1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 333-44467-01
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as specified in its Charter)
Maryland 77-0369575
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 E. Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices)
(Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
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 for such shorter period that the Registrant
was required to file such report, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
2
INDEX
Exhibit
Number Description Page Number
- ------- ----------- -----------
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited) 3
Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997 4
Consolidated Statements of Operations
for the three months ended June 30, 1998 and 1997 5
Consolidated Statements of Operations
for the six months ended June 30, 1998 and 1997 6
Consolidated Statements of Partners' Capital for the
six months ended June 30, 1998 and the year ended
December 31, 1997 7
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 8
Notes to Consolidated Financial Statements 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II: OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds 20
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22
Page 2 of 22
3
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
Essex Portfolio, L.P., a California limited partnership, (the
"Operating Partnership") effectively holds the assets and liabilities
and conducts the operating activities of Essex Property Trust, Inc.,
("Essex" or "The Company"). Essex Property Trust, Inc., a real estate
investment trust incorporated in the State of Maryland, is the sole
general partner of the Operating Partnership.
The information furnished in the accompanying consolidated unaudited
balance sheets, statements of operations, partners' capital and cash
flows of the Operating Partnership reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the
aforementioned financial statements for the interim periods.
The accompanying unaudited financial statements should be read in
conjunction with the notes to such financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Page 3 of 22
4
ESSEX PORTFOLIO, L.P.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
June 30, December 31,
Assets 1998 1997
------ ---------- ------------
Real estate:
Rental properties:
Land and land improvements $ 219,004 $ 182,416
Buildings and improvements 652,593 548,571
--------- ---------
871,597 730,987
Less accumulated depreciation (66,866) (58,040)
--------- ---------
804,731 672,947
Investments 9,746 2,347
Real estate under development 30,547 27,422
--------- ---------
845,024 702,716
Cash and cash equivalents-unrestricted 4,973 4,282
Restricted cash 14,979 6,093
Notes and other related party receivables 10,813 9,264
Notes and other receivables 9,927 8,602
Prepaid expenses and other assets 12,518 3,838
Deferred charges, net 5,581 4,040
--------- ---------
$ 903,815 $ 738,835
========= =========
Liabilities and Partners' Capital
Mortgage notes payable $ 298,867 $ 248,997
Lines of credit 43,672 27,600
Accounts payable and accrued liabilities 36,038 21,337
Distributions payable 11,799 9,189
Deferred gain 5,002 --
Other liabilities 5,171 4,208
--------- ---------
Total liabilities 400,549 311,331
Minority interests 3,027 3,102
Partners' capital:
General Partner:
Common equity 359,507 361,410
Preferred equity 37,505 37,505
--------- ---------
397,012 398,915
Limited Partners:
Common equity 25,452 25,487
Preferred equity 77,775 --
--------- ---------
Total partners' capital 500,239 424,402
--------- ---------
Total liabilities and partners' capital $ 903,815 $ 738,835
========= =========
See accompanying notes to the consolidated unaudited financial statements.
Page 4 of 22
5
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit amounts)
Three months ended
-------------------------------
June 30, June 30,
1998 1997
------------ ------------
Revenues:
Rental $ 30,273 $ 18,353
Interest and other income 1,411 1,227
------------ ------------
31,684 19,580
------------ ------------
Expenses:
Property operating expenses:
Maintenance and repairs 2,460 1,593
Real estate taxes 2,231 1,480
Utilities 1,891 1,142
Administrative 2,230 1,200
Advertising 470 282
Insurance 335 226
Depreciation and amortization 5,632 3,220
------------ ------------
15,249 9,143
------------ ------------
Interest 5,217 2,867
Amortization of deferred financing costs 197 128
General and administrative 1,016 535
------------ ------------
Total expenses 21,679 12,673
------------ ------------
Income before gain on sale of real estate,
minority interests and extraordinary item 10,005 6,907
Gain on sales of real estate -- 414
------------ ------------
Income before minority interests and
extraordinary item 10,005 7,321
Minority interests (121) (103)
------------ ------------
Income before extraordinary item 9,884 7,218
Extraordinary item:
Loss on early extinguishment of debt -- (104)
------------ ------------
Net income 9,884 7,114
Distributions on preferred units (2,367) (491)
------------ ------------
Net income available to common units $ 7,517 $ 6,623
============ ============
Per Operating Partnership Unit data:
Basic:
Income before extraordinary item $ 0.41 $ 0.44
Extraordinary item - debt extinguishment 0.00 (0.01)
------------ ------------
Net income $ 0.41 $ 0.43
============ ============
Weighted average number of partnership
units outstanding during the period 18,506,034 15,393,186
============ ============
Diluted:
Income before extraordinary item $ 0.40 $ 0.43
Extraordinary item - debt extinguishment 0.00 (0.01)
------------ ------------
Net income $ 0.40 $ 0.42
============ ============
Weighted average number of partnership
units outstanding during the period 18,721,303 15,583,794
============ ============
Distributions per Operating Partnership Unit: $ 0.500 $ 0.435
============ ============
See accompanying notes to the consolidated unaudited financial statements.
Page 5 of 22
6
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit amounts)
Six months ended
---------------------------------
June 30, June 30,
1998 1997
------------ -------------
Revenues:
Rental $ 56,803 $ 35,709
Interest and other income 2,717 2,422
------------ ------------
59,520 38,131
------------ ------------
Expenses:
Property operating expenses
Maintenance and repairs 4,728 3,087
Real estate taxes 4,418 2,902
Utilities 3,608 2,280
Administrative 4,133 2,352
Advertising 848 552
Insurance 635 464
Depreciation and amortization 10,301 6,308
------------ ------------
28,671 17,945
------------ ------------
Interest 9,014 6,230
Amortization of deferred financing costs 341 255
General and administrative 1,834 1,051
------------ ------------
Total expenses 39,860 25,481
------------ ------------
Income before gain on sales of real estate,
minority interests and extraordinary item 19,660 12,650
Gain on sales of real estate -- 414
------------ ------------
Income before minority interests and
extraordinary item 19,660 13,064
Minority interests (230) (198)
------------ ------------
Income before extraordinary item 19,430 12,866
Extraordinary item:
Loss on early extinguishment of debt -- (104)
------------ ------------
Net income 19,430 12,762
Distributions on preferred units (3,964) (929)
------------ ------------
Net income available to common units $ 15,466 $ 11,833
============ ============
Per Operating Partnership Unit data:
Basic:
Income before extraordinary item $ 0.84 $ 0.83
Extraordinary item - debt extinguishment 0.00 (0.01)
------------ ------------
Net income $ 0.84 $ 0.82
============ ============
Weighted average number of partnership
units outstanding during the period 18,498,886 14,426,765
============ ============
Diluted:
Income before extraordinary item $ 0.83 $ 0.82
Extraordinary item - debt extinguishment 0.00 (0.01)
------------ ------------
Net income $ 0.83 $ 0.81
============ ============
Weighted average number of partnership
units outstanding during the period 18,726,460 14,619,918
============ ============
Distributions per Operating Partnership Unit: $ 0.950 $ 0.870
============ ============
See accompanying notes to the consolidated unaudited financial statements.
Page 6 of 22
7
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
For the six months ended June 30, 1998 and the
year ended December 31, 1997
(Unaudited)
(Dollars and units in thousands)
General Partner Limited Partners
---------------------------------- ---------------------------------
Preferred Preferred
Common Equity Equity Common Equity Equity
--------------------- --------- --------------------- --------
Units Amount Amount Units Amount Amount Total
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1996 11,592 $ 205,302 $ 17,505 1,855 $ 24,239 $ -- $ 247,046
Contribution-net proceeds
from preferred stock -- -- 20,000 -- -- -- 20,000
Contribution-net proceeds
from common stock 4,995 154,012 -- -- -- -- 154,012
Contribution-net proceeds
from options exercised 28 686 -- -- -- -- 686
Contributions-net proceeds
from partners -- -- -- 18 543 -- 543
Net income -- 26,636 2,681 -- 4,005 -- 33,322
Partners' distributions -- (25,226) (2,681) -- (3,300) -- (31,207)
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1997 16,615 361,410 37,505 1,873 25,487 -- 424,402
Contribution-net proceeds
from perpetual preferred
units -- -- -- -- -- 77,775 77,775
Contribution-net proceeds
from options exercised 17 339 -- -- -- -- 339
Contribution-net proceeds
from dividend reinvest-
ment plan 2 -- -- -- -- -- --
Net income -- 13,722 875 -- 1,744 3,089 19,430
Partners' distributions -- (15,964) (875) -- (1,779) (3,089) (21,707)
--------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 1998 16,634 $ 359,507 $ 37,505 1,873 $ 25,452 $ 77,775 $ 500,239
========= ========= ========= ========= ========= ========= =========
See accompanying notes to the consolidated unaudited financial statements
Page 7 of 22
8
ESSEX PORTFOLIO, L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six months ended
--------------------------
June 30, June 30,
1998 1997
--------- -----------
Net cash provided by operating activities $ 28,223 $ 22,853
--------- ---------
Cash flows from investing activities:
Additions to rental properties (126,632) (93,267)
Additions to restricted cash (8,886) --
Dispositions of rental properties 15,842 3,339
Additions to notes receivable (593) (785)
Additions to real estate under development (10,987) --
Investments in corporations and limited partnerships 461 (30)
--------- ---------
Net cash used in investing activities (130,795) (90,743)
--------- ---------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 150,347 34,420
Repayment of mortgage and other notes payable
and lines of credit (102,848) (48,050)
Additions to deferred charges (1,882) (368)
Additions to related party notes and other receivables (2,696) (23,527)
Repayment of related party notes and other receivables 1,147 14,360
Decrease in offering related accounts payable (110) (887)
Net proceeds from convertible preferred stock sale -- 20,000
Net proceeds from follow-on offerings -- 58,039
Net proceeds from perpetual preferred units sale 77,775 --
Contributions from stock options exercised - general partner 339 338
Distributions to limited partners and minority interest (2,213) (1,614)
Distributions to general partners (16,596) (11,893)
--------- ---------
Net cash provided by financing activities 103,263 40,818
--------- ---------
Net (decrease) increase in cash and cash equivalents 691 (27,072)
Cash and cash equivalents at beginning of period 4,282 46,899
--------- ---------
Cash and cash equivalents at end of period $ 4,973 $ 19,827
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amount capitalized $ 8,236 $ 6,148
========= =========
Supplemental disclosure of non-cash investing and financing activities:
Mortgage notes payable assumed in connection
with purchase of real estate $ 18,443 $ 40,222
========= =========
Distributions payable $ 11,799 $ 7,220
========= =========
See accompanying notes to the consolidated unaudited financial statements.
Page 8 of 22
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Essex Portfolio, L.P. (the "Operating Partnership") was formed in March
1994 and commenced operations on June 13, 1994, when Essex Property Trust,
Inc. (the "Company"), the general partner of the Operating Partnership
(the "General Partner"), completed its initial public offering (the
"Offering") in which it issued 6,275,000 shares of common stock at $19.50
per share. The net proceeds from the Offering of $112,071 were used by the
General Partner to acquire a 77.2% interest in the Operating Partnership.
The Company has elected to be treated as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986 (the "Code"), as amended.
The unaudited consolidated financial statements of the Operating
Partnership are prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions to Form 10-Q. In the opinion of management, all adjustments
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented have been included and
are normal and recurring in nature.
The Company is the sole general partner in the Operating Partnership,
owning an 89.9%, 89.9% and 87.9% general partnership interest as of June
30, 1998, December 31, 1997 and June 30, 1997, respectively.
All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
(2) SIGNIFICANT TRANSACTIONS
(A) Equity Transactions
On April 20, 1998 the Operating Partnership sold 400,000 units of its
7.875% Series B Cumulative Redeemable Preferred Units ("Perpetual
Preferred Units") to an institutional investor in a private placement, at
a price of $50.00 per unit. The net proceeds from this offering were
$19,500.
(B) Acquisitions
(i) On April 1, 1998, the Operating Partnership acquired Bunker Hill
Towers, a 456-unit apartment high-rise community located in Los Angeles,
California, for a contract price of approximately $36.5 million. In
connection with this acquisition, the Operating Partnership assumed an
approximate $18.4 million, 7.39% fixed rate loan. The loan matures in
November 2007. The community features a swimming pool, tennis courts, an
exercise facility, and spa.
(ii) On April 3, 1998, the Operating Partnership acquired Cochran
Apartments, a 58-unit apartment community located in Los Angeles,
California, for a contract price of $5.4 million. The community features a
swimming pool, an exercise facility, and spa.
These second quarter 1998 acquisitions were funded with proceeds from the
Operating Partnership's April 1998 Perpetual Preferred Units offering, the
assumed loan as indicated above, and the Operating Partnership's lines of
credit.
(C) Development Activities
In May 1998, the Operating Partnership broke ground on the Canyon Point
development, located in San Ramon, California. The development involves
the construction of a 114 unit multifamily community. This development is
adjacent to The Shores, a 348 unit apartment community which
Page 9 of 22
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS)
the Operating Partnership currently owns. The total estimated
capitalized costs for the community is $15,700. This community will
feature outstanding views, with individual access garages, nine-foot
ceilings, and ground floor entry.
In May 1998, the Operating Partnership entered into a contract to purchase
a 132 unit multifamily community currently under construction in San Jose,
California. The estimated total capitalized cost for the community is
$18,500. The Operating Partnership's acquisition is scheduled to close
upon completion of the project in March 1999. The community features a
swimming pool, spa, exercise facility, clubhouse, and a business center.
(D) Debt Related Transactions
On May 11, 1998, the Operating Partnership executed an agreement to
replace multiple secured and unsecured credit facilities with an unsecured
revolving line of credit for an aggregate amount of $100,000, which
expires on May 11, 2000, and bears interest at LIBOR + 1.15% on
outstanding balances.
(E) Other - Earthquake Insurance
On June 13, 1998, the Operating Partnership increased the per location and
aggregate limits, the deductible, and the self-insured retention amount of
its earthquake insurance policy. The insurance coverage now provides for
an aggregate limit of $40,000, payable upon a covered loss in excess of a
$7,500 self-insured retention amount. The insurance also provides for a
per building deductible of 5% in California and 2% in Oregon and
Washington.
(3) RELATED PARTY TRANSACTIONS
All general and administrative expenses of the Company, the Operating
Partnership, and Essex Management Corporation ("EMC") are initially borne
by the Operating Partnership, with a portion subsequently allocated to
EMC. Expenses allocated to EMC for the three and six months ended June 30,
1998 totaled $61 and $137, respectively, and are reflected as a reduction
in general and administrative expenses in the accompanying consolidated
statements of operations.
Rental income in the accompanying consolidated statements of operations
includes related party rents earned from space leased to The Marcus &
Millichap Company ("M&M"), including operating expense reimbursement, of
$229 and $430 for the three and six months ended June 30, 1998,
respectively, and $172 and $343 for the three and six months ended June
30, 1997, respectively.
Other income for the three and six months ended June 30, 1998 includes
interest income of $330 and $535, respectively, earned principally under
notes receivable from the partnerships which collectively own Highridge
Apartments, a 255 unit multifamily property located in Rancho Palos Verde,
California ("Highridge"), the partnerships which collectively own an
approximate 30.7% minority interest in Pathways Apartments, a 296 unit
multifamily property located in Long Beach, California ("Pathways") and
from the note receivable from Essex Fidelity I Corporation. For the three
and six months ended June 30, 1998, the Operating Partnership earned $0
and $196, respectively, of dividend income from Essex Sacramento
Corporation and Essex Fidelity I Corporation combined. In addition, the
Operating Partnership earned management fee income of $100 and $205 for
the three and six months ended June 30, 1998, respectively, from Anchor
Village, Highridge, Pathways, and the partnerships which collectively own
the three retail shopping centers located in the Portland, Oregon
metropolitan area.
Page 10 of 22
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS)
Notes and other related party receivables as of June 30, 1998 and December
31, 1997 consist of the following:
June 30, December 31,
1998 1997
-------- ------------
Notes and other related party receivables:
Note receivable from Highridge Apartments
secured, bearing interest at 9%, due March, 2008 $ 2,750 $2,750
Notes receivable from Fidelity I, secured,
bearing interest at 12%, due December 1998 1,580 1,580
Note receivable from Fidelity I and JSV, secured,
bearing interest at 9.5%-10%, due 2015 1,026 726
Notes receivable from Highridge Apartments,
non-interest bearing, due on demand 2,604 1,699
Loans to officers, bearing interest at 8%, due April
2006 375 375
Other related party receivables, substantially
due on demand 2,478 2,134
------- -------
$10,813 $ 9,264
======= =======
Other related party receivables consist primarily of accrued interest
income on related party notes receivables and loans to officers, advances
and accrued management fees from joint venture partnerships, and
unreimbursed expenses due from EMC.
(4) NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued Financial Accounting Standard No. 130
(SFAS130), Reporting Comprehensive Income. SFAS 130 is effective with the
year-end 1998 financial statements; however, the total comprehensive
income is required in the financial statements for interim periods
beginning in 1998. In June 1997, the FASB issued Financial Accounting
Standard No. 131, Disclosure About Segments of An Enterprise and Related
Information. SFAS 131 is effective with the year-end 1998 financial
statements. In February 1998, the FASB issued Financial Accounting
Standards No. 132, Employees' Disclosures about Pensions and Other
Postretirement Benefits. SFAS 132 is effective with the year-end 1998
Financial Statements. Management believes that the adoption of these
statements will not have a material impact on the Operating Partnership's
financial statements.
(5) NET INCOME PER UNIT:
Net income per unit in the accompanying consolidated statements of
operations is calculated for the three months ended June 30, 1998 and
1997, respectively, by dividing net income applicable to the Operating
Partnership units of $7,517 and $6,623 by the weighted average units
outstanding during the period. Net income applicable to the Operating
Partnership units is calculated by deducting preferred distributions of
$2,367 and $491 for the three months ended June 30, 1998 and 1997,
respectively, from net income.
Page 11 of 22
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Net income per unit in the accompanying consolidated statements of operations is
calculated for the six months ended June 30, 1998 and 1997, respectively, by
dividing net income applicable to the Operating Partnership units of $15,466 and
$11,833 by the weighted average units outstanding during the period. Net income
applicable to the Operating Partnership units is calculated by deducting
preferred distributions of $3,964 and $929 for the six months ended June 30,
1998 and 1997, respectively, from net income.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion is based primarily on the consolidated financial
statements of the Operating Partnership as of June 30, 1998 and 1997 and for the
three and six months ended June 30, 1998 and 1997.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These 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.
The Operating Partnership holds, directly or indirectly, all of the Company's
interests in the Company's properties and all of the Company's operations
relating to the Company's properties are conducted through the Operating
Partnership. The Company is the sole general partner of the Operating
Partnership and, as of June 30, 1998 and 1997, owned an 89.9% and 87.9% general
partnership interest in the Operating Partnership, respectively.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in the 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 Operating Partnership's expectations, hopes,
intentions, beliefs and strategies regarding the future. Forward looking
statements include statements regarding potential acquisitions, the anticipated
performance of future acquisitions, recently completed acquisitions and existing
properties, and statements regarding the Operating Partnership's financing
activities. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors including, but not limited to, those risks,
special considerations, and other factors discussed under the caption "Other
Matters" in Item 1 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, and those other risk factors and special considerations
set forth in Essex's and the Operating Partnership's other filings with the
Securities and Exchange Commission (the "SEC") which may cause the actual
results, performance or achievements of the Operating Partnership to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.
GENERAL BACKGROUND
The Operating Partnership's revenues are generated primarily from multifamily
residential and commercial property operations, which accounted for 97% and 96%
of its revenues for the six months ended June 30, 1998 and 1997, respectively.
The Operating Partnership's properties (the "Properties") are located in
California, Washington and Oregon. Occupancy levels of the multifamily
residential Properties in these markets have generally remained high (averaging
over 95% for the last five years).
Since the Operating Partnership began operations in June 1994, the Operating
Partnership has acquired ownership interests in forty-eight multifamily
residential properties, of which thirty-one are located in California, sixteen
are located in Washington and one is located in Oregon. In aggregate, these
acquisitions consist of a total of 9,382 units and had a total capitalized cost
of approximately $696.8 million. As part of its active portfolio management
strategy, the Operating Partnership has sold, since it began operations, five
multifamily residential properties in Northern California consisting of a total
of 579 units and six retail shopping centers in the Portland, Oregon
metropolitan area at an aggregate gross sales price of approximately $59.0
million resulting in net aggregate gain recognition of approximately $13.6
million.
Page 12 of 22
13
Average financial occupancy rates (the percentage resulting from dividing
actual rents by total possible rents as determined by valuing occupied units at
contractual rates and vacant units at market rents) of the Operating
Partnership's multifamily properties on a same-property basis decreased to 95.7%
for the three months ended June 30, 1998 from 96.1% for the three months ended
June 30, 1997. The regional breakdown of such financial occupancy for the three
months ended June 30, 1998 and 1997 is as follows:
June 30, June 30,
1998 1997
-------- --------
Northern California 97.2% 97.3%
Pacific Northwest 94.1% 96.6%
Southern California 94.3% 92.3%
The Operating Partnership's commercial properties were 100% occupied (based on
square footage) as of June 30, 1998.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 1998 to the Three Months Ended
June 30, 1997.
Total Revenues increased by $12,104,000 or 61.8% to $31,684,000 in the second
quarter of 1998 from $19,580,000 in the second quarter of 1997. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to properties that the Operating Partnership owned for both of the
quarters ended June 30, 1998 and 1997 ("Quarterly Same Store Properties").
Three Months Ended
June 30,
Number of ------------------ Dollar Percentage
Properties 1998 1997 Change Change
---------- ------- ------- ------- ----------
Rental income
Same Store Properties
Northern California 13 $ 8,802 $ 8,019 $ 783 9.8%
Pacific Northwest 12 5,450 5,231 219 4.2
Southern California 5 2,783 2,634 149 5.7
Commercial 1 554 430 124 28.8
-- ------- ------- ------- ----
Total Same Store Properties 31 17,589 16,314 1,275 7.8%
==
Properties acquired/disposed of
subsequent to January 1, 1997 12,684 2,039 10,645 522.1%
------- ------- ------- -----
Total rental income 30,273 18,353 11,920 64.9
Interest and other income 1,411 1,227 184 15.0
------- ------- ------- -----
Total revenues $31,684 $19,580 $12,104 61.8%
======= ======= ======= =====
As set forth in the above table, $10,645,000 of the $12,104,000 increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 1997. During this period, the Operating Partnership acquired
interests in thirty-four multifamily properties (the "Acquisition Properties"),
and disposed of one multifamily property and six retail shopping centers (the
"Disposition Properties").
Of the increase in total revenues, $1,275,000 is attributable to increases in
rental income from the Quarterly Same Store Properties. Rental income from the
Quarterly Same Store Properties increased by $1,275,000 or 7.8% to $17,589,000
in the second quarter of 1998 from $16,314,000 in the second quarter of 1997.
The majority of this increase was attributable to the thirteen multifamily
Quarterly Same Store Properties located in Northern California, the rental
income of which increased by $783,000 or 9.8% to $8,802,000 in
Page 13 of 22
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the second quarter of 1998 from $8,019,000 in the second quarter of 1997. This
$783,000 increase is primarily attributable to rental rate increases as offset
by a decrease in financial occupancy to 97.2% in the second quarter of 1998 from
97.3% in the second quarter of 1997. The twelve multifamily Quarterly Same Store
Properties located in the Pacific Northwest accounted for the next largest
regional component of the Quarterly Same Store Properties rental income
increase. The rental income of these properties increased by $219,000 or 4.2% to
$5,450,000 in the second quarter of 1998 from $5,231,000 in the second quarter
of 1997. This $219,000 increase is primarily attributable to rental rate
increases as reduced by the effect of the decrease in financial occupancy to
94.1% in the second quarter of 1998 from 96.6% in the second quarter of 1997.
The five multifamily Quarterly Same Store Properties located in Southern
California also contributed towards the Quarterly Same Store Properties rental
income increase. The rental income of these properties increased by $149,000 or
5.7% to $2,783,000 in the second quarter of 1998 from $2,634,000 in the second
quarter of 1997. The $149,000 increase is attributable to rental rate increases
and an increase in financial occupancy to 94.3% in the second quarter of 1998
from 92.3% in the second quarter of 1997.
The increase in total revenue also reflected an increase of $184,000
attributable to interest and other income, the most significant component of
which relates to other property income from the Acquisition Properties.
Total Expenses increased by $9,006,000 or approximately 71.1% to $21,679,000 in
the second quarter of 1998 from $12,673,000 in the second quarter of 1997.
Interest expense increased by $2,350,000 or 82.0% to $5,217,000 in the second
quarter of 1998 from $2,867,000 in the second quarter of 1997. Such increase was
primarily due to the net addition of outstanding mortgage debt in connection
with property and investment acquisitions. Property operating expenses,
exclusive of depreciation and amortization, increased by $3,694,000 or 62.4% to
$9,617,000 in the second quarter of 1998 from $5,923,000 in the second quarter
of 1997. Of such increase, $3,889,000 was attributable to the Acquisition
Properties and the Disposition Properties. General and administrative expenses
represents the costs of the Operating Partnership's various acquisition and
administrative departments as well as partnership administration and
non-operating expenses. Such expenses increased by $481,000 in the second
quarter of 1998 from the amount for the second quarter of 1997. This increase is
largely due to additional staffing requirements resulting from the growth of the
Operating Partnership.
Net income increased by $2,770,000 to $9,884,000 in the second quarter of 1998
from $7,114,000 in the second quarter of 1997. The increase in net income was
primarily a result of the net contribution of the Acquisition Properties and the
increase in net operating income from the Quarterly Same Store Properties, as
offset by a decrease in operating income attributable to the Disposition
Properties.
RESULTS OF OPERATIONS
Comparison Of The Six Months Ended June 30, 1998 To Six Months Ended June 30,
1997.
Total Revenues increased by $21,389,000 or 56.1% to $59,520,000 in the first six
months of 1998 from $38,131,000 in the first six months of 1997. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to properties that the Operating Partnership owned for both of the
six months ended June 30, 1998 and 1997 ("Same Store Properties").
Page 14 of 22
15
Three Months Ended
June 30,
Number of ------------------ Dollar Percentage
Properties 1998 1997 Change Change
---------- ------- ------- ------- ----------
Rental income
Same Store Properties
Northern California 11 $16,212 $14,649 $ 1,563 10.7%
Pacific Northwest 12 10,778 10,373 405 3.9
Southern California 3 4,086 3,881 205 5.3
Commercial 1 1,040 852 188 22.1
-- ------- ------- ------- -----
Total Same Store Properties 27 32,116 29,755 2,361 7.9%
==
Properties acquired/disposed of
subsequent to January 1, 1997 24,687 5,954 18,733 314.6%
------- ------- ------- -----
Total rental income 56,803 35,709 21,094 59.1
Interest and other income 2,717 2,422 295 12.2
------- ------- ------- -----
Total revenues $59,520 $38,131 $21,389 56.1%
======= ======= ======= =====
As set forth in the above table, $18,733,000 of the $21,389,000 increase in
total revenues is attributable to the Acquisition Properties and the Disposition
Properties.
Of the increase in total revenues, $2,361,000 is attributable to increases in
rental income from the Same Store Properties. Rental income from the Same Store
Properties increased by $2,361,000 or 7.9% to $32,116,000 in the first six
months of 1998 from $29,755,000 in the first six months of 1997. The majority of
this increase was attributable to the eleven multifamily Same Store Properties
located in Northern California, the rental income of which increased by
$1,563,000 or 10.7% to $16,212,000 in the first six months of 1998 from
$14,649,000 in the first six months of 1997. This $1,563,000 increase is
primarily attributable to rental rate increases as offset by a decrease in
financial occupancy to 97.2% in the first six months of 1998 from 97.3% in the
first six months of 1997. The twelve multifamily Same Store Properties located
in the Pacific Northwest accounted for the next largest regional component of
the Same Store Properties rental income increase. The rental income of these
properties increased by $405,000 or 3.9% to $10,778,000 in the first six months
of 1998 from $10,373,000 in the first six months of 1997. This $405,000 increase
is attributable to rental rate increases as offset by a decrease in financial
occupancy to 94.1% in the first six months of 1998 from 96.6% in the first six
months of 1997. The three multifamily Same Store Properties located in Southern
California also contributed towards the Same Store Properties rental income
increase. The rental income of these properties increased by $205,000 or 5.3% to
$4,086,000 in the first six months of 1998 from $3,881,000 in the first six
months of 1997. The $205,000 increase is attributable to rental rate increases
and an increase in financial occupancy to 94.3% in the first six months of 1998
from 93.7% in the first six months of 1997.
The increases in total revenue also reflected an increase of $295,000
attributable to interest and other income, the most significant component
relates to other property income from the Acquisition Properties.
Total Expenses increased by $14,379,000 or approximately 56.4% to $39,860,000 in
the first six months of 1998 from $25,481,000 in the first six months of 1997.
Interest expense increased by $2,784,000 or 44.7% to $9,014,000 in the first six
months of 1998 from $6,230,000 in the first six months of 1997. Such interest
expense increase was primarily due to the net addition of outstanding mortgage
debt in connection with property and investment acquisitions. Property operating
expenses, exclusive of depreciation and amortization, increased by $6,733,000 or
57.9% to $18,370,000 in the first six months of 1998 from $11,637,000 in the
first six months of 1997. Of such increase, $6,791,000 was attributable to the
Acquisition Properties and the Disposition Properties. General and
administrative expenses represents the costs of the Operating Partnership's
various acquisition and administrative departments as well as partnership
administration and non-operating expenses. Such expenses increased by $783,000
in the first
Page 15 of 22
16
six months of 1998 from the amount for the first six months of 1997. This
increase is largely due to additional staffing requirements resulting from the
growth of the Operating Partnership.
Net income increased by $6,668,000 to $19,430,000 in the first six months of
1998 from $12,762,000 in the first six months of 1997. The increase in net
income was primarily a result of the net contribution of the Acquisition
Properties and an increase in net operating income from the Same Store
Properties, as offset by a decrease in operating income attributable to the
Disposition Properties.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Operating Partnership had $4,973,000 of unrestricted cash
and cash equivalents. The Operating Partnership expects to meet its short-term
liquidity requirements by using its working capital, cash generated from
operations, amounts available under lines of credit and the proceeds from the
sale of properties that may be sold from time to time. The Operating Partnership
believes that its future net cash flows will be adequate to meet operating
requirements and to provide for payment of dividends by the Company in
accordance with REIT requirements. The Operating Partnership has credit
facilities in the committed amount of approximately $110,000,000. At June 30,
1998 the Operating Partnership had $43,672,000 outstanding on its lines of
credit, with interest rates during the second quarter of 1998 ranging from 6.9%
to 7.3%. The Operating Partnership expects to meet its long-term liquidity
requirements relating to property acquisition and development (beyond the next
12 months) by using 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 Operating Partnership will have access to the
debt and equity markets in a timely fashion to meet long-term liquidity
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
Operating Partnership's requirements or that the Operating Partnership will be
able to dispose of properties in a timely manner and under terms and conditions
that the Operating Partnership deems acceptable.
The Operating Partnership's unrestricted cash balance increased by $691,000 from
$4,282,000 as of December 31, 1997 to $4,973,000 as of June 30, 1998. This
increase was primarily a result of $103,263,000 of cash provided by financing
activities and $28,223,000 of cash provided by operating activities, which were
reduced by $130,795,000 of cash used in investing activities. Of the
$130,795,000 net cash used in investing activities, $126,632,000 was used to
purchase and upgrade rental properties, $3,125,000 was used to fund real estate
under development, and $8,886,000 was used to fund an increase in the Operating
Partnership's restricted cash; these expenditures were offset by $15,842,000 of
proceeds received from the disposition of three retail properties. The
$103,263,000 net cash provided by financing activities was a result of
$150,347,000 of proceeds from mortgage and other notes payable and lines of
credit and $77,775,000 net proceeds from the Perpetual Preferred Units sales (as
discussed below) as offset by $102,848,000 of repayments of mortgages and other
notes payable and lines of credit, and $18,809,000 of dividends/distributions
paid.
As of June 30, 1998, the total amount of the Operating Partnership's outstanding
debt was $342,539,000. Such indebtedness consisted of $215,136,000 in fixed rate
debt, $68,583,000 of variable rate debt and $58,820,000 of debt represented by
tax exempt variable rate demand bonds, of which $29,220,000 is capped at a
maximum interest rate of 7.2%.
As of June 30, 1998, 35 of the Operating Partnership's Properties were
encumbered by debt. The agreements underlying these encumbrances contain
customary restrictive covenants which the Operating Partnership believes do not
have a material adverse effect on the Operating Partnership's operations. As of
June 30, 1998, the Operating Partnership was in compliance with such covenants.
Also, of the Operating Partnership's 35 Properties encumbered by debt, 18 were
secured by deeds of trust relating solely to those Properties. With respect to
the remaining 17 Properties, three cross collaterized mortgages were secured by
8 Properties, 3 Properties and 3 Properties, respectively, and a separate line
of credit was secured by 3 Properties.
Page 16 of 22
17
The Operating Partnership expects to incur approximately $300 per weighted
average occupancy unit in non-revenue generating capital expenditures for the
year ended December 31, 1998. 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 Operating Partnership 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 or funded during
1998 will not be significantly different than the Operating Partnership's
current expectations.
The Operating Partnership is developing eight multifamily residential projects,
which are anticipated to have an aggregate of approximately 1,578 multifamily
units. Essex expects that such projects will be completed during the next two
years (1998 and 1999). Such projects involve certain risks inherent in real
estate development. See "Other Matters - Development Activities; Risks That
Developments Will Be Delayed or Not Completed" in Item 1 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. The estimated
projected aggregate cost for these projects is $186.0 million of which
approximately $29.5 million has been incurred as of June 30, 1998. The Operating
Partnership expects to fund such commitments with some combination of 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, which may be sold from time to time.
The Operating Partnership pays quarterly distributions from cash available for
distribution. Until it is distributed, cash available for distribution is
invested by the Operating Partnership primarily in short-term investment grade
securities or is used by the Operating Partnership to reduce balances
outstanding under its lines of credit.
On March 31, 1997, the Company completed the sale of 2,000,000 shares of its
Common Stock to Cohen & Steers at a price of $29.125 per share.
On June 20, 1997, the Company completed the sale of an additional $20,000,000 of
its convertible preferred stock to Tiger/Westbrook.
On September 10, 1997, the Company completed a public offering of 1,495,000
shares of its Common Stock at a net price of $31.00 per share.
On December 8, 1997, the Company completed a public offering of 1,500,000 shares
of its Common Stock at a net price of $35.50 per share.
On February 6, 1998, the Operating Partnership sold 1,200,000 units of its
7.875% Series B Cumulative Redeemable Preferred Units ("Perpetual Preferred
Units") to an institutional investor at a price of $50.00 per unit.
On April 20, 1998, The Operating Partnership sold 400,000 units of its Perpetual
Preferred Units at a $50.00 per unit price to the same institutional investor
who purchased the 1,200,000 units in February 1998.
The proceeds from these offerings and sales were used primarily to reduce
balances under the Operating Partnership's lines of credit and to fund
acquisitions and development of multifamily properties.
In the second quarter of 1998, the Operating Partnership and Essex filed a
registration statement (the "1998 Shelf Registration Statement") with the
Securities and Exchange Commission (the "SEC") to register $300,000,000 of
equity securities of the Company and $250,000,000 of debt securities of the
Operating Partnership. The 1998 Shelf Registration Statement was declared
effective by the SEC in May 1998. Prior to the filing of the 1998 Shelf
Registration Statement, the Company had approximately $42,000,000 of capacity
remaining on a previously filed registration statement which registered equity
securities of the Company. Thus, with the prior shelf registration statement and
the 1998 Shelf Registration Statement, the Company has the capacity to issue up
to $342,000,000 of equity securities and the Operating Partnership has the
capacity to issue up to $250,000,000 of debt securities.
Page 17 of 22
18
YEAR 2000 COMPLIANCE
The Operating Partnership has evaluated appropriate courses of action regarding
"Year 2000" compliance. The Operating Partnership has contacted its primary
software vendor and has determined that an upgraded package will be available
for implementation. The total cost of bringing all software, hardware and
operations to Year 2000 compliance has not been fully quantified. Management
estimates that the total costs will not have a material impact on its business
or results of operations. With respect to the preparation for the Year 2000
compliance by third-party service providers and vendors, no estimates have been
made by the Company as to any potential adverse impact on the Operating
Partnership's operations due to any noncompliance. The Operating Partnership is
attempting to identify those risks relating to third party service providers and
vendors, however, no assurance can be given regarding the cost of any failure to
comply.
FUNDS FROM OPERATIONS
Industry analysts generally consider funds from operations, ("Funds From
Operations"), an appropriate measure of performance of an equity REIT. The
Company, the sole general partner in the Operating Partnership, has elected to
be treated as a REIT under the Code. Generally, Funds From Operations adjusts
the net income of equity REITs for non-cash charges such as depreciation and
amortization of rental properties and non-recurring gains or losses. Management
generally considers Funds from Operations to be a useful financial performance
measurement of an equity REIT because, together with net income and cash flows,
Funds from Operations provides investors with an additional basis to evaluate
the ability of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds From Operations does not represent net income
or cash flows from operations as defined by GAAP and is not intended to indicate
whether cash flows will be sufficient to fund cash needs. It should not be
considered as an alternative to net income as an indicator of the REIT's
operating performance or to cash flows as a measure of liquidity. Funds From
Operations does not measure whether cash flow is sufficient to fund all cash
needs including principal amortization, capital improvements and distributions
to shareholders. Funds From Operations also does not represent cash flows
generated from operating, investing or financing activities as defined under
GAAP. Further, Funds from Operations as disclosed by other REITs may not be
comparable to the Operating Partnership's calculation of Funds From Operations.
The following table sets forth the Operating Partnership's calculation of Funds
from Operations for the quarters ended June 30, 1998 and 1997.
Three months ended
-------------------------------
June 30, 1998 June 30, 1997
------------- -------------
Income before minority interests $10,005,000 $ 7,321,000
Adjustments:
Depreciation & amortization 5,632,000 3,220,000
Adjustment for unconsolidated
joint ventures 366,000 448,000
Non-recurring items, including
gain on sale of real estate and
loss from termination __ (414,000)
Minority interests (1) (1,692,000) (142,000)
----------- -----------
Funds from Operations $14,311,000 $10,433,000
=========== ===========
Weighted average number
shares outstanding diluted (1) 20,549,875 16,598,551
=========== ===========
(1) Includes all outstanding shares of the Company's common stock and assumes
conversion of all outstanding operating partnership interests in the Operating
Partnership and Convertible Preferred Stock
Page 18 of 22
19
into shares of the Company's Common Stock. Also includes common stock
equivalents. Minority interests have been adjusted to reflect such conversion.
The National Association of Real Estate Investment Trust ("NAREIT"), a leading
industry trade group, has approved a revised interpretation of Funds from
Operations, which provides, in part, that the amortization of deferred financing
costs is no longer to be added back to net income in the calculation of Funds
from Operations. Consistent with the NAREIT recommendation, Essex has adopted
this new definition beginning in 1996.
Page 19 of 22
20
PART II OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
On April 20, 1998, the Operating Partnership completed the private
placement of 400,000 7.875% Series B Preferred Limited Partnership
Units (the "Perpetual Preferred Units"), representing a limited
partnership interest in the Operating Partnership, to an
institutional investor in return for a contribution to the Operating
Partnership of $20,000,000. Previously, on February 6, 1998, the
Operating Partnership had completed a prior private placement of
1,200,000 Perpetual Preferred Units to this same institutional
investor.
The Perpetual Preferred Units will become exchangeable, on a one for
one basis, in whole or in part at any time on or after the tenth
anniversary of the date of this private placement (or earlier under
certain circumstances) for shares of the Company's 7.875% Series B
Cumulative Redeemable Preferred Stock, par value $.0001 per share
(the "Series B Preferred Stock"). The holders of the Perpetual
Preferred Units have certain rights to cause the Company to register
the Series B Preferred Stock pursuant to the terms of a registration
rights agreement. The registration rights agreement was entered into
in connection with this private placement. On February 10, 1998, the
Company filed Articles Supplementary reclassifying 2,000,000 shares
of its Common Stock par value $.0001 per share, as 2,000,000 shares
of Series B Preferred Stock and setting forth the rights,
preferences and privileges of the Series B Preferred Stock. The
Perpetual Preferred Units have identical rights, preferences and
privileges as the Series B Preferred Stock. Neither the Perpetual
Preferred Units, nor the Series B Preferred Stock may at any time be
convertible into the Company's Common Stock.
The net proceeds from the above private placements were used
primarily to fund acquisition and development activities and for
general purposes.
The April 20, 1998 private placement was completed pursuant to the
exemption from registration contained in Section 4(2) the Securities
Act of 1933, as amended.
Page 20 of 22
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
10.1 Revolving Loan Agreement between Essex Portfolio, L.P., a
California limited partnership, and Bank of America National
Trust and Savings Association dated as of May 11, 1998
11.1 Statement regarding Computation of Earnings per Unit
12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges
and Preferred Unit Distribution
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only)
B. REPORTS ON FORM 8-K
On April 23, 1998, the Company filed a current report on Form 8-K,
regarding its private placement of 400,000 units of its 7.875%
Series B Cumulative Redeemable Preferred Units to the same
institutional investor who previously purchased 1,200,000 of such
units.
On May 14, 1998, the Company filed a current report on Form 8-K,
regarding its purchase of Wimbledon Woods and Bunker Hill Towers.
On June 24, 1998, the Company filed a current report on Form 8-K/A
to amend the current report on Form 8-K filed on March 30, 1998 in
order to provide additional information relating to certain pro
forma adjustments.
On June 24, 1998, the Company filed a current report on Form 8-K/A
to amend the current report on Form 8-K filed on May 14, 1998 in
order to provide additional information relating to certain pro
forma adjustments.
Page 21 of 22
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESSEX PORTFOLIO, L.P.
a California Limited Partnership
By: Essex Property Trust, Inc.
Its: General Partner
/s/ Mark J. Mikl
------------------------------
Mark J. Mikl, Controller
(Authorized Officer and
Principal Accounting Officer)
August 14, 1998
------------------------------
Date
Page 22 of 22
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
10.1 Revolving Loan Agreement between Essex Portfolio L.P., a
California limited partnership, and Bank of America National
Trust and Savings Association dated as of May 11, 1998
11.1 Statement regarding Computation of Earnings per Unit
12.1 Schedule of Compensation of Ratio of Earnings to Fixed Charges
and Preferred Unit Distributions
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only)