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, 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:
18,414,295 shares of Common Stock
as of November 1, 2001
TABLE OF CONTENTS
FORM 10-Q
Part I Page No.
--------
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 4
Consolidated Statements of Operations for the three months
ended September 30, 2001 and 2000 5
Consolidated Statements of Operations for the nine months
ended September 30, 2001 and 2000 6
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2001
and the year ended December 31, 2000 7
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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 6 Exhibits and Reports on Form 8-K 26
Signatures 27
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)
September 30, December 31,
Assets 2001 2000
------- ------------- ------------
Real estate:
Rental properties:
Land and land improvements $ 291,754 $ 289,796
Buildings and improvements 878,727 866,612
------------- -----------
1,170,481 1,156,408
Less accumulated depreciation (146,928) (119,499)
------------- -----------
1,023,553 1,036,909
Investments 92,813 65,703
Real estate under development 79,800 38,231
------------- -----------
1,196,166 1,140,843
Cash and cash equivalents-unrestricted 12,341 6,600
Cash and cash equivalents-restricted 17,458 18,965
Notes receivable from investees and related parties 102,165 77,081
Notes and other receivables 33,085 24,062
Prepaid expenses and other assets 6,816 7,654
Deferred charges, net 5,968 6,644
------------- -----------
$ 1,373,999 $ 1,281,849
============= ===========
Liabilities and Stockholders' Equity
------------------------------------
Mortgage notes payable $ 565,138 $ 502,066
Lines of credit 107,767 93,469
Accounts payable and accrued liabilities 33,964 30,430
Dividends payable 16,619 14,538
Other liabilities 6,435 6,539
Deferred gain -- 5,002
------------- -----------
Total liabilities 729,923 652,044
Minority interests 251,028 238,130
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, 18,512,575 and 18,417,013
issued and outstanding 2 2
Cumulative redeemable preferred stock; $.0001 par
value, no shares issued and outstanding:
7.875% Series B 2,000,000 shares authorized -- --
9.125% Series C 500,000 shares authorized -- --
9.30% Series D 2,000,000 shares authorized -- --
9.25% Series E 2,200,000 shares authorized -- --
Excess stock, $.0001 par value, 330,000,000 shares
authorized and no shares issued and outstanding -- --
Additional paid-in capital 431,136 428,433
Distributions in excess of accumulated earnings (38,090) (36,760)
------------- -----------
Total stockholders' equity 393,048 391,675
------------- -----------
$ 1,373,999 $ 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
-----------------------------
September 30, September 30,
2001 2000
------------- -------------
Revenues:
Rental $ 44,838 $ 42,587
Other property 1,372 1,131
------------ ------------
Total property 46,210 43,718
Interest and other 5,553 3,640
------------ ------------
Total revenues 51,763 47,358
------------ ------------
Expenses:
Property operating expenses
Maintenance and repairs 2,829 2,630
Real estate taxes 3,140 2,815
Utilities 2,309 2,140
Administrative 3,689 3,508
Advertising 655 657
Insurance 307 253
Depreciation and amortization 9,197 8,689
------------ ------------
22,126 20,692
Interest 10,105 8,345
Amortization of deferred financing costs 143 160
General and administrative 1,838 2,215
------------ ------------
Total expenses 34,212 31,412
------------ ------------
Income before gain related to sale of real estate
and minority interests 17,551 15,946
Gain related to sale of real estate 3,788 --
------------ ------------
Income before minority interests 21,339 15,946
Minority interests (6,440) (5,697)
------------ ------------
Net income $ 14,899 $ 10,249
============ ============
Per share data:
Basic:
Net income $ 0.81 $ 0.56
============ ============
Weighted average number of shares
outstanding during the period 18,491,144 18,328,001
============ ============
Diluted:
Net income $ 0.79 $ 0.54
============ ============
Weighted average number of shares
outstanding during the period 21,093,631 20,891,729
============ ============
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)
Nine months ended
-----------------------------
September 30, September 30,
2001 2000
------------- -------------
Revenues:
Rental $ 134,473 $ 118,489
Other property 4,295 3,236
------------ ------------
Total property 138,768 121,725
Interest and other 14,149 7,581
------------ ------------
Total revenues 152,917 129,306
------------ ------------
Expenses:
Property operating expenses
Maintenance and repairs 8,496 7,194
Real estate taxes 9,182 8,276
Utilities 7,290 6,163
Administrative 10,934 10,280
Advertising 2,013 1,669
Insurance 802 723
Depreciation and amortization 26,950 22,306
------------ ------------
65,667 56,611
Interest 29,166 20,620
Amortization of deferred financing costs 510 479
General and administrative 5,566 4,510
------------ ------------
Total expenses 100,909 82,220
------------ ------------
Income before gain related to sale of real estate
and minority interests 52,008 47,086
Gain related to sale of real estate 3,788 4,022
------------ ------------
Income before minority interests 55,796 51,108
Minority interests (18,320) (17,836)
------------ ------------
Net income 37,476 33,272
Preferred stock dividends -- (246)
------------ ------------
Net income available to common stockholders $ 37,476 $ 33,026
============ ============
Per share data:
Basic:
Net income $ 2.03 $ 1.82
============ ============
Weighted average number of shares
outstanding during the period 18,460,790 18,169,655
============ ============
Diluted:
Net income $ 2.00 $ 1.79
============ ============
Weighted average number of shares
outstanding during the period 21,003,100 18,610,593
============ ============
Dividend per share $ 2.10 $ 1.77
============ ============
See accompanying notes to the consolidated unaudited financial statements.
6
ESSEX PROPERTY TRUST, INC
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2000
(Unaudited)
(Dollars and shares in thousands)
Distributions
Additional in excess of
Preferred stock Common stock 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 -- -- 95 -- 2,703 -- 2,703
Net income -- -- -- -- -- 37,476 37,476
Dividends declared -- -- -- -- -- (38,806) (38,806)
------- ---------- ---------- --------- --------- ---------- ---------
Balances at September 30, 2001 -- $ -- 18,512 $ 2 $431,136 $ (38,090) $ 393,048
======= ========== ========== ========= ========= ========== =========
See accompanying notes to the consolidated unaudited financial statements.
7
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine months ended
-----------------------------
September 30, September 30,
2001 2000
------------- -------------
Net cash provided by operating activities: $ 81,371 $ 67,501
------------- -------------
Cash flows from investing activities:
Additions to real estate (17,445) (69,193)
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 1,507 (637)
Additions to notes receivable from investees,
related parties and other receivables (49,798) (60,700)
Repayment of notes receivable from investees,
related parties and other receivables 13,792 3,615
Additions to real estate under development (34,495) (33,326)
Net contribution to investments in corporations
and limited partnerships (27,296) (4,241)
------------- -------------
Net cash used in investing activities (97,748) (133,180)
------------- -------------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 226,903 234,544
Repayment of mortgage and other notes payable
and lines of credit (155,677) (127,439)
Additions to deferred charges (140) (1,232)
Net proceeds from stock options exercised and shares
issued through dividend reinvestment plan 2,703 2,929
Contributions from minority interest partners 6,000 --
Distributions to minority interest partners (18,087) (17,332)
Redemption of operating partnership units (2,555) (218)
Dividends paid (37,029) (31,197)
------------- -------------
Net cash provided by financing activities 22,118 60,055
------------- -------------
Net increase in cash and cash equivalents 5,741 (5,624)
Cash and cash equivalents at beginning of period 6,600 12,348
------------- -------------
Cash and cash equivalents at end of period $ 12,341 $ 6,724
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $2,353 and
$1,779 capitalized $ 26,507 $ 19,803
============= =============
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 $ 2,771
============= =============
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 the consolidated unaudited financial statements.
8
Notes to Consolidated Financial Statements
September 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 nine
months ended September 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 89.6%
general partnership interest as of September 30, 2001, December 31, 2000
and September 30, 2000, respectively.
As of September 30, 2001, the Company operates and has ownership interests
in 87 multifamily properties (containing 19,918 units) and two commercial
properties (with approximately 56,000 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) Private Equity Fund
-------------------
On July 11, 2001, Essex Apartment Value Fund, L.P. (the "Fund"), an
investment fund organized 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 $105,000. Subsequent to
September 30, 2001, the Fund obtained an equity commitment from an
additional institutional investor bringing total equity commitments to
approximately $145,000. 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 $200,000 and
$250,000 and will utilize leverage of between 60% to 65% of the value of
the underlying real estate portfolio. Including the additional equity
commitment received subsequent to September 30, 2001, the Company, through
the General Partner, has a 34.38% 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 at
least 20% of the aggregate capital committed to the Fund.
9
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
Since August 2000 the General Partner has acquired several properties in
anticipation of the Fund's formation. These properties include six
apartment properties having 1,377 apartment units and two development land
parcels on which approximately 368 units are planned for construction.
These properties have an aggregate purchase price of approximately
$123,000. In addition, five of the properties are encumbered by
non-recourse mortgages in the aggregate amount of approximately $70,000. On
September 20, 2001, ownership interests in one of these properties, Andover
Park Apartments, a 240-unit apartment community located in Beaverton,
Oregon was transferred to the Fund. In conjunction with this transfer, the
Fund entered into a new $12,525 long-term non-recourse mortgage secured by
this previously unencumbered property. The loan bears interest at a fixed
rate of 6.66% and is due in September 2011. The General Partner anticipates
that ownership interests in the remaining properties will be transferred to
the Fund in the fourth quarter of 2001. The net investments in these
remaining properties are carried on the Company's balance sheet as
investments and 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.
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) 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 is not prohibited from utilizing
its development and redevelopment capabilities to improve properties that
it currently owns or acquires pursuant to the preceding exceptions.
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 the portfolio manager and is committed to devote substantially all of
his time to the Fund during the investment period. The Fund also has a
five-person advisory committee representing the investors.
(B) Acquisition Activities of the Fund
----------------------------------
On August 13, 2001 the Fund purchased Marbrisas Apartments, a 500-unit
apartment community located in Chula Vista, California for a contract price
of $62,000. In conjunction with this transaction the Fund assumed a
$39,989, 7.99% fixed rate, secured loan which matures in July 2005.
10
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(C) Disposition Activities
----------------------
On September 21,2001, two partnerships in which EMC is a 1% general partner
and the Operating Partnership holds a 1% special limited partnership
interest sold to an unrelated third party its remaining three retail
centers, Canby Square, Garrison Square and Powell Villa located in the
Portland, Oregon metropolitan area for a contract price of $14,527. The
Company recognized a previously deferred gain of $3,788, net of disposition
related costs, related to this transaction. In conjunction with this sale,
in a tax deferred exchange transaction, these two partnerships acquired on
September 28, 2001, Capri at Sunny Hills, a 100-unit apartment community
located in Fullerton, California for a contract price of $16,650.
(D) 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 September 30,
2001, the Company has ownership interests in five development communities,
with an aggregate of 1,274 multifamily units. During the third quarter, the
Company reached stabilized operations at one property, Tierra Vista, a
404-unit apartment community located in Oxnard, California.
(E) 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 September 30, 2001, the Company has ownership interests in
five redevelopment communities, which contain an aggregate of 1,178 units
with total originally projected investment of $24,304 of which
approximately $10,020 remains to be expended. During the third quarter, the
Company reached stabilized operations at one property, Hillcrest Park, a
608-unit apartment community located in Newbury Park, California.
(F) Other
-----
In September 1999, the Company formed a program in which directors and
management of the Company can participate indirectly in an investment in
the Company's common stock. Pursuant to the program, in 1999, the
participants entered into a swap agreement with a securities broker whereby
the securities broker acquired, in open market transactions, 223,475 shares
of the Company's common stock. The agreement by its terms expires in
September 2004 at which time the settlement amount is determined by
comparing the original purchase price of the stock plus interest at a rate
of LIBOR plus 1.5% to the termination date market value of the shares and
all dividends received during the investment period. In the last week of
August 2001, the directors and management effected an early termination of
the agreement with respect to 40,718 shares of the total 223,475 shares,
realizing a gain of approximately $18 per share. Participants are obligated
for any termination or settlement shortfall. The Company is a guarantor of
participant obligations under the program.
(G) Subsequent Event - Equity Transaction
-------------------------------------
In October 2001, the Operating Partnership acquired 100,700 shares of the
Company's outstanding Common Stock. The weighted average exercise price
paid for the shares was $47.88. The amount paid for the shares will be
reflected as a reduction of the common stock and additional-paid-in-capital
in the Company's consolidated balance sheets for the quarter ended December
31, 2001.
11
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(H) Subsequent Event - Investments
------------------------------
On November 1, 2001, the Company acquired ownership interests in
partnerships which own the following five multifamily properties:
Villa Angelina 256 units Placentia, CA
Valley Park Apartments 160 units Fountain Valley, CA
Hearthstone Apartments 140 units Santa Ana, CA
Treehouse Apartments 164 units Santa Ana, CA
Montejo Apartments 124 units Garden Grove, CA
Four of the properties are individually encumbered by non-recourse
mortgages, with a cumulative balance of $39,809, each with a fixed interest
rate of 6.98% and due date of December 2010. One property, Hearthstone
Apartments, is encumbered by two non-recourse mortgages, aggregating to
$10,177 and having a weighted average interest rate of 7.01% and both with
a due date of June 2009.
Each multifamily asset is owned by a limited partnership. The Company's
investment is in the form of a 1% special limited partnership interest and
the 1% sole general partnership interest. The other limited partners were
granted the right to require the applicable partnership to redeem their
interest for cash. Subject to certain conditions, the Company may elect to
deliver an aggregate of 461,163 shares of the Company's common stock in
lieu of the combined partnerships cash redemption obligation. The Company's
interests in these properties are accounted for under the equity method of
accounting.
12
Notes to Consolidated Financial Statements
September 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
September 30, 2001 and 2000 totaled $747 and $447, respectively, and $1,665
and $950 for the nine months ended September 30, 2001 and 2000,
respectively. The allocation is reflected as a reduction in general and
administrative expenses in the accompanying consolidated statements of
operations.
Interest and other income includes interest income of $1,280 and $235 for
the three months ended September 30, 2001 and 2000, respectively, and
$3,498 and $534 for the nine months ended September 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 $564 and $358 for the
three months ended September 30, 2001 and 2000, respectively, and $1,332
and $1,389 for the nine months ended September 30, 2001 and 2000,
respectively.
Notes receivable from investees and related parties as of September 30,
2001 and December 31, 2000 consist of the following:
September 30, December 31,
------------- ------------
Notes receivable from joint ventures investees: 2001 2000
---- ----
Notes receivable from VFGP L.P.'s, secured,
bearing interest from 9% to Prime + 3%, due 2001-2010 $ 40,412 $ 47,840
Receivables from VFGP L.P.'s, non interest bearing, due on demand 8,904 4,804
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 from 7% to LIBOR + 2.5%, due 2002-2004 44,617 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 1,423 1,753
Receivable from City Heights LP, non interest bearing,
due on demand -- 865
Other related party receivables:
Loans to officers, secured, bearing interest at 8%, due April 2006 633 633
Other related party receivables, substantially due on demand 3,226 3,295
-------- --------
$102,165 $ 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
September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(4) New Accounting Pronouncements
-----------------------------
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." The Company does not expect the adoption of
Statements 141 and 142 to have a material effect on the financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all
long-lived assets (including discontinued operations) and consequently
amends APB Opinion No. 30, "Reporting Results of Operations, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequent Occurring Events and Transactions." SFAS No. 144 develops
one accounting model for long-lived assets that are to be disposed of by
sale. The Company will adopt SFAS No. 144 effective January 1, 2002. The
Company has determined that the adoption of SFAS No. 144 will not have a
material impact on the Company's financial statements.
14
Notes in Consolidated Financial Statements
September 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
September 30, 2001 September 30, 2000
-------------------------------------------------------------------------------------------------
Revenues
Northern California $ 16,477 $ 15,446
Southern California 18,376 17,551
Pacific Northwest 11,357 10,721
-------- --------
Total segment revenues 46,210 43,718
Interest and other income 5,553 3,640
-------- --------
Total revenues $ 51,763 $ 47,358
======== ========
Net operating income:
Northern California $ 12,701 11,952
Southern California 12,785 12,167
Pacific Northwest 7,795 7,596
-------- --------
Total segment net operating income 33,281 31,715
Interest and other income 5,553 3,640
Depreciation and amortization (9,197) (8,689)
Interest (10,105) (8,345)
Amortization of deferred financing costs (143) (160)
General and administrative (1,838) (2,215)
-------- --------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 17,551 $ 15,946
======== ========
Nine months ended
September 30, 2001 September 30, 2000
-------------------------------------------------------------------------------------------------
Revenues
Northern California $ 50,072 $ 41,636
Southern California 54,561 50,096
Pacific Northwest 34,135 29,993
--------- ----------
Total segment revenues 138,768 121,725
Interest and other income 14,149 7,581
--------- ----------
Total revenues $ 152,917 $ 129,306
========= ==========
Net operating income:
Northern California $ 38,750 32,166
Southern California 37,812 34,580
Pacific Northwest 23,489 20,674
--------- ----------
Total segment net operating income 100,051 87,420
Interest and other income 14,149 7,581
Depreciation and amortization (26,950) (22,306)
Interest (29,166) (20,620)
Amortization of deferred financing costs (510) (479)
General and administrative (5,566) (4,510)
--------- ----------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 52,008 $ 47,086
========= ==========
15
Notes in Consolidated Financial Statements
September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(5) Segment Information (continued)
-------------------------------
September 30, 2001 December 31, 2000
----------------------------------------------------------------------------------------
Assets:
Northern California $ 304,029 $ 289,839
Southern California 457,571 478,835
Pacific Northwest 261,953 268,235
-------------- ----------------
Total segment net real estate assets 1,023,553 1,036,909
Non-segment assets 350,446 244,940
-------------- ----------------
Total assets $ 1,373,999 $ 1,281,849
============== ================
(6) Net Income Per Share
--------------------
Three months ended Three months ended
September 30, 2001 September 30, 2000
------------------------------------ -------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
Net Income $ 14,899 $ 10,249
Less: dividends on preferred stock - -
--------- ---------
Basic:
Income available to
common stockholders 14,899 18,491 $ 0.81 10,249 18,328 $ 0.56
--------- ------ ======== --------- -------- ========
Effect of Dilutive Securities:
Convertible limited partnership
units 1,832 2,288 1,069 2,136
Convertible preferred stock - - - 41
Stock options - 314 - 386
--------- ------ --------- --------
Diluted:
Income available to common
Stockholders plus assumed
conversions $ 16,731 21,093 $ 0.79 $ 11,318 20,891 $ 0.54
========= ====== ======== ========= ======== ========
Nine months ended Nine months ended
September 30, 2001 September 30,2000
------------------------------- -------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
Net Income $ 37,476 $ 33,272
Less: dividends on preferred stock - (246)
--------- ---------
Basic:
Income available to
common stockholders 37,476 18,461 $ 2.03 33,026 18,170 $ 1.82
--------- ------ ======== --------- -------- ========
Effect of Dilutive Securities:
Convertible limited partnership
units 4,506 2,219 - -(1)
Convertible preferred stock - - 245 154
Stock options - 323 - 287
--------- ------ --------- --------
Diluted:
Income available to common
Stockholders plus assumed
conversions $ 41,982 21,003 $ 2.00 $ 33,272 18,611 $ 1.79
========= ====== ======== ========= ======== ========
(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 nine months ended September 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 September 30, 2001, December 31, 2000 and September 30,
2000, owned an 89.0%, 89.6% and 89.6% general partnership interest in the
Operating Partnership, respectively. The Company has elected to be treated as a
real estate investment trust (a "REIT") for federal income tax purposes.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in the quarterly report on
Form 10-Q which are not historical facts may be considered forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including statements regarding the Company's expectations, hopes, intentions,
beliefs and strategies regarding the future. Forward looking statements include
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 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 nine months ended September 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).
17
Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund managed by
the Company and will be, subject to specific exceptions, the Company's exclusive
investment vehicle for new investments until the Fund's committed capital has
been invested or committed for investments, or if earlier, December 31, 2003.
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. The Company is committed to
invest an amount equal to or greater than 20% of the aggregate capital committed
to the Fund. In addition, Essex will be compensated by the Fund for its asset
management, property management, development and redevelopment services and may
receive incentive distributions if the Fund exceeds certain financial return
benchmarks.
The Company has elected to be treated as a real estate investment trust ("REIT")
for federal income tax purposes, commencing with the year ended December 31,
1994. The Company provides some of its fee-based asset management and
disposition services as well as third-party property management and leasing
services through Essex Management Corporation ("EMC"), in order to maintain
compliance with REIT tax rules. The Company owns 100% of EMC's 19,000 shares of
Series A non-voting Preferred Stock and 5,662 shares of Series B non-voting
Preferred Stock. Executives of the Company own 100% of EMC's 1,000 shares of
Common Stock.
Since the Company's initial public offering (the "IPO") in June 1994, the
Company has acquired ownership interests in 71 multifamily residential
properties and its headquarter and regional office buildings. Of the multifamily
properties acquired since the IPO, 14 are located in Northern California, 37 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 15,607 multifamily units with
total capitalized acquisition costs of approximately $1,306.5 million.
Additionally since its IPO, the Company has developed and has ownership
interests in 9 multifamily development properties that have reached stabilized
operations. These development properties consist of 1,944 units with total
capitalized development costs of $236.8 million. As part of its active portfolio
management strategy, the Company has disposed of, since its IPO, eight
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 $118.7 million resulting in total net realized gains of
approximately $25.8 million.
The Company is currently developing five multifamily residential communities,
with an aggregate of 1,044 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 $156.7 million. As of
September 30, 2001, together with its joint venture partners, the Company's
remaining development commitment is approximately $68.1 million.
Results of Operations
Comparison of the Three Months Ended September 30, 2001 to the Three Months
- ---------------------------------------------------------------------------
Ended September 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 September 30, 2001 and 2000) was 94.7% and 97.0%, for the three months
ended September 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 September 30, 2001 and 2000 are as
follows:
September 30, 2001 September 30, 2000
------------------ ------------------
Southern California 95.4% 96.4%
Northern California 94.6% 98.0%
Pacific Northwest 94.4% 96.4%
18
Total Revenues increased by $4,405,000 or 9.3% to $51,763,000 in the third
quarter of 2001 from $47,358,000 in the third 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
Number of September 30, Dollar Percentage
-------------
Properties 2001 2000 Change Change
---------- ---- ---- ------ ------
(Dollars in thousands)
Revenues
Property revenues Quarterly
Same Store Properties
Southern California 17 $ 12,269 $ 11,726 $ 543 4.6%
Northern California 14 14,075 13,532 543 4.0
Pacific Northwest 20 9,481 9,343 138 1.5
-- -------- --------- --------- -------
Properties 51 35,825 34,601 1,224 3.5
Property revenues properties
acquired/disposed of
subsequent June 30, 2000 10,385 9,117 1,268 13.9
-------- --------- --------- -------
Total property revenues (1) 46,210 43,718 2,492 5.7
-------- --------- --------- -------
Interest and other income 5,553 3,640 1,913 52.6
-------- --------- --------- -------
Total revenues $ 51,763 $ 47,358 $ 4,405 9.3%
======== ========= ========= =======
(1) Also includes two commercial properties, redevelopment communities, and
development communities.
As set forth in the above table, $1,268,000 of the $4,405,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to June 30, 2000, redevelopment communities, development communities and two
commercial properties. During this period, the Company acquired interests in
nine multifamily properties, one commercial property, and reached stabilized
operations at two development communities (the "Quarterly Acquisition
Properties").
Of the increase in total revenues, $1,224,000 is attributable to increases in
property revenues from the Quarterly Same Store Properties. Property revenues
from the Quarterly Same Store Properties increased by approximately 3.5% to
$35,825,000 in the third quarter of 2001 from $34,601,000 in the third quarter
of 2000. The majority of this increase was attributable to the 14 Quarterly Same
Store Properties located in Northern California and the 17 Quarterly Same Store
Properties located in Southern California. The property revenues of the
Quarterly Same Store Properties in Northern California increased by $543,000 or
4.0% to $14,075,000 in the third quarter of 2001 from $13,532,000 in the third
quarter of 2000. The property revenues of the Quarterly Same Store Properties in
Southern California increased by $543,000 or 4.6% to $12,269,000 in the third
quarter of 2001 from $11,726,000 in the third quarter of 2000. The $543,000
increase in Northern California is primarily attributable to rental rate
increases as offset by a decrease in financial occupancy to 94.6% in the third
quarter of 2001 from 98.0% in the third quarter of 2000. The $543,000 increase
in Southern California is primarily attributable to rental rate increases as
offset by a decrease in financial occupancy to 95.4% in the third quarter of
2001 from 96.4% in the third quarter of 2000. The 20 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 $138,000 or 1.5% to $9,481,000 in the third quarter of
2001 from $9,343,000 in the third quarter of 2000. The $138,000 increase is
primarily attributable to rental rate increases as offset by a decrease in
financial occupancy to 94.4% in the third quarter of 2001 from 96.4% in the
third quarter of 2000. The increase in total revenue also reflects an increase
of $1,913,000 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 $2,800,000 or approximately 8.9% to $34,212,000 in
the third quarter of 2001 from $31,412,000 in the third quarter of 2000.
Interest expense increased by $1,760,000 or 21.1% to $10,105,000 in the third
quarter of 2001 from $8,345,000 in the third 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 $926,000 or 7.7% to $12,929,000 in
the third quarter of 2001 from $12,003,000 in the third quarter of 2000. Of such
increase, $312,000 was attributable to the Quarterly Acquisition Properties.
Depreciation and amortization increased by $508,000 or approximately 5.9% to
$9,197,000 in the third quarter of 2001 from $8,689,000 in the third 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 decreased by $377,000 in the third
quarter of 2001 from the amount for the third quarter of 2000. This decrease is
largely due to an increase in the allocation of general and administrative
expenses to EMC and an increase in bonus expense in the third quarter of 2000 as
partially offset by additional staffing requirements resulting from the growth
of the Company.
Net income increased by $4,650,000 to $14,899,000 in the third quarter of 2001
from $10,249,000 in the third quarter of 2000. Net income for the third quarter
of 2001 included recognition of previously deferred gain (net of disposition
related costs) relating to the sale of real estate of $3,788,000. No gains on
sale were recognized in the third quarter of 2000. The remainder of the increase
is 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 Nine Months Ended September 30, 2001 to the Nine Months Ended
- --------------------------------------------------------------------------------
September 30, 2000
- -------------------
Average financial occupancy rates of the Company's multifamily Same Store
Properties (properties owned by the Company for each of the nine months
September 30, 2001 and 2000) was 95.5% and 96.8%, for the nine months ended
September 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 nine months ended September 30, 2001 and 2000 are as follows:
September 30, September 30,
2001 2000
---- ----
Southern California 95.6% 96.3%
Northern California 95.8% 97.8%
Pacific Northwest 95.0% 95.9%
20
Total Revenues increased by $23,611,000 or 18.3% to $152,917,000 in the nine
months ended September 30, 2001 from $129,306,000 in the nine months ended
September 30, 2000. The following table sets forth a breakdown of these revenue
amounts, including the revenues attributable to the Same Store Properties.
Nine Months Ended
Number of September 30, Dollar Percentage
-------------
Properties 2001 2000 Change Change
---------- ---- ---- ------ ------
(Dollars in thousands)
Revenues
Property revenues
Same Store Properties
Southern California 15 $ 32,461 $ 30,555 $ 1,906 6.2%
Northern California 14 43,106 38,539 4,567 11.9
Pacific Northwest 19 26,969 26,001 968 3.7
-- -------- --------- --------- -------
Properties 48 102,536 95,095 7,441 7.8
Property revenues properties
acquired/disposed of
subsequent December 31, 1999 36,232 26,630 9,602 36.1
-------- --------- --------- -------
Total property revenues (1) 138,768 121,725 17,043 14.0
-------- --------- --------- -------
Interest and other income 14,149 7,581 6,568 86.6
-------- --------- --------- -------
Total revenues $152,917 $ 129,306 $ 23,611 18.3%
======== ========= ========= =======
(1) Also includes two commercial properties, redevelopment communities, and
development communities.
As set forth in the above table, $9,602,000 of the $23,611,000 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
fifteen multifamily properties and reached stabilized operations at six
development communities (the "Post 1999 Acquisition Properties") and disposed of
one multifamily property (the "Post 1999 Disposition Properties").
Of the increase in total revenues, $7,441,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 7.8% to $102,536,000 in the
nine months ended September 30, 2001 from $95,095,000 in the nine months ended
September 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 $4,567,000 or
11.9% to $43,106,000 in the nine months ended September 30, 2001 from
$38,539,000 in the nine months ended September 30, 2000. This $4,567,000
increase is primarily attributable to rental rate increases offset by a decrease
in financial occupancy to 95.8% in the nine months ended September 30, 2001 from
97.8% in the nine months ended September 30, 2000. The 15 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 $1,906,000 or 6.2% to $32,461,000 in the nine months
ended September 30, 2001 from $30,555,000 in the nine months ended September 30,
2000. The $1,906,000 increase is attributable to rental rate increases as offset
by a decrease in financial occupancy to 95.6% in the nine months ended September
30, 2001 from 96.3% in the nine months ended September 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 $968,000 or 3.7% to
$26,969,000 in the nine months ended September 30, 2001 from $26,001,000 in the
nine months ended September 30, 2000. The $968,000 increase is primarily
attributable to rental rate increases and as offset be a decrease in financial
occupancy to 95.0% in the nine months ended September 30, 2001 from 95.9% in the
nine months ended September 30, 2000. The increase in total revenue also
reflected an increase of $6,568,000 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 $18,689,000 or approximately 22.7% to $100,909,000
in the nine months ended September 30, 2001 from $82,220,000 in the nine months
ended September 30, 2000. Interest expense increased by $8,546,000 or 41.4% to
$29,166,000 in the nine months ended September 30, 2001 from $20,620,000 in the
nine months ended September 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
$4,412,000 or 12.9% to $38,717,000 in the nine months ended September 30, 2001
from $34,305,000 in the nine months ended September 30, 2000. Of such increase,
$2,902,000 was attributable to the Post 1999 Acquisition Properties and the Post
1999 Disposition Properties. Depreciation and amortization increased by
$4,644,000 or approximately 20.8% to $26,950,000 in the nine months ended
September 30, 2001 from $22,306,000 in the nine months ended September 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 $1,056,000 in the nine
months ended September 30, 2001 from the amount for the nine months ended
September 30, 2000. This increase was 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 $4,204,000 to $37,476,000 in the nine months ended
September 30, 2001 from $33,272,000 in the nine months ended September 30, 2000.
This increase was primarily due to 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 September 30, 2001 the Company had $12,341,000 of unrestricted cash and cash
equivalents. The Company expects to meet its short-term liquidity requirements
by using its working capital, cash generated from operations and amounts
available under lines of credit. The Company believes that its current net cash
flows will be adequate to meet operating requirements and to provide for payment
of dividends by the Company in accordance with REIT qualification requirements.
The Company expects to meet its long-term funding requirements relating to
property acquisition and development (beyond the next 12 months) by using
working capital, amounts available from its line of credit, net proceeds from
public and private debt and equity issuances, and proceeds from the disposition
of properties that may be sold from time to time. There can, however, be no
assurance that the Company will have access to the debt and equity markets in a
timely fashion to meet such future funding requirements or that future working
capital, and borrowings under its line of credit will be available, or if
available, will be sufficient to meet the Company's requirements or that the
Company will be able to dispose of properties in a timely manner and under terms
and conditions that the Company deems acceptable.
The Company has two outstanding unsecured lines of credit for an aggregate
amount of $150,000,000. The first line, in the amount of $120,000,000, matures
in May 2002, with an option to extend it for one year thereafter. Outstanding
balances under this line of credit bear interest at a rate which uses a tiered
rate structure tied to the Company corporate ratings, if any, and leverage
rating which has been priced at LIBOR plus 1.15% during its term. At September
30, 2001 the Company had $77,767,000 outstanding on this line of credit, which
bore an interest rate of approximately 4.0%. A second line of credit in the
amount of $30,000,000 matures in August 2002, with an option to extend for one
year thereafter. Outstanding balances, on this second line bear interest based
on a tiered rate structure currently at LIBOR plus 1.175%. At September 30, 2001
the Company had $30,000,000 outstanding on this line of credit, which bore an
interest rate of approximately 4.0%.
22
In addition to the unsecured lines of credit, the Company had $565,138,000
of secured indebtedness at September 30, 2001. Such indebtedness consisted
of $506,318,000 in fixed rate debt with interest rates varying from 6.8% to
8.3% and maturity dates ranging from 2001 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 2001 ranging
from 4.0% to 5.5% and maturity dates ranging from 2020 to 2026. The
tax-exempt variable rate demand bonds are capped at interest rates ranging
from 7.1% to 7.3%.
The Company's unrestricted cash balance increased by $5,741,000 from
$6,600,000 as of December 31, 2000 to $12,341,000 as of September 30, 2001.
This increase was primarily a result of $81,371,000 net cash provided by
operating activities and $22,118,000 of net cash provided by financing
activities, which was offset in part by $97,748,000 of net cash used in
investing activities. Of the $22,118,000 of net cash provided by financing
activities, $226,903,000 was received in proceeds from mortgage and other
notes payable and lines of credit, which was off set by $155,677,000 in
repayments of mortgage and other notes payable and lines of credit, and
$37,029,000 in dividends/distributions paid. The $97,748,000 of net cash
used in investing activities was primarily a result of $49,798,000 in
additions to notes receivable and investments made to finance real estate
property acquisitions by the Company's investees, related party notes and
other receivables, $34,495,000 used to fund real estate under development,
and $17,445,000 used to purchase and upgrade rental properties which was
offset in part 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 five multifamily residential communities, with an
aggregate of 1,274 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 $156,700,000. As of September 30, 2001,
the Company's remaining commitment to fund the estimated cost to complete
is approximately $68,100,000. 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 nine
months ended September 30, 2001 and 2000.
Three months ended Nine months ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Income before gain on the sales of
real estate and minority interests $ 17,551,000 $ 15,946,000 $ 52,008,000 $ 47,086,000
Adjustments:
Depreciation and amortization 9,197,000 8,689,000 26,950,000 22,306,000
Unconsolidated joint ventures 1,209,000 1,232,000 3,647,000 3,295,000
Minority interests (1) (4,608,000) (4,602,000) (13,814,000) (14,105,000)
------------ ------------ ------------
Funds From Operations $ 23,349,000 $ 21,265,000 $ 68,791,000 $ 58,582,000
============ ============ ============ ============
Weighted average number
shares outstanding diluted (1) 21,093,631 20,891,729 21,003,100 20,658,467
============ ============ ============ ============
(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 September 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 $ 937 12,381 21,879 4,020 36,076 431,025 $ 506,318
Average interest rate 7.3% 7.0% 7.0% 7.3% 6.8% 6.8%
Variable rate LIBOR debt (In thousands)
Amount $ -- 107,767 -- -- -- 58,820(1) $ 166,587
Average interest -- 4.0% -- -- -- 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
September 30, 2001.
25
Part II Other Information
------- -----------------
Item 2: Changes in Securities and Use of Proceeds
On November 1, 2001, the Company acquired ownership interests in
partnerships which own the following five multifamily properties: Villa
Angelina, Valley Park Apartments, Hearthstone Apartments, Treehouse
Apartments, and Montejo Apartments. Each property is owned by a separate
limited partnership in which the Company has a 1% special limited
partnership interest and the 1% sole general partnership interest. The
other limited partners were granted the right to require the applicable
partnership to redeem their interest for cash. Subject to certain
condition, the Company may elect to deliver an aggregate of 461,163 shares
of the Company's common stock in lieu of the combined partnerships'
redemption obligation. This private placement of limited partnerships
interests was completed pursuant to the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933, as amended.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
--------
None
B. Reports on Form 8-K
-------------------
None
26
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 9, 2001
----------------
Date
27