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. 333-44467-01
ESSEX PORFOLIO, 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 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 15
Item 3 Quantitative and Qualitative Disclosure About Market Risk 22
Part II
Item 2 Changes in Securities and Use of Proceeds 24
Item 6 Exhibits and Reports on Form 8-K 24
Signatures 25
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, stockholders' equity 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)
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 Partners' Capital
---------------------------------
Mortgage notes payable $ 380,035 $ 325,822
Lines of credit 60,450 35,693
Accounts payable and accrued liabilities 36,181 28,601
Distributions 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 2,598 2,951
Partners' capital:
General Partner:
Common equity 376,642 352,295
Preferred equity 4,327 37,505
----------- -----------
380,969 389,800
Limited Partners:
Common equity 31,321 25,331
Preferred equity 102,150 102,150
----------- -----------
133,471 127,481
----------- -----------
Total partners' capital 514,440 517,281
----------- -----------
Total liabilities and partners' capital $ 1,016,825 $ 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
---------------------------------
June 30, June 30,
1999 1998
------------- ------------
Revenues:
Rental $ 33,074 $ 30,273
Other property 789 667
------------ ------------
Total property 33,863 30,940
Interest and other 1,035 744
------------ ------------
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
extraordinary item 12,335 10,005
Minority interests (169) (121)
------------ ------------
Income before extraordinary item 12,166 9,884
Extraordinary item:
Loss on early extinguishment of debt (90) --
------------ ------------
Net income 12,076 9,884
Dividends on preferred units-general partner (236) (875)
Dividends on preferred units-limited partner (2,145) (1,492)
------------ ------------
Net income available to common units $ 9,695 $ 7,517
============ ============
Per operating partnership unit data:
Basic:
Income before extraordinary item $ 0.51 $ 0.41
Extraordinary item - debt extinguishment -- --
------------ ------------
Net income $ 0.51 $ 0.41
============ ============
Weighted average number of partnership
units outstanding during the period 19,267,292 18,506,034
============ ============
Diluted:
Income before extraordinary item $ 0.50 $ 0.40
Extraordinary item - debt extinguishment -- --
------------ ------------
Net income $ 0.50 $ 0.40
============ ============
Weighted average number of partnership
units outstanding during the period 19,464,608 18,721,303
============ ============
Distributions per Operating Partnership common unit $ 0.55 $ 0.50
============ ============
See accompanying notes to the consolidated unaudited financial statements.
5
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit amounts)
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
extraordinary item 24,026 19,660
Minority interests (316) (230)
------------ ------------
Income before extraordinary item 23,710 19,430
Extraordinary item:
Loss on early extinguishment of debt (90) --
------------ ------------
Net income 23,620 19,430
Dividends on preferred units-general partner (1,067) (1,750)
Dividends on preferred units-limited partner (4,291) (2,214)
------------ ------------
Net income available to common stockholders $ 18,262 $ 15,466
============ ============
Per operating partnership unit data:
Basic:
Income before extraordinary item $ 0.97 $ 0.84
Extraordinary item - debt extinguishment -- --
------------ ------------
Net income $ 0.97 $ 0.84
============ ============
Weighted average number of partnership
units outstanding during the period 18,939,532 18,498,886
============ ============
Diluted:
Income before extraordinary item $ 0.96 $ 0.83
Extraordinary item - debt extinguishment -- --
------------ ------------
Net income $ 0.96 $ 0.83
============ ============
Weighted average number of partnership
units outstanding during the period 19,107,134 18,726,460
============ ============
Distributions per Operating Partnership common unit $ 1.05 $ 0.95
============ ============
See accompanying notes to the consolidated unaudited financial statements.
6
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
------- --------- ---------- ------ --------- -------- ---------
Balances 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 reinvest-
ment 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 1,618 33,178 (33,178) -- -- -- --
Redemption of limited
partner common units -- -- -- (46) (1,438) -- (1,438)
Common units purchased
by Operating Partnership (257) (6,991) -- -- -- -- (6,991)
Issuance of limited
partner common units -- -- -- 274 7,469 -- 7,469
Contribution-net proceeds
from options exercised 20 362 -- -- -- -- 362
Net income -- 16,262 1,067 -- 2,000 4,291 23,620
Partners' distributions -- (18,464) (1,067) -- (2,041) (4,291) (25,863)
--------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 1999 18,022 $ 376,642 $ 4,327 2,101 $ 31,321 $ 102,150 $ 514,440
========= ========= ========= ========= ========= ========= =========
See accompanying notes to the consolidated unaudited financial statements.
7
ESSEX PORTFOLIO, L.P.
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
Contribution from stock options exercised and shares
issued through dividend reinvestment plan-general partner 362 339
General partner common shares purchased by
limited partners (6,991) --
Distributions to minority interest and limited partners (6,776) (2,806)
Redemption of operating partnership units-limited partner (1,438) --
Distributions to general partner (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 $ --
========= =========
Distributions 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
--------------------------------------
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 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership obtained a
$4,400, 7.0% fixed rate, secured loan which matures in April 2009. Also,
the Operating Partnership 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership assumed a
$4,500, 7.3%
9
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
fixed rate, secured loan which matures in December 2007. Also, the
Operating Partnership 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 Operating Partnership's line of credit.
(B) Development Activities
- --- ----------------------
The Operating Partnership 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 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 June 30, 1999, the Operating Partnership
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 Operating
Partnership owns a 45% interest and will receive a 12% preferred return
on the equity it has invested. In addition, the Operating Partnership 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 Operating Partnership'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
general partner common equity in the accompanying consolidated balance
sheets as of June 30, 1999.
(D) Debt Related Transactions
- --- -------------------------
On June 18, 1999, the Operating Partnership replaced its credit enhancement
agreement on $16,000 of its variable rate secured multifamily housing
mortgage revenue bonds. In connection with this transaction, the Operating
Partnership obtained an $7,500, 7.7% fixed rate, secured loan which matures
in June 2009. The Operating Partnership 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
10
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
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 Operating Partnership 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.
(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, 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 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 Operating Partnership owns an ownership
interest ("Joint Ventures"). Other income also includes management fee
income and investment income earned by the Operating Partnership 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 Operating Partnership'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
Operating Partnership's Joint Venture development projects in 1998.
11
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
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
======= =======
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 June 30, 1999, the Operating Partnership 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
Operating Partnership 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
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 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
12
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
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
======== ========
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
======== ========
13
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):
--------------------------------
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
========== ========
14
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 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.
The Operating Partnership holds, directly or indirectly, all of the Company's
interests in the Operating Partnership's properties and all of the Company's
operations relating to the Company's properties are conducted through the
Operating Partnership. The Company is the sole general partner of the Operating
Partnership and, as of 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.
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% 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 Operating Partnership's multifamily properties (the
"Properties") are located in Northern California (the San Francisco Bay Area),
Southern California (Los Angeles, Ventura, Orange and San Diego counties) and
the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan
areas). The average occupancy levels 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 54 multifamily residential
properties and its headquarters building. Of the multifamily properties
acquired since the Operating Partnership began operations, 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
Operating Partnership has sold, since it began
15
operations, 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 Operating Partnership 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 Operating Partnership'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 Operating Partnership's multifamily
Quarterly Same Store Properties (properties owned by the Operating Partnership
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 Operating Partnership's commercial properties were 100% occupied (based on
square footage) as of June 30, 1999.
16
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 Operating Partnership 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 Operating Partnership'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
17
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 $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 Operating Partnership.
Net income increased by $2,192,000 to $12,076,000 in the second quarter of 1999
from $9,884,000 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 Operating Partnership's multifamily
Same Store Properties (properties owned by the Operating Partnership 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 Operating Partnership'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 Operating Partnership 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").
18
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
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
Operating Partnership'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 Operating Partnership'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 Operating Partnership.
Net income increased by $4,190,000 to $23,620,000 in the first six months of
1999 from $19,430,000 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 Operating Partnership had $1,795,000 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
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 Partnership will be able to
dispose of properties in a timely manner and under terms and conditions that the
Operating Partnership deems acceptable.
19
The Operating Partnership 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 Operating Partnership's option, 1.15% over the LIBOR
rate. The line of credit matures in June 2000. At June 30, 1999 the Operating
Partnership 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%.
In addition to the unsecured line of credit, the Operating Partnership 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 Operating Partnership'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 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 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 Operating Partnership expects that
construction on the remaining five projects will be substantially completed by
the year ended 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 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 $162,000,000. As of June 30, 1999, the Operating Partnership's
remaining commitment to fund the estimated cost to complete is approximately
$71,000,000. The Operating Partnership 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 Operating Partnership 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 Operating Partnership's line of credit.
20
Pursuant to existing shelf registration statements, the Operating Partnership
has the capacity to issue up to $342,000,000 of equity securities and the
Operating Partnership has the capacity to issue up to $250,000,000 of debt
securities.
The Operating Partnership pays quarterly dividends from cash available for
distribution. Until it is distributed, cash available for distribution is
invested by the Operating Partnership primarily in short-term investment grade
securities or is used by the Operating Partnership to reduce balances
outstanding under its lines of credit.
Year 2000 Compliance
The Operating Partnership's State of Readiness. 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. However, because the full ramifications of the Year 2000 issue
will not be fully realized until after the Year 2000 date change, the Operating
Partnership can provide no assurances that its internal systems will not be
adversely affected by the Year 2000 date change.
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.
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 June 30, 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. The Operating
Partnership 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 Operating Partnership's control. Should
either the Operating Partnership's internal systems and devices or the internal
systems and devices of one or more critical vendors fail to achieve Year 2000
readiness, the Operating Partnership'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. 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 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
21
Operating Partnership's presentation of Funds From Operations. The following
table sets forth Operating Partnership'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) 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.
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 June 30, 1999 as interest rates
are consistent with yields currently available to the Operating Partnership 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 Operating Partnership 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
22
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.
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
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's hedging strategies at that time, and interest rates.
23
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 Operating Partnership'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
24
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)
August 12, 1999
---------------
Date
25