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. 333-44467-01
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as specified in its Charter)
Maryland 77-0369575
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 East Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices)
(Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months for such shorter period that the Registrant was required
to file such report, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
---
TABLE OF CONTENTS
FORM 10-Q
Part I Page No.
--------
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets as of September 30, 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 Partners' Capital
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 Portfolio, L.P., a California limited partnership, (the
"Operating Partnership") effectively holds the assets and liabilities
and conducts the operating activities of Essex Property Trust, Inc.
("Essex" or the "Company"). Essex Property Trust, Inc., a real estate
investment trust incorporated in the State of Maryland, is the sole
general partner of the Operating Partnership.
The information furnished in the accompanying consolidated unaudited
balance sheets, statements of operations, partners' capital and cash
flows of the Operating Partnership 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 PORTFOLIO, L.P.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
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 Partners' Capital
---------------------------------
Mortgage notes payable $ 565,138 $ 502,066
Lines of credit 107,767 93,469
Accounts payable and accrued liabilities 33,964 30,430
Distributions payable 16,619 14,538
Other liabilities 6,435 6,539
Deferred gain - 5,002
----------------- -----------------
Total liabilities 729,923 652,044
Minority interests 5,584 364
Partners' capital:
General Partner:
Common equity 393,048 391,675
Preferred equity - -
----------------- -----------------
393,048 391,675
Limited Partners:
Common equity 40,954 33,276
Preferred equity 204,490 204,490
----------------- -----------------
245,444 237,766
----------------- -----------------
Total partners' capital 638,492 629,441
----------------- -----------------
Total liabilities and partners' capital $ 1,373,999 $ 1,281,849
================= =================
See accompanying notes to the consolidated financial statements.
4
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit amounts)
Three months ended
----------------------------------------
September 30, September 30,
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 (28) (22)
------------------- ------------------
Net income 21,311 15,924
Dividends on preferred units-limited partner (4,580) (4,580)
------------------- ------------------
Net income available to common units $ 16,731 $ 11,344
=================== ==================
Per operating partnership unit data:
Basic:
Net income $ 0.81 $ 0.55
=================== ===================
Weighted average number of partnership
units outstanding during the period 20,779,226 20,464,016
=================== ===================
Diluted:
Net income $ 0.79 $ 0.54
=================== ===================
Weighted average number of partnership
units outstanding during the period 21,093,631 20,891,729
=================== ===================
Distributions per Operating Partnership common unit $ 0.70 $ 0.61
=================== ===================
See accompanying notes to the consolidated unaudited financial statements.
5
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit amounts)
Nine months ended
------------------------------------------
September 30, September 30,
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 (75) (348)
------------------- -------------------
Net income 55,721 50,760
Dividends on preferred units-general partner - (245)
Dividends on preferred units-limited partner (13,739) (13,739)
------------------- -------------------
Net income available to common units $ 41,982 $ 36,776
=================== ===================
Per operating partnership unit data:
Basic:
Net income $ 2.03 $ 1.82
=================== ===================
Weighted average number of partnership
units outstanding during the period 20,680,335 20,217,529
=================== ===================
Diluted:
Net income $ 2.00 $ 1.79
=================== ===================
Weighted average number of partnership
units outstanding during the period 21,003,100 20,658,467
=================== ===================
Distributions per Operating Partnership common unit $ 2.10 $ 1.77
=================== ===================
See accompanying notes to the consolidated unaudited financial statements.
6
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
For the nine months ended September 30, 2001 and the
year ended December 31, 2000
(Unaudited)
(Dollars and units in thousands)
General Partner Limited Partners
--------------------------------------- ---------------------------------
Preferred Preferred
Common Equity Equity Common Equity Equity
------------------------- ------------ ------------------- -------------
Units Amount Amount Units Amount Amount Total
---------- ------------- ------------ -------- ---------- ------------- ----------
Balances at December 31, 1999 18,050 $ 383,379 $ 4,314 2,082 $ 31,420 $204,490 $623,603
Contribution-net proceeds
from options exercised 156 3,344 - - - - 3,344
Common units issued from
conversion of Convertible
Preferred Stock 211 4,314 (4,314) - - - -
Redemption of limited partner
common units - - - (12) (555) - (555)
Issuance of limited partner
common units - - - 59 2,365 - 2,365
Net income - 44,105 245 - 5,062 18,319 67,731
Partners' distributions - (43,467) (245) - (5,016) (18,319) 67,047)
------ ----------- -------- ----- -------- -------- ---------
Balances at December 31, 2000 18,417 391,675 - 2,129 33,276 204,490 629,441
Contribution-net proceeds
from options exercised 95 2,703 - - - - 2,703
Redemption of limited partner
common units - - - (49) (2,555) - (2,555)
Issuance of limited partner
common units - - - 209 10,381 - 10,381
Net income - 37,476 - - 4,506 13,739 55,721
Partners' distributions - (38,806) - - (4,654) (13,739) (57,199)
------ ----------- -------- ----- -------- -------- ---------
Balances at September 30, 2001 18,512 $ 393,048 $ - 2,289 $ 40,954 $204,490 $638,492
====== =========== ======== ===== ======== ======== ========
See accompanying notes to the consolidated unaudited financial statements.
7
ESSEX PORTFOLIO, L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine months ended
------------------------------
September 30, September 30,
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
--------------------------------------
Essex Portfolio, L.P. (the "Operating Partnership") was formed in March
1994 and commenced operations on June 13, 1994, when Essex Property
Trust, Inc. (the "Company"), the general partner of the Operating
Partnership, completed its initial public offering (the "Offering") in
which it issued 6,275,000 shares of common stock at $19.50 per share. The
net proceeds from the Offering of $112,071 were used by the Company to
acquire a 77.2% interest in the Operating Partnership. The Company has
elected to be treated as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986 (the "Code"), as amended.
The unaudited consolidated financial statements of the Operating
Partnership are prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions to Form 10-Q. In the opinion of management, all adjustments
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented have been included
and are normal and recurring in nature. These unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements included in the Operating Partnership's
annual report on Form 10-K for the year ended December 31, 2000.
The Company is the sole general partner in the Operating Partnership,
owning an 89.0%, 89.6% and 89.6% general partnership interest as
September 30, 2001, December 31, 2000 and September 30, 2000,
respectively.
As of September 30, 2001, the Operating Partnership 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 Operating Partnership, 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 Operating Partnership's development,
redevelopment and asset management capabilities.
9
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
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 Operating Partnership, 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 Operating Partnership, 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 Operating Partnership
expects its interest in the Fund to be diluted as a result of future
closings, the Operating Partnership is committed to invest an amount
equal to at least 20% of the aggregate capital committed to the Fund.
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 Operating Partnership'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 Operating
Partnership'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 Operating Partnership, 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 Operating Partnership is not prohibited from utilizing
its development and redevelopment capabilities to improve properties that
it currently owns or acquires pursuant to the preceding exceptions.
10
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
The Operating Partnership'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.
(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 Operating Partnership 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 Operating Partnership defines development communities as new
apartment properties that are being constructed or are newly constructed
and in a phase of lease-up and have not yet reached stabilized
operations. At September 30, 2001, the Operating Partnership has
ownership interests in five development communities, with an aggregate of
1,274 multifamily units. During the third quarter, the Operating
Partnership reached stabilized operations at one property, Tierra Vista,
a 404-unit apartment community located in Oxnard, California.
(E) Redevelopment Communities
-------------------------
The Operating Partnership defines redevelopment communities as existing
properties owned or recently acquired which have been targeted for
investment by the Operating Partnership with the expectation of increased
financial returns through property improvement. Redevelopment communities
typically have apartment units that are not available for rent and, as a
result, may have less than stabilized operations. At September 30, 2001,
the Operating Partnership 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 Operating
Partnership reached stabilized operations at one property, Hillcrest
Park, a 608-unit apartment community located in Newbury Park, California.
11
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(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 Operating Partnership's consolidated
balance sheets for the quarter ended December 31, 2001.
(H) Subsequent Event - Investments
------------------------------
On November 1, 2001, the Operating Partnership 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 Operating
Partnership'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 Operating Partnership 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 Operating Partnership'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, Operating
Partnership and Essex Management Corporation, an unconsolidated preferred
stock subsidiary of the Company ("EMC"), are initially borne by the
Operating Partnership, with a portion subsequently allocated to EMC.
Expenses allocated to EMC for the three months ended September 30, 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 Operating Partnership'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 at 9% - 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 at 7% - 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
-----------------------------
The Operating Partnership has adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities," effective January 1, 2001. During
1996 and 1999, the Operating Partnership 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
Operating Partnership 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 Operating Partnership 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
Operating Partnership 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 Operating Partnership will adopt SFAS No. 144
effective January 1, 2002. The Operating Partnership has determined that
the adoption of SFAS No. 144 will not have a material impact on the
Operating Partnership's financial statements
14
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)
(5) Segment Information
-------------------
The Operating Partnership 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 to 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 Unit
-------------------
Three months ended Three months ended
September 30, 2001 September 30, 2000
--------------------------------- ---------------------------------
Weighted Per Weighted Per
Average Unit Average Unit
Income Units Amount Income Units Amount
Net Income $ 21,311 $ 15,924
Less: dividends on general and limited
partner preferred equity (4,580) (4,580)
--------- ----------
Basic:
Income available to
common units 16,731 20,779 $ 0.81 11,344 20,464 $ 0.55
--------- ------ ======== --------- -------- ========
Effect of Dilutive Securities:
Convertible preferred stock - - - 41
Stock options - 315 - 387
--------- ------ --------- --------
Diluted:
Income available to common
units plus assumed
conversions $ 16,731 21,094 $ 0.79 $ 11,344 20,892 $ 0.54
========= ====== ======== ========= ======== ========
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
------------------------ ----------------------------------
Weighted Per Weighted Per
Average Unit Average Unit
Income Units Amount Income Units Amount
Net Income $ 55,721 $ 50,760
Less: dividends on general and limited
partner preferred equity (13,739) (13,984)
--------- ---------
Basic:
Income available to
common units 41,982 20,680 $ 2.03 36,776 20,218 $ 1.82
--------- ------ ======== --------- -------- ========
Effect of Dilutive Securities:
Convertible preferred stock - - 245 154
Stock options - 323 - 287
--------- ------ --------- --------
Diluted:
Income available to common
units plus assumed
conversions $ 41,982 21,003 $ 2.00 $ 37,021 20,659 $ 1.79
========= ====== ======== ========= ======== ========
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 Portfolio, L.P. (the "Operating Partnership") 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.
The Operating Partnership holds, directly or indirectly, all of the Company's
interests in the Operating Partnership's properties and all of the Company's
operations relating to the Company's properties are conducted through the
Operating Partnership. The Company is the sole general partner of the Operating
Partnership and, as of September 30, 2001, December 31, 2000 and September 30,
2000, owed an 89.0%, 89.6% and 89.6% general partnership interest in the
Operating Partnership, respectively.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in the quarterly report on
Form 10-Q which are not historical facts may be considered forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including statements regarding the Operating Partnership's expectations, hopes,
intentions, beliefs and strategies regarding the future. Forward looking
statements include the Operating Partnership's expectation as to the total
capital commitments of the Essex Apartment Value Fund and the acquisition
activities of that fund, statements regarding the Operating Partnership's
expectation as to the timing of completion of current development projects,
beliefs as to the adequacy of future cash flows to meet operating requirements,
and to provide for dividend payments in accordance with REIT requirements and
expectations as to the amount of non-revenue generating capital expenditures for
the year ended December 31, 2001, potential acquisitions and developments, the
anticipated performance of existing properties, future acquisitions and
developments and statements regarding the Operating Partnership's financing
activities. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors including, but not limited to, that the 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 Operating Partnership's current
expectations, as well as those risks, special considerations, and other factors
discussed under the caption "Other Matters/Risk Factors" in Item 1 of the
Operating Partnership's Annual Report on Form 10-K for the year ended December
31, 2000, and those other risk factors and special considerations set forth in
the Operating Partnership's other filings with the Securities and Exchange
Commission (the "SEC") which may cause the actual results, performance or
achievements of the Operating Partnership to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
General Background
The Operating Partnership's property revenues are generated primarily from
multifamily property operations, which accounted for greater than 99% of its
property revenues for the three and nine months ended September 30, 2001 and
2000. The Operating Partnership's multifamily properties (the "Properties") are
located in Northern California (the San Francisco Bay Area), Southern California
(Los Angeles, Ventura, Orange and San Diego counties) and the Pacific Northwest
(the Seattle, Washington and Portland, Oregon metropolitan areas).
17
Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund managed
by the Operating Partnership and will be, subject to specific exceptions, the
Operating Partnership'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 Operating Partnership 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.
Since the Operating Partnership began operations in June 1994, the Operating
Partnership has acquired ownership interests in 71 multifamily residential
properties and its headquarters building. Of the multifamily properties acquired
since the Operating Partnership began operations, 14 are located in Northern
California, 37 are located in Southern California, 15 are located in the
Seattle, Washington metropolitan area and five is 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 it began operations, the Operating
Partnership has developed and has ownership interests in nine multifamily
development properties that have reached stabilized operations. These
development properties consist of 1,944 units with total capitalized development
costs of $236.8 million. As part of its active portfolio management strategy,
the Operating Partnership has disposed of, since it began operations, 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 Operating Partnership is currently developing five multifamily residential
communities, with an aggregate of 1,044 multifamily units. In connection with
these development projects, the Operating Partnership has directly, or in some
cases through its joint venture partners, entered into contractual construction
related commitments with unrelated third parties for approximately $156.7
million. As of September 30, 2001, together with its joint venture partners, the
Operating Partnership'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 Operating Partnership's multifamily
Quarterly Same Store Properties (properties owned by the Operating Partnership
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 Operating Partnership 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 Operating
Partnership'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 Operating Partnership'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 Operating
Partnership'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 Operating Partnership.
Net income increased by $5,387,000 to $21,311,000 in the third quarter of 2001
from $15,924,000 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 Operating Partnership's multifamily
Same Store Properties (properties owned by the Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership'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 Operating
Partnership'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 Operating
Partnership as offset by an increase in the allocation of general and
administrative expenses to EMC.
Net income increased by $4,961,000 to $55,721,000 in the nine months ended
September 30, 2001 from $50,760,000 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 Operating Partnership had $12,341,000 of unrestricted
cash and cash equivalents. The Operating Partnership expects to meet its
short-term liquidity requirements by using its working capital, cash generated
from operations and amounts available under lines of credit. The Operating
Partnership believes that its current net cash flows will be adequate to meet
operating requirements and to provide for payment of dividends by the Company in
accordance with REIT qualification requirements. The Operating Partnership
expects to meet its long-term funding requirements relating to property
acquisition and development (beyond the next 12 months) by using working
capital, amounts available from its 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 Operating Partnership will have access to the debt and equity
markets in a timely fashion to meet such future funding requirements or that
future working capital, and borrowings under its lines of credit will be
available, or if available, will be sufficient to meet the Operating
Partnership's requirements or that the Operating Partnership will be able to
dispose of properties in a timely manner and under terms and conditions that the
Operating Partnership deems acceptable.
The Operating Partnership has two outstanding unsecured lines of credit for an
aggregate amount of $150,000,000. The first line, in the amount of $120,000,000,
matures in May 2002, with an option to extend 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 Operating Partnership corporate
ratings, if any, and leverage rating which has been priced at LIBOR plus 1.15%
during its term. At September 30, 2001 the Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership'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 Operating Partnership
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 Operating Partnership expects that cash from operations
and/or its lines of credit will fund such expenditures. However, there can be no
assurance that the actual expenditures incurred during 2001 and/or the funding
thereof will not be significantly different than the Operating Partnership's
current expectations.
The Operating Partnership 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 Operating Partnership's Annual Report on Form 10-K for the year
ended December 31, 2000. In connection with these development projects, the
Operating Partnership has directly, or in some cases through its joint venture
partners, entered into contractual construction related commitments with
unrelated third parties for a total amount of approximately $156,700,000. As of
September 30, 2001, the Operating Partnership's remaining commitment to fund the
estimated cost to complete is approximately $68,100,000. The Operating
Partnership expects to fund such commitments with a combination of its working
capital, operating cash flows, amounts available on its lines of credit, net
proceeds from public and private equity and debt issuances, and proceeds from
the disposition of properties, which may be sold from time to time.
Pursuant to existing shelf registration statements, the Company has the capacity
to issue up to $342,000,000 of equity securities and the Operating Partnership
has the capacity to issue up to $250,000,000 of debt securities.
The Operating Partnership pays quarterly dividends from cash available for
distribution. Until it is distributed, cash available for distribution is
invested by the Operating Partnership primarily in short-term investment grade
securities or is used by the Operating Partnership to reduce balances
outstanding under its line of credit.
23
Funds from Operations
Industry analysts generally consider funds from operations, ("Funds From
Operations"), an appropriate measure of performance of an equity REIT. The
Company, the sole general partner in the Operating Partnership, has elected to
be treated as a REIT under the code. Generally, Funds From Operations adjusts
the net income of equity REITs for non-cash charges such as depreciation and
amortization of rental properties, gains/losses on sales of real estate property
and extraordinary items. Management considers Funds From Operations to be a
useful financial performance measurement of an equity REIT because, together
with net income and cash flows, Funds From Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions and other capital expenditures. Funds From Operations does
not represent net income or cash flows from operations as defined by generally
accepted accounting principles ("GAAP") and is not intended to indicate whether
cash flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the REIT's operating performance
or to cash flows as a measure of liquidity. Funds From Operations does not
measure whether cash flow is sufficient to fund all cash needs including
principal amortization, capital improvements and distributions to shareholders.
Funds From Operations also does not represent cash flows generated from
operating, investing or financing activities as defined under GAAP. Further,
Funds from Operations as disclosed by other REITs may not be comparable to the
Operating Partnership's presentation of Funds From Operations. The following
table sets forth the Operating Partnership's calculation of Funds from
Operations for the three and nine months ended September 30, 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) Includes all outstanding units of the general partner common equity and
assumes conversion of all limited partner common equity into shares of the
Company's common stock.
24
Item 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Operating Partnership 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 Operating Partnership's real
estate investment portfolio and operations. The Operating Partnership's interest
rate risk management objective is to limit the impact of interest rate changes
on earnings and cash flows and to lower its overall borrowing costs. To achieve
its objectives the Operating Partnership borrows primarily at fixed rates and
may enter into derivative financial instruments such as interest rate swaps,
caps and treasury locks in order to mitigate its interest rate risk on a related
financial instrument. The Operating Partnership does not enter into derivative
or interest rate transactions for speculative purposes.
The Operating Partnership's interest rate risk is monitored using a variety of
techniques. The table below presents the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes. The Operating Partnership believes
that the principal amounts of the Operating Partnership's mortgage notes payable
and line of credit approximate fair value as of September 30, 2001 as interest
rates and other terms are consistent with yields currently available to the
Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 PORTFOLIO, L.P.
A California Limited Partnership
/S/ MARK J. MIKL
-----------------------------------------
Mark J. Mikl, Vice President and Controller
(Authorized Officer and
Principal Accounting Officer)
November 9, 2001
----------------
Date
27