Washington, D.C. 20549
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes [X] No [ ]Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The following document is incorporated by reference in Part III of the Annual Report on Form 10-K: Proxy statement for the annual meeting of stockholders of Essex Property Trust, Inc. to be held May 6, 2008
4
(1) Includes incurred costs and estimated costs to complete these redevelopment projects.
Long Term Debt Transactions
In March 2007,During 2013, the Operating Partnership obtained aCompany repaid $103.7 million in secured debt including secured mortgage loan secured by the Camino Ruiz Square community purchased in December 2006 in the amount of $21.1debt totaling $84.3 million with a fixedat an average interest rate of 5.36%, which matures5.4% and $19.4 million of tax-exempt bonds. In addition, the Company repaid $14.2 million of Mello Roos bonds related to one property. The Company replaced the construction loan on April 1, 2017.
In April 2007, the Operating Partnership refinanced a mortgage loan for $35.7 million secured by the Tierra Vista community in the amount of $62.5 million,Expo with a fixed interest rate of 5.47%, which matures in April 2017.
In June 2007, the Operating Partnership obtained a mortgage loan secured by the Cardiff by the Sea community purchased in April 2007 in the amount of $42.2 million.seven year, $45.0 million term loan. The loan has a fixedvariable interest rate of 5.71%LIBOR plus 1.50% and matures in June 2017. The Operating Partnership assumed a mortgage loan in conjunctionconnection with the acquisitionloan the Company entered into a $45.0 million interest rate swap to fix the rate to 3.7% for the entire seven year period.
In April 2013, the Company issued $300.0 million of The Cairns community in the amount of $12.0 million,senior unsecured notes due on May 1, 2023 with a fixed interestcoupon rate of 5.5%, which matures in3.25% per annum and is payable on May 2014. Finally,1st and November 1st of each year, beginning November 1, 2013 (the 2023 Notes). The 2023 Notes were offered to investors at a price of 99.152% of par value. The 2023 Notes are general unsecured senior obligations of the Operating Partnership, refinanced $18.6 millionrank equally in right of debt secured by the Highridge communitypayment with a $44.8 million fixed interest rate loanall other senior unsecured indebtedness of 6.05%, which matures in June 2017.
In July 2007, the Operating Partnership paid-off a mortgage loan secured by Monterra del Sol for $2.6 million with a fixed interest rate of 7.56%.
In August 2007, the Operating Partnership obtained a mortgage loan secured by the Coldwater Canyon community purchased in May 2007 in the amount of $5.9 million, with a fixed interest rate of 6.1%, which matures in August 2017. The Operating Partnership also refinanced an $11.6 million mortgage loan secured by the Capri at Sunny Hills community with a new loan in the amount of $19.2 million, with a fixed interest rate of 5.8%, which matures in August 2012.
In September 2007, the Operating Partnership assumed two loans in conjunction with the acquisition of the Thomas Jefferson community. The first loan is for $14 million with a fixed interest rate of 5.7% due in March 2017, and the second loan is for $6.0 million with a fixed interest rate of 5.9% due in March 2017.
In December 2007, the Operating Partnership and a joint venture partner obtained a construction loan in the amount of $17.5 million securedare fully and unconditionally guaranteed by the Main Street predevelopment project in Walnut Creek, California.Essex Property Trust, Inc. The loan is variable based on LIBOR plus 125 basis points and matures in December 2009. The initial funding on this loan was approximately $12.1 million, and the remaindercarrying value of the loan will be used for predevelopment costs.2023 Notes, net of discount was $297.7 million as of December 31, 2013.
In January 2008, the Operating Partnership obtained a mortgage loan in the amount of $49.9 million secured by Mirabella, a community located in Marina Del Rey, California. The loan has a fixed interest rate of 5.21%, which matures in January 2018.Bank Debt
Structured Finance
In March 2007, the Operating Partnership originated a $6.9 million mezzanine loan receivable for the acquisition and capital improvement of California Hill, a 153-unit, age-restricted apartment community located in Concord, California. The floating rate note receivable is based on LIBOR with a 5% floor for the LIBOR rate plus 4.75%. The note receivable is due in March 2011.
In September 2007, the Operating Partnership originated a $14.0 million bridge loan for the completion and lease-up of Valley View, a 146-unit apartment community located in Vancouver, Washington. The loan refinanced a construction loan, incorporating additional proceeds for interior upgrades to the remaining phases; exterior and common area upgrades and interest reserves to take the project through lease-up and stabilization. The floating rate note receivable is based on LIBOR with a 5% floor for the LIBOR rate plus 3.38%. The note receivable is due in February 2009.
In October 2007, the Operating Partnership originated a $14.0 million bridge loan secured by 301 Ocean Avenue a 47-unit apartment community located in Santa Monica, California and the interest payments are guaranteed by the owner of the asset. The floating rate note receivable is based on LIBOR with a 5% floor for the LIBOR rate plus 2.95%. The note receivable is due in April 2009.
Derivative Transactions
In March 2007, the Operating Partnership entered into a ten-year forward-starting interest rate swap for a notional amount of $50 million and a settlement date on or before October 1, 2011, to manage interest rate exposure on
identified future debt obligations. In April 2007, in conjunction with the refinance of the Tierra Vista mortgage loan, the Operating Partnership settled a $50 million forward-starting swap and received $1.3 million from the counterparty. The accounting for the swap settlement reduces the effective interest rate on the new Tierra Vista mortgage loan to 5.19%.
As of December 31, 20072013, Fitch Ratings ("Fitch"), Moody’s Investor Service, and Standard and Poor's (“S&P”) credit agencies rated Essex Property Trust, Inc. and Essex Portfolio, L.P. BBB+/Stable, Baa2/Stable, and BBB/Stable, respectively.
In December 2013, in connection with the Operating Partnership had entered into nine forward-startingBRE merger, the Company obtained committed financing up to $1.0 billion (the “bridge loan”) which is available if needed to fund the cash portion of the purchase price. The bridge loan facility is structured as a 364-day unsecured loan facility available in a single draw on the closing date of the merger. The company is exploring several alternatives to fund the cash needs of the transaction including asset sales, joint ventures or new financing.
In January 2014, the Company increased the capacity of the unsecured line of credit facility from $600.0 million to $1.0 billion and included an accordion feature pursuant to which the Company could expand to $1.5 billion. This facility matures in December 2017 with one 18-month extension option. The new facility carries an interest rate swaps totalingbased on its current credit ratings of LIBOR plus 0.95%.
In January 2014, the Company extended the $25.0 million working capital unsecured line of credit for two additional years and reduced the pricing which carries an interest rate based on a notional amounttiered rate structure tied to Fitch and S&P ratings on the credit facility of $450LIBOR plus 0.95%.
In January 2014, the Company reduced the pricing on its $350.0 million with interest rates ranging from 4.9%unsecured term loan by 15 basis points to 5.9% and settlements dates ranging from April 2008 to October 2011. These derivatives qualify for hedge accounting as they are expected to economically hedge the cash flows associated with the refinancing of debt that matures between April 2008 and October 2011. The fair value of the derivatives decreased $8.0 million during the year ended December 31, 2007 to a liability value of $10.2 million as of December 31, 2007, and the derivative liability was recorded in other liabilities in the Operating Partnership’s consolidated financial statements. The changes in the fair values of the derivatives are reflected in accumulated other comprehensive (loss) income in the Operating Partnership’s consolidated financial statements. No hedge ineffectiveness on cash flow hedges was recognized during the year ended December 31, 2007 and 2006.LIBOR plus 1.05%.
Equity Transactions
During the second quarter of 2007, the Company2013, ESS issued and sold 1,670,500913,344 shares of its common stock for $213.7 million at an average stockshare price of $127.91 per share, net$152.92 for proceeds of underwriter fees and expenses.
In August 2007, the Company’s Board of Directors authorized a stock repurchase plan to allow the Company to acquire shares in an aggregate of up to $200 million. The program supersedes the common stock repurchase plan that Essex announced on May 16, 2001. During 2007, the Company repurchased and retired 323,259 shares of its common stock for approximately $32.6$138.4 million, net of fees and commissions. During January 2008, the Company repurchasedfirst quarter of 2014 through February 24, 2014, ESS has issued 462,555 shares of common stock at an additional 137,500 sharesaverage price of $162.97 for $13.2proceeds of $74.9 million, net of fees and commissions. ESS contributed the net proceeds to the Operating Partnership and used the proceeds to pay down debt, fund redevelopment and development pipelines, fund acquisitions, and for general corporate purposes.
WESCO
In 2011, the Company entered into a 50/50 programmatic joint venture, Wesco I LLC (“Wesco I”), with an institutional partner for a total equity commitment of $300.0 million. Each partner’s equity commitment was $150.0 million, and Wesco I will utilize debt targeted at approximately 50% of the cost to acquire and improve real estate. The Company has repurchased 460,759 shares for $45.8 million at an average stock price of $99.30 per share since the stock repurchase plan was approved in August.
ESSEX APARTMENT VALUE FUNDS
Essex Apartment Value Fund, L.P. ("Fund I" and “Fund II”), are investment funds formed by the Operating Partnership to add value through rental growth and asset appreciation, utilizing the Operating Partnership's development, redevelopment and asset management capabilities. The assets in Fund I were sold during 2004 and 2005, and Fund I was liquidated in 2007.
Fund II has eight institutional investors, and the Operating Partnership, with combined partner equity commitments of $265.9 million. Essex has committed $75.0contributed $150.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II utilitized debt as leverage of approximately 65% of the estimated value of the underlying real estate. Fund II invested in apartment communities in the Operating Partnership’s targeted West Coast marketsWesco I, and as of December 31, 2007,2013, Wesco I owned elevennine apartment communities and three development projects. There was no acquisition or disposition activity in Fund IIwith 2,713 units with an aggregate carrying value of approximately $670 million. Investments must meet certain criteria to qualify for inclusion in the year ended December 31, 2007. Essexjoint venture and both partners must approve any new acquisitions and material dispositions. The Company records revenue for its asset management, property management, development, and redevelopment services when earned, and promote income when realized, if Fund IIWesco I exceeds certain financial return benchmarks.
During 2012, the Company entered into a 50/50 programmatic joint venture, Wesco III LLC (“Wesco III”), with an institutional partner for a total equity commitment from the parties of $120.0 million. Each partner’s equity commitment is $60.0 million, and Redevelopment Pipeline
AsWesco III will utilize debt targeted at approximately 50% of the cost to acquire and improve real estate. The Company has contributed $39.7 million to Wesco III and, as of December 31, 2007, the following table sets forth information regarding Fund II’s2013, Wesco III owned three apartment communities with 657 units for an aggregate carrying value of approximately $164 million. Both partners must approve all major decisions including dispositions. The joint venture has an investment period of up to two years. The Company records revenue for its asset management, property management, development, and redevelopment pipelines:services when earned, and promote income when realized, if Wesco III exceeds certain financial return benchmarks.
| | | | | | | As of 12/31/07 ($ in millions) | | |
| | | | | | | Estimated | | | Incurred | | Projected |
Development Pipeline - Fund II | | Location | | Units | | | Project Cost(1) | | | Project Cost | | Stabilization |
Development Projects | | | | | | | | | | | | |
Eastlake 2851 on Lake Union | | Seattle, WA | | 127 | | $ | 35.4 | | $ | 24.7 | | Jul-08 |
Studio 40-41 | | Studio City, CA | | 149 | | | 60.6 | | | 30.7 | | Aug-09 |
Cielo | | Chatsworth, CA | | 119 | | | 39.4 | | | 12.3 | | Sep-09 |
Fund II - Development Pipeline | | | | 395 | | $ | 135.4 | | $ | 67.7 | | |
Redevelopment Pipeline - Fund II | | | | | | | | | | | | |
Redevelopment Projects | | | | | | | | | | | | |
Regency Tower - Phase I - II | | Oakland, CA | | 178 | | $ | 4.5 | | $ | 3.7 | | |
The Renaissance | | Los Angeles, CA | | 168 | | | 5.0 | | | 3.6 | | |
Fund II - Redevelopment Pipeline | | | | 346 | | $ | 9.5 | | $ | 7.3 | | |
| | | | | | | | | | | | |
(1) Includes incurred costs and estimated costs to complete these development and redevelopment projects.
OFFICES AND EMPLOYEES
The Operating PartnershipCompany is headquartered in Palo Alto, California, and has regional offices in Woodland Hills, California; Irvine, California; San Diego, California and Bellevue, Washington. As of December 31, 2007,2013, the Operating PartnershipCompany had approximately 9171,173 employees.
INSURANCE
The Operating PartnershipCompany carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties with a $5.0 million deductible per incident.communities. There are, however, certain types of extraordinary losses, such as, for example, losses from terrorism or earthquake,earthquakes, for which the Operating PartnershipCompany does not have insurance coverage.
Substantially all of the Propertiescommunities are located in areas that are subject to earthquake activity. The Operating PartnershipCompany has established a wholly owned insurance subsidiary, Pacific Western Insurance LLC (“PWI”). Through PWI, the Company is self-insured as it relates to earthquake related losses. Additionally, since January 2008, PWI has provided property and casualty insurance coverage for the first $5.0 million of the Company’s property level insurance claims per incident. As of December 31, 2013, PWI has cash and marketable securities of approximately $40 million. These assets are consolidated in the Company’s financial statements. Beginning in 2013, the Company has obtained limited third party seismic insurance on selected assets in which it holds an ownership interest in.
The Company believes it has a proactive approach to its potential earthquake losses. The Operating PartnershipCompany utilizes third-party seismic consultants for its acquisitions and performsmay perform seismic upgrades to those acquisitions that are determined to have a higher level of potential loss from an earthquake. The Operating PartnershipCompany utilizes internal and third-party loss models to help to determine its exposure. The majority of the Operating Partnership’s Propertiescommunities are lower density garden-style apartments which may be less susceptible to material earthquake damage. The Operating PartnershipCompany will continue to monitor third-party earthquake insurance pricing and conditions and may consider obtaining third-party coverage if it deems it cost effective.effective.
Although the Operating PartnershipCompany may carry insurance for potential losses associated with its Properties,communities, employees, residents, and compliance with applicable laws, it may still incur losses due to uninsured risks, deductibles, co-payments or losses in excess of applicable insurance coverage and those losses may be material.
COMPETITION
There are numerous housing alternatives that compete with our apartmentthe Company’s communities in attracting residents. These include other apartment communities, condominiums and single-family homes that are available for rent in the markets in which the properties are located. The Properties also compete for residents with new and existing homes and condominiums that are for sale.homes. If the demand for our Propertiesthe Company’s communities is reduced or if competitors develop and/or acquire competing properties on a more cost-effective basis,housing, rental rates and occupancy may drop which may have a material adverse affecteffect on ourthe Company’s financial condition and results of operations.
We faceThe Company faces competition from other real estate investment trusts, businesses and other entities in the acquisition, development and operation of properties.apartment communities. Some of the competitors are larger and have greater financial resources than we do.the Company. This competition may result in increased costs of properties we acquire and/apartment communities the Company acquires and or develop.develops.
WORKING CAPITAL
We believeThe Company believes that cash flows generated by ourits operations, existing cash and marketable securities balances, availability under existing lines of credit, access to capital markets and the ability to generate cash gains from the disposition of real estate are sufficient to meet all of ourits reasonably anticipated cash needs during 2008. 2014. As noted above, in connection with the BRE merger, the Company obtained committed financing up to $1.0 billion which is available if needed to fund the cash portion of the purchase price. The company is exploring several alternatives to fund the cash needs of the transaction including asset sales, joint ventures or new financing.
The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect ourthe Company’s plans for acquisitions, dispositions, development and redevelopment activities.
ENVIRONMENTAL CONSIDERATIONS
See the discussion under the caption, “Possible“The Company’s Portfolio may have environmental liabilities”liabilities” in Item 1A, Risk Factors, for information concerning the potential effect of environmental regulations on our operations.its operations, which discussion under the caption “The Company’s Portfolio may have environmental liabilities” is incorporated by reference into this Item 1.
OTHER MATTERS
Certain Policies of the Operating PartnershipCompany
We intendThe Company intends to continue to operate in a manner that will not subject usit to regulation under the Investment Company Act of 1940. The Operating PartnershipCompany has in the past five years and may in the future (i) issue securities senior to its common stock, (ii) fund acquisition activities with borrowings under its line of credit and (iii) offer shares of common stock and/or units of limited partnership interest in the Operating Partnership or affiliated partnerships as partial consideration for property acquisitions. The Operating PartnershipCompany from time to time acquires partnership
interests in partnerships and joint ventures, either directly or indirectly through subsidiaries of the Operating Partnership,Company, when such entities’ underlying assets are real estate. In general, the Operating Partnership does not (i) underwrite securities of other issuers or (ii) actively trade in loans or other investments.
We investThe Company invests primarily in apartment communities that are located in predominantly coastal markets within Southern California, the San Francisco Bay Area, and the Seattle metropolitan area. The Operating PartnershipCompany currently intends to continue to invest in apartment communities in such regions. However, these practices may be reviewed and modified periodically by management.
For purposes of this section, the term “stockholders” means the holders of shares of Essex Property Trust, Inc.’s common stock and preferred stock. Set forth below are the risks that we believe are material to Essex Property Trust, Inc.’s stockholders and Essex Portfolio, L.P.’s unit holders. You should carefully consider the following factors in evaluating our company, our properties and our business.
Our business, operating results, cash flows and financial conditionscondition are subject to various risks and uncertainties, including, without limitation, those set forth below, any one of which could cause the our actual results to vary materially from recent results or from our anticipated future results.
Risk Factors Relating to the Proposed Merger with BRE
The exchange ratio and the cash consideration will not be adjusted in the event of any change in the stock prices of either Essex or BREWe depend. Upon the consummation of the merger, each outstanding share of BRE common stock will be converted automatically into the right to receive 0.2971 shares of Essex common stock, with cash paid in lieu of any fractional shares, plus $12.33 in cash, without interest, each subject to certain adjustments provided for in the merger agreement. The exchange ratio of 0.2971 and cash consideration will not be adjusted for changes in the market prices of either shares of Essex common stock or shares of BRE common stock. Changes in the market price of shares of Essex common stock prior to the merger will affect the market value of the merger consideration that will be paid to BRE shareholders upon completion of the merger. Stock price changes may result from a variety of factors (many of which are beyond the control of Essex and BRE), including the following factors:
| — | market reaction to the announcement of the merger; |
| — | changes in the respective businesses, operations, assets, liabilities and prospects of Essex and BRE; |
| — | changes in market assessments of the business, operations, financial position and prospects of either company or the Combined Company; |
| — | market assessments of the likelihood that the merger will be completed; |
| — | interest rates, general market and economic conditions and other factors generally affecting the market prices of Essex common stock and BRE common stock; |
| — | federal, state and local legislation, governmental regulation and legal developments in the businesses in which Essex and BRE operate; and |
| — | other factors beyond the control of Essex and BRE. |
The market price of shares of Essex common stock at the closing of the merger may vary from its price on ourthe date the merger agreement was executed and thereafter. As a result, the market value of the merger consideration represented by the exchange ratio will also vary.
Therefore, while the number of shares of Essex common stock to be issued per share of BRE common stock is fixed, Essex stockholders cannot be sure of the market value of the merger consideration that will be paid to BRE stockholders upon completion of the merger.
Essex stockholders and unitholders of the Operating Partnership will be diluted by the merger. The merger will dilute the ownership position of Essex stockholders and unitholders of the Operating Partnership. Upon completion of the merger, we estimate that continuing Essex stockholders will own approximately 62% of the issued and outstanding shares of Combined Company common stock, and former BRE stockholders will own approximately 38% of the issued and outstanding common stock of the Combined Company. Consequently, Essex stockholders and unitholders of the Operating Partnership, as a general matter, will have less influence over the management and policies of the Combined Company after the effective time of the merger than they currently exercise over the management and policies of Essex.
Failure to complete the merger could negatively impact the stock prices and the future business and financial results of Essex. If the merger is not completed, the ongoing business of Essex could be adversely affected and Essex will be subject to a variety of risks associated with the failure to complete the merger, including the following:
| — | Essex being required, under certain circumstances, to pay to BRE up to $10 million in expense reimbursement; |
| — | Essex having to pay certain costs relating to the proposed merger, such as legal, accounting, financial advisor, filing, printing and mailing fees; and |
| — | diversion of Essex management focus and resources from operational matters and other strategic opportunities while working to implement the merger. |
If the merger is not completed, these risks could materially affect the business, financial results and stock prices of Essex.
The pendency of the merger could adversely affect the business and operations of Essex. Prior to the effective time of the merger, some tenants or vendors of Essex may delay or defer decisions, which could negatively affect the revenues, earnings, cash flows and expenses of Essex, regardless of whether the merger is completed. Similarly, current and prospective employees of Essex may experience uncertainty about their future roles with the Combined Company following the merger, which may materially adversely affect the ability of Essex to attract and retain key personnel during the pendency of the merger. In addition, due to operating restrictions in the merger agreement, Essex may be unable, during the pendency of the merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.
There can be no assurance that Essex will be able to secure the financing necessary to pay the cash portion of the merger consideration on acceptable terms, in a timely manner, or at all. - OurIn connection with the merger, Essex has obtained commitments for up to $1.0 billion in a senior unsecured bridge loan facility to finance the cash portion of the merger consideration. In addition, Essex is exploring additional alternatives to fund the cash portion of the merger consideration including through existing unsecured credit facilities, asset sales, joint ventures or other financing arrangements. However, Essex has not entered into a definitive agreement for the debt financing, nor has it secured alternative financing, nor has it entered into a definitive agreement for the potential asset sales (the “Asset Sale”) in connection with the merger. There can be no assurance that Essex will be able to secure financing to pay the cash portion of the merger consideration on acceptable terms, in a timely manner, or at all. If Essex is unable to secure such financing, Essex will nonetheless be required to close the merger under the terms of the merger agreement. In addition, the bridge loan facility expires on April 18, 2014 (with a right to extend up to an additional 30 days in certain circumstances) whereas the merger agreement may not be terminable until June 17, 2014.
Risk Factors Relating to the Combined Company Following the Merger
If the proposed merger closes, we will face various additional risks. If the proposed merger closes, the Combined Company (the combination of Essex and BRE pursuant to the merger) will face various additional risks, including, among others, the following:
| — | the Combined Company expects to incur substantial expenses related to the merger; |
| — | following the merger, the Combined Company may be unable to integrate the businesses of Essex and BRE successfully and realize the anticipated synergies and other benefits of the merger or do so within the anticipated timeframe; |
| — | following the merger, the Combined Company may be unable to retain key employees; |
| — | the Combined Company’s anticipated level of indebtedness will increase upon completion of the merger and will increase the related risks Essex now faces; |
| — | the future results of the Combined Company will suffer if the Combined Company does not effectively manage its expanded operations following the merger; |
| — | counterparties to certain significant agreements with Essex or BRE may exercise contractual rights under such agreements in connection with the merger; and |
| — | the Combined Company’s joint ventures, including any joint venture entered into in connection with the asset sale (as described in the joint proxy statement/prospectus), assuming the asset sale occurs, could be adversely affected by the Combined Company’s lack of sole decision-making authority, its reliance on its joint venture partner’s financial condition and disputes between the Combined Company and its joint venture partner. |
Any of these risks could adversely affect the business and financial results of the Combined Company.
If the proposed merger closes, there will be additional risks relating to an investment in our common stock. The results of operations of the Combined Company, as well as the market price of the common stock of the Combined Company, after the merger may be affected by other factors in addition to those currently affecting Essex’s results of operations and the market prices of Essex common stock. Such factors include:
| — | there will be a greater number of shares of the Combined Company common stock outstanding as compared to the number of currently outstanding shares of Essex common stock; |
| — | there will be different stockholders; |
| — | there will be different assets and capitalizations; |
| — | the market price of the Combined Company’s common stock may decline as a result of the merger; |
| — | the Combined Company cannot assure you that it will be able to continue paying dividends at or above the rate currently paid by Essex; |
| — | the Combined Company may need to incur additional indebtedness in the future; |
| — | the Combined Company may incur adverse tax consequences if Essex or BRE has failed or fails to qualify as a REIT for U.S. federal income tax purposes; and |
| — | in certain circumstances, even if the Combined Company qualifies as a REIT, it and its subsidiaries may be subject to certain U.S. federal, state, and other taxes, which would reduce the Combined Company’s cash available for distribution to its stockholders. |
Any of these factors could adversely affect Essex's common stock price and financial results. Accordingly, the historical market prices and financial results of Essex may not be indicative of these matters for the Combined Company after the merger.
The risks set forth in the foregoing risk factors titled "If the proposed merger closes, we will face various additional risks" and "If the proposed merger closes, there will be additional risks relating to an investment in our common stock", and additional risks associated with the merger, are described in more detail under the heading “Risk Factors” in the joint proxy statement/prospectus contained in our Registration Statement on Form S-4, which was filed with the SEC on January 29, 2014. Neither the Form S-4 nor the joint proxy statement/prospectus contained therein is incorporated by reference or constitutes a part of this Annual Report on Form 10-K.
In connection with the announcement of the merger agreement, three lawsuits have been filed and are pending as of February 10, 2014, seeking, among other things, to enjoin the merger, and an injunction or other adverse ruling being entered in this lawsuit may prevent the merger from being effective or from becoming effective within the expected timeframe (if at all).
Since the announcement of the merger agreement on December 19, 2013, three putative class action and shareholder derivative actions have been filed on behalf of alleged BRE stockholders and/or BRE itself in the Circuit Court for Baltimore City, Maryland, under the following captions: Sutton v. BRE Properties, Inc., et al., No. 24-C-13-008425, filed December 23, 2013; Applegate v. BRE Properties, Inc., et al., No. 24-C-14-00002, filed December 30, 2013; and Lee v. BRE Properties, Inc., et al., No. 24-C-14-00046, filed January 3, 2014.
All of these complaints name as defendants BRE, the BRE Board, Essex, and Merger Sub, and allege that the BRE Board breached its fiduciary duties to BRE’s stockholders and/or to BRE itself, and that the merger involves an unfair price, an inadequate sales process, and unreasonable deal protection devices that purportedly preclude competing offers. The complaints further allege that Essex, Merger Sub, and, in some cases, BRE aided and abetted those alleged breaches of duty. The complaints seek injunctive relief, including enjoining or rescinding the merger, and an award of other unspecified attorneys’ and other fees and costs, in addition to other relief.
On February 7, 2014, Plaintiffs filed identical, amended complaints in the three pending actions. The amended complaints add allegations that disclosures regarding the proposed merger in the joint proxy statement/prospectus filed with the SEC on January 29, 2014 are inadequate.
We cannot assure you as to the outcome of these, or any similar future lawsuits, including the costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims. If the plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the merger on the agreed-upon terms, such an injunction may prevent the completion of the merger in the expected time frame, or may prevent it from being completed altogether. Whether or not the plaintiffs’ claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect the operation of the businesses of BRE and Essex.
Risks Relating to Essex Property Trust, Inc. Regardless of Whether
the Proposed Merger with BRE is Consummated
The Company depends on its key personnel. The Company’s success depends on ourits ability to attract and retain executive officers, senior officers and company managers. There is substantial competition for qualified personnel in the real estate industry and the loss of severalany of ourthe Company’s key personnel could have an adverse effect on us.the Company.
Capital and credit market conditions may affect the Company’s access to sources of capital and/or the cost of capital, which could negatively affect the Company’s business, results of operations, cash flows and financial condition. In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to the Company may be adversely affected. The Company’s strong balance sheet, the debt capacity available on the unsecured line of credit with a bank group and access to the public debt and private placement markets and Fannie Mae and Freddie Mac secured debt financing provides some insulation from volatile markets. The Company has benefited from borrowing from Fannie Mae and Freddie Mac, and there are no assurances that these entities will lend to the Company in the future. To the extent that the Company’s access to capital and credit is at a higher cost than the Company has experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) the Company’s ability to make acquisitions, develop communities, obtain new financing, and refinance existing borrowing at competitive rates could be adversely impacted. For the past two years the Company has primarily issued unsecured debt and repaid secured debt when it has matured to place less reliance on mortgage debt financing.
Debt financing has inherent risks –. At December 31, 2007, we2013, the Company had approximately $1.66$3.0 billion of indebtedness (including $233.1$737.0 million of variable rate indebtedness, of which $152.7$300.0 million is subject to interest rate swaps effectively fixing the interest rate and $156.9 million is subject to interest rate protection agreements). We areThe Company is subject to the risks normally associated with debt financing, including the following:
· | — | cash flow may not be sufficient to meet required payments of principal and interest; |
· | — | inability to refinance maturing indebtedness on encumbered properties;apartment communities; |
· | the terms of any refinancing may not be as favorable as the terms of existing indebtedness; |
· — | inability to comply with debt covenants could cause an acceleration of the maturity date; and |
· | — | repaying debt before the scheduled maturity date could result in prepayment penalties. |
Uncertainty of our ability to refinance balloon payments - As of December 31, 2007, we had approximately $1.66 billion of mortgage debt, exchangeable bonds and line of credit borrowings, most of which are subject to balloon payments (see Notes 8 and 9 to the Operating Partnership’s consolidated financial statements for more details) . We do not expect to have sufficient cash flows from operations to make all of these balloon payments. These mortgages, bonds and lines of credit borrowings have the following scheduled principal and balloon payments:
2008--$125.2 million;
2009--$185.7 million;
2010--$154.8 million;
2011--$166.5 million;
2012--$32.2 million;
Thereafter--$993.3 million.
WeThe Company may not be able to refinance such mortgageits indebtedness. This indebtedness bonds, or lines of credit. The Propertiesincludes secured mortgages, and the communities subject to these mortgages could be foreclosed upon or otherwise transferred to the lender. This could cause usthe Company to lose income and asset value. WeThe Company may be required to refinance the debt at higher interest rates or on terms that may not be as favorable as the terms of existing indebtedness.
The Operating Partnership’s current financing activities have not been severely impacted by the tightening in the credit markets. Our strong balance sheet, the established relationships with our unsecured line of credit bank group and access to Fannie Mae and Freddie Mac secured debt financing have insulated us from the turmoil being experienced by many other real estate companies. Recently, we have experienced some expansion in credit spreads as Fannie Mae and Freddie Mac’s tier 4 financing are currently at approximately 200 basis points over the relevant U.S. treasury securities.
Debt financing on Propertiesof communities may result in insufficient cash flow to service debt. - Where possible, we intendappropriate, the Company intends to continue to use leverage to increase the rate of return on ourthe Company’s investments and to provide for additional investments that wethe Company could not otherwise make. There is a risk that the cash flow from the Propertiescommunities will be insufficient to meet both debt payment obligations and the distribution requirements of the real estate investment trust provisions of the Internal Revenue Code. WeCode of 1986, as amended. The Company may obtain additional debt financing in the future through mortgages on some or all of the Properties.communities. These mortgages may be recourse, non-recourse, or cross-collateralized.
Our ability to make payments on and to refinance our indebtedness and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash in the future. To a certain extent, our cash flow is subject to general economic, industry, regional, financial, competitive, operating, legislative, regulatory, taxation, and other factors, many of which are beyond our control.
As of December 31, 2007,2013, the Operating PartnershipCompany had 7449 of its 123139 consolidated apartment communities
encumbered by debt. OfWith respect to the 7449 communities 51encumbered by debt, all of them are secured by deeds of trust relating solely to those properties. With respect to the remaining 23 communities, there are 5 cross-collateralized mortgages secured by 8 communities, 7 communities, 3 communities, 3 communities, and 2 communities, respectively.communities. The holders of this indebtedness will have claims againstrights with respect to these communities and to the extent indebtedness is cross-collateralized, lenders may seek to foreclose uponforeclosure of communities which are not the primary collateral for their loan. This may accelerate other indebtedness secured by communities. Foreclosure of communities would reduce ourthe Company’s income and net asset value.value, and its ability to service other debt.
Risk of rising interest rates - CurrentRising interest rates may affect the Company’s costs of capital and financing activities and results of operation. Interest rates could potentially increase, rapidly, which could result in higher interest expense on ourthe Company’s variable rate indebtedness.indebtedness or increase interest rates when refinancing maturing fixed rate debt. Prolonged interest rate increases could negatively impact ourthe Company’s ability to make acquisitions and develop properties atapartment communities with positive economic returns on investment and ourthe Company’s ability to refinance existing borrowings at acceptable rates.
As of December 31, 2007, we had approximately $220.9 million of long-term variable rate indebtedness bearing interest at floating rates tied to the rate of short-term tax-exempt revenue bonds (which mature at various dates from 2020 through 2034), $12.2 million of short-term variable rate indebtedness bearing interest at LIBOR plus 1.25% related to a predevelopment project due in 2009, and $169.8 million of variable rate indebtedness under our lines of credit. Of the $169.8 million of variable rate indebtedness under our lines of credit, $100.0 million is bearing interest at the Freddie Mac Reference Rate plus from 0.55% to 0.59%, $61.0 million is bearing interest at the underlying interest rate based on a tiered rate structure tied to the Company’s corporate ratings and is currently at LIBOR plus 0.80%, and $8.8 million is bearing interest at the underlying interest rate based on the bank’s Prime Rate less 2.0%. Approximately $152.7 million of the long-term indebtedness is subject to interest rate cap protection agreements, which may reduce the risks associated with fluctuations in interest rates. The remaining $68.2 million of long-term variable rate indebtedness was not subject to any interest rate cap protection agreements as of December 31, 2007. An increase in interest rates may have an adverse effect on our net income and results of operations.borrowings.
Risk of losses on interestInterest rate hedging arrangements may result in losses – . Periodically, we havethe Company has entered into agreements to reduce the risks associated with increases in interest rates, and may continue to do so. Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to usthe Company if interest rates decline. If a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, wethe Company may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the hedging arrangement may subject usthe Company to increased credit risks. In order to minimize counterparty credit risk, our policy is to enterthe Company enters into hedging arrangements only with A-rated financial institutions.institutions that have a current rating of A or higher.
Bond compliance requirements may limit income from certain propertiescommunities -. At December 31, 2007, we2013, the Company had approximately $220.9$167.6 million of variable rate tax-exempt financing relating to the following apartment communities: Inglenook Court, Wandering Creek, Boulevard (Treetops), Huntington Breakers, Camarillo Oaks, Fountain Park, Anchor Village and Hidden Valley (Parker Ranch).financing. This tax-exempt financing subjects these properties toprovides for certain deed restrictions and restrictive covenants. We expectThe Company expects to engage in tax-exempt financings in the future. In addition, theThe Internal Revenue Code and rules and regulations thereunder impose various restrictions, conditions and requirements excludingin order to allow the note holder to exclude interest on qualified bond obligations from gross income for federal income tax purposes. The Internal Revenue Code also requires that at least 20% of apartment units be made available to residents with gross incomes that do not exceed a specified percentage, generally 50%, of the median income for the applicable family size as determined by the Housing and Urban Development Department of the federal government. In addition to federal requirements, certainCertain state and local authorities may impose additional rental restrictions. These restrictions may limit income from the tax-exempt financed propertiescommunities if we arethe Company is required to lower rental rates to attract residents who satisfy the median income test. If the Operating PartnershipCompany does not reserve the required number of apartment homes for residents satisfying these income requirements, the tax-exempt status of the bonds may be terminated, the obligations under the bond documents may be accelerated and wethe Company may be subject to additional contractual liability.
Adverse effect to property income and value due to generalGeneral real estate investment risks -may adversely affect property income and values. Real propertyestate investments are subject to a variety of risks. The yields available from equity investments in real estate depend on the amount of income generated and expenses incurred. If the propertiescommunities do not generate sufficient income to meet operating expenses, including debt service and capital expenditures, cash flow and the ability to make distributions to stockholders will be adversely affected. Income from the Propertiescommunities may be further adversely affected by, among other things, the following factors:
· | — | the general economic climate; |
· | — | local economic conditions in which the Propertiescommunities are located, such as oversupply of housing or a reduction in demand for rental housing; |
· | — | the attractiveness of the propertiescommunities to tenants; |
· | — | competition from other available space;housing; and |
· | — | the Operating Partnership’sCompany’s ability to provide for adequate maintenance and insurance. |
As leases onat the Propertiescommunities expire, tenants may enter into new leases on terms that are less favorable to us.the Company. Income and real estate values also may be adversely affected by such factors as applicable laws (e.g., the Americans with Disabilities Act of 1990 and tax laws), interest rate levels and the availability and terms of financing.. Real estate investments are relatively illiquid and, therefore, ourthe Company’s ability to vary ourits portfolio promptly in response to changes in economic or other conditions may be quite limited.
Economic environmentNational and regional economic environments can negatively impact onthe Company’s operating results -. During recent years, a confluence of factors has resulted in job losses, turmoil and volatility in the capital markets, and caused a national and global recession. The Company’s forecast for the national economy assumes growth of the gross domestic product of the national economy and the economies of the western states in markets where we operate can impact our operating results. Somestates. In the event of these markets are concentrated in high-tech sectors, which have experienced economic downturns, andanother recession, the Company could again in the future. Our property type and diverse geographic locations provide some degree of risk mitigation. However, we are not immune to prolonged economic downturns. Although we believe we are well positioned to meet these challenges, it is possible aincur reduction in rental rates, occupancy levels, property valuations and increases in operating costs such as advertising and turnover and repair and maintenance expense could occur in the eventexpenses.
12
| | | | | | Rentable | | | | | | |
| | | | | | Square | | Year | | Year | | |
Apartment Communities (1) | | Location | | Units | | Footage | | Built | | Acquired | | Occupancy(2) |
Southern California (continued) | | | | | | | | | | | | |
Fountain Park | | Playa Vista, CA | | 705 | | 608,900 | | 2002 | | 2004 | | 96% |
Highridge(6) | | Rancho Palos Verdes, CA | 255 | | 290,200 | | 1972(23) | | 1997 | | 92% |
Bluffs II, The(24) | | San Diego, CA | | 224 | | 126,700 | | 1974 | | 1997 | | 98% |
Summit Park | | San Diego, CA | | 300 | | 229,400 | | 1972 | | 2002 | | 97% |
Vista Capri - North | | San Diego, CA | | 106 | | 51,800 | | 1975 | | 2002 | | 98% |
Brentwood (Hearthstone)(6) | | Santa Ana, CA | | 140 | | 154,800 | | 1970 | | 2001 | | 96% |
Treehouse(6) | | Santa Ana, CA | | 164 | | 135,700 | | 1970 | | 2001 | | 95% |
Hope Ranch Collection | | Santa Barbara, CA | | 108 | | 126,700 | | 1965&73 | | 2007 | | 95% |
Carlton Heights | | Santee, CA | | 70 | | 48,400 | | 1979 | | 2002 | | 94% |
Hidden Valley (Parker Ranch)(25) | | Simi Valley, CA | | 324 | | 310,900 | | 2004 | | 2004 | | 94% |
Meadowood | | Simi Valley, CA | | 320 | | 264,500 | | 1986 | | 1996 | | 91% |
Shadow Point | | Spring Valley, CA | | 172 | | 131,200 | | 1983 | | 2002 | | 97% |
Coldwater Canyon | | Studio City, CA | | 39 | | 34,125 | | 1979 | | 2007 | | 70% |
Lofts at Pinehurst, The | | Ventura, CA | | 118 | | 71,100 | | 1971(26) | | 1997 | | 97% |
Pinehurst(27) | | Ventura, CA | | 28 | | 21,200 | | 1973 | | 2004 | | 98% |
Woodside Village | | Ventura, CA | | 145 | | 136,500 | | 1987 | | 2004 | | 96% |
Walnut Heights | | Walnut, CA | | 163 | | 146,700 | | 1964 | | 2003 | | 94% |
Avondale at Warner Center | | Woodland Hills, CA | | 446 | | 331,000 | | 1970(28) | | 1997 | | 92% |
| | | | 13,205 | | 11,038,017 | | | | | | 95% |
Northern California | | | | | | | | | | | | |
Belmont Terrace | | Belmont, CA | | 71 | | 72,951 | | 1974 | | 2006 | | 96% |
Carlmont Woods(5) | | Belmont, CA | | 195 | | 107,200 | | 1971 | | 2004 | | 98% |
Davey Glen(5) | | Belmont, CA | | 69 | | 65,974 | | 1962 | | 2006 | | 92% |
Pointe at Cupertino, The | | Cupertino, CA | | 116 | | 135,200 | | 1963(29) | | 1998 | | 98% |
Harbor Cove(5) | | Foster City, CA | | 400 | | 306,600 | | 1971 | | 2004 | | 97% |
Stevenson Place | | Fremont, CA | | 200 | | 146,200 | | 1971(30) | | 1983 | | 95% |
Boulevard (Treetops) | | Fremont, CA | | 172 | | 131,200 | | 1978(31) | | 1996 | | 87% |
Waterstone at Fremont (Mountain Vista)(32) | | Fremont, CA | | 526 | | 433,100 | | 1975 | | 2000 | | 94% |
City View (Wimbledon Woods) | | Hayward, CA | | 560 | | 462,400 | | 1975(33) | | 1998 | | 95% |
Alderwood Park(5) | | Newark, CA | | 96 | | 74,624 | | 1987 | | 2006 | | 97% |
Bridgeport (Summerhill Commons) | | Newark, CA | | 184 | | 139,000 | | 1987(34) | | 1987 | | 96% |
Regency Towers(5) | | Oakland, CA | | 178 | | 140,900 | | 1975(35) | | 2005 | | 92% |
San Marcos (Vista del Mar) | | Richmond, CA | | 432 | | 407,600 | | 2003 | | 2003 | | 96% |
Mt. Sutro | | San Francisco, CA | | 99 | | 64,000 | | 1973 | | 2001 | | 98% |
Carlyle, The | | San Jose, CA | | 132 | | 129,200 | | 2000 | | 2000 | | 97% |
Enclave, The(5) | | San Jose, CA | | 637 | | 525,463 | | 1998 | | 2005 | | 96% |
Esplanade | | San Jose, CA | | 278 | | 279,000 | | 2002 | | 2004 | | 97% |
Waterford, The | | San Jose, CA | | 238 | | 219,600 | | 2000 | | 2000 | | 98% |
Hillsdale Garden Apartments(36) | | San Mateo, CA | | 697 | | 611,505 | | 1948 | | 2006 | | 96% |
Bel Air | | San Ramon, CA | | 462 | | 391,000 | | 1988(37) | | 1997 | | 96% |
Canyon Oaks | | San Ramon, CA | | 250 | | 237,894 | | 2005 | | 2007 | | 94% |
Foothill Gardens | | San Ramon, CA | | 132 | | 155,100 | | 1985 | | 1997 | | 94% |
Mill Creek at Windermere | | San Ramon, CA | | 400 | | 381,060 | | 2005 | | 2007 | | 93% |
Twin Creeks | | San Ramon, CA | | 44 | | 51,700 | | 1985 | | 1997 | | 94% |
Le Parc Luxury Apartments | | Santa Clara, CA | | 140 | | 113,200 | | 1975(38) | | 1994 | | 98% |
Marina Cove(39) | | Santa Clara, CA | | 292 | | 250,200 | | 1974(40) | | 1994 | | 98% |
Harvest Park | | Santa Rosa, CA | | 104 | | 116,628 | | 2004 | | 2007 | | 95% |
Bristol Commons | | Sunnyvale, CA | | 188 | | 142,600 | | 1989 | | 1997 | | 97% |
Brookside Oaks(6) | | Sunnyvale, CA | | 170 | | 119,900 | | 1973 | | 2000 | | 99% |
Magnolia Lane(41) | | Sunnyvale, CA | | 32 | | 31,541 | | 2001 | | 2007 | | 97% |
Montclaire, The (Oak Pointe) | | Sunnyvale, CA | | 390 | | 294,100 | | 1973(42) | | 1988 | | 90% |
Summerhill Park | | Sunnyvale, CA | | 100 | | 78,500 | | 1988 | | 1988 | | 98% |
Thomas Jefferson(6) | | Sunnyvale, CA | | 156 | | 110,824 | | 1969 | | 2007 | | 100% |
Windsor Ridge | | Sunnyvale, CA | | 216 | | 161,800 | | 1989 | | 1989 | | 96% |
Vista Belvedere | | Tiburon, CA | | 76 | | 78,300 | | 1963 | | 2004 | | 94% |
Tuscana | | Tracy, CA | | 30 | | 29,088 | | 2007 | | 2007 | | 84% |
| | | | 8,462 | | 7,195,152 | | | | | | 96% |
| | | | | | | | | | | | (continued) |
| | | | | | Rentable | | | | | | |
| | | | | | Square | | Year | | Year | | |
Communities (1) | | Location | | Units | | Footage | | Built | | Acquired | | Occupancy(2) |
Northern California (continued) | | | | | | | | | | | | |
Brookside Oaks(4) | | Sunnyvale, CA | | 170 | | 119,900 | | 1973 | | 2000 | | 95% |
Magnolia Lane(24) | | Sunnyvale, CA | | 32 | | 31,541 | | 2001 | | 2007 | | 94% |
Magnolia Square(4) | | Sunnyvale, CA | | 156 | | 110,824 | | 1969 | | 2007 | | 94% |
Montclaire, The | | Sunnyvale, CA | | 390 | | 294,100 | | 1973(25) | | 1988 | | 97% |
Reed Square | | Sunnyvale, CA | | 100 | | 95,440 | | 1970 | | 2012 | | 97% |
Summerhill Park | | Sunnyvale, CA | | 100 | | 78,500 | | 1988 | | 1988 | | 98% |
| | Sunnyvale, CA | | 216 | | 161,800 | | 1989 | | 1989 | | 97% |
Via | | Sunnyvale, CA | | 284 | | 309,421 | | 2011 | | 2011 | | 97% |
Vista Belvedere | | Tiburon, CA | | 76 | | 78,300 | | 1963 | | 2004 | | 93% |
Tuscana | | Tracy, CA | | 30 | | 29,088 | | 2007 | | 2007 | | 100% |
| | | | 10,494 | | 9,027,362 | | | | | | 96% |
Seattle, Washington Metropolitan Area | | | | | | | | | | | | |
Cedar Terrace | | Bellevue, WA | | 180 | | 174,200 | | 1984 | | 2005 | | 97% |
Courtyard off Main | | Bellevue, WA | | 109 | | 108,388 | | 2000 | | 2010 | | 96% |
Emerald Ridge | | Bellevue, WA | | 180 | | 144,000 | | 1987 | | 1994 | | 97% |
Foothill Commons | | Bellevue, WA | | 388 | | 288,300 | | 1978(26) | | 1990 | | 95% |
Palisades, The | | Bellevue, WA | | 192 | | 159,700 | | 1977 | | 1990 | | 97% |
Sammamish View | | Bellevue, WA | | 153 | | 133,500 | | 1986 | | 1994 | | 97% |
Woodland Commons | | Bellevue, WA | | 302 | | 220,066 | | 1978(27) | | 1990 | | 96% |
Canyon Pointe | | Bothell, WA | | 250 | | 210,400 | | 1990 | | 2003 | | 97% |
Inglenook Court | | Bothell, WA | | 224 | | 183,600 | | 1985 | | 1994 | | 96% |
Salmon Run at Perry Creek | | Bothell, WA | | 132 | | 117,100 | | 2000 | | 2000 | | 98% |
Stonehedge Village | | Bothell, WA | | 196 | | 214,800 | | 1986 | | 1997 | | 97% |
Highlands at Wynhaven | | Issaquah, WA | | 333 | | 424,674 | | 2000 | | 2008 | | 95% |
Park Hill at Issaquah | | Issaquah, WA | | 245 | | 277,700 | | 1999 | | 1999 | | 97% |
Wandering Creek | | Kent, WA | | 156 | | 124,300 | | 1986 | | 1995 | | 97% |
Ascent | | Kirkland, WA | | 90 | | 75,840 | | 1988 | | 2012 | | 95% |
Bridle Trails | | Kirkland, WA | | 108 | | 99,700 | | 1986(28) | | 1997 | | 96% |
Corbella at Juanita Bay | | Kirkland, WA | | 169 | | 103,339 | | 1978 | | 2010 | | 96% |
Evergreen Heights | | Kirkland, WA | | 200 | | 188,300 | | 1990 | | 1997 | | 96% |
Slater 116 | | Kirkland, WA | | 108 | | 81,415 | | 2013 | | 2013 | | 60% |
Montebello | | Kirkland, WA | | 248 | | 272,734 | | 1996 | | 2012 | | 97% |
Laurels at Mill Creek | | Mill Creek, WA | | 164 | | 134,300 | | 1981 | | 1996 | | 97% |
The Elliot at Mukilteo(4) | | Mukilteo, WA | | 301 | | 245,900 | | 1981 | | 1997 | | 94% |
Castle Creek | | Newcastle, WA | | 216 | | 191,900 | | 1997 | | 1997 | | 96% |
Delano/Bon Terra | | Redmond, WA | | 126 | | 116,340 | | 2011/2005 | | 2011/2012 | | 97% |
Elevation | | Redmond, WA | | 157 | | 138,916 | | 1986 | | 2010 | | 95% |
Vesta(6) | | Redmond, WA | | 440 | | 381,675 | | 1998 | | 2011 | | 94% |
Redmond Hill West(6) | | Redmond, WA | | 442 | | 350,275 | | 1985 | | 2011 | | 97% |
Brighton Ridge | | Renton, WA | | 264 | | 201,300 | | 1986 | | 1996 | | 97% |
Fairwood Pond | | Renton, WA | | 194 | | 189,200 | | 1997 | | 2004 | | 97% |
Forest View | | Renton, WA | | 192 | | 182,500 | | 1998 | | 2003 | | 97% |
The Bernard | | Seattle, WA | | 63 | | 43,151 | | 2008 | | 2011 | | 97% |
Annaliese | Seattle, WA | | 56 | | 48,216 | | 2009 | | 2013 | | 94% |
Vox | Seattle, WA | | 58 | | 42,173 | | 2013 | | 2013 | | 96% |
Expo(29) | Seattle, WA | | 275 | | 190,176 | | 2012 | | 2012 | | 96% |
Cairns, The | | Seattle, WA | | 100 | | 70,806 | | 2006 | | 2007 | | 96% |
Domaine | | Seattle, WA | | 92 | | 79,421 | | 2009 | | 2012 | | 95% |
Fountain Court | | Seattle, WA | | 320 | | 207,000 | | 2000 | | 2000 | | 94% |
Joule (30) | | Seattle, WA | | 295 | | 191,109 | | 2010 | | 2010 | | 96% |
Wharfside Pointe | | Seattle, WA | | 142 | | 119,200 | | 1990 | | 1994 | | 93% |
| | | | 7,860 | | 6,725,614 | | | | | | 96% |
Total/Weighted Average | | | | 34,079 | | 29,710,766 | | | | | | 96% |
| | | | | | | | | | | | |
| | | | | | Rentable | | | | | | |
| | | | | | Square | | Year | | Year | | |
Other real estate assets(1) | | Location | | Tenants | | Footage | | Built | | Acquired | | Occupancy(2) |
925 / 935 East Meadow Drive(31) | | Palo Alto, CA | | 1 | | 31,900 | | 1988 / 1962 | | 1997 / 2007 | | 100% |
6230 Sunset Blvd(32) | | Los Angeles, CA | | 1 | | 35,000 | | 1938 | | 2006 | | 100% |
17461 Derian Ave(33) | | Irvine, CA | | 6 | | 110,000 | | 1983 | | 2000 | | 93% |
Santa Clara Retail | | Santa Clara, CA | | 3 | | 139,000 | | 1970 | | 2011 | | 100% |
| | | | 11 | | 315,900 | | | | | | 99% |
| | | | | | Rentable | | | | | | |
| | | | | | Square | | Year | | Year | | |
Apartment Communities (1) | | Location | | Units | | Footage | | Built | | Acquired | | Occupancy(2) |
Seattle, Washington Metropolitan Area | | | | | | | | | | | | |
Cedar Terrace | | Bellevue, WA | | 180 | | 174,200 | | 1984 | | 2005 | | 95% |
Emerald Ridge-North | | Bellevue, WA | | 180 | | 144,000 | | 1987 | | 1994 | | 95% |
Foothill Commons | | Bellevue, WA | | 360 | | 288,300 | | 1978(43) | | 1990 | | 99% |
Palisades, The | | Bellevue, WA | | 192 | | 159,700 | | 1977(44) | | 1990 | | 94% |
Sammamish View | | Bellevue, WA | | 153 | | 133,500 | | 1986(45) | | 1994 | | 87% |
Woodland Commons | | Bellevue, WA | | 236 | | 172,300 | | 1978(43) | | 1990 | | 99% |
Canyon Pointe | | Bothell, WA | | 250 | | 210,400 | | 1990 | | 2003 | | 97% |
Inglenook Court | | Bothell, WA | | 224 | | 183,600 | | 1985 | | 1994 | | 94% |
Salmon Run at Perry Creek | | Bothell, WA | | 132 | | 117,100 | | 2000 | | 2000 | | 97% |
Stonehedge Village | | Bothell, WA | | 196 | | 214,800 | | 1986 | | 1997 | | 95% |
Park Hill at Issaquah | | Issaquah, WA | | 245 | | 277,700 | | 1999 | | 1999 | | 96% |
Wandering Creek | | Kent, WA | | 156 | | 124,300 | | 1986 | | 1995 | | 98% |
Bridle Trails | | Kirkland, WA | | 108 | | 73,400 | | 1986(46) | | 1997 | | 97% |
Evergreen Heights | | Kirkland, WA | | 200 | | 188,300 | | 1990 | | 1997 | | 96% |
Laurels at Mill Creek, The | | Mill Creek, WA | | 164 | | 134,300 | | 1981 | | 1996 | | 97% |
Morning Run(5) | | Monroe, WA | | 222 | | 221,786 | | 1991 | | 2005 | | 97% |
Anchor Village(6) | | Mukilteo, WA | | 301 | | 245,900 | | 1981 | | 1997 | | 96% |
Castle Creek | | Newcastle, WA | | 216 | | 191,900 | | 1997 | | 1997 | | 95% |
Brighton Ridge | | Renton, WA | | 264 | | 201,300 | | 1986 | | 1996 | | 96% |
Fairwood Pond | | Renton, WA | | 194 | | 189,200 | | 1997 | | 2004 | | 95% |
Forest View | | Renton, WA | | 192 | | 182,500 | | 1998 | | 2003 | | 96% |
Cairns, The | | Seattle, WA | | 100 | | 70,806 | | 2006 | | 2007 | | 95% |
Fountain Court | | Seattle, WA | | 320 | | 207,000 | | 2000 | | 2000 | | 96% |
Linden Square | | Seattle, WA | | 183 | | 142,200 | | 1994 | | 2000 | | 97% |
Maple Leaf | | Seattle, WA | | 48 | | 35,500 | | 1986 | | 1997 | | 99% |
Spring Lake | | Seattle, WA | | 69 | | 42,300 | | 1986 | | 1997 | | 99% |
Tower @ 801(5) | | Seattle, WA | | 173 | | 118,500 | | 1970 | | 2005 | | 97% |
Wharfside Pointe | | Seattle, WA | | 142 | | 119,200 | | 1990 | | 1994 | | 97% |
Echo Ridge(5) | | Snoqualmie, WA | | 120 | | 124,539 | | 2000 | | 2005 | | 97% |
| | | | 5,520 | | 4,688,531 | | | | | | 96% |
Other Region | | | | | | | | | | | | |
St. Cloud | | Houston, TX | | 302 | | 306,800 | | 1968 | | 2002 | | 93% |
| | | | | | | | | | | | |
| | | | 302 | | 306,800 | | | | | | 93% |
Total/Weighted Average | | | | 27,489 | | 23,228,500 | | | | | | 96% |
| | | | | | Rentable | | | | | | |
| | | | | | Square | | Year | | Year | | |
Other real estate assets(1) | | Location | | Tenants | | Footage | | Built | | Acquired | | Occupancy(2) |
Office Buildings | | | | | | | | | | | | |
535 - 575 River Oaks(47) | | San Jose, CA | | 1 | | 262,500 | | 1990 | | 2007 | | 100% |
925 East Meadow Drive(48) | | Palo Alto, CA | | 1 | | 17,400 | | 1988 | | 1997 | | 100% |
935 East Meadow Drive(49) | | Palo Alto, CA | | - | | 14,500 | | 1962 | | 2007 | | 0% |
6230 Sunset Blvd(47) | | Los Angeles, CA | | 1 | | 35,000 | | 1938 | | 2006 | | 100% |
17461 Derian Ave(50) | | Irvine, CA | | 3 | | 110,000 | | 1983 | | 2000 | | 100% |
22110-22120 Clarendon Street(51) | | Woodland Hills, CA | | 9 | | 38,940 | | 1982 | | 2001 | | 100% |
Total Office Buildings | | | | 15 | | 478,340 | | | | | | 100% |
| | | | | | | | | | | | |
Recreational Vehicle Parks | | | | | | | | | | | | |
Circle RV | | El Cajon, CA | | 179 spaces | | | | 1977 | | 2002 | | (52) |
Vacationer | | El Cajon, CA | | 159 spaces | | | | 1973 | | 2002 | | (52) |
Total Recreational Vehicle Parks | | | | 338 spaces | | | | | | | | |
| | | | | | | | | | | | |
Manufactured Housing Community | | | | | | | | | | | | |
Green Valley | | Vista, CA | | 157 sites | | | | 1973 | | 2002 | | (52) |
Total Manufactured Housing Community | | | | 157 sites | | | | | | | | |
Footnotes to the Operating Partnership’s PropertiesCompany’s Portfolio Listing as of December 31, 2007
2013
| (1) | Unless otherwise specified, the Operating PartnershipCompany has a 100% ownership interest in each Property.community. |
| (2) | For apartment communities, occupancy rates are based on financial occupancy for the year ended December 31, 2007;2013; for the officecommercial buildings recreational vehicle parks, manufactured housing communities or properties which have not yet stabilized, or have insufficient operating history, occupancy rates are based on physical occupancy as of December 31, 2007.2013. For an explanation of how financial occupancy and physical occupancy are calculated, see “Properties-Occupancy Rates” in this Item 2. |
| (3) | The Operating Partnership has a 30% special limited partnership interest in the entity that owns this apartment community. This investment was made under arrangements whereby the Essex Management Corporation (“EMC”) became the general partner and the existing partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain conditions, the Operating Partnership may, however, elect to deliver an equivalent number of shares of the Company’s common stock in satisfaction of the applicable partnership's cash redemption obligation. |
| (4) | The community is subject to a ground lease, which, unless extended, will expire in 2082. |
(5) | This community is owned by Fund II. The Operating Partnership has a 28.2% interest in Fund II which is accounted for using the equity method of accounting. |
(6) (4) | The Operating PartnershipCompany holds a 1% special limited partner interest in the partnerships which own these apartment communities. These investments were made under arrangements whereby EMC became the 1% sole general partner and the other limited partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain conditions, the Operating PartnershipCompany may, however, elect to deliver an equivalent number of shares of the Company’s common stock in satisfaction of the applicable partnership’s cash redemption obligation. |
(7) | In 2002(5) | This community is owned by Wesco III. The Company has a 50% interest in Wesco III which is accounted for using the Operating Partnership purchased an additional 21 units adjacent to this apartment community for $3 million. This property was built in 1992.equity method of accounting. |
(8) | (6) | This community is owned by Wesco I. The Operating Partnership completedCompany has a $1.6 million redevelopment50% interest in 2000.Wesco I which is accounted for using the equity method of accounting. |
(9) | (7) | The Operating PartnershipCompany completed a $2.3$10.8 million redevelopment in 2000.2009. |
(10) | The Operating Partnership is in the process of performing a $10.7 million redevelopment. |
(11) | The Operating Partnership completed a $6.2 million redevelopment in 2007. . |
(12) (8) | This community is subject to a ground lease, which, unless extended, will expire in 2067. |
(13) | Fund II is in the process of performing a $5.0 million redevelopment. |
(14) | During the third quarter of 2007, the Operating Partnership acquired full ownership by purchasing the general contractor's interest for $9 million. |
(15) | The Operating Partnership is in the process of performing a $6.1 million redevelopment. |
(16) | The Operating Partnership completed an $11.0 million redevelopment in 2001. |
(17) | The Operating Partnership completed an additional $3.6 million redevelopment in 2005. |
(18) (9) | This community is subject to a ground lease, which, unless extended, will expire in 2027. |
(19) | (10) | The Operating PartnershipCompany completed a $3.2$16.6 million redevelopment in 2002.2010. |
(20) | (11) | The Operating Partnership completed a $1.9 million redevelopment in 2000. |
(21) | The Operating Partnership completed a $1.9 million redevelopment in 2001. |
(22) | The Operating Partnership completed a $1.7 million redevelopment in 2001. |
(23) | The Operating PartnershipCompany is in the process of performing a $16.1$13.0 million redevelopment. |
(25) | (13) | The Operating Partnership and EMC haveCompany has a 74.0% and 1%75% member interests, respectively.interest. |
(26) | The Operating Partnership completed a $3.5 million redevelopment in 2002. |
(27) (14) | The community is subject to a ground lease, which, unless extended, will expire in 2028. |
(28) | (15) | The Operating PartnershipCompany completed a $12.0 million redevelopment in 2008. |
| (16) | This community is owned by Fund II. The Company has a 28.2% interest in Fund II which is accounted for using the equity method of accounting. |
| (17) | The Company is in the process of performing a $14.1$10.0 million redevelopment. |
(29) | (18) | The Operating PartnershipCompany completed a $2.7an $8.9 million redevelopment in 2001.2008. |
(30) | (19) | The Operating PartnershipCompany completed a $4.5$9.4 million redevelopment in 1998.2009. |
(31) | (20) | The Operating Partnership isCompany completed a $4.6 million redevelopment in the process of performing an $8.4 million redevelopment.2009. |
(32) | (21) | The Operating Partnership had a preferred limited partnership interest. In March 2007,Company has 55% ownership in this community. The community is being developed in three phases with the Operating Partnership sold part of its limited partnership interest, and in January 2008, the Operating Partnership sold its remaining interest.two phases currently under development. |
(33) | The Operating Partnership is in the process of performing a $9.4 million redevelopment. |
(34) | The Operating Partnership is in the process of performing a $4.6 million redevelopment |
(35) | Fund II is in the process of performing a $4.5 million redevelopment. |
(36) | The community was subject to a ground lease, which, unless extended, would expire in 2047. In the second quarter of 2007, the Operating Partnership entered into a joint venture partnership with a third-party, and the Operating Partnership contributed the improvements for an 81.5% interest and the joint venture partner contributed the title to the land for an 18.5% interest in the partnership. |
(37) | The Operating Partnership completed construction of 114 units of the 462 total units in 2000. |
(38) | The Operating Partnership completed a $3.4 million redevelopment in 2002. |
(39) (22) | A portion of this community on which 84 units are presently located is subject to a ground lease, which, unless extended, will expire in 2028. |
(40) | (23) | The Operating PartnershipCompany is in the process of performing a $9.9$14.1 million redevelopment. |
(41) | (24) | The community is subject to a ground lease, which, unless extended, will expire in 2070. |
(42) | (25) | The Operating PartnershipCompany completed a $12.5 million redevelopment in 2009. |
| (26) | The Company completed a $36.3 million redevelopment in 2012, which included the construction of 28 in-fill units in 2009. |
| (27) | The Company completed the construction of 66 additional apartment homes in 2012 and is in the process of performing a $15.1 million redevelopment.redevelopment for a total cost of $15.4 million. |
(43) | (28) | The Operating Partnership is in the process of performing a joint $30.6 million redevelopment at these communities. |
(44) | The Operating Partnership is in the process of performing a $7.0 million redevelopment |
(45) | The Operating Partnership is in the process of performing a $3.9 million redevelopment. |
(46) | The Operating Partnership is in the process of performingCompany completed a $5.1 million redevelopment and completed construction of 16 units of the community’s 108 units in 2006. Operations were restabilized in the second quarter of 2006. |
(47) | (29) | The property is leased to a single tenant on a short-term basis, and is includedCompany has 50% ownership in the Operating Partnership’s predevelopment pipeline.this community. |
(48) | (30) | The Operating PartnershipCompany has 99% ownership in this community. |
| (31) | The Company occupies 100% of this property. |
(49) | (32) | The property is currently vacant and underleased through July 2014 to a $2.0 million redevelopment. The Operating Partnership expects to occupy 100% of this property upon completion of the redevelopment in approximately the third quarter of 2008.single tenant. |
(50) | (33) | The Operating Partnership has a mortgage receivable, and consolidates this property in accordance with GAAP. The Operating PartnershipCompany occupies 4.6%7% of this property. |
(51) | The Operating Partnership occupies 30% of this property. |
(52) | The Operating Partnership leased these three properties in 2003 to an unrelated third party for approximately 5 years with an option to purchase the property in approximately 2008. |
26
Item 3. Legal Proceedings
Recently there hasThere have been an increasing number of lawsuits against owners and managers of apartment communities alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Operating PartnershipCompany has been sued for mold related matters and has settled some, but not all, of such matters. Insurance carriers have reacted to mold related liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates. The Operating PartnershipCompany has, however, purchased pollution liability insurance, which includes some coverage for mold. The Operating PartnershipCompany has adopted programs designed to manage the existence of mold in its properties as well as guidelinespolicies for promptly addressing and resolving reports of mold when it is detected, and to minimize any impact mold might have on residents orof the property. The Company believes its mold policies and proactive response to address any known existence, reduces its risk of loss from these cases. There can be no assurances that the Company has identified and responded to all mold occurrences, but the Company promptly addresses all known reports of mold. Liabilities resulting from such mold related matters are not expected to have a material adverse effect on the Operating Partnership’sCompany’s financial condition, results of operations or cash flows. As of December 31, 2013, potential liabilities for mold and other environmental liabilities are not quantifiable and an estimate of possible loss cannot be made.
The Operating Partnership carries comprehensive liability, fire, extended coverageinformation set forth and rental loss insurance for eachdiscussed regarding litigation relating to the merger transaction with BRE in note 16, “Commitments and Contingencies”, of the Properties. There are, however, certain typesour notes to consolidated financial statements included in Part IV, Item 15 of extraordinary losses, such as, for example, losses for terrorism or earthquake, for which the Operating Partnership does not have insurance coverage. Substantially all of the Properties are located in areas that are subject to earthquake activity.this Annual Report on Form 10-K is incorporated by reference into this Item 3.
The Operating PartnershipCompany is subject to various other lawsuits in the normal course of its business operations. Such lawsuits are not expected to have a material adverse effect on the Operating Partnership’sCompany’s financial condition, results of operations or cash flows.
Item 4.
SubmissionMine Safety Disclosures
Not Applicable.
27
| | | 2007 | | | 2006 | | | 2005 |
Supplemental disclosure of cash flow information: | | | | | | | | | |
Cash paid for interest, net of $5,100, $3,900 and $1,100 | | | | | | | | | |
capitalized in 2007, 2006 and 2005, respectively | | $ | 74,397 | | $ | 68,686 | | $ | 71,619 |
Supplemental disclosure of noncash investing and | | | | | | | | | |
financing activities: | | | | | | | | | |
Mortgage notes assumed in connection with purchases | | | | | | | | | |
of real estate | | $ | 43,839 | | | - | | | - |
Land contributed by a partner in a consolidated joint venture | | $ | 22,200 | | | - | | | - |
Issuance of DownREIT units in connection with | | | | | | | | | |
purchase of real estate | | $ | 7,067 | | | - | | | - |
Issuance of Operating Partnership units in | | | | | | | | | |
connection with the purchase of real estate | | | - | | $ | 7,704 | | | - |
Land contributed by a partner in a consolidated joint venture | | | | | | | | | |
Accrual of distributions | | $ | 28,521 | | $ | 24,910 | | $ | 22,496 |
Change in value of cash flow hedges and amortization of swap settlement | | | | | | | | | |
included in other liabilities or other assets as applicable | | $ | (8,026) | | $ | (2,933) | | $ | 660 |
Accruals for capital expenditures included in the year-end balance of | | | | | | | | | |
accounts payable and accrued liabilities | | $ | 8,703 | | $ | 4,804 | | $ | 4,636 |
See accompanying notes to consolidated financial statements.statements
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 20062013, 2012, and 20052011
(Dollars in thousands, except for per share and per unit amounts)
(1) Organization
The accompanying consolidated financial statements present the accounts of Essex Portfolio, L.P. (the “Operating Partnership”), and its subsidiaries. Essex Property Trust, Inc. (the(“Essex”, “ESS”, or the “Company”) was incorporated in, which include the stateaccounts of Maryland in March 1994. On June 13, 1994, the Company commenced operations withand Essex Portfolio, L.P. and subsidiaries (the “Operating Partnership,” which holds the completion of an initial public offering (the “Offering”) in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceedsoperating assets of the Offering of $112.1 million were usedCompany). Unless otherwise indicated, the notes to acquire a 77.2% general partnership interest inconsolidated financial statements apply to both the Company and the Operating Partnership.
The Company hasESS is the sole general partner in the Operating Partnership with a 90.9%94.6% general partner interest and the limited partners ownowned a 9.1%5.4% interest in the Operating Partnership as of December 31, 2007.2013. The limited partners may convert their 2,273,472 Operating Partnership units into an equivalent number of shares of common stock. Total Operating Partnership units outstanding were 2,149,802 and 2,122,381 as of December 31, 2013 and 2012, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $308.5 million and $311.2 million, as of December 31, 2013 and 2012, respectively. The Company has reserved shares of common stock for such conversions. These conversion rights may be exercised by the limited partners at any time through 2024.
As of December 31, 2007,2013, the Operating PartnershipCompany owned or had ownership interests in 134164 apartment communities, (aggregating 27,48934,079 units), six officefour commercial buildings, two recreational vehicle parks (totaling 338 spaces), and one manufactured housing community (containing 157 sites)eleven active development projects (collectively, the “Properties”“Portfolio”). The Propertiescommunities are located in Southern California (Los Angeles, Orange, Riverside, Santa Barbara, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area), and the Seattle metropolitan area
In December 2013, the Company and other region (Houston, Texas).BRE Properties, Inc. (“BRE”) entered into a definitive agreement under which BRE will merge with Essex. Under the terms of the agreement, each BRE common share will be converted into 0.2971 newly issued shares of Essex common stock plus $12.33 in cash. The Company has obtained committed financing up to $1.0 billion (the “bridge loan”) which is available if needed to fund the cash portion of the purchase price. The bridge loan facility is structured as a 364-day unsecured loan facility available in a single draw on the closing date of the merger. The company is exploring several alternatives to fund the cash needs of the transaction including asset sales, joint ventures or new financing. The merger is subject to customary closing conditions, including receipt of approval of Essex and BRE shareholders. Additional information about the merger and the bridge loan can be found in the Form S-4 filed with the SEC on January 29, 2014.
(2) Summary of Critical and Significant Accounting Policies
(a) Principles of Consolidation and Basis of Presentation
The accounts of the Operating Partnership,Company, its controlled subsidiaries and the variable interest entities (“VIEs”) in which it is the primary beneficiary are consolidated in the accompanying financial statements. All significant inter-company accounts and transactions have been eliminated. Certain reclassifications have been made to conform to the current year’s presentation.
In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 Revised (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”,Noncontrolling interest includes the 5.4% and 5.5% limited partner interests in the Operating Partnership not held by the Company at December 31, 2013 and 2012, respectively. These percentages include the Operating Partnership’s vested long term incentive plan units (see Note 13).
The Company consolidates 19 DownREIT limited partnerships (comprising twelve properties)eleven communities), an office building thatsince the Company is subject to loans made by the Operating Partnership, and prior to the sale of the property during 2007, the buildings and improvements that were owned by a third-party subject to a ground lease on land that was owned by the Operating Partnership. The Operating Partnership consolidates these entities because it is deemed the primary beneficiary under FIN 46R.of these variable interest entities (“VIEs”). The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $222.7$194.9 million and $163.9$178.3 million, respectively, as of December 31, 20072013, and $269.5$201.1 million and $145.5$178.6 million, respectively, as of December 31, 2006.2012.
The DownREIT entities thatVIEs collectively own twelveeleven apartment communities were investments made under arrangements wherebyin which Essex Management Company (“EMC”) becameis the general partner, the Operating Partnership becameis a special limited partner, and the other limited partners were granted rights of redemption for their interests. Such limited partners can request to be redeemed and the Operating PartnershipCompany can elect to redeem their rights for cash or by issuing shares of the Company'sits common stock on a one share per unit basis. Conversion values will be based on the market value of the Company's common stock at the time of redemption multiplied by the number of units stipulated under the above arrangements. The other limited partners receive distributions based on the Company's current dividend rate times the number of units held. Total DownREIT units outstanding were 1,007,879 and 1,039,431 as of December 31, 2013 and 2012 respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $144.6 million and $152.4 million, as of December 31, 2013 and 2012, respectively. As of December 31, 2007, the maximum number of shares that could be issued to meet redemption of these DownREIT entities is 1,201,012. As of December 31, 20072013 and 2006,2012, the carrying value of the other limited partners' interests is presented at their historical cost and is classified within minority interestsnoncontrolling interest in the accompanying consolidated balance sheets.
Minority interests include the 9.1% and 9.6% limited partner interests in the Operating Partnership not held by the Company at F-17
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20072013, 2012, and 2006, respectively. The Company periodically adjusts the carrying value of minority interest in the Operating Partnership to reflect its share of the book value of the Operating Partnership. Such adjustments are recorded to stockholders’ equity as a reallocation of minority interest in the Operating Partnership in the accompanying consolidated statements of stockholders’ equity. The minority interest balance also includes the Operating Partnership’s cumulative redeemable preferred units (see Note 12).2011
Interest holders in VIEs consolidated by the Operating PartnershipCompany are allocated a priority of net income equal to the cash payments made to those interest holders for services rendered or distributions from cash flow. The remaining results of operations are generally allocated to the Operating Partnership.Company.
As of December 31, 20072013 and 20062012, the Operating Partnership was involved with two VIEs,Company did not have any VIE’s of which it iswas not deemed to be the primary beneficiary. Total assets of these entities were approximately $71.7 million and $78.5 million and total liabilities were approximately $58.3 million and $58.4 million, as of December 31, 2007 and 2006, respectively. The Operating Partnership does not have a significant exposure to loss from its involvement with these unconsolidated VIEs.
(b) Real Estate Rental Properties
Significant expenditures, which improve or extend the life of an asset and have a useful life of greater than one year, are capitalized. Operating real estate assets are stated at cost and consist of land, buildings and improvements, furniture, fixtures and equipment, and other costs incurred during their development, redevelopment and acquisition. Expenditures for maintenance and repairs are charged to expense as incurred.
The depreciable life of various categories of fixed assets is as follows:
Computer software and equipment | 3 - 5 years |
Interior unit improvements | 5 years |
Land improvements and certain exterior components of real property | 10 years |
Real estate structures | 30 years |
In accordance with SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” the Operating PartnershipThe Company capitalizes predevelopment costs incurred in the pursuit of new development opportunities, in the negotiation process, as well as the entitlement process with a high likelihood of the projects becoming development activities. Predevelopment costs for which a future development is no longer considered probable are charged to expense. Allall costs incurred with the predevelopment, development or redevelopment of real estate assets are capitalized if they are clearly associated with the predevelopment, development or redevelopment of rental property, or are associated with the construction or expansion of real property. Such capitalized costs include land, land improvements, allocated costs of the Operating Partnership’sCompany’s project management staff, construction costs, as well as interest and related loan fees, property taxes and insurance. Capitalization begins for predevelopment, development, and redevelopment projects when activity commences. Capitalization ends when the apartment home is completed and the property is available for a new resident.resident or if the development activities are put on hold.
In accordance with FASB’s Statement of Financial Accounting Standard No. 141 (“SFAS No. 141”) “Business Combinations,” the Operating PartnershipThe Company allocates the purchase price of real estate to land and building, and identifiable intangible assets, such as the value of above, below and at-market in-place leases. The values of the above and below market leases are amortized and recorded as either a decrease (in the case of above market leases) or an increase (in the case of below market leases) to rental revenue over the remaining term of the associated leases acquired.acquired, which in the case of below market leases the Company assumes lessees will elect to renew their leases. The value of acquired at-marketin-place leases are amortized to expense over the term the Operating PartnershipCompany expects to retain the acquired tenant, which is generally 20 months.
In accordance with SFAS No. 141 and its applicability to acquired in-place leases, we performThe Company performs the following evaluation for properties we acquire:communities acquired:
| (1) | adjust the purchase price for any fair value adjustments resulting from such things as assumed debt or contingencies; |
| (2) | estimate the value of the real estate “as if vacant” as of the acquisition date; |
(2) | (3) | allocate that value among land and building and determine the associated asset life for each; buildings; |
(3) | (4) | compute the value of the difference between the “as if vacant” value and the adjusted purchase price, which will represent the total intangible assets; |
(4) | allocate(5) | compute the value of the above and below market leases to the intangible assets and determine the associated life of the above market/ below market leases; |
(5) | allocate(6) | compute the remaining intangible value toof the at-market in-place leases orand customer relationships, if any, and the associated lives of these assets. |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
Whenever events or changes in circumstances indicate that the carrying amount of a property held for investment or held for sale may not be fully recoverable, the carrying amount will be evaluated for impairment. If the sum of the property’s expected future cash flows (undiscounted and without interest charges) is less than the carrying amount
(including (including intangible assets) of thea property held for investment, then the Operating PartnershipCompany will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. Such fairFair value of a property is determined using conventional real estate valuation methods, such as discounted cash flow, the property’s unleveraged yield in comparison to the unleveraged yields and sales prices of similar propertiescommunities that have been recently sold, and other third party information, if available. PropertiesCommunities held for sale are carried at the lower of cost and fair value less estimated costs to sell.
During the second quarter As of 2006, the Operating Partnership recorded an impairment loss of $0.8 millionDecember 31, 2013 and in fourth quarter of 2005 the Operating Partnership recorded an impairment loss of $1.3 million resulting from write-downs of a property’s value in Houston, Texas, to reduce the property’s carrying value to its estimated fair value. The2012, no communities were classified as held for sale and no impairment charges arewere recorded in other expenses in the accompanying consolidated statements of operations.2013, 2012 or 2011.
In the normal course of business, the Operating PartnershipCompany will receive purchase offers for sale of its Properties,communities, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually require a due diligence period before consummation of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. The Operating PartnershipCompany classifies real estate as "held for sale" when all criteria under Statement of Financial Accounting Standard No. 144 (“SFAS No. 144”), "Accountingthe accounting standard for the Impairment or Disposaldisposals of Long-Lived Assets"long-lived assets have been met. In accordance with SFAS No. 144, the Operating Partnershipstandard, the Company presents income and gains/losses on propertiescommunities sold or held for sale as discontinued operations net of minority interests. Realoperations. The Company’s equity in income or loss from real estate investments accounted for under the equity method of accounting remain classified in continuing operations upon disposition. (See Note 76 for a description of the Operating Partnership’sCompany’s discontinued operations for 2007, 2006,2013, 2012, and 2005)2011).
(c) Co-investments
The Operating PartnershipCompany owns investments in joint ventures (“co-investments”) in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with FIN 46R or Emerging Issues Task Force Consensus No. 04-05 (“EITF 04-05”), “Determining Whether a General Partner or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.”accounting standards. Therefore, the Operating PartnershipCompany accounts for these investments using the equity method of accounting. Under the equity method of accounting, the investment is carried at the cost of assets contributed, plus the Operating Partnership’sCompany’s equity in earnings less distributions received and the Operating Partnership’sCompany’s share of losses.
A majority of thesethe co-investments, excluding the preferred equity investments, compensate the Operating PartnershipCompany for its asset management services and some of these investments may provide promote distributions if certain financial return benchmarks are achieved. Asset management fees are recognized when earned, and promote fees are recognized when the earnings events have occurred and the amount is determinable and collectible. Asset management fees andAny promote fees are reflected in interest and other and equity income in co-investments, respectively, in the accompanying consolidated statements of operations.(loss) from co-investments.
(d) Revenues and Gains on Sale of Real Estate
Revenues from tenants renting or leasing apartment units recreational vehicle park spaces or manufactured housing community spaces are recorded when due from tenants and are recognized monthly as they are earned, which is not materially different than on a straight-line basis. Units or spaces are rented under short-term leases (generally, lease terms of 6 to 12 months) and may provide no rent for one or two months, depending on the market conditions and leasing practices of the Operating Partnership’sCompany’s competitors in each sub-market at the time the leases are executed. Revenues from tenants leasing commercial space are recorded on a straight-line basis over the life of the respective lease.
The Operating PartnershipCompany recognizes gains on sales of real estate when a contract is in place, a closing has taken place, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property and the Operating PartnershipCompany does not have a substantial continuing involvement in the property.
(e) Cash Equivalents and Restricted Cash
Highly liquid investments with original maturities of three months or less when purchased are classified as cash equivalents. Restricted cash balances relate primarily to reserve requirements for capital replacement at certain Propertiescommunities in connection with the Operating Partnership’sCompany’s mortgage debt.
F-11ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
(f) Marketable Securities
Marketable securities consist of U.S. treasury or agency securities with original maturities of more than three months when purchased. The Operating Partnership has classified these debt securities as held-to-maturity securities, and the Operating PartnershipCompany reports theits available for sale securities at amortized cost.fair value, based on quoted market prices (Level 2 for the unsecured bonds and Level 1 for the common stock and investment funds, as defined by the Financial Accounting Standards Board (“FASB”) standard for fair value measurements as discussed later in Note 2), and any unrealized gain or loss is recorded as other comprehensive income (loss). There were no other than temporary impairment charges for the years ended December 31, 2013, 2012, and 2011. Realized gains and losses, and interest income, and amortization of purchase discounts are included in interest and other income on the consolidated statement of operations.
As of December 31, 2013 and 2012, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities and investment funds that invest in U.S. treasury or agency securities. As of December 31, 2013 and 2012, the Company classified its investments in mortgage backed securities, which mature in November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost. The discount on the mortgage backed securities is being amortized to interest income based on an estimated yield and the maturity date of the securities.
As of December 31, 2013 and 2012 marketable securities consist of the following ($ in thousands):
| | December 31, 2013 | |
| | | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Carrying | |
| | Cost | | | Gain (Loss) | | | Value | |
Available for sale: | | | | | | | | | |
Investment-grade unsecured bonds | | $ | 15,446 | | | $ | 509 | | | $ | 15,955 | |
Investment funds - US treasuries | | | 3,675 | | | | 3 | | | | 3,678 | |
Common stock | | | 13,104 | | | | (1,304 | ) | | | 11,800 | |
Held to maturity: | | | | | | | | | | | | |
Mortgage backed securities | | | 58,651 | | | | - | | | | 58,651 | |
Total | | $ | 90,876 | | | $ | (792 | ) | | $ | 90,084 | |
| | December 31, 2012 | |
| | | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Carrying | |
| | Cost | | | Gain | | | Value | |
Available for sale: | | | | | | | | | |
Investment-grade unsecured bonds | | $ | 15,475 | | | $ | 826 | | | $ | 16,301 | |
Investment funds - US treasuries | | | 3,788 | | | | 1 | | | | 3,789 | |
Common stock | | | 18,917 | | | | 1,704 | | | | 20,621 | |
Held to maturity: | | | | | | | | | | | | |
Mortgage backed securities | | | 52,002 | | | | - | | | | 52,002 | |
Total | | $ | 90,182 | | | $ | 2,531 | | | $ | 92,713 | |
The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold. For the years ended December 31, 2013, 2012 and 2011, the proceeds from sales of available for sale securities totaled $24.2 million, $61.7 million and $33.0 million, respectively. These sales all resulted in gains, which totaled $1.8 million, $0.8 million and $5.0 million for the years ended December 31, 2013, 2012 and 2011, respectively.
(g) Notes Receivable and Interest Income
Notes receivable relate to real estate financing arrangements including mezzanine and bridge loans that exceed one year. They bear interest at a rate based on the borrower’s credit quality and are recorded at face value.secured by real estate. Interest is recognized over the life of the note. The Operating Partnership requires collateral for the notes.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
Each note is analyzed to determine if it is impaired pursuant to SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”.impaired. A note is impaired if it is probable that the Operating PartnershipCompany will not collect all contractually due principal and interest contractually due.interest. The Operating PartnershipCompany does not accrue interest when a note is considered impaired.impaired and an allowance is recorded for any principal and previously accrued interest that are not believed to be collectable. All cash receipts on impaired notes are applied to reduce the principal amount of such notes until the principal has been recovered and, thereafter, are recognized as interest income. As of December 31, 2013 and 2012, no notes were impaired.
(h) Capitalization Policy
The Company capitalizes all direct and certain indirect costs, including interest, real estate taxes and insurance, incurred during development and redevelopment activities. Interest is capitalized on real estate assets that require a period of time to get them ready for their intended use. The amount of interest capitalized is based upon the average amount of accumulated development expenditures during the reporting period. Included in capitalized costs are management’s estimates of the direct and incremental personnel costs and indirect project costs associated with the Company's development and redevelopment activities. Indirect project costs consist primarily of personnel costs associated with construction administration and development, including accounting, legal fees, and various office costs that clearly relate to projects under development. The Company’s capitalized internal costs related to development and redevelopment projects totaled $7.5 million, $6.2 million and $4.3 million for the years ended December 31, 2013, 2012 and 2011, respectively, most of which relates to development projects. These totals include capitalized salaries of $2.6 million, $2.4 million and $2.2 million, for the years ended December 31, 2013, 2012 and 2011, respectively. The Company capitalizes leasing commissions associated with the lease-up of development communities and amortizes the costs over the life of the leases. The amounts capitalized are immaterial for all periods presented.
(h)(i) Fair Value of Financial Instruments
The Company values its financial instruments based on the fair value hierarchy of valuation techniques described in the FASB’s accounting standard for fair value measurements. Level 1 inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability. The Company uses Level 1 inputs for the fair values of its cash equivalents and its marketable securities except for unsecured bonds and mortgage backed securities. The Company uses Level 2 inputs for its investments in unsecured bonds, notes receivable, notes payable, and derivative liabilities. These inputs include interest rates for similar financial instruments. The Company’s valuation methodology for derivatives is described in Note 9. The Company uses Level 3 inputs to estimate the fair value of its mortgage backed securities. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Management believes that the carrying amounts of the outstanding balances under its lines of credit and notes and other receivables approximate fair value as of December 31, 2013 and 2012, because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available for similar instruments. Management has estimated that the fair value of the Company’s $2.30 billion and $2.13 billion of fixed rate debt at December 31, 2013 and 2012, respectively, to be $2.33 billion and $2.24 billion. Management has estimated the fair value of the Company’s $737.0 million and $692.9 million of variable rate debt at December 31, 2013 and 2012, respectively, is $719.4 million and $671.7 million based on the terms of the Company’s existing variable rate debt compared to those available in the marketplace. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payable, other liabilities and dividends payable approximate fair value as of December 31, 2013 and 2012 due to the short-term maturity of these instruments. Marketable securities and derivative liabilities are carried at fair value as of December 31, 2013 and 2012.
At December 31, 2013, the Company’s investments in mortgage backed securities had a carrying value of $58.7 million and the Company estimated the fair value to be approximately $86.2 million. At December 31, 2012, the estimated fair values of the mortgage backed securities were approximately equal to the carrying values. The Company determines the fair value of the mortgage backed securities based on unobservable inputs (level 3 of the fair value hierarchy) considering the assumptions that market participants would make in valuing these securities. Assumptions such as estimated default rates and discount rates are used to determine expected, discounted cash flows to estimate the fair value.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
(j) Interest Rate Protection, Swap, and Forward Contracts
The Operating Partnership has from timeCompany uses interest rate swaps, interest rate cap contracts, and forward starting swaps to timemanage interest rate risks. The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily used interest rate protection, swapswaps and forward contracts to manage its interest rate exposure on current or identified future debt transactions. The Operating Partnership accounts for such derivative contracts using SFAS No. 133. Under SFAS No. 133, derivative instruments are required to be included in the balance sheet at fair value. The changes in the fair value of the derivatives are accounted for depending on the use of the derivative and whether it has been designated and qualifiesforward-starting swaps as a part of its cash flow hedging strategy. The Company was hedging its exposure to the variability in future cash flows for a hedging relationship.portion of its forecasted transactions.
As of December 31, 2013 and 2012, there were no outstanding forward starting swaps. The Operating PartnershipCompany records all derivatives on theits consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Operating PartnershipCompany assesses the initial and ongoing effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.
For derivatives not designated as cash flow hedges, changes in fair value are recognized in earnings. All existing instrumentsof the Company’s interest rate swaps and interest rate caps are considered cash flow hedges andexcept for the Operating Partnership doesswap related to the multifamily revenue refunding bonds for the 101 San Fernando community that was terminated in 2012 as described in detail in Note 9. The Company did not have any fair value hedges as ofduring the years end December 31, 2007.2013, 2012 and 2011.
The Operating Partnership’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Operating Partnership primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.
Amounts reported in accumulated other comprehensive (loss) income related to derivatives will be reclassified to interest expense as interest payments are made on the Operating Partnership’s hedged debt. The Operating Partnership is hedging its exposure to the variability in future cash flows for a portion of its forecasted transactions over a maximum period of 46 months as of December 31, 2007.
(i)(k) Deferred Charges
Deferred charges are principally comprised of loan fees and related costs which are amortized over the terms of the related borrowing in a manner which approximates the effective interest method.
(j)(l) Income Taxes
Generally in any year in which ESS qualifies as a real estate investment trust (“REIT”) under the Internal Revenue Code (the “IRC”), it is not subject to federal income tax on that portion of its income that it distributes to stockholders. No provision for federal income taxes, other than the taxable REIT subsidiaries discussed below, has been made in the accompanying consolidated financial statements for each of the years in the three-year period ended December 31, 2013 as ESS has elected to be and believes it qualifies under the IRC as a REIT and has made distributions during the periods in amounts to preclude ESS from paying federal income tax.
In order to maintain compliance with REIT tax rules, the Company utilizes taxable REIT subsidiaries for various revenue generating or investment activities. The taxable REIT subsidiaries are consolidated by the Company. The activities and tax related provisions, assets and liabilities are not material.
As a partnership, the Operating Partnership is not subject to federal or state income taxes except that in order to maintain ESS’s compliance with REIT tax rules that are applicable to ESS, the Operating Partnership utilizes taxable REIT subsidiaries for various revenue generating or investment activities. The taxable REIT subsidiaries’subsidiaries are consolidated by the Operating Partnership.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
The activitiesstatus of cash dividends distributed for the years ended December 31, 2013, 2012, and 2011 related to common stock, Series F, Series G, and Series H preferred stock are classified for tax related provisions, assets and liabilities are not material.purposes as follows:
| | 2013 | | | 2012 | | | 2011 | |
Common Stock | | | | | | | | | |
Ordinary income | | | 77.34 | % | | | 70.58 | % | | | 63.68 | % |
Capital gain | | | 17.64 | % | | | 8.75 | % | | | 11.16 | % |
Unrecaptured section 1250 capital gain | | | 5.02 | % | | | 7.97 | % | | | 0.74 | % |
Return of capital | | | 0.00 | % | | | 12.70 | % | | | 24.42 | % |
| | | 100.00 | % | | | 100.00 | % | | | 100.00 | % |
| | | | | | | | | | | | |
(k)
| | 2013 | | | 2012 | | | 2011 | |
Series F, G, and H Preferred stock | | | | | | | | | |
Ordinary income | | | 77.34 | % | | | 80.85 | % | | | 100.00 | % |
Capital gains | | | 17.64 | % | | | 10.02 | % | | | 0.00 | % |
Unrecaptured section 1250 capital gain | | | 5.02 | % | | | 9.13 | % | | | 0.00 | % |
| | | 100.00 | % | | | 100.00 | % | | | 100.00 | % |
(m) Preferred EquityStock
The Operating Partnership classifies itsCompany’s Series G Cumulative Convertible Preferred EquityStock (“Series G Preferred Equity”Stock”) based on Emerging Issues Task Force Topic D-98, (“EITF D-98”) “Classification and Measurement of Redeemable Securities.” The Series G Preferred Equity contains fundamental change provisions that allow the holder to redeem the preferred stock for cash if certain events occur. The redemption under these provisions is not solely within the Operating Partnership’sCompany’s control, thus the Operating PartnershipCompany has classified the Series G Preferred EquityStock as temporary equity in the accompanying consolidated balance sheets.sheets as of December 31, 2013 and 2012.
(n) Equity-based Compensation
The Operating Partnership classifies its Series F Cumulative Redeemable Preferred Equity (“Series F Preferred Equity”)cost of share and unit based compensation awards is measured at the grant date based on EITF D-98. The Series F Preferred Stock contains fundamental change provisions that allow the holder to redeem the preferred stock for cash if certain events occur. The redemption under these provisions is within the Operating Partnership’s control, and thus the Operating Partnership has classified the Series F Preferred Equity as permanent equity in the accompanying consolidated balance sheets.
(l) Stock-based Compensation
The Operating Partnership accounts for share based compensation using theestimated fair value method of accounting.the awards. The estimated fair value of stock options and restricted stock granted by the Operating Partnership isCompany are being amortized over the vesting period of the stock options.period. The estimated grant date fair values of the long term incentive plan units (discussed in Note 14)13) are being amortized over the expected service periods.
(m) Legal costs(o) Changes in Accumulated Other Comprehensive Loss by Component
Legal costs associated with matters arising outEssex Property Trust, Inc.
| | Change in fair | | | Unrealized | | | | |
| | | | | gains/(losses) on | | | | |
| | amortization | | | available for sale | | | | |
| | of derivatives | | | securities | | | Total | |
Balance at December 31, 2012, net of noncontrolling interest | | $ | (71,658 | ) | | $ | 2,397 | | | $ | (69,261 | ) |
Other comprehensive income (loss) before reclassification | | | 3,468 | | | | (1,472 | ) | | | 1,996 | |
Amounts reclassified from accumulated other comprehensive loss | | | 8,466 | | | | (1,673 | ) | | | 6,793 | |
Net other comprehensive income (loss) | | | 11,934 | | | | (3,145 | ) | | | 8,789 | |
Balance at December 31, 2013, net of noncontrolling interest | | $ | (59,724 | ) | | $ | (748 | ) | | $ | (60,472 | ) |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
Essex Portfolio, L.P.
| | Change in fair | | | Unrealized | | | | |
| | value and | | | gains/(losses) on | | | | |
| | amortization | | | available for sale | | | | |
| | of derivatives | | | securities | | | Total | |
Balance at December 31, 2012 | | $ | (70,762 | ) | | $ | 2,531 | | | $ | (68,231 | ) |
Other comprehensive income (loss) before reclassification | | | 4,148 | | | | (1,556 | ) | | | 2,592 | |
Amounts reclassified from accumulated other comprehensive loss | | | 8,466 | | | | (1,767 | ) | | | 6,699 | |
Net other comprehensive income (loss) | | | 12,614 | | | | (3,323 | ) | | | 9,291 | |
Balance at December 31, 2013 | | $ | (58,148 | ) | | $ | (792 | ) | | $ | (58,940 | ) |
Amounts reclassified from accumulated other comprehensive loss in connection with non-recurring litigation that is not covered by insurancederivatives are accrued when amountsrecorded to interest expense before amortization on the consolidated statement of operations. Realized gains and losses on available for sale securities are probableincluded in interest and estimable.other income on the consolidated statement of operations.
(n)(p) Accounting Estimates and Reclassifications
The preparation of consolidated financial statements, in accordance with U.S. generally accepted accounting principles (“GAAP”), requires the Operating PartnershipCompany to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Operating PartnershipCompany evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties,portfolio, its investments in and advances to joint ventures and affiliates, its notes receivable and its qualification as a REIT. The Operating PartnershipCompany bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.
Certain reclassifications have been made to prior year balances in order to conform to the current year presentation. Such reclassifications have no impact on reported earnings, total assets or total liabilities.
(o) New Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 establishes new evaluation and measurement processes for all income tax positions taken, and requires expanded disclosures of income tax matters. The adoption of this FIN on January 1, 2007 did not have a material impact on the Operating Partnership’s consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. FAS 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. This statement is effective in fiscal years beginning after November 15, 2007.
The Operating Partnership believes that the adoption of this standard will not have a material effect on its consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). FAS 159 expands opportunities to use fair value measurement in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is effective for fiscal years beginning after November 15, 2007. The Operating Partnership does not plan to measure any eligible financial assets and liabilities at fair value upon the adoption of this standard on January 1, 2008.
In December 2007, the FASB issued revised SFAS No. 141, “Business Combinations” (“FAS 141(R)”). FAS141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree;
recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The objective of the guidance is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. FAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, Management is currently evaluating the impact FAS 141(R) will have on the Operating Partnership’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”). FAS 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value; and entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The objective of the guidance is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. FAS 160 is effective for fiscal years beginning on or after December 15, 2008. Management is currently evaluating the impact FAS 160 will have on the Operating Partnership’s consolidated financial statements.
(3) Real Estate Investments
(a) SalesAcquisitions of Real Estate and Assets Held for Sale
Each property is considered a separately identifiable component of the Operating Partnership and is reported in discontinued operations when the operations and cash flows of the property have been (or will be) eliminated from the ongoing operations of the Operating Partnership as a result of a disposal transaction.
In December 2007, the Operating Partnership sold four communities (875-units) in the Portland metropolitan area for $97.5 million, resulting in a gain of $47.6 million net of minority interest. The proceeds from the sale were used in a tax-free reverse exchange for the purchase of Mill Creek at Windermere in September 2007
In February 2007, the Operating Partnership sold the joint venture property City Heights Apartments, a 687-unit community located in Los Angeles, California for $120 million. The Operating Partnership’s share of the proceeds from the sale totaled $33.9 million, resulting in a $13.7 million gain on sale to the Operating Partnership, and an additional $10.3 million for fees from the joint venture partner, both of which are included in income from discontinued operations. As of December 31, 2006, City Heights was classified as held for sale.
For the year ended December 31, 2005,2013, the gain on the saleCompany purchased six communities consisting of the Eastridge apartment community was $28.51,079 units for $349.1 million. An additional $2.2 million was deferred as of December 31, 2007 and 2006. The $2.2 million was deferred because it is due and payable to the Operating Partnership only upon the sale of units following a condominium conversion which was still in progress as of December 31, 2007. This transaction was included in discontinued operations as we had no other ongoing involvement with the Property.
For the year ended December 31, 2005, $5.0 million previously deferred gain on2012, the saleCompany purchased eleven communities, comprising of The Essex on Lake Merritt apartment community was recognized on the cost recovery method when the cash was received. The $5.0 million was deferred because it was due and payable to the Operating Partnership only upon the sale of2,052 units following a condominium conversion. The sale transaction was included in continuing operations as we continued to manage the rented apartment units in the project during the conversion process.for $551.1 million.
(b) Sales of Real Estate investments
During 2013, the Company sold three communities consisting of 363 units for $57.5 million resulting in gains totaling $29.2 million.
During the first quarter of 2013, the Company sold a land parcel held for future development located in Palo Alto, California for $9.1 million, which resulted in a gain of $1.5 million.
During 2012, the Company sold two communities consisting of 264 units for $28.3 million resulting in gains totaling $10.9 million.
(c) Co-investments
The Operating PartnershipCompany has joint venture investments in a number of co-investments which are accounted for under the equity method. The co-investments’ accounting policies are similar to the Company’s accounting policies. The joint ventures own, operate, and operatedevelop apartment communities.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
Wesco I, LLC
Wesco, I LLC (“Wesco I”) is a 50/50 programmatic joint venture with an institutional partner for a total equity commitment of $300.0 million. Each partner’s equity commitment is $150.0 million. Wesco I will utilize debt targeted at approximately 50% of the cost to acquire and improve real estate. The Company has contributed $150.0 million to Wesco I, and as of December 31, 2013, Wesco I owned nine apartment communities with 2,713 units with an aggregate carrying value of approximately $670 million.
Wesco III, LLC
During 2012, the Company entered into a 50/50 programmatic joint venture, Wesco III LLC (“Wesco III”), with an institutional partner for a total equity commitment from the parties of $120.0 million. Each partner’s equity commitment is $60.0 million. Wesco III will utilize debt targeted at approximately 50% of the cost to acquire and improve real estate. The Company has contributed $39.7 million to Wesco III, and as of December 31, 2013, Wesco III owned three apartment communities with 657 units with an aggregate carrying value of approximately $164 million.
Essex Apartment Value Fund II, L.P. (“Fund I”), was an investment fund organized by the Operating Partnership in 2001 to add value through rental growth and asset appreciation, utilizing the Operating Partnership’s acquisition, development, redevelopment and asset management capabilities. Fund I was considered fully invested in 2003. An affiliate of the Operating Partnership, Essex VFGP, L.P. (“VFGP”), was a 1% general partner and was a 20.4% limited partner. The Operating Partnership owned a 99% limited partnership interest in VFGP. Fund I acquired or developed ownership interests in 19 apartment communities, representing 5,406 apartment units.
Fund I sold its apartment communities during 2004 and 2005. The Fund I dispositions in 2005 resulted in the Operating Partnership recognizing equity income from the gain on the sale of investments of $18.1 million, and $7.0 million in promote income. During 2006, the Operating Partnership recorded an additional $1.2 million in promote income related to the dispositions of assets in 2005, and during 2007 the Operating Partnership recorded $0.3 million in gain on its investment and $0.3 million in promote income related to the final liquidation of Fund I assets.
Essex Apartment Value Fund II, L.P. (“Fund II”), has eight institutional investors and the Operating Partnership, with combined partner equity commitmentscontributions of $265.9 million. Essex has committedThe Company contributed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner. Fund II utilized debt as leverage equal to approximately 65% of55% upon the estimated valueinitial acquisition of the underlying real estate. Fund II investsinvested in apartment communities in the Operating Partnership’sCompany’s targeted West Coast markets with an emphasis on investment opportunities in the Seattle metropolitan area and the San Francisco Bay Area. Subject to certain exceptions, Fund II had been Essex’s primary investment vehicle during 2005 and 2006. As of October 2006, Fund II was fully invested and closed for any future acquisitions or development. As of December 31, 2007,2013, Fund II owned eleventwo apartment communities.
During the year ended December 31, 2013, Fund II sold five communities for gross proceeds of $320.4 million. In connection with the 2013 sales, Fund II incurred a prepayment penalty on debt of which the Company’s pro rata share was $0.4 million. The total gain on the sales was $146.8 million, of which the Company’s pro rata share was $38.8 million, net of internal disposition costs. There are two remaining properties in the Fund II portfolio that are expected to be sold in 2014.
During the year ended December 31, 2012, Fund II sold seven communities for gross proceeds of $413.0 million. In connection with the 2012 sales, Fund II incurred a prepayment penalty on debt of which the Company’s pro rata share was $2.3 million. The total gain on the sales was $106.0 million, of which the Company’s pro rata share was $29.1 million.
Canada Pension Plan Investment Board – Joint Venture Developments
The Company has entered into six development joint ventures with the Canada Pension Plan Investment Board (“CPPIB”) to develop six apartment communities. For each joint venture the Company holds a 50% to 55% non-controlling interest in the venture and threewill earn customary management fees and may earn development, projects. No properties have been sold by Fund II. Consistent with Fund I, Essex records revenue for its asset, management,and property management developmentfees. The Company may also earn a promote interest. These co-investments are not variable interest entities since they have sufficient equity without additional subordinated support, and redevelopment services when earned,the Company and promote income when realized if Fund II exceeds certain financial return benchmarks.
In August 2005,CPPIB jointly have the Operating Partnership purchased 500,000 Series A Preferred shares in Multifamily Technology Solutions, Inc. (“MTS”). The Operating Partnership owns less than 5%power to direct activities that most significantly impact the co-investments’ economic performance. Each of the voting stockco-investments between the Company and CPPIB has a single general partner, which is a subsidiary consolidated by the Company. However, the Company, as general partner of MTSthe co-investments, does not control the co-investments because the limited partners have substantive participating rights. Therefore, the presumption of control by the Company as general partner is overcome by the rights held by CPPIB, and therefore accounts for this investmentthe Company records the co-investments with CPPIB on the cost method.equity method of accounting.
During 2006, the Operating Partnership made a contribution to a development with a joint venture partner totaling $3.4 million, and made additional contributions to this joint venture of $0.7 million during 2007. The development is located in Southern California and as of December 31, 2007 was still in the predevelopment stage.
During March 2007, the Mountain Vista Apartments, LLC, a joint venture that owns the Waterstone at Fremont apartments in Fremont, California, was recapitalized with the inclusion of a new joint venture partner, and as part of this transaction the Operating Partnership received $7.7 million in net distributions from the joint venture. The Operating Partnership accounted for this transaction as a partial sale of the Operating Partnership’s investment and recorded a gain of $2.0 million which is included in equity income in co-investments as a result of this transaction. As of December 31, 2007,2013, the Operating Partnership’s carrying valueCompany and CPPIB have six active developments projects comprised of 1,507 units for total estimated costs of $695.2 million. At December 31, 2013, the total remaining estimated costs to be incurred on these projects was $216.2 million of which the Company’s portion of the remaining costs were $118.9 million.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
Epic – Phase I, a 280 unit community in San Jose, California, a development joint venture with CPPIB, stabilized its remaining investmentoperations in the amendedfourth quarter of 2013. Epic – Phase II and restated Mountain Vista Apartments, LLCPhase III are currently still under development.
The Huxley and The Dylan – Joint Venture Developments
During the third quarter 2011, the Company entered into a development joint venture with a regional developer for the construction of The Huxley, a 187 unit community with approximately 18,200 square feet of retail located in West Hollywood, California. The regional developer contributed the land and the Company contributed approximately $9.0 million in cash for a 50% interest in the venture. The joint venture obtained bond financing for the project in the amount of $54.5 million with a maturity date of October 2046 and entered into an interest rate swap transaction with respect to the bonds that terminates in September 2016 that effectively converts the interest rate to the Securities Industry and Financial Market Association Municipal Swap Index (“SIFMA Municipal Swap Index”) plus 150 basis points through December 2016.
In the fourth quarter 2011, the Company entered into another development joint venture with the same regional developer for the construction of The Dylan, a 184 unit apartment community with approximately 12,750 square feet of retail located in West Hollywood, California. The 50/50 joint venture was $1.2 million. During January 2008, the Operating Partnership collected $7.5 million in connectioncreated with the contribution of $5.8 million by the Company and the contribution of entitled land by the regional developer. The joint venture secured bond financing in the amount of $59.9 million, maturing in December 2046. The joint venture entered into a total return swap agreement that effectively converts the interest rate to SIFMA Municipal Swap Index plus 150 basis points through December 2016.
The bond financing for these two development projects have joint and several liability for the joint venture partners. Additionally, if either partner fails to make capital contributions to one of its remainingthese joint ventures in certain instances, then the ownership interest of the defaulting partner in the other joint venture may be reduced.
One South Market
During May 2013, the Company entered into a development joint venture to develop a 312 unit community in San Jose, California. The Company holds a 55% non-controlling interest in the joint venture and recognized incomewill earn customary management fees and may earn development, asset, and property management fees. The Company may also earn a promote interest. The co-investment is not a variable interest entity since it has sufficient equity without additional subordinated support, and the Company and the partner jointly have the power to direct activities that most significantly impact the co-investment economic performance. The co-investment has a single general partner, which is a subsidiary consolidated by the Company. However, the Company, as general partner of $6.3 million from its preferred interest.the co-investment, does not control the co-investments because the limited partners have substantive participating rights. Therefore, the presumption of control by the Company as general partner is overcome by the rights held by the partner, and the Company records the co-investments on the equity method of accounting.
As of December 31, 2013, the project’s total estimated costs were $145.1 million. At December 31, 2013, the total remaining estimated costs to be incurred on this project was $114.2 million of which the Company’s portion of the remaining costs were $62.8 million.
Preferred Equity Investments
During the first quarter of 2013, the Company made an $8.6 million preferred equity interest investment in an apartment development located in Redwood City, California to a related party entity. The Operating Partnership hadinvestment has a developer agreementpreferred return of 12% and matures in January 2016.
In March 2013, the Company received the redemption of $9.7 million of preferred equity related to distributetwo properties located in downtown Los Angeles, California. The Company recorded $0.4 million of income from redemption penalties due to the general contractorearly redemption of Mirabella apartments 20%these preferred equity investments.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
During the property’s cash flow aftersecond quarter of 2013, the Operating Partnership receivesCompany received the redemption of $13.1 million of preferred equity related to a 9% cumulativeproperty located in downtown Los Angeles, California. The Company recorded $0.5 million of income from redemption penalties due to the early redemption of these preferred equity investments.
In August 2013, the Company made an $8.5 million preferred equity investment in a multifamily development project located in San Jose, California. The investment has a preferred return on its investment from operating cash flowof 12% and a 12% preferred return on its investment from capital transactions cash flow. matures in 3 years.
During the third quarter of 2007,2013, the Operating Partnership acquiredCompany restructured the general contractor's interestterms of a preferred equity investment with a related party entity on a property located in Anaheim, California, reducing the Mirabella property for $9rate from 13% to 9%, while extending the maximum term by one year. The Company recorded a $0.4 million in lieu of distributing a percentage of future cash flowsrestructuring fee related to the general contractor perrestructured investment.
During the second quarter 2012, the Company made a $14 million preferred equity investment in an apartment community located in Cupertino, California to a related party entity. The investment has a preferred return of 9.5% and matures in May 2016. The preferred equity agreement provides for up to $4 million of additional funding for renovation costs.
The carrying values of the Company’s co-investments, all accounted for under the equity method of accounting as of December 31, 2013 and 2012 are as follows ($ in thousands):
| | 2013 | | | 2012 | |
| | | | | | |
| | | | | | |
| | | | | | |
Membership interest in Wesco I | | $ | 142,025 | | | $ | 143,874 | |
Membership interest in Wesco III | | | 39,073 | | | | 9,941 | |
Partnership interest in Fund II | | | 4,166 | | | | 53,601 | |
Membership interest in a limited liability company that owns Expo | | | 12,041 | | | | 18,752 | |
Total operating co-investments | | | 197,305 | | | | 226,168 | |
| | | | | | | | |
Membership interests in limited liability companies with CPPIB that own and are developing Epic, Connolly Station, Mosso I & II, Park 20 (fka Elkhorn) and The Village | | | 301,538 | | | | 186,362 | |
Membership interests in limited liability companies that own and are developing The Huxley and The Dylan | | | 18,545 | | | | 16,552 | |
Membership interest in a limited liability company that owns and is developing One South Market | | | 17,115 | | | | - | |
Total development co-investments | | | 337,198 | | | | 202,914 | |
| | | | | | | | |
Membership interest in Wesco II that owns a preferred equity interest in Parkmerced with a preferred return of 10.1% | | | 94,711 | | | | 91,843 | |
Preferred interest in related party limited liability company that owns Sage at Cupertino with a preferred return of 9.5% | | | 15,775 | | | | 14,438 | |
Preferred interest in a related party limited liability company that owns Madison Park at Anaheim with a preferred return of 9% | | | 13,824 | | | | 13,175 | |
Preferred interest in related party limited liability company that owns an apartment development in Redwood City with a preferred return of 12% | | | 9,455 | | | | - | |
Preferred interest in a limited liability company that owns an apartment development in San Jose with a preferred return of 12% | | | 8,865 | | | | - | |
Preferred interests in limited liability companies that own apartment communities in downtown Los Angeles with preferred returns of 9% and 10% repaid in 2013 | | | - | | | | 22,807 | |
Total preferred interest investments | | | 142,630 | | | | 142,263 | |
Total co-investments | | $ | 677,133 | | | $ | 571,345 | |
the agreement, accordingly, Mirabella became wholly owned by the Operating Partnership.
| | 2007 | | 2006 |
Investments in joint ventures accounted for under the equity |
method of accounting: |
| | | | |
Limited partnership interest of 27.2% and general partner | | | |
interest of 1% in Essex Apartment Value Fund II, L.P (Fund II) | $ | 58,419 | $ | 45,598 |
Preferred limited partnership interest in Mountain Vista | | | |
Apartments LLC (A) | | 1,182 | | 6,806 |
Development joint venture | | 4,090 | | 3,414 |
| | 63,691 | | 55,818 |
Investments accounted for under the cost method of accounting: |
| | | | |
Series A Preferred Stock interest in Multifamily Technology Solutions, Inc | | 500 | | 500 |
| | | | |
Total investments | $ | 64,191 | $ | 56,318 |
| (A) The investment is held in an entity that includes an affiliate of The Marcus & Millichap Company (“TMMC”), and is the general partner. TMMC’s Chairman is also the Chairman of the Company |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
The combined summarized financial information of co-investments, which are accounted for under the equity method, is as
follows: | | December 31, | | |
| | 2007 | | | 2006 | | | |
Balance sheets: |
Rental properties and real estate under development | $ | 614,266 | | $ | 576,134 | | | |
Other assets | | 16,184 | | | 20,681 | | | |
Total assets | $ | 630,450 | | $ | 596,815 | | | |
| | | | | | | | |
Mortgage notes payable | $ | 322,615 | | $ | 301,665 | | | |
Other liabilities | | 24,014 | | | 74,793 | | | |
Partners' capital | | 283,821 | | | 220,357 | | | |
Total liabilities and partners' capital | $ | 630,450 | | $ | 596,815 | | | |
| | | | | | | | |
Operating Partnership's share of capital | $ | 63,691 | | $ | 55,818 | | | |
| | | | | | | |
| | Years ended |
| | December 31, |
| | 2007 | | | 2006 | | | 2005 |
Statements of operations: |
Property revenues | $ | 46,559 | | $ | 43,031 | | $ | 28,156 |
Property operating expenses | | (18,551) | | | (20,464) | | | (11,761) |
Net operating income | | 28,008 | | | 22,567 | | | 16,395 |
Gain on the sale of real estate | | - | | | - | | | 41,985 |
Interest expense | | (13,888) | | | (17,000) | | | (11,042) |
Depreciation and amortization | | (14,116) | | | (12,395) | | | (7,037) |
Net income (loss) | $ | 4 | | $ | (6,828) | | $ | 40,301 |
| | | | | | | | |
Operating Partnership's share of co-investment net income (loss) | | 1,074 | | | (1,503) | | | 18,553 |
Operating Partnership's gain on partial sale of its interest | | 2,046 | | | - | | | - |
| | | | | | | | |
Income (loss) for co-investments | $ | 3,120 | | $ | (1,503) | | $ | 18,553 |
follows ($ in thousands):(c)
| | December 31, | |
| | 2013 | | | 2012 | |
Balance sheets: | | | | | | |
Rental properties and real estate under development | | $ | 1,953,328 | | | $ | 1,745,147 | |
Other assets | | | 61,578 | | | | 168,061 | |
Total assets | | $ | 2,014,906 | | | $ | 1,913,208 | |
| | | | | | | | |
Debt | | $ | 667,641 | | | $ | 820,895 | |
Other liabilities | | | 125,479 | | | | 91,922 | |
Equity | | | 1,221,786 | | | | 1,000,391 | |
Total liabilities and partners' equity | | $ | 2,014,906 | | | $ | 1,913,208 | |
| | | | | | | | |
Company's share of equity | | $ | 677,133 | | | $ | 571,345 | |
| | Years ended | |
| | December 31, | |
| | 2013 | | | 2012 | | | 2011 | |
Statements of operations: | | | | | | | | | |
Property revenues | | $ | 100,402 | | | $ | 130,128 | | | $ | 106,386 | |
Property operating expenses | | | (37,518 | ) | | | (55,990 | ) | | | (43,066 | ) |
Net operating income | | | 62,884 | | | | 74,138 | | | | 63,320 | |
| | | | | | | | | | | | |
Gain on sale of real estate | | | 146,758 | | | | 106,016 | | | | - | |
Interest expense | | | (24,155 | ) | | | (34,959 | ) | | | (27,843 | ) |
General and administrative | | | (5,344 | ) | | | (3,697 | ) | | | (1,748 | ) |
Depreciation and amortization | | | (36,831 | ) | | | (47,917 | ) | | | (44,412 | ) |
Net income (loss) | | $ | 143,312 | | | $ | 93,581 | | | $ | (10,683 | ) |
| | | | | | | | | | | | |
Company's share of net income (loss) | | $ | 55,865 | | | $ | 41,745 | | | $ | (467 | ) |
(d) Real Estate Underfor Development
The Operating PartnershipCompany defines real estate under development activities as new properties that are being constructed, or are newly constructed and, in the case of development communities, are in a phase of lease-up and
have not yet reached stabilized operations. As of December 31, 2007, excluding2013, the Company had two consolidated development projects, owned by Fund II, the Operating Partnership had threeand eight unconsolidated joint venture development projects comprised of 684aggregating 2,501 units for an estimated cost of $236.7 million, of which $125.8 million remains to be expended.
The Operating Partnership defines the predevelopment pipeline as new properties in negotiation or in the entitlement process with a high likelihood of becoming development activities. As of December 31, 2007, the Operating Partnership had five development communities aggregating 1,658 units that were classified as predevelopment projects. The estimated total cost of the predevelopment pipeline at December 31, 2007 is $508.4 million,$1.1 billion, of which $411.3$407.0 million remains to be expended. The Operating Partnership owns land parcels held for future development aggregating 434 units asCompany’s portion of the remaining costs was $249.2 million.
As of December 31, 2007. The Operating Partnership2013, the Company had incurred $25.5 million in costs related to these five land parcels asone consolidated predevelopment project consisting of 200 units.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007.2013, 2012, and 2011
(4) Notes Receivable and Other Receivables from Related Parties
Notes receivable and other receivables from related parties consist of the following as of December 31, 2007 and 2006:
| | 2007 | | | 2006 |
| | | | | |
Related party receivables, unsecured: | | | | |
Loans to officers made prior to July 31, 2002, secured, | | | | |
bearing interest of 8%, due beginning April 2007 | $ | - | | $ | 375 |
Other related party receivables, substantially due on demand | | 904 | | | 834 |
Total notes and other receivable from related parties | $ | 904 | | $ | 1,209 |
| | | | | |
Other related party receivables include accrued management and development fees from Fund II totaling $0.5 million and $0.4 million as of December 31, 2007 and 2006, respectively.
(5) Notes and Other Receivables
Notes receivables, secured by real estate, and other receivables consist of the following as December 31, 20072013 and 2006:
| | 2007 | | | 2006 |
| | | | | |
Note receivable, secured, bearing interest at 12%, due June 2008 | $ | 2,193 | | $ | 2,193 |
Note receivable, secured, bearing interest at LIBOR + 3.69%, due June 2009 | | 7,346 | | | 7,309 |
Note receivable, secured, bearing interest at LIBOR + 4.65%, due January 2008 | | 5,448 | | | 7,807 |
Note receivable, secured, bearing interest at LIBOR + 3.38%, due February 2009 | | 7,128 | | | - |
Note receivable, secured, bearing interest at LIBOR + 4.75%, due March 2011 | | 10,999 | | | - |
Note receivable, secured, bearing interest at LIBOR + 2.95%, due April 2009 | | 14,010 | | | - |
Other receivables | | 2,508 | | | 886 |
| $ | 49,632 | | $ | 18,195 |
2012 ($ in thousands):
| | 2013 | | | 2012 | |
| | | | | | |
Note receivable, secured, bearing interest at 4.0%, due December 2014 (1) | | $ | 3,212 | | | $ | 3,212 | |
Notes and other receivables from affiliates (2) | | | 60,968 | | | | 28,896 | |
Other receivables | | | 4,075 | | | | 3,785 | |
Note receivable, secured, bearing interest at 8.0%, paid in full May 2013 | | | - | | | | 971 | |
Note receivable, secured, bearing interest at 8.8%, paid in full March 2013 | | | - | | | | 10,800 | |
Note receivable, secured, effective interest at 9.6%, paid in full March 2013 | | | - | | | | 18,499 | |
| | $ | 68,255 | | | $ | 66,163 | |
As | (1) | The borrower funds an impound account for capital replacement. |
| (2) | During the second quarter of 2013, the Company provided a short-term bridge loans to Fund II $42.4 million at a rate of LIBOR + 1.75%. In July 2013, Fund II repaid the Company for $42.4 million in short term loans. The Company has provided two bridge loans totaling $56.8 million to Wesco III at a rate of LIBOR + 2.50%, permanent financing is expected to be placed on the Gas Company Lofts and Regency at Mt. View by the end of Q1 2014. In January 2014, Wesco III repaid the loan on Gas Company Lofts. |
During the twelve months ended December 31, 2007,2013, the Operating Partnership originated fiveCompany received the repayment of three notes receivables totaling $47.4$30.5 million. One of the notes was repaid early, and as such the Company recorded $0.8 million which are mezzanine orof income related to a change in estimate on the discount to the note receivable.
During the first quarter of 2013, Wesco III repaid the Company for a $26.0 million short-term bridge loans. The borrowers under each note receivable have the rightloan to extend the maturity date if certain criteria are met specific to each agreement. During August 2006, the Operating Partnership originated a loanassist with the ownerspurchase of a 26-unit apartment community in Sherman Oaks, California. The proceeds from the loan financed the conversion of the units to condominiums for sale. Effective July 1, 2007, the Operating Partnership had ceased accruing interest on the note, due to the current velocity of sales, pricing, and status of the interest reserve. During the fourth quarter of 2007, the Operating Partnership recorded an allowance for loan loss in the amount of $0.5 million on this impaired note receivable, which is approximately equal to accrued and unpaid interest recorded from inception of the note through June 30, 2007. The Operating Partnership believes that the current loan balance of $5.4 million is collectible through the future sales of 17 unsold condominium units.Haver Hill.
(6)(5) Related Party Transactions
The Company has adopted written related party transaction guidelines that are intended to cover transactions in which the Company (including entities it controls) is a party and in which any “related person” has a direct or indirect interest. A “related person” means any Company director, director nominee, or executive officer, any beneficial owner of more than 5% of the Company’s outstanding common stock, and any immediate family member of any of the foregoing persons. A related person may be considered to have an indirect interest in a transaction if he or she (i) is an owner, director, officer or employee of or otherwise associated with another company that is engaging in a transaction with the Company, or (ii) otherwise, through one or more entities or arrangements, has an indirect financial interest in or personal benefit from the transaction.
The related person transaction review and approval process is intended to determine, among any other relevant issues, the dollar amount involved in the transaction; the nature and value of any related person’s direct or indirect interest (if any) in the transaction; and whether or not (i) a related person’s interest is material, (ii) the transaction is fair, reasonable, and serves the best interest of the Company and its shareholders, and (iii) whether the transaction or relationship should be entered into, continued or ended.
Management and other fees from affiliates includesis comprised primarily of asset management, promote,property management, development and redevelopment fees
totaling $5.1 from co-investments. These fees from affiliates total $11.5 million, $5.0$10.9 million, and $11.0$6.1 million for the years ended December 31, 2007, 2006,2013, 2012, and 2005,2011, respectively. All of these fees are net of intercompany amounts eliminated by the Company.
During 2013, the Company has provided short-term bridge loans to Wesco III and Fund II as discussed in Note 4 above. In January 2014, Wesco III repaid the short-term bridge loan to Gas Company Lofts in full.
The Company provided a $26.0 million short-term bridge loan to Wesco III at a rate of LIBOR plus 2.50%, to assist with the purchase of Haver Hill in 2012. The short term bridge loan was repaid in March 2013.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
The Company’s Chairman and founder, Mr. George Marcus, is the Chairman of TMMC,the Marcus & Millichap Company (“MMC”), which is a parent company of a diversified group of real estate service, investment, and development firms. Mr. Marcus is also the Co-Chairman of Marcus & Millichap, Inc. (“MMI”), and Mr. Marcus owns a controlling interest in MMI. MMI is a national brokerage firm. Duringfirm listed on the years ended December 31, 2007, 2006, and 2005, the Operating PartnershipNYSE that underwent its initial public offering in 2013. Fund II paid brokerage commissions totaling $1.3 million, $0.8$0.6 million and $0$0.4 million, respectively, to TMMC an affiliate of MMI related to the sales of properties in 2013 and 2012, respectively, and there were no brokerage commissions paid during 2011. There were no brokerage commissions paid by the Company to MMI or its affiliates during 2013, 2012, and 2011.
As described in Note 3, the Company restructured the terms of a preferred equity investment in a property located in Anaheim, California, reducing the rate from 13% to 9%, while extending the maximum term by one year. The Company recorded $0.4 million of income related to the restructured investment. The entity that owns the property is an affiliate of MMC. Independent directors (other than Mr. Marcus) on the purchaseCompany’s Board of Directors that serve on the Nominating and salesCorporate Governance and Audit Committees approved the restructuring of real estate.the investment in this entity.
In January 2013, the Company invested $8.6 million as a preferred equity interest investment in an entity affiliated with MMC that owns an apartment development in Redwood City, California. Independent directors (other than Mr. Marcus wasMarcus) on the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the investment in this entity.
During the third quarter of 2012, the Company invested $14.0 million as a preferred equity interest investment in an investorentity affiliated with MMC that owns an apartment community in Cupertino, California. The investment has a preferred return of 9.5% and matures in May 2016. The Company expects to invest an additional $4.0 million in preferred equity to fund renovation costs. Independent directors (other than Mr. Marcus) on the two partnerships that owned the Thomas Jefferson Apartments that was acquired by the Operating Partnership during September 2007 in a DownREIT transaction. In conjunction with that transaction, Mr. Marcus received 7,006 DownREIT units in exchange for his partnership interests in those apartments. The Company’s independent Board of Directors approved the acquisition of the apartment community.investment in this entity.
Mr. Marcus isAlso during the Chairmanthird quarter of 2012, the Urban Housing Group (“UHG”)Company acquired Montebello, a 248 unit apartment community in Kirkland, Washington for $52.0 million from an entity affiliated with MMC, and Wesco I acquired Riley Square (formerly Waterstone Santa Clara), a subsidiary of TMMC. During December 2007, UHG sold the rights to the Operating Partnership to acquire the Fourth Street development land parcel156 unit apartment community in Berkeley,Santa Clara, California for $2.8 million. The amount paid to$38.3 million from an entity affiliated with MMC. Independent directors (other than Mr. Marcus) on the Urban Housing Group included reimbursement for the costs incurred by UHG to entitle the property for development. The Company’s independent Board of Directors approved the acquisitionacquisitions of Montebello and Riley Square.
An Executive Vice President of the rightsCompany invested $4.0 million for a 3% limited partnership interest in a partnership with the Company that owns Essex Skyline at MacArthur Place. The Executive Vice President’s investment is equal to a pro-rata share of the contributions to the land parcel.limited partnership. The Executive Vice President’s investment also receives pro-rata distributions resulting from distributable cash generated by the property if and when distributions are made.
(7)(6) Discontinued Operations
In the normal course of business, the Operating Partnership will receive offers for sale of its properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually require a due diligence period before consummation of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. EssexThe Company classifies real estate as "held“held for sale"sale” when all criteria under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (“SFAS 144”) have been met.
In January 2005,sale is considered probable and expected to sell within a year. During 2013, the Operating PartnershipCompany sold four non-core assets that were acquired for $14.9 million. The four non-core assets were: The Riviera Recreational Vehicle Park andLinden Square, a Manufactured Home Park,183 unit community located in Las Vegas, Nevada,Seattle, Washington for which the Operating Partnership had previously entered into master lease and option agreements with an unrelated entity; and two small office buildings, located$25.3 million, resulting in San Diego California. The Operating Partnership recorded a gain of $0.7$12.7 million. Also during 2013, the Company sold Cambridge, a 40 unit property located in Chula Vista, California for $4.7 million, onresulting in a gain of $2.5 million, and Brentwood, a 140 unit property located in Santa Ana, California for $27.5 million, resulting in a gain of $14.0 million. As of December 31, 2013 and 2012, no communities were held for sale.
During 2012, the saleCompany sold two communities, Tierra Del Sol/Norte and Alpine Country, for a total of these assets. $28.3 million resulting in gains totaling $10.9 million.
During 2011, the Company sold one apartment community, Woodlawn Colonial, and one office building, Clarendon, for a total of $23.4 million resulting in gains totaling $8.4 million.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
The Operating PartnershipCompany has recorded the gaingains on salesales and operations for these various assets sold described above as part of discontinued operations in the accompanying consolidated statements of operations.
In June 2005, the Operating Partnership sold the Eastridge apartments, a 188-unit apartment community located in San Ramon, California for approximately $47.5 million. In conjunction with the sale, the Operating Partnership deferred $2.2 million of the gain on the sale of Eastridge because Essex, through a TRS, originated a participating loan to the buyer in the amount of approximately $2.2 million, which allows the Operating Partnership to financially participate in the buyer’s condominium conversion plan. The gain on the sale of the Eastridge property net of the deferral of the $2.2 participating loan was $28.5 million. The Operating Partnership has recorded the gain on sale and operations for Eastridge apartments as part of discontinued operations in the accompanying consolidated statements of operations.
In January 2006, the Operating Partnership sold Vista Capri East and Casa Tierra apartment communities for approximately $7.0 million and in March 2006, the Operating Partnership sold Diamond Valley, a Recreational Vehicle Park, for approximately $1.3 million. The total combined gain was $3.1 million. The Operating Partnership has recorded the gain on sale and operations for the three properties as part of discontinued operations in the accompanying consolidated statements of operations.
In June 2006, the unconsolidated joint venture property, Vista Pointe, a 286-unit apartment community located in Anaheim, California, was sold for approximately $46.0 million. The Operating Partnership’s share of the proceeds from the transaction totaled $19.3 million, resulting in an $8.8 million gain on the sale, and an additional $8.2 million for fees and a promote distribution. The Operating Partnership has recorded the ground lease income and all related gains and fees from the Vista Pointe joint venture as part of discontinued operations in the accompanying consolidated statements of operations.
In December 2006, the Operating Partnership sold Emerald Palms, a 152-unit apartment community located in San Diego for approximately $20.5 million, for a gain of approximately $6.7 million. The Operating Partnership has recorded the gain on sale and operations for Emerald Palms apartments as part of discontinued operations in the accompanying consolidated statements of operations.
As of December 31, 2006, City Heights Apartments, a 687-unit community located in Los Angeles was classified as held for sale, and during February 2007 the property was sold to a third-party for $120 million. The Operating Partnership’s share of the proceeds from the sale totaled $33.9 million, resulting in a $13.7 million gain, net of minority interest, to the Operating Partnership, and an additional $10.3 million for fees from the City Heights joint venture partner are included in discontinued operations in the accompanying consolidated statements of operations.
The Operating Partnership sold the 21 remaining condominium units at the Peregrine Point property during the first three quarters of 2007, and recorded a gain of $1.0 million net of taxes and expenses. The Operating Partnership started selling the units in the third quarter of 2006, and recorded the sale of 45 units and recorded a gain of $2.0 million net of taxes and expenses during 2006. The Operating Partnership has recorded the gain on sale of condominiums and operations for Peregrine Point apartments as part of discontinued operations in the accompanying consolidated statements of operations.
In December 2007, the Operating Partnership sold four communities (875-units) in the Portland metropolitan area for $97.5 million, resulting in a gain of $51.9 million. The Operating Partnership has recorded the gain on sale and operations for the four communities as part of discontinued operations in the accompanying consolidated statements of operations.
The components of discontinued operations are outlined below and include the results of operations for the respective periods that the Operating PartnershipCompany owned such assets, as described above.above ($ in thousands):
| | 2013 | | | 2012 | | | 2011 | |
| | | | | | | | | |
Revenues | | $ | 4,454 | | | $ | 5,848 | | | $ | 9,133 | |
| | | | | | | | | | | | |
Property operating expenses | | | (1,406 | ) | | | (2,181 | ) | | | (3,584 | ) |
Depreciation and amortization | | | (1,098 | ) | | | (1,513 | ) | | | (2,534 | ) |
Expenses | | | (2,504 | ) | | | (3,694 | ) | | | (6,118 | ) |
| | | | | | | | | | | | |
Operating income from real estate sold | | | 1,950 | | | | 2,154 | | | | 3,015 | |
| | | | | | | | | | | | |
Gain on sale of real estate | | | 29,223 | | | | 10,870 | | | | 8,382 | |
Internal disposition costs | | | - | | | | (1,087 | ) | | | (839 | ) |
Income from discontinued operations | | $ | 31,173 | | | $ | 11,937 | | | $ | 10,558 | |
| | | 2007 | | | 2006 | | | 2005 |
| | | | | | | | | |
Rental revenues | | $ | 9,466 | | $ | 19,537 | | $ | 21,267 |
Interest and other income | | | 290 | | | 41 | | | 1,231 |
Equity income co-investments | | | - | | | 238 | | | 477 |
Revenues | | | 9,756 | | | 19,816 | | | 22,975 |
| | | | | | | | | |
Property operating expenses | | | (3,779) | | | (7,611) | | | (8,159) |
Interest expense | | | (416) | | | (2,314) | | | (2,830) |
Depreciation and amortization | | | (1,861) | | | (4,940) | | | (5,300) |
Minority interests | | | - | | | (660) | | | (347) |
Expenses | | | (6,056) | | | (15,525) | | | (16,636) |
| | | | | | | | | |
Income from real estate sold | | | 3,700 | | | 4,291 | | | 6,339 |
| | | | | | | | | |
Gain on sale of real estate | | | 52,874 | | | 20,503 | | | 29,219 |
Gain on sale of real estate - City Heights | | | 78,306 | | | - | | | - |
Promote interest and fees | | | 10,290 | | | 8,221 | | | - |
Minority interests - City Heights | | | (64,624) | | | - | | | - |
| | | 76,846 | | | 28,724 | | | 29,219 |
| | | | | | | | | |
Income from discontinued operations | | $ | 80,546 | | $ | 33,015 | | $ | 35,558 |
(8)(7) Mortgage Notes Payable and Exchangeable Bonds
ESS does not have any indebtedness as all debt is incurred by the Operating Partnership. Mortgage notes payable and exchangeable bonds consist of the following as of December 31, 20072013 and 2006:2012 ($ in thousands):
| | 2013 | | | 2012 | |
| | | | | | |
Fixed rate mortgage notes payable | | $ | 1,236,479 | | | $ | 1,363,731 | |
Variable rate mortgage notes payable(1) | | | 167,601 | | | | 201,868 | |
| | $ | 1,404,080 | | | $ | 1,565,599 | |
| | | | | | | | |
Number of properties securing mortgage notes | | | 49 | | | | 55 | |
Remaining terms | | 1-26 years | | | 1-27 years | |
Weighted average interest rate | | | 5.6 | % | | | 5.4 | % |
| | | 2007 | | | 2006 |
| | | | | | |
Mortgage notes payable to a pension fund, secured by deeds of trust, bearing interest |
at rates ranging from 6.62% to 8.18%, principal and interest payments due monthly, |
and maturity dates ranging from October 2008 through October 2010. Under certain |
conditions a portion of these loans can be converted to an unsecured note payable. |
Three loans are cross-collateralized by a total of 13 properties | | $ | 224,876 | | $ | 228,663 |
| | | | | | |
Mortgage notes payable, secured by deeds of trust, bearing interest at ranges | | | | |
ranging from 4.86% to 7.90%, principal and interest payments due monthly, | | | | |
and maturity dates ranging from March 2008 through June 2018 | | 804,859 | | | 645,702 |
Mortgage notes payable - held for sale, secured by deed of trust, bearing interest |
at 6.90%, principal and interest payments due monthly, and maturity date of |
January 2008. Repaid in February 2007 | | - | | | 32,850 |
| | | | | | |
Multifamily housing mortgage revenue bonds secured by deeds of trust on | | | | |
rental properties and guaranteed by collateral pledge agreements, payable | | | | |
monthly at a variable rate as defined in the Loan Agreement | | | | |
(approximately 4.50% at December 2007 and 4.60% at December 2006), | | | | |
plus credit enhancement and underwriting fees ranging from approximately | | | | |
1.2% to 1.9%. The bonds are primarily convertible to a fixed rate at the Operating | | | | |
Partnership's option. Among the terms imposed on the properties, which are security for |
the bonds, is a requirement that 20% of the units are subject to tenant income | | | | |
criteria. Principal balances are due in full at various maturity dates from December | | | | |
2009 through December 2039. $152.7 million of these bonds are subject to various | | | | |
interest rate cap agreements which limit the maximum interest rate to such bonds | | | 233,138 | | | 186,339 |
| | | | | | |
Exchangeable bonds, unsecured obligations of the Operating Partnership and guaranteed |
by the Company, bearing interest at 3.625% per year, payable November 1 and May 1 |
of each year, which mature on November 1, 2025. The bonds are exchangeable at the |
option of the holder into cash and, in certain circumstances at the Operating Partnership's |
option, shares of the Company's common stock at an initial exchange price of |
$103.25 per share subject to certain adjustments. These bonds will also be exchangeable |
prior to November 1, 2020 under certain circumstances. The bonds are redeemable at |
the Operating Partnership's option for cash at any time on or after November 4, |
2010 and are subject to repurchase for cash at the option of the holder on November 1st |
in years 2010, 2015, and 2020 or upon the occurrence of certain events | | | 225,000 | | | 225,000 |
| | | | | | |
| | $ | 1,487,873 | | $ | 1,318,554 |
The aggregate scheduled principal payments of mortgage notes payable and exchangeable bondsat December 31, 2013 are as follows:follows ($ in thousands):
2014 | | $ | - | |
2015 | | | 67,461 | |
2016 | | | 12,390 | |
2017 | | | 182,731 | |
2018 | | | 271,156 | |
Thereafter | | | 870,342 | |
| | | | |
| | $ | 1,404,080 | |
2008 | $ | 116,357 |
2009 | | 24,689 |
2010 | | 154,813 |
2011 | | 166,545 |
2012 | | 32,183 |
Thereafter | | 993,286 |
| $ | 1,487,873 |
(1) | Variable rate mortgage notes payable consists of multifamily housing mortgage revenue bonds secured by deeds of trust on rental properties and guaranteed by collateral pledge agreements, payable monthly at a variable rate as defined in the Loan Agreement (approximately 1.6% at December 2013 and 1.9% at December 2012) plus credit enhancement and underwriting fees ranging from approximately 1.2% to 1.9%. Among the terms imposed on the properties, which are security for the bonds, is a requirement that 20% of the units are subject to tenant income criteria. Principal balances are due in full at various maturity dates from May 2025 through December 2039. Of these bonds $156.9 million are subject to various interest rate cap agreements which limit the maximum interest rate to such bonds. |
For the Company’s mortgage notes payable as of December 31, 2013, monthly interest expense and principal amortization, excluding balloon payments, totaled approximately $6.1 million and $1.9 million, respectively. Second deeds of trust accounted for $58.4 million of the $1.4 billion in mortgage notes payable as of December 31, 2013. Repayment of debt before the scheduled maturity date could result in prepayment penalties. The prepayment penalty on the majority of the Company’s mortgage notes payable are computed by the greater of (a) 1% of the amount of the principal being prepaid or (b) the present value of the mortgage note payable which is calculated by multiplying the principal being prepaid by the difference between the interest rate of the mortgage note and the stated yield rate on a specified U.S. treasury security as defined in the mortgage note agreement.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
(8) Unsecured Debt and Lines of Credit
TheESS does not have any indebtedness as all debt is incurred by the Operating Partnership has three outstandingPartnership. ESS guarantees the Operating Partnership’s unsecured debt including the revolving credit facilities up to the maximum amounts and for the full term of the facilities.
Unsecured debt and lines of credit consist of the following as of December 31, 2013 and 2012 ($ in thousands):
| | | | | | | | Weighted Average | |
| | | | | | | | Maturity | |
| | 2013 | | | 2012 | | | In Years | |
| | | | | | | | | |
Bonds private placement - fixed rate | | $ | 465,000 | | | $ | 465,000 | | | | 5.2 | |
Term loan - variable rate | | | 350,000 | | | | 350,000 | | | | 3.2 | |
Bonds public offering - fixed rate | | | 595,023 | | | | 297,084 | | | | 9.0 | |
Unsecured debt | | | 1,410,023 | | | | 1,112,084 | | | | | |
Lines of credit | | | 219,421 | | | | 141,000 | | | | 4.3 | |
Total unsecured debt | | $ | 1,629,444 | | | $ | 1,253,084 | | | | | |
| | | | | | | | | | | | |
Weighted average interest rate on fixed rate unsecured bonds | | | 4.0 | % | | | 4.2 | % | | | | |
Weighted average interest rate on variable rate term loan | | | 2.5 | % | | | 2.7 | % | | | | |
Weighted average interest rate on line of credit | | | 2.2 | % | | | 2.3 | % | | | | |
As of December 31 2013 and 2012, the Company had $465 million of unsecured bonds outstanding at an average effective interest rate of 4.5%.
The following is a summary of the Company’s unsecured private placement bonds as of December 31, 2013 and 2012 ($ in thousands):
| | | | | | | | | Coupon | |
| Maturity | | 2013 | | | 2012 | | | Rate | |
| | | | | | | | | | |
Senior unsecured private placement notes | March 2016 | | $ | 150,000 | | | $ | 150,000 | | | | 4.36 | % |
Senior unsecured private placement notes | September 2017 | | | 40,000 | | | | 40,000 | | | | 4.50 | % |
Senior unsecured private placement notes | December 2019 | | | 75,000 | | | | 75,000 | | | | 4.92 | % |
Senior unsecured private placement notes | April 2021 | | | 100,000 | | | | 100,000 | | | | 4.27 | % |
Senior unsecured private placement notes | June 2021 | | | 50,000 | | | | 50,000 | | | | 4.30 | % |
Senior unsecured private placement notes | August 2021 | | | 50,000 | | | | 50,000 | | | | 4.37 | % |
| | | $ | 465,000 | | | $ | 465,000 | | | | | |
As of December 31, 2013 and 2012, the Company had a $350 million unsecured term loan outstanding at an average interest rate of 2.5%. The term loan has a variable interest rate of LIBOR plus 1.2%. During the fourth quarter of 2012, the Company increased the size of the term loan from $200 million to $350 million. The Company entered into interest rate swap contracts for a term of five years with a notional amount totaling $300 million, which effectively converted the interest rate on $300 million of the term loan to a fixed rate.
In April 2013, the Company issued $300.0 million of senior unsecured notes due on May 1, 2023 with a coupon rate of 3.25% per annum and are payable on May 1st and November 1st of each year, beginning November 1, 2013 (the 2023 Notes). The 2023 Notes were offered to investors at a price of 99.152% of par value. The 2023 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Essex Property Trust, Inc. These bonds are included in the aggregate committed amountline “Bonds public offering-fixed rate” in the table above, and as of $310.0December 31, 2013, the carrying value of the 2023 Notes, net of discount was $297.7 million.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
During the third quarter 2012, the Company issued $300.0 million of senior unsecured notes due August 2022 with a coupon rate of 3.625% per annum and are payable on February 15th and August 15th of each year, beginning February 15, 2013 (the 2022 Notes). The 2022 Notes were offered to investors at a price of 98.99% of par value. The 2022 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Essex Property Trust, Inc. On August 15th, 2012, in connection with the 2022 Notes issuance, the Company entered into a registration rights agreement whereby the Operating Partnership agreed to conduct an offer to exchange the 2022 Notes for a new series of publicly registered notes with substantially identical terms. In May 2013, the Operating Partnership completed the exchange and these bonds are included in the line “Bonds public offering-fixed rate” in the table above. As of December 31, 2013 and 2012, the carrying value of the 2022 Notes, net of discount was $297.3 million and $297.1 million, respectively.
The Company has two lines of credit aggregating $625.0 million as of December 31, 2007. In March 2006, the Operating Partnership renegotiated its revolving line of2013. The Company has a $600 million credit to increase the maximum principal amount to $200.0 million from $185.0 million. Additionally, the maturity date
was extended from April 2007 to March 2009,facility with an option for a one-year extension, and the underlying interest rate based on a tiered rate structure tied to Fitch and S&P ratings on the Company’s corporate ratings,credit facility and the rate was reduced to LIBOR plus 0.8% from LIBOR plus 1.0%. Certain terms1.075% as of December 31, 2013. As of December 31, 2013 and covenants2012, the balance of the $200.0$600 million credit facility was $199.0 million and $141.0 million, respectively. This facility matures in December 2015 with two one-year extensions, exercisable by the Company. The Company also has a working capital unsecured line of credit were amended during the third quarter of 2007. The balance on this line of credit was $61.0 million as of December 31, 2007, which yielded an average interest rate of 6.2%. No amounts were outstanding as of December 31, 2006. The Operating Partnership also hasagreement for $25.0 million. This facility matures in January 2014, with a $100 million credit facility from Freddie Mac, which is secured by eight of the Operating Partnership’s apartment communities.one year extension option. The underlying interest rate on thisthe $25.0 million line is between 55based on a tiered rate structure tied to Fitch and 59 and basis points overS&P ratings on the Freddie Mac Reference Rate. Ascredit facility of December 31, 2007 and 2006, $100.0 million and $93.0 million was outstanding under this line of credit, respectively, which yielded an average interest rate of 5.4% and 6.2% as of December 31, 2007 and 2006, respectively, and matures in January 2009. During March 2007, the Operating Partnership entered into an unsecured revolving line of credit for $10.0 million with a commercial bank with an initial maturity date of March 2008. Borrowings under this revolving line of credit bear an interest rate at the bank’s Prime Rate less 2.0%LIBOR plus 1.075%. As of December 31, 2007,2013 and 2012, there was an $8.8a $20.4 million and zero balance, respectively outstanding on the revolvingthis unsecured line.
The Company’s unsecured line of credit at an average interest rate of 5.6%. The creditand unsecured debt agreements contain debt covenants related to limitations on indebtedness and liabilities and maintenance of minimum levels of consolidated earnings before depreciation, interest and amortization and maintenance of minimum tangible net worth.amortization. The Operating PartnershipCompany was in compliance with the line of creditdebt covenants as of December 31, 20072013 and 2006.
2012.
(10)(9) Derivative Instruments and Hedging Activities
During March 2007,The Company uses interest rate swaps and interest rate cap contracts to manage certain interest rate risks. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the Operating Partnershipexpected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
The Company has entered into a ten-year forward-starting interest rate swap for acontracts with an aggregate notional amount of $50$300 million and a settlement date on or before October 1, 2011.
During April 2007,that effectively fixed the Operating Partnership refinanced a mortgage loan for $35.7 million secured by the Tierra Vista property in the amount of $62.5 million, with a fixed interest rate of 5.47%, which matures in April 2017. In conjunction with this transaction the Operating Partnership settled a $50 million forward-starting swap and received $1.3 million from the counterparty. The accounting for the swap settlement reduces the effective interest rate on $300 million of the new Tierra Vista mortgage$350 million unsecured term loan to 5.19%.at 2.29% through November 2016. These derivatives qualify for hedge accounting.
As of December 31, 20072013 the Operating PartnershipCompany also had entered into nine forward-starting interest rate swapscap contracts totaling a notional amount of $450$156.9 million with interest rates ranging from 4.9% to 5.9% and settlements dates ranging from April 2008 to October 2011. These derivativesthat qualify for hedge accounting as they are expectedeffectively limit the Company’s exposure to economically hedgeinterest rate risk by providing a ceiling on the cash flows associated withunderlying variable interest rate for $156.9 million of the refinancingCompany’s tax exempt variable rate debt.
As of debt that matures between April 2008December 31, 2013 and October 2011. The fair2012, the aggregate carrying value of the derivatives decreased $7.9 million during the year ended December 31, 2007 tointerest rate swap contracts was a liability of $2.7 million and $6.6 million, respectively. The aggregate carrying value of $10.2 millionthe interest rate cap contracts was zero on the balance sheet as of December 31, 2007,2013 and December 31, 2012.
During the derivative liability was recorded in other liabilities inthird quarter 2012, the Operating Partnership’s consolidated financial statements. The changes inCompany terminated a swap transaction with respect to the fair values$38.0 million of tax-exempt bonds for the derivatives are reflected in accumulated other comprehensive (loss) income in101 San Fernando apartment community with Citibank because the Operating Partnership’s consolidated financial statements. bonds were repurchased by the Company at par.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
No hedge ineffectiveness on cash flow hedges was recognizedoccurred during the yearyears ended December 31, 20072013, 2012 and 2006.2011.
(11)(10) Lease Agreements
During the fourth quarter of 2003, the Operating Partnership entered into lease and purchase option agreements with unrelated third parties related to its five recreational vehicle (“RV”) parks that were comprised of 1,717 spaces and two manufactured housing communities that contain 607 sites. At the time of agreement, the unrelated third parties had an option to purchase the assets in approximately four years for approximately $41.7 million, which was a 5% premium to the gross book value of the assets. The Operating Partnership received $0.5 million as consideration for entering into the option agreement and a non-refundable upfront payment of $4.0 million, which was recorded as deferred revenue and has been amortized into income over the five year lease term. Under the lease agreements, Essex receives fixed monthly lease payments and passes through all executory costs such as property taxes. In January 2005, the Operating Partnership sold Riviera RV Resort and Riviera Mobile Home Park. As of December 31, 2007,2013 the Operating Partnership still owns two RV parks totaling 338 spaces, and one manufactured housing community that contains 157 sites.
The Operating Partnership owns two predevelopment projects that it leases to tenants. Cadence Campus is an office building, and Essex-HollywoodCompany is a lessor for three commercial building currently utilized as a production studio, and both properties are 100% leased to single tenants. The lease at Cadence Campus will expire in January 2009buildings and the tenant has a right to two six-month extensions, and the Essex-Hollywood lease will expire in July 2008. These two properties generated lease income totaling $4.7 million during the year ended December 31, 2007, which was recorded as net
lease income and included in interest and other income in the accompanying consolidated statementscommercial portions of operations. Interest expense is not being capitalized on these properties while they are leased, and depreciation expense is being recorded on these properties until the leases expire.
The Operating Partnership is also a lessor of an office building located in Southern California.20 mixed use communities. The tenants’ lease terms expire at various times through 2009 with average annual lease payments of approximately $1.3 million.2028. The future minimum non-cancelable base rent to be received under the Cadence Campus, Essex-Hollywood, the two office buildings in Southern California, the RV parks and manufactured housing communitythese operating leases for each of the years ending after December 31 2007 areis summarized as follows:
| | Future |
| | Minimum |
| | Rent |
2008 | $ | 6,184 |
2009 | | 4,149 |
2010 | | 1,439 |
2011 | | 695 |
2012 | | 183 |
2013 and thereafter | | 474 |
| $ | 13,124 |
follows ($ in thousands):
| | Future | |
| | Minimum | |
| | Rent | |
2014 | | $ | 8,624 | |
2015 | | | 7,104 | |
2016 | | | 4,908 | |
2017 | | | 4,158 | |
2018 | | | 3,613 | |
Thereafter | | | 15,271 | |
| | $ | 43,678 | |
The Operating Partnership is also a lessee of an office building located in Palo Alto next to the Operating Partnership’s headquarters. The lease term expires on September 30, 2009, with average annual lease payments of approximately $0.2 million.
(12)(11) Equity Transactions
Preferred Securities Offerings
As of December 31, 2007,2013 and 2012, the Operating Partnership,Company has the following cumulative preferred securities outstanding:
| | | | Liquidation |
Description | | Issue Date | | Preference |
7.875% Series B | | February 1998 | 1,200,000 units | $ 60,000 |
7.875% Series B | | April 1998 | 400,000 units | $ 20,000 |
7.875% Series D | | July 1999 | 2,000,000 units | $ 50,000 |
7.8125% Series F | | September 2003 | 1,000,000 shares | $ 25,000 |
4.875% Series G | | July 2006 | 5,980,000 shares | $ 149,500 |
| | | | Shares | | | Shares | | | Liquidation | |
Description | | Issue Date | | Authorized | | | Outstanding | | | Preference | |
4.875% Series G | | July 2006 | | | 5,980,000 | | | | 178,249 | | | $ | 4,456 | |
7.125% Series H | | April 2011 | | | 8,000,000 | | | | 2,950,000 | | | $ | 73,750 | |
Dividends on the securities are payable quarterly. The holders of the securities have limited voting rights if the required dividends are in arrears. The Series B and D preferred units represent preferred interests issued by the Operating Partnership and are included in minority interests in the accompanying consolidated balance sheets. The preferred units can be exchanged for Series B and D preferred stock of the Company under limited conditions.
In September 2003, the Company issued 1,000,000 shares of its Series F Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”) at a fixed price of $24.664 per share, a discount from the $25.00 per share liquidation value of the shares. The shares pay quarterly distributions at an annualized rate of 7.8125% per year of the liquidation value and are redeemable by the Company on or after September 23, 2008. The shares were issued pursuant to the Company’s existing shelf registration statement. The Company used the net proceeds from this sale of Series F Preferred Stock to redeem all of the 9.125% Series C Cumulative Redeemable Preferred Units (the “Series C Preferred Units”) of Essex Portfolio, L.P., of which the Company is the general partner.
In January 2004, the Operating Partnership restructured its previously issued $50,000, 9.30% Series D Cumulative Redeemable Preferred Units ("Series D Units"), and its previously issued $80,000, 7.875% Series B Cumulative Redeemable Preferred Units ("Series B Units"). The existing distribution rate of 9.30% of the Series D Units continued until July 27, 2004 – the end of the non-call period. Effective July 28, 2004, the distribution rate on the Series D Units was reduced to 7.875%. The date that the Series D Units can first be redeemed at the Company's option was extended by six years to July 28, 2010. The date that the Series B Units can first be redeemed at the Company's option was extended from February 6, 2003 to December 31, 2009.
During the third quarter of 2006, the Company sold 5,980,000 shares of 4.875% Series G Cumulative Convertible Preferred Stock (“Series G”) for gross proceeds of $149.5 million. Holders may convert Series G Preferred Stock into shares of the Company’sESS common stock subject to certain conditions. The conversion rate willwas initially be .1830 shares of common stock per the $25 share liquidation preference, which is equivalent to an initial conversion price of approximately $136.62 per share of common stock (the conversion rate will be subject to adjustment upon the occurrence of specified events). On or after July 31, 2011, the CompanyESS may, under certain circumstances, cause some or all of the Series G Preferred Stock to be converted into that number of shares of common stock at the then prevailing conversion rate.As of December 31, 2013 and 2012, shares of Series G with an aggregate liquidation value of $4.5 million were outstanding.
During the second quarter of 2011, the Company issued 2,950,000 shares of 7.125% Series H Cumulative Redeemable Preferred Stock (“Series H”) at a price of $25.00 per share for net proceeds of $71.2 million, net of costs and original issuance discounts. The Series H has no maturity date and generally may not be called by the Company before April 13, 2016. Net proceeds from the Series H offering were used to redeem all of the 7.875% Series B Cumulative Redeemable Preferred Units of Essex Portfolio, L.P. (“Series B”) with a liquidation value of $80.0 million, which resulted in excess of cash paid of $1.0 million over the carrying value of Series B due to deferred offering costs and original issuance discounts.
Also during the second quarter of 2011, ESS redeemed its 7.8125% Series F Preferred Stock (“Series F”) at liquidation value for $25.0 million which resulted in excess of cash paid of $0.9 million over the carrying value of Series F due to deferred offering costs and original issuance discounts.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
Common Stock Offerings
During 2006, the Company issued and2013, ESS sold approximately 427,700913,344 shares of common stock for $48.3proceeds of $138.4 million, net of fees and commissions, under its Controlled Equity Offering program. Under this program, the Company may from time to time sellat an average price of $152.92.
During 2012 and 2011, ESS issued 2.4 million shares of common stock into the existing trading market at current market prices,in each period for proceeds of $357.7 million and the Operating Partnership used the net proceeds from such sales to primarily fund the development, redevelopment pipelines, and pay down outstanding borrowing under the Operating Partnership’s lines of credit.
During April 2007, the Company issued and sold approximately 170,500 shares of common stock for $21.8$323.9 million, net of fees and commissions, under its Controlled Equity Offering program.respectively.
During May 2007,Operating Partnership Units and Long Term Incentive Plan (“LTIP”) Units
As of December 31, 2013, the Company sold 1,500,000Operating Partnership had outstanding 2,031,612 operating partnership units and 118,190 vested LTIP units. The Operating Partnership’s general partner, ESS, owned 94.6% of the partnership interests in the Operating Partnership at December 31, 2013, and ESS is responsible for the management of the Operating Partnership’s business. As the general partner of the Operating Partnership, ESS effectively controls the ability to issue common stock of ESS upon a limited partner’s notice of redemption. In addition, ESS has generally acquired OP units upon a limited partner’s notice of redemption in exchange for shares of its common stock. The redemption provisions of OP units owned by limited partners that permit ESS to settle in either cash or common stock for proceedsat the option of $191.9 million, net of underwriter fees and expenses.ESS further evaluated in accordance with applicable accounting guidance to determine whether temporary or permanent equity classification on the balance sheet is appropriate. The Operating Partnership used net proceeds fromevaluated this guidance, including the common stock salesrequirement to reduce outstanding borrowings undersettle in unregistered shares, and determined that these OP units meet the Operating Partnership’s lines of credit.requirements to qualify for presentation as permanent equity.
Common Stock Repurchases
In August 2007, the Company’s Board of Directors authorized a stock repurchase plan to allow the Company to acquire sharesLTIP units represent an interest in an aggregate of up to $200 million. The program supersedes the common stock repurchase plan that the Company announced on May 16, 2001. During 2007 the Company repurchased and retired 323,259 shares of its common stock for approximately $32.6 million. During January 2008, the Company repurchased and retired 137,500 shares of its common stock for approximately $13.2 million.
UpREIT and DownREIT transactions
During October 2006, the Operating Partnership acquired Belmont Terrace,for services rendered or to be rendered by the LTIP unit holder in its capacity as a 71-unit community locatedpartner, or in Belmont, California. Theanticipation of becoming a partner, in the Operating Partnership acquiredPartnership. Upon the apartment community in an UpREIT structured transaction for an agreed upon valueoccurrence of approximately $14.7 million. The Operating Partnership issued 72,685 limited operating partnershipspecified events, LTIP units to the prior owners and during the closemay over time achieve full parity with common units of escrow the Operating Partnership paid-offfor all purposes. Upon achieving full parity, LTIP units may be redeemed for an equal number of the existing debtESS’s common stock.
The redemption value of the OP units owned by the limited partners, not including ESS, had such units been redeemed at December 31, 2013, was approximately $308.5 million based on the property.
During September 2007, the Operating Partnership acquired the Thomas Jefferson apartments in Sunnyvale, California, for $28.0 million by acquiring ownership interests in the two limited partnerships that collectively owned the property. In connection with this acquisition, the limited partnerships were restructured to provide for limited partnership units, or DownREIT units, that are redeemable for cash, or at the Operating Partnership's sole discretion, cash or sharesclosing price of theESS’s common stock as of the Company. A total of 62,873 such units were issued,December 31, 2013.
(12) Net Income Per Common Share and the Operating Partnership assumed $20.0 million in mortgage loans in the transaction.
(13) Net Income Per Common Unit
Essex Property Trust, Inc.
Basic and diluted income from continuing and discontinued operations per unit areshare is calculated as follows for the years ended December 31:31 ($ in thousands, except share and per share amounts
):
| | | 2007 | | | 2006 | | | 2005 |
| | | | | Weighted- | | Per | | | | | Weighted- | | | | | | | Weighted- | | |
| | | | | average | | Common | | | | | average | | | | | | | average | | |
| | | | | Common | | Unit | | | | | Common | | | | | | | Common | | |
| | | Income | | Units | | Amount | | | Income | | Units | | | | | Income | | Units | | |
Basic: | | | | | | | | | | | | | | | | | | | |
Income from continuing operations |
available to common units | | $ | 37,342 | | 27,043,697 | $ | 1.38 | | $ | 31,449 | | 25,560,415 | $ | 1.23 | | $ | 50,551 | | 25,343,695 | $ | 2.00 |
Income from discontinued operations | | 80,546 | | 27,043,697 | | 2.98 | | | 33,015 | | 25,560,415 | | 1.29 | | | 35,558 | | 25,343,695 | | 1.40 |
| | | 117,888 | | | | 4.36 | | | 64,464 | | | | 2.52 | | | 86,109 | | | | 3.40 |
| | | | | | | | | | | | | | | | | | | | | |
Effect of Dilutive Securities (1) | | - | | 552,971 | | | | | - | | 469,360 | | | | | - | | 349,942 | | |
Diluted: | | | | | | | | | | | | | | | | | | | |
Income from continuing operations |
available to common units | | 37,342 | | 27,596,668 | | 1.35 | | | 31,449 | | 26,029,775 | | 1.21 | | | 50,551 | | 25,693,637 | | 1.97 |
Income from discontinued operations | | 80,546 | | 27,596,668 | | 2.92 | | | 33,015 | | 26,029,775 | | 1.27 | | | 35,558 | | 25,693,637 | | 1.38 |
| | $ | 117,888 | | | $ | 4.27 | | $ | 64,464 | | | $ | 2.48 | | $ | 86,109 | | | $ | 3.35 |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
| | 2013 | | | 2012 | | | 2011 | |
| | | | | Weighted- | | | Per | | | | | | Weighted- | | | Per | | | | | | Weighted- | | | Per | |
| | | | | average | | | Common | | | | | | average | | | Common | | | | | | average | | | Common | |
| | | | | Common | | | Share | | | | | | Common | | | Share | | | | | | Common | | | Share | |
| | Income | | | Shares | | | Amount | | | Income | | | Shares | | | Amount | | | Income | | | Shares | | | Amount | |
Basic: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from continuing operations available to common stockholders | | $ | 121,324 | | | | 37,248,960 | | | $ | 3.26 | | | $ | 108,532 | | | | 35,032,491 | | | $ | 3.10 | | | $ | 30,570 | | | | 32,541,792 | | | $ | 0.94 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from discontinued operations available to common stockholders | | | 29,487 | | | | 37,248,960 | | | | 0.79 | | | | 11,280 | | | | 35,032,491 | | | | 0.32 | | | | 9,798 | | | | 32,541,792 | | | | 0.30 | |
| | $ | 150,811 | | | | | | | $ | 4.05 | | | $ | 119,812 | | | | | | | $ | 3.42 | | | $ | 40,368 | | | | | | | $ | 1.24 | |
Effect of Dilutive Securities (1) | | | - | | | | 86,335 | | | | | | | | - | | | | 92,430 | | | | | | | | - | | | | 86,922 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from continuing operations available to common stockholders (1) | | $ | 121,324 | | | | 37,335,295 | | | $ | 3.25 | | | $ | 108,532 | | | | 35,124,921 | | | $ | 3.09 | | | $ | 30,570 | | | | 32,628,714 | | | $ | 0.94 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from discontinued operations available to common stockholders | | | 29,487 | | | | 37,335,295 | | | | 0.79 | | | | 11,280 | | | | 35,124,921 | | | | 0.32 | | | | 9,798 | | | | 32,628,714 | | | | 0.30 | |
| | $ | 150,811 | | | | | | | $ | 4.04 | | | $ | 119,812 | | | | | | | $ | 3.41 | | | $ | 40,368 | | | | | | | $ | 1.24 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Operating Partnership has the ability and intent to redeem DownREIT Limited Partnership units for cash and does not consider them to be common unit equivalents.
(1) | On or after November 1, 2020,(1) | Weighted average convertible limited partnership units of 2,131,425, 2,219,046, and 2,231,807, which include vested Series Z and Series Z-1 incentive units, for the holdersyears ended December 31, 2013, 2012 and 2011, respectively, were not included in the determination of diluted earnings per share calculation because they were anti-dilutive. The Company has the $225 million exchangeable notes may exchange, at the then applicable exchange rate, the notesability to redeem DownREIT limited partnership units for cash and at Essex’s option, a portion of the notes may be exchanged for Essex common stock; the current exchange rate is $103.25 per share of Essex common stock. The exchangeable notes will also be exchangeable prior to November 1, 2020, but only upon the occurrence of certain specified events. During 2007, the weighted average common stock price exceeded the $103.25 strike price and therefore common stock issuable upon exchange of the exchangeable notes was included in the diluted share count. The treasury method was used to determine the sharesdoes not consider them to be added to the denominator for the calculation of earnings per diluted unit.potentially dilutive securities. |
Stock options of 25,326, 1,014,168,325; 263,613; and 22,229175,500; for 2007, 2006, 2005,the years ended December 31, 2013, 2012, and 2011, respectively, were not included in the diluted earnings per share calculation because the exercise price of thethese options waswere greater than the average market price of the common shares for the twelve monthsyears ended and, therefore, were anti-dilutive.
5,980,000All shares of cumulative convertible Series G preferred stock Series G have been excluded from diluted earnings per share for 2007the years ended 2013, 2012, and 20062011 respectively, as the effect was anti-dilutive.
(14) Essex Portfolio, L.P.
Basic and diluted income from continuing and discontinued operations per unit is calculated as follows for the years ended December 31 ($ in thousands, except unit and per unit amounts):
| | 2013 | | | 2012 | | | 2011 | |
| | | | | Weighted- | | | Per | | | | | | Weighted- | | | Per | | | | | | Weighted- | | | Per | |
| | | | | average | | | Common | | | | | | average | | | Common | | | | | | average | | | Common | |
| | | | | Common | | | Unit | | | | | | Common | | | Unit | | | | | | Common | | | Unit | |
| | Income | | | Units | | | Amount | | | Income | | | Units | | | Amount | | | Income | | | Units | | | Amount | |
Basic: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from continuing operations available to common unitholders | | $ | 128,576 | | | | 39,380,385 | | | $ | 3.27 | | | $ | 115,834 | | | | 37,251,537 | | | $ | 3.11 | | | $ | 33,035 | | | | 34,773,599 | | | $ | 0.95 | |
Income from discontinued operations | | | 31,173 | | | | 39,380,385 | | | | 0.79 | | | | 11,937 | | | | 37,251,537 | | | | 0.32 | | | | 10,558 | | | | 34,773,599 | | | | 0.30 | |
Income available to common unitholders | | $ | 159,749 | | | | | | | $ | 4.06 | | | $ | 127,771 | | | | | | | $ | 3.43 | | | $ | 43,593 | | | | | | | $ | 1.25 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Effect of Dilutive Securities (1) | | | - | | | | 86,335 | | | | | | | | - | | | | 92,430 | | | | | | | | - | | | | 67,319 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from continuing operations available to common unitholders (1) | | $ | 128,576 | | | | 39,466,720 | | | $ | 3.26 | | | $ | 115,834 | | | | 37,343,967 | | | $ | 3.10 | | | $ | 33,035 | | | | 34,860,521 | | | $ | 0.95 | |
Income from discontinued operations | | | 31,173 | | | | 39,466,720 | | | | 0.79 | | | | 11,937 | | | | 37,343,967 | | | | 0.32 | | | | 10,558 | | | | 34,860,521 | | | | 0.30 | |
Income available to common unitholders | | $ | 159,749 | | | | | | | $ | 4.05 | | | $ | 127,771 | | | | | | | $ | 3.42 | | | $ | 43,593 | | | | | | | $ | 1.25 | |
| (1) | The Operating Partnership has the ability to redeem DownREIT limited partnership units for cash and does not consider them to be potentially dilutive securities. |
Stock options of 168,325; 263,613; and 175,500; for the years ended December 31, 2013, 2012, and 2011, respectively, were not included in the diluted earnings per unit calculation because the exercise price of these options were greater than the average market price of the common shares for the years ended and, therefore, were anti-dilutive.
All units of cumulative convertible Series G preferred interest have been excluded from diluted earnings per unit for the years ended 2013, 2012, and 2011 respectively, as the effect was anti-dilutive.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
(13) Equity Based Compensation Plans
Stock Options and Restricted Stock
Effective JanuaryIn May 2013, stockholders approved the Company’s 2013 Stock Award and Incentive Compensation Plan (“2013 Plan”). The 2013 Plan became effective on June 1, 2006,2013 and serves as the Operating Partnership adoptedsuccessor to the provisions of SFAS No. 123 Revised (“SFAS No. 123(R)”Company’s 2004 Stock Incentive Plan (the “2004 Plan”), “Share-Based Payment”, a revision of SFAS No. 123 usingand no additional equity awards can be granted under the modified prospective approach. SFAS No. 123(R) requires companies to recognize in2004 Plan after the income statementdate the grant-date fair value of stock options and other equity based compensation issued to employees.2013 Plan became effective.
The Essex Property Trust, Inc. 2004 Stock IncentiveCompany’s 2013 Plan provides incentives to attract and retain officers, directors and key employees. The Stock Incentive2013 Plan provides for the grants of options to purchase a specified number of shares of common stock, or grants of restricted shares of common stock.stock and other award types. Under the Stock Incentive2013 Plan, the totalmaximum aggregate number of shares availablethat may be issued is 1,000,000, plus any shares that have not been issued under the 2004 Plan, including shares subject to outstanding awards under the 2004 Plan that are not issued or delivered to a participant for grant is approximately 1,200,000.any reason. The 2004 Stock Incentive2013 Plan is administered by the Compensation Committee of the Board of Directors. The Compensation CommitteeDirectors and is comprised of independent directors. The Compensation Committee is authorized to establish the exercise price; however, the exercise price cannot be less than 100% of the fair market value of the common stock on the grant date. The Operating Partnership’sCompany’s options have a life of five to ten years. Option grants for officers and employees fully vest between one year and five years after the grant date.
Stock-based compensation expense for options and restricted stock under the fair value method totaled approximately $1.2$2.3 million, $1.1$2.0 million, and $0.8$1.5 million for years ended December 31, 2013, 2012 and 2011 respectively. Stock-based compensation capitalized for options and restricted stock totaled $0.4 million, $0.3 million, and $0.2 million for the years ended December 31, 2007, 20062013, 2012 and 2005, respectively. Stock-based compensation capitalized for options totaled approximately $0.2 million, $0.2 million and none for the year ended December 31, 2007, 2006 and 2005,2011, respectively. The intrinsic value of the options exercised totaled $6.3$3.0 million, $6.0$2.9 million, and $4.1$3.8 million, for the years ended December 31, 2007, 2006,2013, 2012, and 2005,2011 respectively. The intrinsic value of the options outstanding and fully vested totaled $7.6 million, $9.9 million, $14.3 million, and $10.8$10.6 million, for the years ended December 31, 2007, 2006,2013, 2012 and 2005,2011, respectively.
Total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted plansoptions totaled $0.8$5.1 million as of
December 31, 2007. The2013 and the unrecognized compensation cost is expected to be recognized over a weighted-average period of 31 to 5 years for the stock option plans.years.
The average fair value of stock options granted for the years ended December 31, 2007, 20062013, 2012 and 20052011 was $11.58, $17.40$15.80, $12.64 and $10.06 per share, respectively,$14.49, respectively. Certain stock options grated in 2013, 2012, and 2011 included a $75 cap or a $100 cap on the appreciation of the market price over the exercise price. The fair value of stock options was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:
| | 2013 | | | 2012 | | | 2011 | |
Stock price | | $ | 153.54 | | | $ | 143.95 | | | $ | 131.87 | |
Risk-free interest rates | | | 2.68 | % | | | 1.16 | % | | | 2.23 | % |
Expected lives | | 10 years | | | 5 - 10 years | | | 10 years | |
Volatility | | | 18.03 | % | | | 20.05 | % | | | 19.63 | % |
Dividend yield | | | 3.15 | % | | | 3.26 | % | | | 3.29 | % |
| | | | 2006 | | 2005 |
Stock price | | $95.34-$126.73 | | $101.01-$132.62 | | $69.11-$91.88 |
Risk-free interest rates | | 3.52%-4.58% | | 4.45%-5.15% | | 3.64%-4.50% |
Expected lives | | 7-9 years | | 4-7 years | | 5-6 years |
Volatility | | 18.52%-20.31% | | 18.44%-18.54% | | 18.09%-18.54% |
Dividend yield | | 3.99%-5.26% | | 3.12%-4.29% | | 4.22%-5.13% |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
A summary of the status of the Company’s stock option plans as of December 31, 2007, 2006,2013, 2012, and 20052011 and changes during the years ended on those dates is presented below:
| | 2013 | | | 2012 | | | 2011 | |
| | | | | Weighted- | | | | | | Weighted- | | | | | | Weighted- | |
| | | | | average | | | | | | average | | | | | | average | |
| | | | | exercise | | | | | | exercise | | | | | | exercise | |
| | Shares | | | price | | | Shares | | | price | | | Shares | | | price | |
Outstanding at beginning of year | | | 623,434 | | | $ | 125.96 | | | | 415,020 | | | $ | 109.71 | | | | 300,642 | | | $ | 88.11 | |
Granted | | | 150,325 | | | | 153.54 | | | | 263,113 | | | | 143.95 | | | | 197,500 | | | | 131.87 | |
Exercised | | | (52,970 | ) | | | 102.43 | | | | (41,603 | ) | | | 77.21 | | | | (83,122 | ) | | | 84.24 | |
Forfeited and canceled | | | (25,301 | ) | | | 135.25 | | | | (13,096 | ) | | | 128.36 | | | | - | | | | - | |
Outstanding at end of year | | | 695,488 | | | | 133.37 | | | | 623,434 | | | | 125.96 | | | | 415,020 | | | | 109.71 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options exercisable at year end | | | 300,632 | | | | 119.09 | | | | 250,620 | | | | 107.12 | | | | 219,820 | | | | 92.31 | |
| | 2007 | | 2006 | | 2005 |
| | | | | | Weighted- | | | | | Weighted- | | | | | Weighted- |
| | | | | | average | | | | | average | | | | | average |
| | | | | | exercise | | | | | exercise | | | | | exercise |
| | Shares | | | | price | | Shares | | | price | | Shares | | | price |
Outstanding at beginning of year | | 570,542 | | $ | | 72.60 | | 530,375 | | $ | 57.73 | | 463,376 | | $ | 47.07 |
Granted | | 29,250 | | | | 119.98 | | 170,350 | | | 106.63 | | 188,800 | | | 78.01 |
Exercised | | (86,056) | | | | 50.23 | | (90,633) | | | 47.57 | | (103,201) | | | 43.47 |
Forfeited and canceled | | (20,033) | | | | 94.29 | | (39,550) | | | 80.85 | | (18,600) | | | 76.70 |
Outstanding at end of year | | 493,703 | | | | 79.83 | | 570,542 | | | 72.60 | | 530,375 | | | 57.73 |
| | | | | | | | | | | | | | |
Options exercisable at year end | | 288,889 | | | | 64.69 | | 272,074 | | | 52.42 | | 248,015 | | | 43.77 |
The following table summarizes information about stock options outstanding as of December 31, 2007:2013:
| | | Options outstanding | | | Options exercisable | |
| | | Number | | | Weighted- | | | | | | Number | | | | |
| | | outstanding | | | average | | | Weighted- | | | exercisable | | | Weighted- | |
| | | as of | | | remaining | | | average | | | as of | | | average | |
Range of | | | December 31, | | | contractual | | | exercise | | | December 31, | | | exercise | |
exercise prices | | | 2013 | | | life (years) | | | price | | | 2013 | | | price | |
$62.34 - $101.01 | | | | 74,261 | | | | 2.7 | | | $ | 79.18 | | | | 72,261 | | | $ | 79.02 | |
105.64 - 161.98 | | | | 604,902 | | | | 7.2 | | | | 139.18 | | | | 228,371 | | | | 131.77 | |
164.76 - 164.76 | | | | 16,325 | | | | 9.4 | | | | 164.76 | | | | - | | | | - | |
| | | | 695,488 | | | | 6.8 | | | | 133.37 | | | | 300,632 | | | | 119.09 | |
| | | | | | | | |
| | | Options outstanding | | Options exercisable |
| | | Number | | Weighted- | | Number | | |
| | | outstanding | | average | | Weighted- | | exercisable | | Weighted- |
| | | as of | | remaining | | average | | as of | | average |
Range of | | December 31, | | contractual | | exercise | | December 31, | | exercise |
exercise prices | | | | life | | price | | 2007 | | | price |
$13.26-26.52 | | 600 | | 0.1 years | | $ | 19.08 | | 600 | | $ | 19.08 |
26.52-39.79 | | 41,547 | | 1.4 years | | 32.64 | | 41,547 | | | 32.64 |
39.78-53.05 | | 90,027 | | 3.8 years | | 49.33 | | 87,427 | | | 49.28 |
53.05-66.31 | | 40,680 | | 5.7 years | | 59.10 | | 38,230 | | | 59.37 |
66.31-79.57 | | 90,775 | | 7.2 years | | 75.69 | | 52,795 | | | 76.37 |
79.57-92.83 | | 58,704 | | 7.5 years | | 83.18 | | 25,170 | | | 82.95 |
92.83-106.10 | | 39,620 | | 8.3 years | | 101.51 | | 7,720 | | | 102.63 |
106.10-119.36 | | 103,500 | | 8.4 years | | 107.36 | | 34,100 | | | 107.42 |
119.36-132.62 | | 28,250 | | 9.3 years | | 125.27 | | 1,300 | | | 128.02 |
| | | 493,703 | | 6.6 years | | 79.83 | | 288,889 | | | 64.69 |
During 2007,2013, 2012, and 2011 the Company issued 17,1781,556, 1,614 and 1,540 shares of restricted stock.stock, respectively. The unrecognized compensation cost related to unvested restricted stock totaled $1.2 million as of December 31, 2013 and is expected to be recognized straight-line over a period of 1 to 7 years less an estimate for forfeitures.years.
The following table summarizes information about restricted stock outstanding as of December 31, 2013, 2012 and 2011 and changes during the years ended:
| | 2013 | | | 2012 | | | 2011 | |
| | | | | Weighted- | | | | | | Weighted- | | | | | | Weighted- | |
| | | | | average | | | | | | average | | | | | | average | |
| | | | | grant | | | | | | grant | | | | | | grant | |
| | Shares | | | price | | | Shares | | | price | | | Shares | | | price | |
Unvested at beginning of year | | | 24,922 | | | $ | 104.52 | | | | 35,219 | | | $ | 98.57 | | | | 44,877 | | | $ | 102.46 | �� |
Granted | | | 1,556 | | | | 158.75 | | | | 1,614 | | | | 149.68 | | | | 1,540 | | | | 134.44 | |
Vested | | | (7,211 | ) | | | 109.86 | | | | (8,641 | ) | | | 106.69 | | | | (9,532 | ) | | | 104.91 | |
Forfeited and canceled | | | (3,091 | ) | | | 100.84 | | | | (3,270 | ) | | | 102.00 | | | | (1,666 | ) | | | 94.35 | |
Unvested at end of year | | | 16,176 | | | | 108.06 | | | | 24,922 | | | | 104.52 | | | | 35,219 | | | | 98.57 | |
Long Term Incentive PlanPlans – Z Units and 2014 LTIP Units
On December 10, 2013, the Operating Partnership issued 50,500 units under the 2014 Long-Term Incentive Plan Award agreements to twelve senior executives of the Company. Pursuant to the 2014 Long-Term Incentive Plan Awards, each recipient was initially granted a number of 2014 Long-Term Incentive Plan Units (the “2014 LTIP Units”), 90% of which are subject to performance-based vesting, and 10% of which are subject to service-based vesting based on continued employment. One-third of the performance-based vesting of the 2014 LTIP Units initially granted will be eligible to be earned by recipients based on Essex’s absolute total stockholder return and two-thirds will be eligible to be earned based on Essex’s relative total stockholder return, in each case, during a one-year performance period beginning on the initial grant date of the awards.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIESThe
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
Prior to 2013, the Company has adopted an incentive program involving the issuance of Series Z Incentive Units and Series Z-1 Incentive Units (collectively referred to as “Z Units”) of limited partnership interest in the Operating Partnership. Vesting in the Z Units is based on performance criteria established in the plan. The criteria can be revised at the beginning of the year by the Board's Compensation Committee if the Committee deems that the plan's criterion is unachievable for any given year. The sale of Z unitsUnits is contractually prohibited and cannot be convertedprohibited. Z Units are convertible into Operating Partnership units until certain conditionswhich are met or 15 years after the inceptionexchangeable for shares of the plan.Company’s common stock that have marketability restrictions. The estimated fair value of a Z unitUnit is determined on the grant date and considers the Company's current stock price, the dividends
that are not paid on unvested units and a marketability discount for the 8 to 15 years of illiquidity. Compensation expense is calculated by taking annualmultiplying estimated vesting increases multipliedfor the period by the estimated fair value as of the grant date less its $1.00 per unit purchase price.
Stock-based compensation expense for Z Units under the fair value method totaled approximately $1.5 million, $1.3 million and $1.6 million, for the years ended December 31, 2007, 2006 and 2005, respectively. Stock-based compensation capitalized for Z Units totaled approximately $0.4 million, $0.3 million and $0.2 million, for the years ended December 31, 2007, 2006 and 2005, respectively. The intrinsic value Effective January 1 of the Z Units subject to conversion totaled $16.0 million as of December 31, 2007. Total unrecognized compensation cost related Z Units subject to conversion in the future granted under the Z Units plans totaled $8.1 million as of December 31, 2007. The unamortized cost is expected to be recognized over the next 4 to 12 years subject to the achievement of the stated performance criteria.
The issuance of Z Units is administered by the Compensation Committee which has the authority to select participants and determine the awards to be made up to a maximum of 600,000 Z Units. The conversion ratchet (accounted for as vesting) of the Z Units into common units, will increase by up to 10% (up to 20% in certain circumstances following their initial issuance) effective January 1of each year for each participating executive who remains employed by the Operating PartnershipCompany if the Company has met a specified “funds from operations” per share target, or such other target as the Compensation Committee deems appropriate, for the prior year, up to a maximum conversion ratchet of 100%. Z units issued in 2011 and 2010 are discussed below.
The Operating Partnershipissuance of Z Units and 2014 LTIP Units are administered by the Compensation Committee which has the optionauthority to redeemselect participants and determine the awards to be made up to a maximum of 600,000 Z Units held by any executive whose employment has been terminated with either common unitsand 2014 LTIP Units.
Stock-based compensation expense for Z Units and 2014 LTIP Units under the fair value method totaled approximately $2.2 million, $2.1 million and $1.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. Stock-based compensation capitalized for Z Units and 2014 LTIP Units totaled approximately $0.5 million, $0.5 million, and $0.3 million, for the years ended December 31, 2013, 2012, and 2011, respectively. The intrinsic value of the Operating Partnership or sharesunvested Z Units and 2014 LTIP Units totaled $21.4 million as of December 31, 2013. Total unrecognized compensation cost related to the unvested Z Units and 2014 LTIP Units under the Z Units and 2014 LTIP Units plans totaled $7.6 million as of December 31, 2013. The unamortized cost for the Z Units and LTIP Units is recognized up to 14 years and four years, respectively, subject to the achievement of the Company’s common stock based on the then-effective conversion ratchet. stated performance criteria.
During 2001,2011, the Operating Partnership issued 200,00046,500 Series ZZ-1 Incentive Units (the “2011 Z-1 Units”) of limited partner interest to eleven senior executives of the Company in exchange for a capital commitment of $1.00 per Series Z Incentive Unit, for an aggregate offering price of $200. The 2001 Z Unit grant had a conversion ratchet of 45, 55, and 65 percent as of January 1, 2005, 2006, and 2007 respectively.
During 2004, the Operating Partnership issued 95,953 Series Z-1 Incentive Units of limited partner interest to fourteen senior executives of the Company in exchange for cash orfrom eight executive officers of the Company, and a capital commitment from the remaining six executives of $1.00 per Series2011 Z-1 Incentive Unit, for an aggregate offering price of $96.Unit. The 2004 Z Unit grant had a conversion ratchet of 20 percent upon issuance, and 30, 40 and 50 percent as of January 1, 2005, 2006 and 2007, respectively. In 2005 an additional 27,0002011 Z-1 Units were granted to two senior executives pursuant to the 2004 grant terms with a 20 percent conversion ratio at issuance, and 30 and 40 percent conversion ratchet as of January 1, 2006 and 2007.
During 2005, the Operating Partnership issued 89,999 Series Z-1 Incentive Units of limited partner interest to fourteen senior executives of the Company in exchange for cash or a capital commitment of $1.00 per Series Z-1 Incentive Unit, for an aggregate offering price of $90. The 2005 Z-1 Unit grant had a conversion ratchet of 20 and 30 percent as of January 1, 2006 and 2007.
Long Term Incentive Plan – Outperformance Plan
Stock-based compensation expense for the Outperformance Plan, (the “OPP”) adopted in December 2007 under the fair value method totaled approximately $0.1 million for year ended December 31, 2007. Total unrecognized compensation cost less an estimate for forfeitures related to the OPP totaled $5.5 million as of December 31, 2007. The unamortized cost is expected to be recognized over the expected service period of five years for senior officers and three years for non-employee directors.
Under the 2007 OPP, award recipients will share in a “performance pool” if the Company’s total return to stockholders for the period from December 4, 2007 (measured based on the closing price of the Company’s common stock on December 4, 2007) through December 3, 2010 exceeds a cumulative total return to stockholders of 30%. The size of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to an aggregate maximum award of $25 million. The maximum award will be reduced by the amount of any forfeited awards. In the event the potential performance pool reaches the maximum aggregate award between June 4, 2010 and December 3, 2010 and remains at that level or higher for 30 consecutive days, the performance period will end early and the performance pool will be formed on the last day of such 30-day period, but the participants will nonetheless be subject to the time-based vesting requirements described below.
Each participant’s award under the 2007 OPP has been designated as a specified percentage of the aggregate performance pool. Assuming the 30% benchmark is achieved, the pool will be allocated among the participants in
accordance with the percentage specified in each participant’s award agreement. Individual awards were made in the form of newly created long term incentive plan (“LTIP”) Units, which are partnership units of the Operating Partnership, and the LTIP units are exchangeable on aconvertible one-for-one basis into common units of the Operating Partnership (which, in turn, are convertible into common stock of the Company) upon the earlier to occur of 100 percent vesting of the extentunits or the LTIPyear 2026. The conversion ratchet (accounted for as vesting) of the 2011 Z-1 Units become vested. Suchinto common units, are exchangeable for sharesincreased to 10 percent effective January 1, 2012 because the Company achieved the FFO minimum target of $5.65 per diluted share in 2011. Each year thereafter, vesting of the Company’s common stock on a one-for-one basis. Any shares of2011 Z-1 Units will be consistent with the Company’s common stock, whichannual FFO growth, but is not to be less than zero or greater than 14 percent. The 2011 Z-1 Unit holders are ultimately issued in connection with the 2007 OPP, will be issued pursuant to the Company’s 2004 Stock Incentive Plan. LTIP Units were granted prior to the determination of the performance pool; however, they will only vest upon satisfaction of performance and time vesting thresholds and will not be entitled to receive distributions, until afteron vested units, that are approximately the benchmark is achieved. Distributions on LTIP Units will equal the distributions payable on eachsame as dividends distributed to common unit ofstockholders.
During 2010, the Operating Partnership on a per unit basis.
Inissued 108,000 Series Z-1 Incentive Units (the “2010 Z-1 Units”) of limited partner interest to twenty executives of the caseCompany. The conversion ratchet (accounted for as vesting) of awards grantedthe 2010 Z-1 Units into common units, increased to senior officers, if20 percent effective January 1, 2011 because the benchmark isCompany achieved the FFO minimum target of $4.75 per diluted share in 2010. Once the units are vested, Z-1 Unit holders receive quarterly distributions of approximately the dividend rate paid on common shares. Each year thereafter, vesting of the 2010 Z-1 Units will be consistent with the Company’s annual FFO growth, but is not to be less than zero or greater than 14 percent.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
The following table summarizes information about the Z Units and 2014 LTIP Units will vestoutstanding as of December 31, 2013 ($ in three substantially equal installments on thousands):
| | Long Term Incentive Plan - Z Units and 2014 LTIP Units | |
| | | | | | | | Aggregate | | | | | | | | | Weighted- | |
| | | | | | | | Intrinsic | | | | | | Weighted- | | | average | |
| | Total | | | Total | | | Value | | | Total | | | average | | | Remaining | |
| | Vested | | | Unvested | | | of Unvested | | | Outstanding | | | Grant-date | | | Contractual | |
| | Units | | | Units | | | Units | | | Units | | | Fair Value | | | Life (years) | |
Balance, December 2010 | | | 326,280 | | | | 171,902 | | | $ | 19,463 | | | | 498,182 | | | $ | 54.15 | | | | 11.2 | |
Granted | | | - | | | | 46,500 | | | | | | | | 46,500 | | | | | | | | | |
Vested | | | 44,520 | | | | (44,520 | ) | | | | | | | - | | | | | | | | | |
Converted | | | (191,718 | ) | | | - | | | | | | | | (191,718 | ) | | | | | | | | |
Cancelled | | | - | | | | (3,863 | ) | | | | | | | (3,863 | ) | | | | | | | | |
Balance, December 2011 | | | 179,082 | | | | 170,019 | | | | 23,719 | | | | 349,101 | | | | 58.17 | | | | 12.3 | |
Granted | | | - | | | | - | | | | | | | | - | | | | | | | | | |
Vested | | | 28,163 | | | | (28,163 | ) | | | | | | | - | | | | | | | | | |
Converted | | | (16,541 | ) | | | - | | | | | | | | (16,541 | ) | | | | | | | | |
Cancelled | | | - | | | | (1,813 | ) | | | | | | | (1,813 | ) | | | | | | | | |
Balance, December 2012 | | | 190,704 | | | | 140,043 | | | | 20,800 | | | | 330,747 | | | | 58.44 | | | | 11.3 | |
Granted | | | - | | | | 50,500 | | | | | | | | 50,500 | | | | | | | | | |
Vested | | | 35,919 | | | | (35,919 | ) | | | | | | | - | | | | | | | | | |
Converted | | | (108,433 | ) | | | - | | | | | | | | (108,433 | ) | | | | | | | | |
Cancelled | | | - | | | | (5,243 | ) | | | | | | | (5,243 | ) | | | | | | | | |
Balance, December 2013 | | | 118,190 | | | | 149,381 | | | $ | 21,438 | | | | 267,571 | | | $ | 63.53 | | | | 9.3 | |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 4, 201031, 2013, 2012, and on each of the first two anniversaries thereafter, based on the officer’s continued employment through the applicable vesting date. In the case of awards granted to non-employee directors, such awards will vest in full on December 4, 2010 if the benchmark is achieved and only to the extent the board members have continued to serve through such date. 2011
In the event of a change of control of the Company prior to the establishment of the performance pool, the performance period will be shortened to end on a date immediately prior to such event and the cumulative stockholder return benchmark will be adjusted on a pro rata basis. The performance pool will be formed as described above if the adjusted benchmark target is achieved, and the awards will become fully vested at such time.
(15)(14) Segment Information
In accordance with FASB No. 131, “Disclosures about Segments of an Enterprise and Related Information” the Operating PartnershipThe Company defines its reportable operating segments as the three geographical regions in which its propertiescommunities are located: Southern California, Northern California and Seattle Metro. Excluded from segment revenues are properties outside of these regions including propertycommunities classified in Houston, Texas,discontinued operations, management and other fees from affiliates, and interest and other income. Non-segment revenues and net operating income included in the following schedule also consist of revenue generated from commercial properties, recreational vehicle parks, and manufactured housing communities.properties. Other non-segment assets include investments, real estate under development, co-investments, cash and cash equivalents, marketable securities, notes receivable,and other receivables, prepaid expenses and other assets and deferred charges.
The revenues and net operating income and assets for each of the reportable operating segments are summarized as follows for the years ended December 31, 2013, 2012, and 2011 ($ in thousands):
| | Years Ended December 31, | |
| | 2013 | | | 2012 | | | 2011 | |
Revenues: | | | | | | | | | |
Southern California | | $ | 265,226 | | | $ | 246,534 | | | $ | 220,416 | |
Northern California | | | 214,402 | | | | 175,325 | | | | 149,457 | |
Seattle Metro | | | 107,553 | | | | 92,489 | | | | 79,832 | |
Other real estate assets | | | 14,822 | | | | 12,348 | | | | 10,955 | |
Total property revenues | | $ | 602,003 | | | $ | 526,696 | | | $ | 460,660 | |
| | | | | | | | | | | | |
Net operating income: | | | | | | | | | | | | |
Southern California | | $ | 176,675 | | | $ | 164,092 | | | $ | 145,353 | |
Northern California | | | 148,204 | | | | 120,540 | | | | 99,047 | |
Seattle Metro | | | 71,407 | | | | 60,853 | | | | 51,477 | |
Other real estate assets | | | 9,705 | | | | 9,044 | | | | 7,273 | |
Total net operating income | | | 405,991 | | | | 354,529 | | | | 303,150 | |
| | | | | | | | | | | | |
Depreciation | | | (192,420 | ) | | | (169,173 | ) | | | (150,009 | ) |
Interest expense before amortization | | | (104,600 | ) | | | (100,244 | ) | | | (91,694 | ) |
Amortization expense | | | (11,924 | ) | | | (11,644 | ) | | | (11,474 | ) |
Management and other fees from affiliates | | | 11,700 | | | | 11,489 | | | | 6,780 | |
General and administrative | | | (25,601 | ) | | | (23,307 | ) | | | (20,694 | ) |
Cost of management and other fees | | | (6,681 | ) | | | (6,513 | ) | | | (4,610 | ) |
Merger expenses | | | (4,284 | ) | | | - | | | | - | |
Interest and other income | | | 11,633 | | | | 13,833 | | | | 17,139 | |
Loss on early retirement of debt | | | (300 | ) | | | (5,009 | ) | | | (1,163 | ) |
Gain on sale of land | | | 1,503 | | | | - | | | | - | |
Equity income (loss) income from co-investments | | | 55,865 | | | | 41,745 | | | | (467 | ) |
Gain on remeasurement of co-investment | | | - | | | | 21,947 | | | | - | |
| | | | | | | | | | | | |
Income before discontinued operations | | $ | 140,882 | | | $ | 127,653 | | | $ | 46,958 | |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
Total assets for each of the reportable operating segments are summarized as follows as of December 31, 2007, 2006,2013 and 2005:2012 ($ in thousands):
| | As of December 31, | |
Assets: | | 2013 | | | 2012 | |
Southern California | | $ | 1,746,434 | | | $ | 1,675,265 | |
Northern California | | | 1,614,159 | | | | 1,489,095 | |
Seattle Metro | | | 741,533 | | | | 699,465 | |
Other real estate assets | | | 86,745 | | | | 88,330 | |
Net reportable operating segments - real estate assets | | | 4,188,871 | | | | 3,952,155 | |
Real estate under development | | | 50,430 | | | | 66,851 | |
Co-investments | | | 677,133 | | | | 571,345 | |
Cash and cash equivalents, including restricted cash | | | 53,766 | | | | 42,126 | |
Marketable securities | | | 90,084 | | | | 92,713 | |
Notes and other receivables | | | 68,255 | | | | 66,163 | |
Other non-segment assets | | | 58,300 | | | | 55,870 | |
Total assets | | $ | 5,186,839 | | | $ | 4,847,223 | |
| | | Years Ended December 31, |
| | | 2007 | | | 2006 | | | 2005 |
Revenues: |
Southern California | | $ | 215,090 | | $ | 198,929 | | $ | 181,048 |
Northern California | | 99,734 | | | 75,624 | | | 67,099 |
Seattle Metro | | 64,079 | | | 55,721 | | | 50,936 |
Other Regions | | 4,530 | | | 4,496 | | | 4,152 |
Total property revenues | | $ | 383,433 | | $ | 334,770 | | $ | 303,235 |
| | | | | | | |
Net operating income: | | | | | | | |
Southern California | | $ | 147,340 | | $ | 135,969 | | $ | 122,551 |
Northern California | | 65,143 | | | 49,907 | | | 44,528 |
Seattle Metro | | 42,137 | | | 35,138 | | | 31,792 |
Other Regions | | 389 | | | (642) | | | (115) |
Total net operating income | | 255,009 | | | 220,372 | | | 198,756 |
| | | | | | | | | |
Depreciation and amortization: | | | | | | | |
Southern California | | (49,551) | | | (43,017) | | | (39,219) |
Northern California | | (27,892) | | | (17,568) | | | (15,984) |
Seattle Metro | | (15,491) | | | (13,170) | | | (12,343) |
Other Regions | | (7,455) | | | (4,339) | | | (7,303) |
| | | (100,389) | | | (78,094) | | | (74,849) |
Interest: | | | | | | | |
Southern California | | (31,626) | | | (26,432) | | | (27,690) |
Northern California | | (18,741) | | | (18,295) | | | (17,201) |
Seattle Metro | | (6,892) | | | (6,904) | | | (6,508) |
Other Regions | | (23,736) | | | (21,267) | | | (19,385) |
| | | (80,995) | | | (72,898) | | | (70,784) |
| | | | | | | | | |
Amortization of deferred financing costs | | (3,071) | | | (2,745) | | | (1,947) |
General and administrative | | (26,273) | | | (22,234) | | | (19,148) |
Other expenses | | (800) | | | (1,770) | | | (5,827) |
Management and other fees from affiliates | | 5,090 | | | 5,030 | | | 10,951 |
Gain on sale or real estate | | - | | | - | | | 6,391 |
Interest and other income | | 10,310 | | | 6,176 | | | 8,524 |
Equity income in co-investments | | 3,120 | | | (1,503) | | | 18,553 |
Minority interests | | (4,847) | | | (4,977) | | | (5,340) |
Income tax provision | | (400) | | | (525) | | | (2,538) |
| | | | | | | |
Income from continuing operations | | $ | 56,754 | | $ | 46,832 | | $ | 62,742 |
| | | | | | | |
| | | | | | | |
Assets: | | | | | | | |
Southern California | | $ | 1,354,818 | | $ | 1,244,037 | | | |
Northern California | | 829,879 | | | 565,405 | | | |
Pacific Northwest | | 353,737 | | | 317,848 | | | |
Other Regions | | 37,338 | | | 76,882 | | | |
Net reportable operating segments - real estate assets | | 2,575,772 | | | 2,204,172 | | | |
Real estate - held for sale, net | | - | | | 41,221 | | | |
Real estate under development | | 233,445 | | | 107,620 | | | |
Co-investments | | 64,191 | | | 56,318 | | | |
Notes and other receivables | | 50,536 | | | 19,404 | | | |
Other non-segment assets | | 56,379 | | | 57,105 | | | |
Total assets | | $ | 2,980,323 | | $ | 2,485,840 | | | |
(16)(15) 401(k) Plan
The Operating PartnershipCompany has a 401(k) benefit plan (the Plan)“Plan”) for all full-time employees who have completed six months of service. Employees may contribute up to 23% of their compensation,Employee contributions are limited by the maximum allowed under Section 401(k) of the Internal Revenue Code. The Operating PartnershipCompany matches the employee contributions for non-highly compensated personnel, up to 50% of their contribution up to a specified maximum. Operating PartnershipCompany contributions to the Plan were approximately $267, $226,$0.2 million, $0.2 million, and $98$0.3 million for the years ended December 31, 2007, 2006,2013, 2012, and 2005.2011, respectively.
(17) Fair Value of Financial Instruments
Management believes that the carrying amounts of its variable rate mortgage notes payable, lines of credit, notes receivable and other receivables from related parties, and notes and other receivables approximate fair value as of December 31, 2007 and 2006, because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available to the Operating Partnership for similar instruments. Management has estimated that the fair value of the Operating Partnership’s $1.25 billion of fixed rate mortgage notes payable and exchangeable bonds at December 31, 2007 are approximately $1.30 billion based on the terms of existing mortgage notes payable compared to those available in the marketplace. At December 31, 2006, the Operating Partnership’s fixed rate mortgage notes payable of $1.13 billion had an approximate market value of $1.22 billion. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, marketable securities, accounts payable and accrued liabilities, other liabilities and dividends payable approximate fair value as of December 31, 2007 and 2006 due to the short-term maturity of these instruments.
(18)(16) Commitments and Contingencies
AtAs of December 31, 2007,2013, the Operating PartnershipCompany had five non-cancelable ground leases for certain apartment communities and buildings that expire between 2027 and 2080. Land2082. Ground lease payments are typically the greater of a stated minimum or a percentage of gross rents generated by these apartment communities. Total minimum lease commitments, under landground leases and operating leases, are approximately $1.8$1.7 million per year for the next five years.
The Operating Partnership has a performance guarantee with a commercial bank related to the Northwest Gateway development.
To the extent that an environmental matter arises or is identified in the future that has other than a remote risk as defined in SFAS 5, of having a material impact on the financial statements, the Operating PartnershipCompany will disclose the estimated range of possible outcomes, and, if an outcome is probable, accrue an appropriate liability for remediation and other potential liability. The Operating PartnershipCompany will consider whether such occurrence results in an impairment of value on the affected property and, if so, accrue an appropriate reserve for impairment.impairment will be recognized.
Except with respect to three Properties,communities, the Operating PartnershipCompany has no indemnification agreements from third parties for potential environmental clean-up costs at its Properties.communities. The Operating PartnershipCompany has no way of determining at this time the magnitude of any potential liability to which it may be subject arising out of unknown environmental conditions or violations with respect to the propertiescommunities formerly owned by the Operating Partnership.Company. No assurance can be given that existing environmental studies with respect to any of the Propertiescommunities reveal all environmental liabilities, that any prior owner or operator of a Property did not create any material environmental condition not known to the Operating Partnership,Company, or that a material environmental condition does not otherwise exist as to any one or more of the Properties.communities. The Operating PartnershipCompany has limited insurance coverage for the types of environmental liabilities described above.
The Operating Partnership may enterCompany has entered into transactions that couldmay require the Operating PartnershipCompany to pay the tax liabilities of the partners in the Operating Partnership or in the DownREIT entities. These transactions which are within the Operating Partnership’sCompany’s control. Although the Operating PartnershipCompany plans to hold the contributed assets or defer recognition of gain on their sale pursuant to like-kind exchange rules under Section 1031 of the Internal Revenue Code the Operating PartnershipCompany can provide no assurance that it will be able to do so and if such tax liabilities were incurred they may to have a material impact on the Operating Partnership’sCompany’s financial position.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
There have been an increasing number of lawsuits against owners and managers of apartment communities alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Operating PartnershipCompany has been sued for mold related matters and has settled some, but not all, of such matters. Insurance carriers have reacted to mold
related liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates. The Operating PartnershipCompany has, however, purchased pollution liability insurance, which includes some coverage for mold. The Operating PartnershipCompany has adopted programs designedpolicies to manage the existencepromptly address and resolve reports of mold in its properties as well as guidelines for promptly addressingwhen it is detected, and resolving reports of mold to minimize any impact mold might have on residents orof the property. The Company believes its mold policies and proactive response to address any known existence, reduces its risk of loss from these cases. There can be no assurances that the Company has identified and responded to all mold occurrences, but the company promptly addresses all known reports of mold. Liabilities resulting from such mold related matters are not expected to have a material adverse effect on the Operating Partnership’sCompany’s financial condition, results of operations or cash flows. As of December 31, 2013, potential liabilities for mold and other environmental liabilities are not quantifiable and an estimate of possible loss cannot be made.
The Operating PartnershipCompany carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties.communities. There are, however, certain types of extraordinary losses, such as, for example, losses forfrom terrorism or earthquake,earthquakes, for which the Operating PartnershipCompany does not have insurance coverage. Substantially all of the Propertiescommunities are located in areas that are subject to earthquake activity. The Company has established a wholly owned insurance subsidiary, Pacific Western Insurance LLC (“PWI”). Through PWI, the Company is self-insured as it relates to earthquake related losses. Additionally, since January 2008, PWI has provided property and casualty insurance coverage for the first $5.0 million of the Company’s property level insurance claims per incident. As of December 31, 2013, PWI has cash and marketable securities of approximately $40 million. These assets are consolidated in the Company’s financial statements. Beginning in 2013, the Company has obtained limited third party seismic insurance on selected assets in which it holds an ownership interest in.
The Company provided a payment guarantee to the counterparties in relation to the total return swaps entered into by the joint venture responsible for the development of The Huxley and The Dylan communities. Further the Company has guaranteed completion of development and made certain debt service guarantees for The Huxley and The Dylan. The outstanding balance for the loans is included in the debt line item in the balance sheet of the co-investments included in Note 3. The payment guarantee is for the payment of the amounts due to the counterparty related total return swaps which are scheduled to mature in September and December 2016. The maximum exposure of the guarantee as of December 31, 2013 was $96.3 million based on the aggregate outstanding debt amount.
Since the announcement of the merger agreement on December 19, 2013, three putative class action and shareholder derivative actions have been filed on behalf of alleged BRE stockholders and/or BRE itself in the Circuit Court for Baltimore City, Maryland, under the following captions: Sutton v. BRE Properties, Inc., et al., No. 24-C-13-008425, filed December 23, 2013; Applegate v. BRE Properties, Inc., et al., No. 24-C-14-00002, filed December 30, 2013; and Lee v. BRE Properties, Inc., et al., No. 24-C-14-00046, filed January 3, 2014.
On February 7, 2014, Plaintiffs filed identical, amended complaints in the three pending actions. The amended complaints add allegations that disclosures regarding the proposed merger in the joint proxy statement/prospectus filed with the SEC on January 29, 2014 are inadequate.
All of these complaints name as defendants BRE, the BRE Board, Essex, and Merger Sub, and allege that the BRE Board breached its fiduciary duties to BRE’s stockholders and/or to BRE itself, and that the merger involves an unfair price, an inadequate sales process, and unreasonable deal protection devices that purportedly preclude competing offers. The Operating Partnershipcomplaints further allege that Essex, Merger Sub, and, in some cases, BRE aided and abetted those alleged breaches of duty. The complaints seek injunctive relief, including enjoining or rescinding the merger, and an award of other unspecified attorneys’ and other fees and costs, in addition to other relief. Essex management believes that the allegations in the complaints against them are without merit and intend to defend vigorously against them.
The Company is subject to various other lawsuits in the normal course of its business operations. Such lawsuits couldare not expected to have a material adverse effect on the Operating Partnership’sCompany’s financial condition, results of operations or cash flows.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
(17) Subsequent Events
In January 2014, the Company sold Vista Capri, a 106 unit apartment community located in San Diego, CA for $14.4 million.
In January 2014, the Company expanded its unsecured revolving credit facility to $1.0 billion from $600 million, and included an accordion feature pursuant to which the Company could expand to $1.5 billion. The facility matures in December 2017, with one 18-month extension option, subject to specified conditions and the payment of an extension fee. The new facility carries an interest rate of LIBOR plus 0.95% based on the Company’s current credit ratings.
In January 2014, the Company extended the $25.0 million working capital unsecured line of credit for two additional years and reduced the pricing which carries an interest rate of LIBOR plus 0.95% based on a tiered rate structure tied to the Company’s current credit ratings.
In January 2014, the Company’s $350 million unsecured term loan was amended and the underlying interest rate on the term loan, which is based on a tiered rate structure tied to the Company’s corporate ratings, was reduced from LIBOR plus 1.20% to LIBOR plus 1.05%.
During the first quarter of 2014 through February 24, 2014, ESS sold 462,555 shares of common stock for $74.9 million, net of fees and commissions at an average price of $162.97.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
(18) Quarterly Results of Operations (Unaudited)
Essex Property Trust, Inc.
The following is a summary of quarterly results of operations for 20072013 and 2006:2012 ($ in thousands, except per share and dividend amounts):
| | Quarter ended | | | Quarter ended | | | Quarter ended | | | Quarter ended | |
| | December 31 | | | September 30 | | | June 30 | | | March 31 | |
2013: | | | | | | | | | | | | |
Total property revenues | | $ | 155,986 | | | $ | 152,177 | | | $ | 148,783 | | | $ | 145,057 | |
| | | | | | | | | | | | | | | | |
Income before discontinued operations | | $ | 20,020 | | | $ | 62,718 | | | $ | 28,983 | | | $ | 29,161 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 36,903 | | | $ | 75,875 | | | $ | 29,575 | | | $ | 29,702 | |
Net income available to common stockholders | | $ | 31,874 | | | $ | 68,788 | | | $ | 24,946 | | | $ | 25,203 | |
Per share data: | | | | | | | | | | | | | | | | |
Net income: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.85 | | | $ | 1.84 | | | $ | 0.67 | | | $ | 0.68 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 0.85 | | | $ | 1.84 | | | $ | 0.67 | | | $ | 0.68 | |
Market price: | | | | | | | | | | | | | | | | |
High | | $ | 165.44 | | | $ | 172.16 | | | $ | 171.11 | | | $ | 156.36 | |
Low | | $ | 137.53 | | | $ | 139.64 | | | $ | 147.56 | | | $ | 147.06 | |
Close | | $ | 143.51 | | | $ | 147.70 | | | $ | 158.92 | | | $ | 150.58 | |
Dividends declared | | $ | 1.21 | | | $ | 1.21 | | | $ | 1.21 | | | $ | 1.21 | |
| | | | | | | | | | | | | | | | |
2012: | | | | | | | | | | | | | | | | |
Total property revenues | | $ | 140,294 | | | $ | 133,760 | | | $ | 128,465 | | | $ | 124,177 | |
| | | | | | | | | | | | | | | | |
Income before discontinued operations | | $ | 49,158 | | | $ | 19,731 | | | $ | 42,050 | | | $ | 16,714 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 49,640 | | | $ | 20,221 | | | $ | 42,490 | | | $ | 27,239 | |
Net income available to common stockholders | | $ | 43,793 | | | $ | 16,219 | | | $ | 37,078 | | | $ | 22,722 | |
Per share data: | | | | | | | | | | | | | | | | |
Net income: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.22 | | | $ | 0.46 | | | $ | 1.07 | | | $ | 0.67 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 1.22 | | | $ | 0.45 | | | $ | 1.07 | | | $ | 0.67 | |
Market price: | | | | | | | | | | | | | | | | |
High | | $ | 150.71 | | | $ | 160.64 | | | $ | 161.53 | | | $ | 151.54 | |
Low | | $ | 136.38 | | | $ | 147.38 | | | $ | 146.05 | | | $ | 136.43 | |
Close | | $ | 146.65 | | | $ | 148.24 | | | $ | 153.92 | | | $ | 151.51 | |
Dividends declared | | $ | 1.10 | | | $ | 1.10 | | | $ | 1.10 | | | $ | 1.10 | |
F-45
| | | Quarter ended | | | Quarter ended | | | Quarter ended | | | Quarter ended |
| | | December 31(1) | | | September 30(1) | | | June 30(1) | | | March 31(1) |
2007: | | | | | | | | | | | | |
Total property revenues | | $ | 101,138 | | $ | 97,780 | | $ | 94,508 | | $ | 90,007 |
| | | | | | | | | | | | |
Income before discontinued operations | | $ | 8,384 | | $ | 15,454 | | $ | 15,010 | | $ | 17,906 |
| | | | | | | | | | | | |
Net income | | $ | 61,175 | | $ | 16,164 | | $ | 16,085 | | $ | 43,876 |
Net income available to common |
units | | $ | 56,304 | | $ | 11,294 | | $ | 11,216 | | $ | 39,074 |
Per unit data: |
Net income: |
Basic | | $ | 2.04 | | $ | 0.41 | | $ | 0.42 | | $ | 1.51 |
| | | | | | | | | | | | |
Diluted | | $ | 2.02 | | $ | 0.40 | | $ | 0.41 | | $ | 1.46 |
| | | | | | | | | | | | |
Distributions per common unit | | $ | 0.93 | | $ | 0.93 | | $ | 0.93 | | $ | 0.93 |
| | | | | | | | | | | | |
2006: | | | | | | | | | |
Total property revenues | | $ | 88,118 | | $ | 84,740 | | $ | 81,665 | | $ | 80,247 |
| | | | | | | | | | | | |
Income before discontinued operations | | $ | 13,440 | | $ | 14,281 | | $ | 9,215 | | $ | 9,896 |
| | | | | | | | | | | | |
Net income | | $ | 21,926 | | $ | 16,412 | | $ | 27,450 | | $ | 14,059 |
Net income available to common |
units | | $ | 16,988 | | $ | 12,062 | | $ | 24,402 | | $ | 11,012 |
Per unit data: |
Net income: |
Basic | | $ | 0.65 | | $ | 0.47 | | $ | 0.97 | | $ | 0.44 |
| | | | | | | | | | | | |
Diluted | | $ | 0.64 | | $ | 0.46 | | $ | 0.95 | | $ | 0.43 |
| | | | | | | | | | | | |
Distributions per common unit | | $ | 0.84 | | $ | 0.84 | | $ | 0.84 | | $ | 0.84 |
| | | | | | | | | | | | |
(1) | Net earnings from discontinued operations have been reclassified for all periods presented. |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Financial Statement Schedule III
Real Estate and Accumulated Depreciation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20072013, 2012, and 2011
(Dollars
Essex Portfolio, L.P.
The following is a summary of quarterly results of operations for 2013 and 2012 ($ in thousands)thousands, except per unit and distribution amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Initial cost | | | | Gross amount carried at close of period | | | | | | | | |
| | | | | | | | | | | Buildings and | | subsequent to | Land and | | Buildings and | | | | Accumulated | | Date of | | Date | | Lives |
Property | | Units | | Location | | Encumbrance | | Land | | improvements | | acquisition | | improvements | | improvements | | Total(1) | | depreciation | | construction | | acquired | | (years) |
Encumbered apartment communities | | | | | | | | | | | | | | | | | | | | | | | | |
Foothill Commons | | 360 | | Bellevue, WA | $ | | $ | 2,435 | $ | 9,821 | $ | 6,074 | $ | 2,440 | $ | 15,890 | $ | 18,330 | $ | 9,298 | | 1978 | | 03/90 | | 3-30 |
Montclaire, The (Oak Pointe) | 390 | | Sunnyvale, CA | | | | 4,842 | | 19,776 | | 12,774 | | 4,847 | | 32,545 | | 37,392 | | 17,967 | | 1973 | | 12/88 | | 3-30 |
Palisades, The | | 192 | | Bellevue, WA | | | | 1,560 | | 6,242 | | 9,421 | | 1,565 | | 15,658 | | 17,223 | | 6,617 | | 1969/1977(2) | 05/90 | | 3-30 |
Pathways | | 296 | | Long Beach, CA | | | | 4,083 | | 16,757 | | 15,174 | | 6,239 | | 29,775 | | 36,014 | | 13,093 | | 1975 | | 02/91 | | 3-30 |
Stevenson Place | | 200 | | Fremont, CA | | | | 996 | | 5,582 | | 7,879 | | 1,001 | | 13,456 | | 14,457 | | 8,763 | | 1971 | | 04/83 | | 3-30 |
Bridgeport (Summerhill Commons) | 184 | | Newark, CA | | | | 1,608 | | 7,582 | | 5,984 | | 1,525 | | 13,649 | | 15,174 | | 7,019 | | 1987 | | 07/87 | | 3-30 |
Summerhill Park | | 100 | | Sunnyvale, CA | | | | 2,654 | | 4,918 | | 1,149 | | 2,656 | | 6,065 | | 8,721 | | 3,978 | | 1988 | | 09/88 | | 3-30 |
Woodland Commons | | 236 | | Bellevue, WA | | | | 2,040 | | 8,727 | | 4,293 | | 2,044 | | 13,016 | | 15,060 | | 7,236 | | 1978 | | 03/90 | | 3-30 |
| | | | | | | 90,005 | | 20,218 | | 79,405 | | 62,748 | | 22,317 | | 140,054 | | 162,371 | | 73,972 | | | | | | |
Fountain Court | | 320 | | Seattle, WA | | | | 6,702 | | 27,306 | | 1,691 | | 6,985 | | 28,714 | | 35,699 | | 7,679 | | 2000 | | 03/00 | | 3-30 |
Hillcrest Park | | 608 | | Newbury Park, CA | | 15,318 | | 40,601 | | 12,353 | | 15,755 | | 52,517 | | 68,272 | | 16,713 | | 1973 | | 03/98 | | 3-30 |
Hillsborough Park | | 235 | | La Habra, CA | | | | 6,291 | | 15,455 | | 827 | | 6,272 | | 16,302 | | 22,573 | | 4,728 | | 1999 | | 09/99 | | 3-30 |
| | | | | | | 76,732 | | 28,311 | | 83,362 | | 14,871 | | 29,012 | | 97,532 | | 126,544 | | 29,120 | | | | | | |
Bel Air | | 462 | | San Ramon, CA | | | | 12,105 | | 18,252 | | 18,642 | | 12,682 | | 36,317 | | 48,999 | | 12,687 | | 1988 | | 01/97 | | 3-30 |
Waterford, The | | 238 | | San Jose, CA | | | | 11,808 | | 24,500 | | 11,688 | | 15,165 | | 32,831 | | 47,996 | | 7,659 | | 2000 | | 06/00 | | 3-30 |
| | | | | | | 58,139 | | 23,913 | | 42,752 | | 30,329 | | 27,847 | | 69,147 | | 96,994 | | 20,346 | | | | | | |
Bonita Cedars | | 120 | | Bonita, CA | | | | 2,496 | | 9,913 | | 977 | | 2,503 | | 10,883 | | 13,386 | | 1,983 | | 1983 | | 12/02 | | 3-30 |
Bristol Commons | | 188 | | Sunnyvale, CA | | | | 5,278 | | 11,853 | | 2,447 | | 5,293 | | 14,285 | | 19,578 | | 5,889 | | 1989 | | 01/97 | | 3-30 |
Castle Creek | | 216 | | Newcastle, WA | | | | 4,149 | | 16,028 | | 2,020 | | 4,833 | | 17,364 | | 22,197 | | 6,593 | | 1997 | | 12/97 | | 3-30 |
Forest View | | 192 | | Renton, WA | | | | 3,731 | | 14,530 | | 689 | | 3,731 | | 15,219 | | 18,950 | | 2,233 | | 1998 | | 10/03 | | 3-30 |
Mira Monte | | 355 | | Mira Mesa, CA | | | | 7,165 | | 28,459 | | 6,909 | | 7,186 | | 35,347 | | 42,533 | | 6,243 | | 1982 | | 12/02 | | 3-30 |
Mission Hills | | 282 | | Oceanside, CA | | | | 10,099 | | 38,778 | | 1,920 | | 10,167 | | 40,630 | | 50,797 | | 3,611 | | 1984 | | 7/05 | | 3-30 |
Walnut Heights | | 163 | | Walnut, CA | | | | 4,858 | | 19,168 | | 1,140 | | 4,887 | | 20,280 | | 25,166 | | 2,927 | | 1964 | | 10/03 | | 3-30 |
Windsor Ridge | | 216 | | Sunnyvale, CA | | | | 4,017 | | 10,315 | | 3,855 | | 4,021 | | 14,167 | | 18,187 | | 8,183 | | 1989 | | 03/89 | | 3-30 |
| | | | | | | 100,000 | | 41,793 | | 149,044 | | 19,959 | | 42,621 | | 168,174 | | 210,796 | | 37,662 | | | | | | |
Alpine Village | | 306 | | Alpine, CA | | 17,016 | | 4,967 | | 19,728 | | 1,994 | | 4,982 | | 21,707 | | 26,689 | | 3,845 | | 1971 | | 12/02 | | 3-30 |
Anchor Village | | 301 | | Mukilteo, WA | | 10,750 | | 2,498 | | 10,595 | | 5,433 | | 2,681 | | 15,845 | | 18,526 | | 7,092 | | 1981 | | 01/97 | | 3-30 |
Barkley, The | | 161 | | Anaheim, CA | | 4,883 | | 2,272 | | 8,520 | | 1,705 | | 2,353 | | 10,144 | | 12,497 | | 3,253 | | 1984 | | 04/00 | | 3-30 |
Bluffs II, The | | 224 | | San Diego, CA | | 12,137 | | 3,405 | | 7,743 | | 5,979 | | 3,442 | | 13,685 | | 17,127 | | 3,756 | | 1974 | | 06/97(3) | 3-30 |
Brentwood (Hearthstone) | | 140 | | Santa Ana, CA | | 9,333 | | 2,833 | | 11,303 | | 4,341 | | 3,502 | | 14,975 | | 18,477 | | 2,798 | | 1970 | | 11/01 | | 3-30 |
Brighton Ridge | | 264 | | Renton, WA | | 16,013 | | 2,623 | | 10,800 | | 3,789 | | 2,656 | | 14,555 | | 17,212 | | 6,030 | | 1986 | | 12/96 | | 3-30 |
Brookside Oaks | | 170 | | Sunnyvale, CA | | 14,130 | | 7,301 | | 16,310 | | 16,792 | | 10,301 | | 30,102 | | 40,403 | | 5,312 | | 1973 | | 06/00 | | 3-30 |
Cairns, The | | 100 | | Seattle, WA | | 11,552 | | 6,937 | | 20,679 | | 62 | | 6,939 | | 20,739 | | 27,678 | | 396 | | 2006 | | 06/07 | | 3-30 |
Camarillo Oaks | | 564 | | Camarillo, CA | | 53,052 | | 10,953 | | 25,254 | | 5,109 | | 11,075 | | 30,241 | | 41,316 | | 13,871 | | 1985 | | 07/96 | | 3-30 |
Camino Ruiz Square | | 160 | | Camarillo, CA | | 21,110 | | 6,871 | | 26,119 | | 64 | | 6,878 | | 26,176 | | 33,054 | | 876 | | 1990 | | 12/06 | | 3-30 |
Canyon Point | | 250 | | Bothell, WA | | 15,736 | | 4,692 | | 18,288 | | 1,082 | | 4,693 | | 19,370 | | 24,062 | | 2,785 | | 1990 | | 10/03 | | 3-30 |
Capri at Sunny Hills | | 100 | | Fullerton, CA | | 19,150 | | 3,337 | | 13,320 | | 3,962 | | 3,867 | | 16,752 | | 20,619 | | 3,444 | | 1961 | | 09/01 | | 3-30 |
Cardiff by the Sea | | 300 | | Cardiff, CA | | 42,200 | | 13,724 | | 57,395 | | 439 | | 14,224 | | 57,881 | | 72,105 | | 1,355 | | 1986 | | 04/07 | | 3-30 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | (Continued) |
| | Quarter ended | | | Quarter ended | | | Quarter ended | | | Quarter ended | |
| | December 31 | | | September 30 | | | June 30 | | | March 31 | |
2013: | | | | | | | | | | | | |
Total property revenues | | $ | 155,986 | | | $ | 152,177 | | | $ | 148,783 | | | $ | 145,057 | |
| | | | | | | | | | | | | | | | |
Income before discontinued operations | | $ | 20,020 | | | $ | 62,718 | | | $ | 28,983 | | | $ | 29,161 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 36,903 | | | $ | 75,875 | | | $ | 29,575 | | | $ | 29,702 | |
Net income available to common unitholders | | $ | 33,776 | | | $ | 72,777 | | | $ | 26,493 | | | $ | 26,703 | |
Per unit data: | | | | | | | | | | | | | | | | |
Net income: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.87 | | | $ | 1.84 | | | $ | 0.67 | | | $ | 0.68 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 0.86 | | | $ | 1.84 | | | $ | 0.67 | | | $ | 0.68 | |
Distributions declared | | $ | 1.21 | | | $ | 1.21 | | | $ | 1.21 | | | $ | 1.21 | |
| | | | | | | | | | | | | | | | |
2012: | | | | | | | | | | | | | | | | |
Total property revenues | | $ | 140,294 | | | $ | 133,760 | | | $ | 128,465 | | | $ | 124,177 | |
| | | | | | | | | | | | | | | | |
Income before discontinued operations | | $ | 49,158 | | | $ | 19,731 | | | $ | 42,050 | | | $ | 16,714 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 49,640 | | | $ | 20,221 | | | $ | 42,490 | | | $ | 27,239 | |
Net income available to common unitholders | | $ | 46,581 | | | $ | 17,296 | | | $ | 39,580 | | | $ | 24,314 | |
Per unit data: | | | | | | | | | | | | | | | | |
Net income: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.23 | | | $ | 0.46 | | | $ | 1.08 | | | $ | 0.67 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 1.23 | | | $ | 0.45 | | | $ | 1.07 | | | $ | 0.67 | |
Distributions declared | | $ | 1.10 | | | $ | 1.10 | | | $ | 1.10 | | | $ | 1.10 | |
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20072013, 2012, and 2011