FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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:
18,366,587 shares of Common Stock
as of August 11, 2000
1
TABLE OF CONTENTS
FORM 10-Q
Page No.
--------
Part I
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets
as of June 30, 2000 and December 31, 1999 4
Consolidated Statements of Operations
for the three months ended June 30, 2000 and 1999 5
Consolidated Statements of Operations
For the six months ended June 30, 2000 and 1999 6
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2000
and the year ended December 31, 1999 7
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosure About Market Risk 22
Part II
Item 2 Changes in Securities and Use of Proceeds 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 6 Exhibits and Reports on Form 8-K 24
Signatures 25
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)
June 30, December 31,
2000 1999
---------- ----------
Assets
Real estate:
Rental properties:
Land and land improvements $ 269,821 $ 234,497
Buildings and improvements 816,079 694,579
---------- ----------
1,085,900 929,076
Less accumulated depreciation (102,350) (96,605)
---------- ----------
983,550 832,471
Investments 51,161 47,992
Real estate under development 32,319 120,414
---------- ----------
1,067,030 1,000,877
Cash and cash equivalents-unrestricted 5,237 12,348
Cash and cash equivalents-restricted 17,092 17,216
Notes and other related party receivables 46,681 13,654
Notes and other receivables 6,073 9,001
Prepaid expenses and other assets 4,513 3,495
Deferred charges, net 6,250 5,722
---------- ----------
$1,152,876 $1,062,313
========== ==========
Liabilities and Stockholders' Equity
Mortgage notes payable $ 403,486 $ 373,608
Line of credit 71,596 10,500
Accounts payable and accrued liabilities 22,007 28,379
Dividends payable 14,503 13,248
Other liabilities 6,242 5,594
Deferred gain 5,002 5,002
---------- ----------
Total liabilities 522,836 436,331
Minority interests 238,710 238,289
Stockholders' equity:
8.75% Convertible Preferred Stock, Series 1996A: $.0001 par
value, 184,687 and 1,600,000 authorized, 184,687 and
1,600,000 issued and outstanding 1 1
Common stock, $.0001 par value, 656,497,491 and 656,497,491
authorized, 18,130,317 and 18,049,952 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 426,946 425,089
Distributions in excess of accumulated earnings (35,619) (37,399)
---------- ----------
Total stockholders' equity 391,330 387,693
---------- ----------
$1,152,876 $1,062,313
========== ==========
See accompanying notes to the consolidated unaudited financial statements.
4
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Three months ended
----------------------------
June 30, June 30,
2000 1999
---------- ----------
Revenues:
Rental $ 39,056 $ 33,074
Other property 1,151 789
---------- ----------
Total property 40,207 33,863
Interest and other 2,205 1,035
---------- ----------
Total revenues 42,412 34,898
---------- ----------
Expenses:
Property operating expenses
Maintenance and repairs 2,413 2,292
Real estate taxes 2,863 2,443
Utilities 1,967 2,013
Administrative 3,440 2,356
Advertising 515 492
Insurance 249 221
Depreciation and amortization 6,950 6,247
---------- ----------
18,397 16,064
---------- ----------
Interest 6,467 5,250
Amortization of deferred financing costs 160 138
General and administrative 1,170 1,111
---------- ----------
Total expenses 26,194 22,563
---------- ----------
Income before gain on the sales of real estate,
minority interests and extraordinary item 16,218 12,335
Gain on the sales of real estate - -
---------- ----------
Income before minority interests
and extraordinary item 16,218 12,335
Minority interests (5,945) (3,369)
---------- ----------
Income before extraordinary item 10,273 8,966
Extraordinary item:
Loss on early extinguishment of debt - (90)
---------- ----------
Net income 10,273 8,876
Preferred stock dividends (129) (236)
---------- ----------
Net income available to common stockholders $ 10,144 $ 8,640
========== ==========
Per share data:
Basic:
Income before extraordinary item $ 0.56 $ 0.51
Extraordinary item - debt extinguishment - (0.01)
---------- ----------
Net income $ 0.56 $ 0.50
========== ==========
Weighted average number of shares
outstanding during the period 18,109,641 17,238,910
========== ==========
Diluted:
Income before extraordinary item $ 0.55 $ 0.49
Extraordinary item - debt extinguishment - -
---------- ----------
Net income $ 0.55 $ 0.49
========== ==========
Weighted average number of shares
outstanding during the period 18,617,756 18,447,710
========== ==========
Dividend per share $ 0.61 $ 0.55
========== ==========
See accompanying notes to the consolidated unaudited financial statements.
5
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Six months ended
----------------------------
June 30, June 30,
2000 1999
---------- ----------
Revenues:
Rental $ 75,902 $ 64,976
Other property 2,105 1,485
---------- ----------
Total property 78,007 66,461
Interest and other 3,941 2,328
---------- ----------
Total revenues 81,948 68,789
---------- ----------
Expenses:
Property operating expenses
Maintenance and repairs 4,564 4,386
Real estate taxes 5,461 4,960
Utilities 4,024 4,008
Administrative 6,772 5,099
Advertising 1,011 1,001
Insurance 470 443
Depreciation and amortization 13,617 12,292
---------- ----------
35,919 32,189
---------- ----------
Interest 12,275 10,184
Amortization of deferred financing costs 319 268
General and administrative 2,295 2,122
---------- ----------
Total expenses 50,808 44,763
---------- ----------
Income before gain on the sales of real estate,
minority interests and extraordinary item 31,140 24,026
Gain on the sales of real estate 4,022 -
---------- ----------
Income before minority interests and extraordinary
item 35,162 24,026
Minority interests (12,139) (6,607)
---------- ----------
Income before extraordinary item 23,023 17,419
Extraordinary item:
Loss on early extinguishment of debt - (90)
---------- ----------
Net income 23,023 17,329
Preferred stock dividends (246) (1,067)
---------- ----------
Net income available to common stockholders $ 22,777 $ 16,262
========== ==========
Per share data:
Basic:
Income before extraordinary item $ 1.26 $ 0.96
Extraordinary item - debt extinguishment - (0.01)
---------- ----------
Net income $ 1.26 $ 0.95
========== ==========
Weighted average number of shares
outstanding during the period 18,088,667 16,988,665
========== ==========
Diluted:
Income before extraordinary item $ 1.24 $ 0.94
Extraordinary item - debt extinguishment - -
---------- ----------
Net income $ 1.24 $ 0.94
========== ==========
Weighted average number of shares
outstanding during the period 18,556,332 18,527,629
========== ==========
Dividend per share $ 1.16 $ 1.05
========== ==========
See accompanying notes to the consolidated unaudited financial statements.
6
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2000 and the
year ended December 31, 1999
(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, 1998 1,600 $ 1 16,641 $ 2 $ 431,278 $ (41,481) $389,800
Shares issued from conversion
of Convertible Preferred Stock (1,415) - 1,618 - - - -
Shares purchased by Operating
Partnership - - (262) - (7,119) - (7,119)
Net proceeds from options exercised - - 53 - 930 - 930
Net income - - - - - 43,564 43,564
Dividends declared - - - - - (39,482) (39,482)
---------- ---------- --------- ---------- ------------- ------------- ---------
Balances at December 31, 1999 185 1 18,050 2 425,089 (37,399) 387,693
Net proceeds from options exercised - 80 1,857 - 1,857
Net income - - - - - 23,023 23,023
Dividends declared - - - - - (21,243) (21,243)
---------- ---------- --------- ---------- ------------- ------------- ---------
Balances at June 30, 2000 185 $ 1 18,130 $ 2 $ 426,946 $ (35,619) $391,330
========== ========== ========= ========== ============= ============= =========
See accompanying notes to the consolidated unaudited financial statements
7
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six months ended
-------------------------------------------
June 30, June 30,
2000 1999
------------------ -------------------
Net cash provided by operating activities: $ 36,395 $ 37,825
------------------ -------------------
Cash flows from investing activities:
Additions to real estate (29,677) (29,557)
Proceeds received from the disposition of real estate 31,302 -
Decrease (Increase) in restricted cash 124 (1,069)
Additions to related party notes and other receivables (36,135) (4,361)
Repayment of related party notes and other receivables 3,566 8,493
Additions to real estate under development (16,888) (41,370)
Net (contribution to) / distributions from investments
in corporations and limited partnerships (2,281) 762
------------------ -------------------
Net cash provided by investing activities (49,989) (67,102)
------------------ -------------------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 88,596 117,650
Repayment of mortgage and other notes payable
and lines of credit (51,522) (54,480)
Additions to deferred charges (847) (934)
Net proceeds from stock options exercised and shares
issued through dividend reinvestment plan 1,857 362
Payment of offering related costs - (314)
Shares purchased by Operating Partnership - (6,991)
Distributions to minority interest/partners (11,449) (6,776)
Redemption of operating partnership units (164) (1,438)
Dividends paid (19,988) (18,555)
------------------ -------------------
Net cash provided by financing activities 6,483 28,524
------------------ -------------------
Net (decrease) in cash and cash equivalents (7,111) (753)
Cash and cash equivalents at beginning of period 12,348 2,548
------------------ -------------------
Cash and cash equivalents at end of period $ 5,237 $ 1,795
================== ===================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $1,356 and
$2,682 capitalized $ 10,899 $ 7,193
================== ===================
Supplemental disclosure of non-cash investing and
financing activities:
Real estate under development transferred to
rental properties $ 89,483 $ -
================== ===================
Mortgage note payable assumed in connection
with the purchase of real estate $ 53,900 $ 15,800
================== ===================
Contribution of Operating Partnership Units in
connection with the purchase of real estate $ 2,365 $ 7,469
================== ===================
See accompanying notes to consolidated unaudited financial statements.
8
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and 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,
1999.
The unaudited consolidated financial statements for the three and six months
ended June 30, 2000 and 1999 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 89.5%, 89.7% and 89.6% general partnership
interest as of June 30, 2000, December 31, 1999 and June 30, 1999,
respectively.
As of June 30, 2000, the Company operates and has ownership interests in 75
multifamily properties (containing 16,431 units) and four commercial
properties (with approximately 250,000 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 April 14, 2000 the Company purchased The Carlyle, a 132-unit apartment
community located in San Jose, California, for a contract price of $18,500.
The Company assumed a $18,224 variable rate construction loan in connection
with this transaction. On June 14, 2000 the Company purchased Waterford
Place, a 238-unit apartment community located in San Jose, California for a
contract price of $35,000. The Company assumed a $31,386 variable rate
construction loan in connection with this transaction. The interest rate on
both variable rate loans are LIBOR plus 1.75% and they mature October 2000.
A portion of the amount paid for The Carlyle and Waterford Place was funded
through the issuance of units of limited partnership interest ("Units") in
the Operating Partnership. Any time after one year from the date of
issuance of the Units, the holders of the Units can require the Operating
Partnership to redeem the Units for cash, or at the Company's option, an
aggregate of 5,000 and 54,291 shares of the Company's common stock to the
sellers of The Carlyle and Waterford Place, respectively. The contract
prices noted above do not include contingent payments to be paid by the
Company and to be determined within eighteen months from the acquisition
date. The additional payment will be an amount which provides the Company
with a targeted range of approximately 8.5-8.7% yield on the property.
On May 2, 2000 the Company purchased Mariners Place, a 105-unit apartment
community located in Oxnard, California, for a contract price of $7,600. The
Company assumed a $4,300, 7.28% fixed rate, secured loan which matures in
April 2009.
9
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
On June 14, 2000 the Company purchased Linden Square, a 183-unit apartment
community located in Seattle, Washington, for a contract price of $15,500.
(B) Development Activities
---------------------------
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 June 30, 2000, the
Company has ownership interests in four development communities, with an
aggregate of 944 multifamily units. During the second quarter of 2000, the
Company reached stabilized operations at three multifamily communities
containing an aggregate of 558 units that were previously reported as
development communities: The Carlyle, Waterford Place, and Mirabella.
Also, during the second quarter, the Company announced one new development
community, Kelvin Avenue. 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 June 30, 2000, the Company, together with its
joint venture partners, is committed to fund approximately $100,200 under
these commitments.
The Carlyle is a 132-unit apartment community located in San Jose,
California. Waterford Place is a 238-unit apartment community located in
San Jose, California. A third party performed the development, management
and leasing of the Carlyle and Waterford Place. The Company purchased these
communities upon stabilization in accordance with the terms of the contract
with the third party. The total investment of approximately $54,560 is
included in rental properties in the accompanying consolidated balance
sheets at June 30, 2000.
Mirabella is a 188-unit apartment community located in Marina del Rey,
California. The total investment of approximately $32,860 is included in
rental properties in the accompanying consolidated balance sheets at June
30, 2000.
Kelvin Avenue is a new development community. In June 2000, the Company
purchased a vacant land parcel in Irvine, California for $3,800 on which it
intends to construct a 138-unit apartment community. No commitments have
been entered into with third parties regarding construction of this
community as of June 30, 2000.
(C) Redevelopment Activities
-----------------------------
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 June 30, 2000, the Company has ownership interests in eight
redevelopment communities in Southern California, which contain an aggregate
of 2,054 units with a total projected investment of $34,768 and
approximately $15,333 remaining cost to complete.
(D) Debt Transactions
----------------------
On June 30, 2000 the Company repaid the $22,500 construction loan secured by
Fountain Court, a 320-unit apartment community in Seattle, Washington, and
purchased the 49% minority interest in the joint venture, both with proceeds
from its line of credit.
On May 19, 2000 the Company replaced its unsecured line of credit. The new
line in the aggregate committed amount of $120,000 bears interest at a rate
which uses a tiered rate structure tied to the
10
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
Company corporate ratings, if any, and leverage rating (7.7% at June 30,
2000), and matures in May 2002 with option to extend for an additional year.
The Company incurred costs of approximately $800 in connection with this
transaction.
(E) Investments
---------------
In the second quarter of 2000, the Company invested in two joint venture
partnerships. Each partnership acquired one multifamily property: Barkley
Apartments, a 161 - unit apartment community located in Anaheim, California
and Brookside Oaks, a 170 - unit apartment community located in Sunnyvale,
California. Barkley Apartments and Brookside Oaks were acquired by the joint
venture partnerships for a contract price of $10,700 and $23,300,
respectively. In connection with these transactions, the partnerships which
acquired these properties assumed a $5,513, 6.63% fixed rate loan secured by
Barkley Apartments which matures in December 2008 and a $8,309, 8.5% fixed
rate secured loan secured by Brookside Apartments which matures in May 2002.
The Partnerships acquired these properties through the issuance of
partnership interests that can later be exchanged for shares of the
Company's Common Stock, or redeemed for cash. The Company's interests in
these properties are accounted for under the equity method of accounting.
On May 1, 2000 the Company made an 11.5% subordinated loan to Mountain Vista
Apartments, LLC in the amount of $9,500 which matures in April 2004. The
Company is obligated to advance an additional $5,000 related to the
redevelopment of the property under the same terms as the original loan.
Additionally, under the terms of the loan, the Company is entitled to 25% of
profits in excess of an 11.5% return on the property. This transaction was
entered into with an entity that is controlled by a member of the Company's
Board of Directors, following approval of the independent board members.
These second quarter 2000 acquisitions, development and redevelopment
activities, debt repayments, and investments were funded through assumed
loans and the issuance of Operating Partnership units as noted above, and
the Company's line 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 June
30, 2000 and 1999 totaled $270 and $110, respectively and $503 and $212 for
the six months ended June 30, 2000 and 1999, 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 $827and $86 for the three months
ended June 30, 2000 and 1999, respectively, and $1,471 and $172 for the six
months ended June 30, 2000 and 1999, respectively. The majority of interest
income was earned on the notes receivable from related party partnerships in
which the Company has an ownership interest. Other income also includes
management fee income and investment income from the Company's related party
partnerships of $706 and $150 for the three months ended June 30, 2000 and
1999, respectively and $1,344 and $310 for the six months ended June 30,
2000 and 1999, respectively.
11
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
Notes and other related party receivables as of June 30, 2000 and December 31,
1999 consist of the following:
June 30, December 31,
2000 1999
------- -------
Notes receivable from Joint Ventures:
------- -------
Note receivable from Highridge Apartments, secured,
bearing interest at 9.4%, 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 9.0%, due on demand 14,532 -
Note receivable from Fidelity I and JSV, secured,
bearing interest at 9.5-10%, due 2015 800 800
Note receivable from Mountain Vista, secured,
bearing interest at 11.5%, due 2004 9,540 -
Receivables from Joint Ventures:
Barkley, non-interest bearing, due on demand 1,189 -
Highridge, non-interest bearing, due on demand 4,337 3,624
Brookside Oaks, non-interest bearing, due on demand 5,312 -
Las Hadas, non-interest bearing, due on demand 1,209 1,209
Anchor Village, non-interest bearing, due on demand 1,361 1,282
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 3,771 2,109
------- -------
$46,681 $13,654
======= =======
Other related party receivables consist primarily of accrued interest income
on related party notes receivables and loans to officers, advances and
accrued management fees from joint venture investees and unreimbursed
expenses due from EMC.
(4) Forward Treasury Contracts
--------------------------
During the second quarter of 2000 the Company sold its one remaining
treasury contract that was originally obtained in connection with specific
anticipated future acquisition and development financings. The Company
received proceeds of approximately $464. It is anticipated that these
proceeds will be reflected as a reduction in specific property future
financing costs.
(5) New Accounting Pronouncements
-----------------------------
In June 1998, the FASB issued Financial Accounting Statement No. 133 (SFAS
133), Accounting for Derivative Instruments and Hedging Activities. The
Company will adopt SFAS 133 for interim periods beginning in 2001, the
effective date of SFAS 133, as amended. Management believes that the
adoption of these statements will not have a material impact on the
Company's financial position or results of operations.
12
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(6) Segment Information
-------------------
The Company defines its reportable operating segments as the three
geographical regions in which it's multifamily residential properties are
located: Northern California, Southern California and the Pacific Northwest.
Non-segment property revenues and net operating income included in the
following schedule consists of revenue generated from the Company's
commercial property. 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
June 30, 2000 June 30, 1999
------------------- --------------
Revenues
Northern California $13,555 $11,617
Southern California 16,771 13,301
Pacific Northwest 9,881 8,373
------- -------
Total segment revenues 40,207 33,291
Non-segment property revenues - 572
Interest and other income 2,205 1,035
------- -------
Total revenues $42,412 $34,898
======= =======
Net operating income:
Northern California $10,610 8,957
Southern California 11,904 9,130
Pacific Northwest 6,805 5,695
------- -------
Total segment net operating income 29,319 23,782
Non-segment net operating income (559) 264
Interest and other income 2,205 1,035
Depreciation and amortization (6,950) (6,247)
Interest (6,467) (5,250)
Amortization of deferred financing costs (160) (138)
General and administrative (1,170) (1,111)
------- -------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $16,218 $12,335
======= =======
Six months ended
June 30, 2000 June 30, 1999
-------------- --------------
Revenues
Northern California $ 26,191 $ 22,905
Southern California 32,544 25,810
Pacific Northwest 19,272 16,489
-------- --------
Total segment revenues 78,007 65,204
Non-segment property revenues - 1,257
Interest and other income 3,941 2,328
-------- --------
Total revenues $ 81,948 $ 68,789
======== ========
Net operating income:
Northern California $ 20,456 $ 17,520
Southern California 22,685 17,462
Pacific Northwest 13,238 11,070
-------- --------
Total segment net operating income 56,379 46,052
Non-segment net operating income (674) 512
Interest and other income 3,941 2,328
Depreciation and amortization (13,617) (12,292)
Interest (12,275) (10,184)
Amortization of deferred financing costs (319) (268)
General and administrative (2,295) (2,122)
-------- --------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 31,140 $ 24,026
======== ========
13
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(6) Segment Information (continued)
-------------------------------
June 30, 2000 December 31, 1999
------------- -----------------
Assets:
Northern California $ 288,124 $ 216,946
Southern California 446,721 415,374
Pacific Northwest 243,551 195,011
---------- ----------
Total segment net real estate assets 978,396 827,331
Non-segment net real estate assets 5,154 5,140
---------- ----------
Net real estate assets 983,550 832,471
Non-segment assets 169,326 229,842
---------- ----------
Total assets $1,152,876 $1,062,313
========== ==========
(7) Net Income Per Share
--------------------
Basic net income per share in the accompanying consolidated statements of
operations is calculated for the three months ended June 30, 2000 and 1999,
respectively, by dividing net income available to common stockholders of
$10,144 and $8,640 by the weighted average shares outstanding during the
period. The diluted weighted average shares outstanding is calculated by
adding all dilutive shares to the basic weighted average shares outstanding.
The Company's convertible preferred stock of 211,071 and 1,011,484
equivalent common shares and options of 297,044 and 197,316 were dilutive
and were added to the basic weighted average shares outstanding for the
three months ended June 30, 2000 and 1999, respectively.
Basic net income per share in the accompanying consolidated statements of
operations is calculated for the six months ended June 30, 2000 and 1999,
respectively, by dividing net income available to common stockholders of
$22,777 and $16,262 by the weighted average shares outstanding during the
period. The diluted weighted average shares outstanding is calculated by
adding all dilutive shares to the basic weighted average shares outstanding.
The Company's convertible preferred stock of 211,071 and 1,371,362
equivalent common shares and options of 256,594 and 167,602 were dilutive
and were added to the basic weighted average shares outstanding for the six
months ended June 30, 2000 and 1999, respectively.
Convertible limited partnership units are not included in the diluted
weighted average shares outstanding for the three and six months ended June
30, 2000 and 1999 as they were anti-dilutive.
14
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 and six months ended June 30, 2000 and 1999. 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 June 30, 2000, December 31, 1999 and June 30, 1999, owned
an 89.5%, 89.7% and 89.6% 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, 2000, 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, 1999, 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 and six months ended June 30, 2000 and 1999. 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.
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
non-voting Preferred Stock. Executives of the Company own 100% of EMC's 1,000
shares of Common Stock.
15
Since the Company's initial public offering (the "IPO") in June 1994, the
Company has acquired ownership interests in 64 multifamily residential
properties and its headquarters building. Of the multifamily properties
acquired since the IPO, 15 are located in Northern California, 31 are located in
Southern California, 17 are located in the Seattle, Washington metropolitan area
and one is located in the Portland, Oregon metropolitan area. In total, these
acquisitions consist of 12,875 multifamily units with total capitalized
acquisition costs of approximately $1,062.5 million. Additionally since its
IPO, the Company has developed and has ownership interests in nine multifamily
development properties that have reached stabilized operations. These
development properties consist of 1,778 units with total capitalized development
costs of $221.4 million. As part of its active portfolio management strategy,
the Company has disposed of, since its IPO, 12 multifamily residential
properties (seven in Northern California, four in Southern California and one in
the Pacific Northwest) consisting of a total of 1,748 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 $190.7
million resulting in total net realized gains of approximately $29.6 million and
a deferred gain of $5.0 million.
The Company is developing four multifamily residential communities, with an
aggregate of 944 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 $162.0 million. As of June 30, 2000,
together with its joint venture partners, the Company's remaining development
commitment is approximately $100.2 million.
Results of Operations
Comparison of the Three Months Ended June 30, 2000 to the Three Months Ended
- ----------------------------------------------------------------------------
March 31,1999.
- --------------
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 June 30, 2000 and 1999) increased to 97.2% for the three months ended June
30, 2000 from 96.5%, for the three months ended June 30, 1999. "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 June 30, 2000 and
1999 are as follows:
June 30, June 30,
2000 1999
---- ----
Northern California 98.3% 97.3%
Southern California 96.4% 96.3%
Pacific Northwest 96.7% 95.6%
16
Total Revenues increased by $7,514,000 or 21.5% to $42,412,000 in the second
quarter of 2000 from $34,898,000 in the second quarter of 1999. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to the Quarterly Same Store Properties.
Three Months Ended
June 30,
Number of ----------------- Dollar Percentage
Properties 2000 1999 Change Change
---------- ------- ------- ------ ----------
Revenues
Property revenues Quarterly
Same Store Properties
Northern California 12 $10,932 $ 9,877 $1,055 10.7%
Southern California 13 9,453 8,813 640 7.3
Pacific Northwest 19 8,716 8,373 343 4.1
-- ------- ------- ------ ----------
Properties 44 29,101 27,063 2,038 7.5
==
Property revenues properties
acquired/disposed of
subsequent to March 31, 1999 11,106 6,800 4,306 63.3
------- ------- ------ ----------
Total property revenues 40,207 33,863 6,344 18.7
------- ------- ------ ----------
Interest and other income 2,205 1,035 1,170 113.0
------- ------- ------ ----------
Total revenues $42,412 $34,898 $7,514 21.5%
======= ======= ====== ==========
As set forth in the above table, $4,306,000 of the $7,514,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to March 31, 1999, redevelopment communities and development communities and one
commercial property. During this period, the Company acquired interests in
fifteen multifamily properties and reached stabilized operations at eight
development communities (the "Quarterly Acquisition Properties"), disposed of
six multifamily properties, and one commercial property (the "Quarterly
Disposition Properties").
Of the increase in total revenues, $2,038,000 is attributable to increases in
property revenues from the Quarterly Same Store Properties. Property revenues
from the Quarterly Same Store Properties increased by approximately 7.5% to
$29,101,000 in the second quarter of 2000 from $27,063,000 in the second quarter
of 1999. The majority of this increase was attributable to the 12 Quarterly
Same Store Properties located in Northern California. The property revenues of
the Quarterly Same Store Properties in Northern California increased by
$1,055,000 or 10.7% to $10,932,000 in the second quarter of 2000 from $9,877,000
in the second quarter of 1999. This $1,055,000 increase is primarily
attributable to rental rate increases and an increase in financial occupancy to
98.3% in the second quarter of 2000 from 97.3% in the second quarter of 1999.
The 13 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
$640,000 or 7.3% to $9,453,000 in the second quarter of 2000 from $8,813,000 in
the second quarter of 1999. The $640,000 increase is attributable to rental
rate increases and an increase in financial occupancy to 96.4% in the second
quarter of 2000 from 96.3% in the second quarter of 1999. 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 $343,000 or 4.1% to $8,716,000 in the
second quarter of 2000 from $8,373,000 in the second quarter of 1999. The
$343,000 increase is primarily attributable to rental rate increase and an
increase in financial occupancy to 96.7% in the second quarter of 2000 from
95.6% in the second quarter of 1999. The increase in total revenue also
reflected an increase of $1,170,000 attributable to interest and other income,
which primarily relates to interest income on outstanding notes receivables and
income earned on the Company's joint venture investments.
Total Expenses increased by $3,631,000 or approximately 16.1% to $26,194,000 in
the second quarter of 2000 from $22,563,000 in the second quarter of 1999.
Interest expense increased by $1,217,000 or 23.2% to $6,467,000 in the second
quarter from $5,250,000 in the second quarter of 1999. 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 $1,630,000 or 16.6% to $11,447,000
in the second quarter of 2000 from
17
$9,817,000 in the second quarter of 1999. Of such increase, $1,522,000 was
attributable to the Quarterly Acquisition Properties and the Disposition
Properties.
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 $59,000 in the second
quarter of 2000 from the amount for the second quarter of 1999. 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 increased by $1,397,000 to $10,273,000 in the second quarter of 2000
from $8,876,000 in the second quarter of 1999. This increase is a result of the
net contribution of the Quarterly Acquisition Properties and the increase in net
operating income from the Quarterly Same Store Properties.
Results of Operations
Comparison of the Six Months Ended June 30, 2000 to the Six Months Ended June
- -----------------------------------------------------------------------------
30,1999.
- --------
Average financial occupancy rates of the Company's multifamily Same Store
Properties (properties owned by the Company for each of the six months ended
June 30, 2000 and 1999) increased to 96.8% for the six months ended June 30,
2000 from 96.1% for the six months ended June 30, 1999. "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 Same Store
Properties for the six months ended June 30, 2000 and 1999 are as follows:
June 30, June 30,
2000 1999
-------- --------
Northern California 98.0% 96.8%
Southern California 96.4% 96.5%
Pacific Northwest 95.7% 94.9%
Total Revenues increased by $13,159,000 or 19.1% to $81,948,000 for the first
six months of 2000 from $68,789,000 for the first six months of 1999. The
following table sets forth a breakdown of these revenue amounts, including the
revenues attributable to the Same Store Properties.
Six Months Ended
June 30,
Number of ---------------- Dollar Percentage
Properties 2000 1999 Change Change
---------- ------- ------- ------- ----------
Revenues
Property revenues Same
Store Properties
Northern California 12 $21,461 $19,542 $ 1,919 9.8%
Southern California 13 18,813 17,515 1,298 7.4
Pacific Northwest 19 17,126 16,489 637 3.9
-- ------- ------- ------- ----------
Same Store
Properties 44 57,400 53,546 3,854 7.2
==
Property revenues properties
acquired/disposed of
subsequent to December 31, 1998 20,607 12,915 7,692 59.6
------- ------- ------- ----------
Total property revenues 78,007 66,461 11,546 17.4
------- ------- ------- ----------
Interest and other income 3,941 2,328 1,613 69.3
------- ------- ------- ----------
Total revenues $81,948 $68,789 $13,159 19.1%
======= ======= ======= ==========
As set forth in the above table, $7,692,000 of the $13,159,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to December 31, 1998, redevelopment communities and development communities and
one commercial property. During this period, the Company acquired fifteen
multifamily properties and reached stabilized operations at eight development
communities (the
18
"Post 1998 Acquisition Properties"), and disposed of six multifamily properties,
and one commercial property (the "Post 1998 Disposition Properties").
Of the increase in total revenues, $3,854,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 7.2% to $57,400,000 in the
first six months of 2000 from $53,546,000 in the first six months of 1999. The
majority of this increase was attributable to the 12 Same Store Properties
located in Northern California The property revenues of these properties
increased by $1,919,000 or 9.8% to $21,461,000 in the first six months of 2000
from $19,542,000 in the first six months of 1999. The $1,919,000 increase is
attributable to rental rate increases which and an increase in financial
occupancy to 98.0% in the first six months of 2000 from 96.8% in the first six
months of 1999. The 13 multifamily Same Store Properties located in Southern
California accounted for the next largest regional component of the Same Store
Properties property revenues increase. The property revenues of the Same Store
Properties in Southern California increased by $1,298,000 or 7.4% to $18,813,000
in the first six months of 2000 from $17,515,000 in the fist six months of 1999.
This $1,298,000 increase is primarily attributable to rental rate increases as
offset by a slight decrease in financial occupancy to 96.4% in the first six
months of 2000 from 96.5% in the first six months of 1999. The 19 multifamily
residential properties located in the Pacific Northwest also contributed to the
Same Store Properties property revenues increase. The property revenues of
these properties increased by $637,000 or 3.9% to $17,126,000 in the first six
months of 2000 from $16,489,000 in the first six months of 1999. The $637,000
increase is primarily attributable to rental rate increase and an increase in
financial occupancy to 95.7% in the first six months of 2000 from 94.9% in the
first six months of 1999. The increase in total revenue also reflected an
increase of $1,613,000 attributable to interest and other income, which
primarily relates to interest income on outstanding notes receivables and income
earned on the Company's joint venture investments.
Total Expenses increased by $6,045,000 or approximately 13.5% to $50,808,000 in
the first six months of 2000 from $44,763,000 in the first six months of 1999.
Interest expense increased by $2,091,000 or 20.5% to $12,275,000 in the first
six months from $10,184,000 in the first six months of 1999. 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 $2,405,000 or 12.1% to $22,302,000
in the first six months of 2000 from $19,897,000 in the first six months of
1999. Of such increase, $2,493,000 was attributable to the Post 1998
Acquisition Properties and the Post 1998 Disposition Properties. The aggregate
property operating expense increase is less than the amount of such increase for
the Post 1998 Acquisition and the Post 1998 Disposition Properties due to a
decrease in property operating expenses of the Same Store Properties.
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 $173,000 in the first
six months of 2000 from the amount for the first six months of 1999. 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 increased by $5,694,000 to $23,023,000 in the first six months of
2000 from $17,329,000 in the first six months of 1999. Net income for the first
six months of 2000 included a gain on the sales of real estate of $4,022,000.
No gain on sales were recognized in the first six months of 1999. The remainder
of the increase is a result of the net contribution of the Post 1998 Acquisition
Properties and the increase in net operating income from the Same Store
Properties.
Liquidity and Capital Resources
At June 30, 2000 the Company had $5,237,000 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
19
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.
In May 2000, the Company replaced its line of credit. The new unsecured
$120,000,000 line of credit matures in May 2002, with an option to extend it for
one year thereafter. Outstanding balances under the 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 (7.7% at June 30, 2000). At June
30, 2000 the Company had $71,596,000 outstanding on its line of credit. During
the quarter ended June 30, 2000, the Company had outstanding balances which bore
interest rates ranging from 7.2% to 9.5%.
In addition to the unsecured line of credit, the Company had $403,486,000 of
secured indebtedness at June 30, 2000. Such indebtedness consisted of
$295,056,000 in fixed rate debt with interest rates varying from 6.4% to 8.8%
and maturity dates ranging from 2000 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 second quarter of 2000 ranging from 5.0% to 6.0%
and maturity dates ranging from 2020 to 2026. The tax exempt variable rate
demand bonds are capped at a maximum interest rates ranging from 7.1% to 7.3%.
The Company also had $49,610,000 in variable rate debt with interest rates at
LIBOR plus 1.75% and maturing in October 2000. The interest rate on the LIBOR
based variable rate debt ranged from 8.3% to 8.5%.
The Company's unrestricted cash balance decreased by $7,111,000 from $12,348,000
as of December 31, 1999 to $5,237,000 as of June 30, 2000. This decrease was
primarily a result of $49,989,000 of net cash used in investing activities,
which was offset by $36,395,000 of net cash provided by operating activities and
$6,483,000 of net cash provided by financing activities. The $49,989,000 of net
cash used in investing activities was primarily a result of $29,677,000 of cash
used to purchase and upgrade rental properties, $16,888,000 used to fund real
estate under development and $36,135,000 of additions to related party notes and
other receivables, which was offset by $31,302,000 of proceeds were received
from the disposition of real estate. Of the $6,483,000 net cash provided by
financing activities, $88,596,000 of proceeds were received from mortgage and
other notes payable and lines of credit which was offset by $51,522,000 of
repayments of mortgage and other notes payable and lines of credit and
$31,437,000 of dividends/distributions paid.
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 $320 per weighted average occupancy unit in non-revenue
generating capital expenditures for the year ended December 31, 2000. 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 2000 and/or the funding thereof will not be
significantly different than the Company's current expectations.
The Company is developing four multifamily residential communities, with an
aggregate of 944 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, 1999. 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 $162,100,000. As of June 30, 2000, the Company's remaining
commitment to fund the estimated cost to complete is approximately $100,200,000.
The Company expects to fund such commitments with a combination of its working
capital, operating cash flows, amounts available on its
20
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 second quarter of 2000, the Company reached stabilized
occupancy at three communities that were previously reported as development
communities, and announced two new development projects.
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.
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 and non-
recurring gains or losses. 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
21
Operations. The following table sets forth the Company's calculation of Funds
from Operations for the three and six months ended June 30, 2000 and 1999.
Three months ended Six months ended
---------------------------- ------------------------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
----------- ------------- ------------- -------------
Income before gain on the sales of
real estate, minority interests and
extraordinary item $16,218,000 $12,335,000 $31,140,000 $24,026,000
Adjustments:
Depreciation and amortization 6,950,000 6,247,000 13,617,000 12,292,000
Unconsolidated joint ventures 1,054,000 366,000 2,063,000 732,000
Minority interests (1) (4,778,000) (2,397,000) (9,504,000) (4,760,000)
----------- ----------- ----------- -----------
Funds From Operations $19,444,000 $16,551,000 $37,316,000 $32,290,000
=========== =========== =========== ===========
Weighted average number
shares outstanding diluted (1) 20,708,639 20,476,092 20,641,343 20,478,496
=========== =========== =========== ===========
(1) Assumes conversion of all outstanding operating partnership interests in
the Operating Partnership and Convertible Preferred Stock, Series 1996 A, into
shares of the Company's Common Stock. Minority interests have been adjusted to
reflect such conversion.
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 June 30, 2000 as interest rates are consistent with yields
currently available to the Company for similar instruments.
For Year Ended: 2000 2001 2002 2003 2004 Thereafter Total
- ----------------------------------------- ------- ----- ------ ------ ----- ---------- ---------
Fixed rate debt (In thousands)
Amount $19,265 2,916 11,396 20,855 2,888 237,736 $295,056
Average interest rate 7.1% 6.6% 6.6% 6.9% 6.9% 6.9%
Variable rate LIBOR debt (In thousands)
Amount $49,610 - 71,596 - - 58,820(1) $180,026
Average interest 8.3% - 7.7% - - 5.50%
(1) Capped at interest rates ranging from 7.1% to 7.3%.
During the second quarter of 2000, the Company sold its one remaining forward
treasury contract. The Company does not have any exposures related to forward
contracts at June 30, 2000.
22
Part II Other Information
- ------- -----------------
Item 2: Changes in Securities and Use of Proceeds
During the second quarter of 2000, Essex Management Corporation, a
California corporation ("EMC") and an affiliate of the Company, as
general partner, and Essex Portfolio, L.P., a California limited
partnership (the "Operating Partnerships"), as to which the Company is
the general partner), as special limited partner, entered into (a) an
Amended and Restated Agreement of Limited Partnership of San Pablo
Medical Investors LTD, a California Limited Partnership and (b) an
Amended and Restated Agreement of Limited Partnership of Gilroy
Associates, a California limited Partnership (collectively, the
"Barkley Partnerships"), pursuant to which the existing Barkley
Partnerships were reorganized for the purposes of acquiring the
property, the Barkley Apartments in Anaheim, California, owned by the
Barkley Partnerships. In connection with the reorganization, 88,804
units of limited partnership interest ("Units") in the Barkley
Partnerships were issued to the existing partners of the Barkley
Partnerships, all of whom the Company believes qualify as accredited
investors, pursuant to an exemption from registration provided in
Regulation D under the Securities Act.
During the second quarter of 2000, Essex Management Corporation, a
California corporation ("EMC") and an affiliate of the Company, as
general partner, and Essex Portfolio, L.P., a California limited
partnership (the "Operating Partnerships"), as to which the Company is
the general partner), as special limited partner, entered into (a) a
Second Amended and Restated Agreement of Limited Partnership of The
Oakbrook Company, an Ohio limited Partnership (the "Brookside Oaks
Partnership"), pursuant to which the existing Brookside Oaks
Partnership was reorganized for the purposes of acquiring the
property, the Brookside Oaks Apartments in Sunnyvle, California, owned
by the Brookside Oaks Partnership. In connection with the
reorganization, 237,355 units of limited partnership interest
("Units") in the Brookside Oaks Partnership were issued to the
existing partners of the Brookside Oaks Partnership, all of whom the
Company believes qualify as accredited investors, pursuant to an
exemption from registration provided in Regulation D under the
Securities Act.
Under the terms of the agreements of limited partnership of the
Partnerships noted above, the holders of Units have the right to
require the applicable partnership to redeem their Units for cash,
subject to certain conditions. Subject to certain conditions, the
Company may, however, elect to deliver an equivalent number of
unregistered shares of the Company's Common Stock to the holders of
the Units in satisfaction of the applicable Partnership's obligation
to redeem the units for cash, upon which delivery, the holders will
have certain rights to require the Company to register the shares of
Common Stock pursuant to the Securities Act.
Item 4: Submission of Matters to a Vote of Security Holders
At the Company's annual meeting, held on April 25, 2000 in Menlo Park,
California, the following votes of security holders occurred:
(a) The following persons were duly elected by the holders of the
Company's Common Stock (the "Stockholders") as Class III
directors of the Company, each for a three (3) year term (until
2003) and until their successors are elected and qualified:
(1) George M. Marcus, 14,994,123 votes for and 660,946 votes
withheld;
(2) Gary P. Martin, 15,549,027 votes for and 106,042 votes
withheld; and
(3) William A. Millichap, 15,549,402 votes for and 105,667
votes withheld.
(b) The Stockholders ratified and approved an amendment to the Essex
Property Trust, Inc. 1994 Stock Incentive Plan by a vote of
9,537,990 votes for, 6,050,742 votes
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against and 66,337 votes abstaining. This amendment increases the
number of shares reserved for issuance under this Plan from
875,400 to 1,375,400 shares.
(c) The Stockholders ratified the appointment of KPMG LLP as the
Company's independent public auditors for the year ending
December 31, 2000 by a vote of 15,382,043 for, 6,031 votes
against and 266,995 votes abstaining.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
--------
10.1 Essex Property Trust, Inc. 1994 Stock Incentive Plan, As Amended
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only)
B. Reports on Form 8-K
-------------------
None
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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, Vice President and Controller
(Authorized Officer and
Principal Accounting Officer)
August 11, 2000
-------------------
Date
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