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, 1999
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 March 31, 1999 and December 31, 1998 4
Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998 5
Consolidated Statements of Partners' Capital
for the three months ended March 31, 1999
and the year ended December 31, 1998 6
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosure About Market Risk 17
Part II
Item 2 Changes in Securities and Use of Proceeds 19
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 20
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 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)
March 31, December 31,
Assets 1999 1998
------ ------------------- ----------------------
Real estate:
Rental properties:
Land and land improvements $ 219,264 $ 219,115
Buildings and improvements 674,396 670,849
------------------- ----------------------
893,660 889,964
Less accumulated depreciation (83,866) (77,789)
------------------- ----------------------
809,794 812,175
Investments 11,239 10,590
Real estate under development 77,391 53,213
------------------- ----------------------
898,424 875,978
Cash and cash equivalents-unrestricted 2,245 2,548
Restricted cash 15,249 15,532
Notes and other related party receivables 10,788 10,450
Notes and other receivables 18,738 18,809
Prepaid expenses and other assets 4,825 3,444
Deferred charges, net 5,142 5,035
------------------- ----------------------
$ 955,411 $ 931,796
=================== ======================
Liabilities and Partners' Capital
---------------------------------
Mortgage notes payable $ 352,778 $ 325,822
Lines of credit 32,000 35,693
Accounts payable and accrued liabilities 29,906 28,601
Distributions payable 11,320 11,145
Deferred gain 5,002 5,002
Other liabilities 5,313 5,301
------------------- ----------------------
Total liabilities 436,319 411,564
Minority interests 2,946 2,951
Partners' capital:
General
Partner:
Common equity 353,400 352,295
Preferred equity 35,454 37,505
------------------- ----------------------
388,854 389,800
Limited
Partners:
Common equity 25,142 25,331
Preferred equity 102,150 102,150
------------------- ----------------------
127,292 127,481
------------------- ----------------------
Total partners' capital 516,146 517,281
------------------- ----------------------
Total liabilities and partners'
capital $ 955,411 $ 931,796
=================== ======================
See accompanying notes to the consolidated unaudited financial statements.
4
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit amounts)
Three months ended
------------------------------------------
March 31, March 31,
1999 1998
------------- -------------
Revenues:
Rental $ 31,902 $ 26,530
Other property 696 522
------------- -------------
Total property 32,598 27,052
Interest and other 1,292 784
------------- -------------
Total revenues 33,890 27,836
------------- -------------
Expenses:
Property operating expenses:
Maintenance and repairs 2,095 2,268
Real estate taxes 2,517 2,187
Utilities 1,995 1,717
Administrative 2,743 1,903
Advertising 509 378
Insurance 221 300
Depreciation and amortization 6,045 4,669
------------- -------------
16,125 13,422
Interest 4,934 3,797
Amortization of deferred financing costs 130 144
General and administrative 1,011 818
------------- -------------
Total expenses 22,200 18,181
------------- -------------
Income before minority interests 11,690 9,655
Minority interests (146) (109)
------------- -------------
Net income 11,544 9,546
Dividends on preferred units - general partner (831) (875)
Dividends on preferred units - limited partner (2,145) (722)
------------- -------------
Net income available to common units $ 8,568 $ 7,949
============ ============
Per Operating Partnership Unit data:
Basic:
Net income $ 0.46 $ 0.43
============ ============
Weighted average number of partnership units
outstanding during the period 18,608,130 18,491,659
============ ============
Diluted:
Net income $ 0.46 $ 0.42
============ ============
Weighted average number of partnership units
outstanding during the period 18,761,479 18,722,273
============ ============
Distributions per Operating Partnership common unit: $ 0.500 $ 0.450
============ ============
See accompanying notes to the consolidated unaudited financial statements.
5
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
For the three months ended March 31, 1999 and the
year ended December 31, 1998
(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
------ -------- ------- ----- ------- -------- --------
Balance at December 31, 1997 16,615 $361,410 $37,505 1,873 $25,487 $ - $424,402
Contribution-net proceeds from
perpetual preferred units - - - - - 102,150 102,150
Contribution-net proceeds from
options exercised 24 464 - - - - 464
Contribution-net proceeds from
dividend reinvestment plan 2 10 - - - - 10
Net income - 22,829 3,500 - 3,496 5,595 35,420
Partners' distributions - (32,418) (3,500) - (3,652) (5,595) (45,165)
------ -------- ------- ----- ------- -------- --------
Balances at December 31, 1998 16,641 $352,295 $37,505 1,873 $25,331 $102,150 $517,281
------ -------- ------- ----- ------- -------- --------
Common units issued from
conversion of Convertible
Preferred Stock 100 2,051 (2,051) - - - 0
Redemption of limited partner
common units - - - (7) (200) - (200)
Contribution-net proceeds from
options exercised 14 39 - - - - 39
Net income - 7,623 831 - 945 2,145 11,544
Partners' distributions - (8,608) (831) - (934) (2,145) (12,518)
------ -------- ------- ----- ------- -------- --------
Balances at March 31, 1999 16,755 $353,400 $35,454 1,866 $25,142 $102,150 $516,146
====== ======== ======= ===== ======= ======== ========
See accompanying notes to the consolidated unaudited financial statements.
6
ESSEX PORTFOLIO, L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three months ended
----------------------------------------
March 31, March 31,
1999 1998
---------- ---------
Net cash provided by operating activities $ 18,800 $ 13,683
---------- ---------
Cash flows from investing activities:
Additions to real estate (4,874) (99,578)
Increase in restricted cash 283 (8,181)
Issuance of notes receivable (152) (140)
Additions to related party notes and other receivables (815) (3,836)
Repayments of related party notes and other receivables 477 2,833
Additions to real estate under development (24,834) (2,112)
Distributions from investments in corporations
and limited partnerships 327 161
Dispositions of real estate - 15,842
--------- ---------
Net cash used in investing activities (29,588) (95,011)
--------- ---------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 53,000 74,275
Repayment of mortgage and other notes payable
and lines of credit (29,737) (40,550)
Additions to deferred charges (337) (424)
Net proceeds from preferred units sale - 58,275
Payment of offering related costs 62 25
Contributions from stock options exercised and shares
issued through dividend reinvestment plan - general partner 39 208
Distributions to limited partners and minority interest (3,026) (843)
Redemption of operating partnership units - limited partner (200) -
Distributions to general partners (9,316) (8,346)
--------- ---------
Net cash provided by financing activities 10,485 82,620
--------- ---------
Net (decrease) increase in cash and cash equivalents (303) 1,292
Cash and cash equivalents at beginning of period 2,548 4,282
--------- ---------
Cash and cash equivalents at end of period $ 2,245 $ 5,574
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amount capitalized $ 3,446 $ 3,410
========= =========
Supplemental disclosure of non-cash investing and
financing activities:
Distributions payable $ 11,320 $ 9,919
========= =========
See accompanying notes to the consolidated unaudited financial statements.
7
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(1) Organization and Basis of Presentation
--------------------------------------
Essex Portfolio, L.P. (the "Operating Partnership") was formed in March 1994
and commenced operations on June 13, 1994, when Essex Property Trust, Inc.
(the "Company"), the general partner of the Operating Partnership, completed
its initial public offering (the "Offering") in which it issued 6,275,000
shares of common stock at $19.50 per share. The net proceeds from the
Offering of $112,071 were used by the Company to acquire a 77.2% interest in
the Operating Partnership. The Company has elected to be treated as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986
(the "Code"), as amended.
The unaudited consolidated financial statements of the Operating Partnership
are prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to
Form 10-Q. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented have been included and are normal and
recurring in nature. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements included in the Operating Partnership's annual report on Form 10-
K for the year ended December 31, 1998.
The Company is the sole general partner in the Operating Partnership, owning
an 90.0%, 89.9% and 89.9% general partnership interest as of March 31, 1999,
December 31, 1998 and March 31, 1998, respectively.
As of March 31, 1999, the Operating Partnership operates and has ownership
interests in 58 multifamily properties (containing 12,267 units) and five
commercial properties (with approximately 290,000 square feet)
(collectively, the "Properties"). The Properties are located in Northern
California (the San Francisco Bay Area), Southern California (Los Angeles,
Ventura, Orange and San Diego counties), and the Pacific Northwest (the
Seattle, Washington and Portland, Oregon metropolitan areas).
All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.
(2) Significant Transactions
------------------------
(A) Development Activities
---------------------------
The Operating Partnership is developing eight multifamily residential
projects, which are anticipated to contain an aggregate of 1,578 multifamily
units. The Operating Partnership expects that such projects will be
completed during 1999. In connection with these 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. As of March 31, 1999, the Operating Partnership is
committed to fund approximately $83,000, representing the estimated cost to
complete these projects.
(B) Equity Transactions
-----------------------
On January 6, 1999, Westbrook Real Estate Fund I, L.P. (formerly known as
Tiger/Westbrook Real Estate Fund, L.P.), and Westbrook Real Estate Co-
Investment Partnership I, L.P. (formerly known as Tiger/Westbrook Real
Estate Co-Investment Partnership, L.P.) (collectively, Tiger/Westbrook)
converted 87,500 shares of its ownership in the Company's 8.75% Convertible
Preferred Stock, Series 1996A (the "Convertible Preferred Stock") into
100,000 shares of the Company's Common Stock ("Common Stock"). The Company
has filed a shelf registration statement covering
8
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
Tiger/Westbrook's resale of all shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock. The shelf registration
statement was declared effective by the Securities and Exchange Commission
in December 1998.
Subsequent to March 31, 1999, Tiger/Westbrook converted an additional
437,500 shares of Convertible Preferred Stock into 500,000 shares of Common
Stock. As of April 30, 1999, Tiger Westbrook owned 1,075,000 shares of
Convertible Preferred Stock.
In March 1999 the Company's Board of Directors authorized the Operating
Partnership to purchase up to 500,000 shares of the Company's Common Stock,
or approximately 3% of the issued and outstanding Common Stock of the
Company, at a total price not to exceed $29.00 in the open market or through
negotiated or block transactions.
(C) Debt Related Transactions
------------------------------
On February 24, 1999, the Operating Partnership entered into two long-term
non-recourse mortgages totaling $27.5 million. The two loans are secured by
one property each; both properties were previously unencumbered. The loans
bear interest at a fixed rate of 6.4% and are due in April 2009. The
proceeds were used to reduce outstanding balances under the Operating
Partnership's $100 million unsecured line of credit.
(D) Subsequent Events
----------------------
In April 1999, the Operating Partnership purchased 257,000 shares of the
Company's outstanding Common Stock. The weighted average exercise price
paid for the shares was $27.14. The amount paid for the shares will be
reflected as a reduction of the general partner's common equity in the
Operating Partnership's consolidated balance sheets for the quarter ended
June 30, 1999.
(3) Related Party Transactions
--------------------------
All general and administrative expenses of the Company, the Operating
Partnership and Essex Management Corporation, an unconsolidated preferred
stock subsidiary of the Company ("EMC") are initially borne by the Operating
Partnership, with a portion subsequently allocated to EMC. Expenses
allocated to EMC for the three months ended March 31, 1999 and 1998 totaled
$102 and $76, respectively and are reflected as a reduction in general and
administrative expenses in the accompanying consolidated statements of
operations.
Included in rental revenue in the accompanying consolidated statements of
operations are rents earned from space leased to Marcus & Millichap ("M&M"),
including operating expense reimbursements of $225 and $201 for the three
months ended March 31, 1999 and 1998, respectively.
Other income includes interest income of $86 and $205 for the three months
ended March 31, 1999 and 1998, respectively, earned principally on the notes
receivable from related party partnerships in which the Operating
Partnership owns an ownership interest ("Joint Ventures"). Other income
also includes management fee income earned by the Operating Partnership from
its Joint Ventures of $159 and $105 for the three months ended March 31,
1999 and 1998, respectively. Also included in other income for the three
months ended March 31, 1999 and 1998 is $185 and $-0-, respectively
representing income earned from operations of the Operating Partnership's
Joint Venture development projects.
9
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
Notes and other related party receivables as of March 31, 1999 and December 31,
1998 consist of the following:
March 31, December 31,
1999 1998
--------- ------------
Notes receivable from Joint Ventures:
Note receivable from Highridge Apartments
secured, bearing interest at 9.4%,
due March 2008 $ 1,047 $ 1,047
Note receivable from Fidelity I, secured,
bearing interest at 8%, due on demand 1,358 1,358
Note receivable from Fidelity I and JSV, secured,
bearing interest at 9.5-10%, due 2015 800 800
Note receivable from Highridge,
non-interest bearing, due on demand 3,038 2,928
Note receivable from Portland Shopping Centers,
non-interest bearing, due on demand 1,209 1,209
Note receivable from Anchor Village,
non-interest bearing, due on demand 1,054 933
Other related party receivables:
Loans to officers, bearing interest at 8%, due
April 2006 500 500
Other related party receivables, substantially
due on demand 1,782 1,675
------- -------
$10,788 $10,450
======= =======
Other related party receivables consist primarily of accrued interest
income on related party notes receivables and loans to officers, advances
and accrued management fees from joint venture investees and unreimbursed
expenses due from EMC.
(4) Forward Treasury Contracts:
---------------------------
The Operating Partnership has four forward treasury contracts for an
aggregate notional amount of $60,000, locking the 10 year treasury rate at
between 6.15% - 6.26%. These contracts are to limit the interest rate
exposure on identified future debt financing requirements relating to the
multifamily development projects and a maturity of an $18,520 fixed rate
loan. These contracts will be settled no later than June 2000. If the
contracts were settled as of March 31, 1999, the Operating Partnership
would be obligated to pay approximately $3,172.
The Operating Partnership has a LIBOR based swap contract for a notional
amount of $12,298, fixing the one month LIBOR rate at 6.14%. This contract
limits the Operating Partnership's interest rate exposure on borrowings on
its LIBOR based lines of credit. If this contract were settled as of March
31, 1999 the Operating Partnership would be obligated to pay approximately
$240.
(5) New Accounting Pronouncements:
------------------------------
In June 1998, the FASB issued Financial Accounting Statement No. 133 (SFAS
133), Accounting for Derivative Instruments and Hedging Activities. The
Operating Partnership will adopt SFAS 133
10
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
for interim periods beginning in 2000, the effective date of SFAS 133. Had
SFAS 133 been implemented in the first quarter of 1999, a charge to earnings
of $3,172 relating to treasury contracts that do not qualify as anticipatory
hedges under SFAS 133 would have been recorded. Such charge would be
considered a non-recurring item and therefore would not effect the Operating
Partnership's calculation of funds from operations.
(6) Segment Information:
--------------------
The Operating Partnership defines its reportable operating segments as the
three geographical regions in which its multifamily residential properties
are located, Northern California, Southern California, and the Pacific
Northwest. Non-segment property revenues and net operating income included
in the following schedule consists of revenue generated from the Operating
Partnership's two commercial properties. Excluded from segment revenues is
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
March 31, 1999 March 31, 1998
--------------- ------------------
Revenues
Northern California $ 11,288 $ 9,242
Southern California 12,509 9,143
Pacific Northwest 8,116 7,780
-------- --------
Total segment revenues 31,913 26,165
Non-segment property revenues 685 887
Interest and other income 1,292 784
-------- --------
Total revenues $ 33,890 $ 27,836
======== ========
Net operating income:
Northern California $ 8,562 $ 6,828
Southern California 8,332 5,915
Pacific Northwest 5,376 4,926
-------- --------
Total segment net operating income 22,270 17,669
Non-segment net operating income 248 630
Interest and other income 1,292 784
Depreciation and amortization (6,045) (4,669)
Interest (4,934) (3,797)
Amortization of deferred financing costs (130) (144)
General and administrative (1,011) (818)
-------- --------
Income before minority interests $ 11,690 $ 9,655
======== ========
March 31, 1999 December 31, 1998
-------------- -----------------
Assets:
Northern California $240,166 $241,676
Southern California 354,607 355,077
Pacific Northwest 197,424 198,761
-------- --------
Total segment net real estate assets 792,197 795,514
Non-segment net real estate assets 17,597 16,661
-------- --------
Net real estate assets 809,794 812,175
Non-segment assets 145,617 119,621
-------- --------
Total assets $955,411 $931,796
======== ========
11
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 months ended March 31, 1999 and 1998. This information should be read
in conjunction with the accompanying consolidated unaudited 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.
The Operating Partnership holds, directly or indirectly, all of the Company's
interests in the Company'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 March 31, 1999, December 31, 1998 and March 31, 1998,
owned an 90.0%, 89.9% and 89.9% general partnership interest in the Operating
Partnership, respectively.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in the quarterly report on
Form 10-Q which are not historical facts may be considered forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including statements regarding the Operating Partnership's expectations, hopes,
intentions, beliefs and strategies regarding the future. Forward looking
statements include statements regarding the Operating Partnership's expectation
as to the timing of completion of current development projects, beliefs as to
the adequacy of future cash flows to meet operating requirements, and to provide
for dividend payments in accordance with REIT requirements and expectations as
to the amount of non-revenue generating capital expenditures for the year ended
December 31, 1999, potential acquisitions and developments, the anticipated
performance of existing properties, future acquisitions and developments and
statements regarding the Operating Partnership's financing activities. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors including, but not limited to, that the actual completion of
development projects will be subject to delays, that such development projects
will not be completed, that future cash flows will be inadequate to meet
operating requirements and/or will be insufficient to provide for dividend
payments in accordance with REIT requirements, that the actual non-revenue
generating capital expenditures will exceed the Operating Partnership's current
expectations, as well as those risks, special considerations, and other factors
discussed under the caption "Other Matters/Risk Factors" in Item 1 of the
Operating Partnership's Annual Report on Form 10-K for the year ended December
31, 1998, 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 98% and 97% of its property
revenues for the three months ended March 31, 1999 and 1998, respectively. The
Operating Partnership's properties (the "Properties") are located in Northern
California (the San Francisco Bay Area), Southern California (Los Angeles,
Ventura, Orange and San Diego counties) and the Pacific Northwest (the Seattle,
Washington and Portland, Oregon metropolitan areas). The average occupancy
level of the Operating Partnership's portfolio has exceeded 95% for the last
five years.
Since the Operating Partnership began operations in June 1994, the Operating
Partnership has acquired ownership interests in 48 multifamily residential
properties and its headquarters building. Of the properties acquired since the
IPO, 11 are located in Northern California, 21 are located in Southern
California, 16 are located in the Seattle, Washington metropolitan area and one
is located in the Portland, Oregon metropolitan area. In total, these
acquisitions consist of 9,498 multifamily units and approximately 17,500 square
feet for the headquarters building with total capitalized acquisition costs of
approximately $716.7 million. As part of its active portfolio management
strategy, the Operating Partnership has sold, since its IPO, six multifamily
residential properties (five in Northern California and one in the Pacific
Northwest)
12
consisting of a total of 819 units and disposed of six retail shopping centers
in the Portland, Oregon metropolitan area at an aggregate gross sales price of
approximately $71.1 million resulting in a total net realized gain of
approximately $13.6 million and a deferred gain of $5.0 million.
The Operating Partnership has committed approximately $204.9 million relating to
eight development projects which are expected to contain an aggregate of 1,578
multifamily units and to be substantially completed during 1999. At March 31,
1999, the Operating Partnership's remaining commitment to fund the estimated
total cost of such projects is approximately $83.0 million.
The Operating Partnership defines "financial occupancy" 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. Average financial occupancy
rates of the Operating Partnership's multifamily Same Store Properties
(properties owned by the Operating Partnership for the three months ended March
31, 1999 and 1998) increased to 96.1% for the three months ended March 31, 1999
from 95.8%, for the three months ended March 31, 1998. The regional breakdown
of financial occupancy for the multifamily Same Store Properties for the three
months ended March 31, 1999 and 1998 are as follows:
March 31, March 31,
1999 1998
---------- ----------
Northern California 96.8% 96.9%
Southern California 97.0% 96.1%
Pacific Northwest 94.4% 94.0%
The Operating Partnership's commercial properties were 100% occupied (based on
square footage) as of March 31, 1999.
Results of Operations
Comparison of the Three Months Ended March 31, 1999 to the Three Months Ended
- -----------------------------------------------------------------------------
March 31, 1998.
- ---------------
Total Revenues increased by $6,054,000 or 21.7% to $33,890,000 in the first
quarter of 1999 from $27,836,000 in the first quarter of 1998. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to the Same Store Properties.
Three Months Ended
March 31,
Number of -------------------- Dollar Percentage
Properties 1999 1998 Change Change
---------- ------- ------- ------ -----------
Revenues
Property revenues Same Store
Properties
Northern California 12 $ 9,151 $ 8,774 $ 377 4.3%
Southern California 15 8,625 7,967 658 8.3
Pacific Northwest 18 7,562 7,174 388 5.4
Commercial 2 685 496 189 38.1
-- ------- ------- ------ -----
Total property revenues
Same Store Properties 47 26,023 24,411 1,612 6.6%
==
Property revenues properties
acquired/disposed of
subsequent to January 1, 1998 6,575 2,641 3,934 149.0
------- ------- ------ -----
Total property revenues 32,598 27,052 5,546 20.5
------- ------- ------ -----
Interest and other income 1,292 784 508 64.8
------- ------- ------ -----
Total revenues $33,890 $27,836 $6,054 21.7%
======= ======= ====== =====
As set forth in the above table, $3,934,000 of the $6,054,000 increase in total
revenues is attributable to properties acquired or disposed of subsequent to
January 1, 1998. During this period, the Operating Partnership acquired
interests in five multifamily properties (the "Acquisition Properties"), and
disposed of one multifamily property and three retail shopping centers (the
"Disposition Properties").
13
Of the increase in total revenues, $1,612,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 6.6% to $26,023,000 in the
first quarter of 1999 from $24,411,000 in the first quarter of 1998. The
majority of this increase was attributable to the 15 Same Store Properties
located in Southern California. The property revenues of these properties
increased by $658,000 or 8.3% to $8,625,000 in the first quarter of 1999 from
$7,967,000 in the first quarter of 1998. The $658,000 increase is attributable
to rental rate increases and the increase in financial occupancy to 97.0% in the
first quarter of 1999 from 96.1% in the first quarter of 1998. The 18
multifamily residential properties located in the Pacific Northwest accounted
for the next largest regional component of the Same Store Properties property
revenues increase. The property revenues of these properties increased by
$388,000 or 5.4% to $7,562,000 in the first quarter of 1999 from $7,174,000 in
the first quarter of 1998. The $388,000 increase is primarily attributable to
rental rate increases and an increase in financial occupancy to 94.4% in the
first quarter of 1999 from 94.0% in the first quarter of 1998. The 12
multifamily Same Store Properties located in Northern California also
contributed to the Same Store Properties property revenues increase. The
property revenues of the Same Store Properties in Northern California increased
by $377,000 or 4.3% to $9,151,000 in the first quarter of 1999 from $8,774,000
in the first quarter of 1998. This $377,000 increase is primarily attributable
to rental rate increases as reduced by the effect of the decrease in financial
occupancy to 96.8% in the first quarter of 1999 from 96.9% in the first quarter
of 1998. The increase in total revenue also reflected an increase of $508,000
attributable to other income, which primarily relates to interest income on
outstanding notes receivables and also income earned from the Operating
Partnership's investments in joint venture development projects.
Total Expenses increased by $4,019,000 or approximately 22.1% to $22,200,000 in
the first quarter of 1999 from $18,181,000 in the first quarter of 1998.
Interest expense increased by $1,137,000 or 29.9% to $4,934,000 in the first
quarter of 1999 from $3,797,000 in the first quarter of 1998. Such 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 amortization, increased by $1,327,000 or 15.2% to
$10,080,000 in the first quarter of 1999 from $8,753,000 in the first quarter of
1998. Of such increase, $1,475,000 was attributable to the Acquisition
Properties and the Disposition Properties. General and administrative expenses
represents 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 $193,000 in the first quarter of
1999 from the amount for the first quarter of 1998. This increase is largely
due to additional staffing requirements resulting from the growth of the
Operating Partnership.
Net income increased by $1,998,000 to $11,544,000 in the first quarter of 1999
from $9,546,000 in the first quarter of 1998. A significant component of the
increase in net income was primarily a result of the net contribution of the
Acquisition Properties and the increase in net operating income from the Same
Store Properties.
Liquidity and Capital Resources
At March 31, 1999, the Operating Partnership had $2,245,000 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 future net cash flows will be adequate to meet
operating requirements and to provide for payment of dividends by the Operating
Partnership in accordance with REIT requirements. The Operating Partnership has
credit facilities in the aggregate committed amount of approximately
$110,000,000. At March 31, 1999 the Operating Partnership had $32,000,000
outstanding on its lines of credit, with interest rates during the first quarter
of 1999 ranging from 6.0% to 6.8%. 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 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 the lines of credit will be available, or if available, will be
sufficient to meet the Operating Partnership's requirements or that the
Operating
14
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's unrestricted cash balance decreased by $303,000 from
$2,548,000 as of December 31, 1998 to $2,245,000 as of March 31, 1999. This
decrease was primarily a result of $29,588,000 of net cash used in investing
activities, which was offset by $18,800,000 of net cash provided by operating
activities and $10,485,000 of net cash provided by financing activities. Of the
$29,588,000 net cash used in investing activities, $24,834,000 was used to fund
real estate under development and $4,874,000 was used to upgrade rental
properties. The $10,485,000 net cash provided by financing activities was
primarily a result of $53,000,000 of proceeds from mortgage and other notes
payable and lines of credit as offset by $29,737,000 of repayments of mortgages
and other notes payable and lines of credit and $12,342,000 of
dividends/distributions paid.
As of March 31, 1999, the total amount of the Operating Partnership's
outstanding debt was $384,778,000. Such indebtedness consisted of $293,958,000
in fixed rate debt, $32,000,000 of variable rate debt under the Operating
Partnership's line of credit and $58,820,000 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%.
As of March 31, 1999, 35 of the Operating Partnership's majority owned
properties were encumbered by debt. The agreements underlying these encumbrances
contain customary restrictive covenants which the Operating Partnership believes
do not have a material adverse effect on its operations. As of March 31, 1999,
the Operating Partnership was in compliance with such covenants. Also, of the
Operating Partnership's 35 properties encumbered by debt, 20 were secured by
deeds of trust relating solely to those properties. With respect to the
remaining 15 properties, eight properties secured one mortgage, three properties
secured one mortgage, three properties secured one mortgage and one property
secured the Operating Partnership's $10 million line of credit.
Non-revenue generating capital expenditures are improvements and upgrades that
extend the useful life of the asset and are not related to preparing a
multifamily property unit to be rented to a tenant. The Operating Partnership
expects to incur approximately $315 per weighted average occupancy unit in non-
revenue generating capital expenditures for the year ended December 31, 1999.
These expenditures do not include the improvements required in connection with
the origination of mortgage loans, expenditures for Acquisition Properties
renovations and improvements 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 1999 and/or the funding thereof will not be
significantly different than the Operating Partnership's current expectations.
The Operating Partnership is developing eight multifamily residential projects,
which are anticipated to contain an aggregate of 1,578 multifamily units. The
Operating Partnership expects that such projects will be completed during 1999.
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, 1998. 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 $204,900,000. As of
March 31, 1999, the Operating Partnership's remaining commitment to fund the
estimated cost to complete is approximately $83,000,000. The Operating
Partnership expects to fund such commitments with some combination of its
working capital 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 distributions from cash available for
distribution. Until it is distributed, cash available for distribution is
invested by the Operating Partnership primarily in short-term
15
investment grade securities or is used by the Operating Partnership to reduce
balances outstanding under its lines of credit.
Year 2000 Compliance
The Operating Partnership's State of Readiness. The Operating Partnership
utilizes a number of computer software programs and operating systems across its
entire organization, including applications used in financial business systems
and various administrative functions. To the extent that the Operating
Partnership's software applications contains source code that are unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification or replacement of such applications will be necessary. The
Operating Partnership currently believes that its "Year 2000" issues are limited
to information technology ("IT") systems (i.e., software programs and computer
operating systems). There are no significant non-IT systems (i.e., devices used
to control, monitor or assist the operation of equipment and machinery), the
failure of which would have a material effect on the Operating Partnership's
operations. The Operating Partnership has completed its assessment of the Year
2000 compliance issues presented by its IT systems.
Employing a team made up of internal personnel, the Operating Partnership has
identified IT systems that are not Year 2000 compliant and has substantially
modified or replaced such systems as necessary. The Operating Partnership has
communicated with third parties with whom it does significant business, such as
financial institutions and vendors to determine their readiness for Year 2000
compliance. Based on position statements received by the Operating Partnership,
it appears that the Year 2000 compliance effort being made by third parties with
which the Operating Partnership does significant business is sufficient to avoid
a material adverse impact on the Operating Partnership's liquidity or ongoing
results of operations. However, no assurance can be given regarding the cost of
their failure to comply. The Operating Partnership is in the process of
developing contingency plans should third parties with which the Operating
Partnership does significant business fail to be Year 2000 compliant.
Costs of Addressing the Operating Partnership's Year 2000 issues. Given the
information known at this time about the Operating Partnership's systems that
are non-compliant, coupled with the Operating Partnership's ongoing, normal
course-of-business efforts to upgrade or replace critical systems, as necessary,
management does not expect Year 2000 compliance costs to have any material
adverse impact on the Operating Partnership's liquidity or ongoing results of
operations. As of March 31, 1999, no compliance costs have been incurred by the
Operating Partnership. The costs of any future assessment and remediation will
be paid out of the Operating Partnership's general and administrative expenses.
Risks of the Operating Partnership's Year 2000 issues. In light of the
Operating Partnership's assessment and remediation efforts to date, and the
planned, normal course-of-business upgrades planned by the Operating Partnership
and its vendors, management believes that any residual Year 2000 risk is limited
to non-critical business applications and support hardware. No assurance can be
given, however, that all of the Operating Partnership's systems will be year
2000 compliant or that compliance will not have a material adverse effect on the
Operating Partnership's future liquidity or results of operations or ability to
service debt.
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 Internal Revenue Code of 1986 ("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 and non-
recurring gains or losses. 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
16
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 Operating
Partnership's calculation of Funds from Operations for the three months ended
March 31, 1999 and 1998.
March 31, 1999 March 31, 1998
--------------- ---------------
Income before minority interests $11,690,000 $ 9,655,000
Adjustments:
Depreciation & amortization 6,045,000 4,669,000
Adjustment for unconsolidated
joint ventures 367,000 296,000
Perpetual preferred distribution
and minority interests (1) (2,363,000) (907,000)
----------- -----------
Funds from Operations $15,739,000 $13,713,000
=========== ===========
Weighted average number
shares outstanding diluted (1) 20,496,718 20,550,845
=========== ===========
(1) Includes all outstanding shares of the general partner common equity and
preferred equity and assumes conversion of all limited partner common equity
into shares of the Company's Common Stock. Minority interests have been
adjusted to reflect such conversion. Also includes potentially dilutive common
shares.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Operating Partnership is exposed to interest rate changes primarily as a
result of its line of credit and long-term debt used to maintain liquidity and
fund capital expenditures and expansion of the Operating Partnership's real
estate investment portfolio and operations. The Operating Partnership's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives the Operating Partnership borrows primarily at fixed
rates and may enter into derivative financial instruments such as interest rate
swaps, caps and treasury locks in order to mitigate its interest rate risk on a
related financial instrument. The Operating Partnership does not enter into
derivative or interest rate transactions for speculative purposes.
The Operating Partnership's interest rate risk is monitored using a variety of
techniques. The table below presents the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes. The Operating Partnership believes
that the principal amounts of the Operating Partnership's mortgage notes payable
and line of credit approximate fair value as of March 31, 1999 as interest rates
are consistent with yields currently available to the Operating Partnership for
similar instruments.
For Year Ended:
(In thousands) 1999 2000 2001 2002 2003 Thereafter Total
Fixed rate debt $1,809 20,395 2,429 24,472 30,083 214,770 $293,958
Average interest rate 7.06% 7.06% 6.56% 6.56% 5.71% 5.71%
Variable rate LIBOR debt $ - 32,000 - - - 58,820(1) $ 90,820
Average interest rate - 6.20% - - - 5.50%
(1) $29,220,000 is capped at 7.2%
17
The Operating Partnership has a LIBOR based swap contract for a notional amount
of $12,298,000 fixing the one month LIBOR at 6.14% which limits interest rate
exposure on borrowings under the LIBOR based lines of credit and matures in
2002. The fair value of this contract as of March 31, 1999 is approximately
$239,500. The Operating Partnership also has four forward treasury contracts
for an aggregate notional amount of $60,000,000, locking the 10 year treasury
rate at between 6.14%-6.26% which limit interest rate exposure on certain future
debt financing and will be settled in 2000. The fair value of these contracts
as of March 31, 1999 is approximately $3,171,500. The fair value represents the
estimated payments that would be made to terminate the agreement at March 31,
1999.
The LIBOR based swap contract and the four forward treasury contracts represent
the exposures that exist as of March 31, 1999. As firm commitments do not exist
as of March 31, 1999, the information presented herein has limited predictive
value. As a result, the Operating Partnership's ultimate realized gain or loss
with respect to interest rate fluctuations will depend on the exposures that may
arise during the period, the Operating Partnership hedging strategies at that
time, and interest rates.
18
Part II Other Information
- ------- -----------------
Item 2: Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
--------
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only)
B. Reports on Form 8-K
-------------------
None
19
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
By: Essex Property Trust, Inc.
Its: General Partner
/s/ Mark J. Mikl
-----------------------------------
Mark J. Mikl, Controller
(Authorized Officer and
Principal Accounting Officer)
May 14, 1999
----------------
Date
20