The following discussion is based primarily on the consolidated unaudited financial statements of Essex Property Trust, Inc. ("Essex" or the "Company") for the three and nine months ended September 30, 2003 and 2002. This information should be read in conjunction with the accompanying consolidated unaudited financial statements and notes thereto. These consolidated financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results and all such adjustments are of a normal recurring nature.
Substantially all of the assets of the Company are held by, and substantially all operations are conducted through, Essex Portfolio, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership and, as of September 30, 2003, December 31, 2002 and September 30, 2002, with a 90.1%, 90.0% and 88.7 % general partnership interest in the Operating Partnership, respectively. The Company has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes.
General Background
The Company's property revenues are generated primarily from multifamily property operations, which accounted for greater than 96% of its property revenues for the three and nine months ended September 30, 2003 and 2002. The Company's multifamily properties (the "Properties") are located in Southern California (Los Angeles, Ventura, Orange and San Diego counties), Northern California (the San Francisco Bay Area), the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas) and other areas (Houston, Texas, Las Vegas, Nevada and Hemet, California).
Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund organized by the Company in 2001 to add value through rental growth and asset appreciation, utilizing the Company's development, redevelopment and asset management capabilities. Currently the Fund is considered fully invested based on its acquisitions to date and anticipated development and redevelopment expenditures. The Fund now expects to utilize leverage of approximately 61% of the value of the underlying real estate portfolio. The Company is committed to invest 21.4% of the aggregate capital committed to the Fund. In addition, the Company will be compensated by the Fund for its asset management, property management, development and redevelopment services and may receive incentive payments if the Fund exceeds certain financial return benchmarks. Since its formation, the Fund has acquired ownership interests in 17 multifamily residential properties, representing 4,926 apartment units with an aggregate purchase price of approximately $500 million, excluding redevelopment expenses, and disposed of two multifamily residential property, consisting of 530 apartment units at a gross sales price of approximately $73 million resulting in a net realized gain of approximately $5.7 million. In addition, three development land parcels, where approximately 612 apartment units are planned for construction, have been purchased by the Fund with a total estimated cost for the projects of approximately $107.5 million. As of September 30, 2003, the remaining commitments to fund these projects is approximately $48.8 million of which approximately $10.4 million is the Company's commitment. The 132- unit Kelvin Avenue development project in Irvine, California is still in the process of obtaining entitlements and its estimated total costs have not yet been finalized and is not included in the numbers above.
The Company has elected to be treated as a REIT for federal income tax purposes, commencing with the year ended December 31, 1994. The Company provides a majority of its fee based asset management and disposition services as well as third-party property management and leasing services through Essex Management Corporation ("EMC"), in order to maintain compliance with REIT tax rules. The Company owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of the Company own 100% of EMC's 1,000 shares of Common Stock.
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Since the Company's initial public offering (the "IPO") in June 1994, the Company has acquired ownership interests in 105 multifamily residential properties, its headquarters building, three Southern California office buildings, five recreational vehicle parks, and two manufactured housing communities. With respect to the multifamily residential properties that the Company acquired, 14 are located in Northern California, 69 are located in Southern California, 15 are located in the Seattle Metropolitan Area, five are located in the Portland Metropolitan Area and two are located in other areas. In total, these acquisitions consist of 21,536 units with total capitalized acquisition costs of approximately $2,005.2 million. Additionally, since its IPO, the Company has developed and has ownership interests in ten multifamily properties that have reached stabilized operations. These development properties consist of 2,406 units with total capitalized development costs of $309.5 million. As part of its active portfolio management strategy, the Company has disposed of, since its IPO, twelve multifamily residential properties (six in Northern California, five in Southern California and one in the Pacific Northwest) consisting of a total of 2,014 units, six retail shopping centers in the Portland, Oregon metropolitan area and its former headquarters building located in Northern California at an aggregate gross sales price of approximately $259.5 million resulting in a net realized gain of approximately $53.8 million.
The Company (excluding the Fund's development communities) has ownership interests in and is developing three multifamily residential communities, with an aggregate of 756 multifamily units. In connection with these development projects, the Company has directly entered into contractual construction related commitments with unrelated third parties and the total projected estimated cost for these projects is approximately $122.2 million. As of September 30, 2003, the remaining commitment to fund these projects is approximately $26.0 million.
Results of Operations
Comparison of the Three Months Ended September 30, 2003 to the Three Months Ended September 30, 2002
Average financial occupancy rates of the Company's multifamily Quarterly Same Store Properties (stabilized properties consolidated by the Company for each of the three months ended September 30, 2003 and 2002) was 96.0% and 96.1%, for the three months ended September 30, 2003 and 2002, respectively. "Financial occupancy" is defined as the percentage resulting from dividing actual rental revenue by total possible rental revenue. Actual rental revenue represents contractual rental revenue pursuant to leases without considering delinquency and concessions. Total possible rental revenue represents the value of all apartment units, with occupied units valued at contractual rental rates pursuant to leases and vacant units valued at estimated market rents. We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate. Financial occupancy rates disclosed by other REITs may not be comparable to our calculation of financial occupancy.
The regional breakdown of average financial occupancy for the multifamily Quarterly Same Store Properties for the three months ended September 30, 2003 and 2002 are as follows:
Three months ended
September 30,
----------------------
2003 2002
--------- -----------
Southern California 97.0% 96.3%
Northern California 95.6% 96.8%
Pacific Northwest 94.8% 94.8%
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Total Revenues increased by $9,442,000 or 19.4% to $58,237,000 in the third quarter of 2003 from $48,795,000 in the third quarter of 2002. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the Quarterly Same Store Properties.
Three Months Ended
September 30,
Number of -------------------- Dollar Percentage
Properties 2003 2002 Change Change
----------- --------- --------- --------- -----------
Revenues: (Dollars in thousands)
Property revenues - quarterly
Quarterly Same Store Properties
Southern California 22 $ 17,914 $ 17,263 $ 651 3.8 %
Northern California 16 12,189 13,589 (1,400) (10.3)
Pacific Northwest 23 10,032 10,534 (502) (4.8)
----------- --------- --------- --------- -----------
Properties 61 40,135 41,386 (1,251) (3.0)
Property revenues - properties
acquired subsequent to
June 30, 2002 (1) 15,120 2,243 12,877 574.1
--------- --------- --------- -----------
Total property revenues 55,255 43,629 11,626 26.6
Interest and other income 2,982 5,166 (2,184) (42.3)
--------- --------- --------- -----------
Total revenues $ 58,237 $ 48,795 $ 9,442 19.4 %
========= ========= ========= ===========
(1) Also includes four office buildings, five recreational vehicle parks, two manufactured housing communities, redevelopment communities, and development communities.
As set forth in the above table, the $9,442,000 net increase in total revenues was mainly attributable to an increase of $12,877,000 attributable to multifamily properties acquired subsequent to June 30, 2002, four office buildings, five recreational vehicle parks, two manufactured housing communities, redevelopment communities and development communities, which was offset in part by a decrease in interest and other income of $2,184,000 and a decrease in revenues from the Quarterly Same Store Properties of $1,251,000. Subsequent to June 30, 2002, the Company acquired interests in 21 multifamily properties, two office buildings, five recreational vehicle parks, two manufactured housing communities and achieved stabilized operations in three redevelopment communities and one development community (the "Quarterly Acquisitions Properties").
Interest and other income decreased by $2,184,000 or 42.3% to $2,982,000 in the third quarter of 2003 from $5,166,000 in the third quarter of 2002. The decrease primarily relates to the repayment of notes receivable which resulted in a decrease in interest income on notes receivables and the sale of co- investment assets resulting in the decrease in income earned on the Company's co-investments.
Property revenues from the Quarterly Same Store Properties decreased by $1,251,000 or 3.0% to $40,135,000 in the third quarter of 2003 from $41,386,000 in the third quarter of 2002. The majority of this decrease was attributable to the 16 Quarterly Same Store Properties located in Northern California and the 23 Quarterly Same Store Properties located in the Pacific Northwest. The property revenues of the Quarterly Same Store Properties in Northern California decreased by $1,400,000 or 10.3% to $12,189,000 in the third quarter of 2003 from $13,589,000 in the third quarter of 2002. The decrease in Northern California is primarily attributable to rental rate decreases and a decrease in financial occupancy to 95.6% in the third quarter of 2003 from 96.8% in the third quarter of 2002. The property revenues of the Quarterly Same Store Properties in the Pacific Northwest decreased by $502,000 or 4.8% to $10,032,000 in the third quarter of 2003 from $10,534,000 in the third quarter of 2002. The $502,000 decrease in the Pacific Northwest is primarily attributable to rental rate decreases. Financial occupancy remained constant at 94.8% in the third quarter of 2003 as compared to the third quarter of 2002. The 22 Quarterly Same Store Properties located in Southern California offset the net decrease in total property revenues from the other Quarterly Same Store Properties. The property revenues for these properties increased by $651,000 or 3.8% to $17,914,000 in the third quarter of 2003 from $17,263,000 in the third quarter of 2002. The $651,000 increase is primarily attributable to rental rate increases and an increase in financial occupancy to 97.0% in the third quarter of 2003 from 96.3% in the third quarter of 2002.
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Total Expenses increased by $11,156,000 or approximately 34.6% to $43,373,000 in the third quarter of 2003 from $32,217,000 in the third quarter of 2002. This increase was mainly due to an increase in property operating expenses of $8,867,000 or 40.4% to $30,834,000 in the third quarter of 2003 from $21,967,000 in the third quarter of 2002. Of such operating expense increase $9,443,000 was attributable to the Quarterly Acquisition Properties, which was offset by a small decrease in operating expense attributable to the Quarterly Same Store Properties. Interest expense increased by $1,907,000 or 22.1% to $10,528,000 in the third quarter of 2003 from $8,621,000 in the third quarter of 2002. The increase in interest expense is due to increases in the mortgage notes payable and line of credit balances
Minority interests decreased by $360,000 or 6.0% to $5,604,000 in the third quarter of 2003 from $5,964,000 in the third quarter of 2002. This is primarily due to the decrease in net income of the Operating Partnership.
Net incomedecreased by $1,354,000 or 12.8% to $9,260,000 in the third quarter of 2003 from $10,614,000 in the third quarter of 2002. The decrease in net income is mainly attributable to the factors noted above.
Comparison of the Nine Months Ended September 30, 2003 to the Nine Months Ended September 30, 2002
Average financial occupancy rates of the Company's multifamily Same Store Properties (stabilized properties consolidated by the Company for each of the nine months ended September 30, 2003 and 2002) was 95.6% and 94.4%, for the nine months ended September 30, 2003 and 2002, respectively.
The regional breakdown of average financial occupancy for the multifamily Same Store Properties for the nine months ended September 30, 2003 and 2002 are as follows:
Nine Months Ended
September 30,
----------------------
2003 2002
--------- -----------
Southern California 96.0% 94.3%
Northern California 95.6% 95.7%
Pacific Northwest 94.8% 92.8%
Total Revenues increased by $26,491,000 or 17.8% to $175,679,000 in the nine months ended September 30, 2003 from $149,188,000 in the nine months ended September 30, 2002.
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The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the Same Store Properties.
Nine Months Ended
September 30,
Number of -------------------- Dollar Percentage
Properties 2003 2002 Change Change
----------- --------- --------- --------- -----------
Revenues: (Dollars in thousands)
Property revenues
Same Store Properties
Southern California 22 $ 52,922 $ 50,413 $ 2,509 5.0 %
Northern California 16 38,182 42,165 (3,983) (9.4)
Pacific Northwest 23 30,567 31,747 (1,180) (3.7)
----------- --------- --------- --------- -----------
Properties 61 121,671 124,325 (2,654) (2.1)
Property revenues - properties
acquired subsequent to
December 31, 2001 (1) 44,761 5,902 38,859 658.4
--------- --------- --------- -----------
Total property revenues 166,432 130,227 36,205 27.8
Interest and other income 9,247 18,961 (9,714) (51.2)
--------- --------- --------- -----------
Total revenues $ 175,679 $ 149,188 $ 26,491 17.8 %
========= ========= ========= ===========
(1) Also includes four office buildings, five recreational vehicle parks, two manufactured housing communities, redevelopment communities, and development communities.
As set forth in the above table, the $26,491,000 net increase in total revenues was mainly attributable to an increase of $38,859,000 attributable to multifamily properties acquired subsequent to December 31, 2001, four office buildings, five recreational vehicle parks, two manufactured housing communities, redevelopment communities and development communities, which was offset in part by a decrease in interest and other income of $9,714,000 and a decrease in revenue from the Same Store Properties of $2,654,000. Subsequent to December 31, 2001, the Company acquired interests in 21 multifamily properties, two office buildings, five recreational vehicle parks, two manufactured housing communities and achieved stabilized operations in three redevelopment communities and one development community (the "Acquisitions Properties").
Interest and other income decreased by $9,714,000 or 51.2% to $9,247,000 in the nine months ended September 30, 2003 from $18,961,000 in the nine months ended September 30, 2002. The decrease primarily relates to the repayment or conversion to non-accrual of notes receivable which resulted in a decrease in interest income on notes receivables and the sale of co-investment assets resulting in the decrease in income earned on the Company's co- investments.
Property revenues from the Same Store Properties decreased by $2,654,000 or 2.1% to $121,671,000 in the nine months ended September 30, 2003 from $124,325,000 in the nine months ended September 30, 2002. The majority of this decrease was attributable to the 16 Same Store Properties located in Northern California and the 23 Same Store Properties located in the Pacific Northwest. The property revenues of the Same Store Properties in Northern California decreased by $3,983,000 or 9.4% to $38,182,000 in the nine months ended September 30, 2003 from $42,165,000 in the nine months ended September 30, 2002. The decrease in Northern California is primarily attributable to rental rate decreases and a slight decrease in financial occupancy to 95.6% in the nine months ended September 30, 2003 from 95.7% in the nine months ended September 30, 2002. The property revenues of the Same Store Properties in the Pacific Northwest decreased by $1,180,000 or 3.7% to $30,567,000 in the nine months ended September 30, 2003 from $31,747,000 in the nine months ended September 30, 2002. The $1,180,000 decrease in the Pacific Northwest is primarily attributable to rental rate decreases offset by an increase in financial occupancy to 94.8% in the nine months ended September 30, 2003 from 92.8% in the nine months ended September 30, 2002. The 22 multifamily residential properties located in Southern California offset the net decrease in total property revenues from the other Same Store Properties. The property revenues for these properties increased by $2,509,000 or 5.0% to $52,922,000 in the nine months ended September 30, 2003 from $50,413,000 in the nine months ended September 30, 2002. The $2,509,000 increase is primarily attributable to rental rate increases and an increase in financial occupancy to 96.0% in the nine months ended September 30, 2003 from 94.3% in the nine months ended September 30, 2002.
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Total Expenses increased by $32,399,000 or approximately 33.8% to $128,291,000 in the nine months ended September 30, 2003 from $95,892,000 in the nine months ended September 30, 2002. This increase was mainly due to an increase in property operating expenses of $25,759,000 or 39.8% to $90,400,000 in the nine months ended September 30, 2003 from $64,641,000 in the nine months ended September 30, 2002. Of such operating expense increase $25,256,000 was attributable to the Acquisition Properties. Interest expense increased by $5,796,000 or 22.2% to $31,858,000 in the nine months ended September 30, 2003 from $26,062,000 in the nine months ended September 30, 2002. The increase in interest expense is due to increases in the line of credit balance.
Minority interests decreased by $1,066,000 or 5.8% to $17,247,000 in the nine months ended September 30, 2003 from $18,313,000 in the nine months ended September 30, 2002. This is primarily due to the decrease in net income of the Operating Partnership.
Discontinued operationsdecreased by $8,286,000 to $0 in the nine months ended September 30, 2003 from $8,286,000 in the nine months ended September 30, 2002. This decrease is due to the reduction of gain on sale of real estate and operating income from Tara Village, a 168-unit apartment community located in Tarzana, California, which was sold on June 18, 2002.
Net incomedecreased by $13,128,000 or 30.3% to $30,141,000 in the nine months ended September 30, 2003 from $43,269,000 in nine months ended September 30, 2002. The decrease in net income is mainly attributable to the factors noted above.
Liquidity and Capital Resources
At September 30, 2003, the Company had $10,400,000 of unrestricted cash and cash equivalents. The Company expects to meet its short-term liquidity requirements by using its working capital, cash generated from operations, and amounts available under lines of credit or other financings. The Company believes that its current net cash flows will be adequate to meet operating requirements and to provide for payment of dividends by the Company in accordance with REIT qualification requirements. The Company expects to meet its long-term liquidity requirements relating to property acquisitions and development (beyond the next 12 months) and balloon debt maturities by using a combination of some or all of the following sources: working capital, amounts available on lines of credit, net proceeds from public and private debt and equity issuances, and proceeds from the disposition of properties that may be sold from time to time. There can, however, be no assurance that the Company will have access to the debt and equity markets in a timely fashion to meet such future funding requirements or that future working capital and borrowings under the lines of credit will be available, or if available, will be sufficient to meet the Company's requirements or that the Company will be able to dispose of properties in a timely manner and under terms and conditions that the Company deems acceptable.
The Company has two outstanding unsecured lines of credit for an aggregate amount of $215,000,000. The first line, in the amount of $185,000,000, matures in May 2004, with an option to extend it for one year thereafter. Outstanding balances under this line of credit bear interest at a rate, which uses a tiered rate structure tied to the Company's corporate ratings, if any, and leverage rating, which has been priced at LIBOR plus 1.10%. At September 30, 2003 the Company had $132,700,000 outstanding on this line of credit. In July 2003, the Company expanded this line from $165,000,000 to $185,000,000. No other material terms of this facility were revised. A second line of credit in the amount of $30,000,000 matures in December 2003. Outstanding balances, if any, on this second line bear interest based on a tiered rate structure currently at LIBOR plus 1.10%. At September 30, 2003 the Company had $30,000,000 outstanding on this line of credit. The outstanding balance on this line of credit was repaid subsequent to the end of the quarter. At September 30, 2003, these lines of credit bore interest rates of approximately 2.3%. The credit agreements contain debt covenants related to limitations on indebtedness and liabilities, maintenance of minimum levels of consolidated earnings before depreciation, interest and amortization and maintenance of minimum tangible net worth.
In addition, the Fund, the investment fund managed by the Company, has an unsecured line of credit for an aggregate amount of $50,000,000. In August 2003, the Fund reduced this line from $125,000,000 to $50,000,000. This facility is directly tied to the remaining capital commitments of certain investors. As of September 30, 2003, the maximum amount available on this line was approximately $47,568,000. The line bears interest at LIBOR plus 0.875%. As of September 30, 2003, the line had an outstanding balance of $36,572,000. This line matures in December 2003. The Fund plans on using one or more of the following sources to repay the outstanding balance at maturity: working capital, secured mortgage financing, construction financing, calling undrawn equity commitments, and proceeds from the disposition of properties which may be sold from time to time. The line provides for debt covenants relating to limitations on mortgage indebtedness.
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In addition to the Company's unsecured lines of credit, the Company had $664,596,000 of secured indebtedness at September 30, 2003. Such indebtedness consisted of $595,024,000 in fixed rate debt with interest rates varying from 5.5% to 8.2% and maturity dates ranging from 2005 to 2026. The indebtedness also includes $69,572,000 of tax-exempt variable rate demand bonds with interest rates paid during the nine months ended September 30, 2003 which averaged 3.7% and maturity dates ranging from 2020 to 2032. The tax-exempt variable rate demand bonds are capped at interest rates ranging from 7.1% to 7.3%.
The Company's unrestricted cash balance increased by $1,838,000 from $8,562,000 as of December 31,2002 to $10,400,000 as of September 30, 2003. The Company generated $73,748,000 in cash from operating activities, used $58,553,000 cash in investing activities and used $13,357,000 cash in financing activities. The $58,553,000 net cash used in investing activities was primarily a result of $24,293,000 contributed to investments in corporations and limited partnerships, $20,119,000 used to fund real estate under development, $13,090,000 used to upgrade rental properties and $8,337,000 used to fund additions to notes receivables from investees, other related parties and other receivables. The $13,357,000 net cash used in financing activities was primarily a result of $66,618,000 of repayments of mortgages and other notes payable and lines of credit, $50,184,000 of dividends paid, $15,389,000 of distributions to minority interest partners offset by $89,851,000 of proceeds from mortgages and other notes and line of credit and $24,664,000 of net proceeds from the issuance of preferred stock.
Non-revenue generating capital expenditures are improvements and upgrades that extend the useful life of the property and are not related to preparing a multifamily property unit to be rented to a tenant. The Company expects to incur approximately $375 per weighted average occupancy unit in non-revenue generating capital expenditures for the year ended December 31, 2003. These expenditures do not include the improvements required in connection with the origination of mortgage loans, expenditures for acquisition properties' renovations and improvements, which are expected to generate additional revenue, and renovation expenditures required pursuant to tax-exempt bond financings. The Company expects that cash from operations and/or its lines of credit will fund such expenditures. However, there can be no assurance that the actual expenditures incurred during 2003 and/or the funding thereof will not be significantly different than the Company's current expectations.
The Company is currently developing six multifamily residential projects, with an aggregate of 1,368 multifamily units. Such projects involve certain risks inherent in real estate development. See "Other Matters/ Risk Factors-- Risks that Development Activities Will be Delayed or Not Completed and/or Fail to Achieve Expected Results" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. In connection with these development projects, the Company has directly, or in some cases through its joint venture partners entered into contractual construction related commitments with unrelated third parties and the total projected estimated cost for these projects is approximately $229,700,000. As of September 30, 2003, the remaining commitment to fund these development projects is approximately $74,800,000, of which approximately $36,400,000 is the Company's commitment. The 132-unit Kelvin Avenue development project in Irvine, California is still in the process of obtaining entitlements and its estimated total costs have not yet been finalized and is not included in the numbers above. The Company expects to fund such commitments by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of properties, if any.
The Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in short-term investment grade securities or is used by the Company to reduce balances outstanding under its line of credit.
Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund organized by the Company in 2001 to add value through rental growth and asset appreciation, utilizing the Company's development, redevelopment and asset management capabilities. Currently the Fund is considered fully invested based on its acquisitions to date and anticipated development and redevelopment expenditures. The Fund now expects to utilize leverage of approximately 61% of the value of the underlying real estate portfolio. The Company is committed to invest 21.4% of the aggregate capital committed to the Fund. In addition, the Company will be compensated by the Fund for its asset management, property management, development and redevelopment services and may receive incentive payments if the Fund exceeds certain financial return benchmarks.
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Financing and equity issuances. During the third quarter of 2003 and the early part of the fourth quarter of 2003, the Company undertook the following financing activities and equity issuances.
On July 30, 2003, in connection with the Company's acquisition, by merger, of John M. Sachs, Inc. ("Sachs") that was completed on December 17, 2002, and under the terms of the merger agreement, a final analysis was prepared, which indicated that the actual net liabilities of Sachs were less than the net liabilities of Sachs estimated to be outstanding as of the merger date. Based on the final analysis and as a post-closing adjustment payment pursuant to the merger agreement, the Company made a final payment of approximately $1,766,000 in cash and issued an additional 35,860 shares of common stock to certain of the pre-merger shareholders of Sachs.
On September 23, 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 do not begin to accrue a dividend until November 25, 2003, and, following that date, will pay quarterly distributions at an annualized rate of 7.8125% per year of the liquidation value and will be redeemable by the Company on or after September 23, 2008. The Company will amortize the original discount in connection with the issuance of these shares in the fourth quarter of 2003, resulting in a charge of approximately $336,000. The shares were issued pursuant to the Company's existing shelf registration statement. The Company intends to use 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. On October 15, 2003, the Company issued a notice of redemption to the holders of Series C Preferred Stock. The Company expects to redeem all outstanding Series C Preferred Units on November 24, 2003, for a price of $50.00 per unit plus accrued and unpaid dividends.
On October 6, 2003, the Company sold 1.6 million newly issued shares of common stock and received offering proceeds (before expenses) of $60.67 per share, representing a 3.25% discount to the common stock's closing price on September 30, 2003, the date of the underwriting agreement between the Company and the underwriter, pursuant to which the shares were sold. The shares were issued pursuant to the Company's existing shelf registration statement. The net proceeds of the offering of approximately $96,772,000 is expected to be used for the acquisition of multifamily communities located in the Company's targeted West Coast markets and may also be used for general corporate purposes, including the repayment of debt and the funding of development activities.
After the Company's equity issuances, the Company has the capacity pursuant to existing shelf registration statements to issue up to $219,455,250 in equity securities and the Operating Partnership has the capacity pursuant to such registration statements to issue up to $250,000,000 of debt securities.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and other commitments at September 30, 2003, and the effect such obligations could have on our liquidity and cash flow in future periods:
Less Than 2-3 4-5 Over 5
1 Year Years Years Years Total
(In thousands) --------- --------- --------- --------- ---------
Mortgage notes payable $ 1,689 $ 48,904 $ 83,527 $ 530,476 $ 664,596
Lines of credit 30,000 132,700 -- -- 162,700
Development commitments(1) 36,400 -- -- -- 36,400
Redevelopment commitments(2) 3,000 -- -- -- 3,000
Essex Apartment Value Fund, L.P.
capital commitment 15,285 -- -- -- 15,285
--------- --------- --------- --------- ---------
$ 86,374 $ 181,604 $ 83,527 $ 530,476 $ 881,981
========= ========= ========= ========= =========
(1) $35,242 of these commitments relate to actual contracts as of September 30, 2003.
(2) $712 of these commitments relate to actual contracts as of September 30,2003
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New Accounting Pronouncements Not Yet Adopted
In January 2003, the FASB approved for issuance FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The disclosure requirements of FIN 46 are effective for all financial statements initially issued after January 31, 2003. It is reasonably possible that certain of the entities through which and with which the Company conducts business, including those described in Notes 3(b) and 5 of the Company's December 31, 2002 consolidated financial statements will be deemed to be Variable Interest Entities (VIEs) under the provisions of FIN 46. Based on its preliminary evaluation of the entities considered reasonably possible to be VIEs, the total assets and liabilities net of intercompany balances of such entities were estimated at $77,775,000 and $55,603,000 at September 30, 2003. The Company's estimated maximum exposure to loss would be equal to its investments in these arrangements, which totaled $22,850,000, as of September 30, 2003. The disclosures provided reflect management's understanding and analysis of FIN 46 based upon information currently available. The evaluation of the impact of FIN 46 on the Company's consolidated financial statements is ongoing and is subject to change in the event additional interpretive guidance is provided by the Financial Accounting Standards Board or others.
Forward Looking Statements
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report on Form 10-Q which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company's expectations as to the timing of completion of current development projects and the stabilization dates of such projects, expectation as to the total projected costs and rental rates of current development projects, beliefs as to the adequacy of future cash flows to meet operating requirements and to provide for dividend payments in accordance with REIT requirements, expectations as to the amount of capital expenditures, expectations as to the amount of non-revenue generating capital expenditures, future acquisitions and developments, the anticipated performance of the Essex Apartment Value Fund, L.P., the anticipated performance of existing properties, statements regarding the Company's financing activities and the use of proceeds from such activities.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the Company will fail to achieve its business objectives, that the actual completion of development projects will be subject to delays, that the stabilization dates of such projects will be delayed, that the total projected costs of current development projects will exceed expectations, that such development projects will not be completed, that development projects and acquisitions will fail to meet expectations, that estimates of future income from an acquired property may prove to be inaccurate, that future cash flows will be inadequate to meet operating requirements and/or will be insufficient to provide for dividend payments in accordance with REIT requirements, that the actual non-revenue generating capital expenditures will exceed the Company's current expectations, that the Essex Apartment Value Fund will fail to perform as anticipated, that the Company's partners in this Fund fail to fund capital commitments as contractually required, that there may be a downturn in the markets in which the Company's properties are located, that the terms of any refinancing may not be as favorable as the terms of existing indebtedness, and that the Company will not be able to complete property acquisitions, as anticipated, for which the proceeds from recent equity issuances were intended to be used, as well as those risks, special considerations, and other factors discussed under the caption "Potential Factors Affecting Future Operating Results" below and those discussed under the caption "Other Matters/Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002, and those other risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (the "SEC") which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
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Potential Factors Affecting Future Operating Results
Many factors affect the Company's actual financial performance and may cause the Company's future results to be different from past performance or trends. These factors include those factors discussed under the caption "Other Matters/Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and the following:
Economic Environment and Impact on Operating Results
Both the national economy and the economies of the western states in which the Company owns, manages and develops properties, some of which are concentrated in high-tech sectors, have been and may continue to be in an economic downturn. The impacts of such downturn on operating results can include, and are not limited to, reduction in rental rates, occupancy levels, property valuations and increases in operating costs such as advertising, turnover and repair and maintenance expense.
The Company's property type and diverse geographic locations provide some degree of risk moderation but are not immune to a prolonged down cycle in the real estate markets in which the Company operates. Although the Company believes it is well positioned to meet the challenges ahead, it is possible that further reductions in occupancy and market rental rates will result in reduction of rental revenues, operating income, cash flows, and market value of the Company's shares. Prolonged recession could also affect the Company's ability to obtain financing at acceptable rates of interest and to access funds from the disposition of properties at acceptable prices.
Development and Redevelopment Activities
The Company pursues multifamily residential properties and development and redevelopment projects from time to time. Development projects generally require various government and other approvals, the receipt of which cannot be assured. The Company's development and redevelopment activities generally entail certain risks, including the following:
