FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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. 1-13106
ESSEX PROPERTY TRUST, INC.
(Exact name of Registrant as specified in its Charter)
Maryland 77-0369576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 East Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices)
(Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months for such shorter period that the Registrant was required
to file such report, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
18,029,851 shares of Common Stock
as of August 11, 1999
TABLE OF CONTENTS
FORM 10-Q
Part I Page No.
--------
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998 4
Consolidated Statements of Operations
for the three months ended June 30, 1999 and 1998 5
Consolidated Statements of Operations
for the six months ended June 30, 1999 and 1998 6
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1999
and the year ended December 31, 1998 7
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosure About Market Risk 21
Part II
Item 2 Changes in Securities and Use of Proceeds 23
Item 6 Exhibits and Reports on Form 8-K 23
Signatures 24
2
Part I Financial Information
- ------ ---------------------
Item 1: Financial Statements (Unaudited)
--------------------------------
"Essex" or the "Company" means Essex Property Trust, Inc., a real estate
investment trust incorporated in the State of Maryland, or where the
context otherwise requires, Essex Portfolio, L.P., a limited partnership
in which Essex Property Trust, Inc. is the sole general partner.
The information furnished in the accompanying consolidated unaudited
balance sheets, statements of operations, stockholders' equity and cash
flows of the Company reflects all adjustments which are, in the opinion
of management, necessary for a fair presentation of the aforementioned
financial statements for the interim periods.
The accompanying unaudited financial statements should be read in
conjunction with the notes to such financial statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
3
ESSEX PROPERTY TRUST, INC.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)
June 30, December 31,
Assets 1999 1998
------ ------------- --------------
Real estate:
Rental properties:
Land and land improvements $ 233,060 $ 219,115
Buildings and improvements 716,517 670,849
------------- -------------
949,577 889,964
Less accumulated depreciation (90,030) (77,789)
------------- -------------
859,547 812,175
Investments 11,895 10,590
Real estate under development 93,335 53,213
------------- -------------
964,777 875,978
Cash and cash equivalents - unrestricted 1,795 2,548
Restricted cash 16,601 15,532
Notes and other related party receivables 14,811 10,450
Notes and other receivables 10,414 18,809
Prepaid expenses and other assets 2,726 3,444
Deferred charges, net 5,701 5,035
------------- -------------
$ 1,016,825 $ 931,796
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Mortgage notes payable $ 380,035 $ 325,822
Lines of credit 60,450 35,693
Accounts payable and accrued liabilities 36,181 28,601
Dividends payable 12,346 11,145
Deferred gain 5,002 5,002
Other liabilities 5,773 5,301
------------- -------------
Total liabilities 499,787 411,564
Minority interests 136,069 130,432
Stockholders' equity:
8.75% Convertible Preferred Stock, Series 1996A: $.0001
par value, 184,687 and 1,600,000 authorized, 184,687 1 1
and 1,600,000 issued and outstanding
Common stock, $.0001 par value, 660,697,491 and
659,282,178 authorized, 18,022,802 and 16,640,616
issued and outstanding 2 2
7.875% Series B cumulative redeemable preferred stock:
$.0001 par value, 2,000,000 shares authorized and no
shares issued and outstanding - -
9.125% Series C cumulative redeemable preferred
stock: $.0001 par value, 500,000 shares authorized
and no shares issued and outstanding - -
Excess stock, $.0001 par value 330,000,000 shares
authorized and no shares issued and outstanding - -
Additional paid-in capital 424,649 431,278
Accumulated deficit (43,683) (41,481)
------------- -------------
Total stockholders' equity 380,969 389,800
------------- -------------
$ 1,016,825 $ 931,796
============= =============
See accompanying notes to the consolidated unaudited financial statements.
4
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Three months ended
-------------------------------------------------
June 30, June 30,
1999 1998
---------------------- ---------------------
Revenues:
Rental $ 33,074 $ 30,273
Other property 789 668
---------------------- ---------------------
Total property 33,863 30,941
Interest and other 1,035 743
---------------------- ---------------------
Total revenues 34,898 31,684
---------------------- ---------------------
Expenses:
Property operating expenses
Maintenance and repairs 2,292 2,460
Real estate taxes 2,443 2,231
Utilities 2,013 1,891
Administrative 2,356 2,230
Advertising 492 470
Insurance 221 335
Depreciation and amortization 6,247 5,632
---------------------- ---------------------
16,064 15,249
---------------------- ---------------------
Interest 5,250 5,217
Amortization of deferred financing costs 138 197
General and administrative 1,111 1,016
---------------------- ---------------------
Total expenses 22,563 21,679
---------------------- ---------------------
Income before minority interests and 12,335 10,005
extraordinary item
Minority interests (3,369) (2,457)
---------------------- ---------------------
Income before extraordinary item 8,966 7,548
Extraordinary item:
Loss on early extinguishment of debt (90) -
---------------------- ---------------------
Net income 8,876 7,548
Preferred stock dividends (236) (875)
---------------------- ---------------------
Net income available to common stockholders $ 8,640 $ 6,673
====================== =====================
Per share data:
Basic:
Income before extraordinary item $ 0.51 $ 0.40
Extraordinary item - debt extinguishment (0.01) -
---------------------- ---------------------
Net income $ 0.50 $ 0.40
====================== =====================
Weighted average number of shares
outstanding during the period 17,238,910 16,632,561
====================== =====================
Diluted:
Income before extraordinary item $ 0.49 $ 0.40
Extraordinary item - debt extinguishment - -
---------------------- ---------------------
Net income $ 0.49 $ 0.40
====================== =====================
Weighted average number of shares
outstanding during the period 18,447,710 16,847,830
====================== =====================
Dividend per share $ 0.55 $ 0.50
====================== =====================
See accompanying notes to the consolidated unaudited financial statements.
5
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Six months ended
------------------------------------------------
June 30, June 30,
1999 1998
---------------------- --------------------
Revenues:
Rental $ 64,976 $ 56,803
Other property 1,485 1,189
---------------------- --------------------
Total property 66,461 57,992
Interest and other 2,328 1,528
---------------------- --------------------
Total revenues 68,789 59,520
---------------------- --------------------
Expenses:
Property operating expenses
Maintenance and repairs 4,386 4,728
Real estate taxes 4,960 4,418
Utilities 4,008 3,608
Administrative 5,099 4,133
Advertising 1,001 848
Insurance 443 635
Depreciation and amortization 12,292 10,301
---------------------- --------------------
32,189 28,671
---------------------- --------------------
Interest 10,184 9,014
Amortization of deferred financing costs 268 341
General and administrative 2,122 1,834
---------------------- --------------------
Total expenses 44,763 39,860
---------------------- --------------------
Income before minority interests and 24,026 19,660
extraordinary item
Minority interests (6,607) (4,187)
---------------------- --------------------
Income before extraordinary item 17,419 15,473
Extraordinary item:
Loss on early extinguishment of debt (90) -
---------------------- --------------------
Net income 17,329 15,473
Preferred stock dividends (1,067) (1,750)
---------------------- --------------------
Net income available to common stockholders $ 16,262 $ 13,723
====================== ====================
Per share data:
Basic:
Income before extraordinary item $ 0.96 $ 0.83
Extraordinary item - debt extinguishment (0.01) -
---------------------- --------------------
Net income $ 0.95 $ 0.83
====================== ====================
Weighted average number of shares
outstanding during the period 16,988,665 16,625,413
====================== ====================
Diluted:
Income before extraordinary item $ 0.94 $ 0.81
Extraordinary item - debt extinguishment - -
---------------------- --------------------
Net income $ 0.94 $ 0.81
====================== ====================
Weighted average number of shares
outstanding during the period 18,527,629 16,852,987
====================== ====================
Dividend per share $ 1.05 $ 0.95
====================== ====================
See accompanying notes to the consolidated unaudited financial statements.
6
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Stockholders' Equity
For the six months ended June 30, 1999 and the
year ended December 31, 1998
(Unaudited)
(Dollars and shares in thousands)
Preferred stock Common stock Additional
------------------- ------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
--------- --------- -------- ---------- ------------- ----------- ------------
Balances at December 31, 1997 1,600 $ 1 16,615 $ 2 $ 430,804 $ (31,892) $ 398,915
Shares issued from Dividend
Reinvestment Plan - - 2 - 10 - 10
Net proceeds from options exercised - - 24 - 464 - 464
Net income - - - - - 26,328 26,328
Dividends declared - - - - - (35,917) (35,917)
--------------------------------------- ------------- ----------- ------------
Balances at December 31, 1998 1,600 1 16,641 2 431,278 (41,481) 389,800
Shares issued from conversion
of Convertible Preferred Stock (1,415) - 1,618 - - - -
Shares purchased by Operating
Partnership - - (257) - (6,991) - (6,991)
Net proceeds from options exercised - - 20 - 362 - 362
Net income - - - - - 17,329 17,329
Dividends declared - - - - - (19,531) (19,531)
--------------------------------------- ------------- ----------- ------------
Balances at June 30, 1999 185 $ 1 18,022$ 2 $ 424,649 $ (43,683) $ 380,969
======================================= ============= =========== ============
See accompanying notes to the consolidated unaudited financial statements
7
ESSEX PROPERTY TRUST, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six months ended
------------------------------------------------
June 30, June 30,
1999 1998
---------------------- --------------------
Net cash provided by operating activities: $ 37,825 $ 28,223
---------------------- --------------------
Cash flows from investing activities:
Additions to real estate (29,557) (126,632)
Increase in restricted cash (1,069) (8,886)
Dispositions of real estate - 15,842
Additions to related party notes and other receivables (4,361) (2,696)
Repayment of related party notes and other receivables 8,493 1,147
Additions to real estate under development (41,370) (10,987)
Distributions from investments in corporations
and limited partnerships 762 461
---------------------- --------------------
Net cash used in investing activities (67,102) (131,751)
---------------------- --------------------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 117,650 150,347
Repayment of mortgage and other notes payable
and lines of credit (54,480) (102,848)
Additions to deferred charges (934) (1,882)
Payment of offering related costs (314) (110)
Net proceeds from preferred units sales - 77,775
Net proceeds from stock options exercised and shares
issued through dividend reinvestment plan 362 339
Shares purchased by Operating Partnership (6,991) -
Distributions to minority interest/partners (6,776) (2,806)
Redemption of operating partnership units (1,438) -
Dividends paid (18,555) (16,596)
---------------------- --------------------
Net cash provided by financing activities 28,524 104,219
---------------------- --------------------
Net decrease (increase) in cash and cash equivalents (753) 691
Cash and cash equivalents at beginning of period 2,548 4,282
---------------------- --------------------
Cash and cash equivalents at end of period $ 1,795 $ 4,973
====================== ====================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $2,682 and
$1,775 capitalized $ 7,193 $ 8,236
====================== ====================
Supplemental disclosure of non-cash investing and
Financing activities:
Mortgage notes payable assumed in connection
with purchase of real estate $ 15,800 $ 18,443
====================== ====================
Contribution of Operating Partnership Units in
connection with the purchase of real estate $ 7,469 $ -
====================== ====================
Dividends payable $ 12,346 $ 11,799
====================== ====================
See accompanying notes to consolidated unaudited financial statements.
8
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(1) Organization and Basis of Presentation
--------------------------------------
The unaudited consolidated financial statements of the Company are prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q.
In the opinion of management, all adjustments necessary for a fair
presentation of the financial position, results of operations and cash flows
for the periods presented have been included and are normal and recurring in
nature. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Company's annual report on Form 10-K for the year ended December 31,
1998.
The unaudited consolidated financial statements for the three and six months
ended June 30, 1999 and 1998 include the accounts of the Company and Essex
Portfolio, L.P. (the "Operating Partnership", which holds the operating
assets of the Company). The Company is the sole general partner in the
Operating Partnership, owning an 89.6%, 89.9% and 89.9% general partnership
interest as of June 30, 1999, December 31, 1998 and June 30, 1998,
respectively.
Currently, the Company operates and has ownership interests in 64
multifamily properties (containing 12,974 units) and five commercial
properties (with approximately 290,000 square feet) (collectively, the
"Properties"). The Properties are located in Northern California (the San
Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and
San Diego counties), and the Pacific Northwest (the Seattle, Washington and
Portland, Oregon metropolitan areas).
All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.
(2) Significant Transactions
------------------------
(A) Acquisition Activities
---------------------------
On April 30, 1999, the Company purchased Glenbrook and Euclid Apartments,
together a 169-unit apartment community located in Pasadena, California for
an aggregate contract price of $13,600. These communities feature secure
parking garages, controlled security access, and pool areas. In connection
with this transaction, the Company obtained a $4,400, 7.0% fixed rate,
secured loan which matures in April 2009. Also, the Company assumed a
$2,900, 7.6% fixed rate, secured loan which matures in July 2007. A portion
of the amount paid for the properties was funded through the issuance of
units of limited partnership interest ("Units") in the Operating
Partnership. Any time after one year from the date of issuance of the Units,
the holders of the Units can require the Operating Partnership to redeem the
Units for either cash, or at the Company's option an aggregate of 273,912
shares of the Company's common stock. This private placement of Units was
completed pursuant to the exemption from registration contained in Section
4(2) of the Securities Act of 1933, as amended.
On June 4, 1999, the Company purchased a leasehold interest in Fairways
Apartments, with a remaining term of 28 years. Fairways Apartments is a 74-
unit apartment community, located in Newport Beach, California and was
purchased for a contract price of $7,500. This community features vaulted
ceilings, two-car garages, spa and pool areas.
On June 11, 1999, the Company purchased Columbus and Loraine Apartments,
together a 215-unit apartment community located in Glendale, California for
an aggregate contract price of $21,100. In connection with this
transaction, the Company assumed a $4,500, 7.3% fixed rate, secured loan
which matures in December 2007. Also, the Company assumed a $8,400, 7.8%
fixed rate, secured loan which matures in August 2007. These communities
feature fitness centers, pool and spa areas and fireplaces.
These second quarter 1999 acquisitions were funded with the proceeds from
the mortgage loans, assumed loans and Operating Partnership interests as
indicated above, and the Company's line of credit.
9
(B) Development Activities
---------------------------
The Company is developing seven multifamily residential projects, which are
anticipated to contain an aggregate of 1,333 multifamily units. As of June
30, 1999, construction is complete on 100% of the units on two of these
development projects. The remaining five projects are anticipated to be
substantially completed by the year ended December 31, 1999. In connection
with these projects, the Company has directly, or in some cases through its
joint venture partners, entered into contractual construction related
commitments with unrelated third parties. As of June 30, 1999, the Company
is committed to fund approximately $71,000, representing the estimated cost
to complete these projects.
One project which was previously reported as a development project achieved
stabilized occupancy in the third quarter of 1999. The 245-unit apartment
community, Park Hill @ Issaquah, located in Issaquah, Washington, is owned
by a joint venture in which the Company owns a 45% interest and will receive
a 12% preferred return on the equity it has invested. In addition, the
Company has an option to purchase the property five years subsequent to
completion. The community is located amid wooded hillsides and has
convenient freeway access. The community also features spacious units,
direct access garages, and other amenities including a video theatre, pool
and spa, and exercise room. The Company's interest in the joint venture is
reported as a component of investments in the accompanying consolidated
balance sheets as of June 30, 1999.
(C) Equity Transactions
------------------------
In the first six months of 1999, WBP I Holding Corp. (formerly known as
Tiger/Westbrook Real Estate Fund, L.P.), and WBP II Holding Corp. (formerly
known as Tiger/Westbrook Real Estate Co-Investment Partnership, L.P.)
(collectively, Tiger/Westbrook) converted 1,415,313 shares of its ownership
in the Company's 8.75% Convertible Preferred Stock, Series 1996A (the
"Convertible Preferred Stock") into 1,617,501 shares of Common Stock. As of
June 30, 1999, Tiger Westbrook owned 184,687 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 per share not to exceed $29.00 in the open market
or through negotiated or block transactions. In April 1999, the Operating
Partnership purchased 257,000 shares of the Company's outstanding Common
Stock. The weighted average price paid for the shares was $27.14. The amount
paid for the shares is reflected as a reduction of the issued and
outstanding common stock and additional-paid-in-capital in the accompanying
consolidated balance sheets as of June 30, 1999.
(D) Debt Related Transactions
------------------------------
On June 18, 1999, the Company replaced its credit enhancement agreement on
$16,000 of its variable rate secured multifamily housing mortgage revenue
bonds. In connection with this transaction, the Company obtained an $7,500,
7.7% fixed rate, secured loan which matures in June 2009. The Company wrote-
off $90 of costs related to the previous credit enhancement agreement which
is presented as a loss on early extinguishment of debt in the accompanying
consolidated statements of operations. The effective variable interest rate
of the $16,000 bonds was reduced from 6.9% to 4.8%.
(E) Other- Earthquake Insurance
--------------------------------
On June 13, 1999, the Company renewed its earthquake insurance policy. The
insurance coverage is unchanged from the prior year and provides for an
aggregate limit of $40,000, payable upon a covered loss in excess of a
$7,500 self-insured retention amount. The insurance also provides for a per
building deductible of 5% in California and 2% in Oregon and Washington.
10
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(F) Subsequent Event
---------------------
On July 28, 1999, the Operating Partnership completed the sale of 2,000,000
units of its 9.30% Series D Cumulative Redeemable Preferred Units to two
related institutional investors in a private placement, at a price of $25.00
per unit. The net proceeds from this sale were approximately $49,000.
(3) Related Party Transactions
--------------------------
All general and administrative expenses of the Company and Essex Management
Corporation, an unconsolidated preferred stock subsidiary of the Company
("EMC") are initially borne by the Company, with a portion subsequently
allocated to EMC. Expenses allocated to EMC for the three months ended June
30, 1999 and 1998 totaled $110 and $61, respectively, and $212 and $137 for
the six months ended June 30, 1999 and 1998, respectively. The expenses 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 $247 and $229 for the three
months ended June 30, 1999 and 1998, respectively, and $412 and $430 for the
six months ending June 30, 1999 and 1998, respectively.
Other income includes interest income of $86 and $330 for the three months
ended June 30, 1999 and 1998, respectively, and $172 and $535 for the six
months ended June 30, 1999 and 1998, respectively. This interest income was
earned principally on the notes receivable from related party partnerships
in which the Company owns an ownership interest ("Joint Ventures"). Other
income also includes management fee income and investment income earned by
the Company from its Joint Ventures of $150 and $100 for the three months
ended June 30, 1999 and 1998, respectively and $310 and $205 for the six
months ended June 30, 1999 and 1998, respectively. Also included in other
income is income earned from operations of the Company's Joint Venture
development projects of $234 and $419 for the three and six months ended
June 30, 1999, respectively. No income was earned from operations of the
Company's Joint Venture development projects in 1998.
Notes and other related party receivables as of June 30, 1999 and December 31, 1998 consist of the following:
June 30, December 31,
-------- ------------
Notes receivable from Joint Ventures: 1999 1998
---- ----
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 4,843 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 3,199 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 1,147 933
Other related party receivables:
Loans to officers, bearing interest at 8%, due April 2006 500 500
Other related party receivables, substantially due on demand 2,066 1,675
------- -------
$14,811 $10,450
======= =======
11
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
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 Company 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 June
30, 1999, the Company would be obligated to pay approximately $899.
(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
Company will adopt SFAS 133 for interim periods beginning in 2001, the
effective date of SFAS 133, as amended. Had SFAS 133 been implemented in
1999, a charge to earnings of $899 relating to treasury contracts that do
not qualify as anticipatory hedges under SFAS 133 would have been recorded
for the six months ended June 30, 1999. Such charge would be considered a
non-recurring item and therefore would not effect the Company's calculation
of funds from operations.
(6) Segment Information:
--------------------
The Company 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 Company's
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
June 30, 1999 June 30, 1998
-------------------------------------------------------------------------
Revenues
Northern California $11,617 $10,509
Southern California 13,301 11,717
Pacific Northwest 8,373 8,096
------- -------
Total segment revenues 33,291 30,322
Non-segment property revenues 572 618
Interest and other income 1,035 744
------- -------
Total revenues $34,898 $31,684
======= =======
Net operating income:
Northern California $ 8,957 $ 7,898
Southern California 9,130 7,626
Pacific Northwest 5,695 5,357
------- -------
Total segment net operating income 23,782 20,881
Non-segment net operating income 264 442
Interest and other income 1,035 744
Depreciation and amortization (6,247) (5,632)
Interest (5,250) (5,217)
Amortization of deferred financing costs (138) (197)
General and administrative (1,111) (1,016)
------- -------
Income before minority interests
and extraordinary item $12,335 $10,005
======= =======
12
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(6) Segment Information (continued):
--------------------------------
Six months ended
June 30, 1999 June 30, 1998
-------------------------------------------------------------------------------
Revenues
Northern California $ 22,905 $ 19,751
Southern California 25,810 20,860
Pacific Northwest 16,489 15,863
---------- --------
Total segment revenues 65,204 56,474
Non-segment property revenues 1,257 1,518
Interest and other income 2,328 1,528
---------- --------
Total revenues $ 68,789 $ 59,520
========== ========
Net operating income:
Northern California $ 17,520 $ 14,726
Southern California 17,462 13,541
Pacific Northwest 11,070 10,282
---------- --------
Total segment net operating income 46,052 38,549
Non-segment net operating income 512 1,073
Interest and other income 2,328 1,528
Depreciation and amortization (12,292) (10,301)
Interest (10,184) (9,014)
Amortization of deferred financing costs (268) (341)
General and administrative (2,122) (1,834)
---------- --------
Income before minority interests
and extraordinary item $ 24,026 $ 19,660
========== ========
June 30, 1999 December 31, 1998
------------------------------------------------------------------------------
Assets:
Northern California $ 239,452 $241,676
Southern California 405,763 355,077
Pacific Northwest 196,679 198,761
---------- --------
Total segment net real estate assets 841,894 795,514
Non-segment net real estate assets 17,653 16,661
---------- --------
Net real estate assets 859,547 812,175
Non-segment assets 157,278 119,621
---------- --------
Total assets $1,016,825 $931,796
========== ========
13
Item 2: Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations
---------------------
The following discussion is based primarily on the consolidated unaudited
financial statements of Essex Property Trust, Inc. ("Essex" or the "Company")
for the three months ended June 30, 1999 and 1998 and for the six months ended
June 30, 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.
Substantially all of the assets of the Company are held by, and substantially
all operations were conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). The Company is the sole general partner of the Operating
Partnership and, as of June 30, 1999, December 31, 1998 and June 30, 1998, owned
an 89.6%, 89.9% and 89.9% general partnership interest in the Operating
Partnership, respectively. The Company has elected to be treated as a real
estate investment trust (a "REIT") for federal income tax purposes.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in the quarterly report on
Form 10-Q which are not historical facts may be considered forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including statements regarding the Company's expectations, hopes, intentions,
beliefs and strategies regarding the future. Forward looking statements include
statements regarding the Company's expectation as to the timing of completion of
current development projects, beliefs as to the adequacy of future cash flows to
meet operating requirements, and to provide for dividend payments in accordance
with REIT requirements and expectations as to the amount of non-revenue
generating capital expenditures for the year ended December 31, 1999, potential
acquisitions and developments, the anticipated performance of existing
properties, future acquisitions and developments and statements regarding the
Company's financing activities. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors including, but not limited
to, that the actual completion of development projects will be subject to
delays, that such development projects will not be completed, that future cash
flows will be inadequate to meet operating requirements and/or will be
insufficient to provide for dividend payments in accordance with REIT
requirements, that the actual non-revenue generating capital expenditures will
exceed the Company's current expectations, as well as those risks, special
considerations, and other factors discussed under the caption "Other
Matters/Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, and those other risk factors and special
considerations set forth in the Company's other filings with the Securities and
Exchange Commission (the "SEC") which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements.
General Background
The Company's property revenues are generated primarily from multifamily
property operations, which accounted for 98% of its property revenues for the
three months ended June 30, 1999 and 1998 and 98% and 97% of its property
revenues for the six months ended June 30, 1999 and 1998, respectively. The
Company's multifamily properties (the "Properties") are located in Northern
California (the San Francisco Bay Area), Southern California (Los Angeles,
Ventura, Orange and San Diego counties) and the Pacific Northwest (the Seattle,
Washington and Portland, Oregon metropolitan areas). The average occupancy
levels of the Company's portfolio has exceeded 95% for the last five years.
The Company has elected to be treated as a real estate investment trust ("REIT")
for federal income tax purposes, commencing with the year ended December 31,
1994. In order to maintain compliance with REIT tax rules, the Company provides
some of its fee-based asset management and disposition services as well as
third-party property management and leasing services through Essex Management
Corporation ("EMC"). The Company owns 100% of EMC's 19,000 shares of non-voting
Preferred Stock. Executives of the Company own 100% of EMC's 1,000 shares of
Common Stock.
14
Since the Company's initial public offering (the "IPO") in June 1994, the
Company has acquired ownership interests in 54 multifamily residential
properties and its headquarters building. Of the multifamily properties
acquired since the IPO, 10 are located in Northern California, 26 are located in
Southern California, 17 are located in the Seattle, Washington metropolitan area
and one is located in the Portland, Oregon metropolitan area. In total, these
acquisitions consist of 10,206 multifamily units with total capitalized
acquisition costs of approximately $765.3 million. As part of its active
portfolio management strategy, the Company has sold, since its IPO, six
multifamily residential properties (five in Northern California and one in the
Pacific Northwest) 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 Company has committed approximately $162.0 million relating to seven
development projects which are expected to contain an aggregate of 1,333
multifamily units. At June 30, 1999, the Company's remaining commitment to fund
the estimated total cost of such projects is approximately $71.0 million.
Results of Operations
Comparison of the Three Months Ended June 30, 1999 to the Three Months Ended
- ----------------------------------------------------------------------------
June 30, 1998.
- --------------
Average financial occupancy rates of the Company's multifamily Quarterly Same
Store Properties (properties owned by the Company for the three months ended
June 30, 1999 and 1998) increased to 96.6% for the three months ended June 30,
1999 from 95.7%, for the three months ended June 30, 1998. "Financial Occupancy"
is defined as the percentage resulting from dividing actual rental income by
total possible rental income. Total possible rental income is determined by
valuing occupied units at contractual rents and vacant units at market rents.
The regional breakdown of financial occupancy for the multifamily Quarterly Same
Store Properties for the three months ended June 30, 1999 and 1998 are as
follows:
June 30, June 30,
1999 1998
--------- ---------
Northern California 97.5% 97.3%
Southern California 96.5% 95.5%
Pacific Northwest 95.6% 93.8%
The Company's commercial properties were 100% occupied (based on square footage)
as of June 30, 1999.
15
Total Revenues increased by $3,214,000 or 10.1% to $34,898,000 in the second
quarter of 1999 from $31,684,000 in the second quarter of 1998. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to the Quarterly Same Store Properties.
Three Months Ended
June 30,
Number of -------- Dollar Percentage
Properties 1999 1998 Change Change
---------- ---- ---- ------ ------
Revenues
Property revenues Quarterly Same
Store Properties
Northern California 13 $10,973 $10,509 $ 464 4.4%
Southern California 16 10,513 9,729 784 8.1
Pacific Northwest 18 7,768 7,330 438 6.0
Commercial 2 687 689 (2) (0.3)
-- ------- ------- ------ ----
Total property revenues
Quarterly Same Store
Properties 49 29,941 28,257 1,684 6.0
==
Property revenues properties
acquired/disposed of
subsequent to March 31, 1998 3,922 2,683 1,239 46.2
------- ------- ------ ----
Total property revenues 33,863 30,940 2,923 9.4
------- ------- ------ ----
Interest and other income 1,035 744 291 39.1
------- ------- ------ ----
Total revenues $34,898 $31,684 $3,214 10.1%
======= ======= ====== ====
As set forth in the above table, $1,239,000 of the $3,214,000 increase in total
revenues is attributable to properties acquired or disposed of subsequent to
March 31, 1998. During this period, the Company acquired interests in eight
multifamily properties (the "Acquisition Properties"), and disposed of one
multifamily property (the "Disposition Property").
Of the increase in total revenues, $1,684,000 is attributable to increases in
property revenues from the Quarterly Same Store Properties. Property revenues
from the Quarterly Same Store Properties increased by approximately 6.0% to
$29,941,000 in the second quarter of 1999 from $28,257,000 in the second quarter
of 1998. The majority of this increase was attributable to the 16 multifamily
Quarterly Same Store Properties located in Southern California. The property
revenues of the Quarterly Same Store Properties in Southern California increased
by $784,000 or 8.1% to $10,513,000 in the second quarter of 1999 from $9,729,000
in the second quarter of 1998. This $784,000 increase is primarily attributable
to rental rate increases and the increase in financial occupancy to 96.5% in the
second quarter of 1999 from 95.5% in the second quarter of 1998. The 13
Quarterly Same Store Properties located in Northern California accounted for the
next largest regional component of the Quarterly Same Store Properties property
revenues increase. The property revenues of these properties increased by
$464,000 or 4.4% to $10,973,000 in second quarter of 1999 from $10,509,000 in
the second quarter of 1998. The $464,000 increase is attributable to rental
rate increases and the increase in financial occupancy to 97.5% in the second
quarter of 1999 from 97.3% in the second quarter of 1998. The 18 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 $438,000 or 6.0% to $7,768,000 in the
second quarter of 1999 from $7,330,000 in the second quarter of 1998. The
$438,000 increase is primarily attributable to rental rate increases and an
increase in financial occupancy to 95.6% in the second quarter of 1999 from
93.8% in the second quarter of 1998. The increase in total revenue also
reflected an increase of $291,000 attributable to other income, which primarily
relates to interest income on outstanding notes receivables and income earned on
the Company's investments in joint venture development projects.
Total Expenses increased by $884,000 or approximately 4.1% to $22,563,000 in the
second quarter of 1999 from $21,679,000 in the second quarter of 1998. Interest
expense increased by $33,000 or 0.6% to $5,250,000 in the second quarter from
$5,217,000 in the second quarter of 1998. Such increase was primarily due to
the net addition of outstanding mortgage debt in connection with property and
investment acquisitions which was offset by lower average interest rates
incurred on outstanding debt balances. Property operating expenses, exclusive
of depreciation and amortization, increased by $200,000 or 2.1% to $9,817,000 in
the second quarter of 1999 from $9,617,000 in the second quarter of 1998. Of
such increase, $390,000 was attributable to the Acquisition Properties and the
Disposition Property. General
16
and administrative expenses represents the costs of the Company's various
acquisition and administrative departments as well as partnership administration
and non-operating expenses. Such expenses increased by $95,000 in the second
quarter of 1999 from the amount for the second quarter of 1998. This increase is
largely due to additional staffing requirements resulting from the growth of the
Company.
Net income increased by $1,328,000 to $8,876,000 in the second quarter of 1999
from $7,548,000 in the second 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
Quarterly Same Store Properties.
Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June
- -----------------------------------------------------------------------------
30, 1998.
- ---------
Average financial occupancy rates of the Company's multifamily Same Store
Properties (properties owned by the Company for the six months ended June 30,
1999 and 1998) increased to 96.5% for the six months ended June 30, 1999 from
95.7% for the six months ended June 30, 1998. The regional breakdown of
financial occupancy for the multifamily Same Store Properties for the six months
ended June 30, 1999 and 1998 are as follows:
June 30, June 30,
1999 1998
---- ----
Northern California 97.4% 97.1%
Southern California 97.0% 95.8%
Pacific Northwest 95.0% 93.9%
The Company's commercial properties were 100% occupied (based on square footage)
as of June 30, 1999.
Total Revenues increased by $9,269,000 or 15.6% to $68,789,000 for the first six
months of 1999 from $59,520,000 for the first six months of 1998. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to the Same Store Properties.
Six Months Ended
June 30,
Number of -------- Dollar Percentage
Properties 1999 1998 Change Change
---------- ---- ---- ------ ------
Revenues
Property revenues Same Store
Properties
Northern California 12 $18,470 $17,702 $ 768 4.3%
Southern California 14 16,898 15,590 1,308 8.4
Pacific Northwest 18 15,329 14,504 825 5.7
Commercial 2 1,485 1,199 286 23.9
-- ------- ------- ------ ----
Total property revenues
Same Store Properties 46 52,182 48,995 3,187 6.5%
==
Property revenues properties
acquired/disposed of
subsequent to December 31, 1997 14,279 8,997 5,282 58.7
------- ------- ------ ----
Total property revenues 66,461 57,992 8,469 14.6
------- ------- ------ ----
Interest and other income 2,328 1,528 800 52.4
------- ------- ------ ----
Total revenues $68,789 $59,520 $9,269 15.6%
======= ======= ====== ====
As set forth in the above table, $5,282,000 of the $9,269,000 increase in total
revenues is attributable to properties acquired or disposed of subsequent to
December 31, 1997. During this period, the Company acquired interests in ten
multifamily properties (the "Post-1997 Acquisition Properties"), and disposed of
one multifamily property and three retail shopping centers (the "Post-1997
Disposition Properties").
Of the increase in total revenues, $3,187,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 6.5% to $52,182,000 in the
first six months of 1999 from $48,995,000 in the first six months of 1998. The
17
majority of this increase was attributable to the 14 Same Store Properties
located in Southern California. The property revenues of these properties
increased by $1,308,000 or 8.4% to $16,898,000 in first six months of 1999 from
$15,590,000 in the first six months of 1998. The $1,308,000 increase is
attributable to rental rate increases and the increase in financial occupancy to
97.0% in the first six months of 1999 from 95.8% in the first six months of
1998. The 18 multifamily Same Store 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 $825,000 or 5.7% to $15,329,000 in the first six months of 1999 from
$14,504,000 in the first six months of 1998. The $825,000 increase is primarily
attributable to rental rate increases and an increase in financial occupancy to
95.0% in the first six months of 1999 from 93.9% in first six months of 1998.
The 12 multifamily residential 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 $768,000 or 4.3% to $18,470,000 in the first six months of 1999 from
$17,702,000 in the first six months of 1998. This $768,000 increase is
primarily attributable to rental rate increases and the effect of the increase
in financial occupancy to 97.4% in the first six months of 1999 from 97.1% in
the first six months of 1998. The increase in total revenue also reflected an
increase of $800,000 attributable to other income, which primarily relates to
interest income on outstanding notes receivables and income earned on the
Company's investments in joint venture development projects.
Total Expenses increased by $4,903,000 or approximately 12.3% to $44,763,000 in
the first six months of 1999 from $39,860,000 in the first six months of 1998.
Interest expense increased by $1,170,000 or 13.0% to $10,184,000 in the first
six months from $9,014,000 in the first six months 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 $1,527,000 or 8.3% to
$19,897,000 in the first six months of 1999 from $18,370,000 in the first six
months of 1998. Of such increase, $1,829,000 was attributable to the Post-1997
Acquisition Properties and the Post-1997 Disposition Properties. General and
administrative expenses represents the costs of the Company's various
acquisition and administrative departments as well as partnership administration
and non-operating expenses. Such expenses increased by $288,000 in the first
six months of 1999 from the amount for the first six months of 1998. This
increase is largely due to additional staffing requirements resulting from the
growth of the Company.
Net income increased by $1,856,000 to $17,329,000 in the first six months of
1999 from $15,473,000 in the first six months 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 June 30, 1999, the Company had $1,795,000 of unrestricted cash and cash
equivalents. The Company expects to meet its short-term liquidity requirements
by using its working capital, cash generated from operations and amounts
available under lines of credit. The Company believes that its 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. The Company
expects to meet its long-term funding requirements relating to property
acquisition and development (beyond the next 12 months) by using working
capital, amounts available from lines of credit, net proceeds from public and
private debt and equity issuances, and proceeds from the disposition of
properties that may be sold from time to time. There can, however, be no
assurance that the Company will have access to the debt and equity markets in a
timely fashion to meet such future funding requirements or that future working
capital, and borrowings under the lines of credit will be available, or if
available, will be sufficient to meet the Company's requirements or that the
Company will be able to dispose of properties in a timely manner and under terms
and conditions that the Company deems acceptable.
The Company has a $100,000,000 unsecured line of credit. Outstanding balances
under the line of credit bear interest at the bank's reference rate or at the
Company's option, 1.15% over the LIBOR rate. The line of credit matures in June
2000. At June 30, 1999 the Company had $60,450,000 outstanding on its line of
credit, with interest rates during the second quarter of 1999 ranging from 6.0%
to 6.2%.
18
In addition to the unsecured line of credit, the Company had $380,035,000 of
secured indebtedness at June 30, 1999. Such indebtedness consisted of
$321,215,000 in fixed rate debt with interest rates varying from 6.5% to 8.8%
and maturity dates ranging from 2000 to 2026. The indebtedness also includes
$58,820,000 of debt represented by tax exempt variable rate demand bonds with
interest rates paid during the first six months of 1999 of 5.5% and maturity
dates ranging from 2020 to 2026. A portion of the tax exempt variable rate
demand bonds, $29,220,000, is capped at a maximum interest rate of 7.3%.
The Company's unrestricted cash balance decreased by $753,000 from $2,548,000 as
of December 31, 1998 to $1,795,000 as of June 30, 1999. This decrease was
primarily a result of $67,102,000 of net cash used in investing activities,
which was offset by $37,825,000 of net cash provided by operating activities and
$28,524,000 of net cash provided by financing activities. Of the $67,102,000
net cash used in investing activities, $41,370,000 was used to fund real estate
under development and $29,557,000 was used to purchase and upgrade rental
properties. The $28,524,000 net cash provided by financing activities was
primarily a result of $117,650,000 of proceeds from mortgage and other notes
payable and lines of credit as offset by $54,480,000 of repayments of mortgages
and other notes payable and lines of credit and $25,331,000 of
dividends/distributions paid.
Non-revenue generating capital expenditures are improvements and upgrades that
extend the useful life of the property and are not related to preparing a
multifamily property unit to be rented to a tenant. The Company expects to
incur approximately $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 Company expects that cash from operations and/or its lines of credit will
fund such expenditures. However, there can be no assurance that the actual
expenditures incurred during 1999 and/or the funding thereof will not be
significantly different than the Company's current expectations.
The Company is developing seven multifamily residential projects, which are
anticipated to contain an aggregate of 1,333 multifamily units. Construction is
complete on two of the projects, and leasing activities have begun at five of
the projects. The Company expects that construction on the remaining five
projects will be substantially completed by December 31, 1999, with leasing
activities completed by the second quarter of 2000. Such projects involve
certain risks inherent in real estate development. See "Other Matters/Risk
Factors - Risks That Development Activities Will Be Delayed or Not Completed" in
Item 1 of the Company's Annual Report on Form 10-K for the year ended December
31, 1998. In connection with these development projects, the Company has
directly, or in some cases through its joint venture partners, entered into
contractual construction related commitments with unrelated third parties for
approximately $162,000,000. As of June 30, 1999, the Company's remaining
commitment to fund the estimated cost to complete is approximately $71,000,000.
The Company expects to fund such commitments with a 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. One project which was
previously reported as a development project has achieved stabilized occupancy
subsequent to the second quarter of 1999. This project, Park Hill @ Issaquah,
is owned by a joint venture in which the Company owns a 45% interest.
On July 28, 1999, The Operating Partnership completed the sale of 2,000,000
units of its 9.30% Series D Cumulative Redeemable Preferred Units to two related
institutional investors at a price of $25.00 per unit. The net proceeds from
this sale were approximately $49,000,000. The net proceeds were used primarily
to reduce outstanding balances under the Company's line of credit.
Pursuant to existing shelf registration statements, the Company has the capacity
to issue up to $342,000,000 of equity securities and the Operating Partnership
has the capacity to issue up to $250,000,000 of debt securities.
The Company pays quarterly dividends from cash available for distribution.
Until it is distributed, cash available for distribution is invested by the
Company primarily in short-term investment grade securities or is used by the
Company to reduce balances outstanding under its lines of credit.
19
Year 2000 Compliance
The Company's State of Readiness. Employing a team made up of internal
personnel, the Company has identified IT systems that are not Year 2000
compliant and has substantially modified or replaced such systems as necessary.
However, because the full ramifications of the Year 2000 issue will not be fully
realized until after the Year 2000 date change, the Company can provide no
assurances that its internal systems will not be adversely affected by the Year
2000 date change.
The Company 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 Company, it appears that the Year 2000 compliance effort being made by third
parties with which the Company does significant business is sufficient to avoid
a material adverse impact on the Company's liquidity or ongoing results of
operations. However, no assurance can be given regarding the cost of their
failure to comply.
Costs of Addressing the Company's Year 2000 issues. Given the information known
at this time about the Company's systems that are non-compliant, coupled with
the Company'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 Company's liquidity or ongoing
results of operations. As of June 30, 1999, no compliance costs have been
incurred by the Company. The costs of any future assessment and remediation
will be paid out of the Company's general and administrative expenses.
Risks of the Company's Year 2000 issues. The Company believes that it is taking
appropriate steps to assess and address its Year 2000 issues and currently does
not expect that its business will be adversely affected by the Year 2000 issue
in any material respect. Nevertheless, achieving Year 2000 readiness is
dependent on many factors, some of which are not completely within the Company's
control. Should either the Company's internal systems and devices or the
internal systems and devices of one or more critical vendors fail to achieve
Year 2000 readiness, the Company's business and its results of operations could
be adversely affected.
Funds from Operations
Industry analysts generally consider funds from operations, ("Funds From
Operations"), an appropriate measure of performance of an equity REIT.
Generally, Funds From Operations adjusts the net income of equity REITs for non-
cash charges such as depreciation and amortization of rental properties 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 net income as an indicator of the REIT's operating
performance or to cash flows as a measure of liquidity. Funds From Operations
does not measure whether cash flow is sufficient to fund all cash needs
including principal amortization, capital improvements and distributions to
shareholders. Funds From Operations also does not represent cash flows
generated from operating, investing or financing activities as defined under
GAAP. Further, Funds from Operations as disclosed by other REITs may not be
comparable to the Company's presentation of Funds From Operations. The
20
following table sets forth Essex's calculation of Funds from Operations for the
three and six months ended
June 30, 1999 and 1998.
Three months ended Six months ended
------------------- ----------------
June 30 June 30 June 30 June 30
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Income before
minority interests and
extraordinary item $12,335,000 $10,005,000 $24,026,000 $19,660,000
Adjustments:
Depreciation & amortization 6,247,000 5,632,000 12,292,000 10,301,000
Adjustment for unconsolidated
joint ventures 366,000 366,000 732,000 662,000
Minority interests (1) (2,397,000) (1,692,000) (4,760,000) (2,599,000)
----------- ----------- ----------- -----------
Funds from Operations $16,551,000 $14,311,000 $32,290,000 $28,024,000
=========== =========== =========== ===========
Weighted average number
shares outstanding diluted (1) 20,476,092 20,549,875 20,478,496 20,555,032
=========== =========== =========== ===========
(1) Assumes conversion of all outstanding operating partnership interests in
the Operating Partnership and Convertible Preferred Stock, Series 1996 A, into
shares of the Company's Common Stock. Minority interests have been adjusted to
reflect such conversion.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company 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 Company's real estate investment portfolio and
operations. The Company's interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives the Company borrows
primarily at fixed rates and may enter into derivative financial instruments
such as interest rate swaps, caps and treasury locks in order to mitigate its
interest rate risk on a related financial instrument. The Company does not
enter into derivative or interest rate transactions for speculative purposes.
The Company's interest rate risk is monitored using a variety of techniques.
The table below presents the principal amounts and weighted average interest
rates by year of expected maturity to evaluate the expected cash flows and
sensitivity to interest rate changes. The Company believes that the principal
amounts of the Company's mortgage notes payable and line of credit approximate
fair value as of June 30, 1999 as interest rates are consistent with yields
currently available to the Company for similar instruments.
For Year Ended: 1999 2000 2001 2002 2003 Thereafter Total
Fixed rate debt (In thousands)
$ 1,354 21,034 3,114 25,206 30,870 239,637 $321,215
Average interest rate 7.06% 7.06% 6.56% 6.56% 5.71% 5.71%
Variable rate LIBOR debt (In thousands)
$ - 60,450 - - - 58,820(1) $119,270
Average interest rate - 6.20% - - - 5.50%
(1) $29,220,000 is capped at 7.3%
The Company 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 which will be
settled in 2000. The fair value of these contracts as of June 30, 1999 is
approximately $899,000. The fair value represents the estimated payments that
would be made to terminate the agreement at June 30, 1999.
21
The four forward treasury contracts represent the exposures that exist as of
June 30, 1999. As firm commitments do not exist as of June 30, 1999, the
information presented herein has limited predictive value. As a result, the
Company's ultimate realized gain or loss with respect to interest rate
fluctuations will depend on the exposures that may arise during the period, the
Company's hedging strategies at that time, and interest rates.
22
Part II Other Information
- ------- -----------------
Item 2: Changes in Securities and Use of Proceeds
-----------------------------------------
(c) Recent Sales of Unregistered Securities
On July 28, 1999, Essex Portfolio, L.P., a California limited partnership
(the "Operating Partnership") as to which the Company is the sole general
partner, completed the private placement of 2,000,000 9.30% Series D
Cumulative Redeemable Preferred Units (the "Perpetual Preferred Units"),
representing a limited partnership interest of the Operating Partnership,
to two related institutional investors in return for contributions to the
Operating Partnership totaling $50 million. The Perpetual Preferred
Units will become exchangeable, on a one for one basis, in whole or in
part at any time on or after the tenth anniversary of the date of this
private placement (or earlier under certain circumstances) for shares of
the Company's 9.30% Series D Cumulative Redeemable Preferred Stock, par
value $.0001 per share (the "Series D Preferred Stock"). Pursuant to the
terms of a registration rights agreement, entered into in connection with
this private placement, the holders of Series D Preferred Stock will have
certain rights to cause the Company to register such shares of Series D
Preferred Stock. On July 30, 1999, the Company filed Articles
Supplementary reclassifying 2,000,000 shares of its Common Stock, par
value $.0001 per share, as 2,000,000 shares of Series D Preferred Stock
and setting forth the rights, preference and privileges of the Series D
Preferred Stock.
The net proceeds from the above private placement were used to reduce
outstanding balances on the Company's line of credit.
The above private Placement was completed pursuant to the exemption from
registration contained in Section 4(2) the Securities Act of 1933, as
amended.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
--------
3.1 Articles Supplementary reclassifying 2,000,000 shares of
Common Stock as 2,000,000 shares of 9.30% Series D
Cumulative Redeemable Preferred Stock, filed with the State
of Maryland on July 30, 1999.
10.1 Fourth Amendment to the First Amended and Restated
Agreement of Limited Partnership of Essex Portfolio, L.P.,
dated July 28, 1999.
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only)
B. Reports on Form 8-K
-------------------
None
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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
(Authorized Officer and
Principal Accounting Officer)
August 12, 1999
-------------------
Date
24