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 March 31, 2001
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.)
925 East 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 __
-----
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:
18,456,841 shares of Common Stock
as of May 1, 2001
TABLE OF CONTENTS
FORM 10-Q
Part I Page No.
--------
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000 4
Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000 5
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2001
and the year ended December 31, 2000 6
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and 2000 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosure About Market Risk 20
Part II
Item 2 Changes in Securities and Use of Proceeds 21
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
2
Part I Financial Information
- ------ ---------------------
Item 1: Financial Statements (Unaudited)
--------------------------------
"Essex" or the "Company" 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 limited partnership
in which Essex Property Trust, Inc. is the sole general partner.
The information furnished in the accompanying consolidated unaudited
balance sheets, statements of operations, stockholders' equity and cash
flows of the Company 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.
3
ESSEX PROPERTY TRUST, INC.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)
March 31, December 31,
Assets 2001 2000
------ -------- ------------
Real estate:
Rental properties:
Land and land improvements $ 287,842 $ 289,796
Buildings and improvements 862,242 866,612
-------------- --------------
1,150,084 1,156,408
Less accumulated depreciation (128,325) (119,499)
-------------- --------------
1,021,759 1,036,909
Investments 69,751 65,703
Real estate under development 50,678 38,231
-------------- --------------
1,142,188 1,140,843
Cash and cash equivalents-unrestricted 11,827 6,600
Cash and cash equivalents-restricted 18,430 18,965
Notes receivable from investees and other related parties 66,971 77,081
Notes and other receivables 26,487 24,062
Prepaid expenses and other assets 6,492 7,654
Deferred charges, net 6,638 6,644
-------------- --------------
$ 1,279,033 $ 1,281,849
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Mortgage notes payable $ 539,171 $ 502,066
Lines of credit 44,733 93,469
Accounts payable and accrued liabilities 26,873 30,430
Dividends payable 16,495 14,538
Other liabilities 6,375 6,539
Deferred gain 5,002 5,002
-------------- --------------
Total liabilities 638,649 652,044
Minority interests 249,588 238,130
Stockholders' equity:
8.75% Convertible Preferred Stock, Series 1996A: $.0001
par value, no shares authorized, issued and outstanding - -
Common stock, $.0001 par value, 656,682,178 and
656,682,178 authorized, 18,455,841 and 18,417,013
issued and outstanding 2 2
Cumulative redeemable preferred stock; $.0001 par
value, no shares issued and outstanding:
7.875% Series B 2,000,000 shares authorized - -
9.125% Series C 500,000 shares authorized - -
9.30% Series D 2,000,000 shares authorized - -
9.25% Series E 2,200,000 shares authorized - -
Excess stock, $.0001 par value, 330,000,000 shares
authorized and no shares issued and outstanding - -
Additional paid-in capital 429,423 428,433
Distributions in excess of accumulated earnings (38,629) (36,760)
-------------- --------------
Total stockholders' equity 390,796 391,675
-------------- --------------
$ 1,279,033 $ 1,281,849
============== ==============
See accompanying notes to the consolidated unaudited financial statements.
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Three months ended
---------------------------------
March 31, March 31,
2001 2000
--------- --------
Revenues:
Rental $ 44,591 $ 36,846
Other property 1,459 954
------------ ------------
Total property 46,050 37,800
Interest and other 4,060 1,736
------------ ------------
Total revenues 50,110 39,536
------------ ------------
Expenses:
Property operating expenses
Maintenance and repairs 2,741 2,151
Real estate taxes 3,081 2,598
Utilities 2,489 2,056
Administrative 3,623 3,332
Advertising 710 497
Insurance 262 221
Depreciation and amortization 8,826 6,667
------------ ------------
21,732 17,522
Interest 9,424 5,808
Amortization of deferred financing costs 160 159
General and administrative 1,874 1,125
------------ ------------
Total expenses 33,190 24,614
------------ ------------
Income before gain on the sales of real estate
and minority interests 16,920 14,922
Gain on the sales of real estate - 4,022
------------ ------------
Income before minority interests 16,920 18,944
Minority interests (5,871) (6,194)
------------ ------------
Net income 11,049 12,750
Preferred stock dividends - (117)
------------ ------------
Net income available to common stockholders $ 11,049 $ 12,633
============ ============
Per share data:
Basic:
Net income $ 0.60 $ 0.70
============ ============
Weighted average number of shares
outstanding during the period 18,427,644 18,067,694
============ ============
Diluted:
Net income $ 0.59 $ 0.69
============ ============
Weighted average number of shares
outstanding during the period 18,810,140 18,499,759
============ ============
Dividend per share $ 0.70 $ 0.55
============ ============
See accompanying notes to the consolidated unaudited financial statements.
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2001 and the
year ended December 31, 2000
(Unaudited)
(Dollars and shares in thousands)
Distributions
Preferred stock Common stock Additional in excess of
--------------- --------------- paid-in accumulated
Shares Amount Shares Amount capital earnings Total
------ ------ ------ ------ ------------ ---------- -----------
Balances at December 31, 1999 185 $ 1 18,050 $ 2 $ 425,089 $ (37,399) $ 387,693
Shares issued on conversion
of Convertible Preferred Stock (185) (1) 211 - - (1)
Net proceeds from options exercised - - 156 3,344 - 3,344
Net income - - - - 44,353 44,353
Dividends declared - - - - (43,714) (43,714)
-------- -------- ------- ----- ---------- --------- ---------
Balances at December 31, 2000 - - 18,417 2 428,433 (36,760) 391,675
Net proceeds from options exercised - - 39 990 - 990
Net income - - - - 11,049 11,049
Dividends declared - - - - (12,918) (12,918)
-------- -------- ------- ----- ---------- --------- ---------
Balances at March 31, 2001 - $ - 18,456 $ 2 $ 429,423 $ (38,629) $ 390,796
======== ======== ======= ===== ========== ========= =========
See accompanying notes to the consolidated unaudited financial statements
ESESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three months ended
------------------------------------------
March 31, March 31,
2001 2000
----------------- ---------------
Net cash provided by operating activities: $ 22,877 $ 22,032
----------------- ---------------
Cash flows from investing activities:
Additions to real estate (8,139) (5,548)
Proceeds received from the disposition of real estate - 31,302
Proceeds received from contribution of real estate to
corporate investee 15,987 -
Decrease/(increase) in restricted cash 535 (866)
Additions to notes receivable from investees,
other related parties and other receivables (6,547) (2,000)
Repayment of notes receivable from investees,
other related parties and other receivables 12,401 2,036
Additions to real estate under development (6,547) (9,526)
Net contribution to investments in corporations
and limited partnerships (1,325) (605)
----------------- ---------------
Net cash provided by investing activities 6,465 14,793
----------------- ---------------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 72,000 17,000
Repayment of mortgage and other notes payable
and lines of credit (83,631) (28,191)
Additions to deferred charges (154) -
Net proceeds from stock options exercised and shares
issued through dividend reinvestment plan 990 1,080
Contributions from minority interest partners 6,000 -
Distributions to minority interest partners (5,879) (5,768)
Redemption of operating partnership units (2,207) (164)
Dividends paid (11,234) (10,044)
----------------- ---------------
Net cash used in financing activities (24,115) (26,087)
----------------- ---------------
Net increase in cash and cash equivalents 5,227 10,738
Cash and cash equivalents at beginning of period 6,600 12,348
----------------- ---------------
Cash and cash equivalents at end of period $ 11,827 $ 23,086
================= ===============
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $722 and
$656 capitalized $ 9,742 $ 3,446
================= ===============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of Operating Partnership Units in
connection with the purchase of real estate $ 8,000 $ -
================= ===============
Exchange of related party notes receivable for investments $ 8,347 $ -
================= ===============
Contribution of real estate in exchange for notes receivable $ 6,571 $ -
================= ===============
Consolidation of previously unconsolidated investment $ 6,000 $ -
================= ===============
See accompanying notes to consolidated unaudited financial statements.
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share an per unit amounts)
(1) Organization and Basis of Presentation
--------------------------------------
The unaudited consolidated financial statements of the Company 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. These unaudited 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 for the year ended December 31,
2000.
The unaudited consolidated financial statements for the three months ended
March 31, 2001 and 2000 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 an 89.2%, 89.6% and 89.7% general partnership
interest as of March 31, 2001, December 31, 2000 and March 31, 2000,
respectively.
As of March 31, 2001, the Company operates and has ownership interests in 83
multifamily properties (containing 18,673 units) and five commercial
properties (with approximately 290,000 square feet) (collectively, the
"Properties"). The Properties are located in Northern California (the San
Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and
San Diego counties), and the Pacific Northwest (the Seattle, Washington and
Portland, Oregon metropolitan areas).
All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.
(2) Significant Transactions
------------------------
(A) Acquisition Activities
---------------------------
On March 22, 2001, in connection with the acquisition of The Carlyle
Apartments in April 2000, Essex issued 158,202 Operating Partnership units
convertible into Common Stock at the option of the holder. This was the
final payment and was based on an amount that provides Essex with a targeted
yield on the property. Total consideration paid for the property was
$26,500.
(B) Development Communities
----------------------------
The Company defines development communities as new apartment properties that
are being constructed or are newly constructed and in a phase of lease-up
and have not yet reached stabilized operations. At March 31, 2001, the
Company has ownership interests in six development communities, with an
aggregate of 1,673 multifamily units.
During the first quarter, the Company announced one new development
community, Parker Ranch, in which the Company has entered into a joint
venture agreement to develop a 324 unit multifamily community in Simi
Valley, California. The Company has a 50% partnership interest in this
venture.
8
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share an per unit amounts)
In connection with the properties currently under development, the Company
has directly, or in some cases through its joint ventures, entered into
contractual construction related commitments with unrelated third parties.
At March 31, 2001, the Company, together with its joint venture partners, is
committed to fund approximately $102,000 under these commitments.
(C) Redevelopment Communities
------------------------------
The Company defines redevelopment communities as existing properties owned
or recently acquired which have been targeted for investment by the Company
with the expectation of increased financial returns through property
improvement. Redevelopment communities typically have apartment units that
are not available for rent and, as a result, may have less than stabilized
operations. At March 31, 2001, the Company has ownership interests in four
redevelopment communities, which contain an aggregate of 1,632 units with
total originally projected investment of $27,343 of which approximately
$6,500 remains to be expended.
(D) Debt Transactions
---------------------
On January 31, 2001 Essex VFGP, Inc. (VFGP), one of the Company's corporate
investees, entered into three separate long-term non-recourse mortgages
totaling $28,530. Each loan is secured by one property. These properties
were previously unencumbered. The loans bear interest at fixed rates ranging
from 6.945% to 7.090% and are due in February 2011. The properties
encumbered were Hunt Club, El Encanto and Rosebeach Apartments. VFGP plans
to contribute these properties, together with others, to a joint venture
that it is planning to form in the future. The Company's investment in
these assets is reflected in the Company's consolidated financial statements
as notes receivable from investees and other related parties and
investments.
On March 12, 2001, the Company entered into a $56,000 long-term non-recourse
mortgage secured by a previously unencumbered property. The loan bears
interest at a fixed rate of 6.76% and is due in March 2011.
The proceeds from these loans were used to repay a variable rate
construction loan (approximately $18,000) and to reduce outstanding balances
under the Company's unsecured lines of credit.
(E) Other Items
---------------
On March 1, 2001 the Company purchased Clarewood Office Building, an
approximately 39,000 square foot office building in Woodland Hills,
California for a contract price of $4,500. The Company plans to initially
occupy approximately 7,000 square feet. The Company's employees that will
occupy this space with be certain Southern California property operations,
development, redevelopment and accounting personnel. The building has
eleven third party tenants occupying approximately 28,700 feet. The largest
single tenant occupies approximately 10,900 square feet.
9
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share an per unit amounts)
Acquisition and development and redevelopment and other activities for the
first quarter of 2001 were funded through the issuance of Operating
Partnership interests and financings as noted above and the Company's lines
of credit.
(3) Related Party Transactions
--------------------------
All general and administrative expenses of the Company and Essex Management
Corporation, an unconsolidated preferred stock subsidiary of the Company
("EMC"), are initially borne by the Company, with a portion subsequently
allocated to EMC. Expenses allocated to EMC for the three months ended
March 31, 2001 and 2000 totaled $430 and $233, respectively. The allocation
is reflected as a reduction in general and administrative expenses in the
accompanying consolidated statements of operations.
Other income includes interest income of $901 and $122 for the three months
ended March 31, 2001 and 2000, respectively. The majority of interest income
was earned on the notes receivable from investees. Other income also
includes management fee income and investment income from the Company's
investees of $344 and $474 for the three months ended March 31, 2001 and
2000, respectively.
Notes receivables from investees and other related parties as of March 31,
2001 and December 31, 2000 consist of the following:
March 31, December 31,
--------- ------------
Notes receivable from joint ventures investees: 2001 2000
---- ----
Notes receivable from VFGP L.P.'s, secured,
bearing interest at 9% - Prime + 3%, due 2001-2010 $ 40,413 $ 47,840
Note receivable from Highridge Apartments, secured,
bearing interest at 9%, due March 2008 1,047 1,047
Note receivable from Highridge Apartments, secured,
bearing interest at 10%, due on demand 2,950 2,950
Note receivable from Fidelity 1, secured
bearing interest at LIBOR = 2.5%, due 2004 6,511 5,613
Receivables from Down REIT entities, noninterest bearing,
due on demand - 8,281
Receivable from Newport Beach North LLC and Newport Beach
South LLC, noninterest bearing, due on demand 2,179 1,753
Receivable from City Heights LP, noninterest bearing,
due on demand 865 865
Receivables from VFGP L.P.s, non interest bearing, due on demand 8,422 4,804
Other related party receivables:
Loans to officers, secured, bearing interest at 8%, due April 2006 633 633
Other related party receivables, substantially due on demand 3,951 3,295
------------ ------------
$ 66,971 $ 77,081
============ ============
10
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share an per unit amounts)
Other related party receivables consist primarily of accrued interest income
on notes receivable from joint venture investees and loans to officers,
advances and accrued management fees from joint venture investees and
unreimbursed expenses due from EMC.
(4) New Accounting Pronouncements
-----------------------------
The Company has adopted SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities." effective January 1, 2001. Under the SFAS 133
derivative instruments are required to be included in the balance sheet at
fair value. The changes in the fair value of the derivatives are accounted
for depending on the use of the derivative and whether it has been
designated and qualifies as a part of hedging relationship. If the hedged
exposure is a cash flow exposure, the effective portion of the gain or loss
on the derivative instrument is reported initially as a component of other
comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of the gain
or loss is reported in earnings immediately. The difference between a
derivative's previous carrying amount and its fair value is recorded as a
transition adjustment, which will be allocated between net income and other
comprehensive income based on the entity's strategy for assessing the
effectiveness of the hedge.
During 1996 and 1999, the Company purchased interest rate cap contracts in
order to reduce the risks associated with increases in interest rates on its
tax exempt variable rate demand bonds. The Company has the right to receive
cash if interest rates increase above a specified level. The purpose of the
caps is to hedge the exposure to variability in expected future interest
cash flows above a fixed interest rate, and, accordingly, they are accounted
for as cash flow hedges under SFAS 133. The Company determines the fair
value of the caps and assesses the ineffectiveness of the hedge based on
changes in the time value of the caps. As of January 1, 2001, there were no
changes in the intrinsic value of the caps since the date the caps were
purchased, and the changes in fair value of the caps is attributable
entirely to changes in time value. The amortized cost of the cap contracts
exceeded their fair value by approximately $450,000, which resulted in a
transition adjustment (charge to earnings) of that amount in the quarter
ended March 31, 2001.
11
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share an per unit amounts)
(5) Segment Information
-------------------
The Company defines its reportable operating segments as the three
geographical regions in which its properties are located: Northern
California, Southern California and the Pacific Northwest. Excluded from
segment revenues are interest and other corporate income. Other non-segment
assets include investments, real estate under development, cash, receivables
and other assets. The revenues, net operating income, and assets for each of
the reportable operating segments are summarized as follows for the periods
presented.
Three months ended
March 31, 2001 March 31, 2000
--------------- ------------------
Revenues
Northern California $ 16,727 $ 12,636
Southern California 17,936 15,773
Pacific Northwest 11,387 9,391
---------- ----------
Total segment revenues 46,050 37,800
Interest and other income 4,060 1,736
---------- ----------
Total revenues $ 50,110 $ 39,536
========== ==========
Net operating income:
Northern California $ 13,017 9,824
Southern California 12,343 10,690
Pacific Northwest 7,784 6,431
---------- ----------
Total segment net operating income 33,144 26,945
Interest and other income 4,060 1,736
Depreciation and amortization (8,826) (6,667)
Interest (9,424) (5,808)
Amortization of deferred financing costs (160) (159)
General and administrative (1,874) (1,125)
---------- ----------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 16,920 $ 14,922
========== ==========
March 31, 2001 December 31, 2000
-------------- -----------------
Assets:
Northern California $ 295,711 $ 289,839
Southern California 459,952 478,835
Pacific Northwest 266,096 268,235
---------- ----------
Total segment net real estate assets 1,021,759 1,036,909
Non-segment assets 257,274 244,940
---------- ----------
Total assets $1,279,033 $1,281,849
========== ==========
12
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share an per unit amounts)
(6) Net Income Per Share
--------------------
Three months ended Three months ended
March 31, 2001 March 31, 2000
--------------------------- -----------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
Net Income $11,049 $12,750
Less: dividends on preferred stock - (117)
------- ---------
Basic:
Income available to
common stockholders 11,049 18,427 $0.60 12,633 18,068 $0.70
------- ------ ======= --------- -------- ======
Effect of Dilutive Securities:
Convertible limited partnership
units - - (1) - - (1)
Convertible preferred stock - - 117 211
Stock options - 383 - 221
------- ------ --------- --------
Diluted:
Income available to common
stockholders plus assumed
conversions $11,049 18,810 $0.59 $12,750 18,500 $0.69
======= ====== ======= ========= ======== ======
(1) Securities not included because they were anti-dilutive.
13
Item 2: Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations
---------------------
The following discussion is based primarily on the consolidated unaudited
financial statements of Essex Property Trust, Inc. ("Essex" or the "Company")
for the three months ended March 31, 2001 and 2000. This information should be
read in conjunction with the accompanying consolidated unaudited financial
statements and notes thereto. These consolidated financial statements include
all adjustments which are, in the opinion of management, necessary to reflect a
fair statement of the results and all such adjustments are of a normal recurring
nature.
Substantially all of the assets of the Company are held by, and substantially
all operations are conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). The Company is the sole general partner of the Operating
Partnership and, as of March 31, 2001, December 31, 2000 and March 31, 2000,
owned an 89.2%, 89.6% and 89.7% general partnership interest in the Operating
Partnership, respectively. The Company has elected to be treated 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 Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including statements regarding the Company's expectations, hopes, intentions,
beliefs and strategies regarding the future. Forward looking statements include
statements regarding the Company's expectation as to the timing of completion of
current development projects, beliefs as to the adequacy of future cash flows to
meet operating requirements, and to provide for dividend payments in accordance
with REIT requirements and expectations as to the amount of non-revenue
generating capital expenditures for the year ended December 31, 2001, potential
acquisitions and developments, the anticipated performance of existing
properties, future acquisitions and developments and statements regarding the
Company's financing activities. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors including, but not limited
to, that the actual completion of development projects will be subject to
delays, that such development projects will not be completed, that future cash
flows will be inadequate to meet operating requirements and/or will be
insufficient to provide for dividend payments in accordance with REIT
requirements, that the actual non-revenue generating capital expenditures will
exceed the Company's current expectations, as well as those risks, special
considerations, and other factors discussed under the caption "Other
Matters/Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, and those other risk factors and special
considerations set forth in the Company's other filings with the Securities and
Exchange Commission (the "SEC") which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements.
General Background
The Company's property revenues are generated primarily from multifamily
property operations, which accounted for greater than 99% of its property
revenues for the three months ended March 31, 2001 and 2000. The Company's
multifamily properties (the "Properties") are located in Northern California
(the San Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange
and San Diego counties) and the Pacific Northwest (the Seattle, Washington and
Portland, Oregon metropolitan areas). The average occupancy levels of the
Company's portfolio has exceeded 95% for the last five years.
14
The Company has elected to be treated as a real estate investment trust ("REIT")
for federal income tax purposes, commencing with the year ended December 31,
1994. The Company provides some of its fee-based asset management and
disposition services as well as third-party property management and leasing
services through Essex Management Corporation ("EMC"), in order to maintain
compliance with REIT tax rules. The Company owns 100% of EMC's 19,000 shares of
Series A non-voting Preferred Stock and 5,662 shares of Series B non-voting
Preferred Stock. Executives of the Company own 100% of EMC's 1,000 shares of
Common Stock.
Since the Company's initial public offering (the "IPO") in June 1994, the
Company has acquired ownership interests in 68 multifamily residential
properties and its headquarter and regional office buildings. Of the
multifamily properties acquired since the IPO, 14 are located in Northern
California, 35 are located in Southern California, 15 are located in the
Seattle, Washington metropolitan area and four are located in the Portland,
Oregon metropolitan area. In total, these acquisitions consist of 14,767
multifamily units with total capitalized acquisition costs of approximately
$1,181.5 million. Additionally since its IPO, the Company has developed and has
ownership interests in eight multifamily development properties that have
reached stabilized operations. These development properties consist of 1,540
units with total capitalized development costs of $180.6 million. As part of
its active portfolio management strategy, the Company has disposed of, since its
IPO, 8 multifamily residential properties (six in Northern California, one in
Southern California and one in the Pacific Northwest) consisting of a total of
1,021 units, six retail shopping centers in the Portland, Oregon metropolitan
area and one commercial property in Northern California at an aggregate gross
sales price of approximately $116.4 million resulting in total net realized
gains of approximately $27.2 million and a deferred gain of $5.0 million.
The Company is currently developing six multifamily residential communities,
with an aggregate of 1,673 multifamily units. In connection with these
development projects, the Company has directly, or in some cases through its
joint venture partners, entered into contractual construction related
commitments with unrelated third parties for approximately $208.4 million. As
of March 31, 2001, together with its joint venture partners, the Company's
remaining development commitment is approximately $101.5 million.
Results of Operations
Comparison of the Three Months Ended March 31, 2001 to the Three Months Ended
- -----------------------------------------------------------------------------
March 31, 2000
- --------------
Average financial occupancy rates of the Company's multifamily Quarterly Same
Store Properties (properties owned by the Company for each of the three months
ended March 31, 2001 and 2000) was 96.2% for the three months ended March 31,
2001 and 96.2%, for the three months ended March 31, 2000. "Financial Occupancy"
is defined as the percentage resulting from dividing actual rental income by
total possible rental income. Total possible rental income is determined by
valuing occupied units at contractual rents and vacant units at market rents.
The regional breakdown of financial occupancy for the multifamily Quarterly Same
Store Properties for the three months ended March 31, 2001 and 2000 are as
follows:
March 31, March 31,
2001 2000
---- ----
Southern California 95.7% 96.3%
Northern California 97.0% 97.3%
Pacific Northwest 95.4% 94.6%
15
Total Revenues increased by $10,574,000 or 26.7% to $50,110,000 in the first
quarter of 2001 from $39,536,000 in the first quarter of 2000. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to the Quarterly Same Store Properties.
Three
Months Ended
March 31,
Number of --------- Dollar Percentage
Properties 2001 2000 Change Change
---------- ---- ---- ------ ------
Revenues
Property revenues Quarterly
Same Store Properties
Southern California 17 $11,381 $10,666 $ 715 6.7%
Northern California 14 14,478 12,212 2,266 18.6
Pacific Northwest 19 8,999 8,409 590 7.0
-- ------- ------- ------- ----------
Properties 50 34,858 31,287 3,571 11.4
==
Property revenues properties
acquired/disposed of
subsequent to December 31, 1999 11,192 6,513 4,679 71.8
------- ------- ------- ----------
Total property revenues (1) 46,050 37,800 8,250 21.8
------- ------- ------- ----------
Interest and other income 4,060 1,736 2,324 133.9
------- ------- ------- ----------
Total revenues $50,110 $39,536 $10,574 26.7%
======= ======= ======= ==========
(1) Also includes two commercial properties, redevelopment communities, and
development communities.
As set forth in the above table, $4,679,000 of the $10,574,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to December 31, 1999, redevelopment communities, development communities and two
commercial properties. During this period, the Company acquired interests in
twelve multifamily properties and reached stabilized operations at five
development communities (the "Quarterly Acquisition Properties") and disposed of
one multifamily property (the "Quarterly Disposition Properties").
Of the increase in total revenues, $3,571,000 is attributable to increases in
property revenues from the Quarterly Same Store Properties. Property revenues
from the Quarterly Same Store Properties increased by approximately 11.4% to
$34,858,000 in the first quarter of 2001 from $31,287,000 in the first quarter
of 2000. The majority of this increase was attributable to the 14 Quarterly
Same Store Properties located in Northern California. The property revenues of
the Quarterly Same Store Properties in Northern California increased by
$2,266,000 or 18.6% to $14,478,000 in the first quarter of 2001 from $12,212,000
in the first quarter of 2000. This $2,266,000 increase is primarily
attributable to rental rate increases offset by a decrease in financial
occupancy to 97.0% in the first quarter of 2001 from 97.3% in the first quarter
of 2000. The 17 Quarterly Same Store Properties located in Southern California
accounted for the next largest regional component of the Quarterly Same Store
Property revenue increase. The property revenues of these properties increased
by $715,000 or 6.7% to $11,381,000 in the first quarter of 2001 from $10,666,000
in the first quarter of 2000. The $715,000 increase is attributable to rental
rate increases offset by a decrease in financial occupancy to 95.7% in the first
quarter of 2001 from 96.3% in the first quarter of 2000. The 19 multifamily
residential properties located in the Pacific Northwest also contributed to the
Quarterly Same Store Properties property revenues increase. The property
revenues of these properties increased by $590,000 or 7.0% to $8,999,000 in the
first quarter of 2001 from $8,409,000 in the first quarter of 2000. The
$590,000 increase is primarily attributable to rental rate increase and an
increase in financial occupancy to 95.4% in the first quarter of 2001 from 94.6%
in the first quarter of 2000. The increase in total revenue also reflected an
increase of $2,324,000 attributable to interest and other income, which
primarily relates to interest income on notes receivables and income earned on
the Company's joint venture investments.
16
Total Expenses increased by $8,576,000 or approximately 34.8% to $33,190,000 in
the first quarter of 2001 from $24,614,000 in the first quarter of 2000.
Interest expense increased by $3,616,000 or 62.3% to $9,424,000 in the first
quarter of 2001 from $5,808,000 in the first quarter of 2000. Such increase was
primarily due to the net addition of outstanding mortgage debt in connection
with property and investment acquisitions which was offset in part by
capitalization of interest charges relating to the Company's development and
redevelopment communities. Property operating expenses, exclusive of
depreciation and amortization, increased by $2,051,000 or 18.9% to $12,906,000
in the first quarter of 2001 from $10,855,000 in the first quarter of 2000. Of
such increase, $1,525,000 was attributable to the Quarterly Acquisition
Properties and the Disposition Properties. Depreciation and amortization
increased by $2,159,000 or approximately 32.4% to $8,826,000 in the first
quarter of 2001 from $6,667,000 in the first quarter of 2000, primarily due to
the acquisition of assets during that period.
General and administrative expenses represent the costs of the Company's various
acquisition and administrative departments as well as partnership administration
and non-operating expenses. Such expenses increased by $749,000 in the first
quarter of 2001 from the amount for the first quarter of 2000. This increase is
largely due to additional staffing requirements resulting from the growth of the
Company as offset by an increase in the allocation of general and administrative
expenses to EMC.
Net income decreased by $1,701,000 to $11,049,000 in the first quarter of 2001
from $12,750,000 in the first quarter of 2000. This decrease is primarily
attributable to the gain on the sales of real estate of $4,022,000 in the first
quarter of 2000. There was no gain on the sales of real estate in the first
quarter of 2001. This decrease was offset by the net contribution of the
Quarterly Acquisition Properties and the increase in net operating income from
the Quarterly Same Store Properties.
Liquidity and Capital Resources
At March 31, 2001 the Company had $11,827,000 of unrestricted cash and cash
equivalents. The Company expects to meet its short-term liquidity requirements
by using its working capital, cash generated from operations and amounts
available under lines of credit. The Company believes that its current net cash
flows will be adequate to meet operating requirements and to provide for payment
of dividends by the Company in accordance with REIT qualification requirements.
The Company expects to meet its long-term funding requirements relating to
property acquisition and development (beyond the next 12 months) by using
working capital, amounts available from its line of credit, net proceeds from
public and private debt and equity issuances, and proceeds from the disposition
of properties that may be sold from time to time. There can, however, be no
assurance that the Company will have access to the debt and equity markets in a
timely fashion to meet such future funding requirements or that future working
capital, and borrowings under its line of credit will be available, or if
available, will be sufficient to meet the Company's requirements or that the
Company will be able to dispose of properties in a timely manner and under terms
and conditions that the Company deems acceptable.
The Company has two outstanding unsecured lines of credit for an aggregate
amount of $150,000,000. The first line, in the amount of $120,000,000, matures
in May 2002, with an option to extend it for one year thereafter. Outstanding
balances under this line of credit bear interest at a rate which uses a tiered
rate structure tied to the Company corporate ratings, if any, and leverage
rating which has been priced at LIBOR plus 1.15% during its term. At March 31,
2001 the Company had $44,733,000 outstanding on this line of credit. A second
line of credit in the amount of $30,000,000 matures in August 2001, with an
option to extend for one year thereafter. Outstanding balances, if any, on this
second line bear interest based on a tiered rate structure currently at LIBOR
plus 1.175%. At March 31, 2001 the Company had no outstanding balances on this
line of credit. During the quarter ended March 31, 2001, the Company had
outstanding balances which bore interest rates of approximately 5.9%.
17
In addition to the unsecured line of credit, the Company had $539,171,000 of
secured indebtedness at March 31, 2001. Such indebtedness consisted of
$480,351,000 in fixed rate debt with interest rates varying from 6.6% to 8.8%
and maturity dates ranging from 2002 to 2026. The indebtedness also included
$58,820,000 of debt represented by tax exempt variable rate demand bonds with
interest rates paid during the first quarter of 2001 ranging from 4.0% to 5.5%
and maturity dates ranging from 2020 to 2026. The tax-exempt variable rate
demand bonds are capped at interest rates ranging from 7.1% to 7.3%.
The Company's unrestricted cash balance increased by $5,227,000 from $6,600,000
as of December 31, 2000 to $11,827,000 as of March 31, 2001. This increase was
primarily a result of net cash provided by operating activities and $6,465,000
of net cash provided by investing activities, which was offset by $24,115,000 if
net cash used in financing activities. Of the $24,115,000 of net cash used in
financing activities, $83,631,000 were repayments of mortgage and other notes
payable and lines of credit, which was off set by $72,000,000 received in
proceeds from mortgage and other notes payable and lines of credit and
$11,234,000 of dividends/distributions paid. The $6,465,000 of net cash
provided by investing activities was primarily a result of $15,987,000 in
proceeds received from contribution of real estate to corporate investee,
$12,401,000 of additions to related party notes and other receivables, which was
offset by $8,139,000 used to purchase and upgrade rental properties.
Non-revenue generating capital expenditures are improvements and upgrades that
extend the useful life of the property and are not related to preparing a
multifamily property unit to be rented to a tenant. The Company expects to
incur approximately $330 per weighted average occupancy unit in non-revenue
generating capital expenditures for the year ended December 31, 2001. These
expenditures do not include the improvements required in connection with the
origination of mortgage loans, expenditures for renovations and improvements on
recently acquired properties which are expected to generate additional revenue,
and renovation expenditures required pursuant to tax-exempt bond financings.
The Company expects that cash from operations and/or its lines of credit will
fund such expenditures. However, there can be no assurance that the actual
expenditures incurred during 2001 and/or the funding thereof will not be
significantly different than the Company's current expectations.
The Company is developing six multifamily residential communities, with an
aggregate of 1,673 multifamily units. Such projects involve certain risks
inherent in real estate development. See "Other Matters/Risk Factors - Risks
That Development Activities Will Be Delayed or Not Completed" in Item 1 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2000. In
connection with these development projects, the Company has directly, or in some
cases through its joint venture partners, entered into contractual construction
related commitments with unrelated third parties for a total amount of
approximately $208,400,000. As of March 31, 2001, the Company's remaining
commitment to fund the estimated cost to complete is approximately $101,500,000.
The Company expects to fund such commitments with a combination of its working
capital, operating cash flows, 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. During the
first quarter of 2001, the Company announced one new development project.
Pursuant to existing shelf registration statements, 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.
The Company pays quarterly dividends from cash available for distribution.
Until it is distributed, cash available for distribution is invested by the
Company primarily in short-term investment grade securities or is used by the
Company to reduce balances outstanding under its line of credit.
18
Funds from Operations
Industry analysts generally consider funds from operations, ("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 of rental properties,
gains/losses on sales of real estate property and extraordinary items.
Management 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 generally accepted accounting
principles ("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 Company's presentation of
Funds From Operations. The following table sets forth the Company's calculation
of Funds from Operations for the three ended March 31, 2001 and 2000.
Three months ended
--------------------------
March March
------------ ------------
31, 2001 31, 2000
------------ ------------
Income before gain on the sales of
real estate and minority interests $16,920,000 $14,922,000
Adjustments:
Depreciation and amortization 8,826,000 6,667,000
Unconsolidated joint ventures 1,237,000 1,009,000
Minority interests (1) (4,605,000) (4,726,000)
----------- -----------
Funds From Operations $22,378,000 $17,872,000
=========== ===========
Weighted average number
shares outstanding diluted (1) 20,922,186 20,578,898
=========== ===========
(1) Assumes conversion of all outstanding operating partnership interests in
the Operating Partnership. Minority interests have been adjusted to reflect
such conversion.
19
Item 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to interest rate changes primarily as a result of its
line of credit and long-term debt used to maintain liquidity and fund capital
expenditures and expansion of the Company's real estate investment portfolio and
operations. The Company's interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives the Company borrows
primarily at fixed rates and may enter into derivative financial instruments
such as interest rate swaps, caps and treasury locks in order to mitigate its
interest rate risk on a related financial instrument. The Company does not
enter into derivative or interest rate transactions for speculative purposes.
The Company's interest rate risk is monitored using a variety of techniques.
The table below presents the principal amounts and weighted average interest
rates by year of expected maturity to evaluate the expected cash flows and
sensitivity to interest rate changes. The Company believes that the principal
amounts of the Company's mortgage notes payable and line of credit approximate
fair value as of March 31, 2001 as interest rates and other terms are consistent
with yields currently available to the Company for similar instruments.
For Year Ended: 2001 2002 2003 2004 2005 Thereafter Total
- --------------- ---- ---- ---- ---- ---- ---------- -----
Fixed rate debt (In thousands)
Amount $2,372 11,396 20,842 2,888 34,861 407,992 $480,351
Average interest rate 7.3% 7.2% 7.2% 7.3% 6.8% 6.8%
Variable rate LIBOR debt (In thousands)
Amount $ - 44,733 - - - 58,820 (1) $103,553
Average interest - 6.0% - - - 5.50%
(1) Capped at interest rates ranging from 7.1% to 7.3%.
The Company does not have any exposures related to forward contracts at
March 31, 2001.
20
Part II Other Information
- ------- -----------------
Item 2: Changes in Securities and Use of Proceeds
Recent sales of unregistered securities
---------------------------------------
On March 22, 2001, in connection with the acquisition of The
Carlyle Apartments in April 2000, Essex issued 158,202 Operating
Partnership units, which are convertible into common stock of
Essex at the option of the holder. This private placement of
operating partnership units was completed pursuant to the
exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
--------
4.1 Amendment to Rights Agreement
B. Reports on Form 8-K
-------------------
None
21
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, Vice President and Controller
(Authorized Officer and
Principal Accounting Officer)
May 10, 2001
------------
Date
22