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 September 30, 1996
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. 1-13106
ESSEX PROPERTY TRUST, INC.
(Exact name of Registrant as specified in its Charter)
Maryland 77-0369576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
777 CALIFORNIA AVENUE, PALO ALTO, CALIFORNIA 94304
(Address of principal executive offices)
(Zip code)
(415) 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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
8,805,500 shares of Common Stock
with $.0001 par value as of November 12, 1996
Page 1
INDEX
Exhibit
Number Description Page Number
- ------- ----------- -----------
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheet
as of September 30, 1996 and December 31, 1995 4
Condensed Consolidated Statement of Operations
for the three months ended September 30, 1996 and 1995 5
Condensed Consolidated Statement of Operations
for the nine months ended September 30, 1996 and 1995 6
Condensed Consolidated Statement of Stockholders'
Equity from January 1, 1994 through September 30, 1996 7
Condensed Consolidated Statement of Cash Flows
for the nine months ended September 30, 1996 and 1995 8
Notes to Condensed Consolidated Financial Statements 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
PART II: OTHER INFORMATION
Item 2: Changes in Securities 23
Item 4: Submission for Matters to a Vote of Security Holders 24
Item 6: Exhibits and Reports on Form 8-K 25
Signatures 26
Page 2
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
"Essex" means Essex Property Trust, Inc., a real estate
investment trust incorporated in the State of Maryland,
or where the context otherwise requires, Essex
Portfolio, L.P., a partnership in which Essex Property
Trust, Inc. is the sole general partner.
The information furnished in the accompanying condensed
consolidated balance sheet, condensed consolidated
statements of operations, stockholders' equity and cash
flows of Essex reflect 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
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Balance Sheet
(Unaudited)
(Dollars in thousands)
September 30, December 31,
ASSETS 1996 1995
------------- ------------
Real estate:
Rental properties:
Land and land improvements $ 78,409 $ 61,738
Buildings and improvements 266,495 222,620
---------- ---------
344,904 284,358
Less accumulated depreciation (45,296) (40,281)
---------- ---------
299,608 244,077
Investments 8,576 8,656
---------- ---------
308,184 252,733
Cash and cash equivalents 6,238 3,983
Notes and other related party receivables 3,319 4,780
Notes and other receivables 5,105 5,130
Prepaid expenses and other assets 4,706 1,944
Deferred charges, net 2,903 5,090
---------- ---------
$ 330,455 $ 273,660
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $ 129,176 $ 136,061
Lines of credit 7,500 18,463
Accounts payable and accrued liabilities 8,866 2,964
Dividends payable 4,834 3,455
Other liabilities 1,984 1,565
---------- ---------
Total liabilities 152,360 162,508
Minority interest 25,363 26,423
Stockholders' equity:
8.75% Convetible Preferred Stock,
Series 1996A: $.0001 par value,
1,600,000 and none authorized and
800,000 and none issued and
outstanding - -
Common stock, $.0001 par value, per
share, 668,400,000 and 670,000,000
authorized, 8,805,500 and 6,275,000
issued and outstanding 1 1
Excess stock, $.0001 par value per
share, 330,000,000 shares authorized,
no shares issued or outstanding
Additional paid-in capital 184,100 112,070
Accumulated deficit (31,369) (27,342)
---------- ---------
Total stockholders' equity 152,732 84,729
---------- ---------
$ 330,455 $ 273,660
---------- ---------
---------- ---------
See accompanying notes to the unaudited financial statements.
Page 4
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Three months ended
---------------------------------
September 30, December 31,
1996 1995
------------- ------------
Revenues:
Rental $ 12,119 $ 10,387
Interest and other income 704 597
----------- ----------
12,823 10,984
----------- ----------
Expenses:
Property operating expenses
Maintenance and repairs 1,113 980
Real estate taxes 924 831
Utilities 791 726
Administrative 713 636
Advertising 161 67
Insurance 190 143
Depreciation and amortization 2,276 2,037
----------- ----------
6,168 5,420
----------- ----------
Interest 2,828 2,725
Amortization of deferred financing costs 103 311
General and administrative 416 360
Loss from hedge termination 3 26
----------- ----------
Total expenses 9,518 8,842
----------- ----------
Net income before gain on sales of
real estate, minority interest
and extraordinary item 3,305 2,142
Gain on sales of real estate 71 0
----------- ----------
Net income before minority interest
and extraordinary item 3,376 2,142
Minority interest (672) (554)
----------- ----------
Income before extraordinary item 2,704 1,588
Extraordinary item:
Loss on early extinguishment of debt (472) 0
----------- ----------
Net income $ 2,232 $ 1,588
----------- ----------
----------- ----------
Per share data:
Net income per share form operations
before extraordinary item $ 0.33 $ 0.25
Extraordinary item - debt extinguishment (0.06) 0.00
----------- ----------
Net income per share $ 0.27 $ 0.25
----------- ----------
----------- ----------
Weighted average number of shares
outstanding during the period 7,611,139 6,275,000
----------- ----------
----------- ----------
See accompanying notes to the unaudited financial statements.
Page 5
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine months ended
---------------------------------
September 30, September 30,
1996 1995
------------- ------------
Revenues:
Rental $ 34,123 $ 31,112
Interest and other income 2,008 1,706
------------- ------------
36,131 32,818
------------- ------------
Expenses:
Property operating expenses
Maintenance and repairs 3,218 2,898
Real estate taxes 2,693 2,533
Utilities 2,276 2,240
Administrative 1,967 1,965
Advertising 451 216
Insurance 482 414
Depreciation and amortization 6,513 6,008
------------- ------------
17,600 16,274
------------- ------------
Interest 8,738 8,198
Amortization of deferred financing costs 529 1,023
General and administrative 1,279 1,083
Loss from hedge termination 42 39
------------- ------------
Total expenses 28,188 26,617
------------- ------------
Net income before gain on sales of
real estate, minority interest
and extraordinary item 7,943 6,201
Gain on sales of real estate 2,480 789
------------- ------------
Net income before minority interest
and extraordinary item 10,423 6,990
Minority interest (1,772) (1,755)
------------- ------------
Income before extraordinary item 8,651 5,235
Extraordinary item:
Loss on early extinguishment of debt (3,317) (154)
------------- ------------
Net income $ 5,334 $ 5,081
------------- ------------
------------- ------------
Per share data:
Net income per share form operations
before extraordinary item $ 1.26 $ 0.83
Extraordinary item - debt extinguishment (0.50) (0.02)
------------- ------------
Net income per share $ 0.76 $ 0.81
------------- ------------
------------- ------------
Weighted average number of shares
outstanding during the period 6,720,380 6,275,000
------------- ------------
------------- ------------
See accompanying notes to the unaudited financial statements.
Page 6
ESSEX PROPERTY TRUST, INC.
Consolidated Statement of Stockholders' Equity
For the nine months ended September 30, 1996 and the
years ended December 31, 1995, 1994 and 1993
(Dollars and shares in thousands)
Retained
Preferred stock Common stock Additional earnings/
--------------------- ---------------------- paid - in (Accumulated
Shares Amount Shares Amount capital deficit) Total
------- -------- ------- --------- ----------- ------------ ---------
Balance at December 31, 1992 - $ - - $ - $ - $ 8,844 $ 8,844
Contributions - - - - - 100 100
Distributions - - - - - (1,139) (1,139)
Net loss - - - - - (33) (33)
------- -------- ------- --------- ----------- ------------ ---------
Balance at December 31, 1993 - - - - - 7,772 7,772
Distributions - - - - - (1,273) (1,273)
Net income through June 12, 1994 - - - - - 152 152
------- -------- ------- --------- ----------- ------------ ---------
Balance at June 12, 1994 - - - - - 6,651 6,651
Net proceeds from the initial
public offering - - 6,275 1 112,070 - 112,071
Effect of the initial public
offering - - - - - (5,658) (5,658)
Recognition of minority interest - - - - - (25,889) (25,889)
------- -------- ------- --------- ----------- ------------ ---------
Balances after the reorganization
and offering - - 6,275 1 112,070 (24,896) 87,175
Net income - - - - - 3,266 3,266
Dividends declared - - - - - (5,742) (5,742)
------- -------- ------- --------- ----------- ------------ ---------
Balances at December 31, 1994 - - 6,275 1 112,070 (27,372) 84,699
Net income - - - - - 10,604 10,604
Dividends declared - - - - - (10,574) (10,574)
------- -------- ------- --------- ----------- ------------ ---------
Balances at December 31, 1995 - - 6,275 1 112,070 (27,342) 84,729
Net proceeds from preferred
stock sale 800 - - - 18,025 - 18,025
Net proceeds from follow-on
public offering - - 2,530 - 53,996 - 53,996
Net proceeds from options
exercised - - 1 - 9 - 9
Net income - - - - - 5,334 5,334
Dividends declared - - - - - (9,361) (9,361)
------- -------- ------- --------- ----------- ------------ ---------
Balances at September 30, 1996 800 $ - 8,806 $ 1 $184,100 $(31,369) $152,732
------- -------- ------- --------- ----------- ------------ ---------
------- -------- ------- --------- ----------- ------------ ---------
See accompanying notes to the unaudited financial statements.
Page 7
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine months ended
---------------------------------
September 30, September 30,
1996 1995
------------- ------------
Net cash provided by operating activities $ 16,844 $ 13,950
Cash flows from investing activities:
Additions to real estate investments (72,640) (1,992)
Dispositions of real estate investments 13,327 4,569
Investments in corporations and joint ventures 425 (4,262)
------------- ------------
Net cash used in investing activities (58,888) (1,685)
Cash flows from financing activities:
Proceeds from mortgages, other notes payable
and lines of credit 64,383 16,400
Repayment of mortgages, other notes payable
and lines of credit (82,231) (18,423)
Additions to deferred charges (979) (608)
Additions to notes and other related party
receivables/payables (4,636) -
Repayment of notes and other related party
receivables/payables 6,097 (160)
Net proceeds from convertible preferred stock sale 18,025 -
Net proceeds from follow-on common stock offering 54,005 -
Distribution to partners/dividends to shareholders (10,365) (10,244)
------------- ------------
Net cash provided by (used in) financing activities 44,299 (13,035)
------------- ------------
Net increase (decrease) in cash and cash equivalents 2,255 (770)
Cash and cash equivalents at beginning of period 3,983 2,411
------------- ------------
Cash and cash equivalents at end of period $ 6,238 $ 1,641
------------- ------------
------------- ------------
Supplemental diclosure of cash flow information
Cash paid for interest $ 8,945 $ 8,238
------------- ------------
------------- ------------
Supplemental disclosure of non-cash investing
and financing activity
Dividends declared and payable $ 4,834 $ 3,455
------------- ------------
------------- ------------
See accompanying notes to the unaudited financial statements.
Page 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Essex Property
Trust, Inc. ("Essex" or the "Company") are prepared in accordance with
generally accepted accounting principles for interim financial information
and 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. These unaudited condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements included in the Company's annual
report on Form 10-K/A2 for the year ended December 31, 1995.
The consolidated financial statements for the three months and nine months
ended September 30, 1996 and 1995 include the accounts of the Company and
Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating
assets of the Company). The Company is the sole general partner in the
Operating Partnership, owning 82.6% and 77.2% interests as of September 30,
1996 and 1995, respectively.
All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.
(2) SIGNIFICANT TRANSACTION
(A) EQUITY TRANSACTIONS
(i) On June 20, 1996, the Company entered into an agreement to sell up to
$40,000 of the Company's 8.75% Convertible Preferred Stock, Series 1996A (the
"Convertible Preferred Stock") at $25.00 per share to Tiger/Westbrook Real
Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment Partner ship,
L.P. (collectively, "Tiger/Westbrook"). In the first phase of this
transaction Tiger/Westbrook on July 1, 1996 purchased 340,000 shares of
Convertible Preferred Stock for an aggregate purchase price of $8,500 and
loaned the Company an additional $11,500. This loan was exchanged for
460,000 shares of Convertible Preferred Stock at $25 per share upon
stockholder approval of the transaction on September 27, 1996.
Tiger/Westbrook is obligated to purchase up to an additional $20,000 of
Convertible Preferred Stock as requested by Essex on or prior to June 20,
1997. Holders of shares of Convertible Preferred Stock are entitled to
receive annual cumulative cash dividends, payable quarterly, in an amount
equal to the greater of (i) $2.1875 per share (8.75% of the $25.00 per share
price) or (ii) the dividends (subject to adjustment) paid with respect to the
Common Stock plus, in both cases, any accumulated but unpaid dividends on the
Convertible Preferred Stock. After June 20, 1997, 25% of the 1.6 million
authorized shares of Convertible Preferred Stock is convertible into Common
Stock at the option of the holder, and thereafter, at the beginning of each
next three-month period, an additional 25% of the Convertible Preferred Stock
is convertible. The conversion price per share of Convertible Preferred
Stock is $21.875, subject to adjustment under certain circumstances.
(ii) On August 14, 1996, the Company sold 2.2 million shares of Common Stock
in a follow-on public offering for $22.75 per share. In addition, on August
20, 1996, the underwriters for this offering exercised their "over-allotment"
option and purchased an additional 330,000 shares at $22.75 per share. Upon
completion of this follow-on offering the Company used the proceeds to
increase its ownership interest in the Operating Partnership from
approximately 77.2% to 82.6%.
Page 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(iii) On September 18, 1996, the Board of Directors of the Company voted to
increase the dividend to an annualized rate of $1.74 per share, from $1.70
per share and declared a quarterly cash dividend of $.435 per share to be
paid to stockholders of record as of September 30, 1996.
(B) ACQUISITIONS
(i) On August 23,1996, the Company completed its acquisition of Camarillo
Oaks Apartments, a 371 unit apartment community in Camarillo, California for
a contract price of $20,750. The property offers a full amenity package
including swimming pools, spa, sauna and picnic areas. Essex utilized
proceeds from the equity transactions and the sale of a property in the
second quarter of 1996 to fund this acquisition. Subsequent to September 30,
1996, the Company placed $19,420 of tax-exempt financing on the property.
(ii) On August 30, 1996, the Company acquired Landmark Apartments, a 285 unit
apartment community in Hillsboro, Oregon for a contract price of $17,700.
The amenities at the community include a swimming pool, indoor Jacuzzi,
racquetball court, and fitness center. Essex utilized proceeds from the
equity transactions to fund this purchase.
(iii) On August 30, 1996, the Company acquired Eastridge Apartments, a 188
unit apartment community in San Ramon, California for an approximate price of
$19,200. The community features a fitness center, spa, pool and security
perimeter. Essex utilized proceeds from the equity transactions to fund this
purchase.
(C) DEVELOPMENT ACTIVITIES
(i) Essex previously entered into a partnership for the purpose of
developing Jackson School Village, a 200 unit apartment community in
Hillsboro, Oregon. The lease up on this project started in early August 1996
with substantial completion of the project anticipated by the end of the
year.
(ii) The Company has entered into a letter agreement with Fairfield
Properties to form a partnership that will construct 374 apartment units in
Milpitas, California. The partnership agreement is near completion and
estimates the total project cost to be $45,500. Essex has entered into a
contract to purchase the land for this development for approximately $10,900.
The purchase contract requires Essex to acquire the site within 90 days
after the completion of the entitlement phase of this project, currently
anticipated to be approximately March 1997. The land is expected to be
contributed to the partnership upon closing the land purchase.
(D) DISPOSITIONS
(i) Essex has entered into a contract to sell its six neighborhood shopping
centers for $22,200. The contract is subject to a number of contingencies
and there is no assurance that such sale will be completed.
(E) DEBT RELATED TRANSACTIONS
(i) On August 14, 1996, Essex repaid a $9,938 LIBOR based variable rate loan
which had an interest rate swap agreement fixing the interest rate at 6.69%.
Essex wrote off approximately $383 in deferred financing and interest rate
protection costs associated with this loan. Essex utilized proceeds from the
equity transactions to fund this payoff.
(ii) On August, 14, 1996, Essex repaid a $7,224, 8.5% fixed rate loan which
was assumed upon the purchase of Treetops Apartments on January 31, 1996.
Essex wrote off approximately $64 in deferred financing costs related to this
transaction. Essex utilized proceeds from the equity transactions to fund
this payoff.
Page 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(iii) On August 22, 1996, the City of Freemont issued $9,800 in variable rate
tax-exempt demand bonds related to the financing of Treetops Apartments. The
30 year bonds, which mature August, 2026, were enhanced by FNMA and achieved
a Standard & Poor's rating of AAA/A-1+. The bonds credit enhancement is
secured by Treetops Apartments, a 172 unit apartment community located in
Fremont, California. The bonds have a seven year interest rate cap at 7.0%.
Essex will use approximately $925 on the bond proceeds to renovate the
property. The net proceeds will be used for property acquisitions and/or
debt repayments.
(3) RELATED PARTY TRANSACTIONS
Since June 13, 1994, all general and administrative expenses of the Company
and Essex Management Corporation ("EMC") have been initially borne by the
Company, with a portion subsequently allocated to EMC. Expenses allocated to
EMC for the three and nine months ended September 30, 1996 totaled $465 and
$1,321, respectively, and are reflected as a reduction in general and
administrative expenses in the accompanying consolidated statements of
operations.
Included in rental income in the accompanying consolidated statements of
operations is related party rents earned from space leased to The Marcus &
Millichap Company ("M&M"), including operating expense reimbursements, of
$169 and $509 for the three and nine months ended September 30, 1996,
respectively and $170 and $505 for the three and nine months ended September
30, 1995, respectively.
Included in other income for the three and nine months ended September 30,
1996 is interest income of $212 and $729, respectively, which were earned
principally under notes receivable from Essex Fidelity I Corporation, Essex
Sacramento Corporation, Essex Marina Cove, L.P., and Pathways. In addition,
management fees and equity income of $282 and $652 were earned for the three
and nine month periods ended September 30, 1996, respectively, from Essex
Bristol Partners, L.P., Essex San Ramon Partners, L.P. and Essex Marina Cove,
L.P.
Since June 13, 1994, EMC has provided property management services to the
Company's neighborhood shopping centers. The fee paid by the Company for the
three and nine months ended September 30, 1996 was $28, and $85,
respectively, and is included in administrative expense in the accompanying
consolidated statements of operations.
Page 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Notes and other related party receivables as of September 30, 1996 and December
31, 1995 consist of the following:
September 30, December 31,
1996 1995
---- ----
Notes receivable from Essex Sacramento
Corporation bearing interest at 9% due
on demand $ 1,466 $ 2,566
Notes receivable from Essex Fidelity I
Corporation interest at 9% due on demand 226 974
Notes receivable from Essex Fidelity I
Corporation and Jackson School Village,
L.P. bearing interest at 9.5% - 10%, due 2015 500 500
Other related party receivables 1,127 740
-------- --------
$ 3,319 $ 4,780
-------- --------
-------- --------
Other related party receivables consist primarily of unreimbursed expenses
due from EMC, accrued interest income on related party notes receivables and
acquisition cost-related reimbursements due from Essex San Ramon Partners,
L.P.
During the three and nine months ended September 30, 1996, the Company paid
brokerage commissions totaling $0 and $562, respectively to M&M in connection
with the purchase and disposition of real estate. The commissions are
reflected as an increased cost on the purchase of real estate or a reduction
in the gain on sale in the accompanying condensed consolidated financial
statements.
(4) PRO FROMA FINANCIAL INFORMATION
In 1996, Essex consummated five property acquisitions and two property
dispositions with independent third parties in "arms-lengths" transactions.
One property acquisition was acquired on November 7, 1996 subsequent to the
quarter ended September 30, 1996. The property, Meadowood Apartments, was
built in 1986 and contains 320 apartment units with 264,500 square feet
located in Simi Valley, California. The contract price was $25,740. The
seller was an unrelated third party. Essex assumed $17,733 in tax exempt
bonds with a 6.455% interest rate. The interest rate on bonds is fixed
through February 2008 at which time they will be repriced at the market rate
at that time. The bonds mature in January 2026. The balance of the purchase
price was funded by the October 24, 1996 issuance of $19,420 in variable
rate tax exempt bonds issued by the City of Camarillo in connection with the
financing of Camarillo Oaks Apartments. The Camarillo bonds carry a "AAA"
rating and are enhanced by Fannie Mae and mature in October 2026. The bonds
have a seven year interest rate cap at 7%.
The following unaudited pro forma condensed consolidated balance sheet as of
September 30, 1996 and the statements of operations for the nine months
ended September 30, 1996 and for the year ended December 31, 1995 are
presented as if the 1996 property acquisitions and disposition had occurred
on January 1, 1995.
Page 12
Proforma financial statements table of contents: Page
----
Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1996 14
Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended September 30, 1996 15
Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1995 16
Notes to Pro Forma Condensed Consolidated
Financial Statements 17
Page 13
ESSEX PROPERTY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(Unaudited)
(Dollars in thousands, except shares and per share amounts)
PRO FORMA
ADJUSTMENTS (2)
ACQUISITION
HISTORICAL PROPERTY PRO FORMA
------------ --------------- -----------
ASSETS
Real estate
Rental properties
Land and land improvements $ 78,409 $ 6,435 $ 84,844
Buildings and improvements 266,495 19,305 285,800
---------- ---------- ----------
344,904 25,740 370,644
Less accumulated depreciation (45,296) (45,296)
---------- ---------- ----------
299,608 25,740 325,348
Investments 8,576 8,576
---------- ---------- ----------
308,184 25,740 333,924
Cash and cash equivalents 6,238 2,463 8,701
Notes and other receivables 8,424 8,424
Other assets 7,609 1,450 9,059
---------- ---------- ----------
$ 330,455 $ 29,653 $ 360,108
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $ 129,176 37,153 166,329
Lines of credit 7,500 (7,500) 0
Accounts payable and accrued liabilities 8,866 8,866
Dividends payable 4,834 4,834
Other liabilities 1,984 1,984
---------- ---------- ----------
Total liabilities 152,360 29,653 182,013
Minority interest 25,363 25,363
STOCKHOLDERS' EQUITY
8.75% convertible preferred stock,
series 1996A, $.001 par value,
1,600,000 authorized, 800,000
issued and outstanding - -
Common stock, $.0001 par value, 668,400,000
shares authorized, 8,805,500 shares
issued and outstanding 1 1
Additional paid in capital 184,100 184,100
Accumlulated deficit (31,369) (31,369)
---------- ---------- ----------
152,732 0 152,732
---------- ---------- ----------
$ 330,455 $ 29,653 $ 360,108
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to Pro Forma financial statements
Page 14
ESSEX PROPERTY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
(Dollars in thousands, except shares and per share amounts)
PRO FORMA ADJUSTMENTS (3)
----------------------------
ACQUISITION DISPOSITION
HISTORICAL PROPERITIES PROPERITIES PRO FORMA
---------- ----------- ----------- ----------
REVENUES
Rental $ 34,123 $ 7,240 $ 701 $ 40,662
Interest and other income 2,008 145 8 2,145
---------- --------- -------- ---------
36,131 7,385 709 42,807
EXPENSES
Property operating expenses
Maintenance and repairs 3,218 657 55 3,820
Real estate taxes 2,693 667 69 3,291
Utilities 2,276 459 26 2,709
Administrative 1,967 407 48 2,326
Advertising 451 115 6 560
Insurance 482 93 11 564
Depreciation and amortization 6,513 1,459 106 7,866
---------- --------- -------- ---------
17,600 3,857 321 21,136
Interest 8,738 1,283 180 9,841
Amortization of deferred financing costs 529 18 8 539
General and administrative 1,279 0 0 1,279
Loss from hedge termination 42 0 0 42
---------- --------- -------- ---------
Total expenses 28,188 5,158 509 32,837
---------- --------- -------- ---------
Income before gain on sales of real estate,
minority interest and extraordinary item 7,943 2,227 200 9,970
Gain on sales of real estate 2,480 0 0 2,480
---------- --------- -------- ---------
Income before minority interest and
extraordinary item 10,423 2,227 200 12,450
Minority interest (1,772) (386) (35) (2,123)
---------- --------- -------- ---------
Income before extraordinary item 8,651 1,841 165 10,327
Extraordinary item (3,317) 0 0 (3,317)
---------- --------- -------- ---------
Net income $ 5,334 $ 1,841 $ 165 $ 7,010
---------- --------- -------- ---------
---------- --------- -------- ---------
PER SHARE DATA
Net income per share from operations
before extraordinary item $ 1.26 $ 1.17
Extraordinary item - debt
extinguishment (0.50) (0.37)
---------- ---------
Net income per share $ 0.76 $ 0.80
---------- ---------
---------- ---------
Weighted average number of shares
outstanding during the period 6,720,380 8,805,500
---------- ---------
---------- ---------
SUPPLEMENTAL INFORMATION -
FUNDS FROM OPERATIONS
Income before minority interest and
extraordinary item $ 10,423 $ 2,227 $ 200 $ 12,450
Adjustments
Depreciation and amortization 6,513 1,459 106 7,866
Adjustment for unconsolidated
joint ventures 379 0 0 379
Non-recurring items, including gain
on sales of real estate and loss
from hedge termination (2,438) 0 0 (2,438)
Minority interest - Pathways (416) 0 (416)
---------- --------- -------- ---------
Funds from operations $ 14,461 $ 3,686 $ 306 $ 17,841
---------- --------- -------- ---------
---------- --------- -------- ---------
See accompanying notes to Pro Forma financial statements
Page 15
ESSEX PROPERTY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
(Unaudited)
(Dollars in thousands, except shares and per share amounts)
PRO FORMA ADJUSTMENTS (3)
----------------------------
ACQUISITION DISPOSITION
HISTORICAL PROPERITIES PROPERITIES PRO FORMA
---------- ----------- ----------- ----------
REVENUES
Rental $ 41,640 $ 12,617 $ 1,813 $ 52,444
Interest and other income 2,300 232 23 2,509
---------- --------- -------- ---------
43,940 12,849 1,836 54,953
EXPENSES
Property operating expenses
Maintenance and repairs 3,811 1,133 171 4,773
Real estate taxes 3,371 1,156 191 4,336
Utilities 2,974 795 133 3,636
Administrative 2,592 732 121 3,203
Advertising 299 184 34 449
Insurance 557 154 26 685
Depreciation and amortization 8,007 2,403 286 10,124
---------- --------- -------- ---------
21,611 6,557 962 27,206
Interest 10,928 2,194 474 12,648
Amortization of deferred financing costs 1,355 34 23 1,366
General and administrative 1,527 0 0 1,527
Loss from hedge termination 288 0 0 288
---------- --------- -------- ---------
Total expenses 35,709 8,785 1,459 43,035
---------- --------- -------- ---------
Income before gain on sales of real
estate, minority interest and
extraordinary item 8,231 4,064 377 11,918
Gain on sales of real estate 6,013 0 (2,872) 8,885
---------- --------- -------- ---------
Income before minority interest and
extraordinary item 14,244 4,064 (2,495) 20,803
Minority interest (3,486) (705) (65) (4,126)
---------- --------- -------- ---------
Income before extraordinary item 10,758 3,359 (2,560) 16,677
Extraordinary item (154) 0 0 (154)
---------- --------- -------- ---------
Net income $ 10,604 $ 3,359 (2,560) $ 16,523
---------- --------- -------- ---------
---------- --------- -------- ---------
PER SHARE DATA
Net income per share from operations
before extraordinary item $ 1.71 $ 1.90
Extraordinary item - debt
extinguishment (0.02) (0.02)
---------- ---------
Net income per share $ 1.69 $ 1.88
---------- ---------
---------- ---------
Weighted average number of shares
outstanding during the period 6,275,000 8,805,000
---------- ---------
---------- ---------
SUPPLEMENTAL INFORMATION -
FUNDS FROM OPERATIONS
Income before minority interest
and extraordinary item $ 14,244 $ 4,064 (2,495) $ 20,803
Adjustments
Depreciation and amortization 8,007 2,403 286 10,124
Adjustment for unconsolidated
joint ventures 121 0 0 121
Non-recurring items, including gain
on sales of real estate and loss
from hedge termination (5,725) 0 2,872 (8,597)
Minority interest - Pathways (527) 0 (527)
---------- --------- -------- ---------
Funds from operations $ 16,120 $ 6,467 663 $ 21,924
---------- --------- -------- ---------
---------- --------- -------- ---------
See accompanying notes to Pro Forma financial statements
Page 16
ESSEX PROPERTY TRUST, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
(Dollars in thousands, except shares and per share amounts)
(1) OVERVIEW
Between January 31, 1996 and November 7, 1996, Essex consummated five
property acquisitions and two property dispositions with independent third
parties in "arms-lengths" transactions. Below is a summary of property
acquisitions and disposition whose effects are incorporated into the
unaudited pro forma financial statements as of January 1, 1995.
1996 ACQUISITIONS
On January 31, 1996, Essex acquired Treetops Apartments which was built in
1978 and contains 172 apartment units with 131,200 square feet and is
located in Fremont, California. The contract price was $10,725. Essex
funded this acquisition by assuming an existing 8.5% fixed interest rate
mortgage in the amount of $7,266 and the remainder was funded by Essex's
lines of credit. On August 14, 1996, Essex repaid the mortgage on the
property with the proceeds from its secondary common stock offering. On
August 22, 1996, Essex completed a $9,800 tax exempt bond financing on the
property.
On August 23, 1996, Essex completed its acquisition of Camarillo Oaks
Apartments for a contract price of $20,750. Camarillo Oaks is a 371-unit
apartment property consisting of approximately 303,800 square feet located in
Camarillo, California. Essex utilized proceeds from its August 14, 1996
offering of common stock and from the sale of a property to complete the
acquisition. On October 24, 1996, Essex completed a $19,420 tax exempt bond
financing on the property.
On August 30, 1996, Essex acquired Eastridge Apartments which was built in
1988 and contains 188 apartment units with 174,100 square feet located San
Ramon, California. The contract price was approximately $19,200. The price
includes the cost relating to the retirement of a land lease which occurred
on September 27, 1996. Essex utilized proceeds from its August 14, 1996
offering of common stock to complete the acquisition.
On August 30 1996, Essex acquired Landmark Apartments which was built in 1990
and contains 285 apartment units with 282,900 square feet located in
Hillsboro, Oregon. The contract price was $17,700. Essex utilized proceeds
from its August 14, 1996 offering of common stock to complete the acquisition.
On November 7, 1996, Essex acquired Meadowood Apartments, which was built
in 1986 and contains 320 apartment units with 264,500 square feet located in
Simi Valley, California. The contract price was $25,740. Essex assumed
$17,733 in tax exempt bonds at a 6.455% interest rate. The bonds have a
fixed interest rate through February 2008, at which time they will be
repriced. The bonds mature in January 2026. The balance of the purchase
price was funded by $19,420 of 30 year variable rate tax exempt bonds issued
by the City of Camarillo in connection with Camarillo Oaks Apartments. The
excess of the Camarillo bond proceeds not used to fund this acquisition went
to fully pay off $7,500 outstanding on the Company's lines of credit.
Page 17
ESSEX PROPERTY TRUST, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
(Dollars in thousands, except shares and per share amounts)
1996 DISPOSITIONS
On April 30, 1996, Essex sold Viareggio Apartments, a 116-unit, 89,615 square
foot apartment community located in San Jose, California. The gross sales
price was $10,610, resulting in a net gain of approximately $2,266. Essex
used the proceeds to reduce indebtedness and to facilitate the acquisition of
Camarillo Oaks.
On June 21, 1996, Essex sold Westbridge Apartments, a 92-unit, 104,560 square
foot apartment community in Yuba City, California. The gross sales price was
$3,700, resulting in a net gain of approximately $214. Essex used the
proceeds to reduce outstanding indebtedness.
(2) PRO FORMA BALANCE SHEET ADJUSTMENTS
The pro forma condensed consolidated balance sheet as of September 30, 1996
includes pro forma adjustments for property acquisitions subsequent to
September 30, 1996. Real estate investments were increased by $25,740 based
on the contracted acquisition price of Meadowood Apartments. It is assumed
that 75% of the increase in real estate investment will be allocated to
buildings and improvements for purposes of depreciation.
(3) PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS
The pro forma condensed consolidated statement of operations for the nine
months ended September 30, 1996 and for the twelve months ended December 31,
1995 include the following Proforma adjustments:
For Treetops Apartments, acquired on January 31, 1996, pro forma adjustment
was made by taking its eight months actual operating results through August 31,
1996 and annualizing them for their inclusion in either the nine months ended
September 30, 1996 and the twelve months ended December 31, 1995 Pro Forma
Statement of Operations.
For Viareggio Apartments and Westbridge Apartments, the Pro Forma Statements
of Operations reflects the elimination of the actual results of operations.
The twelve month ended December 31, 1995 Pro Forma Statement of Operation
reflects the gain on sale of these properties as if the sales had occurred on
January 1, 1995.
For the properties, Camarillo Oaks Apartments, Eastridge Apartments, Landmark
Apartments and Meadowood Apartment, based on their short period actual
operating results and in the case of Meadowood Apartments being acquired
subsequent to September 30, 1996, their budgeted operating results were
included in the nine months ended September 30, 1996 or the twelve months
ended December 31, 1995 Pro Forma Statements of Operations based on their
respective internal operating budgets.
Page 18
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 Essex Property Trust, Inc. ("Essex" or the "Company") as of
September 30, 1996 and 1995 and for the three months and nine months ended
September 30, 1996 and 1995.
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.
Substantially all the assets of Essex are held by, and substantially all
operations conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). Essex is the sole general partner of the Operating
Partnership and, as of September 30, 1996 and 1995, owned 82.6% and 77.2%
general partnership interest in the Operating Partnership, respectively. The
Company qualifies as a real estate investment trust (a "REIT") for Federal
income tax purposes.
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 the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors including, but not limited
to, those risks and special consideration set forth in Essex's other SEC
filings which may cause the actual results, performance or achievements of
Essex to be materially different from any further results, performance or
achievements expressed or implied by such forward-looking statements.
GENERAL BACKGROUND
Essex's revenues are generated primarily from multifamily residential, retail
and commercial property operations, which accounted for 94% and 95% of its
revenues for the nine months ended September 30, 1996 and 1995, respectively.
Essex's Properties (the "Properties") are located in California, Oregon and
Washington. Occupancy levels of Essex's multifamily residential Properties
in these markets have generally remained high (averaging over 95% for the
last five years).
Essex has qualified as a REIT for federal income tax purposes,
commencing with the year ending December 31, 1994. In order to maintain
compliance with REIT tax rules, Essex provides fee-based asset management and
disposition services as well as third-party property management and leasing
services through EMC. Essex owns 100% of EMC's 19,000 shares of nonvoting
preferred stock. Executives of Essex own 100% of EMC's 1,000 shares of
common stock. Essex has been actively engaged in the business of acquiring
and managing portfolios of non-performing assets along with institutional
investors. Asset management services resulting from these portfolios are
provided by EMC, typically for the term that is required to acquire,
reposition and dispose of the portfolio. Asset management agreements usually
provide for a base management fee calculated as a percentage of the gross
asset value of the portfolio under management, and an incentive fee based
upon the overall financial performance of the portfolio. Accordingly, the
fees earned as a result of these contracts fluctuate as assets are acquired
and disposed of. Essex benefits from such fees indirectly through receipt of
preferred stock dividend from and by allocation of related expenses to EMC.
In general, Essex believes, however, that there will be fewer opportunities
to acquire portfolios of non-performing assets in the future.
Page 19
Average financial occupancy rates of the Company's multifamily properties
on a same-property basis for the three months ended September 30, 1996 and
1995 increased to 97.2% from 96.8%, respectively. The region breakdown is as
follows:
September 30, September 30,
1996 1995
---- ----
Northern California 98.7% 98.7%
Seattle Metropolitan 95.9% 94.5%
Southern California 95.8% 95.4%
The Company's retail and commercial properties were 95% occupied (based on
square footage) as of September 30, 1996.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1995
TOTAL REVENUES increased by $1,839,000 or 16.7% to $12,823,000 in the third
quarter of 1996 from $10,984,000 in the third quarter of 1995. Rental
revenues increased by $1,732,000 or 16.7% to $12,119,000 in the third quarter
of 1996 from $10,387,000 in the third quarter of 1995. Of the $1,732,000
increase approximately $1,081,000 was the net effect of properties acquired
or disposed of in 1995 or 1996, with the remainder of the increase relating
to rental rate and occupancy level increases at properties owned by the
Company during the periods being compared. Rental revenues from the San
Francisco Bay Area and Seattle multifamily residential Properties increased
by $908,000 to $9,003,000 in the third quarter of 1996 from $8,095,000 in the
third quarter of 1995. Rental revenue increased by $781,000 during the third
quarter of 1996 from the amount in the third quarter of 1995 for the
Properties located in Southern California. Approximately $736,000 of this
increase is attributable to the acquisition of a property in this region
during the third quarter of 1996. Commercial property rental revenue
increased $43,000 for the third quarter of 1996 from the amount in the third
quarter of 1995 as a result of increased occupancy.
TOTAL EXPENSES increased by $676,000 or approximately 7.6% to $9,518,000 in
the third quarter of 1996 from $8,842,000 in the third quarter of 1995.
Interest expense increased by $103,000 or 3.8% to $2,828,000 in the third
quarter of 1996 from $2,725,000 in the third quarter of 1995. 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 $509,000 or 15.1% to $3,892,000 in the third quarter of 1996
from $3,383,000 in the third quarter of 1995. Of such increase, $379,000 was
attributable to Properties acquired or disposed of in 1995 and 1996. General
and administrative expenses represent the costs of Essex's various
acquisition and administrative departments as well as partnership
administration and non-operating expenses. Such expenses increased by $56 in
the third quarter of 1996 from the third quarter of 1995.
NET INCOME AFTER MINORITY INTEREST increased by $644,000 to $2,232,000 in the
third quarter of 1996 from $1,588,000 in the third quarter of 1995. Net
income includes a $472,000 loss on early extinguishment of debt and a
$71,000 of gain on the sales of real estate. The increase in net income was
primarily a result of same property net operating income increases over the
prior year and the net contribution of properties acquired during 1996.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
TOTAL REVENUES increased by $3,313,000 or 10.1% to $36,131,000 in the first
nine months of 1996 from $32,818,000 in the first nine months of 1995.
Rental revenues increase by $3,011,000 or 9.7% to
Page 20
$34,123,000 in the first nine months of 1996 from $31,112,000 in the first
nine months of 1995. Of the $3,011,000 increase approximately $1,209,000 was
the net effect of properties acquired or disposed of in 1995 and 1996, with
the remainder of the increase primarily relating to rental rate and occupancy
level increases at properties owned by the Company during the periods being
compared. Rental revenues from the San Francisco Bay Area and Seattle
multifamily residential Properties increased by $1,912,000 to $26,214,000 in
the first nine months of 1996 from $24,302,000 in the first nine months of
1995. Rental revenue increased by $865,000 during the first nine months of
1996 from the amount in the first nine months of 1995 for the Properties
located in southern California. Approximately $736,000 of this increase is
attributable to the acquisition of a property in this region during the third
quarter of 1996. Commercial property rental revenue increased $234,000 for
the first nine months of 1996 from the amount for the third quarter of 1995
as a result of increased occupancy.
TOTAL EXPENSES increased by $1,571,000 or approximately 5.9% to $28,188,000
in the first nine months of 1996 from $26,617,000 in the first nine months of
1995. Interest expense increased by $540,000 or 6.6% to $8,738,000 in the
first nine months of 1996 from $8,198,000 in the first nine months of 1995.
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 $821,000 or 8.0% to $11,087,000 in the first nine
months of 1996 from $10,266,000 in the first nine months of 1995. Of such
increase, $408,000 was attributable to Properties acquired or disposed of in
1995 and 1996. General and administrative expenses represent the costs of
Essex's various acquisition and administrative departments as well as
partnership administration and non-operating expenses. Such expenses
increased by $196,000 in the first nine months of 1996 from the first nine
months of 1995.
NET INCOME AFTER MINORITY INTEREST increased by $253,000 to $5,334,000 in the
first nine months of 1996 from $5,081,000 in the first nine months of 1995.
The increase of $253,000 was reduced by the loss on the early extinguishment
of debt which was $3,163,000 greater than such loss in the same period in
1995 and which was partially offset by gain on the sales of real estate that
was $1,691,000 greater than the gain in the same period as 1995. The
increase in net income, net of the loss on the early extinguishment of debt
and gain on the sales of real estate is primarily due to same property net
operating income increases over the prior period and contributions made by
properties acquired in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, Essex had $6,238,000 in cash and cash equivalents.
The Company expects to meet its short-term liquidity requirements by using
this working capital, the proceeds from its sale of Convertible Preferred
Stock, amounts available on lines of credit, and any portion of net cash flow
from operations not currently distributed. The Company 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. Essex has credit facilities in the committed amount of
approximately $25,700,000. The Company is currently negotiating an increase
in the available amount of its lines of credit. At September 30, 1996 Essex
had $7,500,000 outstanding on its lines of credit, with interest rates during
the year ranging from 7.2% to 7.5%.
Essex's cash balance increased $2,255,000 from $3,983,000 as of December 31,
1995 to $6,238,000 as of September 30, 1996. This increase in cash was a result
of $16,844,000 net cash provided by operating activities, and $44,299,000 in net
cash provided by financing activities, which was decreased by $58,888,000 net
cash used in investing activities. The $58,888,000 net cash used in investing
activities is a result of $72,640,000 used to purchase and upgrade rental
properties as offset in part by $13,327,000 provided by the disposition of real
estate. The significant components which contributed to the $44,299,000 net
cash provided by financing activities was a result of $54,005,000 net proceeds
from the follow-on common stock offering, $18,025,000 net proceeds from the sale
of Convertible Preferred Stock, $64,383,000 of proceeds from mortgages, other
notes payable and line of credit as offset by $82,231,000 of repayments of
mortgages, other notes payable and lines of credit and $10,365,000 of
dividends/distributions paid.
Page 21
As of September 30, 1996, Essex's combined outstanding indebtedness under
mortgages and lines of credit consisted of $93,295,000 in fixed rate debt,
(such component includes variable rate indebtedness subject to interest rate
swap agreements), $12,480,000 in debt based on the Federal Home Loan Bank's
11th District Cost of Funds index ("the 11th District Debt"), $23,400,000 of
debt represented by tax exempt variable rate demand bonds, of which
$9,800,000 is capped at a maximum interest rate of 7.0%, and $7,500,000 of
debt is based on The London Interbank Offered Rates ("LIBOR"). Essex's 11th
District Debt is subject to maximum annual payment adjustments of 7.5% and a
maximum interest rate during the term of the loans of 13%.
Essex expects to incur approximately $1,450,000 or $300 per weighted average
occupancy unit in non-revenue generating capital expenditures for the year
ended December 31, 1996. These expenditures do not include the improvements
required in connection with Northwestern Mutual mortgage loans and renovation
expenditures required pursuant to tax-exempt bond financings. Essex expects
that cash from operations and/or the lines of credit will fund such
expenditures.
Essex 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 lines of credit.
On July 1, 1996, the Company sold 340,000 shares of its 8.75% Convertible
Preferred Stock, Series 1996A (the "Convertible Preferred Stock") for
$8,500,000 and borrowed $11,500,000 from Tiger/Westbrook Real Estate Fund,
L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P.
(collectively "Tiger/Westbrook") as part of a private placement of
$40,000,000 in Convertible Preferred Stock. On September 27, 1996 the
stockholders approved the transaction, resulting in the exchange of the
$11,500,000 loan for an additional 460,000 shares of Convertible Preferred
Stock. The Company may require Tiger/Westbrook to purchase up to an
additional $20,000,000 of Convertible Preferred Stock at any time prior to
June 20, 1997.
On March 7, 1996, the Company filed a shelf registration statement for up to
$100,000,000 of Common Stock, preferred stock, depository shares and warrants
to purchase common and preferred stock. The shelf registration statement was
declared effective by the Securities and Exchange Commission on June 6, 1996.
In late July 1996, the Company commenced a public offering of its common
stock. On August 20, 1996 the Company completed the issuance of 2,530,000
shares of its common stock (including 330,000 shares of common stock sold
pursuant to the underwriters exercise of their over-allotment option) at a
price of $22.75 per share. The net proceeds were used primarily to fund
property acquisitions. After completion of this follow-on offering the
Company has the capacity pursuant to its shelf registration to issue up to
$42,442,500 of equity securities.
The Company will utilize the proceeds of public offerings of shares of common
stock, sales of Convertible Preferred Stock to Tiger/Westbrook, availability
under its lines of credit, and cash balances to fund its and future property
acquisition and development activities. Essex expects to meet certain
long-term liquidity requirements such as scheduled debt maturities and
repayment of short-term financing of acquisition and development activities
through the issuance of long-term secured and unsecured debt and offerings by
Essex of additional equity securities (or limited partnership interests in
the Operating Partnership).
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations an appropriate
measure of performance of an equity REIT. Generally, Funds from Operations
adjusts the net income of equity REITs for non-cash charges such as
depreciation and amortization 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
Page 22
operations as defined by GAAP and does not necessarily indicate that 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 Operating Partnership'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 Company's calculation of Funds from
Operations. The following table sets forth Essex's calculation of actual
Funds from Operations for the quarter ended September 30, 1996 and 1995.
Three months ended
-------------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
Income before minority interest
and extraordinary item $ 3,376,000 $ 2,142,000
Adjustments:
Depreciation & Amortization 2,276,000 2,037,000
Adjustment for Unconsolidated
Joint Venture 130,000 51,000
Non-recurring Items, including
gain on sales of real estate
and loss from hedge termination (68,000) 26,000
Minority Interest - Pathways (144,000) (123,000)
------------ --------------
Funds from Operations-
fully diluted $ 5,570,000 $ 4,133,000
------------ --------------
------------ --------------
Weighted average number of
shares outstanding-fully
diluted (1) 9,878,075 8,130,000
------------ --------------
------------ --------------
(1) Assumes conversion of all outstanding shares of Convertible Preferred
Stock and operating partnership interests in the Operating Partnership
into shares of Essex's common stock.
The National Association of Real Estate Investment Trusts ("NAREIT"), a
leading industry trade group, has approved a revised definition of Funds from
Operations, which provides that the amortization of deferred financing costs
is no longer added back to net income to calculate Funds from Operations.
Essex has adopted the revised NAREIT definition of Funds from Operations as
of January 1, 1996 and has restated prior year amounts for consistency.
PART II OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
On June 20, 1996, the Company entered into a definitive agreement to
sell up to $40.0 million of the Company's 8.75% Convertible Preferred
Stock, Series 1996A (the "Convertible Preferred Stock") at $25.00 per
share to Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook
Real Estate Co-Investment Partnership, L.P. (collectively,
"Tiger/Westbrook"). In the first phase of this transaction,
Tiger/Westbrook on July 1, 1996 purchased 340,000 shares of
Convertible Preferred Stock for an aggregate purchase price
of $8.5 million and loaned the Company an additional $11.5
million. This loan was exchanged for 460,000 shares of
Convertible Preferred Stock upon stockholder approval of the
transaction which occurred on September 27, 1996.
As part of the second phase of this transaction, Tiger/Westbrook is
obligated to purchase up to an additional $20.0 million of Convertible
Preferred Stock as requested by Essex on or prior to June 20, 1997.
Page 23
The terms, rights and preference of the Convertible Preferred Stock
are set forth in the Articles Supplementary and the other exhibits
that were filed with the Company's Current Report on Form 8-K, filed
on July 16, 1996, which are incorporated herein by reference.
A summary of such terms, rights and preferences was set forth in Item
2 of the Company's Report or Form 10-Q for the quarter ended June 30,
1996.
ITEM 4: SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS
At the Special Meeting of Stockholders on September 27, 1996, the
stockholders approved the following proposals:
(1) The proposal to approve the sale and issuance of up to 1,600,000
shares of the Company's 8.75% Convertible Preferred Stock, Series
1996A ("the Convertible Preferred Stock") was approved (4,843,114
votes for and 378,838 votes against or withheld).
(2) The proposal to amend the ownership limitation provisions in the
Company's Charter was approved (4,835,570 votes for and 386,411
votes against or withheld).
The third proposal submitted at the Special Stockholders Meeting
concerned certain proposed amendments to the Company's Charter to
provide for changes in the composition of the Board of Directors in
the event of the breach of certain protective provisions in the
Charter relating to the Convertible Preferred Stock. This proposal,
which requires a 66% affirmative vote for passage, has not yet been
approved by the stockholders. The Special Stockholders Meeting was
adjourned to December 17, 1996 in order to obtain additional votes
from the stockholders in connection with this third proposal.
Page 24
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
3.1 First Amendment to Articles of Amendment and Restatement
of Essex Property Trust, Inc.
10.1 Letter Agreement with Tiger/Westbrook entities re: Limitations
on Ownership of Stock of the Company.
12.1 Statement of Competition of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividend
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only).
B. REPORTS ON FORM 8-K
On September 11, 1996, Essex filed a current report on Form 8-K, which
described 1996 property acquisitions and disposition and included pro
forma financial statements as if the 1996 property acquisitions and
dispositions had occurred on January 1, 1995.
On October 17, 1996, Essex filed Form 8-K/A (to the report which was
filed on September 11, 1996) regarding 1996 property acquisitions and
dispositions to include combined historical summary of gross income
and direct operating expenses for the year ended December 31, 1995
for such 1996 property acquisitions.
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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 PROPERTY TRUST, INC.
/s/ MARK J. MIKL
____________________________
Mark J. Mikl, Controller
(Principal Accounting Officer)
Date November 13, 1996
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