FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
Part I Page No.
--------
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 4
Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999 5
Consolidated Statements of Operations for the nine months
ended September 30, 2000 and 1999 6
Consolidated Statements of Partners' Capital
for the nine months ended September 30, 2000
and the year ended December 31, 1999 7
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 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)
September 30, December 31,
Assets 2000 1999
------ ----------------------- ----------------------
Real estate:
Rental properties:
Land and land improvements $ 276,492 $ 234,497
Buildings and improvements 850,359 694,579
----------------------- ----------------------
1,126,851 929,076
Less accumulated depreciation (111,041) (96,605)
----------------------- ----------------------
1,015,810 832,471
Investments 50,732 47,992
Real estate under development 48,757 120,414
----------------------- ----------------------
1,115,299 1,000,877
Cash and cash equivalents-unrestricted 6,724 12,348
Cash and cash equivalents-restricted 17,853 17,216
Notes and other related party receivables 26,894 13,654
Notes and other receivables 50,357 9,001
Prepaid expenses and other assets 5,573 3,495
Deferred charges, net 6,475 5,722
----------------------- ----------------------
$ 1,229,175 $ 1,062,313
======================= ======================
Liabilities and Partners' Capital
---------------------------------
Mortgage notes payable $ 470,256 $ 373,608
Line of credit 74,857 10,500
Accounts payable and accrued liabilities 28,086 28,379
Distributions payable 14,404 13,248
Other liabilities 6,578 5,594
Deferred gain 5,002 5,002
----------------------- ----------------------
Total liabilities 599,183 436,331
Minority interests 360 2,379
Partners' capital:
General Partner:
Common equity 391,541 383,379
Preferred equity - 4,314
----------------------- ----------------------
391,541 387,693
Limited Partners:
Common equity 33,601 31,420
Preferred equity 204,490 204,490
----------------------- ----------------------
238,091 235,910
----------------------- ----------------------
Total partners' capital 629,632 623,603
----------------------- ----------------------
Total liabilities and partners' capital $ 1,229,175 $ 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
----------------------------------------------------------
September 30, September 30,
2000 1999
-------------------------- --------------------------
Revenues:
Rental $ 42,587 $ 35,699
Other property 1,131 772
-------------------------- --------------------------
Total property 43,718 36,471
Interest and other 3,640 1,274
-------------------------- --------------------------
Total revenues 47,358 37,745
-------------------------- --------------------------
Expenses:
Property operating expenses
Maintenance and repairs 2,630 2,210
Real estate taxes 2,815 2,686
Utilities 2,140 2,214
Administrative 3,508 2,581
Advertising 657 509
Insurance 253 232
Depreciation and amortization 8,689 7,084
-------------------------- --------------------------
20,692 17,516
-------------------------- --------------------------
Interest 8,345 5,560
Amortization of deferred financing costs 160 147
General and administrative 2,215 1,096
-------------------------- --------------------------
Total expenses 31,412 24,319
-------------------------- --------------------------
Income before gain on the sales of real estate,
minority interests and extraordinary item 15,946 13,426
Gain on the sales of real estate - 4,708
-------------------------- --------------------------
Income before minority interests
and extraordinary item 15,946 18,134
Minority interests (22) (172)
-------------------------- --------------------------
Income before extraordinary item 15,924 17,962
Extraordinary item:
Loss on early extinguishment of debt - -
-------------------------- --------------------------
Net income 15,924 17,962
Dividends on preferred units-general partner - (149)
Dividends on preferred units-limited partner (4,580) (3,368)
-------------------------- --------------------------
Net income available to common units $ 11,344 $ 14,445
========================== ==========================
Per operating partnership unit data:
Basic:
Income before extraordinary item $ 0.55 $ 0.72
Extraordinary item - debt extinguishment - -
-------------------------- --------------------------
Net income $ 0.55 $ 0.72
========================== ==========================
Weighted average number of partnership
units outstanding during the period 20,464,016 20,137,957
========================== ==========================
Diluted:
Income before extraordinary item $ 0.54 $ 0.71
Extraordinary item - debt extinguishment - -
-------------------------- --------------------------
Net income $ 0.54 $ 0.71
========================== ==========================
Weighted average number of partnership
units outstanding during the period 20,891,729 20,573,866
========================== ==========================
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)
Nine months ended
----------------------------------------------------------
September 30, September 30,
2000 1999
-------------------------- --------------------------
Revenues:
Rental $ 118,489 $ 100,675
Other property 3,236 2,258
-------------------------- --------------------------
Total property 121,725 102,933
Interest and other 7,581 3,602
-------------------------- --------------------------
Total revenues 129,306 106,535
-------------------------- --------------------------
Expenses:
Property operating expenses
Maintenance and repairs 7,194 6,595
Real estate taxes 8,276 7,646
Utilities 6,163 6,222
Administrative 10,280 7,680
Advertising 1,669 1,510
Insurance 723 675
Depreciation and amortization 22,306 19,376
-------------------------- --------------------------
56,611 49,704
-------------------------- --------------------------
Interest 20,620 15,744
Amortization of deferred financing costs 479 415
General and administrative 4,510 3,218
-------------------------- --------------------------
Total expenses 82,220 69,081
-------------------------- --------------------------
Income before gain on the sales of real estate,
minority interests and extraordinary item 47,086 37,454
Gain on the sales of real estate 4,022 4,708
-------------------------- --------------------------
Income before minority interests
and extraordinary item 51,108 42,162
Minority interests (348) (490)
-------------------------- --------------------------
Income before extraordinary item 50,760 41,672
Extraordinary item:
Loss on early extinguishment of debt - (90)
-------------------------- --------------------------
Net income 50,760 41,582
Dividends on preferred units-general partner (245) (1,216)
Dividends on preferred units-limited partner (13,739) (7,658)
-------------------------- --------------------------
Net income available to common units $ 36,776 $ 32,708
========================== ==========================
Per operating partnership unit data:
Basic:
Income before extraordinary item $ 1.82 $ 1.70
Extraordinary item - debt extinguishment - -
-------------------------- --------------------------
Net income $ 1.82 $ 1.70
========================== ==========================
Weighted average number of partnership
units outstanding during the period 20,217,529 19,343,397
========================== ==========================
Diluted:
Income before extraordinary item $ 1.79 $ 1.66
Extraordinary item - debt extinguishment - -
-------------------------- --------------------------
Net income $ 1.79 $ 1.66
========================== ==========================
Weighted average number of partnership
units outstanding during the period 20,658,467 20,500,206
========================== ==========================
Distributions per Operating Partnership common unit $ 1.77 $ 1.60
========================== ==========================
See accompanying notes to the consolidated unaudited financial statements.
6
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
For the nine months ended September 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) (218) - (218)
Issuance of limited
partner common units - - - 59 2,365 - 2,365
Contribution-net proceeds
from options exercised 132 2,929 - - - - 2,929
Common units issued from
conversion of Convertible
Preferred Stock 211 4,314 (4,314) - - - -
Net income - 33,024 245 - 3,752 13,739 50,760
Partners' distributions - (32,105) (245) - (3,718) (13,739) (49,807)
------ -------- -------- ----- ------- -------- --------
Balances at September 30, 2000 18,393 $391,541 $ - 2,136 $33,601 $204,490 $629,632
====== ======== ======== ===== ======= ======== ========
See accompanying notes to the consolidated unaudited financial statements.
7
ESSEX PORTFOLIO, L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine months ended
---------------------------------
September 30, September 30,
2000 2000
--------------- ---------------
Net cash provided by operating activities: $ 67,501 $ 61,328
--------------- ---------------
Cash flows from investing activities:
Additions to real estate (69,193) (135,882)
Proceeds received from the disposition of real estate 31,302 18,400
Decrease in restricted cash (637) (1,290)
Additions to related party notes and other receivables (60,700) (10,049)
Repayment of related party notes and other receivables 3,615 9,299
Additions to real estate under development (33,326) (51,636)
Net (contribution to) / distributions from investments
in corporations and limited partnerships (4,241) (2,806)
--------------- ---------------
Net cash provided by investing activities (133,180) (173,964)
--------------- ---------------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 234,544 216,650
Repayment of mortgage and other notes payable
and lines of credit (127,439) (157,302)
Additions to deferred charges (1,232) (876)
Net proceeds from preferred unit sales - 103,215
Net proceeds from stock options exercised and shares
issued through dividend reinvestment plan 2,929 922
Payment of offering related costs - 95
Shares purchased by Operating Partnership - (6,991)
Distributions to minority interest and limited partners (17,332) (10,472)
Redemption of operating partnership units (218) (2,084)
Distributions to general partner (31,197) (28,731)
--------------- ---------------
Net cash provided by financing activities 60,055 114,426
--------------- ---------------
Net (decrease) in cash and cash equivalents (5,624) 1,790
Cash and cash equivalents at beginning of period 12,348 2,548
--------------- ---------------
Cash and cash equivalents at end of period $ 6,724 $ 4,338
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $1,779 and
$3,963 capitalized $ 19,803 $ 10,579
=============== ===============
Supplemental disclosure of non-cash investing and
financing activities:
Real estate under development transferred to
rental properties $ 89,483 $ 21,700
=============== ===============
Mortgage note payable assumed in connection
with the purchase of real estate $ 53,900 $ 15,800
=============== ===============
Issuance of Operating Partnership Units in
connection with the purchase of real estate $ 2,365 $ 7,469
=============== ===============
Consolidation of previously unconsolidated investment $ 2,771 $ -
=============== ===============
See accompanying notes to consolidated unaudited financial statements.
8
Notes to Consolidated Financial Statements
September 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 89.6%, 89.7% and 89.6% general partnership interest as September
30, 2000, December 31, 1999 and September 30, 1999, respectively.
As of September 30, 2000, the Operating Partnership operates and has
ownership interests in 77 multifamily properties (containing 16,721 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 August 17, 2000 the Operating Partnership purchased El Encanto
Apartments, a 116-unit apartment community located in Tustin, California,
for a contract price of $10,250.
On September 20, 2000 the Operating Partnership purchased Rosebeach
Apartments, a 174-unit apartment community located in La Mirada,
California, for a contract price of $11,700. The Operating Partnership
plans to invest an additional amount of approximately $4,900 in conjunction
with a major renovation and repositioning program at the property.
In connection with the acquisition of the Carlyle Apartments (completed in
April 2000) and Waterford Place (completed in June 2000). Essex issued
179,367 and 54,291 respectively, of Operating Partnership Interests
convertible into Common Stock.
(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
September 30, 2000, the Operating Partnership has ownership interests in
six development communities, with an aggregate of 1,256 multifamily units.
During the third
9
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
quarter, the Operating Partnership announced one new development community,
Vista del Mar. 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 September 30, 2000, the
Operating Partnership, together with its joint venture partners, has
committed to fund approximately $209,400 under these commitments, of which
$123,500 is remaining.
Vista del Mar is a new development community. In September 2000, the
Operating Partnership purchased a vacant land parcel in Richmond,
California on which it intends to build up to 504 apartment houses. The
first phase of the project consists of 312 apartment homes having an
estimated total capitalized cost of $43,800.
(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 September 30, 2000,
the Operating Partnership has ownership interests in six redevelopment
communities, which contain an aggregate of 1,801 units with a total
projected investment of $30,820 and approximately $12,291 remaining cost in
costs for completion of redevelopment.
These third quarter 2000 acquisitions and development and redevelopment
activities were funded through the Operating Partnership's line of credit.
(D) Debt Transactions
--- -----------------
On September 12, 2000 the Operating Partnership entered into two long-term
non-recourse mortgages totaling $58,100. The two loans are secured by one
property each and are cross collateralized. Both properties were previously
unencumbered. The loans bear interest at a fixed rate of 8.18% and are due
in September 2010. The proceeds were used to reduce outstanding balances
under the Operating Partnership's unsecured lines 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 September 30, 2000 and
1999 totaled $447 and $112, respectively and $950 and $324 for the nine
months ended September 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 $235 and $84 for the three months
ended September 30, 2000 and 1999, respectively, and $534 and $256 for the
nine months ended September 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 $358 and $107 for
the three months ended September 30, 2000 and 1999, respectively and $1,389
and $416 for the nine months ended September 30, 2000 and 1999,
respectively.
10
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
Notes and other related party receivables as of September 30, 2000 and
December 31, 1999 consist of the following:
September 30, December 31,
Notes receivable from Joint Ventures: 2000 1999
------------- ------------
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 10.0%, due on demand 500 -
Note receivable from Fidelity I and JSV, secured,
bearing interest at 9.5-10%, due 2015 - 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 1,116 -
Highridge, non-interest bearing, due on demand 4,726 3,624
Brookside Oaks, non-interest bearing, due on demand 168 -
Las Hadas, non-interest bearing, due on demand 3,053 1,209
Anchor Village, non-interest bearing, due on demand 1,554 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 1,607 2,109
------- -------
$26,894 $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) 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.
(5) 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
11
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
included in the following schedule consists of revenue generated from the
Operating Partnership's commercial properties. One of the commercial
properties was sold in September of 1999, the remaining commercial property
houses the Operating Partnership's corporate headquarters. 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
----------------------------------------
September 30, 2000 September 30, 1999
------------------- -------------------
Revenues
Northern California $15,446 $11,898
Southern California 17,551 15,723
Pacific Northwest 10,721 8,366
------- -------
Total segment revenues 43,718 35,987
Non-segment property revenues - 484
Interest and other income 3,640 1,274
------- -------
Total revenues $47,358 $37,745
======= =======
Net operating income:
Northern California $11,952 9,214
Southern California 12,167 11,161
Pacific Northwest 7,596 5,639
------- -------
Total segment net operating income 31,715 26,014
Non-segment net operating income - 25
Interest and other income 3,640 1,274
Depreciation and amortization (8,689) (7,084)
Interest (8,345) (5,560)
Amortization of deferred financing costs (160) (147)
General and administrative (2,215) (1,096)
------- -------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $15,946 $13,426
======= =======
Nine months ended
----------------------------------------
September 30, 2000 September 30, 1999
------------------- -------------------
Revenues
Northern California $ 41,636 $ 34,803
Southern California 50,096 41,533
Pacific Northwest 29,993 24,855
-------- --------
Total segment revenues 121,725 101,191
Non-segment property revenues - 1,742
Interest and other income 7,581 3,602
-------- --------
Total revenues $129,306 $106,535
======== ========
Net operating income:
Northern California $ 32,166 $ 26,734
Southern California 34,580 28,623
Pacific Northwest 20,674 16,710
-------- --------
Total segment net operating income 87,420 72,067
Non-segment net operating income - 538
Interest and other income 7,581 3,602
Depreciation and amortization (22,306) (19,376)
Interest (20,620) (15,744)
Amortization of deferred financing costs (479) (415)
General and administrative (4,510) (3,218)
-------- --------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 47,086 $ 37,454
======== ========
12
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(6) Segment Information (continued)
-------------------------------
September 30, 2000 December 31, 1999
------------------ -----------------
Assets:
Northern California $ 286,146 $ 216,946
Southern California 469,950 415,374
Pacific Northwest 254,607 195,011
---------- ----------
Total segment net real estate assets 1,010,703 827,331
Non-segment net real estate assets 5,107 5,140
---------- ----------
Net real estate assets 1,015,810 832,471
Non-segment assets 213,365 229,842
---------- ----------
Total assets $1,229,175 $1,062,313
========== ==========
13
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(7) Net Income Per Unit
-------------------
Three months ended September 30, 2000 and 1999
Weighted Per Weighted Per
Average Unit Average Unit
Income Units Amount Income Units Amount
--------- -------- ------ -------- -------- ------
Income before extraordinary item $ 15,924 $17,962
Less: dividends on general and limited
partner preferred equity (4,580) (3,517)
-------- -------
Basic:
Income before extraordinary
item available to
common units 11,344 20,464 $0.55 14,445 20,138 $0.72
-------- ------ ====== ------- -------- ======
Effect of Dilutive Securities:
Convertible preferred stock - 41 149 211
Stock options - 387 - 225
-------- ------ ------- --------
Diluted:
Income before extraordinary
item available to common
units plus assumed
conversions $ 11,344 20,892 $0.54 $14,594 20,574 $0.71
======== ====== ====== ======= ======== ======
Nine months ended September 30, 2000 and 1999
Weighted Per Weighted Per
Average Unit Average Unit
Income Units Amount Income Units Amount
-------- -------- ------ ------- -------- ------
Income before extraordinary item $ 50,760 $41,672
Less: dividends on general and limited
partner preferred equity (13,984) (8,874)
-------- -------
Basic:
Income before extraordinary
item available to
common units 36,776 20,218 $1.82 32,798 19,344 $1.70
-------- ------ ====== ------- -------- ======
Effect of Dilutive Securities:
Convertible preferred stock 245 154 1,216 980
Stock options - 287 - 176
-------- ------ ------- --------
Diluted:
Income before extraordinary
item available to common
units plus assumed
conversions $ 37,021 20,659 $1.79 $34,014 20,500 $1.66
======== ====== ====== ======= ======== ======
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 nine months ended September 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 presentation of financial position and operating 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 September 30, 2000, December 31, 1999 and September 30,
1999, owed an 89.6%, 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 nine months ended September 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 66 multifamily residential
properties and its headquarters building. Of the multifamily properties
acquired since the Operating Partnership began operations, 15 are located in
Northern California, 33 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
15
consist of 13,165 multifamily units with total capitalized acquisition costs of
approximately $1,092.6 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 currently developing six multifamily residential
communities, with an aggregate of 1,256 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 $209.4
million. As of September 30, 2000, together with its joint venture partners,
the Operating Partnership's remaining development commitment is approximately
$123.5 million.
Results of Operations
Comparison of the Three Months Ended September 30, 2000 to the Three Months
- ---------------------------------------------------------------------------
Ended September 30, 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 September 30, 2000 and 1999) increased to
97.0% for the three months ended September 30, 2000 from 96.3%, for the three
months ended September 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 September 30, 2000 and 1999 are as follows:
September 30, September 30,
2000 1999
---- ----
Northern California 98.1% 96.9%
Southern California 96.4% 96.9%
Pacific Northwest 96.4% 94.9%
16
Total Revenues increased by $9,613,000 or 25.5% to $47,358,000 in the third
quarter of 2000 from $37,745,000 in the third 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
September 30,
Number of ------------------- Dollar Percentage
Properties 2000 1999 Change Change
------------- ------- ------- ------ ------
Revenues
Property revenues Quarterly
Same Store Properties
Northern California 12 $11,650 $10,020 $1,630 16.3%
Southern California 13 9,655 9,033 622 6.9
Pacific Northwest 19 8,875 8,366 509 6.1
-- ------- ------- ------ -----
Properties 44 30,180 27,419 2,761 10.1
==
Property revenues properties
acquired/disposed of
subsequent to June 30, 1999 13,538 9,052 4,486 49.6
------- ------- ------ -----
Total property revenues 43,718 36,471 7,247 19.9
------- ------- ------ -----
Interest and other income 3,640 1,274 2,366 185.7
------- ------- ------ -----
Total revenues $47,358 $37,745 $9,613 25.5%
======= ======= ====== =====
As set forth in the above table, $4,486,000 of the $9,613,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to June 30, 1999, redevelopment communities, development communities and one
commercial property. During this period, the Operating Partnership acquired
interests in twelve 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, $2,761,000 is attributable to increases in
property revenues from the Quarterly Same Store Properties. Property revenues
from the Quarterly Same Store Properties increased by approximately 10.1% to
$30,180,000 in the third quarter of 2000 from $27,419,000 in the third 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
$1,630,000 or 16.3% to $11,650,000 in the third quarter of 2000 from $10,020,000
in the third quarter of 1999. This $1,630,000 increase is primarily
attributable to rental rate increases and an increase in financial occupancy to
98.1% in the third quarter of 2000 from 96.9% in the third 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 $622,000 or
6.9% to $9,655,000 in the third quarter of 2000 from $9,033,000 in the third
quarter of 1999. The $622,000 increase is attributable to rental rate increases
which was offset by a slight decrease in financial occupancy to 96.4% in the
third quarter of 2000 from 96.9% in the third 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 $509,000 or 6.1% to
$8,875,000 in the third quarter of 2000 from $8,366,000 in the third quarter of
1999. The $509,000 increase is primarily attributable to rental rate increase
and an increase in financial occupancy to 96.4% in the third quarter of 2000
from 94.9% in the third quarter of 1999. The increase in total revenue also
reflected an increase of $2,366,000 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 $7,093,000 or approximately 29.2% to $31,412,000 in
the third quarter of 2000 from $24,319,000 in the third quarter of 1999.
Interest expense increased by $2,785,000 or 50.1% to $8,345,000 in the third
quarter from $5,560,000 in the third 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 depreciation and amortization, increased by $1,571,000 or 15.1% to
$12,003,000 in the third quarter of
17
2000 from $10,432,000 in the third quarter of 1999. Of such increase, $1,417,000
was attributable to the Quarterly Acquisition Properties and the Disposition
Properties. Depreciation and amortization increased by $1,605,000 or
approximately 22.7% to $8,689,000 in the third quarter of 2000 from $7,084,000
in the third quarter of 1999, primarily due to the acquisition of assets
during that period.
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 $1,119,000 in the third quarter of 2000 from the amount for the third quarter
of 1999. This increase is largely due to increased accruals for anticipated
bonuses based on the Operating Partnership's performance and 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 decreased by $2,038,000 to $15,924,000 in the third quarter of 2000
from $17,962,000 in the third quarter of 1999. This decrease is primarily
attributable to the gain on the sales of real estate of $4,708,000 in the third
quarter of 1999. There was no gain on the sales of real estate in the third
quarter of 2000. This decrease was offset by the net contribution of the
Quarterly Acquisition Properties and the increase in net operating income from
the Quarterly Same Store Properties.
Results of Operations
Comparison of the Nine Months Ended September 30, 2000 to the Nine Months
- --------------------------------------------------------------------------
Ended September 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 nine months ended September 30, 2000 and 1999) increased to 96.9% for the
nine months ended September 30, 2000 from 96.2% for the nine months ended
September 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 nine months ended
September 30, 2000 and 1999 are as follows:
September 30, September 30,
2000 1999
------------- -------------
Northern California 98.1% 96.8%
Southern California 96.4% 96.6%
Pacific Northwest 95.9% 94.9%
Total Revenues increased by $22,771,000 or 21.4% to $129,306,000 for the first
nine months of 2000 from $106,535,000 for the first nine months of 1999. The
following table sets forth a breakdown of these revenue amounts, including the
revenues attributable to the Same Store Properties.
Nine Months Ended
September 30,
Number of ------------------ Dollar Percentage
Properties 2000 1999 Change Change
---------- -------- -------- ------- ----------
Revenues
Property revenues Same
Store Properties
Northern California 12 $ 33,111 $ 29,563 $ 3,548 12.0%
Southern California 13 28,468 26,548 1,920 7.2
Pacific Northwest 19 26,001 24,855 1,146 4.6
-- -------- -------- ------- -----
Same Store
Properties 44 87,580 80,966 6,614 8.2
==
Property revenues properties
acquired/disposed of
subsequent to December 31, 1998 34,145 21,967 12,178 55.4
-------- -------- ------- -----
Total property revenues 121,725 102,933 18,792 18.3
-------- -------- ------- -----
Interest and other income 7,581 3,602 3,979 110.5
-------- -------- ------- -----
Total revenues $129,306 $106,535 $22,771 21.4%
======== ======== ======= =====
18
As set forth in the above table, $12,178,000 of the $22,771,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to December 31, 1998, redevelopment communities, development communities and one
commercial property. During this period, the Operating Partnership acquired 17
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, $6,614,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 8.2% to $87,580,000 in the
first nine months of 2000 from $80,966,000 in the first nine 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 $3,548,000 or 12.0% to $33,111,000 in the first nine months of 2000
from $29,563,000 in the first nine months of 1999. The $3,548,000 increase is
attributable to rental rate increases and an increase in financial occupancy to
98.1% in the first nine months of 2000 from 96.8% in the first nine 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 $1,920,000 or 7.2% to $28,468,000 in the
first nine months of 2000 from $26,548,000 in the first nine months of 1999.
This $1,920,000 increase is primarily attributable to rental rate increases as
offset by a slight decrease in financial occupancy to 96.4% in the first nine
months of 2000 from 96.6% in the first nine 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 $1,146,000 or 4.6% to $26,001,000 in the first
nine months of 2000 from $24,855,000 in the first nine months of 1999. The
$1,146,000 increase is primarily attributable to rental rate increase and an
increase in financial occupancy to 95.9% in the first nine months of 2000 from
94.9% in the first nine months of 1999. The increase in total revenue also
reflected an increase of $3,979,000 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 $13,139,000 or approximately 19.0% to $82,220,000 in
the first nine months of 2000 from $69,081,000 in the first nine months of 1999.
Interest expense increased by $4,876,000 or 31.0% to $20,620,000 in the first
nine months from $15,744,000 in the first nine 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 $3,977,000 or 13.1% to
$34,305,000 in the first nine months of 2000 from $30,328,000 in the first nine
months of 1999. Of such increase, $3,909,000 was attributable to the Post 1998
Acquisition Properties and the Post 1998 Disposition Properties. Depreciation
and amortization increased by $2,930,000 or approximately 15.1% to $22,306,000
in the first nine months of 2000 from $19,376,000 in the first nine months of
1999, primarily due to the acquisitions of assets during that period.
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 $1,292,000 in the first nine months of 2000 from the amount for the first
nine months of 1999. This increase is largely due to increased accruals for
anticipated bonuses based on the Operating Partnership's performance and
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 $9,178,000 to $50,760,000 in the first nine months of
2000 from $41,582,000 in the first nine months of 1999. The increase is
primarily attributable to 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 September 30, 2000 the Operating Partnership had $6,724,000 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
19
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.
The Operating Partnership has two outstanding unsecured lines of credit for an
aggregate amount of $150,000,000. The first line, in the amount of
$120,000,000, matures in May 2002, with an option to extend for one year
thereafter. Outstanding balances under this line of credit bear interest at a
rate which uses a tiered rate structure tied to the Operating Partnership's
corporate ratings, if any, and leverage rating (7.9% at September 30, 2000). At
September 30, 2000 the Operating Partnership had $74,857,000 outstanding on this
line of credit. A second line of credit in the amount of $30,000,000 matures in
September 2001, with an option to extend for one year thereafter. Outstanding
balances if any, under the second line bear interest based on a tiered rate
structure currently at LIBOR plus 1.175%. At September 30, 2000, the Operating
Partnership had no balances outstanding under the second line of credit.
During the quarter ended September 30, 2000, the Operating Partnership's
outstanding balances under these two lines bore interest rates ranging from
7.8% to 9.5%.
In addition to the unsecured lines of credit, the Operating Partnership had
$470,256,000 of secured indebtedness at September 30, 2000. Such indebtedness
consisted of $361,826,000 in fixed rate debt with interest rates ranging from
6.5% 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 third 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 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 8.4% to 8.6% for
the first nine months of 2000.
The Operating Partnership's unrestricted cash balance decreased by $5,624,000
from $12,348,000 as of December 31, 1999 to $6,724,000 as of September 30, 2000.
This decrease was primarily a result of $133,180,000 of net cash used in
investing activities, which was offset by $67,501,000 of net cash provided by
operating activities and $60,055,000 of net cash provided by financing
activities. The $133,180,000 of net cash used in investing activities was
primarily a result of $69,193,000 of cash used to purchase and upgrade rental
properties, $33,326,000 used to fund real estate under development and
$60,700,000 of additions to related party notes and other receivables, which was
offset by $31,302,000 of proceeds received from the disposition of real estate.
Of the $60,055,000 net cash provided by financing activities, $234,544,000 of
proceeds were received from mortgage and other notes payable and lines of credit
which was offset by $127,439,000 of repayments of mortgage and other notes
payable and lines of credit and $48,780,000 of dividends/distributions paid
and redemption of operating partnership units.
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. 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.
20
The Operating Partnership is developing six multifamily residential communities,
with an aggregate of 1,256 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 $209,400,000. As of September 30,
2000, the Operating Partnership's remaining commitment to fund the estimated
cost to complete is approximately $123,500,000. 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
third quarter of 2000, the Operating Partnership announced one new development
project.
Pursuant to existing shelf registration statements, the Company has the capacity
to issue up to $342,000,000 of equity securities and the Operating Partnership
has the capacity to issue up to $250,000,000 of debt securities.
The 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, gains/losses on sales of real estate property
and extraordinary items. Management considers Funds from Operations to be a
useful financial performance measurement of an equity REIT because, together
with net income and cash flows, Funds from Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions and other capital expenditures. Funds From Operations does
not represent net income or cash flows from operations as defined by generally
accepted accounting principles ("GAAP") and is not intended to indicate whether
cash flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the REIT's operating performance
or to cash flows as a measure of liquidity. Funds From Operations does not
measure whether cash flow is sufficient to fund all cash needs including
principal amortization, capital improvements and distributions to shareholders.
Funds From Operations also does not represent cash flows generated from
operating, investing or financing activities as defined under GAAP. Further,
Funds from Operations as
21
disclosed by other REITs may not be comparable to the Operating Partnership's
presentation of Funds From Operations. The following table sets forth the
Operating Partnership's calculation of Funds from Operations for the three and
nine months ended September 30, 2000 and 1999.
Three months ended Nine months ended
----------------------------- ----------------------------
September 30, September 30 September 30 September 30
2000 1999 2000 1999
----------- ----------- ------------ -----------
Income before gain on the sales of
real estate, minority interests and
extraordinary item $15,946,000 $13,426,000 $ 47,086,000 $37,454,000
Adjustments:
Depreciation and amortization 8,689,000 7,084,000 22,306,000 19,376,000
Unconsolidated joint ventures 1,232,000 366,000 3,295,000 1,102,000
Minority interests and dividends
on preferred units-general
partner (1) (4,602,000) (3,616,000) (14,105,000) (8,378,000)
----------- ----------- ------------ -----------
Funds From Operations $21,265,000 $17,260,000 $ 58,582,000 $49,554,000
=========== =========== ============ ===========
Weighted average number
shares outstanding diluted (1) 20,891,729 20,573,866 20,658,467 20,236,763
=========== =========== ============ ===========
(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 September 30, 2000 as interest
rates and other terms 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 2,888 304,506 $361,826
Average interest rate 7.1% 6.6% 6.6% 6.9% 6.9% 6.9%
Variable rate LIBOR debt (In thousands)
Amount $49,610 - 74,857 - - 58,820(1) $183,287
Average interest 8.3% - 7.7% - - 5.50%
(1) Capped at interest rates ranging from 7.1% to 7.3%.
The Operating Partnership does not have any exposures related to forward
contracts at September 30, 2000.
22
Part II Other Information
- ------- -----------------
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
--------
10.1 Form of Revolving Loan Agreement among Essex Portfolio L.P.,
Bank of America and other banks as specified therein.
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 PROPERTY TRUST, INC.
/S/ MARK J. MIKL
----------------
Mark J. Mikl, Vice President and Controller
(Authorized Officer and
Principal Accounting Officer)
November 10, 2000
---------------------
Date
24