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. 333-44467-01
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as specified in its Charter)
Maryland 77-0369575
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 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
----- -----
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 Partners' Capital
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 6 Exhibits and Reports on Form 8-K 23
Signatures 24
2
Part I Financial Information
- ------ ---------------------
Item 1: Financial Statements (Unaudited)
--------------------------------
Essex Portfolio, L.P., a California limited partnership, (the "Operating
Partnership") effectively holds the assets and liabilities and conducts
the operating activities of Essex Property Trust, Inc. ("Essex" or the
"Company"). Essex Property Trust, Inc., a real estate investment trust
incorporated in the State of Maryland, is the sole general partner of
the Operating Partnership.
The information furnished in the accompanying consolidated unaudited
balance sheets, statements of operations, partners' capital and cash
flows of the 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 PORTFOLIO, L.P.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
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 Partners' Capital
---------------------------------
Mortgage notes payable $ 403,486 $ 373,608
Line of credit 71,596 10,500
Accounts payable and accrued liabilities 22,007 28,379
Distributions 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 359 2,379
Partners' capital:
General Partner:
Common equity 387,016 383,379
Preferred equity 4,314 4,314
---------- ----------
391,330 387,693
Limited Partners:
Common equity 33,861 31,420
Preferred equity 204,490 204,490
---------- ----------
238,351 235,910
---------- ----------
Total partners' capital 629,681 623,603
---------- ----------
Total liabilities and partners' capital $1,152,876 $1,062,313
========== ==========
See accompanying notes to the consolidated unaudited financial statements.
4
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit 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 (180) (169)
---------- ----------
Income before extraordinary item 16,038 12,166
Extraordinary item:
Loss on early extinguishment of debt - (90)
---------- ----------
Net income 16,038 12,076
Dividends on preferred units-general partner (129) (236)
Dividends on preferred units-limited partner (4,580) (2,145)
---------- ----------
Net income available to common units $ 11,329 $ 9,695
========== ==========
Per operating partnership unit data:
Basic:
Income before extraordinary item $ 0.56 $ 0.51
Extraordinary item - debt extinguishment - -
---------- ----------
Net income $ 0.56 $ 0.51
========== ==========
Weighted average number of partnership
units outstanding during the period 20,200,524 19,267,292
========== ==========
Diluted:
Income before extraordinary item $ 0.55 $ 0.50
Extraordinary item - debt extinguishment - -
---------- ----------
Net income $ 0.55 $ 0.50
========== ==========
Weighted average number of partnership
units outstanding during the period 20,708,639 19,464,608
========== ==========
Distributions per Operating Partnership common unit $ 0.61 $ 0.55
========== ==========
See accompanying notes to the consolidated unaudited financial statements.
5
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit 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 (326) (316)
---------- ----------
Income before extraordinary item 34,836 23,710
Extraordinary item:
Loss on early extinguishment of debt - (90)
---------- ----------
Net income 34,836 23,620
Dividends on preferred units-general partner (246) (1,067)
Dividends on preferred units-limited partner (9,159) (4,291)
---------- ----------
Net income available to common units $ 25,431 $ 18,262
========== ==========
Per operating partnership unit data:
Basic:
Income before extraordinary item $ 1.26 $ 0.97
Extraordinary item - debt extinguishment - -
---------- ----------
Net income $ 1.26 $ 0.97
========== ==========
Weighted average number of partnership
units outstanding during the period 20,173,678 18,939,532
========== ==========
Diluted:
Income before extraordinary item $ 1.24 $ 0.96
Extraordinary item - debt extinguishment - -
---------- ----------
Net income $ 1.24 $ 0.96
========== ==========
Weighted average number of partnership
units outstanding during the period 20,641,343 19,107,134
========== ==========
Distributions per Operating Partnership common unit $ 1.16 $ 1.05
========== ==========
See accompanying notes to the consolidated unaudited financial statements.
6
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
For the six months ended June 30, 2000 and the
year ended December 31, 1999
(Unaudited)
(Dollars and units in thousands)
General Partner Limited Partners
-------------------------------- ------------------------------
Preferred Preferred
Common Equity Equity Common Equity Equity
------------------- -------- ----------------- --------
Units Amount Amount Units Amount Amount Total
------ -------- -------- ----- ------- -------- --------
Balances at December 31,
1998 16,641 $352,295 $ 37,505 1,873 $25,331 $102,150 $517,281
Contribution-net proceeds from
perpetual preferred units - - - - - 102,340 102,340
Contribution-net proceeds
from options exercised 53 930 - - - - 930
Common units issued from
conversion of Convertible
Preferred Stock 1,618 33,191 (33,191) - - - -
Redemption of limited partner
common units - - - (65) (2,101) - (2,101)
Issuance of limited
partner common units - - - 274 7,469 - 7,469
Common units purchased
by Operating Partnership (262) (7,119) - - - - (7,119)
Net income - 42,231 1,333 - 5,051 12,238 60,853
Partners' distributions - (38,149) (1,333) - (4,330) (12,238) (56,050)
------ -------- -------- ----- ------- -------- --------
Balances at December 31,
1999 18,050 383,379 4,314 2,082 31,420 204,490 623,603
Redemption of limited partner
common units - - - (5) (165) - (165)
Issuance of limited
partner common units - - - 59 2,365 - 2,365
Contribution-net proceeds
from options exercised 80 1,857 - - - - 1,857
Net income - 22,777 246 - 2,654 9,159 34,836
Partners' distributions - (20,997) (246) - (2,413) (9,159) (32,815)
------ -------- -------- ----- ------- -------- --------
Balances at June 30,
2000 18,130 $387,016 $ 4,314 2,136 $33,861 $204,490 $629,681
====== ======== ======== ===== ======= ======== ========
See accompanying notes to the consolidated unaudited financial statements.
7
ESSEX PORTFOLIO, L.P.
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 and limited partners (11,449) (6,776)
Redemption of operating partnership units (164) (1,438)
Distributions to general partner (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
--------------------------------------
Essex Portfolio, L.P. (the "Operating Partnership") was formed in March 1994
and commenced operations on June 13, 1994, when Essex Property Trust, Inc.
(the "Company"), the general partner of the Operating Partnership, completed
its initial public offering (the "Offering") in which it issued 6,275,000
shares of common stock at $19.50 per share. The net proceeds from the
Offering of $112,071 were used by the Company to acquire a 77.2% interest in
the Operating Partnership. The Company has elected to be treated as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986
(the "Code"), as amended.
The unaudited consolidated financial statements of the Operating Partnership
are prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to
Form 10-Q. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented have been included and are normal and
recurring in nature. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements included in the Operating Partnership's annual report on Form 10-
K for the year ended December 31, 1999.
The Company is the sole general partner in the Operating Partnership, owning
an 89.5%, 89.7% and 89.6% general partnership interest as June 30, 2000,
December 31, 1999 and June 30, 1999, respectively.
As of June 30, 2000, the Operating Partnership 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 Operating Partnership purchased The Carlyle, a 132-
unit apartment community located in San Jose, California, for a contract
price of $18,500. The Operating Partnership assumed a $18,224 variable rate
construction loan in connection with this transaction. On June 14, 2000 the
Operating Partnership purchased Waterford Place, a 238-unit apartment
community located in San Jose, California for a contract price of $35,000.
The Operating Partnership 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 Operating Partnership's option an
aggregate of 5,000 and 54,291 shares of the Company's common stock to the
sellers of The Carlyle
9
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
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 Operating Partnership with a targeted
range of approximately 8.5-8.7% yield on the property.
On May 2, 2000 the Operating Partnership purchased Mariners Place, a 105-
unit apartment community located in Oxnard, California, for a contract price
of $7,600. The Operating Partnership assumed a $4,300, 7.28% fixed rate,
secured loan which matures in April 2009.
On June 14, 2000 the Operating Partnership purchased Linden Square, a 183-
unit apartment community located in Seattle, Washington, for a contract
price of $15,500.
(B) Development Activities
---------------------------
The Operating Partnership 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 Operating Partnership has ownership interests in four
development communities, with an aggregate of 944 multifamily units. During
the second quarter of 2000, the Operating Partnership 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 Operating Partnership announced one new development community, Kelvin
Avenue. In connection with the properties currently under development, the
Operating Partnership 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 Operating Partnership,
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 Operating Partnership
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 Operating
Partnership 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 Operating Partnership defines redevelopment communities as existing
properties owned or recently acquired which have been targeted for
investment by the Operating Partnership 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
Operating Partnership has ownership interests
10
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
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 Operating Partnership 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 Operating Partnership 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 Company's
corporate ratings, if any, an leverage rating (7.7% at June 30, 2000) and
matures in May 2002 with option to extend for an additional year. The
Operating Partnership incurred costs of approximately $800 in connection
with this transaction.
(E) Investments
---------------
In the second quarter of 2000, the Operating Partnership 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 Operating
Partnership's interests in these properties are accounted for under the
equity method of accounting.
On May 1, 2000 the Operating Partnership made an 11.5% subordinated loan to
Mountain Vista Apartments, LLC in the amount of $9,500 which matures in
April 2004. The Operating Partnership 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 Operating
Partnership 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 Operating Partnership's line of credit.
(3) Related Party Transactions
--------------------------
All general and administrative expenses of the Company, the Operating
Partnership and Essex Management Corporation, an unconsolidated preferred
stock subsidiary of the Company ("EMC"), are initially borne by the
Operating Partnership, 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,
11
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
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 Operating Partnership has an ownership interest. Other income
also includes management fee income and investment income from the Operating
Partnership'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.
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 Operating Partnership sold its one
emaining treasury contract that was originally obtained in connection with
specific anticipated future acquisition and development financings. The
Operating Partnership received proceeds of approximately $464. It is
12
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
anticipated that these proceeds will be reflected as a reduction in specific
future property 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
Operating Partnership 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
Operating Partnership's financial position or results of operations.
(6) Segment Information
-------------------
The Operating Partnership 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 Operating
Partnership'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
======== =======
Three 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:
13
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
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
======== ========
(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 Unit
-------------------
Basic net income per unit 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 units of $11,329
and $9,695 by the weighted average units outstanding during the period. The
diluted weighted average units outstanding is calculated by adding all
dilutive units to the basic weighted average units outstanding. The
Company's convertible preferred stock of 211,071 equivalent common shares
for the three months ended June 30, 2000 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 unit 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 units of $25,431
and $18,262 by the weighted average units outstanding during the period. The
diluted weighted average units outstanding is calculated by adding all
dilutive units to the basic weighted average units outstanding. The
Company's convertible preferred stock of 211,071 and 0 equivalent common
shares for the six months ended June 30, 2000 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.
The Company's convertible preferred stock are not included in the diluted
weighted average shares outstanding for the three and six months ended June
30, 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 Portfolio, L.P. (the "Operating Partnership") 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.
The Operating Partnership holds, directly or indirectly, all of the Company's
interests in the Operating Partnership's properties and all of the Company's
operations relating to the Company's properties are conducted through the
Operating Partnership. The Company is the sole general partner of the Operating
Partnership and, as of June 30, 2000, December 31, 1999 and June 30, 1999, owed
an 89.5%, 89.7% and 89.6% general partnership interest in the Operating
Partnership, respectively.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in the quarterly report on
Form 10-Q which are not historical facts may be considered forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including statements regarding the Operating Partnership's expectations, hopes,
intentions, beliefs and strategies regarding the future. Forward looking
statements include statements regarding the Operating Partnership'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 Operating Partnership'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 Operating Partnership'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
Operating Partnership'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 Operating Partnership's other filings with the Securities and Exchange
Commission (the "SEC") which may cause the actual results, performance or
achievements of the Operating Partnership to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
General Background
The Operating Partnership's 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 Operating Partnership'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 Operating Partnership's portfolio has exceeded 95% for
the last five years.
Since the Operating Partnership began operations in June 1994, the Operating
Partnership has acquired ownership interests in 64 multifamily residential
properties and its headquarters building. Of the multifamily properties
acquired since the Operating Partnership began operations, 15 are located in
Northern California, 31 are located in Southern California, 17 are located in
the Seattle, Washington
15
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 it began operations, the Operating Partnership 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 Operating Partnership has disposed of, since
it began operations, 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 Operating Partnership is developing four multifamily residential
communities, with an aggregate of 944 multifamily units. In connection with
these development projects, the Operating Partnership 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
Operating Partnership'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 Operating Partnership's multifamily
Quarterly Same Store Properties (properties owned by the Operating Partnership
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 Operating Partnership 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 Operating Partnership'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 Operating Partnership's
development and redevelopment communities. Property operating expenses,
exclusive of
17
depreciation and amortization, increased by $1,630,000 or 16.6% to $11,447,000
in the second quarter of 2000 from $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 Operating
Partnership'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 Operating Partnership as offset by an increase
in the allocation of general and administrative expenses to EMC.
Net income increased by $3,962,000 to $16,038,000 in the second quarter of 2000
from $12,076,000 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 Operating Partnership's multifamily
Same Store Properties (properties owned by the Operating Partnership 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%
======= ======= ======= ====
18
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 Operating Partnership acquired
fifteen multifamily properties and reached stabilized operations at eight
development communities (the "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 Operating Partnership'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 Operating Partnership'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 Operating
Partnership'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 Operating Partnership as offset by
an increase in the allocation of general and administrative expenses to EMC.
Net income increased by $11,216,000 to $34,836,000 in the first six months of
2000 from $23,620,000 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.
19
Liquidity and Capital Resources
At June 30, 2000 the Operating Partnership had $5,237,000 of unrestricted cash
and cash equivalents. The Operating Partnership expects to meet its short-term
liquidity requirements by using its working capital, cash generated from
operations and amounts available under lines of credit. The Operating
Partnership 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 Operating Partnership
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 Operating Partnership 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 Operating
Partnership's requirements or that the Operating Partnership will be able to
dispose of properties in a timely manner and under terms and conditions that the
Operating Partnership deems acceptable.
In May 2000, the Operating Partnership 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 structure tied to the Company
corporate ratings, if any, and leverage rating (7.7% at June 30, 2000). At June
30, 2000 the Operating Partnership had $71,596,000 outstanding on its line of
credit. During the quarter ended June 30, 2000, the Operating Partnership had
outstanding balances which bore interest rates ranging from 7.2% to 9.5%.
In addition to the unsecured line of credit, the Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership
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 Operating Partnership expects that cash from operations and/or
its lines of credit will fund such expenditures.
20
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
Operating Partnership's current expectations.
The Operating Partnership 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 Operating Partnership's Annual Report on Form 10-K for the year
ended December 31, 1999. In connection with these development projects, the
Operating Partnership 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 Operating Partnership's remaining commitment to fund the
estimated cost to complete is approximately $100,200,000. The Operating
Partnership 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
second quarter of 2000, the Operating Partnership 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 Operating Partnership pays quarterly dividends from cash available for
distribution. Until it is distributed, cash available for distribution is
invested by the Operating Partnership primarily in short-term investment grade
securities or is used by the Operating Partnership to reduce balances
outstanding under its 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. The
Company, the sole general partner in the Operating Partnership, has elected to
be treated as a REIT under the code. Generally, Funds From Operations adjusts
the net income of equity REITs for non-cash charges such as depreciation and
amortization of rental properties and non-recurring gains or losses. Management
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 Operating Partnership's presentation
of Funds From
21
Operations. The following table sets forth the Operating Partnership'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) Includes all outstanding units of the general partner common equity and
preferred equity and assumes conversion of all limited partner common
equity into shares of the Company's Common Stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Operating Partnership 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 Operating Partnership's real
estate investment portfolio and operations. The Operating Partnership'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 Operating Partnership 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 Operating Partnership does not enter into
derivative or interest rate transactions for speculative purposes.
The Operating Partnership'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 Operating Partnership believes
that the principal amounts of the Operating Partnership'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 Operating Partnership 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 Operating Partnership sold its one
remaining forward treasury contract. The Operating Partnership 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 Sunnyvale,
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 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
23
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESSEX PORTFOLIO, L.P.
A California Limited Partnership
By: Essex Property Trust, Inc.
Its: General Partner
/s/ Mark J. Mikl
------------------------------------------------
Mark J. Mikl, Vice President and Controller
(Authorized Officer and
Principal Accounting Officer)
August 11, 2000
----------------
Date
24