank of America Illinois to provide the Operating Partnership a $250 million unsecured line of credit. In September 1997, this agreement was amended to increase the potential borrowings to $500 million. This line of credit matures in November 1999 and borrowings generally will bear interest at a per annum rate of one, two, three or six month LIBOR, plus a certain rate dependent upon the Company's credit rating, which rate is currently 0.45%, and is subject to an annual facility fee of $750,000. As of December 31, 1997, $235 million were outstanding on this line of credit, bearing interest at a weighted average rate of 6.46%.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. NOTES
On May 16, 1994, the Operating Partnership issued $125 million of unsecured senior notes (the "1999 Notes") in a private placement (the "Debt Offering") to qualified institutional buyers. The 1999 Notes were issued at a discount, which is being amortized over the life of the 1999 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $0.2 million. The 1999 Notes are due May 15, 1999 and bear interest at a rate of 8.5%, which is payable semiannually in arrears on May 15 and November 15. In February 1996 the Company entered into an interest rate protection agreement that hedged the interest rate risk of the 1999 Notes by locking the effective four-year Treasury Rate, commencing May 15, 1999. There was no current cost to the Company for entering into this agreement.
In December 1994, the Operating Partnership registered $500 million in debt securities pursuant to a debt shelf registration statement (the "Debt Shelf Registration") of which $100 million of unsecured floating rate notes (the "Floating Rate Notes") were issued by the Operating Partnership on December 22, 1994 (the "Public Debt Offering"). The Floating Rate Notes were repaid at maturity on December 22, 1997.
In April 1995, the Operating Partnership issued $125 million of unsecured fixed rate notes (the "2002 Notes") in connection with the Debt Shelf Registration in a public debt offering (the "Second Public Debt Offering"). The 2002 Notes were issued at a discount, which is being amortized over the life of the 2002 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $0.6 million. The 2002 Notes are due on April 15, 2002 and bear interest at 7.95%, which is payable semiannually on each October 15 and April 15. The Operating Partnership received net proceeds of $123.1 million in connection with the Second Public Debt Offering. Prior to the issuance of the 2002 Notes, the Operating Partnership entered into an interest rate protection agreement to effectively fix the interest rate cost of such issuance. The Operating Partnership made a one-time settlement payment of this protection transaction, which was approximately $0.8 million and is being amortized over the term of the 2002 Notes on a straight-line basis. As of December 31, 1997 the unamortized balance of this cost was approximately $0.5 million.
In August 1996, the Operating Partnership issued $150 million of unsecured fixed rate notes (the "2026 Notes") in connection with the Debt Shelf Registration in a public debt offering (the "Third Public Debt Offering"). The 2026 Notes are due on August 15, 2026 and bear interest at 7.57%, which is payable semiannually in arrears on February 15 and August 15, commencing February 15, 1997. The 2026 Notes are redeemable at any time after August 15, 2006 by the Operating Partnership pursuant to the terms thereof. The Operating Partnership received net proceeds of approximately $149 million in connection with this issuance. Prior to the issuance of the 2026 Notes, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of this issuance to 7.5%. The Operating Partnership received a one-time settlement payment from this transaction, which was approximately $0.6 million, which amount is
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
being amortized over the term of the 2026 Notes on a straight-line basis. As of December 31, 1997, the unamortized balance was approximately $0.5 million.
On September 18, 1996, the Operating Partnership filed with the SEC a Form S-3 Registration Statement to register $500 million of debt securities (the "1996 Debt Shelf Registration"). The SEC declared this Registration effective on September 23, 1996.
In October 1997, the Operating Partnership issued $150 million of unsecured fixed rate notes (the "2017 Notes") in connection with the 1996 Debt Shelf Registration in a public debt offering (the "Fourth Public Debt Offering"). The 2017 Notes were issued at a discount, which is being amortized over the life of the 2017 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $1.2 million. 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 connection with the 1996 Debt Shelf Registration in a public debt offering (the "Fifth 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 in arrears on May 15 and November 15, commencing on May 15, 1998. The 2001 Notes were issued at a discount, which is being amortized over the life of the 2001 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $0.3 million. The Operating Partnership received net proceeds of approximately $148.9 million in connection with the 2001 Notes. The 2003 Notes were issued at a discount, which is being amortized over the life of the 2003 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $0.1 million. The Operating Partnership received net proceeds of approximately $49.6 million in connection with the 2003 Notes. Prior to the issuance of the 2001 and 2003 Notes, the Operating Partnership entered into two interest rate protection agreements to effectively fix the interest rate costs of such issuances. The Operating Partnership made a one time settlement payment of each protection transaction, which was approximately $5 million and $1.7 million, respectively, which are being amortized over the term of the Notes on a straight-line basis. As of December 31, 1997 the unamortized balance of these costs were approximately $4.9 million and $1.6 million, respectively.
Included in the note balance are four unsecured note issuances assumed in connection with the Wellsford Merger. These are discussed in the following three paragraphs.
In January 1995, $100 million of senior unsecured notes due February 1, 2002 (the "2002-A Notes") were issued. The 2002-A Notes bear interest at a rate of 9.375%, which is payable
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
semiannually in arrears on August 1 and February 1. In connection with the assumption of the 2002-A Notes, the Company recorded a premium in the amount of $5.6 million, which is being amortized over the remaining life of the notes on a straight-line basis. As of December 31, 1997, the unamortized premium balance relating to the 2002-A Notes was approximately $4.9 million.
In August 1995, $125 million of senior unsecured notes were issued. Of the $125 million issued, $55 million of these notes are due August 15, 2000 (the "2000 Notes") and bear interest at a rate of 7.25%, which is payable semiannually in arrears on February 15 and August 15. The remaining $70 million of these notes are due August 15, 2005 (the "2005 Notes") and bear interest at a rate of 7.75%, which is payable semiannually in arrears on February 1 and August 1.
In November 1996, $25 million of medium term unsecured floating rate notes due November 24, 1999 (the "1999-A Notes") were issued. The 1999-A Notes bear interest at 90 day LIBOR plus 0.32%, which is payable quarterly in arrears on the 25th day of each February, May, August and November.
Also included in the note balance are two unsecured note issuances assumed in connection with the EWR Merger. These are discussed in the following two paragraphs.
In April 1997, $75 million of senior unsecured notes due April 15, 2004 (the "2004 Notes") were issued. The 2004 Notes bear interest at a rate of 7.5%, which is payable semiannually in arrears on October 15 and April 15. In connection with the assumption of the 2004 Notes, the Company recorded a premium in the amount of $1.7 million, which is being amortized over the remaining life of the notes on a straight-line basis. As of December 31, 1997, the unamortized premium balance relating to the 2004 Notes was approximately $1.7 million.
In April 1997, $50 million of senior unsecured notes due April 15, 2007 (the "2007 Notes") were issued. The 2007 Notes bear interest at a rate of 7.625%, which is payable semiannually in arrears on October 15 and April 15. In connection with the assumption of the 2007 Notes, the Company recorded a premium in the amount of $1.6 million, which is being amortized over the remaining life of the notes on a straight-line basis. As of December 31, 1997, the unamortized premium balance relating to the 2007 Notes was approximately $1.6 million.
In regard to all of the interest rate protection agreements mentioned in the previous paragraphs, the Company believes that it has limited exposure to the extent of non-performance by the counterparties of each agreement since each counterpart is a major U.S. financial institution, and the Company does not anticipate their non-performance.
14. EMPLOYEE TRANSACTIONS
As of December 31, 1997, the outstanding principal balance on the employee notes issued in connection with Common Shares purchased was, in the aggregate, approximately $5.14 million. Douglas Crocker II, President and Chief Executive Officer of the Company, and four other officers
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
had purchased an aggregate of 194,000 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 $5.4 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 employee notes are recourse to Mr. Crocker and the four other officers and are collateralized by pledges of the 194,000 Common Shares purchased. Subsequent to December 31,1997, one of the four other officers repaid his note in full.
In addition, as of December 31, 1997, the outstanding principal balance on additional notes issued to Mr. Crocker and one other officer was approximately $0.7 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. The notes are recourse to Mr. Crocker and the other officer and are collateralized by pledges of options, share awards and Common Shares purchased.
Mr. Crocker has a deferred compensation agreement (the "Deferred Compensation Agreement") which Deferred Compensation Agreement will provide Mr. Crocker with a salary benefit after his termination of employment with the Company. If Mr. Crocker's employment is terminated without cause, he would be entitled to annual deferred compensation for a 10-year period commencing on the termination date in an amount equal to his average annual base compensation (before bonus) for the prior five calendar years, multiplied by a percentage equal to 10% per year since December 31, 1995. In the event Mr. Crocker's employment is terminated as a result of his death, permanent disability or incapacity, he would be entitled to a similar amount except the annual percentage would be 15% and the maximum paid per year would not exceed 100% of his average base salary. Should Mr. Crocker be terminated for cause or should he choose to leave voluntarily without good reason, he would not be entitled to any deferred compensation. The Company recognized approximately $0.5 million of compensation expense for both 1997 and 1996 related to this Deferred Compensation Agreement.
In addition, Gerald Spector, Executive Vice President and Chief Operating Officer of the Company, entered into a Deferred Compensation Agreement in 1997, which agreement provides Mr. Spector with a salary benefit after his termination of employment with the Company. If Mr. Spector's employment is terminated without cause, he would be entitled to annual deferred compensation for a 15-year period commencing on the termination date in an amount equal to 75% of his average annual base compensation (before bonus) for the prior five calendar years, multiplied by a percentage equal to 6.67% per each year since December 31, 1996. In the event Mr. Spector's employment is terminated as a result of his death, permanent disability or incapacity, he would be entitled to a similar amount except that the annual percentage would be 10%, not 6.67%. Should Mr. Spector be terminated for cause or should he choose to leave voluntarily without good reason, he would not be entitled to any deferred compensation. The Company recognized approximately $0.2 million of compensation expense in 1997 related to this Deferred Compensation Agreement.
The Board of Trustees also approved a share distributions agreement (the "Share Distributions Agreement") for Mr. Crocker. On January 18, 1996, Mr. Crocker was issued options
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to purchase 100,000 Common Shares at the then current market price of the Common Shares, which vest over a 3-year period and are effective for 10 years. Pursuant to the terms of the Share Distributions Agreement, upon the exercise of any of these options, Mr. Crocker would be entitled to an amount equal to the amount of Common Share distributions that would have been paid on said shares being exercised had he owned said shares for the period from January 18, 1996 until the date of the exercise of the options in question. Mr. Crocker's death or termination of employment would not affect this agreement with the Company.
In May, 1997, Jeffrey 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 Evans executed a consulting agreement with an affiliate of the Company. The consulting agreement has a term of two years and expires on December 31, 1999. Pursuant to the consulting agreement, Mr. Evans will serve as a senior management consultant to the Company and will receive 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 will also be 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.
Also in connection with the EWR Merger, in December, 1997, Richard Berry executed an employment agreement with an affiliate of the Company which expires on December 31, 2000 and provides for cash compensation of $250,000 per annum. Pursuant to the agreement, Mr. Berry exchanged all unvested restricted shares of Evans common shares at the time of the EWR Merger into 18,747 restricted Common Shares of the Company, which will vest on December 31, 2000. Mr. Berry also received an option to purchase 77,500 Common Shares that will vest in three equal annual installments and will have an exercise price equal to $50.125 per Common Share. The agreement also provided that Mr. Berry will be eligible to participate in all of the Company's employee benefit plans which persons in comparable positions participate.
In December, 1997, Mr. Berry also entered into a Deferred Compensation Agreement with the Company which will pay benefits only in the event Mr. Berry's employment with the Company is terminated prior to January 1, 2000. In such a case, the amount payable under Mr. Berry's agreement will equal the value of any restricted Common Shares received in exchange for EWR common shares which are forfeited upon his termination of employment. The payment will be made in two semi-annual installments over the one-year period following termination of employment, and interest of 9% per annum will accrue on the balance over the one-year payment period.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $0.8 million for the year ended December 31, 1996 and expects to make contributions in the amount of approximately $1.5 million for the year ended December 31, 1997.
15. DEPOSITS-RESTRICTED
Deposits-restricted as of December 31, 1997 primarily included a deposit in the amount of $20 million held in a third party escrow account made to provide third party construction financing in connection with the Joint Venture Agreement. Also, approximately $8.8 million was held in third party escrow accounts made in connection with the Company's disposition of Diplomat South and for several expected 1998 acquisitions. In addition, approximately $7.6 million was for tenant security and utility deposits for certain of the Company's Properties.
Deposits-restricted, as of December 31, 1996, primarily included deposits in the amount of approximately $16.4 million held in third party escrow accounts which were made in connection with five Properties acquired in 1997. In addition, approximately $3.7 million was for tenant security and utility deposits for certain of the Company's Properties.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. GAIN ON EARLY EXTINGUISHMENT OF DEBT
In June 1995, the Company paid approximately $12.6 million in full satisfaction of a $14.6 million mortgage note obligation related to one of its Properties. As a result, the Company recognized a gain of $2 million on the extinguishment of this indebtedness.
17. SUMMARIZED PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
The following Summarized Pro Forma Condensed Statement of Operations has been prepared as if the March 1997 Common Share Offerings, the Series D Preferred Share Offering, the June 1997 Common Share Offerings, the Wellsford Merger, the September 1997 Common Share Offering, the Series G Preferred Share Offering, the Fourth Public Debt Offering, the October 1997 Common Share Offering, the Fifth Public Debt Offering, the December 1997 Common Share Offerings, the EWR Merger, the acquisition of an additional 124 Properties, including the related assumption of $597.2 million of mortgage indebtedness, the repayment of $113.4 million of mortgage indebtedness and the disposition of seven properties (as described in Note 3, Note 4, Note 6, Note 8, Note 11 and Note 13 of Notes to Consolidated Financial Statements) had occurred on January 1, 1997. This would result in 89,085,265 Common Shares outstanding. 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, 1997, or to project results for any future period. The amounts presented in the following statement are in thousands except for share amounts:
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SHARE OPTION PLAN
Pursuant to the Company's Amended and Restated 1993 Share Option and Share Award Plan (the "Third 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 Option and Award Plan, certain officers of the Company may be awarded Common Shares, subject to conditions and restrictions as described in the 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, 1997, 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 has reserved 5,600,000 Common Shares for issuance under the Option and Award Plan. The Options generally are granted at the fair market value of the Company's 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 Third 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 Third 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 Third 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.
The Company has elected to apply the provisions of Accounting Principles Board Opinion
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Financial Accounting Standards Board No. 123 (FASB 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 FASB No. 123 would be recognized over the vesting period of the options. The fair value for the Company's options granted subsequent to December 31, 1994 was estimated at the time the options were granted using the Black Scholes option pricing model with the following weighted-average assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of 6.51%, 6.35% and 6.33%; dividend yields of 7.64%, 6.98% and 5.32%; volatility factors of the expected market price of the Company's Common Shares of 0.226, 0.226 and 0.218; 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 years ended December 31, 1997, 1996 and 1995:
The table below summarizes the Option activity of the Third Amended Option and Award Plan for the three years ended December 31, 1997:
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1997, 1996 and 1995, 1,329,516 shares, 898,075 shares and 743,368 shares were exercisable, respectively. Exercise prices for Options outstanding as of December 31, 1997 ranged from $26 to $54.8125. Expiration dates ranged from August 11, 2003 to December 24, 2007. The remaining weighted-average contractual life of those Options was 8.27 years. The weighted-average grant date fair value of Options granted during 1997 was $7.37.
19. 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 1996, the Company issued 39,458 Common Shares at a net price of $30.44 per share. 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.
20. 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 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
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cash distributions in additional Common Shares. 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).
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 other litigation, except as mentioned in the previous paragraph, 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 connection with the Joint Venture Agreement, as discussed in Note 7, the Company is obligated to fund an additional $20 million in connection with the third party construction financing.
In connection with the Wellsford Merger, the Company has provided a standby obligation in the amount of $30 million pursuant to an agreement entered into with Wellsford Real Properties, Inc., a Maryland corporation ("WRP"), for the construction financing for a multifamily development project located in Denver, Colorado. In addition, the Company has provided a $14.8 million credit enhancement with respect to bonds issued to finance certain public improvements at the multifamily development project.
The Company has lease agreements with an affiliated party covering office space occupied by the management offices located in Tampa, Florida (the "Tampa Office") and Chicago, Illinois (the "Chicago Office"). The Tampa Office agreement expires on October 31, 2001 and the Chicago Office 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"); Atlanta, Georgia (the "Atlanta Office"); Scottsdale, Arizona (the "Scottsdale Office") and Irvine, California (the "Irvine Office"). The lease agreement for the Dallas Office expires on February 28, 1999, the lease agreement for the Bethesda Office expires on November 30, 1998, the lease agreement for the Denver Office expires on December 31, 2002, the lease agreement for the Seattle Office expires on November 30, 2000, the lease agreement for the Atlanta Office expires on May 14, 2001, the lease agreement for the Scottsdale Office expires on July 31, 1999 and the lease agreement for the Irvine Office expires on July 31, 1998.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 September 1, 1996, the Company increased the office space occupied by its corporate personnel. The lease agreement covering the additional space expires on April 29, 1998.
During the years ended December 31, 1997, 1996 and 1995, total rentals, including a portion of real estate taxes, insurance, repairs and utilities, aggregated $1,491,766, $1,020,311, and $1,049,731, respectively.
The minimum basic aggregate rental commitment under the above described leases in years succeeding December 31, 1997 is as follows:
22. TRANSACTIONS WITH RELATED PARTIES
Certain related entities provided services to the Company. These included, but were not limited to, Rosenberg & Liebentritt, P.C., which provided legal services, and Greenberg & Pociask, Ltd., which provided tax and accounting services. Fees paid to these related entities in the aggregate amounted to approximately $1.3 million, $0.7 million and $2.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. 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, $4.1 million and $2.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997, 1996 and 1995, $643,519, $315,700 and $366,300, respectively, was owed to Rosenberg & Liebentritt, P.C. for legal fees incurred in connection with securities offerings, litigation matters, property acquisitions and other general corporate matters.
Equity Group Investments, Inc. and certain of its subsidiaries, including Equity Assets Management, Inc., Eagle Flight Services, Equity Properties & Development, L.P. and EPMC ("EGI"), have provided certain services to the Company which include, but are not limited to, financial and accounting services, investor relations, corporate secretarial, computer and support services, real estate tax evaluation services, market consulting and research services, financing services, information systems services and property development services. Fees paid to EGI for these services amounted to $1.1 million, $1.3 million and $3.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. Amounts due to EGI were approximately $74,578, $0.3 million and $1.1 million as of December 31, 1997, 1996 and 1995, respectively.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the affiliated lease agreements discussed in Note 21, the Company paid Equity Office Holdings, L.L.C. ("EOH") $145,511, $118,919 and $104,421 in connection with the Chicago Office, $177,793, $137,638 and $9,783 in connection with the Tampa Office and $632,693, $409,392 and $632,725 in connection with the space occupied by the corporate headquarters for the years ended December 31, 1997, 1996 and 1995, respectively. Amounts due to EOH were approximately $59,675 and $46,435 as of December 31, 1997 and 1996, respectively. As of December 31, 1995, no amounts were owed to EOH.
In connection with the Private Equity Offering and the Shelf Offering, the Company paid Equity Institutional Investors, Inc. ("EII") consulting fees in the amount of $200,000 for the year ended December 31, 1995. As of December 31, 1997 and 1996, no amounts were owed to EII for consulting services.
Artery Property Management, Inc. ("Artery") provided the Company consulting services with regard to property acquisitions and additional business opportunities. Fees paid for those services and reimbursed expenses amounted to approximately $0.2 million and $0.7 million for the years ended December 31, 1996 and 1995.
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 $2.3 million, $4,300 and $41,300 for the years ended December 31, 1997, 1996 and 1995, 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 $5.7 million, $6.7 million and $7 million for the years ended December 31, 1997, 1996 and 1995, respectively.
23. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following unaudited quarterly data has been prepared on the basis of a December 31 year end. The 1997 and 1996 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 weighted average Common Share outstanding and impact of Statement No. 128, see Note 5 of Notes to Consolidated Financial Statements. Amounts are in thousands, except for per share amounts.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. SUBSEQUENT EVENTS
On January 7, 1998, the Company acquired Cityscape Apartments, a 156-unit multifamily property located in St. Louis Park, Minnesota, from an unaffiliated third party for a purchase price of approximately $12.3 million.
On January 9, 1998, the Company acquired 740 River Drive Apartments, a 162-unit multifamily property located in St. Paul, Minnesota, from an unaffiliated third party for a purchase price of approximately $12.8 million, which included the assumption of mortgage indebtedness of approximately $7 million.
On January 13, 1998, the Company acquired Prospect Towers Apartments, a 157-unit multifamily property, including a vacant parcel of land, located in Hackensack, New Jersey, from an unaffiliated third party for a purchase price of approximately $36.3 million, which included the assumption of mortgage indebtedness of approximately $14.9 million.
On January 16, 1998, the Company acquired Park Place Apartments, a 229-unit multifamily property located in Houston, Texas, from an unaffiliated third party for a purchase price of approximately $13.6 million, which included the assumption of mortgage indebtedness of approximately $10.2 million.
On January 16, 1998, the Company acquired Park Westend Apartments, a 312-unit multifamily property located in Richmond, Virginia, from an unaffiliated third party for a purchase price of approximately $13.3 million, which included the assumption of mortgage indebtedness of approximately $7.2 million.
On January 27, 1998, the Company completed an offering of 4,000,000 publicly registered Common Shares, which were sold at a price of $50.4375 per share. The Company received net proceeds of approximately $195.3 million in connection therewith.
On January 29, 1998, the Company acquired Emerald Bay at Winter Park Apartments, a 431-unit multifamily property located in Winter Park, Florida, from an unaffiliated third party for a purchase price of approximately $15.7 million.
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 effective on February 27, 1998.
On February 5, 1998, the Company acquired Farnham Park Apartments, a 216-unit multifamily property located in Houston, Texas, from an unaffiliated third party for a purchase price of approximately $15.7 million, which included the assumption of mortgage indebtedness of approximately $11.5 million.
On February 18, 1998, the Company completed offerings of 988,340 publicly registered Common Shares, which were sold at a price of $50.625 per share. The Company received net proceeds of approximately $47.5 million in connection therewith.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 23, 1998, the Company completed an offering of 1 million publicly registered Common Shares, which were sold at a price of $48 per share. The Company received net proceeds of approximately $47.5 million in connection therewith.
On February 25, 1998, the Company acquired Plantation Apartments, a 232-unit multifamily property located in Houston, Texas, from an unaffiliated third party for a purchase price of approximately $10 million.
On February 27, 1998, the Company acquired Balcones Club Apartments, a 312-unit multifamily property located in Austin, Texas, from an unaffiliated third party for a purchase price of approximately $12.3 million.
Through February 1998, the Company sold approximately 639,000 Common Shares pursuant to the DRIP Plan and raised proceeds of approximately $31.7 million.
On March 2, 1998, the Company acquired Coach Lantern Apartments, a 90-unit multifamily property located in Scarborough, Maine, from an unaffiliated third party for a purchase price of approximately $4.7 million.
On March 2, 1998, the Company acquired Foxcroft Apartments, a 104-unit multifamily property located in Scarborough, Maine, from an unaffiliated third party for a purchase price of approximately $4.9 million.
On March 2, 1998, the Company acquired Yarmouth Woods Apartments, a 138-unit multifamily property located in Yarmouth, Maine, from an unaffiliated third party for a purchase price of approximately $6.6 million.
On March 2, 1998, the Company declared a $0.67 distribution per Common Share, $0.585938 per Series A Preferred Share, $0.570313 per Series B Depositary Share and per Series C Depositary Share, $0.5375 per Series D Depositary Share, $0.603125 per Series F Preferred Share and $0.453125 per Series G Depositary Share for the quarter ended March 31, 1998 to shareholders of record on March 27, 1998. In addition, the Company declared a $0.4375 per Series E Preferred Share for the quarter ended March 31, 1998 to shareholders of record on March 13, 1998.
On March 12, 1998, the Company disposed of two Properties for a total sales price of $16.7 million.
To the Board of Trustees Equity Residential Properties Trust
In connection with our audit of the consolidated financial statements of Equity Residential Properties Trust referred to in our report dated February 14, 1996, which financial statements are included in this Form 10-K, we have also audited the 1995 information in the financial statement schedule listed in the Index to the Financial Statements and Schedule. In our opinion, this financial statement schedule presents fairly, in all material respects, the 1995 information required to be set forth therein.
/s/ GRANT THORNTON LLP ------------------------------- GRANT THORNTON LLP
Chicago, Illinois February 14, 1996
S-1
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-2
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-3
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-4
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-5
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-6
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-7
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-8
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-9
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-10
SCHEDULE III EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
NOTES:
(A) The balance of furniture & fixtures included in the total amount was $232,636,142 as of December 31, 1997. (B) The aggregate cost for Federal Income Tax purposes as of December 31, 1997 was approximately $6.2 billion. (C) The life to compute depreciation for furniture & fixtures is 7 years. (D) These two properties are encumbered by $14,947,187 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 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) Combined with Cedar Cove. (K) Formerly known as Oxford & Sussex. (L) Formerly known as Post Place. (M) Formerly known as The Vinings at Coral Springs. (N) Formerly known as The Plantations (NC). (O) These five properties are pledged as additional collateral in connection with the tax-exempt bond refinancing. (P) These 21 properties are encumbered by $133,669,779 in bonds. (Q) These 5 properties are encumbered by a $50,200,125 note payable. (R) Balances represent development properties Montierra, The Retreat and Vista Grove. These apartment communities are currently under construction and/or are in the process of being leased up.
* 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.
S-11
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, 1997, 1996, and 1995 are as follows:
The changes in accumulated depreciation for the years ended December 31, 1997, 1996 and 1995 are as follows:
S-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.
3.1+++ Second Amended and Restated Declaration of Trust of Equity Residential Properties Trust dated May 30, 1997
3.2+++ Second 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 in connection with up to $500 million of debt securities
10.1*** Fourth 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++ Second Amended and Restated Revolving Credit Agreement, dated as of September 9, 1997 among the Operating Partnership and Morgan Guaranty Trust Company of New York, as lead agent, Bank of America National Trust and Savings Association, as co-lead agent, The First National Bank of Chicago, as co-agent, U.S. Bank National Association f/k/a and d/b/a First Bank National Association, as co-agent and NationsBank of Texas, N.A., as co-agent
PART IV
and NationsBank of Texas, N.A., as co-agent
10.13#### Consulting Agreement dated August 27, 1997 between Equity Residential Properties Management Limited Partnership and Stephen O. Evans
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, L.P.
12 Computation of Ratio of Earnings to Fixed Charges
21 List of Subsidiaries of Equity Residential Properties Trust
23.1 Consent of Grant Thornton L.L.P.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney for John W. Alexander dated March 2, 1998
24.2 Power of Attorney for James D. Harper, Jr. dated March 2, 1998
24.3 Power of Attorney for Errol R. Halperin dated March 2, 1998
24.4 Power of Attorney for B. Joseph White dated March 2, 1998
24.5 Power of Attorney for Barry S. Sternlicht dated March 4, 1998
24.6 Power of Attorney for Henry H. Goldberg dated March 2, 1998
24.7 Power of Attorney for Edward Lowenthal dated March 2, 1998
24.8 Power of Attorney for Jeffrey H. Lynford dated March 2, 1998
24.9 Power of Attorney for Stephen O. Evans dated March 2, 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 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 10-Q for the quarter ended September 30, 1995, dated November 7, 1995, and incorporated herein by reference. **** Included as an exhibit to the Company's Form 10-K for the year ended December 31, 1994. + 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 8-K dated September 10, 1997, filed on September 10, 1997. +++ 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 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 an exhibit to the Company's Form S-4 filed on September 18, 1997. (b) Reports on Form 8-K:
A Report on Form 8-K dated October 9, 1997, reporting information for property acquisitions.
A Report on Form 8-K/A dated October 9, 1997, reporting information for property acquisitions.
(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, 1998 By: /s/ Douglas Crocker II -------------- ------------------------------------------- Douglas Crocker II President, Chief Executive Officer, Trustee and *Attorney-in-Fact
Date: March 13, 1998 By: /s/ David J. Neithercut -------------- ------------------------------------------- David J. Neithercut Executive Vice-President and Chief Financial Officer
Date: March 13, 1998 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, 1998 By: /s/ Samuel Zell -------------- ------------------------------------------- Samuel Zell Chairman of the Board of Trustees
Date: March 13, 1998 By: /s/ Gerald A. Spector -------------- ------------------------------------------- Gerald A. Spector Executive Vice-President, Chief Operating Officer and Trustee
Date: March 13, 1998 By: /s/ Sheli Z. Rosenberg -------------- ------------------------------------------- Sheli Z. Rosenberg Trustee
PART IV
SIGNATURES-CONTINUED --------------------
Date: March 13, 1998 By: /s/ James D. Harper -------------- ------------------------------------------- James D. Harper Trustee
Date: March 13, 1998 By: /s/ Errol R. Halperin -------------- ------------------------------------------- Errol R. Halperin Trustee
Date: March 13, 1998 By: /s/ Barry S. Sternlicht -------------- ------------------------------------------- Barry S. Sternlicht Trustee
Date: March 13, 1998 By: /s/ John W. Alexander -------------- ------------------------------------------- John W. Alexander Trustee
Date: March 13, 1998 By: /s/ B. Joseph White -------------- ------------------------------------------- B. Joseph White Trustee
Date: March 13, 1998 By: /s/ Henry H. Goldberg -------------- ------------------------------------------- Henry H. Goldberg Trustee
Date: March 13, 1998 By: /s/ Jeffrey H. Lynford -------------- ------------------------------------------- Jeffrey H. Lynford Trustee
Date: March 13 1998 By: /s/ Edward Lowenthal -------------- ------------------------------------------- Edward Lowenthal Trustee
Date: March 13, 1998 By: /s/ Stephen O. Evans -------------- ------------------------------------------- Stephen O. Evans Trustee
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
EQUITY RESIDENTIAL PROPERTIES TRUST
PAGE FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
Report of Independent Auditors Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996 to
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 to
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements to
SCHEDULE FILED AS PART OF THIS REPORT
Report of Independent Accountants S-1
Schedule III - Real Estate and Accumulated Depreciation S-2 to S-12
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, 1997 and 1996 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. 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.
/s/ Ernst & Young LLP ----------------- ERNST & YOUNG LLP
Chicago, Illinois February 26, 1998 except for Note 24, as to which the date is March 12, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees Equity Residential Properties Trust
We have audited the accompanying consolidated statements of operations, changes in shareholders' equity and cash flows for the year ended December 31, 1995 of Equity Residential Properties Trust. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of its operations and its cash flows of Equity Residential Properties Trust for the year ended December 31, 1995, in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Chicago, Illinois February 14, 1996
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
See accompanying notes.
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
See accompanying notes.
EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT FOR 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 CHANGES IN SHAREHOLDERS' EQUITY (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") and Evans Withycombe Residential, Inc. ("EWR") (the "EWR Merger"). The Company has elected to be taxed as a REIT under Section 856(c) of the Internal Revenue Code 1986, as amended (the "Code"). As a result, the Company generally will not be subject to Federal income tax to the extent it distributes 95% of its taxable income to its shareholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any year, its taxable income may be subject to income tax at regular corporate rates (including any applicable alternative minimum tax). Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and excise taxes on its undistributed income.
EQR is the successor to the multifamily property business of Equity Properties Management Corp. ("EPMC"), an entity controlled by Mr. Samuel Zell, Chairman of the Board of Trustees of the Company, and a series of other entities which owned 69 of the multifamily properties contributed to the Company at the time of the Company's initial public offering (the "Initial Properties"). Forty- six of the Initial Properties (the "Zell Properties") were contributed or sold by entities substantially controlled by Mr. Zell and primarily owned by Mr. Zell and trusts for the benefit of Mr. Robert Lurie, a deceased partner of Mr. Zell. The remaining 23 of the Initial Properties (the "Starwood Properties") were acquired from entities controlled by Starwood Capital Partners, L.P. ("Starwood") and its affiliates ("Starwood Original Owners"). Prior to the completion of the Company's initial public offering (the "EQR IPO") of 13,225,000 common shares of beneficial interest, $.01 par value per share ("Common Shares"), EPMC provided multifamily residential management services (the "Management Business") to the Zell Properties.
The Company is engaged in the acquisition, disposition, ownership, management and operation of multifamily properties. As of December 31, 1997, the Company controlled a portfolio of 463 multifamily properties (individually a "Property" and collectively the "Properties") containing 135,200 apartment units. The Company's interest in six of these Properties at the time of acquisition thereof consisted solely of ownership of debt collateralized by such Properties. The Company also has an investment in partnership interests and subordinated mortgages collateralized by 21 properties and mortgage loans collateralized by five properties (collectively, the "Additional Properties"). The Properties and Additional Properties are located throughout the United States in the following 35 states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In exchange for contributing 33 of the Zell Properties and the Management Business and the Starwood Properties, the 33 existing entities (the "Zell Original Owners"), and entities controlled by Starwood and EPMC received a total of 8,433,238 partnership interests ("OP Units") (including an additional 93,639 OP Units issued in August 1994 and 1,835 OP Units issued in September 1995) in ERP Operating Limited Partnership (the "Operating Partnership"). The OP Units are exchangeable on a one-for-one basis into Common Shares. The other 13 Zell Properties were acquired from 13 existing partnerships (the "Zell Sellers") for $43.5 million in cash. The Management Business, the Zell Original Owners and the Zell Sellers are collectively the "EQR's Predecessor Business".
The Company has formed a series of partnerships (the "Financing Partnerships") which beneficially own certain Properties encumbered by mortgage indebtedness. The Operating Partnership owns a 1% limited partner interest and a 98% general partner interest in each Financing Partnership. The remaining 1% general partner interest in each Financing Partnership is 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 (the "LLCs") which own certain Properties and one such LLC which has an investment in partnership interests and subordinated mortgages collateralized by 21 of the Additional Properties. The Operating Partnership is a 99% managing member of each LLC and a QRS Corporation is a 1% member of each LLC. In addition, the Company also owns a 1% general partner interest and a 81.1% limited partner interest in Evans Withycombe Residential, L. P. (the "EWR Operating Partnership") and the Operating Partnership owns a 16.1% limited partner interest and a 1% managing general partner interest in the EWR Operating Partnership.
As of December 31, 1997, 451 Properties were managed by either Equity Residential Properties Management Limited Partnership, the successor to the Management Business contributed by EPMC contemporaneously with the EQR IPO or Equity Residential Properties Management Limited Partnership II (collectively, the "Management Partnerships"). The Management Partnerships collect a property management fee consistent with a reasonable arms- length charge for the performance of such services. The sole general partner of the Management Partnerships with a 1% interest is the Operating Partnership. The sole limited partners of the Management Partnerships are Equity Residential Properties Management Corp. ("Management Corp.") and Equity Residential Properties Management Corp. II ("Management Corp. II"), respectively, and each has a 99% interest in the respective partnership.
2. BASIS OF PRESENTATION
The Wellsford Merger and the EWR Merger (collectively, the "Mergers") were treated as purchases in accordance with Accounting Principles Board Opinion No. 16. The fair value of the
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 accompanying consolidated statements of operations and cash flows include the results of both Wellsford and EWR 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, the Management Partnerships, the Financing Partnerships, the LLCs and the EWR Operating Partnership, each such entity has been consolidated with the Company for financial reporting purposes. In regard to Management Corp., Management Corp. II and Evans Withycombe Management, Inc., 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. 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 issued by the Company with a market value of $443.7 million, the liquidation value of $157.5 million for the Series E Preferred 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 expected to contain 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
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of approximately $16.7 million.
4. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
On September 11, 1995, the Company filed with the Securities and Exchange Commission (the "SEC") a Form S-3 Registration Statement to register up to $500 million of its non-voting preferred shares of beneficial interest, $0.01 par value per share ("Preferred Shares"), Common Shares and depositary shares, pursuant to a shelf offering (the "Second Shelf Registration").
In January 1996, the Company completed an offering of 1,725,000 registered Common Shares, which were sold at a net price of $29.375 per share (the "January 1996 Common Share Offering") and received net proceeds of approximately $50.7 million in connection therewith.
Also in January 1996, the Company filed with the SEC a Form S-3 Registration Statement to register 1,676,423 Common Shares which may be sold by the holders thereof or by holders of OP Units upon the issuance of Common Shares in exchange for such OP Units.
In February 1996, the Company completed an offering of 2,300,000 registered Common Shares, which were sold at a net price of $29.50 per share (the "February 1996 Common Share Offering") and received net proceeds of approximately $67.8 million in connection therewith.
On May 21, 1996, the Company completed an offering of 2,300,000 publicly registered Common Shares, which were sold at a net price of $30.50 per share. On May 28, 1996, the Company completed the sale of 73,287 publicly registered Common Shares to employees of the Company and to employees of Equity Group Investments, Inc. and certain of its subsidiaries ("EGI") and certain of their respective affiliates and consultants at a net price equal to $30.50 per share. On May 30, 1996, the Company completed an offering of 1,264,400 publicly registered Common Shares, which were sold at a net price of $30.75 per share. The Company received net proceeds of approximately $111.3 million in connection with the sale of the 3,637,687 Common Shares mentioned above (collectively, the "May 1996 Common Share Offerings").
On June 26, 1996, the Company filed with the SEC a Form S-3 Registration Statement to register 608,665 Common Shares which may be issued by the Company to holders of 608,665 OP Units. The SEC declared this Registration effective on September 6, 1996.
On September 18, 1996, the Company filed with the SEC a Form S-3 Registration Statement to register $500 million of equity securities (the "1996 Equity Shelf Registration"). The SEC declared this Registration effective on September 23, 1996.
In September 1996, the Company completed the sale of 2,272,728 publicly registered Common Shares, which were sold at a net price of $33 per share. The Company received net proceeds of approximately $75 million in connection with this offering (the "September 1996 Common Share Offering").
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On September 27, 1996, the Company filed with the SEC a Form S-3 Registration Statement to register 1,182,835 Common Shares which may be issued by the Company to holders of 1,182,835 OP Units. The SEC declared this Registration effective on October 3, 1996.
In December 1996, the Company completed offerings of 4,440,000 publicly registered Common Shares, which were sold to the public at a price of $41.25 per share (the "December 1996 Common Share Offerings"). The Company received net proceeds of approximately $177.4 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 "March 1997 Common Share Offerings"). The Company received net proceeds of approximately $88.3 million therefrom.
On May 14, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register $500 million of equity securities (the "June 1997 Equity Shelf Registration"). The SEC declared this registration statement effective on June 5, 1997.
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 "June 1997 Common Share Offerings"). The Company received net proceeds of approximately $398.9 million therefrom.
On July 28, 1997, the Company filed with the SEC a Form S-3 Registration Statement to register $750 million of equity securities (the "August 1997 Equity Shelf Registration"). The SEC declared this registration statement effective on August 4, 1997.
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 (the "September 1997 Common Share Offering").
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 (the "October 1997 Common Share Offering").
On December 11, 1997, in connection with the acquisition of one 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. On December 23, 1997, the Company completed an offering of 467,722 publicly registered Common Shares, which were sold to the public at a price of $51.3125 per share and received net proceeds of approximately $22.8 million in connection therewith. The sale of the 1,204,018 Common Shares mentioned above is collectively, the "December 1997 Common Share Offerings".
The following table presents the changes in the Company's issued and outstanding
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Shares for the years ended December 31, 1997, 1996 and 1995 (excluding OP Units of 9,592,590, 7,858,228 and 8,208,882 outstanding at December 31, 1997, 1996 and 1995, respectively):
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Under certain circumstances, the issuance of Preferred Shares may require shareholder approval pursuant to the rules and the regulations of the New York Stock Exchange.
In June 1995, the Company sold 6,120,000 of its 9 3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (liquidation preference $25 per share) (the "Series A Preferred Shares"), pursuant to a $250 million shelf registration (the "Preferred Shelf Registration"), at $25 per share. The Company raised gross proceeds of $153 million from this offering (the "Series A Preferred Share Offering"). The net proceeds of approximately $148.2 million from the Series A Preferred Share Offering were contributed by the Company to the Operating Partnership in exchange for 6,120,000 of the Operating Partnership's 9 3/8% Series A cumulative redeemable preference units. The Series A Preferred Shares are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of January, April, July and October of each year, at the annual rate of 9 3/8% of the liquidation preference of $25 per share. The Series A Preferred Shares are not redeemable prior to June 1, 2000. On or after June 1, 2000, the Preferred Shares may be redeemed for cash at the option of the Company in whole or in part, at a redemption price of $25 per share, plus accrued and unpaid distributions, if any, thereon.
In November 1995, the Company sold 5,000,000 depositary shares (the "Series B Depositary Shares") pursuant to the Preferred Shelf Registration and the Second Shelf Registration. Each Series B Depositary Share represents a 1/10 fractional interest in a 9 1/8% Series B Cumulative Redeemable Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series B Preferred Shares"). The liquidation preference of each of the Series B Preferred Shares is $250.00 (equivalent to $25 per Series B Depositary Share). The Company raised gross proceeds of $125 million from this offering (the "Series B Preferred Share Offering"). The net proceeds of approximately $121 million from the Series B Preferred Share Offering were contributed by the Company to the Operating Partnership in exchange for 500,000 of the Operating Partnership's 9 1/8% Series B cumulative redeemable preference units. The Series B Preferred Shares are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of January, April, July and October of each year, commencing on January 15, 1996, at the annual rate of 91/8% of the liquidation preference of $25 per Depositary Share. The Series B Preferred Shares are not redeemable prior to October 15, 2005. On and after October 15, 2005, the Series B Preferred Shares may be redeemed for cash at the option of the Company, in whole or in part, at a redemption price of $250 per share (equivalent to $25 per Series B Depositary Share), plus accrued and unpaid distributions, if any, thereon.
In September 1996 the Company sold 4,600,000 depositary shares (the "Series C Depositary Shares") pursuant to the Second Shelf Registration. Each Series C Depositary Share
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
represents a 1/10 fractional interest in a 9 1/8% Series C Cumulative Redeemable Preferred Share of Beneficial Interest, $0.01 par value per share (the "Series C Preferred Shares"). The liquidation preference of each of the Series C Preferred Shares is $250.00 (equivalent to $25 per Series C Depositary Share). The Company raised gross proceeds of $115 million from this offering (the "Series C Preferred Share Offering"). The Company contributed the net proceeds of approximately $111.4 million from the Series C Preferred Share Offering to the Operating Partnership in exchange for 460,000 of the Operating Partnership's 9 1/8% Series C cumulative redeemable preference units. The Series C Preferred Shares are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of January, April, July and October of each year, commencing on October 15, 1996, at the annual rate of 9 1/8% of the liquidation preference of $25 per Series C Depositary Share. The Series C Preferred Shares are not redeemable prior to September 9, 2006. On and after September 9, 2006, the Series C Preferred Shares may be redeemed for cash at the option of the Company, in whole or in part, at a redemption price of $250 per share (equivalent to $25 per Series C Depositary Share), plus accrued and unpaid distributions, if any, thereon.
In May 1997, the Company sold 7,000,000 depositary shares (the "Series D Depositary Shares") pursuant to the June 1997 Equity Shelf Registration. 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"). The Company contributed the net proceeds of approximately $169.5 million from the Series D Preferred Share Offering to the Operating Partnership in exchange for 700,000 of the Operating Partnership's 8.60% Series D cumulative redeemable preference units.
The Series E Preferred Shares are cumulative from the date of original issue and are payable quarterly on January 1, April 1, July 1 and October 1 in an amount equal to $1.75 per share per annum. Each Series E Preferred Share is convertible at the option of the holder thereof at any time into Common Shares at a conversion price of $44.93 per Common Share (equivalent to a conversion rate of approximately .5564 Common Share for each Series E Preferred Share). The Series E Preferred Shares are not redeemable prior to November 1, 1998. On and after November 1, 1998, the Series E Preferred Shares may be redeemed at the option of the Company, in whole or in part, initially at $25.875 per share and thereafter at prices declining to $25.00 per share on and after November 1, 2003, plus accrued and unpaid distributions, if any, thereon. In October 1997, 1,300 of the Series E Preferred Shares were converted into 723 Common Shares of the Company.
The Series F Preferred Shares are cumulative from the date of original issue and are payable quarterly on or about the fifteenth day of January, April, July and October of each year at the rate of 9.65% of the liquidation preference of $25 per share. The Series F Preferred Shares are not redeemable prior to August 24, 2000. On or after August 24, 2000, the Series F Preferred Shares may be redeemed for cash at the option of the Company, in whole or in part, at a redemption price
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of $25.00 per share, plus accrued and unpaid distributions, if any, thereon.
In September 1997, the Company sold 11,000,000 depositary shares (the "Series G Depositary Shares") pursuant to the August 1997 Equity Shelf Registration. 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. The Company contributed the net proceeds of approximately $303.6 million from the Series G Preferred Share Offering to the Operating Partnership in exchange for 1,265,000 of the Operating Partnership's 7 1/4% Series G convertible cumulative preference units.
Net proceeds from the Company's Common 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 are allocated between shareholders' equity and the equity position of the limited partners of the Operating Partnership (collectively, the "Minority Interests") (to the extent represented by OP Units), to account for the change in their respective percentage ownership of the underlying equity of the Operating Partnership.
Assuming conversion of all OP Units, total Common Shares outstanding at December 31, 1997 would have been 98,677,855. As of December 31, 1997, the Minority Interests held 9,592,590 OP Units, which represented a 9.72% interest in the Operating Partnership.
The Company paid a $0.625, $0.625, $0.625 and $0.67 per Common Share distribution on April 11, July 11, October 10 and December 30, 1997, respectively, for the quarters ended March 31, June 30, September 30 and December 31, 1997, to Common Share holders of record on March 28, June 27, September 26 and December 15, 1997, respectively.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the distributions paid to Preferred Share and Depositary Share holders related to the year ended December 31, 1997:
(A) Partial distribution of $0.3344 covers the period May 21 through July 15, 1997. (B) Partial distribution of $0.1108 covers the period September 24 through October 15, 1997.
5. 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. Real estate intended to be held and operated by the Company over their remaining useful life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the particular real estate may not be recoverable. If these events or changes in circumstances are present, the Company estimates the sum of the expected future cash flows
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(undiscounted) to result from the operations and eventual disposition of the particular real estate, and if less than the carrying amount of the real estate, the Company will recognize an impairment loss. Upon recognition of any impairment loss the Company measures that loss based on the amount by which the carrying amount of the real estate exceeds the estimated fair value of the real estate.
For rental 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 the Company has a commitment to sell the property and/or is actively marketing the property for sale. Real estate to be disposed of is reported at the lower of its carrying amount or its estimated fair value, less its cost to sell. Depreciation is not recorded during the period in which assets are held for disposal.
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, a 10-year estimated life for land improvements and up to a seven-year estimated life for furniture, fixtures and equipment. 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. Initial direct leasing costs are expensed as incurred and 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 deprecation are removed from the respective accounts. Any gain or loss on sale or disposition is recognized in accordance with generally accepted accounting principles.
The Company classifies developments and lease-up properties as construction-in-progress until construction on the apartment community has been completed and the apartment community has reached stabilized occupancy. The Company generally considers a property stabilized when it first reaches 93% physical occupancy. The Company also classifies land relating to construction- in-progress as land on its balance sheet. Land associated with construction-in-progress was $8.3 million as of December 31, 1997.
(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.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain the Company's lines of credit, 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. As of December 31, 1997 and 1996, the accumulated amortization of such deferred financing costs was $4.2 million and $3.8 million, 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) Fair Value of Financial Instruments
The fair values of the Company's financial instruments, including cash and cash equivalents, and 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, 1997 was estimated to be approximately $184.8 million compared to the Company's carrying value of $176.1 million. 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.
(f) 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.
(g) Lease Agreements
A substantial portion of the leases entered into between the tenant and a multifamily property for the rental of an apartment unit is month-to-month or year-to-year, renewable upon consent of both parties.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(h) 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 Company paid no Federal income taxes during the year ended December 31, 1997. The aggregate cost of land and depreciable property for Federal income tax purposes as of December 31, 1997 was approximately $6.2 billion.
(i) Income per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("Statement 128"). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All net income per weighted average Common Share and net income per weighted average Common Share - assuming dilution amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. The conversion of an OP Unit to a Common Share will have no effect on income per Common Share, either on a basic or diluted basis, since the allocation of earnings to an OP Unit is equivalent to a Common Share. The effect of a conversion of an OP Unit to a Common Share has been excluded from the basic earnings per share calculation due to certain restrictions.
(j) Minority Interests
Net income is allocated to the Minority Interests 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 the Company. Issuance of additional Common Shares or OP Units changes the ownership interests of both the Minority Interests and the Company. 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 generally accepted accounting principles, 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.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REAL ESTATE
The following summarizes the carrying amounts for the real estate as of December 31, 1997 and 1996:
In addition to the Mergers, during the year ended December 31, 1997, the Company acquired the 124 Properties listed below. Each Property was purchased from an unaffiliated third party, except for 12 of the Properties, which were purchased from affiliates of the Company, Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership ("Zell/Merrill I") and subsidiaries of Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership II ("Zell/Merrill II"). The total purchase price for the Properties acquired from Zell/Merrill I and Zell/Merrill II was approximately $162.2 million. In connection with certain of the acquisitions listed below, the Company assumed mortgage indebtedness of approximately $597.2 million and issued OP Units and Common Shares having a value of approximately $191.3 million. The cash portion of these transactions was funded primarily from proceeds raised from the March 1997 Common Share Offerings, the Series D Preferred Share Offering, the June 1997 Common Share Offerings, the September 1997 Common Share Offering, the Series G Preferred Share Offering, the October Common Share Offering, and the December Common Share Offerings as well as from proceeds raised from the issuances of debt securities as discussed in Note 13.
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)
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT IN LIMITED PARTNERSHIPS - DEVELOPMENT PROPERTIES
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 a portion of the total project development cost of new multifamily developments in certain of the Company's target markets (the "Joint Venture Agreement"). As of December 31, 1997, the Company has funded approximately $6.9 million in connection with this agreement. The amounts invested are included in other assets on the balance sheet.
8. REAL ESTATE DISPOSITIONS
During 1997, the Company disposed of the properties listed below. Each property was sold to an unaffiliated third party.
The Company recognized a total gain of approximately $13.8 million on the disposition of these seven Properties, the portion of one Property and the vacant land parcel.
During the year ended December 31, 1995, the Company recorded a $1 million loss, which represented the estimated impairment in connection with the potential sale of University Park, located in Toledo, Ohio. This Property had a net carrying amount as of December 31, 1995 of approximately $1.1 million after the impairment loss. The impairment loss on real estate to be disposed of is included in gain on disposition of properties on the statement of operations for the year ended December 31, 1995.
9. CALCULATION OF NET INCOME PER WEIGHTED AVERAGE COMMON SHARE
The following tables sets forth the computation of net income per weighted average Common Share outstanding and net income per weighted average Common Share outstanding - assuming dilution.
For additional disclosures regarding the employee share options, see Note 18.
Convertible Preferred Shares that could be converted into 2,763,898 shares of common shares were outstanding at December 31, 1997 but were not included in the computation of diluted earnings per share because it would be anti-dilutive.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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 Additional Properties. These 21 Additional 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 value), $1.6 million represents a one time payment for an interest rate protection agreement and $0.3 million represents 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. The investment in limited partnership interests is accounted for under the equity method and is included in other assets on the balance sheet.
As of December 31, 1997 the second mortgage notes had a combined principal balance of approximately $25.5 million, 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. The third mortgage notes had a combined principal balance of approximately $71.1 million, 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 determined to be 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, 1997 was $9 million. During 1997 and 1996, the Company amortized $3.1 million and $0.6 million, respectively, which is included in interest income- investment in mortgage notes in the consolidated statement of operations. This discount is being amortized utilizing the effective yield method.
On April 28, 1997, the Company made an $88 million investment in six mortgage loans collateralized by five multifamily properties. These five multifamily properties are included in the Additional Properties. As of December 31, 1997, these six mortgage loans had a combined principal balance of approximately $88 million and accrue interest at a rate of 8.25%. These six mortgage loans are scheduled to mature on January 1, 2006.
11. MORTGAGE NOTES PAYABLE
As of December 31, 1997, the Company had outstanding mortgage indebtedness of approximately $1.6 billion encumbering 152 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $145.1 million) was approximately $2.6 billion. The mortgage notes payables are generally due in monthly installments of interest only. In connection
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with the Properties acquired during the year ended December 31, 1997, including the effects of the Mergers, the Company assumed the outstanding mortgage balances on 90 Properties in the aggregate amount of $931 million, which includes a premium of approximately $3.9 million recorded in connection with the EWR Merger.
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 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, 1997 and 1996, the aggregate notional amounts of these agreements were approximately $174.3 million and $166.8 million, respectively. 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, 1997 and 1996, the aggregate notional amount of these agreements was approximately $174.3 million and $166.8 million, respectively. 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 believes that it has limited exposure to the extent of non-performance by the counterparties of the agreements since each counterparty is a major U.S. financial institution, and the Company does not anticipate their non-performance. Furthermore, any non-performance by the counterparty is offset by non-performance by the Company.
The Company also has an interest rate cap agreement for a notional amount of $228,000,000, for which it will receive payments if the PSA index exceeds 5.75%, that terminates on December 1, 1999. 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 it's Properties. The Company has no payment obligations to the counterparty with respect to this agreement.
As of December 31, 1997, scheduled maturities for the Company's outstanding mortgage indebtedness are at various dates through October 1, 2030. During the year ended December 31, 1997, effective interest cost on these mortgage notes was 7.5%. During the year ended December 31, 1997, the Company repaid the outstanding mortgage balances on 29 Properties in the aggregate amount of $113.4 million. Subsequent to December 31, 1997, the Company repaid the outstanding mortgage balance on one Property in the amount of approximately $18.2 million. In February 1996, the Company entered into an interest rate protection agreement, which hedged the interest rate risk of $50 million of mortgage loans, scheduled to mature in September 1997 by locking the
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
five year Treasury Rate, commencing October 1, 1997 through October 1, 2002. This agreement was cancelled in July 1997, at no cost to the Company, in conjunction with the Company entering into another interest rate protection agreement to effectively fix the cost of the Company's unsecured notes issued in November 1997.
As of December 31, 1996, the Company had outstanding mortgage indebtedness of approximately $755.4 million encumbering 88 of the Properties. The carrying value of such Properties (net of accumulated depreciation of $141.2 million) was approximately $1.1 billion. The mortgage notes payables are generally due in monthly installments of interest only. In connection with the Properties acquired during the year ended December 31, 1996, the Company assumed the outstanding mortgage balances on 14 Properties in the aggregate amount of $142.2 million. In addition, during 1996, in two separate transactions, certain indebtedness evidenced by tax-exempt bonds encumbering certain Properties was refinanced resulting in an increase in mortgage indebtedness affecting these Properties of approximately $112 million. In connection with one of these transactions, the Company also recorded an extraordinary loss in the amount of approximately $3.5 million, which represented the write-off of unamortized deferred financing costs from the early retirement of debt.
During the year ended December 31, 1996, the effective interest cost on these mortgage notes was 7.87%. During the year ended December 31, 1996, the Company repaid the outstanding mortgage balances on eight Properties in the aggregate amount of $57 million.
During 1996 the Company terminated two interest rate protection agreements that were initially entered into in connection with two mortgage loans with notional amounts totaling $64.2 million. These two agreements effectively converted these two mortgage loans to fixed rate instruments based on the London Interbank Offered Rate ("LIBOR"). Upon the termination of these agreements the Company received settlement payments of approximately $230,000.
Aggregate payments of principal on mortgage notes payable for each of the next five years and thereafter are as follows:
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LINES OF CREDIT
On November 15, 1996, the Company completed an agreement with Morgan Guaranty Trust Company of New York and Bank of America Illinois to provide the Operating Partnership a $250 million unsecured line of credit. In September 1997, this agreement was amended to increase the potential borrowings to $500 million. This line of credit matures in November 1999 and borrowings generally will bear interest at a per annum rate of one, two, three or six month LIBOR, plus a certain rate dependent upon the Company's credit rating, which rate is currently 0.45%, and is subject to an annual facility fee of $750,000. As of December 31, 1997, $235 million were outstanding on this line of credit, bearing interest at a weighted average rate of 6.46%.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. NOTES
On May 16, 1994, the Operating Partnership issued $125 million of unsecured senior notes (the "1999 Notes") in a private placement (the "Debt Offering") to qualified institutional buyers. The 1999 Notes were issued at a discount, which is being amortized over the life of the 1999 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $0.2 million. The 1999 Notes are due May 15, 1999 and bear interest at a rate of 8.5%, which is payable semiannually in arrears on May 15 and November 15. In February 1996 the Company entered into an interest rate protection agreement that hedged the interest rate risk of the 1999 Notes by locking the effective four-year Treasury Rate, commencing May 15, 1999. There was no current cost to the Company for entering into this agreement.
In December 1994, the Operating Partnership registered $500 million in debt securities pursuant to a debt shelf registration statement (the "Debt Shelf Registration") of which $100 million of unsecured floating rate notes (the "Floating Rate Notes") were issued by the Operating Partnership on December 22, 1994 (the "Public Debt Offering"). The Floating Rate Notes were repaid at maturity on December 22, 1997.
In April 1995, the Operating Partnership issued $125 million of unsecured fixed rate notes (the "2002 Notes") in connection with the Debt Shelf Registration in a public debt offering (the "Second Public Debt Offering"). The 2002 Notes were issued at a discount, which is being amortized over the life of the 2002 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $0.6 million. The 2002 Notes are due on April 15, 2002 and bear interest at 7.95%, which is payable semiannually on each October 15 and April 15. The Operating Partnership received net proceeds of $123.1 million in connection with the Second Public Debt Offering. Prior to the issuance of the 2002 Notes, the Operating Partnership entered into an interest rate protection agreement to effectively fix the interest rate cost of such issuance. The Operating Partnership made a one-time settlement payment of this protection transaction, which was approximately $0.8 million and is being amortized over the term of the 2002 Notes on a straight-line basis. As of December 31, 1997 the unamortized balance of this cost was approximately $0.5 million.
In August 1996, the Operating Partnership issued $150 million of unsecured fixed rate notes (the "2026 Notes") in connection with the Debt Shelf Registration in a public debt offering (the "Third Public Debt Offering"). The 2026 Notes are due on August 15, 2026 and bear interest at 7.57%, which is payable semiannually in arrears on February 15 and August 15, commencing February 15, 1997. The 2026 Notes are redeemable at any time after August 15, 2006 by the Operating Partnership pursuant to the terms thereof. The Operating Partnership received net proceeds of approximately $149 million in connection with this issuance. Prior to the issuance of the 2026 Notes, the Company entered into an interest rate protection agreement to effectively fix the interest rate cost of this issuance to 7.5%. The Operating Partnership received a one-time settlement payment from this transaction, which was approximately $0.6 million, which amount is
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
being amortized over the term of the 2026 Notes on a straight-line basis. As of December 31, 1997, the unamortized balance was approximately $0.5 million.
On September 18, 1996, the Operating Partnership filed with the SEC a Form S-3 Registration Statement to register $500 million of debt securities (the "1996 Debt Shelf Registration"). The SEC declared this Registration effective on September 23, 1996.
In October 1997, the Operating Partnership issued $150 million of unsecured fixed rate notes (the "2017 Notes") in connection with the 1996 Debt Shelf Registration in a public debt offering (the "Fourth Public Debt Offering"). The 2017 Notes were issued at a discount, which is being amortized over the life of the 2017 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $1.2 million. 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 connection with the 1996 Debt Shelf Registration in a public debt offering (the "Fifth 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 in arrears on May 15 and November 15, commencing on May 15, 1998. The 2001 Notes were issued at a discount, which is being amortized over the life of the 2001 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $0.3 million. The Operating Partnership received net proceeds of approximately $148.9 million in connection with the 2001 Notes. The 2003 Notes were issued at a discount, which is being amortized over the life of the 2003 Notes on a straight-line basis. As of December 31, 1997 the unamortized discount balance was approximately $0.1 million. The Operating Partnership received net proceeds of approximately $49.6 million in connection with the 2003 Notes. Prior to the issuance of the 2001 and 2003 Notes, the Operating Partnership entered into two interest rate protection agreements to effectively fix the interest rate costs of such issuances. The Operating Partnership made a one time settlement payment of each protection transaction, which was approximately $5 million and $1.7 million, respectively, which are being amortized over the term of the Notes on a straight-line basis. As of December 31, 1997 the unamortized balance of these costs were approximately $4.9 million and $1.6 million, respectively.
Included in the note balance are four unsecured note issuances assumed in connection with the Wellsford Merger. These are discussed in the following three paragraphs.
In January 1995, $100 million of senior unsecured notes due February 1, 2002 (the "2002-A Notes") were issued. The 2002-A Notes bear interest at a rate of 9.375%, which is payable
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
semiannually in arrears on August 1 and February 1. In connection with the assumption of the 2002-A Notes, the Company recorded a premium in the amount of $5.6 million, which is being amortized over the remaining life of the notes on a straight-line basis. As of December 31, 1997, the unamortized premium balance relating to the 2002-A Notes was approximately $4.9 million.
In August 1995, $125 million of senior unsecured notes were issued. Of the $125 million issued, $55 million of these notes are due August 15, 2000 (the "2000 Notes") and bear interest at a rate of 7.25%, which is payable semiannually in arrears on February 15 and August 15. The remaining $70 million of these notes are due August 15, 2005 (the "2005 Notes") and bear interest at a rate of 7.75%, which is payable semiannually in arrears on February 1 and August 1.
In November 1996, $25 million of medium term unsecured floating rate notes due November 24, 1999 (the "1999-A Notes") were issued. The 1999-A Notes bear interest at 90 day LIBOR plus 0.32%, which is payable quarterly in arrears on the 25th day of each February, May, August and November.
Also included in the note balance are two unsecured note issuances assumed in connection with the EWR Merger. These are discussed in the following two paragraphs.
In April 1997, $75 million of senior unsecured notes due April 15, 2004 (the "2004 Notes") were issued. The 2004 Notes bear interest at a rate of 7.5%, which is payable semiannually in arrears on October 15 and April 15. In connection with the assumption of the 2004 Notes, the Company recorded a premium in the amount of $1.7 million, which is being amortized over the remaining life of the notes on a straight-line basis. As of December 31, 1997, the unamortized premium balance relating to the 2004 Notes was approximately $1.7 million.
In April 1997, $50 million of senior unsecured notes due April 15, 2007 (the "2007 Notes") were issued. The 2007 Notes bear interest at a rate of 7.625%, which is payable semiannually in arrears on October 15 and April 15. In connection with the assumption of the 2007 Notes, the Company recorded a premium in the amount of $1.6 million, which is being amortized over the remaining life of the notes on a straight-line basis. As of December 31, 1997, the unamortized premium balance relating to the 2007 Notes was approximately $1.6 million.
In regard to all of the interest rate protection agreements mentioned in the previous paragraphs, the Company believes that it has limited exposure to the extent of non-performance by the counterparties of each agreement since each counterpart is a major U.S. financial institution, and the Company does not anticipate their non-performance.
14. EMPLOYEE TRANSACTIONS
As of December 31, 1997, the outstanding principal balance on the employee notes issued in connection with Common Shares purchased was, in the aggregate, approximately $5.14 million. Douglas Crocker II, President and Chief Executive Officer of the Company, and four other officers
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
had purchased an aggregate of 194,000 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 $5.4 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 employee notes are recourse to Mr. Crocker and the four other officers and are collateralized by pledges of the 194,000 Common Shares purchased. Subsequent to December 31,1997, one of the four other officers repaid his note in full.
In addition, as of December 31, 1997, the outstanding principal balance on additional notes issued to Mr. Crocker and one other officer was approximately $0.7 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. The notes are recourse to Mr. Crocker and the other officer and are collateralized by pledges of options, share awards and Common Shares purchased.
Mr. Crocker has a deferred compensation agreement (the "Deferred Compensation Agreement") which Deferred Compensation Agreement will provide Mr. Crocker with a salary benefit after his termination of employment with the Company. If Mr. Crocker's employment is terminated without cause, he would be entitled to annual deferred compensation for a 10-year period commencing on the termination date in an amount equal to his average annual base compensation (before bonus) for the prior five calendar years, multiplied by a percentage equal to 10% per year since December 31, 1995. In the event Mr. Crocker's employment is terminated as a result of his death, permanent disability or incapacity, he would be entitled to a similar amount except the annual percentage would be 15% and the maximum paid per year would not exceed 100% of his average base salary. Should Mr. Crocker be terminated for cause or should he choose to leave voluntarily without good reason, he would not be entitled to any deferred compensation. The Company recognized approximately $0.5 million of compensation expense for both 1997 and 1996 related to this Deferred Compensation Agreement.
In addition, Gerald Spector, Executive Vice President and Chief Operating Officer of the Company, entered into a Deferred Compensation Agreement in 1997, which agreement provides Mr. Spector with a salary benefit after his termination of employment with the Company. If Mr. Spector's employment is terminated without cause, he would be entitled to annual deferred compensation for a 15-year period commencing on the termination date in an amount equal to 75% of his average annual base compensation (before bonus) for the prior five calendar years, multiplied by a percentage equal to 6.67% per each year since December 31, 1996. In the event Mr. Spector's employment is terminated as a result of his death, permanent disability or incapacity, he would be entitled to a similar amount except that the annual percentage would be 10%, not 6.67%. Should Mr. Spector be terminated for cause or should he choose to leave voluntarily without good reason, he would not be entitled to any deferred compensation. The Company recognized approximately $0.2 million of compensation expense in 1997 related to this Deferred Compensation Agreement.
The Board of Trustees also approved a share distributions agreement (the "Share Distributions Agreement") for Mr. Crocker. On January 18, 1996, Mr. Crocker was issued options
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to purchase 100,000 Common Shares at the then current market price of the Common Shares, which vest over a 3-year period and are effective for 10 years. Pursuant to the terms of the Share Distributions Agreement, upon the exercise of any of these options, Mr. Crocker would be entitled to an amount equal to the amount of Common Share distributions that would have been paid on said shares being exercised had he owned said shares for the period from January 18, 1996 until the date of the exercise of the options in question. Mr. Crocker's death or termination of employment would not affect this agreement with the Company.
In May, 1997, Jeffrey 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 Evans executed a consulting agreement with an affiliate of the Company. The consulting agreement has a term of two years and expires on December 31, 1999. Pursuant to the consulting agreement, Mr. Evans will serve as a senior management consultant to the Company and will receive 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 will also be 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.
Also in connection with the EWR Merger, in December, 1997, Richard Berry executed an employment agreement with an affiliate of the Company which expires on December 31, 2000 and provides for cash compensation of $250,000 per annum. Pursuant to the agreement, Mr. Berry exchanged all unvested restricted shares of Evans common shares at the time of the EWR Merger into 18,747 restricted Common Shares of the Company, which will vest on December 31, 2000. Mr. Berry also received an option to purchase 77,500 Common Shares that will vest in three equal annual installments and will have an exercise price equal to $50.125 per Common Share. The agreement also provided that Mr. Berry will be eligible to participate in all of the Company's employee benefit plans which persons in comparable positions participate.
In December, 1997, Mr. Berry also entered into a Deferred Compensation Agreement with the Company which will pay benefits only in the event Mr. Berry's employment with the Company is terminated prior to January 1, 2000. In such a case, the amount payable under Mr. Berry's agreement will equal the value of any restricted Common Shares received in exchange for EWR common shares which are forfeited upon his termination of employment. The payment will be made in two semi-annual installments over the one-year period following termination of employment, and interest of 9% per annum will accrue on the balance over the one-year payment period.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $0.8 million for the year ended December 31, 1996 and expects to make contributions in the amount of approximately $1.5 million for the year ended December 31, 1997.
15. DEPOSITS-RESTRICTED
Deposits-restricted as of December 31, 1997 primarily included a deposit in the amount of $20 million held in a third party escrow account made to provide third party construction financing in connection with the Joint Venture Agreement. Also, approximately $8.8 million was held in third party escrow accounts made in connection with the Company's disposition of Diplomat South and for several expected 1998 acquisitions. In addition, approximately $7.6 million was for tenant security and utility deposits for certain of the Company's Properties.
Deposits-restricted, as of December 31, 1996, primarily included deposits in the amount of approximately $16.4 million held in third party escrow accounts which were made in connection with five Properties acquired in 1997. In addition, approximately $3.7 million was for tenant security and utility deposits for certain of the Company's Properties.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. GAIN ON EARLY EXTINGUISHMENT OF DEBT
In June 1995, the Company paid approximately $12.6 million in full satisfaction of a $14.6 million mortgage note obligation related to one of its Properties. As a result, the Company recognized a gain of $2 million on the extinguishment of this indebtedness.
17. SUMMARIZED PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
The following Summarized Pro Forma Condensed Statement of Operations has been prepared as if the March 1997 Common Share Offerings, the Series D Preferred Share Offering, the June 1997 Common Share Offerings, the Wellsford Merger, the September 1997 Common Share Offering, the Series G Preferred Share Offering, the Fourth Public Debt Offering, the October 1997 Common Share Offering, the Fifth Public Debt Offering, the December 1997 Common Share Offerings, the EWR Merger, the acquisition of an additional 124 Properties, including the related assumption of $597.2 million of mortgage indebtedness, the repayment of $113.4 million of mortgage indebtedness and the disposition of seven properties (as described in Note 3, Note 4, Note 6, Note 8, Note 11 and Note 13 of Notes to Consolidated Financial Statements) had occurred on January 1, 1997. This would result in 89,085,265 Common Shares outstanding. 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, 1997, or to project results for any future period. The amounts presented in the following statement are in thousands except for share amounts:
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SHARE OPTION PLAN
Pursuant to the Company's Amended and Restated 1993 Share Option and Share Award Plan (the "Third 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 Option and Award Plan, certain officers of the Company may be awarded Common Shares, subject to conditions and restrictions as described in the 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, 1997, 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 has reserved 5,600,000 Common Shares for issuance under the Option and Award Plan. The Options generally are granted at the fair market value of the Company's 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 Third 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 Third 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 Third 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.
The Company has elected to apply the provisions of Accounting Principles Board Opinion
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Financial Accounting Standards Board No. 123 (FASB 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 FASB No. 123 would be recognized over the vesting period of the options. The fair value for the Company's options granted subsequent to December 31, 1994 was estimated at the time the options were granted using the Black Scholes option pricing model with the following weighted-average assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of 6.51%, 6.35% and 6.33%; dividend yields of 7.64%, 6.98% and 5.32%; volatility factors of the expected market price of the Company's Common Shares of 0.226, 0.226 and 0.218; 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 years ended December 31, 1997, 1996 and 1995:
The table below summarizes the Option activity of the Third Amended Option and Award Plan for the three years ended December 31, 1997:
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1997, 1996 and 1995, 1,329,516 shares, 898,075 shares and 743,368 shares were exercisable, respectively. Exercise prices for Options outstanding as of December 31, 1997 ranged from $26 to $54.8125. Expiration dates ranged from August 11, 2003 to December 24, 2007. The remaining weighted-average contractual life of those Options was 8.27 years. The weighted-average grant date fair value of Options granted during 1997 was $7.37.
19. 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 1996, the Company issued 39,458 Common Shares at a net price of $30.44 per share. 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.
20. 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 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
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cash distributions in additional Common Shares. 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).
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 other litigation, except as mentioned in the previous paragraph, 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 connection with the Joint Venture Agreement, as discussed in Note 7, the Company is obligated to fund an additional $20 million in connection with the third party construction financing.
In connection with the Wellsford Merger, the Company has provided a standby obligation in the amount of $30 million pursuant to an agreement entered into with Wellsford Real Properties, Inc., a Maryland corporation ("WRP"), for the construction financing for a multifamily development project located in Denver, Colorado. In addition, the Company has provided a $14.8 million credit enhancement with respect to bonds issued to finance certain public improvements at the multifamily development project.
The Company has lease agreements with an affiliated party covering office space occupied by the management offices located in Tampa, Florida (the "Tampa Office") and Chicago, Illinois (the "Chicago Office"). The Tampa Office agreement expires on October 31, 2001 and the Chicago Office 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"); Atlanta, Georgia (the "Atlanta Office"); Scottsdale, Arizona (the "Scottsdale Office") and Irvine, California (the "Irvine Office"). The lease agreement for the Dallas Office expires on February 28, 1999, the lease agreement for the Bethesda Office expires on November 30, 1998, the lease agreement for the Denver Office expires on December 31, 2002, the lease agreement for the Seattle Office expires on November 30, 2000, the lease agreement for the Atlanta Office expires on May 14, 2001, the lease agreement for the Scottsdale Office expires on July 31, 1999 and the lease agreement for the Irvine Office expires on July 31, 1998.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 September 1, 1996, the Company increased the office space occupied by its corporate personnel. The lease agreement covering the additional space expires on April 29, 1998.
During the years ended December 31, 1997, 1996 and 1995, total rentals, including a portion of real estate taxes, insurance, repairs and utilities, aggregated $1,491,766, $1,020,311, and $1,049,731, respectively.
The minimum basic aggregate rental commitment under the above described leases in years succeeding December 31, 1997 is as follows:
22. TRANSACTIONS WITH RELATED PARTIES
Certain related entities provided services to the Company. These included, but were not limited to, Rosenberg & Liebentritt, P.C., which provided legal services, and Greenberg & Pociask, Ltd., which provided tax and accounting services. Fees paid to these related entities in the aggregate amounted to approximately $1.3 million, $0.7 million and $2.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. 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, $4.1 million and $2.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997, 1996 and 1995, $643,519, $315,700 and $366,300, respectively, was owed to Rosenberg & Liebentritt, P.C. for legal fees incurred in connection with securities offerings, litigation matters, property acquisitions and other general corporate matters.
Equity Group Investments, Inc. and certain of its subsidiaries, including Equity Assets Management, Inc., Eagle Flight Services, Equity Properties & Development, L.P. and EPMC ("EGI"), have provided certain services to the Company which include, but are not limited to, financial and accounting services, investor relations, corporate secretarial, computer and support services, real estate tax evaluation services, market consulting and research services, financing services, information systems services and property development services. Fees paid to EGI for these services amounted to $1.1 million, $1.3 million and $3.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. Amounts due to EGI were approximately $74,578, $0.3 million and $1.1 million as of December 31, 1997, 1996 and 1995, respectively.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the affiliated lease agreements discussed in Note 21, the Company paid Equity Office Holdings, L.L.C. ("EOH") $145,511, $118,919 and $104,421 in connection with the Chicago Office, $177,793, $137,638 and $9,783 in connection with the Tampa Office and $632,693, $409,392 and $632,725 in connection with the space occupied by the corporate headquarters for the years ended December 31, 1997, 1996 and 1995, respectively. Amounts due to EOH were approximately $59,675 and $46,435 as of December 31, 1997 and 1996, respectively. As of December 31, 1995, no amounts were owed to EOH.
In connection with the Private Equity Offering and the Shelf Offering, the Company paid Equity Institutional Investors, Inc. ("EII") consulting fees in the amount of $200,000 for the year ended December 31, 1995. As of December 31, 1997 and 1996, no amounts were owed to EII for consulting services.
Artery Property Management, Inc. ("Artery") provided the Company consulting services with regard to property acquisitions and additional business opportunities. Fees paid for those services and reimbursed expenses amounted to approximately $0.2 million and $0.7 million for the years ended December 31, 1996 and 1995.
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 $2.3 million, $4,300 and $41,300 for the years ended December 31, 1997, 1996 and 1995, 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 $5.7 million, $6.7 million and $7 million for the years ended December 31, 1997, 1996 and 1995, respectively.
23. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following unaudited quarterly data has been prepared on the basis of a December 31 year end. The 1997 and 1996 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 weighted average Common Share outstanding and impact of Statement No. 128, see Note 5 of Notes to Consolidated Financial Statements. Amounts are in thousands, except for per share amounts.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. SUBSEQUENT EVENTS
On January 7, 1998, the Company acquired Cityscape Apartments, a 156-unit multifamily property located in St. Louis Park, Minnesota, from an unaffiliated third party for a purchase price of approximately $12.3 million.
On January 9, 1998, the Company acquired 740 River Drive Apartments, a 162-unit multifamily property located in St. Paul, Minnesota, from an unaffiliated third party for a purchase price of approximately $12.8 million, which included the assumption of mortgage indebtedness of approximately $7 million.
On January 13, 1998, the Company acquired Prospect Towers Apartments, a 157-unit multifamily property, including a vacant parcel of land, located in Hackensack, New Jersey, from an unaffiliated third party for a purchase price of approximately $36.3 million, which included the assumption of mortgage indebtedness of approximately $14.9 million.
On January 16, 1998, the Company acquired Park Place Apartments, a 229-unit multifamily property located in Houston, Texas, from an unaffiliated third party for a purchase price of approximately $13.6 million, which included the assumption of mortgage indebtedness of approximately $10.2 million.
On January 16, 1998, the Company acquired Park Westend Apartments, a 312-unit multifamily property located in Richmond, Virginia, from an unaffiliated third party for a purchase price of approximately $13.3 million, which included the assumption of mortgage indebtedness of approximately $7.2 million.
On January 27, 1998, the Company completed an offering of 4,000,000 publicly registered Common Shares, which were sold at a price of $50.4375 per share. The Company received net proceeds of approximately $195.3 million in connection therewith.
On January 29, 1998, the Company acquired Emerald Bay at Winter Park Apartments, a 431-unit multifamily property located in Winter Park, Florida, from an unaffiliated third party for a purchase price of approximately $15.7 million.
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 effective on February 27, 1998.
On February 5, 1998, the Company acquired Farnham Park Apartments, a 216-unit multifamily property located in Houston, Texas, from an unaffiliated third party for a purchase price of approximately $15.7 million, which included the assumption of mortgage indebtedness of approximately $11.5 million.
On February 18, 1998, the Company completed offerings of 988,340 publicly registered Common Shares, which were sold at a price of $50.625 per share. The Company received net proceeds of approximately $47.5 million in connection therewith.
EQUITY RESIDENTIAL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 23, 1998, the Company completed an offering of 1 million publicly registered Common Shares, which were sold at a price of $48 per share. The Company received net proceeds of approximately $47.5 million in connection therewith.
On February 25, 1998, the Company acquired Plantation Apartments, a 232-unit multifamily property located in Houston, Texas, from an unaffiliated third party for a purchase price of approximately $10 million.
On February 27, 1998, the Company acquired Balcones Club Apartments, a 312-unit multifamily property located in Austin, Texas, from an unaffiliated third party for a purchase price of approximately $12.3 million.
Through February 1998, the Company sold approximately 639,000 Common Shares pursuant to the DRIP Plan and raised proceeds of approximately $31.7 million.
On March 2, 1998, the Company acquired Coach Lantern Apartments, a 90-unit multifamily property located in Scarborough, Maine, from an unaffiliated third party for a purchase price of approximately $4.7 million.
On March 2, 1998, the Company acquired Foxcroft Apartments, a 104-unit multifamily property located in Scarborough, Maine, from an unaffiliated third party for a purchase price of approximately $4.9 million.
On March 2, 1998, the Company acquired Yarmouth Woods Apartments, a 138-unit multifamily property located in Yarmouth, Maine, from an unaffiliated third party for a purchase price of approximately $6.6 million.
On March 2, 1998, the Company declared a $0.67 distribution per Common Share, $0.585938 per Series A Preferred Share, $0.570313 per Series B Depositary Share and per Series C Depositary Share, $0.5375 per Series D Depositary Share, $0.603125 per Series F Preferred Share and $0.453125 per Series G Depositary Share for the quarter ended March 31, 1998 to shareholders of record on March 27, 1998. In addition, the Company declared a $0.4375 per Series E Preferred Share for the quarter ended March 31, 1998 to shareholders of record on March 13, 1998.
On March 12, 1998, the Company disposed of two Properties for a total sales price of $16.7 million.
To the Board of Trustees Equity Residential Properties Trust
In connection with our audit of the consolidated financial statements of Equity Residential Properties Trust referred to in our report dated February 14, 1996, which financial statements are included in this Form 10-K, we have also audited the 1995 information in the financial statement schedule listed in the Index to the Financial Statements and Schedule. In our opinion, this financial statement schedule presents fairly, in all material respects, the 1995 information required to be set forth therein.
/s/ GRANT THORNTON LLP ------------------------------- GRANT THORNTON LLP
Chicago, Illinois February 14, 1996
S-1
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-2
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-3
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-4
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-5
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-6
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-7
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-8
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-9
EQUITY RESIDENTIAL PROPERTIES TRUST Real Estate and Accumulated Depreciation December 31, 1997
S-10
SCHEDULE III EQUITY RESIDENTIAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
NOTES:
(A) The balance of furniture & fixtures included in the total amount was $232,636,142 as of December 31, 1997. (B) The aggregate cost for Federal Income Tax purposes as of December 31, 1997 was approximately $6.2 billion. (C) The life to compute depreciation for furniture & fixtures is 7 years. (D) These two properties are encumbered by $14,947,187 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 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) Combined with Cedar Cove. (K) Formerly known as Oxford & Sussex. (L) Formerly known as Post Place. (M) Formerly known as The Vinings at Coral Springs. (N) Formerly known as The Plantations (NC). (O) These five properties are pledged as additional collateral in connection with the tax-exempt bond refinancing. (P) These 21 properties are encumbered by $133,669,779 in bonds. (Q) These 5 properties are encumbered by a $50,200,125 note payable. (R) Balances represent development properties Montierra, The Retreat and Vista Grove. These apartment communities are currently under construction and/or are in the process of being leased up.
* 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.
S-11
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, 1997, 1996, and 1995 are as follows:
The changes in accumulated depreciation for the years ended December 31, 1997, 1996 and 1995 are as follows:
S-12