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 March 31, 1997
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.)
777 CALIFORNIA AVENUE, PALO ALTO, CALIFORNIA 94304
(Address of principal executive offices)
(Zip code)
(415) 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:
13,599,616 shares of Common Stock
as of April 30, 1997
Page 1 of 77
INDEX
Exhibit
Number Description Page Number
- ------- ----------- -----------
PART I: FINANCIAL INFORMATION
- ------ ---------------------
Item 1: Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets
as of March 31, 1997 and December 31, 1996 4
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1997 and 1996 5
Condensed Consolidated Statements of Stockholders'
Equity for the three months ended March 31, 1997 6
and the year ended December 31, 1996
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and 1996 7
Notes to Condensed Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II: OTHER INFORMATION
- ------- -----------------
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
Page 2 of 77
PART I FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------
"Essex" 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 partnership in which
Essex Property Trust, Inc. is the sole general partner.
The information furnished in the accompanying condensed
consolidated balance sheets, condensed consolidated statements of
operations, stockholders' equity and cash flows of Essex reflect
all adjustments which are, in the opinion of management, necessary
for a fair presentation of the aforementioned financial statements
for the interim periods.
The accompanying unaudited financial statements should be read in
conjunction with the notes to such financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Page 3 of 77
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
March 31, December 31,
Assets 1997 1996
------ ----------------- -----------------
Real estate:
Rental properties:
Land and land improvements $ 116,929 $ 90,557
Buildings and improvements 364,089 303,252
----------------- -----------------
481,018 393,809
Less accumulated depreciation (50,703) (47,631)
----------------- -----------------
430,315 346,178
Investments 3,244 8,537
----------------- -----------------
433,559 354,715
Cash and cash equivalents-unrestricted 8,298 42,705
Cash and cash equivalents-restricted 4,618 4,194
Notes and other related party receivables 23,806 2,362
Notes and other receivables 64,449 5,293
Prepaid expenses and other assets 4,000 3,745
Deferred charges, net 4,299 4,160
----------------- -----------------
$ 543,029 $ 417,174
================= =================
Liabilities and Stockholders' Equity
------------------------------------
Mortgage notes payable $ 183,358 $ 153,205
Lines of credit 34,420 0
Accounts payable and accrued liabilities 10,528 7,346
Dividends payable 6,289 6,286
Other liabilities 2,819 2,249
----------------- -----------------
Total liabilities 237,414 169,086
Minority interest 25,211 25,281
Stockholders' equity:
8.75% Convetible Preferred Stock, Series 1996A: $.0001
par value, 1,600,000 authorized and 800,000 issued and
outstanding 1 1
Common stock, $.0001 par value, per share, 668,400,000
and 668,400,000 authorized, 13,596,566 and 11,591,650
issued and outstanding 1 1
Excess stock, $.0001 par value per share, 330,000,000
shares authorized, no shares issued or outstanding
Additional paid-in capital 314,324 256,106
Accumulated deficit (33,922) (33,301)
----------------- -----------------
Total stockholders' equity 280,404 222,807
----------------- -----------------
$ 543,029 $ 417,174
================= =================
See accompanying notes to the unaudited financial statements.
Page 4 of 77
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Three months ended
---------------------------------
March 31, March 31,
1997 1996
------------ ----------
Revenues:
Rental $ 17,356 $ 10,951
Interest and other income 1,195 603
------------ ----------
18,551 11,554
------------ ----------
Expenses:
Property operating expenses
Maintenance and repairs 1,494 1,007
Real estate taxes 1,422 886
Utilities 1,138 756
Administrative 1,152 656
Advertising 270 151
Insurance 238 146
Depreciation and amortization 3,088 2,190
------------ ----------
8,802 5,792
------------ ----------
Interest 3,363 2,901
Amortization of deferred financing costs 127 245
General and administrative 516 397
Loss from hedge termination 0 21
------------ ----------
Total expenses 12,808 9,356
------------ ----------
Net income before minority interest and
extraordinary item 5,743 2,198
Minority interest (875) (75)
------------ ----------
Income before extraordinary item 4,868 2,123
Extraordinary item:
Loss on early extinguishment of debt 0 (2,180)
------------ ----------
Net income/(loss) $ 4,868 $ (57)
============ ==========
Per share data:
Net income per share from operations before
extraordinary item $ 0.38 $ 0.34
Extraordinary item - debt extinguishment 0.00 (0.35)
------------ ----------
Net income/(loss) per share $ 0.38 $ (0.01)
============ ==========
Weighted average number of shares used in net
income/(loss) per share calculation 11,784,952 6,275,000
============ ==========
Dividend per share $ 0.435 $ 0.425
============ ==========
See accompanying notes to the unaudited financial statements.
Page 5 of 77
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statements of Stockholders' Equity
For the three months ended March 31, 1997 and the
year ended December 31, 1996
(Unaudited)
(Dollars and shares in thousands)
Retained
Preferred stock Common stock Additional earnings/
----------------------- ----------------------- paid - in (Accumulated
Shares Amount Shares Amount capital deficit) Total
--------- ------------- --------- ------------- ------------ ------------ -----------------
Balances at December 31, 1995 6,275 $ 1 $ 112,070 $ (27,342) $ 84,729
Net proceeds from preferred
stock offering 800 $ 1 - - 17,504 - 17,505
Net proceeds from follow-on
public offerings - - 5,313 - 126,464 - 126,464
Net proceeds from options exercised - - 4 - 68 - 68
Net income - - - - - 8,881 8,881
Dividends declared - - - - - (14,840) (14,840)
--------- ---------- --------- ---------- ---------- ---------- --------------
Balances at December 31, 1996 800 1 11,592 1 256,106 (33,301) 222,807
Net proceeds from options exercised - - 5 - 99 - 99
Net proceeds from offering 2,000 58,119 58,119
Net income 4,868 4,868
Dividends declared (5,489) (5,489)
--------- ---------- --------- ---------- ---------- ---------- --------------
Balances at March 31, 1997 800 $ 1 13,597 $ 1 $ 314,324 $ (33,922) $ 280,404
========= ============= ========= ============= ============ ============ =================
See accompanying notes to the unaudited financial statements
Page 6 of 77
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three months ended
-----------------------
March 31, March 31,
1997 1996
--------- --------
Net cash provided by operating activities $ 12,674 $ 5,695
--------- --------
Cash flows from investing activities:
Additions to rental properties (51,032) (12,748)
Additions to notes receivable (785) -
Investments in corporations and joint ventures (64) 154
--------- --------
Net cash used in investing activities (51,881) (12,594)
--------- --------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 34,420 45,271
Repayment of mortgage and other notes payable
and lines of credit (665) (34,568)
Additions to deferred charges (267) (225)
Additions to notes and other related party
receivables/payables (22,805) 2,166
Repayment of notes and other related party
receivables/payables 1,361 (3,622)
Decrease in offering related accounts payable (630)
-
Net proceeds from stock options exercised 99
-
Distributions to minority interest/partners (807) (778)
Dividends paid (5,482) (2,677)
--------- --------
Net cash provided by financing activities 5,224 5,567
--------- --------
Net decrease in cash and cash equivalents (33,983) (1,332)
Cash and cash equivalents at beginning of period 46,899 3,983
--------- --------
Cash and cash equivalents at end of period $ 12,916 $ 2,651
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,126 $ 2,910
======== ========
Supplemental disclosure of non-cash investing and
Financing activities:
Mortgage note payable assumed in connection
with purchase of real estate $ 30,818 $ -
======== ========
Dividends payable $ 6,289 $ 3,455
======== ========
See accompanying notes to unaudited financial statements.
Page 7 of 77
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
The unaudited condensed consolidated financial statements of Essex
Property Trust, Inc. ("Essex" or the "Company") are prepared in
accordance with generally accepted accounting principles for interim
financial information and 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 condensed 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, 1996.
The consolidated financial statements for the three months ended March
31, 1997 and 1996 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 88.0% and 77.2% general partnership
interest in it as of March 31, 1997 and 1996, respectively.
All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
(2) SIGNIFICANT TRANSACTIONS
------------------------
(A) Equity Transaction
-----------------------
On March 31, 1997 the Company completed the sale of 2,000,000 shares of
Common Stock to Cohen & Steers Capital Management. The 2,000,000 shares
are newly issued and registered under a shelf registration statement
previously filed by Essex. This privately negotiated transaction
generated gross proceeds of approximately $58,250, and such proceeds will
be used to reduce debt and acquire additional multifamily properties in
the Company's targeted West Coast markets. Proceeds from this offering
were received April 3, 1997.
(B) Acquisitions
----------------
(i) On January 3, 1997, the Company acquired Wilshire Promenade
Apartments, a 128 unit apartment community in Fullerton, California, for
a contract price of $10,250. The community features a swimming pool, spa
and exercise room.
(ii) On January 28, 1997, the Company acquired Tara Village Apartments, a
168 unit apartment community in Tarzana, California, for a contract price
of $10,300. The community features a playground, sauna, swimming pool and
recreation room.
(iii) On January 30, 1997, Essex purchased the ownership interest of its
joint venture partner, Acacia Capital Corporation, in The Shores and
Bristol Commons properties, and is now the sole owner of these
properties. Essex acquired Acacia's approximate 55% ownership interest in
these properties for $7,900. The $7,900 represents a return of Acacia's
original investment, plus approximately $1,400. Using the original
acquisition capitalization rates for these properties, Essex estimates
that The Shores and Bristol Commons have appreciated to over $9,000 since
their time of acquisition. Concurrent with the purchase of Acacia's
ownership interest, these properties, their underlying debt and their
operations have been consolidated into the Company's financial
statements. The debt consolidated into the balance sheet consists of an
$18,520, 7.25% fixed
Page 8 of 77
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
rate loan secured by The Shores, due in December 2000, and a $12,298,
7.54% fixed rate loan, with interest fixed pursuant to an interest rate
swap agreement, secured by Bristol Commons and due in June 2002.
Subsequent to March 31, 1997, the Company repaid the loan secured by the
Bristol Commons property with a portion of the proceeds from its sale of
2,000,000 shares of Common Stock to Cohen & Steers.
(iv) On February 27, 1997, the Company acquired Foothill Apartments and
Twin Creek Apartments, adding 176 units to the Company's portfolio. These
properties are located in San Ramon, California, and were purchased
together for an aggregate contract price of $19,166. These communities
each feature a swimming pool and spa.
These first quarter 1997 acquisitions were funded with proceeds from
the Company's December 1996 follow-on Common Stock offering.
(3) RELATED PARTY TRANSACTIONS
--------------------------
All general and administrative expenses of the Company and Essex
Management Corporation ("EMC") are initially borne by the Company, with a
portion subsequently allocated to EMC. Expenses allocated to EMC for the
three months ended March 31, 1997 totaled $293 and are reflected as a
reduction in general and administrative expenses in the accompanying
consolidated statements of operations.
Rental income in the accompanying consolidated statements of operations
includes related party rents earned from space leased to The Marcus &
Millichap Company ("M&M"), including operating expense reimbursement, of
$171 and $170 for the three months ended March 31, 1997 and 1996,
respectively.
Other income for the three months ended March 31, 1997 includes interest
income of $393 which was earned principally under notes receivable from
Essex Fidelity I Corporation, the partnerships which collectively own
Anchor Village, a 301 unit multifamily property located in Mukilteo,
Washington ("Anchor Village"), the partnerships which collectively own
Highridge Apartments, a 255 unit multifamily property located in Rancho
Palos Verde, California ("Highridge") and the partnerships which
collectively own an approximate 30.7% minority interest in Pathways
Apartments, a 296 unit multifamily property located in Long Beach,
California ("Pathways"). For the three months ended March 31, 1997 the
Company earned $29 of dividend income from EMC. In addition, Essex earned
management fee income of $88 for the three months ended March 31, 1997,
from Anchor Village, Highridge and Pathways.
EMC provided property management services to the Company's neighborhood
shopping centers. The fees paid by the Company for such services for the
three months ended March 31, 1997 was $30, and is included in
administrative expense in the accompanying consolidated statements of
operations.
Page 9 of 77
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Notes and other related party receivables as of March 31, 1997 and December 31,
1996 consist of the following:
March 31, December 31,
1997 1996
-------- --------
Notes receivable from Fidelity I and Sacramento,
secured, bearing interest at 9%, due on demand $ - $ 718
Notes receivable from Fidelity I and JSV,
secured, bearing interest at 9.5%-10%, due 2015 726 726
Note receivable from Anchor Village, secured,
bearing interest at 8%, due January 14, 1998 9,650 -
Note receivable from Highridge, secured,
bearing interest at 9.375%, due August 1, 1997 12,489 -
Other related party receivables, substantially
due on demand 941 918
-------- --------
$ 23,806 $ 2,362
======== ========
Other related party receivables consist primarily of unreimbursed expenses due
from EMC and accrued interest income on related party notes receivables.
(4) EARNINGS PER SHARE
------------------
The Company will adopt the provisions of The Statement of Financial
Accounting Standard No. 128 (SFAS128), Earnings Per Share, for
------------------
financial statements with periods ending after December 15, 1997.
Earlier application is not permitted. After the effective date, all
prior period earnings per share data presented will be restated to
conform with the provisions of SFAS128. Had the Company applied the
provisions of SFAS128 to the unaudited financial statements for the
period ending March 31, 1997, the effect on earnings per share data
would have been immaterial.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATION
--------------------
The following discussion is based primarily on the consolidated financial
statements of Essex Property Trust, Inc. ("Essex" or the "Company") as of March
31, 1997 and 1996 and for the three months ended March 31, 1997 and 1996.
This information should be read in conjunction with the accompanying condensed
consolidated financial statements and notes thereto. These 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.
Page 10 of 77
Substantially all of the assets of Essex are held by, and substantially all
operations conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). Essex is the sole general partner of the Operating Partnership
and, as of March 31, 1997 and 1996, owned 88.0% and 77.2% general partnership
interest in the Operating Partnership, respectively. The Company qualifies 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 the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors including, but not limited to, those risks and
special consideration set forth in Essex's other filings with the Securities and
Exchange Commission (the "SEC") which may cause the actual results, performance
or achievements of Essex to be materially different from any further results,
performance or achievements expressed or implied by such forward-looking
statements.
GENERAL BACKGROUND
Essex's revenues are generated primarily from multifamily residential, retail
and commercial property operations, which accounted for 95% and 97% of its
revenues for the three months ended March 31, 1997 and 1996, respectively.
Essex's Properties (the "Properties") are located in California, Oregon and
Washington. Occupancy levels of Essex's multifamily residential properties in
these markets have generally remained high (averaging over 95% for the last five
years).
Essex elects to be treated as a real estate investment trust ("REIT")for Federal
income tax purposes, commencing with the year ending December 31, 1994. In order
to maintain compliance with REIT tax rules, Essex provides fee-based asset
management and disposition services as well as third-party property management
and leasing services through Essex Management Corporation ("EMC"). Essex owns
100% of EMC's 19,000 shares of non-voting Preferred Stock. Executives of Essex
own 100% of EMC's 1,000 shares of Common Stock. Essex has been actively engaged
in the business of acquiring and managing portfolios of non-performing assets
along with institutional investors. Asset management services resulting from
these portfolios are provided by EMC, typically for the term that is required to
acquire, reposition and dispose of the portfolio. Asset management agreements
usually provide for a base management fee calculated as a percentage of the
gross asset value of the portfolio under management, and an incentive fee based
upon the overall financial performance of the portfolio. Accordingly, the fees
earned as a result of these contracts fluctuate as assets are acquired and
disposed of. Essex benefits from such fees indirectly through receipt of
preferred stock dividend and by allocation of related expenses to EMC. In
general, Essex believes, however, that there will be limited opportunities to
acquire portfolios of non-performing assets in the future.
Since the Company's IPO in June 1994, the Company has acquired ownership
interest in twenty multifamily residential properties, twelve in California,
seven in Washington and one in Oregon, consisting of a total of 3,947 units for
an aggregate total capitalized cost of approximately $261.1 million. As part of
its active portfolio management strategy, the Company has sold, since its IPO,
four multifamily residential properties in Northern California consisting of a
total of 442 units, at an aggregate gross sales price of approximately $26.9
million resulting in a net aggregate gain of approximately $8.7 million.
Page 11 of 77
Average financial occupancy rates of the Company's multifamily properties
on a same-property basis increased to 97.0% from 96.9%, for the three months
ended March 31, 1997 and 1996, respectively. The regional breakdown is as
follows:
March 31, March 31,
1997 1996
--------- ---------
Northern California 96.9% 98.6%
Seattle Metropolitan 97.6% 95.0%
Southern California 95.3% 96.9%
The Company's retail and commercial properties were 98% occupied (based on
square footage) as of March 31, 1997.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1997 to the Three Months Ended
- -----------------------------------------------------------------------------
March 31, 1996.
- --------------
Total Revenues increased by $6,997,000 or 60.6% to $18,551,000 in the first
- --------------
quarter of 1997 from $11,554,000 in the first quarter of 1996. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to properties that Essex for all of both the quarters ended March
31, 1997 and 1996 ("Same Store Properties") owned.
Three Months
Ended
March 31,
--------------- Dollar Percentage
1997 1996 Change Change
------ ------ ------ ----------
Number of
Properties
Rental income ----------
Same Store Properties
Northern California 8 $ 4,834 $ 4,304 $ 530 12.3%
Seattle Metropolitan 9 3,807 3,530 277 7.9
Southern California 2 1,199 1,187 12 1.0
Retail and commercial 7 1,257 1,199 58 4.8
-------- ------- ------- ------ -----
Total Same Store Properties 26 11,097 10,220 877 8.6
========
Properties acquired/
disposed of subsequent
to January 1, 1996 6,259 731 5,528 757.0
------- ------- ------ -----
Total rental income 17,356 10,951 6,405 58.5
Other income 1,195 603 592 98.2
------- ------- ------ -----
Total revenues $18,551 $11,554 $6,997 60.6%
======= ======= ====== =====
As set forth in the above table, $5,528,000 of the $6,997,000 increase in total
revenues is attributable to properties acquired or disposed of subsequent to
January 1, 1996. During this period, Essex acquired 13 multifamily properties
(the "Acquisition Properties"), and disposed of 2 multifamily properties (the
"Disposition Properties").
Of the increase in total revenues, $877,000 is attributable to increases in
rental income from the Same Store Properties. Rental income from the Same Store
Properties increased by approximately 8.6% to $11,097,000 in the first quarter
of 1997 from $10,220,000 in the first quarter of 1996. A significant portion of
this increase was attributable to the eight multifamily Same Store Properties
located in Northern California, the rental income of which increased by $530,000
or 12.3% to $4,834,000 in the first quarter of 1997 from $4,304,000 in the first
quarter of 1996. The $530,000 increase, is primarily attributable to rental rate
increases as offset by a decrease in financial occupancy to 96.9% from 98.6% for
the quarter ended March 31, 1997 and 1996, respectively. In addition the nine
multifamily residential properties located in
Page 12 of 77
Seattle, significantly contributed towards this Same Store Properties rental
income increase. The rental income of these properties increased by $277,000 or
7.9% to $3,807,000 in the first quarter of 1997 from $3,530,000 in the first
quarter of 1996. Of the $277,000 increase, $187,000 is attributable to rental
rate increases with the remainder primarily attributable to an increase in
financial occupancy to 97.6% from 95% for the quarter ended March 31, 1997 and
1996, respectively.
The increases in total revenue also reflected an increase of $592,000
attributable to other income, which includes an increase in interest income of
$449,000.
Total Expenses increased by $3,452,000 or approximately 36.9% to $12,808,000 in
- --------------
the first quarter of 1997 from $9,356,000 in the first quarter of 1996. Interest
expense increased by $462,000 or 15.9% to $3,363,000 in the first quarter of
1997 from $2,901,000 in the first quarter of 1996. Such interest expense
increase was primarily due to the net addition of outstanding mortgage debt in
connection with property and investment acquisitions. Property operating
expenses, exclusive of depreciation and amortizations increased by $2,112,000 or
58.6% to $5,714,000 in the first quarter of 1997 from $3,602,000 in the first
quarter of 1996. Of such increase, $2,017,000 was attributable to Properties
acquired or disposed of in 1996 and 1997. General and administrative expenses
represents the costs of Essex's various acquisition and administrative
departments as well as partnership administration and non-operating expenses.
Such expenses increased by $119,000 in the first quarter of 1997 from the amount
for the first quarter of 1996. This increase is largely due to additional
staffing requirements resulting from the growth of Essex.
Net income increased by $4,925,000 to $4,868,000 in the first quarter of 1997
- ----------
from ($57,000) in the first quarter of 1996. The first quarter 1996 results
included a charge for extraordinary item of $2,180,000. The remaining increase
in net income was primarily a result of the net contribution of the Acquisition
Properties as offset by the Disposition Properties, and increase in net
operating income from the Same Store Properties.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Essex had $8,298,000 of unrestricted cash and cash
equivalents. On March 31, 1997 Essex recorded a receivable for the sale of
Common Stock to Cohen & Steers of $58,250,000. These proceeds were received on
April 3, 1997. The Company expects to meet its short-term liquidity requirements
by using this working capital, the proceeds from the above mentioned sale of
Common Stock, the proceeds from the anticipated sale of Convertible Preferred
Stock, amounts available on lines of credit, and any portion of net cash flow
from operations not currently distributed. The Company believes that its future
net cash flows will be adequate to meet operating requirements and to provide
for payment of dividends by the Company in accordance with REIT requirements.
Essex has credit facilities in the committed amount of approximately
$63,820,000. At March 31, 1997 Essex had $34,420,000 outstanding on its lines of
credit, with interest rates during the first quarter of 1997 ranging from 7.2%
to 7.5%. Subsequent to the quarter ended March 31, 1997, the Company repaid its
outstanding lines of credit balance with a portions of the proceeds from the
sale of 2,000,000 shares to Cohen & Steers.
Essex's total cash balances decreased $33,983,000 from $46,899,000 as of
December 31, 1996 to $12,916,000 as of March 31, 1997. This decrease was a
result of $51,881,000 of cash used in investing activities, which was offset by
$12,674,000 of cash provided by operating activities, and $5,224,000 of cash
provided by financing activities. Of the $51,881,000 net cash used in investing
activities, $51,032,000 was used to purchase and upgrade rental properties. The
$5,224,000 net cash provided by financing activities was primarily a result of
$34,420,000 of proceeds from lines of credit and other notes payable as offset
by $665,000 of repayments of mortgages, other notes payable and lines of credit,
$22,805,000 issued in notes receivable and $6,289,000 of dividends/distributions
paid.
As of March 31, 1997, Essex's combined outstanding indebtedness under mortgages
and lines of credit consisted of $140,538,000 in fixed rate debt, $42,820,000 of
debt represented by tax exempt variable rate demand bonds, of which $29,220,000
is capped at a maximum interest rate of 7.2%, and $34,420,000 of debt which has
an interest rate based on The Internal Banking Offshore Rate ("IBOR").
Page 13 of 77
Essex expects to incur approximately $300 per weighted average occupancy unit in
non-revenue generating capital expenditures for the year ended December 31,
1997. These expenditures do not include the improvements required in connection
with Northwestern Mutual and John Hancock mortgage loans and renovation
expenditures required pursuant to tax-exempt bond financings. Essex expects that
cash from operations and/or the lines of credit will fund such expenditures.
Essex 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 lines of credit.
On August 20, 1996, Essex completed the sale of 2,530,000 shares of its Common
Stock through an underwritten public offering at a price of $22.75 per share.
The net proceeds were used primarily to fund property acquisitions.
In September 1996, Essex completed the sale of $20 million of its 8.75%
Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock") to
Tiger/Westbrook Real Estate Fund, L.P., and Tiger/Westbrook Real Estate
Co-Investment Partnership, L.P. (collectively "Tiger/Westbrook"). Essex may
require Tiger/Westbrook to purchase up to an additional $20 million of
Convertible Preferred Stock at any time prior to June 20, 1997.
On December 24, 1996, Essex completed the sale of 2,783,000 shares of its Common
Stock through an underwritten public offering at a price of $27.75 per share.
The net proceeds were used primarily to fund property acquisitions.
On March 31, 1997, pursuant to its existing shelf registration statement, Essex
completed the sale of 2,000,000 shares of its Common Stock to Cohen & Steers at
a price of $29.125 per share. The net proceeds will be used primarily to reduce
debt and acquire additional multifamily properties. After the completion of this
sale, Essex has the capacity pursuant to its shelf registration statement to
issue up to approximately $144 million of equity securities.
The Company will utilize the proceeds from public offerings of shares of Common
Stock, availability under its lines of credit, and cash balances to fund its
future property acquisition and development activities. Essex expects to meet
certain long-term liquidity requirements such as scheduled debt maturities and
repayment of short-term financing of acquisition and development activities
through the issuance of long-term secured and unsecured debt and offerings by
Essex of additional equity securities (or limited partnership interests in the
Operating Partnership).
FUNDS FROM OPERATIONS
Industry analysts generally consider 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 and non-recurring gains or losses. Management generally
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 GAAP and does not necessarily indicate that 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 Operating Partnership'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 calculation of Funds from Operations.
Page 14 of 77
The following table sets forth Essex's calculation of Funds from Operations for
the quarters ended March 31, 1997 and 1996.
Three months ended
----------------------------------------
March 31, 1997 March 31, 1996
----------------- -----------------
Net Income before minority interest
and extraordinary item $ 5,743,000 $ 2,198,000
Adjustments:
Depreciation & Amortization 3,088,000 2,190,000
Adjustment for Unconsolidated Joint Venture - 119,000
Non-recurring Items, loss from hedge termination - 21,000
Minority Interest - Pathways (138,000) (140,000)
----------- -----------
Funds from Operations $ 8,693,000 $ 4,388,000
=========== ===========
Weighted average number of
shares outstanding-fully diluted (1) 14,557,019 8,130,000
========== ===========
(1) Assumes conversion of all outstanding shares of Convertible Preferred Stock
and operating partnership interests in the Operating Partnership into shares
of Essex's common stock.
The National Association of Real Estate Investment Trust ("NAREIT"), a leading
industry trade group, has approved a revised definition of Funds from
Operations, which provides that the amortization of deferred financing costs is
no longer added back to net income to calculate Funds from Operations. Essex
adopted the revised NAREIT definition of Funds from Operations as of January 1,
1996.
Page 15 of 77
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
-------- Page
----
10.1 Phantom Stock Unit Agreement for Mr. Guericke 18
10.2 Phantom Stock Unit Agreement for Mr. Schall 25
10.3 Replacement Promissory Note (April 15, 1996) and
Pledge Agreement for Mr. Guericke 32
10.4 Promissory Note (December 31, 1996) and Pledge
Agreement for Mr. Guericke 43
10.5 Replacement Promissory Note (April 30, 1996) and
Pledge Agreement for Mr. Schall 54
10.6 Promissory Note (December 31, 1996) and
Pledge Agreement for Mr. Schall 65
11.1 Statements regarding Computation of Earnings per Share 76
12.1 Schedule of Computation of Ratio of Earnings to
Fixed Charges 77
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only). --
B. REPORTS ON FORM 8-K
-------------------
On April 3, 1997, Essex filed a current report on Form 8-K, regarding
its sale of 2,000,000 shares Common Stock pursuant to its Shelf
Registration Statement.
Page 16 of 77
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, Controller
(Principal Accounting Officer)
May 13, 1997
----------------------------
Date
Page 17 of 77