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, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 1-13106
ESSEX PROPERTY TRUST, INC.
(Exact name of Registrant as specified in its Charter)
Maryland 77-0369576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 East Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices)
(Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months for such shorter period that the Registrant was required
to file such report, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date:
18,474,237 shares of Common
Stock as of August 1, 2001
TABLE OF CONTENTS
FORM 10-Q
Part I Page No.
--------
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 4
Consolidated Statements of Operations for the three months
ended June 30, 2001 and 2000 5
Consolidated Statements of Operations for the six months
ended June 30, 2001 and 2000 6
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2001
and the year ended December 31, 2000 7
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosure About Market Risk 25
Part II
Item 2 Changes in Securities and Use of Proceeds 26
Item 4 Submission of Matter to a Vote of Security Holders 27
Item 6 Exhibits and Reports on Form 8-K 27
Signatures 28
2
Part I Financial Information
Item 1: Financial Statements (Unaudited)
"Essex" or the "Company" means Essex Property Trust, Inc., a real
estate investment trust incorporated in the State of Maryland, or
where the context otherwise requires, Essex Portfolio, L.P., a limited
partnership in which Essex Property Trust, Inc. is the sole general
partner.
The information furnished in the accompanying consolidated unaudited
balance sheets, statements of operations, stockholders' equity and
cash flows of the Company reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the
aforementioned financial statements for the interim periods.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the notes to such financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
3
ESSEX PROPERTY TRUST, INC.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)
June 30, December 31,
Assets 2001 2000
------ ------------ ------------
Real estate:
Rental properties:
Land and land improvements $ 291,245 $ 289,796
Buildings and improvements 875,452 866,612
------------ ------------
1,166,697 1,156,408
Less accumulated depreciation (137,734) (119,499)
------------ ------------
1,028,963 1,036,909
Investments 77,113 65,703
Real estate under development 62,728 38,231
------------ ------------
1,168,804 1,140,843
Cash and cash equivalents-unrestricted 12,666 6,600
Cash and cash equivalents-restricted 16,530 18,965
Notes receivable from investees and
related parties 118,236 77,081
Notes and other receivables 29,050 24,062
Prepaid expenses and other assets 7,429 7,654
Deferred charges, net 6,207 6,644
------------ ------------
$ 1,358,922 $ 1,281,849
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Mortgage notes payable $ 566,024 $ 502,066
Lines of credit 95,158 93,469
Accounts payable and accrued
liabilities 29,040 30,430
Dividends payable 16,553 14,538
Other liabilities 6,417 6,539
Deferred gain 5,002 5,002
------------ ------------
Total liabilities 718,194 652,044
Minority interests 250,796 238,130
Stockholders' equity:
8.75% Convertible Preferred Stock,
Series 1996A: $.0001 par value, no
shares authorized, issued and outstanding - -
Common stock, $.0001 par value, 656,682,178
and 656,682,178 authorized, 18,473,237
and 18,130,317 issued and outstanding 2 2
Cumulative redeemable preferred stock;
$.0001 par value, no shares issued and
outstanding:
7.875% Series B 2,000,000 shares authorized - -
9.125% Series C 500,000 shares authorized - -
9.30% Series D 2,000,000 shares authorized - -
9.25% Series E 2,200,000 shares authorized - -
Excess stock, $.0001 par value, 330,000,000
shares authorized and no shares issued and
outstanding - -
Additional paid-in capital 429,960 428,433
Distributions in excess of accumulated
earnings (40,030) (36,760)
------------ ------------
Total stockholders' equity 389,932 391,675
------------ ------------
$ 1,358,922 $ 1,281,849
============ ============
See accompanying notes to the consolidated unaudited financial statements.
4
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Three months ended
-------------------------------
June 30, June 30,
2001 2000
------------ ------------
Revenues:
Rental $ 45,044 $ 39,056
Other property 1,465 1,151
------------ ------------
Total property 46,509 40,207
Interest and other 4,536 2,205
------------ ------------
Total revenues 51,045 42,412
------------ ------------
Expenses:
Property operating expenses
Maintenance and repairs 2,927 2,413
Real estate taxes 2,961 2,863
Utilities 2,492 1,967
Administrative 3,622 3,440
Advertising 648 515
Insurance 233 249
Depreciation and amortization 8,927 6,950
------------ ------------
21,810 18,397
Interest 9,637 6,467
Amortization of deferred financing costs 207 160
General and administrative 1,854 1,170
------------ ------------
Total expenses 33,508 26,194
------------ ------------
Income before minority interests 17,537 16,218
Minority interests (6,010) (5,945)
------------ ------------
Net income 11,527 10,273
Preferred stock dividends - (129)
------------ ------------
Net income available to common stockholders $ 11,527 $ 10,144
============ ============
Per share data:
Basic:
Net income $ 0.62 $ 0.56
============ ============
Weighted average number of shares
outstanding during the period 18,462,237 18,109,641
============ ============
Diluted:
Net income $ 0.61 $ 0.55
============ ============
Weighted average number of shares
outstanding during the period 18,777,636 18,617,756
============ ============
Dividend per share $ 0.70 $ 0.61
============ ============
See accompanying notes to the consolidated unaudited financial statements.
5
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Six months ended
-------------------------------
June 30, June 30,
2001 2000
------------ ------------
Revenues:
Rental $ 89,635 $ 75,902
Other property 2,923 2,105
------------ ------------
Total property 92,558 78,007
Interest and other 8,596 3,941
------------ ------------
Total revenues 101,154 81,948
------------ ------------
Expenses:
Property operating expenses
Maintenance and repairs 5,668 4,564
Real estate taxes 6,042 5,461
Utilities 4,981 4,024
Administrative 7,245 6,772
Advertising 1,358 1,011
Insurance 495 470
Depreciation and amortization 17,753 13,617
------------ ------------
43,542 35,919
Interest 19,061 12,275
Amortization of deferred financing costs 367 319
General and administrative 3,729 2,295
------------ ------------
Total expenses 66,699 50,808
------------ ------------
Income before gain on the sales of real estate
and minority interests 34,455 31,140
Gain on the sales of real estate - 4,022
------------ ------------
Income before minority interests 34,455 35,162
Minority interests (11,880) (12,139)
------------ ------------
Net income 22,575 23,023
Preferred stock dividends - (246)
------------ ------------
Net income available to common stockholders $ 22,575 $ 22,777
============ ============
Per share data:
Basic:
Net income $ 1.22 $ 1.26
============ ============
Weighted average number of shares
outstanding during the period 18,445,361 18,088,667
============ ============
Diluted:
Net income $ 1.20 $ 1.24
============ ============
Weighted average number of shares
outstanding during the period 18,785,349 18,556,332
============ ============
Dividend per share $ 1.40 $ 1.16
============ ============
See accompanying notes to the consolidated unaudited financial statements.
6
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2001 and the
year ended December 31, 2000
(Unaudited)
(Dollars and shares in thousands)
Distributions
Preferred stock Common stock Additional in excess of
------------------- ----------------- paid - in accumulated
Shares Amount Shares Amount capital earnings Total
------ ------ ------ ------ --------- ------------ ------
Balances at December 31, 1999 185 $ 1 18,050 $ 2 $425,089 $(37,399) $387,693
Shares issued on conversion
of Convertible Preferred Stock (185) (1) 211 - - - (1)
Net proceeds from options exercised - - 156 - 3,344 - 3,344
Net income - - - - - 44,353 44,353
Dividends declared - - - - - (43,714) (43,714)
------- ----- ------ ---- -------- -------- --------
Balances at December 31, 2000 - - 18,417 2 428,433 (36,760) 391,675
Net proceeds from options exercised - - 56 - 1,527 - 1,527
Net income - - - - - 22,575 22,575
Dividends declared - - - - - (25,845) (25,845)
------- ----- ------ ---- -------- -------- --------
Balances at June 30, 2001 - $ - 18,473 $ 2 $429,960 $(40,030) $389,932
======= ===== ====== ==== ======== ======== ========
See accompanying notes to the consolidated unaudited financial statements
7
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six months ended
-------------------------
June 30, June 30,
2001 2000
--------- --------
Net cash provided by operating activities: $ 50,305 $ 36,395
--------- --------
Cash flows from investing activities:
Additions to real estate (13,658) (29,677)
Proceeds received from the disposition of real estate - 31,302
Proceeds received from contribution of real estate to
corporate investee 15,987 -
Decrease / (increase) in restricted cash 2,435 124
Additions to notes receivable from investees,
related parties and other receivables (61,846) (36,135)
Repayment of notes receivable from investees,
related parties and other receivables 13,818 3,566
Additions to real estate under development (17,519) (16,888)
Net contribution to investments in corporations
and limited partnerships (11,762) (2,281)
--------- --------
Net cash used in investing activities (72,545) (49,989)
--------- --------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 169,294 88,596
Repayment of mortgage and other notes payable
and lines of credit (109,791) (51,522)
Additions to deferred charges (140) (847)
Net proceeds from stock options exercised and shares
issued through dividend reinvestment plan 1,527 1,857
Contributions from minority interest partners 6,000 -
Distributions to minority interest partners (11,928) (11,449)
Redemption of operating partnership units (2,555) (164)
Dividends paid (24,101) (19,988)
--------- --------
Net cash provided by financing activities 28,306 6,483
--------- --------
Net increase in cash and cash equivalents 6,066 (7,111)
Cash and cash equivalents at beginning of period 6,600 12,348
--------- --------
Cash and cash equivalents at end of period $ 12,666 $ 5,237
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $1,303 and
$1,356 capitalized $ 18,213 $ 10,899
========= ========
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of Operating Partnership Units in
connection with the purchase of real estate $ 10,381 $ 2,365
========= ========
Real estate under development transferred to rental properties $ - $ 89,483
========= ========
Exchange of notes receivable from investees for investments $ 8,347 $ -
========= ========
Contribution of real estate in exchange for notes receivable and
investments $ 22,463 $ -
========= ========
Consolidation of previously unconsolidated investment $ 8,087 $ -
========= ========
Mortgage note payable assumed in connection with
purchase of real estate $ 6,144 $ 53,900
========= ========
Exchange of investment for note receivable from investee $ 1,501 $ -
========= ========
See accompanying notes to consolidated unaudited financial statements.
8
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(1) Organization and Basis of Presentation
The unaudited consolidated financial statements of the Company are
prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to
Form 10-Q. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations and
cash flows for the periods presented have been included and are normal
and recurring in nature. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements included in the Company's annual report on Form 10-K
for the year ended December 31, 2000.
The unaudited consolidated financial statements for the three and six
months ended June 30, 2001 and 2000 include the accounts of the Company
and Essex Portfolio, L.P. (the "Operating Partnership", which holds the
operating assets of the Company). The Company is the sole general partner
in the Operating Partnership, owning an 89.0%, 89.6% and 89.5% general
partnership interest as of June 30, 2001, December 31, 2000 and June 30,
2000, respectively.
As of June 30, 2001, the Company operates and has ownership interests in
84 multifamily properties (containing 18,914 units) and five commercial
properties (with approximately 290,000 square feet) (collectively, the
"Properties"). The Properties are located in Northern California (the San
Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange
and San Diego counties), and the Pacific Northwest (the Seattle,
Washington and Portland, Oregon metropolitan areas).
All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
(2) Significant Transactions
(A) Acquisition Activities
On May 1, 2001 the Company purchased Andover Park Apartments, a 240-unit
apartment community located in Beaverton, Oregon for a contract price of
$16,633. The Company plans to contribute this property to a joint venture
that was formed (see Note F, "Subsequent Event"). Accordingly, the
Company's investment is reflected in the Company's financial statements
as notes receivable from investees and related parties and investments.
On June 1, 2001 the Company completed the partner buyout of Mt. Sutro
Terrace Apartments, a 99-unit apartment community located in San
Francisco, California. The buyout was at the Company's option under a
capped pricing formula which terms were agreed to at the time of the
Company's initial investment in September 1999. In conjunction with the
partner buyout the Company issued 50,725 Operating Partnership units
which are convertible into Common Stock at the option of the holder.
On June 29, 2001, the Company purchased Moanalua Hillside Apartments
through one of its taxable REIT subsidiaries. Moanalua Hillside
Apartments is a 700-unit apartment community located in Honolulu, Hawaii
which was acquired for a contract price of $42,200. The Company has
entered into a contract to resell this property to an unrelated third
party at a price in excess of the Company's purchase price. However,
there can be no assurance that the sale of the property will close as
expected. Accordingly, the Company's net investment is reflected in the
Company's financial statements as notes receivable and investments from
investees and related parties.
9
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(B) Development Communities
The Company defines development communities as new apartment properties
that are being constructed or are newly constructed and in a phase of
lease-up and have not yet reached stabilized operations. At June 30,
2001, the Company has ownership interests in six development communities,
with an aggregate of 1,678 multifamily units.
(C) Redevelopment Communities
The Company defines redevelopment communities as existing properties
owned or recently acquired which have been targeted for investment by the
Company with the expectation of increased financial returns through
property improvement. Redevelopment communities typically have apartment
units that are not available for rent and, as a result, may have less
than stabilized operations. At June 30, 2001, the Company has ownership
interests in six redevelopment communities, which contain an aggregate of
1,786 units with total originally projected investment of $35,375 of
which approximately $13,374 remains to be expended.
(D) Debt Transactions
On May 3, 2001 the Company entered into a $5,144 long-term non-recourse
second mortgage secured by a property. This loan bears interest at a
fixed rate of 7.49% and is due in April 2008.
On June 26, 2001 the Company entered into a $16,600 long-term
non-recourse mortgage secured by a previously unencumbered property. The
loan bears interest at a fixed rate of 7.03% and is due in July 2011.
The proceeds from these mortgages were used to reduce outstanding
balances on the Company's unsecured lines of credit.
Acquisition and development and redevelopment and other activities for
the second quarter of 2001 were funded through Operating Partnership unit
issuance and debt transactions as noted above and the Company's unsecured
lines of credit.
(E) Equity Transactions
On June 28, 2001, the Operating Partnership issued 200,000 Series Z
Incentive Units of limited partner interest (the "Series Z Incentive
Units") to eleven senior executives of the Company in exchange for a
capital commitment of $1.00 per Series Z Incentive Unit, for an aggregate
offering price of $200,000. Upon certain triggering events, the Series Z
Incentive Units will automatically convert into common Operating
Partnership units based on a conversion ratio that may increase over time
upon satisfaction of specific conditions. The conversion ratio, initially
set at zero, will increase on January 1 of each year for each
participating executive who remains employed by the Company if the
Company has met a specified "funds from operations" per share target for
the prior year, up to a maximum conversion ratio of 1.0. In certain
change of control situations, the participating executives will also be
given the option to convert their units at the then-effective conversion
ratio. In addition, the Operating Partnership has the option to redeem
Series Z Incentive Units held by any executive whose employment has been
terminated for any reason and the obligation to redeem any such units
following the death of the holder. In such event, the Operating
Partnership will redeem the units for, at its option, either common
Operating Partnership units or shares of the Company's common stock based
on the then-effective conversion ratio.
10
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
The Series Z Incentive Units are entitled to participate in regular
quarterly distributions on an adjusted basis. Initially, each Series Z
Incentive Unit will receive 10% of the distribution received by each
common Operating Partnership unit. Over time the distribution percentage
may increase, generally based on satisfaction of the same conditions as
increases in the conversion ratio.
(F) Subsequent Event
On July 11, 2001, Essex Apartment Value Fund, L.P. (the "Fund"), an
investment fund controlled by the Company, had its initial closing with
three institutional investors. The Fund will acquire, develop, and manage
multifamily properties located in California, Oregon, and Washington. The
Fund's objective is to add value through rental growth and appreciation,
using the Company's development, redevelopment and asset management
capabilities.
The total equity committed to the Fund by investors, including the
Operating Partnership, at the initial closing was $105 million. An
affiliate of the Company, Essex VFGP, L.P., is the Fund's general partner
(the "General Partner"). The Operating Partnership owns a 99% limited
partner interest in the General Partner. Additional closings are expected
to occur as investors who have been offered the opportunity to invest in
the Fund make their determinations, before the final closing date of
January 15, 2002. The Fund is currently anticipated to have total capital
commitments of between $200 million and $250 million and will utilize
leverage of between 60% to 65% of the value of the underlying real estate
portfolio. After the initial closing, the Company, through the General
Partner, has a 47.62% interest in the Fund on economic terms identical to
the other investors with respect to capital invested. Though the Company
expects its interest in the Fund to be diluted as a result of future
closings, the Company is committed to invest an amount equal to or
greater than 20% of the aggregate capital committed to the Fund.
The General Partner will transfer to the Fund ownership of several
properties which were acquired over the last eleven months in
anticipation of the Fund's formation. These properties include six
apartment properties having 1377 apartment units and two development land
parcels on which approximately 368 units are planned for construction.
Following such transfer, five of the properties will be encumbered by
non-recourse mortgages in the aggregate amount of approximately $70
million. The Company's net investment in these six properties has been
carried in notes receivable from investees and related parties.
In addition to distributions with respect to its share of the Fund's
invested capital, the General Partner (1) will receive distributions from
the Fund in the annual amount of 1% of the Fund's committed capital,
payable quarterly for managing the Fund's operations, and (2) may receive
over the life of the Fund incentive distributions up to 20% of the
cumulative net profits on all of the Fund's investments, if the Fund
exceeds certain financial return benchmarks, including a minimum 10%
compounded annual return on the investors' total capital contributions.
The General Partner will also be paid fees consistent with industry
standards for its property management, development and redevelopment
services with respect to the Fund's investments. The General Partner will
not receive transaction fees, such as acquisition, disposition, financing
or similar fees, in connection with the operation of the Fund.
11
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
Subject to specific exceptions, the Fund will generally be the Company's
exclusive investment vehicle for new investments until the earlier of (i)
the date at least 90% of the Fund's aggregate capital commitments have
been invested or committed or reserved for investments or (ii) December
31, 2003. The exceptions are: (1) properties acquired to complete
transactions intended to qualify for non-recognition under Section 1031
of the Internal Revenue , (2) transactions involving properties with 75
units or less, (3) transactions which require equity securities of the
Company, including convertible or exchangeable securities, with a value
of at least $750,000, (4) mezzanine loans, (4) follow-on investments and
re-building of properties which have been destroyed or damaged, (5) land
leases with remaining terms of less than 35 years; and (6) other
transactions which are prohibited from being consummated on behalf of the
Fund due to express restrictions or diversification limitations.
The Company's senior executives, Keith Guericke, Michael Schall, John
Eudy, Craig Zimmerman and John Burkart, serve as the Fund's investment
committee and are required to devote such time as is reasonably necessary
to achieve the objectives of the Fund. Investors have the right to
suspend their capital commitments to the Fund if two or more of these
executives are no longer actively involved in the management of the Fund.
John Burkart serves as portfolio manager and is committed to devote
substantially all of his time to the Fund during the investment period.
The Fund has a five-person advisory committee representing the investors.
12
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(3) Related Party Transactions
All general and administrative expenses of the Company and Essex Management
Corporation, an unconsolidated preferred stock subsidiary of the Company
("EMC"), are initially borne by the Company, with a portion subsequently
allocated to EMC. Expenses allocated to EMC for the three months ended June
30, 2001 and 2000 totaled $488 and $270, respectively, and $918 and $503
for the six months ended June 30, 2001 and 2000, 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 $1,319 and $827 for the three
months ended June 30, 2001 and 2000, respectively, and $2,219 and $1,471
for the six months ended June 30, 2001 and 2000, respectively. The majority
of interest income was earned on the notes receivable from investees. Other
income also includes management fee income and investment income from the
Company's investees of $423 and $706 for the three months ended June 30,
2001 and 2000, respectively, and $770 and $1,344 for the six months ended
June 30, 2001 and 2000, respectively.
Notes receivable from investees and related parties as of June 30, 2001 and
December 31, 2000 consist of the following:
June 30, December 31,
2001 2000
---- ----
Notes receivable from joint ventures investees:
Notes receivable from VFGP L.P.'s, secured,
bearing interest at 9% - Prime + 3%, due 2001-2010 $ 56,943 $ 47,840
Note receivable from Highridge Apartments, secured,
bearing interest at 9%, due March 2008 - 1,047
Note receivable from Highridge Apartments, secured,
bearing interest at 10%, due on demand 2,950 2,950
Notes receivable from Fidelity 1, secured,
bearing interest at 7% - LIBOR + 2.5%, due 2002-2004 41,741 5,613
Receivables from Down REIT entities, non interest bearing,
due on demand - 8,281
Receivable from Newport Beach North LLC and Newport Beach
South LLC, non interest bearing, due on demand 648 1,753
Receivable from City Heights LP, non interest bearing,
due on demand 865 865
Receivables from VFGP L.P.s, non interest bearing, due on demand 9,991 4,804
Other related party receivables:
Loans to officers, secured, bearing interest at 8%, due April 2006 633 633
Other related party receivables, substantially due on demand 4,465 3,295
--------- --------
$ 118,236 $ 77,081
========= ========
Other related party receivables consist primarily of accrued interest
income on notes receivable from joint venture investees and loans to
officers, advances and accrued management fees from joint venture
investees and unreimbursed expenses due from EMC.
13
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(4) New Accounting Pronouncements
The Company has adopted SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities." effective January 1, 2001. Under the SFAS 133
derivative instruments are required to be included in the balance sheet at
fair value. The changes in the fair value of the derivatives are accounted
for depending on the use of the derivative and whether it has been
designated and qualifies as a part of hedging relationship. If the hedged
exposure is a cash flow exposure, the effective portion of the gain or loss
on the derivative instrument is reported initially as a component of other
comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of the
gain or loss is reported in earnings immediately. The difference between a
derivative's previous carrying amount and its fair value was recorded as a
transition adjustment, which was allocated between net income and other
comprehensive income based on the entity's strategy for assessing the
effectiveness of the hedge.
During 1996 and 1999, the Company purchased interest rate cap contracts in
order to reduce the risks associated with increases in interest rates on
its tax exempt variable rate demand bonds. The Company has the right to
receive cash if interest rates increase above a specified level. The
purpose of the caps is to hedge the exposure to variability in expected
future interest cash flows above a fixed interest rate, and, accordingly,
they are accounted for as cash flow hedges under SFAS 133. The Company
determines the fair value of the caps and assesses the ineffectiveness of
the hedge based on changes in the time value of the caps. As of January 1,
2001, there were no changes in the intrinsic value of the caps since the
date the caps were purchased, and the changes in fair value of the caps is
attributable entirely to changes in time value. The amortized cost of the
cap contracts exceeded their fair value by approximately $450,000, which
resulted in a transition adjustment (charge to earnings) of that amount in
the quarter ended March 31, 2001.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and also specifies the criteria
that intangible assets acquired in a business combination must meet in
order to be recognized and reported apart from goodwill. Statement 142
requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142
also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. We do not expect the adoption of Statements 141
and 142 to have a material effect on our financial statements.
14
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(5) Segment Information
The Company defines its reportable operating segments as the three
geographical regions in which its properties are located: Northern
California, Southern California and the Pacific Northwest. Excluded from
segment revenues are interest and other corporate income. Other non-segment
assets include investments, real estate under development, cash,
receivables and other assets. The revenues, net operating income, and
assets for each of the reportable operating segments are summarized as
follows for the periods presented.
Three months ended
June 30, 2001 June 30, 2000
----------------------------------------------------------------------------------
Revenues
Northern California $ 16,869 $ 13,556
Southern California 18,249 16,772
Pacific Northwest 11,391 9,879
------------- -------------
Total segment revenues 46,509 40,207
Interest and other income 4,536 2,205
------------- -------------
Total revenues $ 51,045 $ 42,412
============= =============
Net operating income:
Northern California $ 13,036 10,379
Southern California 12,681 11,697
Pacific Northwest 7,909 6,684
------------- -------------
Total segment net operating income 33,626 28,760
Interest and other income 4,536 2,205
Depreciation and amortization (8,927) (6,950)
Interest (9,637) (6,467)
Amortization of deferred financing costs (207) (160)
General and administrative (1,854) (1,170)
------------- -------------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 17,537 $ 16,218
============= =============
Six months ended
June 30, 2001 June 30, 2000
----------------------------------------------------------------------------------
Revenues
Northern California $ 33,794 $ 26,190
Southern California 35,986 32,545
Pacific Northwest 22,778 19,272
------------- -------------
Total segment revenues 92,558 78,007
Interest and other income 8,596 3,941
------------- -------------
Total revenues $ 101,154 $ 81,948
============= =============
Net operating income:
Northern California $ 26,167 20,211
Southern California 24,908 22,417
Pacific Northwest 15,694 13,077
------------- -------------
Total segment net operating income 66,769 55,705
Interest and other income 8,596 3,941
Depreciation and amortization (17,753) (13,617)
Interest (19,061) (12,275)
Amortization of deferred financing costs (367) (319)
General and administrative (3,729) (2,295)
------------- -------------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 34,455 $ 31,140
============= =============
15
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(5) Segment Information (continued)
-------------------------------
June 30, 2001 December 31, 2000
- -----------------------------------------------------------------------------------------
Assets:
Northern California $ 305,506 $ 289,839
Southern California 459,259 478,835
Pacific Northwest 264,198 268,235
------------- -------------
Total segment net real estate assets 1,028,963 1,036,909
Non-segment assets 329,959 244,940
------------- -------------
Total assets $ 1,358,922 $ 1,281,849
============= =============
(6) Net Income Per Share
--------------------
Three months ended Three months ended
June 30, 2001 June 30, 2000
------------------------------ ------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
Net Income $ 11,527 $ 10,273
Less: dividends on preferred stock - (129)
-------- --------
Basic:
Income available to
common stockholders 11,527 18,462 $ 0.62 10,144 18,110 $ 0.56
-------- ------- ====== -------- ------- ======
Effect of Dilutive Securities:
Convertible limited partnership
units - - (1) - - (1)
Convertible preferred stock - - 129 211
Stock options - 316 - 297
-------- ------- -------- -------
Diluted:
Income available to common
Stockholders plus assumed
conversions $ 11,527 18,778 $ 0.61 $ 10,273 18,618 $ 0.55
======== ======= ====== ======== ======= ======
Six months ended Six months ended
June 30, 2001 June 30, 2000
------------------------------ ------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
Net Income $ 22,575 $ 23,023
Less: dividends on preferred stock - (246)
-------- --------
Basic:
Income available to
common stockholders 22,575 18,445 $ 1.22 22,777 18,089 $ 1.26
-------- ------- ====== -------- ------- ======
Effect of Dilutive Securities:
Convertible limited partnership
units - - (1) - - (1)
Convertible preferred stock - - 246 211
Stock options - 340 - 256
-------- ------- -------- -------
Diluted:
Income available to common
Stockholders plus assumed
conversions $ 22,575 18,785 $ 1.20 $ 23,023 18,556 $ 1.24
======== ======= ====== ======== ======= ======
(1) Securities not included because they were anti-dilutive.
16
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The following discussion is based primarily on the consolidated unaudited
financial statements of Essex Property Trust, Inc. ("Essex" or the "Company")
for the three and six months ended June 30, 2001 and 2000. This information
should be read in conjunction with the accompanying consolidated unaudited
financial statements and notes thereto. These consolidated financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect a fair statement of the results and all such adjustments are of a normal
recurring nature.
Substantially all of the assets of the Company are held by, and substantially
all operations are conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). The Company is the sole general partner of the Operating
Partnership and, as of June 30, 2001, December 31, 2000 and June 30, 2000, owned
an 89.0%, 89.6% and 89.5% general partnership interest in the Operating
Partnership, respectively. The Company has elected to be treated as a real
estate investment trust (a "REIT") for federal income tax purposes.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in the quarterly report on
Form 10-Q which are not historical facts may be considered forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including statements regarding the Company's expectations, hopes, intentions,
beliefs and strategies regarding the future. Forward looking statements include
the Company's expectation as to its resale of the Moanalua Hillside Apartments,
the Company's expectations as to the total capital commitments of the Essex
Apartment Value Fund and the acquisition activities of that fund, statements
regarding the Company's expectation as to the timing of completion of current
development projects, beliefs as to the adequacy of future cash flows to meet
operating requirements, and to provide for dividend payments in accordance with
REIT requirements and expectations as to the amount of non-revenue generating
capital expenditures for the year ended December 31, 2001, potential
acquisitions and developments, the anticipated performance of existing
properties, future acquisitions and developments and statements regarding the
Company's financing activities. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors including, but not limited
to, that the Company's resale of the Moanlua Hillside Apartments will not be
completed as expected, that the total capital commitments and acquisition
activities of the Essex Apartment Value Fund will be less than anticipated, that
the actual completion of development projects will be subject to delays, that
such development projects will not be completed, that future cash flows will be
inadequate to meet operating requirements and/or will be insufficient to provide
for dividend payments in accordance with REIT requirements, that the actual
non-revenue generating capital expenditures will exceed the Company's current
expectations, as well as those risks, special considerations, and other factors
discussed under the caption "Other Matters/Risk Factors" in Item 1 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2000, and
those other risk factors and special considerations set forth in the Company's
other filings with the Securities and Exchange Commission (the "SEC") which may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.
General Background
The Company's property revenues are generated primarily from multifamily
property operations, which accounted for greater than 99% of its property
revenues for the three and six months ended June 30, 2001 and 2000. The
Company's multifamily properties (the "Properties") are located in Northern
California (the San Francisco Bay Area), Southern California (Los Angeles,
Ventura, Orange and San Diego counties) and the Pacific Northwest (the Seattle,
Washington and Portland, Oregon metropolitan areas). The average occupancy
levels of the Company's portfolio has exceeded 95% for the last five years.
17
The Company has elected to be treated as a real estate investment trust ("REIT")
for federal income tax purposes, commencing with the year ended December 31,
1994. The Company provides some of its fee-based asset management and
disposition services as well as third-party property management and leasing
services through Essex Management Corporation ("EMC"), in order to maintain
compliance with REIT tax rules. The Company owns 100% of EMC's 19,000 shares of
Series A non-voting Preferred Stock and 6,085 shares of Series B non-voting
Preferred Stock. Executives of the Company own 100% of EMC's 1,000 shares of
Common Stock.
Since the Company's initial public offering (the "IPO") in June 1994, the
Company has acquired ownership interests in 69 multifamily residential
properties and its headquarter and regional office buildings. Of the multifamily
properties acquired since the IPO, 14 are located in Northern California, 35 are
located in Southern California, 15 are located in the Seattle, Washington
metropolitan area and five are located in the Portland, Oregon metropolitan
area. In total, these acquisitions consist of 15,007 multifamily units with
total capitalized acquisition costs of approximately $1,198.2 million.
Additionally since its IPO, the Company has developed and has ownership
interests in eight multifamily development properties that have reached
stabilized operations. These development properties consist of 1,540 units with
total capitalized development costs of $180.6 million. As part of its active
portfolio management strategy, the Company has disposed of, since its IPO, 8
multifamily residential properties (six in Northern California, one in Southern
California and one in the Pacific Northwest) consisting of a total of 1,021
units, six retail shopping centers in the Portland, Oregon metropolitan area and
one commercial property in Northern California at an aggregate gross sales price
of approximately $116.4 million resulting in total net realized gains of
approximately $27.2 million and a deferred gain of $5.0 million.
The Company is currently developing six multifamily residential communities,
with an aggregate of 1,678 multifamily units. In connection with these
development projects, the Company has directly, or in some cases through its
joint venture partners, entered into contractual construction related
commitments with unrelated third parties for approximately $212.2 million. As of
June 30, 2001, together with its joint venture partners, the Company's remaining
development commitment is approximately $89.3 million.
Results of Operations
Comparison of the Three Months Ended June 30, 2001 to the Three Months Ended
- ----------------------------------------------------------------------------
June 30, 2000
- -------------
Average financial occupancy rates of the Company's multifamily Quarterly Same
Store Properties (properties owned by the Company for each of the three months
ended June 30, 2001 and 2000) was 95.6% and 97.1%, for the three months ended
June 30, 2001 and 2000, respectively. "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, 2001 and 2000 are as follows:
June 30, June 30,
2001 2000
---- ----
Southern California 95.8% 96.3%
Northern California 95.6% 98.1%
Pacific Northwest 95.2% 96.7%
18
Total Revenues increased by $8,633,000 or 20.4% to $51,045,000 in the second
quarter of 2001 from $42,412,000 in the second quarter of 2000. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to the Quarterly Same Store Properties.
Three Months Ended
June 30,
Number of -------- Dollar Percentage
Properties 2001 2000 Change Change
---------- ---- ---- ------ ------
Revenues
Property revenues Quarterly
Same Store Properties
Southern California 16 $ 11,181 $ 10,418 $ 763 7.3%
Northern California 14 14,553 12,796 1,757 13.7
Pacific Northwest 19 8,986 8,716 270 3.1
-- -------- -------- ------- -----
Properties 49 34,720 31,930 2,790 8.7
Property revenues properties
acquired/disposed of
subsequent March 31, 2000 11,789 8,277 3,512 42.4
-------- -------- ------- -----
Total property revenues(1) 46,509 40,207 6,302 15.7
-------- -------- ------- -----
Interest and other income 4,536 2,205 2,331 105.7
-------- -------- ------- -----
Total revenues $ 51,045 $ 42,412 $ 8,633 20.4%
======== ======== ======= =====
(1) Also includes two commercial properties, redevelopment communities, and
development communities.
As set forth in the above table, $3,512,000 of the $8,633,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to March 31, 2000, redevelopment communities, development communities and two
commercial properties. During this period, the Company acquired interests in
thirteen multifamily properties and reached stabilized operations at two
development communities (the "Quarterly Acquisition Properties").
Of the increase in total revenues, $2,790,000 is attributable to increases in
property revenues from the Quarterly Same Store Properties. Property revenues
from the Quarterly Same Store Properties increased by approximately 8.7% to
$34,720,000 in the second quarter of 2001 from $31,930,000 in the second quarter
of 2000. The majority of this increase was attributable to the 14 Quarterly Same
Store Properties located in Northern California. The property revenues of the
Quarterly Same Store Properties in Northern California increased by $1,757,000
or 13.7% to $14,553,000 in the second quarter of 2001 from $12,796,000 in the
second quarter of 2000. This $1,757,000 increase is primarily attributable to
rental rate increases as offset by a decrease in financial occupancy to 95.6% in
the second quarter of 2001 from 98.1% in the second quarter of 2000. The 16
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 $763,000 or
7.3% to $11,181,000 in the second quarter of 2001 from $10,418,000 in the second
quarter of 2000. The $763,000 increase is attributable to rental rate increases
as offset by a decrease in financial occupancy to 95.8% in the second quarter of
2001 from 96.3% in the second quarter of 2000. The 19 multifamily residential
properties located in the Pacific Northwest also contributed to the Quarterly
Same Store Properties property revenues increase. The property revenues of these
properties increased by $270,000 or 3.1% to $8,986,000 in the second quarter of
2001 from $8,716,000 in the second quarter of 2000. The $270,000 increase is
primarily attributable to rental rate increases as offset by a decrease in
financial occupancy to 95.2% in the second quarter of 2001 from 96.7% in the
second quarter of 2000. The increase in total revenue also reflected an increase
of $2,331,000 attributable to interest and other income, which primarily relates
to interest income on notes receivables and income earned on the Company's joint
venture investments.
19
Total Expenses increased by $7,314,000 or approximately 27.9% to $33,508,000 in
the second quarter of 2001 from $26,194,000 in the second quarter of 2000.
Interest expense increased by $3,170,000 or 49.0% to $9,637,000 in the second
quarter of 2001 from $6,467,000 in the second quarter of 2000. Such increase was
primarily due to the net addition of outstanding mortgage debt in connection
with property and investment acquisitions which was offset in part by
capitalization of interest charges relating to the Company's development and
redevelopment communities. Property operating expenses, exclusive of
depreciation and amortization, increased by $1,436,000 or 12.5% to $12,883,000
in the second quarter of 2001 from $11,447,000 in the second quarter of 2000. Of
such increase, $1,086,000 was attributable to the Quarterly Acquisition
Properties. Utility cost, a component of property operating expense, increased
by $525,000 or 29.7% to $2,492,000 in the second quarter of 2001 from $1,967,000
in the second quarter of 2000 and was attributable to the Quarterly Acquisition
Properties and as a result of shortages of natural gas and electricity
throughout the western region of the United States. Depreciation and
amortization increased by $1,977,000 or approximately 28.4% to $8,927,000 in the
second quarter of 2001 from $6,950,000 in the second quarter of 2000, primarily
due to the acquisition of assets.
General and administrative expenses represent the costs of the Company's various
acquisition and administrative departments as well as partnership administration
and non-operating expenses. Such expenses increased by $684,000 in the second
quarter of 2001 from the amount for the second quarter of 2000. This increase is
largely due to additional staffing requirements resulting from the growth of the
Company as offset by an increase in the allocation of general and administrative
expenses to EMC.
Net income increased by $1,254,000 to $11,527,000 in the second quarter of 2001
from $10,273,000 in the second quarter of 2000. This increase is primarily
attributable to the net contribution of the Quarterly Acquisition Properties and
the increase in net operating income from the Quarterly Same Store Properties.
Comparison of the Six Months Ended June 30, 2001 to the Six Months Ended June
30, 2000
- -------------------------------------------------------------------------------
Average financial occupancy rates of the Company's multifamily Same Store
Properties (properties owned by the Company for each of the six months June 30,
2001 and 2000) was 95.9% and 96.7%, for the six months ended June 30, 2001 and
2000, respectively. "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, 2001 and 2000 are as follows:
June 30, June 30,
2001 2000
---- ----
Southern California 95.7% 96.3%
Northern California 96.3% 97.7%
Pacific Northwest 95.3% 95.7%
20
Total Revenues increased by $19,206,000 or 23.4% to $101,154,000 in the six
months ended June 30, 2001 from $81,948,000 in the six months ended June 30,
2000. 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 2001 2000 Change Change
---------- ---- ---- ------ ------
Revenues
Property revenues
Same Store Properties
Southern California 16 $ 22,183 $ 20,748 $ 1,435 6.9%
Northern California 14 29,030 25,007 4,023 16.1
Pacific Northwest 19 17,985 17,126 859 5.0
-- -------- -------- -------- -------
Properties 49 69,198 62,881 6,317 10.0
Property revenues properties
acquired/disposed of
subsequent December 31, 1999 23,360 15,126 8,234 54.4
-------- -------- -------- -------
Total property revenues(1) 92,558 78,007 14,551 18.7
-------- -------- -------- -------
Interest and other income 8,596 3,941 4,655 118.1
-------- -------- -------- -------
Total revenues $101,154 $ 81,948 $ 19,206 23.4%
======== ======== ======== =======
(1) Also includes two commercial properties, redevelopment communities, and
development communities.
As set forth in the above table, $8,234,000 of the $19,206,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to December 31, 1999, redevelopment communities, development communities and two
commercial properties. During this period, the Company acquired interests in
thirteen multifamily properties and reached stabilized operations at five
development communities (the "Post 1999 Acquisition Properties") and disposed of
one multifamily property (the "Post 1999 Disposition Properties").
Of the increase in total revenues, $6,317,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 10.0% to $69,198,000 in the six
months ended June 30, 2001 from $62,881,000 in the six months ended June 30,
2000. The majority of this increase was attributable to the 14 Same Store
Properties located in Northern California. The property revenues of the Same
Store Properties in Northern California increased by $4,023,000 or 16.1% to
$29,030,000 in the six months ended June 30, 2001 from $25,007,000 in the six
months ended June 30, 2000. This $4,023,000 increase is primarily attributable
to rental rate increases offset by a decrease in financial occupancy to 96.3% in
the six months ended June 30, 2001 from 97.7% in the six months ended June 30,
2000. The 16 Same Store Properties located in Southern California accounted for
the next largest regional component of the Same Store Property revenue increase.
The property revenues of these properties increased by $1,435,000 or 6.9% to
$22,183,000 in the six months ended June 30, 2001 from $20,748,000 in the six
months ended June 30, 2000. The $1,435,000 increase is attributable to rental
rate increases as offset by a decrease in financial occupancy to 95.7% in the
six months ended June 30, 2001 from 96.3% in the six months ended June 30, 2000.
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 $859,000 or 5.0% to
$17,985,000 in the six months ended June 30, 2001 from $17,126,000 in the six
months ended June 30, 2000. The $859,000 increase is primarily attributable to
rental rate increases and as offset be a decrease in financial occupancy to
95.3% in the six months ended June 30, 2001 from 95.7% in the six months ended
June 30, 2000. The increase in total revenue also reflected an increase of
$4,655,000 attributable to interest and other income, which primarily relates to
interest income on notes receivables and income earned on the Company's joint
venture investments.
21
Total Expenses increased by $15,891,000 or approximately 31.3% to $66,699,000 in
the six months ended June 30, 2001 from $50,808,000 in the six months ended June
30, 2000. Interest expense increased by $6,786,000 or 55.3% to $19,061,000 in
the six months ended June 30, 2001 from $12,275,000 in the six months ended June
30, 2000. Such increase was primarily due to the net addition of outstanding
mortgage debt in connection with property and investment acquisitions which was
offset in part by capitalization of interest charges relating to the Company's
development and redevelopment communities. Property operating expenses,
exclusive of depreciation and amortization, increased by $3,487,000 or 15.6% to
$25,789,000 in the six months ended June 30, 2001 from $22,302,000 in the six
months ended June 30, 2000. Of such increase, $2,613,000 was attributable to the
Post 1999 Acquisition Properties and the Post 1999 Disposition Properties.
Utility cost, a component of property operating expense, increased by $957,000
or 23.8% to $4,981,000 in the second quarter of 2001 from $4,024,000 in the
second quarter of 2000 and was attributable to the Post 1999 Acquisition
Properties and the Post 1999 Disposition Properties and as a result of shortages
of natural gas and electricity throughout the western region of the United
States. Depreciation and amortization increased by $4,136,000 or approximately
30.4% to $17,753,000 in the six months ended June 30, 2001 from $13,617,000 in
the six months ended June 30, 2000, primarily due to the acquisition of assets.
General and administrative expenses represent the costs of the Company's various
acquisition and administrative departments as well as partnership administration
and non-operating expenses. Such expenses increased by $1,434,000 in the six
months ended June 30, 2001 from the amount for the six months ended June 30,
2000. This increase is largely due to additional staffing requirements resulting
from the growth of the Company as offset by an increase in the allocation of
general and administrative expenses to EMC.
Net income decreased by $448,000 to $22,575,000 in the six months ended June 30,
2001 from $23,023,000 in the six months ended June 30, 2000. This decrease is
primarily attributable to the gain on the sales of real estate of $4,022,000 in
the first six months of 2000. There was no gain on the sales of real estate in
the first six months of 2001. This decrease was offset by the net contribution
of the Post 1999 Acquisition Properties and the increase in net operating income
from the Same Store Properties.
Liquidity and Capital Resources
At June 30, 2001 the Company had $12,666,000 of unrestricted cash and cash
equivalents. The Company expects to meet its short-term liquidity requirements
by using its working capital, cash generated from operations and amounts
available under lines of credit. The Company believes that its current net cash
flows will be adequate to meet operating requirements and to provide for payment
of dividends by the Company in accordance with REIT qualification requirements.
The Company expects to meet its long-term funding requirements relating to
property acquisition and development (beyond the next 12 months) by using
working capital, amounts available from its lines of credit, net proceeds from
public and private debt and equity issuances, and proceeds from the disposition
of properties that may be sold from time to time. There can, however, be no
assurance that the Company will have access to the debt and equity markets in a
timely fashion to meet such future funding requirements or that future working
capital, and borrowings under its lines of credit will be available, or if
available, will be sufficient to meet the Company's requirements or that the
Company will be able to dispose of properties in a timely manner and under terms
and conditions that the Company deems acceptable.
The Company has two outstanding unsecured lines of credit for an aggregate
amount of $150,000,000. The first line, in the amount of $120,000,000, matures
in May 2002, with an option to extend it for one year thereafter. Outstanding
balances under this line of credit bear interest at a rate which uses a tiered
rate structure tied to the Company corporate ratings, if any, and leverage
rating which has been priced at LIBOR plus 1.15% during its term. At June 30,
2001 the Company had $95,158,000 outstanding on this line of credit, which bore
interest rates of approximately 5.0%. A second line of credit in the amount of
$30,000,000 matures in August 2001, with an option to extend for one year
thereafter. Outstanding balances, if any, on this second line bear interest
based on a tiered rate structure currently at LIBOR plus 1.175%. At June 30,
2001 the Company had no outstanding balances on this line of credit.
22
In addition to the unsecured lines of credit, the Company had $566,024,000 of
secured indebtedness at June 30, 2001. Such indebtedness consisted of
$507,204,000 in fixed rate debt with interest rates varying from 5.8% to 8.3%
and maturity dates ranging from 2002 to 2026. The indebtedness also included
$58,820,000 of debt represented by tax exempt variable rate demand bonds with
interest rates paid during the second quarter of 2001 ranging from 4.0% to 5.5%
and maturity dates ranging from 2020 to 2026. The tax-exempt variable rate
demand bonds are capped at interest rates ranging from 7.1% to 7.3%.
The Company's unrestricted cash balance increased by $6,066,000 from $6,600,000
as of December 31, 2000 to $12,666,000 as of June 30, 2001. This increase was
primarily a result of $50,305,000 net cash provided by operating activities and
$28,306,000 of net cash provided by financing activities, which was offset by
$72,545,000 of net cash used in investing activities. Of the $28,306,000 of net
cash provided by financing activities, $169,294,000 was received in proceeds
from mortgage and other notes payable and lines of credit, which was off set by
$109,791,000 in repayments of mortgage and other notes payable and lines of
credit, and $24,101,000 in dividends/distributions paid. The $72,545,000 of net
cash used in investing activities was primarily a result of $61,846,000 in
additions to notes receivable and investments made to finance real estate
acquisitions by the Company's investees, related party notes and other
receivables, $17,519,000 used to fund real estate under development, and
$13,658,000 used to purchase and upgrade rental properties which was offset by
$15,987,000 in proceeds received from contribution of real estate to corporate
investee.
Non-revenue generating capital expenditures are improvements and upgrades that
extend the useful life of the property and are not related to preparing a
multifamily property unit to be rented to a tenant. The Company expects to incur
approximately $330 per weighted average occupancy unit in non-revenue generating
capital expenditures for the year ended December 31, 2001. These expenditures do
not include the improvements required in connection with the origination of
mortgage loans, expenditures for renovations and improvements on recently
acquired properties which are expected to generate additional revenue, and
renovation expenditures required pursuant to tax-exempt bond financings. The
Company expects that cash from operations and/or its lines of credit will fund
such expenditures. However, there can be no assurance that the actual
expenditures incurred during 2001 and/or the funding thereof will not be
significantly different than the Company's current expectations.
The Company is developing six multifamily residential communities, with an
aggregate of 1,678 multifamily units. Such projects involve certain risks
inherent in real estate development. See "Other Matters/Risk Factors - Risks
That Development Activities Will Be Delayed or Not Completed" in Item 1 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2000. In
connection with these development projects, the Company has directly, or in some
cases through its joint venture partners, entered into contractual construction
related commitments with unrelated third parties for a total amount of
approximately $212,200,000. As of June 30, 2001, the Company's remaining
commitment to fund the estimated cost to complete is approximately $89,300,000.
The Company expects to fund such commitments with a combination of its working
capital, operating cash flows, amounts available on its lines of credit, net
proceeds from public and private equity and debt issuances, and proceeds from
the disposition of properties, which may be sold from time to time.
Pursuant to existing shelf registration statements, the Company has the capacity
to issue up to $342,000,000 of equity securities and the Operating Partnership
has the capacity to issue up to $250,000,000 of debt securities.
The Company pays quarterly dividends from cash available for distribution. Until
it is distributed, cash available for distribution is invested by the Company
primarily in short-term investment grade securities or is used by the Company to
reduce balances outstanding under its line of credit.
23
Funds from Operations
Industry analysts generally consider funds from operations, ("Funds From
Operations"), an appropriate measure of performance of an equity REIT.
Generally, Funds From Operations adjusts the net income of equity REITs for
non-cash charges such as depreciation and amortization of rental properties,
gains/losses on sales of real estate property and extraordinary items.
Management considers Funds From Operations to be a useful financial performance
measurement of an equity REIT because, together with net income and cash flows,
Funds From Operations provides investors with an additional basis to evaluate
the ability of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds From Operations does not represent net income
or cash flows from operations as defined by generally accepted accounting
principles ("GAAP") and is not intended to indicate whether cash flows will be
sufficient to fund cash needs. It should not be considered as an alternative to
net income as an indicator of the REIT's operating performance or to cash flows
as a measure of liquidity. Funds From Operations does not measure whether cash
flow is sufficient to fund all cash needs including principal amortization,
capital improvements and distributions to shareholders. Funds From Operations
also does not represent cash flows generated from operating, investing or
financing activities as defined under GAAP. Further, Funds from Operations as
disclosed by other REITs may not be comparable to the Company's presentation of
Funds From Operations. The following table sets forth the Company's calculation
of Funds from Operations for the three and six months ended June 30, 2001 and
2000.
Three months ended Six months ended
------------------ ----------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Income before gain on the sales of
real estate and minority interests $ 17,537,000 $ 16,218,000 $ 34,455,000 $ 31,140,000
Adjustments:
Depreciation and amortization 8,927,000 6,950,000 17,753,000 13,617,000
Unconsolidated joint ventures 1,201,000 1,054,000 2,438,000 2,063,000
Minority interests(1) (4,602,000) (4,778,000) (9,206,000) (9,504,000)
------------ ------------- ------------- -------------
Funds From Operations $ 23,063,000 $ 19,444,000 $ 45,440,000 $ 37,316,000
============ ============= ============ ============
Weighted average number
shares outstanding diluted(1) 21,034,366 20,708,639 20,970,138 20,641,343
============ ============= ============ ============
(1) Assumes conversion of all outstanding operating partnership interests in the
Operating Partnership. Minority interests have been adjusted to reflect such
conversion.
24
Item 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to interest rate changes primarily as a result of its
lines of credit and long-term debt used to maintain liquidity and fund capital
expenditures and expansion of the Company's real estate investment portfolio and
operations. The Company's interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives the Company borrows primarily
at fixed rates and may enter into derivative financial instruments such as
interest rate swaps, caps and treasury locks in order to mitigate its interest
rate risk on a related financial instrument. The Company does not enter into
derivative or interest rate transactions for speculative purposes.
The Company's interest rate risk is monitored using a variety of techniques. The
table below presents the principal amounts and weighted average interest rates
by year of expected maturity to evaluate the expected cash flows and sensitivity
to interest rate changes. The Company believes that the principal amounts of the
Company's mortgage notes payable and line of credit approximate fair value as of
June 30, 2001 as interest rates and other terms are consistent with yields
currently available to the Company for similar instruments.
For Year Ended: 2001 2002 2003 2004 2005 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------
Fixed rate debt (In thousands)
Amount $ 1,826 12,225 21,490 3,602 35,624 432,437 $ 507,204
Average interest rate 7.3% 7.0% 7.0% 7.3% 6.8% 6.8%
Variable rate LIBOR debt (In thousands)
Amount $ - 94,158 - - - 58,820(1) $ 153,978
Average interest - 5.0% - - - 5.1%
(1) Capped at interest rates ranging from 7.1% to 7.3%.
The Company does not have any exposures related to forward contracts at June 30,
2001.
25
Part II Other Information
- ------- -----------------
Item 2: Changes in Securities and Use of Proceeds
On June 1, 2001, in connection with the completion of its acquisition of the
Mt. Sutro Terrace Apartments, the Company issued 50,725 Operating Partnership
Units, which are convertible into common stock of the Company at the option of
the holder. This private placement of operating partnership units was completed
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended.
On June 28, 2001, the Operating Partnership completed a private placement of
200,000 Series Z Incentive Units of limited partner interest (the "Series Z
Incentive Units") as part of the Company's Long Term Incentive Plan. The
Operating Partnership offered these Series Z Incentive Units to eleven senior
executives of the Company in exchange for a capital commitment of $1.00 per
Series Z Incentive Unit, for an aggregate offering price of $200,000. Upon
certain triggering events, the Series Z Incentive Units will automatically
convert into common Operating Partnership units based on a conversion ratio that
may increase over time upon satisfaction of specific conditions. The conversion
ratio, initially set at zero, will increase on January 1 of each year for each
participating executive who remains employed by the Company if the Company has
met a specified "funds from operations" per share target for the prior year, up
to a maximum conversion ratio of 1.0. The Series Z Incentive Units will
automatically convert (1) if the conversion ratio reaches the maximum level of
1.0, (2) if none of the participating executives remain employed by the Company,
(3) if the Company dissolves or is liquidated or, (4) at the latest, on January
1, 2016. In certain change of control situations, the participating executives
will also be given the option to convert their units at the then-effective
conversion ratio. In addition, the Operating Partnership has the option to
redeem Series Z Incentive Units held by any executive whose employment has been
terminated for any reason and the obligation to redeem any such units following
the death of the holder. In such event, the Operating Partnership will redeem
the units for, at its option, either common Operating Partnership units or
shares of the Company's common stock based on the then-effective conversion
ratio.
The Series Z Incentive Units are entitled to participate in regular quarterly
distributions on an adjusted basis. Initially, each Series Z Incentive Unit will
receive 10% of the distribution received by each common Operating Partnership
unit. Over time the distribution percentage may increase, generally based on
satisfaction of the same conditions as increases in the conversion ratio.
The Operating Partnership did not engage any underwriters or placement agents in
connection with the private placement and no commissions were paid. The Company
anticipates collecting the capital commitment by offsetting future distributions
to the participating executives and using the proceeds for working capital
purposes. In light of information received by the Operating Partnership in
connection with such transaction, management believes that the private placement
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended.
26
Item 4: Submission of Matters to a Vote of Security Holders
At the Company's annual meeting, held on May 15, 2001 in Menlo Park,
California, the following votes of security holders occurred:
(a) The following persons were duly elected by the holders of the
Company's Common Stock (the "Stockholders") as Class I directors of the Company,
each for a three (3) year term (until 2004) and until their successors are
elected and qualified:
(1) Keith R. Guericke, 16,854,796 votes for and 22,356 votes
withheld;
(2) Issie N. Rabinovitch, 16,855,096 votes for and 22,056 votes
withheld; and
(3) Thomas E. Randlett, 16,855,096 votes for and 22,056 votes
withheld.
(b) The Stockholders ratified the appointment of KPMG LLP as the Company's
independent public auditors for the year ending December 31, 2001 by a vote of
16,570,456 for, 11,711 votes against and 294,984 votes abstaining.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
--------
10.1 Sixth Amendment to the First Amended and Restated Agreement of
Limited Partnership of Essex Portfolio, L.P.
B. Reports on Form 8-K
-------------------
None
27
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESSEX PROPERTY TRUST, INC.
/S/ MARK J. MIKL
-----------------------------------------
Mark J. Mikl, Vice President and Controller
(Authorized Officer and
Principal Accounting Officer)
August 13, 2001
---------------
Date
28