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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24497
AIMCO PROPERTIES, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1275621
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization) 80222-4348
1873 SOUTH BELLAIRE STREET, SUITE 1700, (Zip Code)
DENVER, CO
(Address of principal executive offices)
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Registrant's telephone number, including area code: (303) 757-8101
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE NOT APPLICABLE
(Title of each class (Name of each exchange on which
to be so registered) each class to be registered)
Securities registered pursuant to Section 12(g) of the Act:
PARTNERSHIP COMMON UNITS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 11, 1999, there were 67,618,941 Partnership Common Units
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
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AIMCO PROPERTIES, L.P.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
ITEM PAGE
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PART I
1. Business.................................................... 1
1998 Developments........................................... 2
Financial Information About Industry Segments............... 6
Operating and Financial Strategies.......................... 6
Growth Strategies........................................... 7
Property Management Strategies.............................. 8
Taxation of the Partnership................................. 8
Taxation of AIMCO........................................... 9
Competition................................................. 9
Regulation.................................................. 9
Insurance................................................... 11
Employees................................................... 11
2. Properties.................................................. 11
3. Legal Proceedings........................................... 12
4. Submission of Matters to a Vote of Unitholders.............. 13
PART II
5. Market Price of and Distributions on the Registrant's Common
Units and Related Unitholder Matters...................... 13
6. Selected Financial Data..................................... 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
7a. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 26
8. Financial Statements and Supplementary Data................. 27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 27
PART III
10. Directors and Executive Officers of the Registrant.......... 27
11. Executive Compensation...................................... 30
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 32
13. Certain Relationships and Related Transactions.............. 32
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form
8-K....................................................... 35
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PART I
INTRODUCTION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements in certain circumstances. Certain
information included in this report, and other filings (collectively "SEC
Filings") under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (as well as information communicated orally or
in writing between the dates of such SEC Filings) contains or may contain
information that is forward looking, including, without limitation, statements
regarding the effect of acquisitions, the future financial performance of AIMCO
Properties, L.P., a Delaware limited partnership (together with its subsidiaries
and other controlled entities, the "Partnership" (and together with entities in
which the Partnership has a controlling financial interest, the "Company")) and
Apartment Investment and Management Company, a Maryland corporation which
controls the Partnership ("AIMCO"), the ability of AIMCO to qualify as a real
estate investment trust (a "REIT"), which involves the application of highly
technical and complex provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and the effect of government regulations. Actual results
may differ materially from those described in the forward looking statements and
will be affected by a variety of risks and factors including, without
limitation, national and local economic conditions, the general level of
interest rates, terms of governmental regulations that affect the Partnership
and interpretations of those regulations, the competitive environment in which
the Partnership operates, financing risks, including the risk that the
Partnership's cash flows from operations may be insufficient to meet required
payments of principal and interest, real estate risks, including variations of
real estate values and the general economic climate in local markets and
competition for tenants in such markets, acquisition and development risks,
including failure of such acquisitions to perform in accordance with
projections, and possible environmental liabilities, including costs which may
be incurred due to necessary remediation of contamination of properties
presently owned or previously owned by the company. Readers should carefully
review the Partnership's financial statements and the notes thereto, as well as
the risk factors described in the SEC filings.
ITEM 1. BUSINESS.
The Partnership is a Delaware limited partnership organized pursuant to the
provisions of the Delaware Revised Uniform Limited Partnership Act (as amended
from time to time, or any successor to such statute, the "Act"), engaged in the
ownership, acquisition, development, expansion, and management of multi-family
apartment properties. The term of the Partnership commenced on May 16, 1994, and
will continue until December 31, 2093, unless the Partnership is dissolved
sooner pursuant to the provisions of the Third Amended and Restated Agreement of
limited partnership, dated as of July 29, 1994 (the "Partnership Agreement"), or
as otherwise provided by the Act. AIMCO-GP, Inc., a Delaware corporation and a
wholly owned subsidiary of AIMCO (the "General Partner"), is the sole general
partner of the Partnership, and another wholly owned subsidiary of AIMCO,
AIMCO-LP, Inc., a Delaware corporation (the "Special Limited Partner"), is a
limited partner in the Partnership. As of December 31, 1998, AIMCO held an
approximate 83% interest in the Partnership. AIMCO, which was formed on January
10, 1994, is a self-administered and self-managed REIT that does not have any
material assets or operations other than its interest in the Partnership. On
July 24, 1994, AIMCO completed its initial public offering and engaged in a
business combination and consummated a series of related transactions which
enabled it to continue and expand the property management and related businesses
of Property Asset Management, L.L.C. and its affiliated companies, and PDI
Realty Enterprises, Inc. (collectively, the "AIMCO Predecessors").
Based on apartment unit data compiled by the National Multi Housing
Council, we believe that, as of December 31, 1998, the Company was the largest
owner and manager of multifamily apartment properties in the United States. As
of December 31, 1998, the Partnership owned or managed 379,363 apartment units
in 2,147 properties located in 49 states, the District of Columbia and Puerto
Rico, as follows:
- owned or controlled 61,672 units in 234 apartment properties;
- held an equity interest in 171,657 units in 910 apartment properties; and
- managed 146,034 units in 1,003 apartment properties for third party
owners and affiliates.
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By virtue of its aggregate 83% interest in the Partnership and its control of
the General Partner, AIMCO has the ability to control all of the day-to-day
operations of the Partnership. Moreover, by virtue of its ownership interest in
the Partnership and the General Partner, AIMCO is able to approve amendments to
the Partnership Agreement, without the approval of any other limited partners of
the Partnership, except for certain amendments that require the approval of all
of the limited partners. AIMCO conducts substantially all of its operations
through the Partnership.
The Partnership's principal executive offices are located at 1873 South
Bellaire Street, Suite 1700, Denver, Colorado 80222-4348 and its telephone
number is (303) 757-8101.
1998 DEVELOPMENTS
Ambassador Acquisition
On May 8, 1998, Ambassador Apartments, Inc. ("Ambassador") was merged with
and into AIMCO, with AIMCO being the surviving corporation. The purchase price
of $713.6 million was comprised of $90.3 million in cash, $372.0 million of
assumed debt and up to approximately 6.6 million shares of AIMCO Class A Common
Stock valued at $251.3 million. Pursuant to the Ambassador merger agreement,
each outstanding share of Ambassador common stock was converted into the right
to receive 0.553 shares of AIMCO Class A Common Stock. Concurrently, all
outstanding options to purchase Ambassador common stock were converted into cash
or options to purchase AIMCO Class A Common Stock, at the same conversion ratio.
The merger was accounted for as a purchase. Contemporaneously with the
consummation of the Ambassador merger, a subsidiary of the Partnership merged
with Ambassador's operating partnership and each outstanding unit of limited
partnership interest in the Ambassador operating partnership was converted into
the right to receive 0.553 Partnership Common Units ("OP Units") of the
Partnership. Prior to the merger, Ambassador was a self-administered and
self-managed real estate investment trust engaged in the ownership and
management of garden-style apartment properties leased primarily to middle
income tenants. Ambassador owned 52 apartment communities with a total of 15,728
units located in Arizona, Colorado, Florida, Georgia, Illinois, Tennessee and
Texas, and managed one property containing 252 units for an unrelated third
party.
Insignia Acquisition
On October 1, 1998, Insignia Financial Group, Inc., a Delaware corporation,
was merged with and into AIMCO with AIMCO being the surviving corporation. The
purchase price of $1,125.7 million was comprised of the issuance of up to
approximately 8.9 million shares of Class E Cumulative Convertible Preferred
Stock (the "Class E Preferred Stock") valued at $301.2 million, $670.1 million
in assumed debt and liabilities (including the $50 million special dividend,
assumed liabilities of Insignia Properties Trust and transaction costs), $149.5
million in assumed mandatory redeemable convertible preferred securities, and
$4.9 million in cash. The merger was accounted for as a purchase. The Class E
Preferred Stock entitled the holders thereof to receive the same cash dividends
per share as holders of AIMCO Class A Common Stock. In addition, on January 15,
1999, holders of Class E Preferred Stock received a special dividend in an
aggregate amount of approximately $50 million, and all outstanding shares of
Class E Preferred Stock automatically converted into an equal number of shares
of AIMCO Class A Common Stock.
As a result of the Insignia merger, AIMCO acquired: (i) Insignia's
interests in Insignia Properties Trust, a Maryland REIT ("IPT"), which was a
majority owned subsidiary of Insignia; (ii) Insignia's interest in Insignia
Properties, L.P., IPT's operating partnership ("IPLP"); (iii) 100% of the
ownership of the Insignia entities that provide multifamily property management
and partnership administrative services; (iv) Insignia's interest in multifamily
co-investments; (v) Insignia's ownership of subsidiaries that control
multifamily properties not included in IPT; (vi) Insignia's limited partner
interests in public and private syndicated real estate limited partnerships; and
(vii) assets incidental to the foregoing businesses (collectively, the "Insignia
Multifamily Business").
Concurrently with the Insignia merger, AIMCO contributed to the Partnership
all the assets and liabilities acquired, except Insignia's interests in IPT, in
exchange for approximately 3.8 million OP Units
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valued at approximately $132.5 million and $4.9 million in cash. The assets and
liabilities contributed to the Partnership consisted of assets valued at $775.7
million, assumed debt and liabilities of $488.8 million (including the $50
million special dividend and transaction costs) and $149.5 million in assumed
mandatory redeemable convertible preferred securities.
Also on October 1, 1998, in connection with and following the Insignia
Merger, the Partnership purchased from IPLP the economic interests underlying
substantially all the assets of IPLP, excluding certain enumerated assets such
as cash (the "IPLP Exchange and Assumption"). In exchange for the economic
interests underlying the assets, the Partnership agreed to assume all the
obligations of IPLP with respect to such assets and issued to IPLP approximately
10.2 million OP Units (which were assigned a value of approximately $386.2
million). Effective February 26, 1999, upon completion of the merger with IPT
(described below), IPLP and the Partnership unwound the IPLP Exchange and
Assumption.
IPT Merger
As a result of the Insignia merger, AIMCO acquired approximately 51% of the
outstanding shares of beneficial interest of IPT. On February 26, 1999, IPT was
merged with and into AIMCO, with AIMCO being the surviving corporation. Pursuant
to the merger, each of the outstanding shares of IPT that were not held by AIMCO
were converted into the right to receive 0.3601 shares of AIMCO Class A Common
Stock, resulting in the issuance of approximately 4.3 million shares of AIMCO
Class A Common Stock (valued at approximately $158.8 million).
Simultaneously with the IPT merger, AIMCO contributed all the assets and
liabilities of IPT to the Partnership in exchange for approximately 8.9 million
OP Units (valued at approximately $318.2 million). The assets and liabilities
contributed to the Partnership consisted of assets valued at $395.7 million and
assumed debt and liabilities of approximately $77.5 million. Also in connection
with the IPT merger, the IPLP Exchange and Assumption was unwound and the
approximately 10.2 million OP Units issued in connection with the IPLP Exchange
and Assumption were canceled.
Individual Property Acquisitions
During the year ended December 31, 1998, the Company purchased or acquired
control of 30 properties consisting of 6,707 apartment units for total
consideration of $316.5 million. The Company's purchase price consisted of
$172.3 million in assumed mortgage obligations, $96.0 million in cash, and $48.2
million of OP Units.
Tender Offers
During 1998, the Company made separate offers to the limited partners of
approximately 280 partnerships to acquire their limited partnerships interests.
The Company paid approximately $41.0 million in cash and OP Units to acquire
limited partnership interests pursuant to the offers.
Property Dispositions
In 1998, the Company sold seven properties for an aggregate sales price of
$54.5 million. Cash proceeds to the Company from the sales were used to repay a
portion of the Company's outstanding short-term indebtedness. The results of
operations of three of these properties were accounted for by the Company under
the equity method. The Company recognized a gain of approximately $4.3 million
on the disposition of the four consolidated properties.
Debt Assumptions and Financings
During the year ended December 31, 1998, the Company assumed or incurred
new non-recourse indebtedness totalling $544.4 million in connection with the
acquisition of 82 apartment properties.
In January 1998, AIMCO and the Partnership entered into a new $50 million
credit agreement with Bank of America National Trust and Savings Association and
Bank Boston, N.A. The Partnership is the
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borrower under the credit agreement, but all obligations thereunder are
guaranteed by AIMCO and certain of its subsidiaries. In October 1998, the
parties amended and restated the credit agreement. The agreement now provides
for a revolving credit facility of up to $100 million, including a swing line of
up to $30 million. The credit facility matures on September 30, 1999, unless
extended, at the discretion of the lenders. The credit agreement also provides
for the conversion of the revolving facility into a three-year term loan. Under
the credit agreement, as amended in January 1999, loans bear interest at LIBOR
or Bank of America's reference rate, at the election of the Partnership, plus an
applicable margin. The margins range from 2.25% to 2.75% for a LIBOR rate
borrowing and 0.75% to 1.25% for a base rate borrowing, both dependant upon the
total balance outstanding relative to the calculated borrowing base value. The
balance outstanding under the credit facility was $84.3 million as of December
31, 1998.
In February 1998, the Partnership, as borrower, and AIMCO and certain
single asset wholly-owned subsidiaries of the Company, as guarantors, entered
into a five year $50 million secured credit facility agreement with Washington
Mortgage Financial Group, Ltd. AIMCO and certain subsidiaries guaranteed loans
under the agreement and the guarantees were secured by certain of their assets,
including four apartment properties and two mortgage notes. Under the agreement,
advances to the Partnership were funded with the proceeds from the sale to
investors of mortgage-backed securities issued by Fannie Mae and secured by the
advance and an interest in the collateral. The interest rate on each advance was
determined by investor bids for such mortgage-backed securities, plus a margin.
In February 1999, the Partnership terminated the credit facility and repaid all
outstanding borrowings with proceeds from new long-term, fully amortizing
indebtedness secured by certain properties that previously secured the credit
facility.
In October 1998, the Partnership and AIMCO entered into an interim term
loan agreement with Lehman Brothers Inc. and one of its affiliates, and borrowed
$300 million thereunder. The loan is unsecured and matures on September 30,
1999. The proceeds were used to finance the Insignia merger and related fees and
expenses, to refinance existing indebtedness, and for general working capital
purposes. The loan bears interest at a base rate or the rate at which eurodollar
deposits for one month are offered in the interbank eurodollar market, plus, in
either case, a margin which averages 1.375% to 2.208% in the case of base rate
loans, and 2.375% to 3.208% in the case of eurodollar loans. The base rate will
be the higher of (i) the primary rate of Citibank, N.A., (ii) the secondary
market rate for three month certificates of deposit plus 1%, or (iii) the
federal funds effective rate plus 0.5%. In November 1998, AIMCO sold Class J
Cumulative Convertible Preferred Stock ("Class J Preferred Stock") for proceeds
of $100.0 million, which was contributed by AIMCO to the Partnership in exchange
for 1,000,000 Class J Cumulative Convertible Preferred Units ("Class J Preferred
Units"). The Partnership used the proceeds to pay down the loan. As of December
31, 1998, there was $196 million of indebtedness outstanding under the loan
agreement. In February 1999, net proceeds of $115.0 million from the sale of
5,000,000 shares of AIMCO's Class K Convertible Cumulative Preferred Stock
("Class K Preferred Stock") were contributed by AIMCO to the Partnership in
exchange for 5,000,000 Class K Convertible Cumulative Preferred Units ("Class K
Preferred Units"). The Partnership used the proceeds to further pay down the
loan.
In December 1998, the Company completed the refinancing of $222 million in
variable rate tax-exempt debt assumed in conjunction with the May 1998 merger
with Ambassador. The debt was secured by 27 properties located in Texas,
Arizona, Tennessee and Illinois. Through the refinancing, the Company converted
the previous tax-exempt debt to $204 million in fixed rate, fully amortizing
tax-exempt debt secured by 26 properties. The new debt has a weighted average
interest rate of 5.8% and matures in 23 years. The Company also incurred $7.1
million of taxable debt secured by three of the properties, repaid $11.4 million
of the previous tax-exempt debt, released $21.5 million in cash reserves and
impound accounts held by the prior mortgagors, and released two properties that
served as additional collateral for the previous debt.
In February and March 1999, the Company incurred in the aggregate $83.4
million of long-term, fixed rate, fully amortizing mortgage debt secured by 13
properties in separate loan transactions. The Company used the $81.5 million of
net proceeds from the financings to repay debt under the interim loan agreement
with Lehman Brothers Inc., to repay debt under its credit facility with Bank of
America National Trust and Savings Association and Bank, Boston, N.A. and to
provide working capital. As of March 11, 1999, the balance outstanding under the
interim loan agreement was $25 million, under the credit facility was
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$74.8 million and under the IPT credit agreement was $45.0 million. The amount
available under the credit facility at March 11, 1999 was $24 million and under
the IPT credit agreement was $5.0 million.
Equity Offerings of AIMCO
The Partnership Agreement requires that, whenever AIMCO issues shares of
its Class A Common Stock or its preferred stock, the proceeds from such
issuances are contributed to the Partnership in exchange for an equal number of
OP Units or Partnership Preferred Units ("Preferred Units"), respectively. In
1998, AIMCO raised proceeds of over $391 million in three public offerings and
three private placements of equity securities. The total proceeds were
contributed by AIMCO to the Partnership in exchange for similar classes of
preferred units that have the same respective terms as the preferred stock
detailed below. These transactions are summarized below:
NUMBER TOTAL PROCEEDS
OF SHARES IN DISTRIBUTION
TRANSACTION TYPE DATE OR UNITS MILLIONS RATE
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Class D Cumulative Preferred
Stock of AIMCO................. Public Feb. 1998 4,200,000 $105.00 8.75%
Class G Cumulative Preferred
Stock of AIMCO................. Public Jul. 1998 4,050,000 $101.25 9.375%
Class H Cumulative Preferred
Stock of AIMCO................. Public Aug. 1998 2,000,000 $ 50.00 9.5%
Class J Cumulative Convertible
Preferred Stock of AIMCO....... Private Nov. 1998 1,250,000 $100.00 (1)
Preferred Partnership Units of
Ambassador Apartments, L.P..... Private Dec. 1998 1,400,000 $ 30.85 7.75%
Warrant to purchase AIMCO Class A
Common Stock................... Private Dec. 1998 875,000 $ 4.15 N/A
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TOTAL PROCEEDS 1998............................................... $391.25
Class K Convertible Cumulative
Preferred Stock of AIMCO....... Public Feb. 1999 5,000,000 $125.00 (2)
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(1) Holders of Class J Preferred Stock are entitled to receive cash dividends at
the rate of 7% per annum of the $100 liquidation preference (equivalent to
$7 per annum per share) for the period from November 6, 1998 until November
15, 1998, 8% per annum of the $100 liquidation preference (equivalent to $8
per annum per share) for the period from November 15, 1998 until November
15, 1999, 9% per annum of the $100 liquidation preference (equivalent to $9
per annum per share) for the period from November 15, 1999 until November
15, 2000, and 9 1/2% per annum of the $100 liquidation preference
(equivalent to $9.50 per annum per share) thereafter. The Class J Preferred
Units held by AIMCO have the same terms as the Class J Preferred Stock.
(2) For three years from the date of original issuance, the Class K Preferred
Stock dividends will be in an amount per share equal to the greater of (i)
$2.00 per year (equivalent to 8% of the $25 liquidation preference), or (ii)
the cash dividend payable on the number of shares of AIMCO Class A Common
Stock (or portion thereof) into which a share of Class K Preferred Stock is
convertible. Beginning with the third anniversary of the date of original
issuance, the Class K Preferred Stock dividends per share will be increased
to the greater of (i) $2.50 per year (equivalent to 10% of the $25
liquidation preference), or (ii) the cash dividend payable on the number of
shares of AIMCO Class A Common Stock (or portion thereof) into which a share
of Class K Preferred Stock is convertible. The Class K Preferred Units held
by AIMCO have the same terms as the Class K Preferred Stock.
Pending acquisitions
In the ordinary course of business, the Company engages in discussions and
negotiations regarding the acquisition of apartment properties (including
interests in entities that own apartment properties). The
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Company frequently enters into contracts and nonbinding letters of intent with
respect to the purchase of properties. These contracts are typically subject to
certain conditions and permit the Company to terminate the contract in its sole
and absolute discretion if it is not satisfied with the results of its due
diligence investigation of the properties. The Company believes that such
contracts essentially result in the creation of an option on the subject
properties and give the Company greater flexibility in seeking to acquire
properties. As of March 8, 1999, the Company had under contract or letter of
intent an aggregate of 32 multi-family apartment properties with a maximum
aggregate purchase price of $571.1 million, including estimated capital
improvements, which, in some cases, may be paid in the form of assumption of
existing debt. All such contracts are subject to termination by the Company as
described above. No assurance can be given that any of these possible
acquisitions will be completed or, if completed, that they will be accretive on
a per share basis.
Contribution and Management Agreement
In order to maintain AIMCO's qualification as a REIT under the Code, AIMCO
has acquired, and may in the future acquire, an interest in entities in which
the Partnership does not own any interest (the "QRSs"). AIMCO and the
Partnership have entered into a Contribution and Management Agreement (the
"Management Agreement"), pursuant to which the Partnership has acquired from
AIMCO, in exchange for interests in the Partnership, the economic benefits of
the assets owned by the QRSs, and AIMCO has granted the Partnership certain
rights with respect to the assets owned by the QRSs. Under the Management
Agreement, the Partnership has a right of first refusal to acquire the assets
owned by the QRSs for no additional consideration. Under the Management
Agreement, AIMCO is obligated to contribute to the Partnership all dividends,
distributions, and other proceeds received from the QRSs (excluding
distributions received in respect of any interest in the Partnership).
Properties owned by the QRSs and properties in which the QRSs have ownership
interests are included in the consolidated financial statements of the
Partnership pursuant to the Management Agreement.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one industry segment, the ownership and management
of real estate properties. See the consolidated financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K for financial
information relating to the Company.
OPERATING AND FINANCIAL STRATEGIES
The Company's operating and financing strategies to attempt to meet its
objective of providing long-term, predictable funds from operations ("FFO") per
OP Unit, less a reserve for Capital Replacements of $300 per apartment unit,
include the following:
- Acquisition of Properties at Less Than Replacement Cost. The Company
attempts to acquire properties at a significant discount to their
replacement cost.
- Geographic Diversification. The Company operates in 49 states, the
District of Columbia and Puerto Rico. This geographic diversification
insulates the Company, to some degree, from inevitable downturns in any
one market.
- Market Growth. The Company seeks to operate in markets where population
and employment growth are expected to exceed the national average and
where it believes it can become a regionally significant owner or manager
of properties. For the period from 1996 through 1999, annual population
and employment growth rates in the Company's five largest regional
markets are forecasted to be 2.2% and 3.6%, respectively.
- Product Diversification. The Company's portfolio of apartment properties
spans a wide range of apartment community types, both within and among
markets.
- Capital Replacement. The Company believes that the physical condition and
amenities of its apartment communities are important factors in its
ability to maintain and increase rental rates. The
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Company allocates approximately $300 annually per owned apartment unit
for Capital Replacements, and reserves unexpended amounts for future
capital replacements.
- Debt Financing. The Company's strategy is generally to incur debt to
increase its return on equity while maintaining acceptable interest
coverage ratios. The Company seeks to maintain a ratio of free cash flow
to combined interest expense and preferred stock dividends of between 2:1
and 3:1, and a ratio of earnings before interest, income taxes,
depreciation and amortization (with certain adjustments and after a
provision of approximately $300 per owned apartment unit) to debt service
of at least 2:1, and to match debt maturities to the character of the
assets financed. For the year ended December 31, 1998, the Company was
within these targets. The Company uses predominantly long-term,
fixed-rate and self-amortizing non-recourse debt in order to avoid the
refunding or repricing risks of short-term borrowings. The Company also
uses short-term debt financing to fund acquisitions and generally expects
to refinance such borrowings with proceeds from equity offerings or
long-term debt financings. As of December 31, 1998, approximately 24.2%
of the Company's outstanding debt was short-term debt and 75.8% was
long-term debt. As of March 11, 1999, approximately 9.5% of the Company's
outstanding debt was short-term debt and 90.5% was long-term debt.
- Dispositions. From time to time, the Company sells properties that do not
meet its return on investment criteria or that are located in areas where
the Company does not believe that the long-term neighborhood values
justify the continued investment in the properties.
- Distribution Policy. The Partnership pays distributions on its OP Units
to share its profitability with its OP Unitholders. The Partnership
distributed 65.7%, 66.5% and 72.3% of FFO to holders of OP Units for the
years ended December 31, 1998, 1997 and 1996, respectively. It is the
present policy of the Board of Directors of AIMCO, as General Partner, to
increase the distribution annually in an amount equal to one-half of the
projected increase in FFO, adjusted for Capital Replacements, subject to
minimum distribution requirements to maintain AIMCO's REIT status.
GROWTH STRATEGIES
The Company seeks growth through two primary sources -- acquisitions and
internal expansion.
Acquisition Strategies.
The Company believes its acquisition strategies will increase profitability
and predictability of earnings by increasing its geographic diversification,
economies of scale and opportunities to provide ancillary services to tenants at
its properties. Since AIMCO's initial public offering in July 1994, the Company
has completed numerous acquisition transactions, expanding its portfolio of
owned or managed properties from 132 apartment properties with 29,343 units to
2,147 apartment properties with 379,363 units as of December 31, 1998. The
Company acquires additional properties primarily in three ways:
- Direct Acquisitions. The Company may directly, including through mergers
and other business combinations, acquire individual properties or
portfolios of properties and controlling interests in entities that own
or control such properties or portfolios. To date, a significant portion
of the Company's growth has resulted from the acquisition of other
companies that owned or controlled properties.
- Acquisition of Managed Properties. The Company believes that its property
management operations support its acquisition activities. Since AIMCO's
initial public offering, the Company has acquired from its managed
portfolio 15 properties comprising 4,432 units for total consideration of
$155.4 million.
- Increasing its Interest in Partnerships. For properties where the Company
owns a general partnership interest in the property-owning partnership,
the Company may seek to acquire, subject to its fiduciary duties, the
interests in the partnership held by third parties for cash or, in some
cases, in exchange for OP Units. The Company has completed tender offers
with respect to approximately 280 partnerships and has purchased
additional interests in such partnerships for cash and for OP Units.
7
10
Internal Growth Strategies.
The Company pursues internal growth primarily through the following
strategies:
- Revenue Increases. The Company increases rents where feasible and seeks
to improve occupancy rates.
- Redevelopment of Properties. The Company believes redevelopment of
selected properties in superior locations provides advantages over
development of new properties. The Company believes that redevelopment
generally allows the Company to maintain rents comparable to new
properties and, compared to development of new properties, can be
accomplished with relatively lower financial risk, in less time and with
reduced delays due to governmental regulation.
- Expansion of Properties. The Company believes that expansion within or
adjacent to properties already owned or managed by the Company also
provides growth opportunities at lower risk than new development. Such
expansion can offer cost advantages to the extent common area amenities
and on-site management personnel can service the property expansions.
- Conversion of Affordable Properties; Improvement of Performance. The
Company believes that it may be able to significantly increase its return
from its portfolio of affordable properties by improving operations at
some of its properties or by converting some of these properties to
conventional properties.
- Ancillary Services. The Company's management believes that its ownership
and management of properties provides it with unique access to a customer
base for the sale of additional services which generate incremental
revenues. The Company currently provides cable television, telephone
services, appliance rental, and carport, garage and storage space rental
at certain properties.
- Controlling Expenses. Cost reductions are accomplished by local focus on
the regional operating center level and by exploiting economies of scale.
As a result of the size of its portfolio and its creation of regional
concentrations of properties, the Company has the ability to leverage
fixed costs for general and administrative expenditures and certain
operating functions, such as insurance, information technology and
training, over a large property base.
PROPERTY MANAGEMENT STRATEGIES
The Company seeks to improve the operating results from its property
management business by, among other methods, combining centralized financial
control and uniform operating procedures with localized property management
decision-making and market knowledge. The Company's management operations are
organized into 35 regional operating centers. Each of the regional operating
centers is supervised by a Regional Vice-President.
TAXATION OF THE PARTNERSHIP
The Partnership is treated as a "pass-through" entity for Federal income
tax purposes and is not itself subject to Federal income taxation. Each partner
of the partnership, however, is subject to tax on his allocable share of
partnership tax items, including partnership income, gains, losses, deductions
and credits ("Partnership Tax Items") for each taxable year during which he is a
partner, regardless of whether he receives any actual distributions of cash or
other property from the Partnership during the taxable year. Generally, the
characterization of any particular Partnership Tax Item is determined by the
Partnership, rather than at the partner level, and the amount of a partner's
allocable share of such item is governed by the terms of the partnership
agreement. AIMCO, the General Partner, is the "tax matters partner" of the
Partnership for Federal income tax purposes. The tax matters partner is
authorized, but not required, to take certain actions on behalf of the
Partnership with respect to tax matters.
8
11
TAXATION OF AIMCO
AIMCO has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended, commencing with its taxable year ended December 31, 1994, and
intends to continue to operate in such a manner. AIMCO's current and continuing
qualification as a REIT depends on its ability to meet the various requirements
imposed by the Internal Revenue Code, through actual operating results,
distribution levels and diversity of stock ownership.
If AIMCO qualifies for taxation as a REIT, it will generally not be subject
to U.S. Federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a corporation. If AIMCO fails to qualify as a REIT in any taxable
year, its taxable income will be subject to U.S. Federal income tax at regular
corporate rates (including any applicable alternative minimum tax). Even if
AIMCO qualifies as a REIT, it may be subject to certain state and local income
taxes and to U.S. Federal income and excise taxes on its undistributed income.
If in any taxable year AIMCO fails to qualify as a REIT and incurs
additional tax liability, AIMCO may need to borrow funds or liquidate certain
investments in order to pay the applicable tax and AIMCO would not be compelled
to make distributions under the Code. Unless entitled to relief under certain
statutory provisions, AIMCO would also be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification is
lost. Although AIMCO currently intends to operate in a manner designed to
qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause AIMCO to fail to qualify as a REIT or may cause
the Board of Directors of AIMCO to revoke the REIT election.
AIMCO and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of AIMCO and its
stockholders may not conform to the U.S. Federal income tax treatment.
COMPETITION
There are numerous housing alternatives that compete with the Company's
properties in attracting residents. The Company's properties compete directly
with other multi-family rental apartments and single family homes that are
available for rent in the markets in which the Company's properties are located.
The Company's properties also compete for residents with new and existing homes
and condominiums. The number of competitive properties in a particular area
could have a material effect on the Company's ability to lease apartment units
at its properties and on the rents charged. The Company competes with numerous
real estate companies in acquiring, developing and managing multi-family
apartment properties and seeking tenants to occupy its properties. In addition,
the Company competes with numerous property management companies in the markets
where the properties managed by the Company are located.
REGULATION
General
Multi-family apartment properties are subject to various laws, ordinances
and regulations, including regulations relating to recreational facilities such
as swimming pools, activity centers and other common areas. Changes in laws
increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions, as
well as changes in laws affecting development, construction and safety
requirements, may result in significant unanticipated expenditures, which would
adversely affect the Company's cash flows from operating activities. In
addition, future enactment of rent control or rent stabilization laws or other
laws regulating multi-family housing may reduce rental revenue or increase
operating costs in particular markets.
9
12
HUD Enforcement
A significant number of properties owned by the Company are subject to
regulation by HUD. Under its regulations, HUD reserves the right to approve the
owner and the manager of HUD-insured and HUD-assisted properties, as well as
their "principals" (e.g., general partners, stockholders with a 10% or greater
interest, officers and directors) in connection with the acquisition of a
property, participation in HUD programs or the award of a management contract.
This approval process is commonly referred to as "2530 Clearance." HUD monitors
the performance of properties with HUD-insured mortgage loans. HUD also monitors
compliance with applicable regulations, and takes performance and compliance
into account in approving the acquisition of management of HUD-assisted
properties. In the event of instances of unsatisfactory performance or
regulatory violations, the HUD office with jurisdiction over the applicable
property has the authority to enter a "flag" into the computerized 2530
Clearance system. If one or more flags have been entered, a decision whether to
grant 2530 Clearance is then subject to review by HUD's Multi-family
Participation Review Committee in Washington, D.C. (the "2530 Committee"). As a
result of certain mortgage defaults and unsatisfactory ratings received by NHP
Incorporated in years prior to its acquisition by the Company in December 1997,
HUD believes that the 2530 Committee must review any application for 2530
Clearance filed by the Company. On December 18, 1998, the Company received
approval of approximately fifty 2530 applications and had no unresolved flags in
the 2530 system as of December 31, 1998.
The Company believes that the 2530 Committee will continue to apply the
2530 clearance process to large management portfolios such as the Company's with
discretion and flexibility. While there can be no assurance, the Company
believes that the unsatisfactory reviews and the mortgage defaults will not have
a material impact on its results of operations or financial condition. If HUD
were to disapprove the Company as property manager for one or more affordable
properties, the Company's ability to obtain property management revenues from
new affordable properties would be impaired.
Laws Benefitting Disabled Persons
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain Federal requirements related to
access and use by disabled persons. These requirements became effective in 1992.
A number of additional Federal, state and local laws may also require
modifications to the Company's properties, or restrict certain further
renovations of the properties, with respect to access thereto by disabled
persons. For example, the Fair Housing Amendments Act of 1988 requires apartment
properties first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with these laws could result in the imposition of
fines or an award of damages to private litigants and also could result in an
order to correct any non-complying feature, which could result in substantial
capital expenditures. Although the Company believes that its properties are
substantially in compliance with present requirements, it may incur
unanticipated expenses to comply with these laws.
Regulation of Affordable Housing
As of December 31, 1998, the Company owned or controlled 12 properties,
held an equity interest in 462 properties and managed for third parties and
affiliates 578 properties that benefit from governmental programs intended to
provide housing to people with low or moderate incomes. These programs, which
are usually administered by the United States Department of Housing and Urban
Development ("HUD") or state housing finance agencies, typically provide
mortgage insurance, favorable financing terms or rental assistance payments to
the property owners. As a condition to the receipt of assistance under these
programs, the properties must comply with various requirements, which typically
limit rents to pre-approved amounts. If permitted rents on a property are
insufficient to cover costs, a sale of the property may become necessary, which
could result in a loss of management fee revenue. The Company must obtain the
approval of HUD in order to manage, or acquire a significant interest in, a
HUD-assisted or HUD-insured property. The Company can make no assurance that it
will always receive such approval.
10
13
Environmental
Various Federal, state and local laws subject property owners or operators
to liability for the costs of removal or remediation of certain hazardous
substances present on a property. Such laws often impose liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of the hazardous substances. The presence of, or the failure to properly
remediate, hazardous substances may adversely affect occupancy at contaminated
apartment communities and the Company's ability to sell or borrow against
contaminated properties. In addition to the costs associated with investigation
and remediation actions brought by governmental agencies, the presence of
hazardous wastes on a property could result in personal injury or similar claims
by private plaintiffs. Various laws also impose liability for the cost of
removal or remediation of hazardous substances at the disposal or treatment
facility. Anyone who arranges for the disposal or treatment of hazardous or
toxic substances is potentially liable under such laws. These laws often impose
liability whether or not the person arranging for the disposal ever owned or
operated the disposal facility. In connection with the ownership, operation and
management of properties, the Company could potentially be liable for
environmental liabilities or costs associated with its properties.
INSURANCE
Management believes that the Company's properties are covered by adequate
fire, flood and property insurance provided by reputable companies and with
commercially reasonable deductibles and limits.
EMPLOYEES
The Company has a staff of employees performing various acquisition,
redevelopment and management functions. The Company has approximately 13,000
employees, most of whom are employed at the property level. None of the
employees are represented by a union, and the Company has never experienced a
work stoppage. The Company believes it maintains satisfactory relations with its
employees.
ITEM 2. PROPERTIES.
The Company's properties are located in 49 states, Puerto Rico and the
District of Columbia. The properties are managed by four Division
Vice-Presidents controlling 35 regional operating centers. The following table
sets forth information for the regional operating centers as of December 31,
1998:
REGIONAL
OPERATING NUMBER OF NUMBER OF
CENTER DIVISION PROPERTIES UNITS
- --------- --------- ---------- ---------
Chicago, IL................................................. Far West 60 11,744
Denver, CO.................................................. Far West 73 11,478
Kansas City, MO............................................. Far West 97 13,138
Los Angeles, CA............................................. Far West 69 10,239
Oakland, CA................................................. Far West 80 8,931
Phoenix, AZ................................................. Far West 51 13,138
San Diego, CA............................................... Far West 36 5,291
----- -------
466 73,959
Allentown, PA............................................... East 48 7,493
Columbia, SC................................................ East 57 10,011
Greenville, SC.............................................. East 70 8,650
Philadelphia, PA............................................ East 37 11,804
MLG Sub ROC 2............................................... East 27 8,061
Richmond, VA................................................ East 43 11,420
Rockville, MD............................................... East 84 13,053
Maine Sub ROC 1............................................. East 70 2,328
Tarrytown, NY............................................... East 67 9,582
----- -------
503 82,402
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REGIONAL
OPERATING NUMBER OF NUMBER OF
CENTER DIVISION PROPERTIES UNITS
- --------- --------- ---------- ---------
Atlanta, GA................................................. Southeast 63 11,896
Boca Raton, FL.............................................. Southeast 35 7,797
Miami, FL................................................... Southeast 49 10,454
Mobile, AL.................................................. Southeast 62 10,136
Nashville, TN............................................... Southeast 63 11,589
Orlando, FL................................................. Southeast 52 12,786
Tampa, FL................................................... Southeast 53 13,075
----- -------
377 77,733
Austin, TX.................................................. West 55 10,452
Columbus, OH................................................ West 57 8,774
Dallas I, TX................................................ West 65 12,773
Dallas II, TX............................................... West 68 13,153
Houston I, TX............................................... West 49 10,458
Houston II, TX.............................................. West 58 13,818
Indianapolis, IN............................................ West 43 9,675
----- -------
395 79,103
Portfolio:
Senior Living Sub ROC 1..................................... Oxford 8 1,638
Affordable Midwest.......................................... Oxford 44 5,711
Conventional Mideast........................................ Oxford 23 6,342
Conventional Midwest........................................ Oxford 45 10,725
Conventional South.......................................... Oxford 41 10,210
----- -------
161 34,626
Other....................................................... 245 31,540
----- -------
2,147 379,363
===== =======
At December 31, 1998, the Company owned or controlled 234 properties
containing 61,672 units. These properties contain, on average, 261 apartment
units, with the largest property containing 2,113 apartment units. These
properties offer residents a range of amenities, including swimming pools,
clubhouses, spas, fitness centers, tennis courts and saunas. Many of the
apartment units offer design and appliance features such as vaulted ceilings,
fireplaces, washer and dryer hook-ups, cable television, balconies and patios.
In addition, at December 31, 1998, the Company held an equity interest in 910
properties containing 171,657 units, and managed 1,003 other properties
containing 146,034 units. The Company's 2,147 properties contain, on average,
177 apartment units, with the largest property containing 2,899 apartment units.
Substantially all of the properties owned or controlled by the Company are
encumbered by mortgage indebtedness or serve as collateral for the Company's
indebtedness. At December 31, 1998, the Company had aggregate mortgage
indebtedness totaling $1,213.4 million, which was secured by 193 properties
having an aggregate weighted average interest rate of 7.1%. As of December 31,
1998, approximately 24.2% of the Company's outstanding debt was short-term debt
and 75.8% was long-term debt. As of March 11, 1999, approximately 9.5% of the
Company's outstanding debt was short-term debt and 90.5% was long-term debt. See
the financial statements included elsewhere in this Annual Report on Form 10-K
for additional information about the Company's indebtedness.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal actions resulting from its
operating activities. These actions are routine litigation and administrative
proceedings arising in the ordinary course of business, some of which are
covered by liability issuance, and none of which are expected to have a material
adverse effect on the consolidated financial condition or results of operations
of the Company.
12
15
In connection with the Company's offers to purchase interests in limited
partnerships that own properties, the Company and its affiliates are sometimes
subject to legal actions, including allegations that such activities may involve
breaches of fiduciary duties to the limited partners of such partnerships or
violations of the relevant partnership agreements. The Company believes it
complies with its fiduciary obligations and relevant partnership agreements, and
does not expect such legal actions to have a material adverse effect on the
consolidated financial condition or results of operations of the Company and its
subsidiaries taken as a whole. The Company may incur costs in connection with
the defense or settlement of such litigation, which could adversely affect the
Company's desire or ability to complete certain transactions and thereby have a
material adverse effect on the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS.
None.
PART II
ITEM 5. MARKET PRICE OF AND DISTRIBUTIONS ON THE REGISTRANT'S COMMON UNITS AND
RELATED UNITHOLDER MATTERS.
There is no public market for the OP Units, and the Partnership does not
intend to list the OP Units on any securities exchange. In addition, the
partnership agreement restricts the transferability of OP Units. The following
table sets forth the cash distributions per OP Unit during the years ended
December 31, 1998 and 1997.
YEAR ENDED
DECEMBER 31,
------------------
1998 1997
------- -------
1st Quarter................................................. $0.5625 $0.4625
2nd Quarter................................................. 0.5625 0.4625
3rd Quarter................................................. 0.5625 0.4625
4th Quarter................................................. 0.5625 0.4625
On March 11, 1999, there were 67,618,941 OP Units outstanding, held by 735
unitholders of record.
RECENT SALES OF UNREGISTERED SECURITIES.
For the year ended December 31, 1998, the Partnership issued 1.2 million OP
Units and 90,000 Preferred Units in transactions to acquire real estate property
or interests in real estate property. Each of these transactions was exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to Section 4(2) thereof or Regulation D thereunder.
In January 1998, the Partnership sold 15,000 High Performance Units to a
joint venture formed by fourteen members of AIMCO's senior management, and to
three non-employee directors of AIMCO for $2.1 million in cash. All the proceeds
were used for general corporate purposes. This transaction was exempt from
registration under the Securities Act, pursuant to Section 4(2) thereof or
Regulation D thereunder.
During the year ended December 31, 1998, the Partnership issued to AIMCO,
in exchange for cash, 4,200,000 Class D Preferred Units, 4,050,000 Class G
Preferred Units, and 2,000,000 Class H Preferred Units. All the proceeds were
used to repay indebtedness or for general corporate purposes. Each of these
transactions was also exempt from registration under the Securities Act,
pursuant to Section 4(2) thereof or Regulation D thereunder.
On November 6, 1998, AIMCO issued 1,000,000 shares of Class J Preferred
Stock in exchange for $100.0 million in cash. The cash proceeds of $100.0
million were contributed by AIMCO to the Partnership in exchange for 1,000,000
Class J Preferred Units. All of the proceeds were used to repay indebtedness
under the Company's interim term loan agreement with Lehman Brothers, Inc. In
addition, on the same date, AIMCO issued 250,000 shares of Class J Preferred
Stock to the Partnership in a private placement in exchange for 250,000 Class J
Preferred Units. Each of these transactions was exempt from registration under
the Securities Act, pursuant to Section 4(2) thereof or Regulation D thereunder.
13
16
On December 14, 1998, AEW Targeted Securities Fund, L.P. purchased for $35
million: (i) 1,400,000 Class B partnership preferred units of a subsidiary of
the Partnership, and (ii) a warrant to purchase 875,000 shares of AIMCO Class A
Common Stock. The partnership preferred units may be redeemed at the option of
the holders at any time, and at the option of the Company under certain
circumstances. Any redemption of the units may be satisfied by delivery of cash,
AIMCO Class A Common Stock or OP Units. The warrant has an exercise price of $40
per share. The warrant may be exercised at any time, and expires upon a
redemption of the Class B partnership preferred units. The Company used all of
the $35 million of proceeds from these transactions for general corporate
purposes. The partnership preferred units and warrant were sold in private
transactions exempt from registration under the Securities Act, pursuant to
Section 4(2) thereof or Regulation D thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The historical selected financial data for the Company for the years ended
December 31, 1998, 1997 and 1996 is based on audited financial statements. This
information should be read in conjunction with such financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein. The historical
selected financial data for the Company for the year ended December 31, 1995 and
the period from July 29, 1994 (the date of inception) through December 31, 1994
and for the Company's Predecessors for the period January 1, 1994 through July
28, 1994 is based on audited financial statements.
THE COMPANY'S
THE COMPANY PREDECESSORS
-------------------------------------------------------------------------- --------------
FOR THE PERIOD FOR THE PERIOD
JULY 29, JANUARY 1,
1994 1994
FOR THE YEAR ENDED DECEMBER 31, THROUGH THROUGH
--------------------------------------------------------- DECEMBER 31, JULY 28,
1998 1997 1996 1995 1994 1994
------------ ------------ ------------ ------------ -------------- --------------
OPERATING DATA:
RENTAL PROPERTY OPERATIONS:
Rental and other income........ $ 373,963 $ 193,006 $ 100,516 $ 74,947 $ 24,894 $ 5,805
Property operating expenses.... (145,966) (76,168) (38,400) (30,150) (10,330) (2,263)
Owned property management
expenses..................... (10,882) (6,620) (2,746) (2,276) (711) --
Depreciation................... (83,908) (37,741) (19,556) (15,038) (4,727) (1,151)
---------- ---------- ---------- -------- -------- -------
133,207 72,477 39,814 27,483 9,126 2,391
---------- ---------- ---------- -------- -------- -------
SERVICE COMPANY BUSINESS:
Management fees and other
income....................... 22,675 13,937 8,367 8,132 3,217 6,533
Management and other
expenses..................... (16,764) (10,373) (5,560) (5,150) (2,211) (6,173)
Corporate overhead
allocation................... (196) (588) (590) (581) -- --
---------- ---------- ---------- -------- -------- -------
5,715 2,976 2,217 2,401 1,006 360
---------- ---------- ---------- -------- -------- -------
General and administrative
expenses..................... (11,418) (5,396) (1,512) (1,804) (977) (36)
Interest expense............... (88,208) (51,385) (24,802) (13,322) (1,576) (4,214)
Interest income................ 29,252 8,676 523 658 123 --
Equity in earnings of
unconsolidated
subsidiaries................. 12,009 4,636 -- -- -- --
Equity in losses of
unconsolidated real estate
partnerships................. (2,665) (1,798) -- -- -- --
Loss from IPLP Exchange and
Assumption................... (2,648) -- -- -- -- --
Minority interest.............. (1,868) 1,008 (111) -- -- --
Amortization of goodwill....... (8,735) (948) (500) (428) -- --
---------- ---------- ---------- -------- -------- -------
Income from operations......... 64,641 30,246 15,629 14,988 7,702 (1,499)
Gain on disposition of
properties................... 4,287 2,720 44 -- -- --
---------- ---------- ---------- -------- -------- -------
Income (loss) before
extraordinary item........... 68,928 32,966 15,673 14,988 7,702 (1,499)
Extraordinary item -- early
extinguishment of debt....... -- (269) -- -- -- --
---------- ---------- ---------- -------- -------- -------
Net income (loss).............. $ 68,928 $ 32,697 $ 15,673 $ 14,988 $ 7,702 $(1,499)
========== ========== ========== ======== ======== =======
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17
THE COMPANY'S
THE COMPANY PREDECESSORS
-------------------------------------------------------------------------- --------------
FOR THE PERIOD FOR THE PERIOD
JULY 29, JANUARY 1,
1994 1994
FOR THE YEAR ENDED DECEMBER 31, THROUGH THROUGH
--------------------------------------------------------- DECEMBER 31, JULY 28,
1998 1997 1996 1995 1994 1994
------------ ------------ ------------ ------------ -------------- --------------
OTHER INFORMATION:
Total owned or controlled
properties (end of period)... 234 147 94 56 48 4
Total owned or controlled
apartment units (end of
period)...................... 61,672 40,039 23,764 14,453 12,513 1,711
Total equity apartment units
(end of period).............. 171,657 83,431 19,045 19,594 20,758 29,343
Units under management (end of
period)...................... 146,034 69,587 19,045 19,594 20,758 29,343
Basic earnings per OP Unit..... $ 0.80 $ 1.09 $ 1.05 $ 0.86 $ 0.42 N/A
Diluted earnings per OP Unit... $ 0.78 $ 1.08 $ 1.04 $ 0.86 $ 0.42 N/A
Distributions paid per OP
Unit......................... $ 2.25 $ 1.85 $ 1.70 $ 1.66 $ 0.29 N/A
BALANCE SHEET INFORMATION:
Real estate, before accumulated
depreciation................. $2,743,865 $1,657,207 $ 865,222 $477,162 $406,067 $47,500
Real estate, net of accumulated
depreciation................. 2,515,710 1,503,922 745,145 448,425 392,368 33,270
Total assets................... 4,186,764 2,100,510 827,673 480,361 416,739 39,042
Total mortgages and notes
payable...................... 1,601,730 808,530 522,146 268,692 141,315 40,873
Redeemable partnership units... -- 197,086 96,064 38,463 32,047 --
Mandatorily redeemable 1994
Cumulative Senior Preferred
Units........................ -- -- -- -- 96,600 --
Partnership-obligated mandatory
redeemable convertible
preferred securities of a
subsidiary trust............. 149,500 -- -- -- -- --
Partners' capital.............. 2,153,335 960,176 178,462 160,947 137,354 (9,345)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
financial statements incorporated by reference in Item 8 of this Annual Report
on Form 10-K.
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997
Net Income
The Company recognized net income of $68.9 million, and net income
attributable to holders of OP Units of $42.4 million, for the year ended
December 31, 1998, compared to net income of $32.7 million, and net income
attributable to holders of OP Units of $30.4 million, for the year ended
December 31, 1997. Net income attributable to holders of OP Units represents net
income less distributions on Preferred Units.
The increase in net income attributable to holders of OP Units of $12.0
million, or 39.5%, was primarily the result of the following:
- the increase in net "same store" property results;
- the acquisition of 11,706 units in 44 apartment communities during 1997;
- the acquisition of 22,459 units in 82 apartment communities during 1998;
- the acquisition of NHP Incorporated ("NHP") in December 1997;
- the acquisition of Ambassador Apartments, Inc. in May 1998;
15
18
- the acquisition of the Insignia Multi-family Business in October 1998;
and
- receipt of interest income on general partner loans to unconsolidated
real estate partnerships and notes receivable.
The effect of the above on net income was partially offset by the sale of
four properties in 1998 and five properties in 1997. These factors are discussed
in more detail in the following paragraphs.
Rental Property Operations
Rental and other property revenues from the Company's owned or controlled
properties totaled $374.0 million for the year ended December 31, 1998, compared
to $193.0 million for the year ended December 31, 1997, an increase of $181.0
million, or 93.8%. Rental and other property revenues consisted of the following
(in thousands):
1998 1997
-------- --------
1997 acquisitions........................................... $124,266 $ 36,871
1998 acquisitions........................................... 88,857 --
"Same store" properties..................................... 150,476 136,219
1997 dispositions........................................... -- 4,092
1998 dispositions........................................... 304 8,106
Properties in lease-up after the completion of an expansion
or renovation............................................. 10,060 7,718
-------- --------
Total............................................. $373,963 $193,006
======== ========
Property operating expenses consist of on-site payroll costs, utilities
(net of reimbursements received from tenants), contract services, turnover
costs, repairs and maintenance, advertising and marketing, property taxes and
insurance. Property operating expenses totaled $146.0 million for the year ended
December 31, 1998, compared to $76.2 million for the year ended December 31,
1997, an increase of $69.8 million, or 91.6%. Property operating expenses
consisted of the following (in thousands):
1998 1997
-------- -------
1997 acquisitions........................................... $ 48,570 $15,389
1998 acquisitions........................................... 33,811 --
"Same store" properties..................................... 59,993 52,870
1997 dispositions........................................... -- 1,972
1998 dispositions........................................... 348 3,592
Properties in lease-up after the completion of an expansion
or renovation............................................. 3,244 2,345
-------- -------
Total............................................. $145,966 $76,168
======== =======
Owned property management expenses, representing the costs of managing the
Company's owned or controlled properties, totaled $10.9 million for the year
ended December 31, 1998, compared to $6.6 million for the year ended December
31, 1997, an increase of $4.3 million, or 65.2%. The increase resulted from
acquisitions of properties in 1997 and 1998 and acquisitions of controlling
interests in properties through the NHP and Ambassador mergers.
16
19
Service Company Business
Income from the service company business was $5.7 million for the year
ended December 31, 1998, compared to $3.0 million for the year ended December
31, 1997, an increase of $2.7 million or 90%. The increase was primarily due to
management contracts acquired in the Insignia merger that are held by the
Company, as well as the transfer of majority-owned management contracts from the
management companies to the Partnership. When the Company owns at least a 40%
interest in a real estate partnership, the management contract with that real
estate partnership is assigned to the Partnership. In addition, the increase is
partially due to additional partnership and administrative fees resulting from
the acquisition of partnership interests during 1998. The commercial asset
management and brokerage businesses were reorganized as part of the management
companies at the start of 1998. The insurance portion of operations and also
property management services were reorganized as part of the management
companies, effective July 1, 1998. The Company's share of income from service
company businesses consisted of the following (in thousands):
1998 1997
-------- -------
Properties managed
Management fees and other income.......................... $ 18,718 $ 9,353
Management and other expenses............................. (13,472) (9,498)
-------- -------
5,246 (145)
-------- -------
Commercial asset management
Management and other income............................... -- 245
Management and other expenses............................. -- (275)
-------- -------
-- (30)
-------- -------
Reinsurance operations
Revenues.................................................. 993 4,228
Expenses.................................................. (255) (360)
-------- -------
738 3,868
-------- -------
Other
Revenues.................................................. 2,964 111
Expenses.................................................. (3,037) (240)
-------- -------
(73) (129)
-------- -------
Corporate overhead allocation............................... (196) (588)
-------- -------
$ 5,715 $ 2,976
======== =======
General and Administrative Expenses
General and administrative expenses totaled $11.4 million for the year
ended December 31, 1998, compared to $5.4 million for the year ended December
31, 1997, an increase of $6.0 million, or 111.1%. The increase in general and
administrative expenses is primarily due to additional corporate costs and
additional employee salaries associated with the purchase of NHP Real Estate
Companies in June 1997 and the mergers with NHP Incorporated in December 1997,
Ambassador Apartments, Inc. in May 1998 and Insignia Financial Group, Inc. in
October 1998. In addition, due to the growth of the Company, several new
departments have been added including legal, tax and limited partnership
administration, as well as increased levels of personnel in the accounting and
finance departments.
Interest Expense
Interest expense, which includes the amortization of deferred finance
costs, totaled $88.2 million for the year ended December 31, 1998, compared to
$51.4 million for the year ended December 31, 1997, an increase of $36.8 million
or 71.6%. The increase was primarily due to interest expense incurred in
connection with the acquisition of interests in Ambassador Apartments, Inc. and
Insignia Financial Group, Inc. and interest expense incurred in connection with
1998 and 1997 acquisitions.
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20
Interest income
Interest income totaled $29.3 million for the year ended December 31, 1998,
compared to $8.7 million for the year ended December 31, 1997. The increase is
primarily due to interest earned on the increased average outstanding balances
of general partner loans and notes receivable.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
The Company recognized net income of $32.7 million and net income
attributable to holders of OP Units of $30.4 million for the year ended December
31, 1997 compared to net income of $15.7 million, all attributable to holders of
OP Units, for the year ended December 31, 1996. Net income attributable to
holders of OP Units represents net income less distributions on Preferred Units.
There were no Preferred Units outstanding during 1996. The increase in net
income allocable to holders of OP units of $14.7 million, or 93.6%, was
primarily the result of the following:
- the acquisition of 10,484 units in 42 apartment communities primarily
during November and December 1996;
- the acquisitions of 11,706 units in 44 apartment communities during 1997;
- the acquisition of interests in the NHP Partnerships including the period
June through December 1997;
- the acquisition of NHP Partnerships in December 1997;
- interest income on general partner loans to unconsolidated real estate
partnerships; and
- the increase in net "same store" property results.
The effect of the above on net income was partially offset by the sale of
four properties in August 1996 and five properties in October 1997. These
factors are discussed in more detail in the following paragraphs.
Rental Property Operations
Rental and other property revenues from the Company's owned or controlled
properties totaled $193.0 million for the year ended December 31, 1997, compared
to $100.5 million for the year ended December 31, 1996, an increase of $92.5
million, or 92.0%. Rental and other property revenues consisted of the following
(in thousands):
1997 1996
-------- --------
1996 acquisitions........................................... $ 68,505 $ 14,970
1997 acquisitions........................................... 22,163 --
"Same store" properties..................................... 78,724 75,069
Acquisitions of interests in the NHP Partnerships........... 15,592 --
1996 dispositions........................................... -- 3,363
1997 dispositions........................................... 4,092 4,719
Properties in lease-up after the completion of an expansion
or renovation............................................. 3,930 2,395
-------- --------
Total............................................. $193,006 $100,516
======== ========
Average monthly rent per occupied unit for the same store properties
increased to $571 at December 31, 1997 from $560 at December 31, 1996, an
increase of 2.0%. Weighted average physical occupancy for the properties
increased to 94.8% at December 31, 1997, from 94.5% at December 31, 1996, an
increase of 0.3%.
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Property operating expenses totaled $76.2 million for the year ended
December 31, 1997, compared to $38.4 million for the year ended December 31,
1996, an increase of $37.8 million, or 98.4%. Property operating expenses
consisted of the following (in thousands):
1997 1996
------- -------
1996 acquisitions........................................... $28,911 $ 5,258
1997 acquisitions........................................... 8,402 --
"Same store" properties..................................... 28,009 28,234
Acquisition of interests in the NHP Partnerships............ 7,304 --
1996 dispositions........................................... -- 1,793
1997 dispositions........................................... 1,972 2,300
Properties in lease-up after the completion of an expansion
or renovation............................................. 1,570 815
------- -------
Total............................................. $76,168 $38,400
======= =======
Owned property management expenses, representing the costs of managing the
Company's owned properties, totaled $6.6 million for the year ended December 31,
1997, compared to $2.7 million for the year ended December 31, 1996, an increase
of $3.9 million or 144.4%. The increase resulted from the acquisition of
properties in 1996 and 1997 and the acquisition of interests in the NHP
Partnerships.
Service Company Business
Income from the service company business was $3.0 million for the year
ended December 31, 1997 compared to $2.2 million for the year ended December 31,
1996, an increase of $0.8 million or 36.4%. The increase is due to the
acquisition by the Company of property management businesses in August and
November 1996, the acquisition of partnership interests which provide for
certain partnership and administrative fees, and a captive insurance subsidiary
acquired in connection with the acquisition of the NHP Real Estate Companies in
June 1997, which were offset by the expiration of the Company's commercial asset
management contracts on March 31, 1997. The Company's share of income from
service company businesses consisted of the following (in thousands):
1997 1996
------- -------
Properties managed
Management fees and other income.......................... $ 9,353 $ 5,679
Management and other expenses............................. (9,498) (4,623)
------- -------
(145) 1,056
------- -------
Commercial asset management
Management and other income............................... 245 1,026
Management and other expenses............................. (275) (339)
------- -------
(30) 687
------- -------
Reinsurance operations
Revenues.................................................. 4,228 1,267
Expenses.................................................. (360) (282)
------- -------
3,868 985
------- -------
Brokerage and other
Revenues.................................................. 111 395
Expenses.................................................. (240) (316)
------- -------
(129) 79
------- -------
Corporate overhead allocation............................... (588) (590)
------- -------
$ 2,976 $ 2,217
======= =======
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Income (loss) from the management of properties for third parties and
affiliates was $(0.1) million for the year ended December 31, 1997 compared to
$1.1 million for the year ended December 31, 1996, a decrease of $1.2 million,
or 109.1%.
Losses from commercial asset management were $30,000 for the year ended
December 31, 1997 compared to income of $0.7 million for the year ended December
31, 1996. The decrease is primarily due to the expiration of certain commercial
management contracts in March 1997.
Income from the reinsurance operations for the year ended December 31, 1997
increased by $2.9 million from the year ended December 31, 1996, due to
increased premiums collected from a larger work force, improved loss experience
and the closure of claims for less than the amounts previously reserved, as well
as the acquisition of the NHP Real Estate Companies, which included the
acquisition of a captive insurance company.
General and Administrative Expenses
General and administrative expenses totaled $5.4 million for the year ended
December 31, 1997 compared to $1.5 million for the year ended December 31, 1996,
an increase of $3.9 million, or 260.0%. The increase in general and
administrative expenses is primarily due to the purchase of the NHP Real Estate
Companies in June 1997 and the merger with NHP in December 1997.
Interest Expense
Interest expense, which includes the amortization of deferred finance
costs, totaled $51.4 million for the year ended December 31, 1997, compared to
$24.8 million for the year ended December 31, 1996, an increase of $26.6 million
or 107.3%. The increase was primarily due to interest expense incurred in
connection with the acquisition of interests in the NHP Real Estate Companies
and NHP and interest expense incurred in connection with 1997 and 1996
acquisitions.
Interest Income
Interest income totaled $8.7 million for the year ended December 31, 1997,
compared to $0.5 million for the year ended December 31, 1996. The increase is
primarily due to interest earned on general partner loans to unconsolidated real
estate partnerships acquired in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $52.8 million in cash and cash
equivalents and $53.7 million of restricted cash, primarily consisting of
reserves and impounds held by lenders for capital expenditures, property taxes
and insurance. In addition, cash, cash equivalents and restricted cash is held
by partnerships and subsidiaries which are not presented on a consolidated
basis. The Company's principal demands for liquidity include normal operating
activities, payments of principal and interest on outstanding debt, capital
improvements, acquisitions of or investments in properties, and distributions
paid to its unitholders. The Company considers its cash provided by operating
activities to be adequate to meet short-term liquidity demands.
As of December 31, 1998, 90% of the Company's owned or controlled
properties and 53% of its total assets were encumbered by debt. The Company had
total outstanding indebtedness of $1,601.7 million, of which $1,321.4 million
was secured by properties. The Company's indebtedness is comprised of $819.3
million of secured long-term financing, $394.1 million of secured tax-exempt
bonds and $388.3 in secured and unsecured short-term financing. As of December
31, 1998, approximately 27.0% of the Company's indebtedness bears interest at
variable rates. As of March 11, 1999, approximately 9.5% of the Company's
indebtedness bears interest at variable rates. General Motors Acceptance
Corporation had made 85 loans (the "GMAC Loans") to property owning partnerships
of the Company, each of which is secured by the property owned by such
partnership. The 85 GMAC Loans had an aggregate outstanding principal balance of
$175.2 million as of December 31, 1998. Certain GMAC Loans are
cross-collateralized with certain other GMAC Loans. Other
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23
than certain GMAC Loans, none of the Company's debt is subject to
cross-collateralization provisions. The weighted average interest rate on the
Company's long-term, secured, tax-exempt notes payable was 7.0% with a weighted
average maturity of 12.0 years as of December 31, 1998. The weighted average
interest rate on the Company's secured and unsecured short-term financing was
7.1% as of December 31, 1998.
In February 1999, the $50 million credit facility with Washington Mortgage
Financial Group, Ltd. was terminated and all outstanding indebtedness was repaid
with the proceeds from new, long-term, fully amortizing indebtedness secured by
properties that previously secured the credit facility.
In February and March 1999, the Company incurred in the aggregate $83.4
million of long-term, fixed rate, fully amortizing mortgage debt secured by 13
properties in separate loan transactions. The Company used the $81.5 million of
net proceeds from the financings to repay debt under the interim loan agreement
with Lehman Brothers Inc., to repay debt under its credit facility with Bank of
America National Trust and Savings Association and Bank Boston, N.A. and to
provide working capital. As of March 11, 1999, the balance outstanding under the
interim loan agreement was $25 million, under the credit facility was $74.8
million and under the IPT credit agreement was $45.0 million. The amount
available under the credit facility at March 11, 1999 was $24 million and under
the IPT credit agreement was $5.0 million.
The Company expects to meet its long-term liquidity requirements, such as
refinancing debt and property acquisitions, through long-term borrowings, both
secured and unsecured, the issuance of debt or equity securities (including OP
Units) and cash generated from operations. In August 1998, AIMCO and the
Partnership filed a shelf registration statement with the Securities and
Exchange Commission ("SEC") with respect to an aggregate of $1,268 million of
debt and equity securities of AIMCO (of which $268 million was carried forward
from AIMCO's 1997 shelf registration statement) and $500 million of debt
securities of the Partnership. The registration statement was declared effective
by the SEC on December 10, 1998. As of December 31, 1998, AIMCO had $1,268
million available and the Partnership had $500 million available from this
registration statement. On February 18, 1999, AIMCO raised net proceeds of
$120.6 million in a public offering and contributed all of the proceeds to the
Partnership in exchange for 5,000,000 Class K Preferred Units. The offering
reduced the amount remaining available to AIMCO under the shelf registration
statement to $1,143 million. All proceeds were used to further reduce the
balance outstanding under the Lehman interim loan. The Company expects to
finance pending acquisitions of real estate interests with the issuance of
equity securities and debt.
CAPITAL EXPENDITURES
For the year ended December 31, 1998, the Company spent $28.3 million for
Capital Replacements (expenditures for routine maintenance of a property), $28.1
million for Initial Capital Expenditures ("ICE", expenditures at a property that
have been identified, at the time the property is acquired, as expenditures to
be incurred within one year of the acquisition), and $20.1 million for
construction and capital enhancements (amenities that add a material new feature
or revenue source at a property). These expenditures were funded by borrowings
under the Company's primary credit facility, working capital reserves and net
cash provided by operating activities. During 1999, the Company will provide an
allowance for capital replacements of $300 per apartment unit. ICE and capital
enhancements will primarily be funded by cash from operating activities and
borrowings under the Company's primary credit facility.
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The Company's accounting treatment of various capital and maintenance costs
is detailed in the following table:
DEPRECIABLE LIFE
EXPENDITURE ACCOUNTING TREATMENT IN YEARS
- ----------- -------------------- ----------------
Initial capital expenditures........................ capitalize 5 to 30
Capital enhancements................................ capitalize 5 to 30
Capital replacements:
Carpet/vinyl replacement............................ capitalize 5
Carpet cleaning..................................... expense N/A
Major appliance replacement (refrigerators, stoves, capitalize 5
dishwashers, washers/dryers)......................
Cabinet replacement................................. capitalize 5
Major new landscaping............................... capitalize 5
Seasonal plantings and landscape replacements....... expense N/A
Roof replacements................................... capitalize 30
Roof repairs........................................ expense N/A
Model furniture..................................... capitalize 5
Office equipment.................................... capitalize 5
Exterior painting, significant...................... capitalize 5
Interior painting................................... expense N/A
Parking lot repairs................................. expense N/A
Parking lot repaving................................ capitalize 30
Equipment repairs................................... expense N/A
General policy for capitalization................... capitalize amounts various
in excess of $250
FUNDS FROM OPERATIONS
The Company measures its economic profitability based on Funds From
Operations ("FFO"), less a reserve for Capital Replacements of $300 per
apartment unit. The Company's management believes that FFO, less such a reserve,
provides investors with an understanding of the Company's ability to incur and
service debt and make capital expenditures. 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 and losses from debt restructuring and
sales of property, plus real estate related depreciation and amortization
(excluding amortization of financing costs), and after adjustments for
unconsolidated partnerships and joint ventures. The Company calculates FFO based
on the NAREIT definition, as adjusted for amortization of goodwill, the
non-cash, deferred portion of the income tax provision for unconsolidated
subsidiaries and less the payment of distributions on Preferred Units. FFO
should not be considered as an alternative to net income or net cash flows from
operating activities, as calculated in accordance with GAAP, as an indication of
the Company's performance or as a measure of liquidity. FFO is not necessarily
indicative of cash available to fund future cash needs. In addition, there can
be no assurance that the Company's basis for computing FFO is comparable with
that of other real estate investment trusts.
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25
For the years ended December 31, 1998, 1997 and 1996, the Company's FFO is
calculated as follows (amounts in thousands):
1998 1997 1996
--------- --------- --------
Net income............................................ $ 68,928 $ 32,697 $ 15,673
Extraordinary item.................................... -- 269 --
Gain on disposition of properties..................... (4,287) (2,720) (44)
Real estate depreciation, net of minority interests... 79,869 33,751 19,056
Real estate depreciation related to unconsolidated
entities............................................ 34,765 9,864 --
Amortization of goodwill.............................. 11,401 948 500
Amortization of recoverable amount of management
contracts........................................... 14,776 1,587 --
Deferred taxes........................................ 9,215 4,894 --
Preferred unit distributions.......................... (20,837) (135) --
--------- --------- --------
Funds From Operations (FFO)........................... $ 193,830 $ 81,155 $ 35,185
========= ========= ========
Weighted average number of OP units and OP unit
equivalents:
OP units............................................ 52,798 27,732 14,978
OP unit equivalents................................. 1,306 381 16
Preferred units convertible into OP units........... 2,463 1,006 --
--------- --------- --------
56,567 29,119 14,994
========= ========= ========
CASH FLOW INFORMATION:
Cash flow provided by operating activities............ $ 144,152 $ 73,032 $ 38,806
Cash flow used in investing activities................ (342,541) (717,663) (88,144)
Cash flow provided by financing activities............ 214,133 668,549 60,129
CONTINGENCIES
HUD Enforcement
In October 1997, NHP received a subpoena from the HUD Inspector General,
which requested documents relating to any arrangement whereby NHP or any of its
affiliates provides or has provided compensation to owners of HUD multi-family
projects in exchange for or in connection with property management of a HUD
project. The Company believes that other owners and managers of HUD projects
have received similar subpoenas. Documents provided by the Company to the HUD
Inspector General relating to certain of NHP acquisitions of property management
rights for HUD projects may be responsive to the subpoena. The Company believes
that its operations are in compliance, in all material respects, with all laws,
rules and regulations relating to HUD-assisted or HUD-insured properties.
Effective February 13, 1998, counsel for the Company and the U.S. Attorney for
the Northern District of California entered into a Tolling Agreement related to
certain civil claims the government may have against the Company. Although no
action has been initiated against the Company or, to the Company's knowledge,
any owner of a HUD property managed by the Company, if any such action is taken
in the future, it could ultimately affect existing arrangements with respect to
HUD projects, affect the Company's ability to receive 2530 Clearances or
otherwise have a material adverse effect on the Company's results of operations.
HUD also has the authority to suspend or deny property owners and managers from
participation in HUD programs with respect to additional assistance within a
geographic region through imposition of a Limited Denial of Participation by any
HUD office or nationwide for violations of HUD regulatory requirements.
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Year 2000 Compliance
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF
THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Over the past two years, the Company has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed in time, the Year 2000 issue could have a material impact on the
operations of the Company.
The Company's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Company has
fully completed its assessment of all information systems that could be
significantly affected by the Year 2000, and has begun the remediation, testing
and implementation phases on both hardware and software systems. Assessments are
continuing in regards to embedded systems. The status of each is detailed below.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE
COMPUTER HARDWARE
During 1997 and 1998, the Company identified all of the computer systems at
risk and formulated a plan to repair or replace each of the affected systems.
During 1997, when the Company merged with NHP, the mainframe system used by NHP
was Year 2000 compliant. In August 1998, the Year-2000 compliant system became
fully functional for the entire Company.
In addition to the mainframe, PC-based network servers, routers and desktop
PCs were analyzed for compliance. The Company has begun to replace each of the
non-compliant network connections and desktop PCs and, as of December 31, 1998,
had completed approximately 75% of this effort.
The total cost to replace the PC-based network servers, routers and desktop
PCs is expected to be approximately $1.5 million, of which $1.3 million has been
incurred to date. The remaining network connections and desktop PCs are expected
to be upgraded to Year 2000 compliant systems by March 31, 1999.
COMPUTER SOFTWARE
The Company utilizes a combination of off-the-shelf, commercially available
software programs as well as custom-written programs that are designed to fit
specific needs. Both of these types of programs were studied, and implementation
plans written and executed with the intent of repairing or replacing any non-
compliant software programs.
In 1997, when the Company merged with NHP, the core financial system used
by NHP was Year 2000 compliant. During 1998, the Company integrated all of its
core financial systems to this compliant system for general ledger and financial
reporting purposes.
In 1997, the Company determined that the software used for property
management and rent collection was not Year 2000 compliant. During 1998, the
Company implemented a Year 2000 compliant system at each of its owned or managed
properties, at a cost of $1.4 million. During 1998, the Company acquired 82
properties and acquired the Insignia Multi-family Business. Insignia owned or
managed 1,100 properties.
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As properties are acquired, the Company converts the existing property
management and rent collection systems to the Company's Year 2000 compliant
systems. The estimated additional costs to convert such systems at all recently
acquired properties, including those acquired from Insignia, is $200,000, and
the implementation and testing process is expected to be completed by March 31,
1999.
The final software area is the office software and server operating
systems. The Company has upgraded all non-compliant office software systems on
each PC and has upgraded 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
March 31, 1999.
OPERATING EQUIPMENT
The Company has operating equipment, primarily at the property sites, which
needed to be evaluated for Year 2000 compliance. In September 1997, the Company
began taking a census and inventory of embedded systems (including those devices
that use time to control systems and machines at specific properties, for
example, elevators, heating, ventilating and air conditioning systems, security
and alarm systems, etc.)
The Company has chosen to focus its attention mainly upon security systems,
elevators, heating, ventilating and air conditioning systems, telephone systems
and switches, and sprinkler systems. While this area is the most difficult to
fully research adequately, management has not yet found any major non-
compliance issues that put the Company at risk financially or operationally. The
Company intends to have a third-party conduct an audit of these systems and
report their findings by March 31, 1999.
Any of the above operating equipment that has been found to be
non-compliant to date has been replaced or repaired. To date, these have
consisted only of security systems and phone systems. As of December 31, 1998,
the Company has evaluated approximately 86% of the operating equipment for Year
2000 compliance.
The total cost incurred as of December 31, 1998 to replace or repair the
operating equipment was approximately $70,000. The Company estimates the cost to
replace or repair any remaining operating equipment is approximately $325,000,
and the Company expects to be completed by April 30, 1999.
The Company continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within the enterprise.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000
The Company continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Company
has banking relationships with three major financial institutions, all of which
have indicated their compliance efforts will be complete before May 1999. The
Company has updated data transmission standards with two of the three financial
institutions. The Company's contingency plan in this regard is to move accounts
from any institution that cannot be certified Year 2000 compliant by June 1,
1999.
The Company does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems with the Company (external agents). To date, the Company is
not aware of any external agent with a Year 2000 compliance issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 compliant.
Management does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Company. However, the effect of non-compliance by external agents is not readily
determinable.
COSTS TO ADDRESS YEAR 2000
The total cost of the Year 2000 project is estimated at $3.5 million and is
being funded from operating cash flows. To date, the Company has incurred
approximately $2.8 million ($0.6 million expensed and $2.2 million capitalized
for new systems and equipment) related to all phases of the Year 2000 project.
Of the
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28
total remaining project costs, approximately $0.5 million is attributable to the
purchase of new software and operating equipment, which will be capitalized. The
remaining $0.2 million relates to repair of hardware and software and will be
expensed as incurred.
RISKS ASSOCIATED WITH THE YEAR 2000
Management believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Company does not complete any additional phases, certain worst case scenarios
could occur. The worst case scenarios include elevators, security and heating,
ventilating and air conditioning systems that read incorrect dates and operate
with incorrect schedules (e.g., elevators will operate on Monday as if it were
Sunday). Although such a change would be annoying to residents, it is not
business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Company. The Company could be subject to
litigation for, among other things, computer system failures, equipment
shutdowns or a failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
CONTINGENCY PLANS ASSOCIATED WITH THE YEAR 2000
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other<