FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 333-44467-01
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as specified in its Charter)
Maryland 77-0369575
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 East Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices)
(Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months for such shorter period that the Registrant was required
to file such report, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
-----
TABLE OF CONTENTS
FORM 10-Q
Part I Page No.
--------
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 4
Consolidated Statements of Operations
for the three months ended September 30, 1999 and 1998 5
Consolidated Statements of Operations
for the nine months ended September 30, 1999 and 1998 6
Consolidated Statements of Partner's Capital
for the nine months ended September 30, 1999
and the year ended December 31, 1998 7
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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, partner's capital and cash
flows of the Operating Partnership reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the
aforementioned financial statements for the interim periods.
The accompanying unaudited financial statements should be read in
conjunction with the notes to such financial statements and
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
3
ESSEX PORTFOLIO, L.P.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
September 30, December 31,
Assets 1999 1998
------ ---------------- -----------------
Real estate:
Rental properties:
Land and land improvements $ 268,516 $ 219,115
Buildings and improvements 794,665 670,849
---------------- -----------------
1,063,181 889,964
Less accumulated depreciation (92,774) (77,789)
---------------- -----------------
970,407 812,175
Investments 14,735 10,590
Real estate under development 83,148 53,213
---------------- -----------------
1,068,290 875,978
Cash and cash equivalents-unrestricted 4,338 2,548
Restricted cash 16,822 15,532
Notes and other related party receivables 19,811 10,450
Notes and other receivables 11,160 18,809
Prepaid expenses and other assets 3,609 3,444
Deferred charges, net 5,496 5,035
---------------- -----------------
$ 1,129,526 $ 931,796
================ =================
Liabilities and Partners' Capital
---------------------------------
Mortgage notes payable $ 379,463 $ 325,822
Lines of credit 57,200 35,693
Accounts payable and accrued liabilities 44,857 28,601
Distributions payable 13,378 11,145
Deferred gain 5,002 5,002
Other liabilities 6,227 5,301
---------------- -----------------
Total liabilities 506,127 411,564
Minority interests 2,570 2,951
Partners' capital:
General Partner:
Common equity 380,102 352,295
Preferred equity 4,314 37,505
---------------- -----------------
384,416 389,800
Limited Partners:
Common equity 31,048 25,331
Preferred equity 205,365 102,150
----------------- -----------------
236,413 127,481
---------------- -----------------
Total partners' capital 620,829 517,281
---------------- -----------------
Total liabilities and partners' capital $ 1,129,526 $ 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
------------------------------------
September 30, September 30,
1999 1998
----------------- ----------------
Revenues:
Rental $ 35,699 $ 31,068
Other property 772 722
-------------- ------------
Total property 36,471 31,790
Interest and other 1,274 861
-------------- ------------
Total revenues 37,745 32,651
-------------- ------------
Expenses:
Property operating expenses
Maintenance and repairs 2,210 1,858
Real estate taxes 2,686 2,349
Utilities 2,214 2,023
Administrative 2,581 2,888
Advertising 509 342
Insurance 232 224
Depreciation and amortization 7,084 5,575
-------------- ------------
17,516 15,259
-------------- ------------
Interest 5,560 5,245
Amortization of deferred financing costs 147 212
General and administrative 1,096 1,007
Provision for litigation loss - 930
-------------- ------------
Total expenses 24,319 22,653
-------------- ------------
Income before gain on sale of real estate,
minority interests and extraordinary item 13,426 9,998
Gain on the sale of real estate 4,708 9
-------------- ------------
Income before minority interests
and extraordinary item 18,134 10,007
Minority interests (172) (105)
-------------- ------------
Income before extraordinary item 17,962 9,902
Extraordinary item:
Loss on early extinguishment of debt - (806)
-------------- ------------
Net income 17,962 9,096
Dividends on preferred units-general partner (149) (2,450)
Dividends on preferred units-limited partners (3,368) -
-------------- ------------
Net income available to common units $ 14,445 $ 6,646
============== ============
Per operating partnership unit data:
Basic:
Income before extraordinary item $ 0.72 $ 0.40
Extraordinary item - debt extinguishment - (0.04)
-------------- ------------
Net income $ 0.72 $ 0.36
============== ============
Weighted average number of partnership
units outstanding during the period 20,137,957 18,508,701
============== ============
Diluted:
Income before extraordinary item $ 0.71 $ 0.40
Extraordinary item - debt extinguishment - (0.04)
-------------- ------------
Net income $ 0.71 $ 0.36
============== ============
Weighted average number of partnership
units outstanding during the period 20,573,866 18,694,894
============== ============
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)
Nine months ended
-------------------------------------------
September 30, September 30,
1999 1998
-------------------- -------------------
Revenues:
Rental $ 100,675 $ 87,871
Other property 2,258 1,911
------------ ------------
Total property 102,933 89,782
Interest and other 3,602 2,389
------------ ------------
Total revenues 106,535 92,171
------------ ------------
Expenses:
Property operating expenses
Maintenance and repairs 6,595 6,585
Real estate taxes 7,646 6,767
Utilities 6,222 5,631
Administrative 7,680 7,022
Advertising 1,510 1,190
Insurance 675 859
Depreciation and amortization 19,376 15,876
------------ ------------
49,704 43,930
------------ ------------
Interest 15,744 14,259
Amortization of deferred financing costs 415 553
General and administrative 3,218 2,841
Provision for litigation loss - 930
------------ ------------
Total expenses 69,081 62,513
------------ ------------
Income before gain on sale of real estate,
minority interests and extraordinary item 37,454 29,658
Gain on the sale of real estate 4,708 9
------------ ------------
Income before minority interests
and extraordinary item 42,162 29,667
Minority interests (490) (334)
------------ ------------
Income before extraordinary item 41,672 29,333
Extraordinary item:
Loss on early extinguishment of debt (90) (806)
------------ ------------
Net income 41,582 28,527
Dividends on preferred units-general partner (1,216) (6,414)
Dividends on preferred units-limited partners (7,658) -
------------ ------------
Net income available to common units $ 32,708 $ 22,113
============ ============
Per operating partnership unit data:
Basic:
Income before extraordinary item $ 1.70 $ 1.24
Extraordinary item - debt extinguishment - (0.04)
------------ ------------
Net income $ 1.70 $ 1.20
============ ============
Weighted average number of partnership
units outstanding during the period 19,343,397 18,502,194
============ ============
Diluted:
Income before extraordinary item $ 1.66 $ 1.22
Extraordinary item - debt extinguishment - (0.04)
------------ ------------
Net income $ 1.66 $ 1.18
============ ============
Weighted average number of partnership
units outstanding during the period 20,500,206 18,688,353
============ ============
Distribution per Operating Partnership common unit $ 1.60 $ 1.45
============ ============
See accompanying notes to the consolidated unaudited financial statements.
6
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
For the nine months ended September 30, 1999 and the
year ended December 31, 1998
(Unaudited)
(Dollar 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 reinvestment plan 2 10 - - - - 10
Net income - 22,829 3,500 - 3,496 5,595 35,420
Partners' distributions - (32,418) (3,500) - (3,652) (5,595) (45,165)
----------- ----------- ------------ ---------- ----------- ------------ ------------
Balances at December 31,
1998 16,641 $ 352,295 $ 37,505 1,873 $ 25,331 $ 102,150 $ 517,281
Common units issued from
conversion of Convertible
Preferred Stock 1,618 33,191 (33,191) - - - -
Redemption of limited partner
common units - - - (46) (2,084) - (2,084)
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
perpetual preferred units - - - - - 103,215 103,215
Contribution-net proceeds
from options exercised 54 922 - - - - 922
Net income - 29,189 1,216 - 3,519 7,658 41,582
Partners' distributions - (28,504) (1,216) - (3,187) (7,658) (40,565)
----------- ------------ ------------ ---------- ----------- ------------ ------------
Balances at September 30,
1999 18,056 $ 380,102 $ 4,314 2,101 $ 31,048 $ 205,365 $ 620,829
=========== ============ ============ ========== =========== ============ ============
See accompanying notes to the consolidated unaudited financial statements.
7
ESSEX PORTFOLIO, L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine months ended
-----------------------------------------
September 30, September 30,
1999 1998
------------------ -------------------
Net cash provided by operating activities $ 61,328 $ 48,725
------------------ -------------------
Cash flows from investing activities:
Additions to real estate (135,882) (152,660)
Proceeds received from the disposition of real estate 18,400 26,354
Increase in restricted cash (1,290) (9,112)
Additions to related party notes and other receivables (10,049) (3,888)
Repayment of related party notes and other receivables 9,299 2,850
Additions to real estate under development (51,636) (24,018)
Net (contribution to) / distribution from investments
in corporations and limited partnerships (2,806) 531
------------------ -------------------
Net cash used in investing activities (173,964) (159,943)
------------------ -------------------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 216,650 199,347
Repayment of mortgage and other notes payable
and lines of credit (157,302) (133,879)
Additions to deferred charges (876) (1,823)
Increase in (payment of) offering related costs 95 (282)
Net proceeds from preferred units sales 103,215 77,775
Contribution from stock options exercised and shares
issued through dividend reinvestment plan-general partner 922 393
General partner common shares purchased by
limited partners (6,991) -
Distributions to minority interest and limited partners (10,472) (5,624)
Redemption of operating partnership units-limited partner (2,084) -
Distributions to general partner (28,731) (25,900)
------------------ -------------------
Net cash provided by financing activities 114,426 110,007
------------------ -------------------
Net increase (decrease) in cash and cash equivalents 1,790 (1,211)
Cash and cash equivalents at beginning of period 2,548 4,282
------------------ -------------------
Cash and cash equivalents at end of period $ 4,338 $ 3,071
================== ===================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $3,963 and
$2,575 capitalized $ 10,579 $ 10,917
================== ===================
Supplemental disclosure of non-cash investing and
Financing activities:
Real estate under development transferred to
rental properties $ 21,700 $ -
================== ===================
Mortgage notes payable assumed in connection
with purchase of real estate $ 15,800 $ 18,443
================== ===================
Issuance of Operating Partnership Units in
connection with the purchase of real estate $ 7,469 $ -
================== ===================
Distributions payable $ 13,378 $ 10,913
================== ===================
See accompanying notes to consolidated unaudited financial statements.
8
Notes to Consolidated Financial Statements
September 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
September 30, 1999, December 31, 1998 and September 30, 1998, respectively.
As of September 30, 1999, the Operating Partnership operates and has
ownership interests in 68 multifamily properties (containing 14,486 units)
and four commercial properties (with approximately 250,000 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 August 31, 1999, the Operating Partnership purchased Coronado at
Newport-North, a 732-unit apartment community located in Newport Beach,
California for a contract price of $62,000. This property was contributed
to a joint venture limited liability company, Newport Beach North LLC,
subsequent to September 30, 1999 as discussed under footnote 2 (F).
On September 30, 1999, the Operating Partnership purchased Avondale at
Warner Center, a 446-unit apartment community located in Woodland Hills,
California for a contract price of $35,000. A portion of the purchase price
was paid with proceeds received from the sale of a commercial property, 777
California (the former headquarters building) located in Palo Alto,
California.
On September 30, 1999, the Operating Partnership invested $1,996 for a 46%
limited partnership interest and Essex Management Corporation became the
sole general partner in Mt. Sutro Terrace Associates, L.P. Mt. Sutro
Terrace Associates, L.P. is a California limited partnership which acquired
Mt. Sutro Terrace Apartments, a 99-unit apartment community located in San
Francisco, California for an implied value of approximately $10,260. The
property has an approximate $5,800 variable rate non-recourse loan which
matures in 2027.
9
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
These third quarter 1999 acquisitions were funded with the proceeds from
the disposition of the commercial property as noted above, proceeds
received from the Operating Partnership's perpetual preferred units
offerings and the Operating Partnership's line of credit.
(B) Disposition Activities
---------------------------
On September 10, 1999, the Operating Partnership sold one of its commercial
properties, 777 California (the former headquarters building) located in
Palo Alto, California for a gross sales price of $18,400, resulting in a
gain of $4,708. The building was sold to an entity controlled by a member
of the Company's Board of Directors, following approval of the independent
board members. The proceeds from this sale were reinvested in the purchase
of Avondale at Warner Center. The transaction was an exchange transaction
in accordance with the Internal Revenue Code Section 1031.
(C) Development Activities
---------------------------
Development communities are defined by the Operating Partnership as new
construction of apartment properties which are currently in a phase of
construction or lease-up and have not reached stabilized operations. As of
September 30, 1999, the Operating Partnership is developing eight
multifamily residential communities, with an aggregate of 1,500 multifamily
units. In the third quarter of 1999, the Operating Partnership announced
two new development communities and also reached stabilized operations at
two multifamily communities containing 480 units that were previously
reported as development communities. In connection with the properties
currently under development, the Operating Partnership has directly, or in
some cases through its joint venture entities, entered into contractual
construction related commitments with unrelated third parties. As of
September 30, 1999, the Operating Partnership is committed to fund
approximately $71,100.
Perry Creek is a 132-unit development community located in Bothell,
Washington. The estimated total capitalized cost for this community is
$14,700. Construction has begun in the third quarter of 1999 and initial
occupancy is expected in the second quarter of 2000.
The Essex at Lake Merritt is mid/high rise development community located in
Oakland, California with up to 270 units. The Operating Partnership
purchased a lakefront site on Lake Merritt in downtown Oakland for a
contract purchase price of $5,500 on which the Operating Partnership plans
to construct a premier waterfront project. No commitments have been entered
into with third parties regarding construction of this community as of
September 30, 1999.
The two projects which were previously reported as development projects and
have achieved stabilized operations in the third quarter of 1999 are Park
Hill at Issaquah and Hillsborough Park.
Park Hill at Issaquah is a 245-unit multifamily property located in
Issaquah, Washington. The property is owned by a joint venture in which the
Operating Partnership owns a 45% interest. The Operating Partnership is
entitled to 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 Operating Partnership's investment
in the joint venture is included in investments in the accompanying
consolidated balance sheets.
Hillsborough Park is a 235-unit multifamily property located in La Habra,
California. The property is wholly owned by the Operating Partnership. The
total investment for the property of approximately $21,700 is included in
rental properties in the accompanying consolidated balance sheets.
(D) Redevelopment Activities
-----------------------------
Redevelopment communities are defined by the Operating Partnership as
existing properties owned by the Operating Partnership which have been
targeted for additional investment dollars from which
10
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
the Operating Partnership expects to achieve increased financial returns.
Redevelopment communities are currently under a phase of construction and
as a result, may have less than stabilized operations. As of September 30,
1999, the Operating Partnership has three redevelopment communities in
Southern California with an aggregate of 861 units for a total projected
investment of $13,700.
One redevelopment community, Monterra del Mar, a 96-unit apartment
community located in Pasadena, California was completed during the third
quarter of 1999 for a total investment of $1,300 in renovation
expenditures.
(E) Equity Transactions
------------------------
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
$48,925. On September 3, 1999, the Operating Partnership completed the sale
of 2,200,000 units of its 9.25% Series E Cumulative Redeemable Preferred
Units to an institutional investor in a private placement, at a price of
$25.00 per unit. The net proceeds from this sale were approximately
$53,400. Preferred units and related dividends are included in minority
interest in the accompanying consolidated financial statements.
In September 1999, the Operating Partnership formed a program in which
directors and management of the Operating Partnership can participate
indirectly in an investment in the Company's common stock. The participants
have entered into a swap agreement with a securities broker whereby the
securities broker has acquired, in open market transactions, 223,475 shares
of the Company's common stock. The agreement terminates in five years at
which time the settlement amount is determined by comparing the original
purchase price of the stock plus interest at a rate of LIBOR plus 1.5% to
the termination date market value of the shares and all dividends received
during the investment period. In certain circumstances the participants may
be required to provide collateral to the securities broker. The Operating
Partnership has guaranteed performance of the participants with respect to
any obligations relating to the swap agreement.
(F) Subsequent Event
---------------------
On October 29, 1999, the Operating Partnership entered into two separate
joint venture entities with an approximate 49.9% equity interest. Together
with the joint venture partners, the Operating Partnership formed two
separate private REIT entities, Newport Beach North, Inc. and Newport Beach
South, Inc. Newport Beach North, Inc. and Newport Beach South, Inc. own an
approximate 99.65% interest in Newport Beach North, LLC and Newport Beach
South, LLC, respectively. The Operating Partnership contributed its
investment of Coronado at Newport - North, an acquisition made in the third
quarter of 1999, to Newport Beach North, LLC. At the same time, the
partners in Newport Beach South, LLC purchased Coronado at Newport - South,
a 715-unit apartment community located in Newport Beach, California for a
contract price of $64,500. The two entities have identical ownership
structures and profit and loss are allocated to the partners in accordance
with their ownership interests.
In connection with formation of the two joint ventures, the entities
obtained non-recourse debt financing for $34,100 and $37,600 for Newport
Beach North, LLC and Newport Beach South, LLC, respectively. The loans bear
interest at LIBOR plus 2.25% and mature in 2002. The joint venture entities
plan to invest a total of approximately $28,000 additionally into the
properties for exterior and interior renovation and such investment is
intended to be funded through additional advances under the loans referred
to above. The Operating Partnership is entitled to management and
redevelopment fee income from the joint venture and incentive payments
based on the financial success of the joint venture. The Operating
Partnership intends to account for its investment in the joint venture
under the equity method of accounting.
11
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(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 September 30, 1999 and
1998 totaled $112 and $37, respectively, and $324 and $174 for the nine
months ended September 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 $221 and $133 for
the three months ended September 30, 1999 and 1998, respectively, and $693
and $563 for the nine months ending September 30, 1999 and 1998,
respectively.
Other income includes interest income of $84 and $249 for the three months
ended September 30, 1999 and 1998, respectively, and $256 and $784 for the
nine months ended September 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 $107 and $143 for the three months ended September 30, 1999 and
1998, respectively and $416 and $348 for the nine months ended June 30,
1999 and 1998, respectively.
Notes and other related party receivables as of September 30, 1999 and
December 31, 1998 consist of the following:
September 30, December 31,
------------- ------------
1999 1998
---- ----
Notes receivable from Joint Ventures:
Note receivable from Highridge Apartments
secured, bearing interest at 9.4%, due March 2008 $ 1,047 $ 1,047
Note receivable from Fidelity I, secured,
bearing interest at 8%, due on demand 1,358 1,358
Note receivable from Fidelity I and JSV, secured,
bearing interest at 9.5-10%, due 2015 800 800
Note receivable from Highridge,
bearing interest at 10%, due on demand 2,950 --
Note receivable from Fidelity I,
non-interest bearing, due on demand 5,411 --
Note receivable from Highridge,
non-interest bearing, due on demand 3,389 2,928
Note receivable from Portland Shopping Centers,
non-interest bearing, due on demand 2,127 1,209
Note receivable from Anchor Village,
non-interest bearing, due on demand 1,242 933
Other related party receivables:
Loans to officers, bearing interest at 8%, due April 2006 500 500
Other related party receivables, substantially due on demand 987 1,675
------- -------
$19,811 $10,450
======= =======
12
Notes to Consolidated Financial Statements
September 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 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 $18,160 fixed rate
loan. These contracts will be settled no later than June 2000. If the
contracts were settled as of September 30, 1999, the Operating Partnership
would be obligated to pay approximately $635.
(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 $635 relating to treasury
contracts that do not qualify as anticipatory hedges under SFAS 133 would
have been recorded for the nine months ended September 30, 1999.
(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 other
assets. The revenues, net operating income, and assets for each of the
reportable operating segments are summarized as follows for the periods
presented.
Three months ended
September 30, 1999 September 30, 1998
------------------- -------------------
Revenues
Northern California $ 11,898 $ 11,117
Southern California 15,723 12,054
Pacific Northwest 8,366 8,121
----------- ----------
Total segment revenues 35,987 31,292
Non-segment property revenues 484 498
Interest and other income 1,274 861
----------- ----------
Total revenues $ 37,745 $ 32,651
=========== ==========
Net operating income:
Northern California $ 9,214 $ 8,493
Southern California 11,161 8,130
Pacific Northwest 5,639 5,393
----------- ----------
Total segment net operating income 26,014 22,016
Non-segment net operating income 25 90
Interest and other income 1,274 861
Depreciation and amortization (7,084) (5,575)
Interest (5,560) (5,245)
Amortization of deferred financing costs (147) (212)
General and administrative (1,096) (1,007)
Provision for litigation loss -- (930)
----------- ----------
Income before gain on the sale of real
estate, minority interests and
and extraordinary item $ 13,426 $ 9,998
=========== ==========
13
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(6) Segment Information (continued)
-------------------------------
Nine months ended
September 30, 1999 September 30, 1998
----------------------------------------------------------------
Revenues
Northern California $ 34,803 $ 30,867
Southern California 41,533 32,915
Pacific Northwest 24,855 23,997
---------- --------
Total segment revenues 101,191 87,779
Non-segment property revenues 1,742 2,003
Interest and other income 3,602 2,389
---------- --------
Total revenues $ 106,535 $ 92,171
========== ========
Net operating income:
Northern California $ 26,734 $ 23,221
Southern California 28,623 21,671
Pacific Northwest 16,710 15,676
---------- --------
Total segment net operating income 72,067 60,568
Non-segment net operating income 538 1,160
Interest and other income 3,602 2,389
Depreciation and amortization (19,376) (15,876)
Interest (15,744) (14,259)
Amortization of deferred financing costs (415) (553)
General and administrative (3,218) (2,841)
Provision for litigation loss -- (930)
---------- --------
Income before gain on the sale of real
estate, minority interests and
and extraordinary item $ 37,454 $ 29,658
========== ========
September 30, 1999 December 31, 1998
----------------------------------------------------------------
Assets:
Northern California $ 239,283 $241,676
Southern California 529,907 355,077
Pacific Northwest 196,041 198,761
---------- --------
Total segment net real estate assets 965,231 795,514
Non-segment net real estate assets 5,176 16,661
---------- --------
Net real estate assets 970,407 812,175
Non-segment assets 159,119 119,621
---------- --------
Total asset $1,129,526 $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 September 30, 1999 and 1998 and for the nine months ended
September 30, 1999 and 1998. This information should be read in conjunction
with the accompanying consolidated unaudited financial statements and notes
thereto. These consolidated financial statements include all adjustments which
are, in the opinion of management, necessary to reflect a fair statement of the
results and all such adjustments are of a normal recurring nature.
The Operating Partnership holds, directly or indirectly, all of the Company's
interests in the Operating Partnership's properties and all of the Company's
operations relating to the Company's properties are conducted through the
Operating Partnership. The Company is the sole general partner of the Operating
Partnership and, as of September 30, 1999, December 31, 1998 and September 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 greater than 97% of its
property revenues for the three and nine months ended September 30, 1999 and
1998. 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 58 multifamily residential
properties and its current headquarters building. Of the multifamily properties
acquired since the IPO, 11 are located in Northern California, 29 are located in
Southern California, 18 are located in the Seattle, Washington metropolitan area
and one is located in the Portland, Oregon metropolitan area. In total, these
acquisitions consist of 11,238 multifamily units with total capitalized
acquisition costs of approximately $875.4 million. As part of its active
portfolio management strategy, the Operating Partnership has sold, since its
IPO, six multifamily residential properties (five in Northern California and one
in the Pacific Northwest) consisting of a total of 819 units
15
and disposed of six retail shopping centers in the Portland, Oregon metropolitan
area and one commercial property in Northern California at an aggregate gross
sales price of approximately $89.5 million resulting in a total net realized
gain of approximately $18.5 million and a deferred gain of $5.0 million. The
Operating Partnership has also achieved stabilized operations at two multifamily
communities which contain an aggregate of 480 units.
The Operating Partnership is developing eight multifamily residential
communities, with an aggregate of 1,500 multifamily units. In connection with
these development projects, the Operating Partnership has directly, or in some
cases through its joint venture partners, entered into contractual construction
related commitments with unrelated third parties for approximately $161,800,000.
As of September 30, 1999, the Operating Partnership's remaining development
commitment is approximately $71,100,000.
Results of Operations
Comparison of the Three Months Ended September 30, 1999 to the Three Months
- ---------------------------------------------------------------------------
Ended September 30, 1998.
- -------------------------
Average financial occupancy rates of the Operating Partnership's multifamily
Quarterly Same Store Properties (properties owned by the Operating Partnership
for each of the three months ended September 30, 1999 and 1998) decreased to
96.5% for the three months ended September 30, 1999 from 96.6%, for the three
months ended September 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 September 30, 1999 and 1998 are as follows:
September 30, September 30,
1999 1998
-------------- --------------
Northern California 97.0% 97.4%
Southern California 97.0% 97.0%
Pacific Northwest 95.0% 95.1%
The Operating Partnership's commercial property was 100% occupied (based on
square footage) as of September 30, 1999.
16
Total Revenues increased by $5,094,000 or 15.6% to $37,745,000 in the third
quarter of 1999 from $32,651,000 in the third 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
September 30,
Number of ---------------- Dollar Percentage
Properties 1999 1998 Change Change
---------- ------- ------- ------ ----------
Revenues
Property revenues Quarterly Same
Store Properties
Northern California 13 $11,133 $10,773 $360 3.3%
Southern California 16 10,770 10,051 719 7.2
Pacific Northwest 18 7,760 7,523 237 3.2
Commercial 1 22 22 -- --
-- ------- ------ ----- ---
Total property revenues
Quarterly Same Store
Properties 48 29,685 28,369 1,316 4.6
==
Property revenues properties
acquired/disposed of
subsequent to June 30, 1998 (1) 6,786 3,421 3,365 98.3
------- ------- ------ ------
Total property revenues 36,471 31,790 4,681 14.7
------- ------- ------ -------
Interest and other income 1,274 861 413 48.0
------- ------- ----- ------
Total revenues $37,745 $32,651 $5,094 15.6%
======= ======= ====== =======
(1) Also includes redevelopment communities and development communities.
As set forth in the above table, $3,365,000 of the $5,094,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to June 30, 1998, redevelopment communities and development communities. During
this period, the Operating Partnership acquired interests in eight multifamily
properties and reached stabilized operations at one development community (the
"Acquisition Properties"), and disposed of one multifamily property and one
commercial property (the "Disposition Properties").
Of the increase in total revenues, $1,316,000 is attributable to increases in
property revenues from the Quarterly Same Store Properties. Property revenues
from the Quarterly Same Store Properties increased by approximately 4.6% to
$29,685,000 in the third quarter of 1999 from $28,369,000 in the third 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 $719,000 or 7.2% to $10,770,000 in the third quarter of 1999 from $10,051,000
in the third quarter of 1998. This $719,000 increase is primarily attributable
to rental rate increases. 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 $360,000 or 3.3% to $11,133,000 in
third quarter of 1999 from $10,773,000 in the third quarter of 1998. The
$360,000 increase is attributable to rental rate increases which was offset by a
decrease in financial occupancy to 97.0% in the third quarter of 1999 from 97.4%
in the third 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 $237,000 or 3.2% to $7,760,000 in the third quarter of 1999 from $7,523,000
in the third quarter of 1998. The $237,000 increase is primarily attributable
to rental rate increases which was offset by a decrease in financial occupancy
to 95.0% in the third quarter of 1999 from 95.1% in the third quarter of 1998.
The increase in total revenue also reflected an increase of $413,000
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 $1,666,000 or approximately 7.4% to $24,319,000 in
the third quarter of 1999 from $22,653,000 in the third quarter of 1998.
Interest expense increased by $315,000 or 6.0% to $5,560,000 in the third
quarter from $5,245,000 in the third 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 capitalization of
interest charges on the Operating Partnership's
17
development and redevelopment communities. Property operating expenses,
exclusive of depreciation and amortization, increased by $748,000 or 7.7% to
$10,432,000 in the third quarter of 1999 from $9,684,000 in the third quarter of
1998. Of such increase, $925,000 was attributable to the Acquisition Properties
and the Disposition Properties. General and administrative expenses represents
the costs of the Operating Partnership's various acquisition and administrative
departments as well as partnership administration and non-operating expenses.
Such expenses increased by $89,000 in the third quarter of 1999 from the amount
for the third quarter of 1998. This increase is largely due to additional
staffing requirements resulting from the growth of the Operating Partnership.
Net income increased by $8,866,000 to $17,962,000 in the third quarter of 1999
from $9,096,000 in the third quarter of 1998. Net income for the three months
ended September 30, 1999 included a gain on the sale of real estate of
$4,708,000. The remainder 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 Nine Months Ended September 30, 1999 to the Nine Months Ended
- -------------------------------------------------------------------------------
September 30, 1998.
- -------------------
Average financial occupancy rates of the Operating Partnership's multifamily
Same Store Properties (properties owned by the Operating Partnership for each of
the nine months ended September 30, 1999 and 1998) increased to 96.6% for the
nine months ended September 30, 1999 from 96.0% for the nine months ended
September 30, 1998. The regional breakdown of financial occupancy for the
multifamily Same Store Properties for the nine months ended September 30, 1999
and 1998 are as follows:
September 30, September 30,
1999 1998
-------------- --------------
Northern California 97.4% 97.1%
Southern California 97.2% 96.2%
Pacific Northwest 95.0% 94.3%
The Operating Partnership's commercial property was 100% occupied (based on
square footage) as of September 30, 1999.
Total Revenues increased by $14,364,000 or 15.6% to $106,535,000 for the first
nine months of 1999 from $92,171,000 for the first nine months of 1998. The
following table sets forth a breakdown of these revenue amounts, including the
revenues attributable to the Same Store Properties.
Nine Months Ended
September 30,
Number of ----------------- Dollar Percentage
Properties 1999 1998 Change Change
---------- -------- ------- ------- -----------
Revenues
Property revenues Same Store
Properties
Northern California 12 $ 27,941 $26,848 $ 1,093 4.1%
Southern California 14 25,615 23,736 1,879 7.9
Pacific Northwest 18 23,089 22,028 1,061 4.8
Commercial 1 67 67 -- --
---- -------- ------- ------- -----
Total property revenues
Same Store Properties 45 76,712 72,679 4,033 5.5%
==
Property revenues properties
acquired/disposed of
subsequent to December 31, 1997 (1) 26,221 17,103 9,118 53.3
------ -------- ------- -------
Total property revenues 102,933 89,782 13,151 14.6
-------- -------- ------- -------
Interest and other income 3,602 2,389 1,213 50.8
-------- -------- ------- ------
Total revenues $106,535 $92,171 $14,364 15.6%
======== ======== ======= ======
(1) Also includes redevelopment communities and development communities.
18
As set forth in the above table, $9,118,000 of the $14,364,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to December 31, 1997, redevelopment communities and development communities.
During this period, the Operating Partnership acquired interests in 12
multifamily properties and reached stabilized operations at one wholly-owned
development community (the "Post-1997 Acquisition Properties"), and disposed of
one multifamily property, one commercial property and three retail shopping
centers (the "Post-1997 Disposition Properties").
Of the increase in total revenues, $4,033,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 5.5% to $76,712,000 in the
first nine months of 1999 from $72,679,000 in the first nine 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 $1,879,000 or 7.9% to $25,615,000 in first nine months of 1999 from
$23,736,000 in the first nine months of 1998. The $1,879,000 increase is
attributable to rental rate increases and the increase in financial occupancy to
97.2% in the first nine months of 1999 from 96.2% in the first nine months of
1998. The 12 multifamily Same Store Properties located in Northern California
accounted for the next largest regional component of the Same Store Properties
property revenues increase. The property revenues of these properties increased
by $1,093,000 or 4.1% to $27,941,000 in the first nine months of 1999 from
$26,848,000 in the first nine months of 1998. The $1,093,000 increase is
primarily attributable to rental rate increases and an increase in financial
occupancy to 97.4% in the first nine months of 1999 from 97.1% in first nine
months of 1998. The 18 multifamily residential properties located in the Pacific
Northwest also contributed to the Same Store Properties property revenues
increase. The property revenues of the these properties increased by $1,061,000
or 4.8% to $23,089,000 in the first nine months of 1999 from $22,028,000 in the
first nine months of 1998. This $1,061,000 increase is primarily attributable
to rental rate increases and the effect of the increase in financial occupancy
to 95.0% in the first nine months of 1999 from 94.3% in the first nine months of
1998. The increase in total revenue also reflected an increase of $1,213,000
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 $6,568,000 or approximately 10.5% to $69,081,000 in
the first nine months of 1999 from $62,513,000 in the first nine months of 1998.
Interest expense increased by $1,485,000 or 10.4% to $15,744,000 in the first
nine months from $14,259,000 in the first nine months 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 the capitalization
of interest charges on the Operating Partnership's development and redevelopment
communities. Property operating expenses, exclusive of depreciation and
amortization, increased by $2,274,000 or 8.1% to $30,328,000 in the first nine
months of 1999 from $28,054,000 in the first nine months of 1998. Of such
increase, $2,847,000 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 $377,000 in the first nine
months of 1999 from the amount for the first nine months of 1998. This increase
is largely due to additional staffing requirements resulting from the growth of
the Operating Partnership.
Net income increased by $13,056,000 to $41,583,000 in the first nine months of
1999 from $28,527,000 in the first nine months of 1998. Net income for the
first nine months of 1999 included a gain on the sale of real estate of
$4,708,000. The remainder 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 September 30, 1999, the Operating Partnership had $4,338,000 of unrestricted
cash and cash equivalents. The Operating Partnership expects to meet its short-
term liquidity requirements by using its working capital, cash generated from
operations and amounts available under lines of credit. The Operating
Partnership believes that its current net cash flows will be adequate to meet
operating requirements and to provide for payment of dividends by the Company in
accordance with REIT requirements. The Operating Partnership expects to meet its
long-term funding requirements relating to
19
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.
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 September 30, 1999 the
Operating Partnership had $57,200,000 outstanding on its line of credit, with
interest rates during the third quarter of 1999 ranging from 6.4% to 8.1%.
In addition to the unsecured line of credit, the Operating Partnership had
$379,463,000 of secured indebtedness at September 30, 1999. Such indebtedness
consisted of $320,643,000 in fixed rate debt with interest rates varying from
6.4% 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 nine months of 1999 of 5.5% and
maturity dates ranging from 2020 to 2026. A portion of the tax exempt variable
rate demand bonds, $45,220,000, is capped at a maximum interest rates ranging
from 7.1% to 7.3%.
The Operating Partnership's unrestricted cash balance increased by $1,790,000
from $2,548,000 as of December 31, 1998 to $4,338,000 as of September 30, 1999.
This increase was primarily a result of $114,426,000 of net cash provided by
financing activities and $61,328,000 of net cash provided by operating
activities, which was offset by $173,964,000 of net cash used in investing
activities. The $114,426,000 net cash provided by financing activities was
primarily a result of $216,650,000 of proceeds from mortgage and other notes
payable and lines of credit and $103,215,000 of proceeds from preferred unit
sales as offset by $157,302,000 of repayments of mortgages and other notes
payable and lines of credit and $39,203,000 of dividends/distributions paid. Of
the $173,964,000 net cash used in investing activities, $135,882,000 was used to
purchase and upgrade rental properties and $51,636,000 was used to fund real
estate under development.
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 eight multifamily residential
communities, with an aggregate of 1,500 multifamily units. Such projects
involve certain risks inherent in real estate development. See "Other
Matters/Risk Factors - Risks That Development Activities Will Be Delayed or Not
Completed" in Item 1 of the Operating Partnership's Annual Report on Form 10-K
for the year ended December 31, 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 $161,800,000. As of
September 30, 1999, the Operating Partnership's remaining commitment to fund the
estimated cost to complete is approximately $71,100,000. The Operating
Partnership expects to fund such commitments with a combination of its working
capital, operating cash flows, amounts available on its lines of credit, net
proceeds from public and private equity and debt issuances, and proceeds from
the disposition of properties, which may be sold from time to time. In the
third quarter of 1999, the Operating Partnership announced the commencement of
two new
20
development communities and also reached stabilized occupancy at two communities
that were previously reported as development communities.
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 $48,925,000. The net proceeds were used primarily
to reduce outstanding balances under the Operating Partnership's line of credit.
On September 3, 1999, The Operating Partnership completed the sale of 2,200,000
units of its 9.25% Series E 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 $53,400,000. The net proceeds were used primarily
to reduce outstanding balances under the Operating Partnership's line of credit.
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.
Readiness Disclosure for Year 2000
The Operating Partnership's State of Readiness. The Operating Partnership is
aware of the issues associated with the programming code in existing computer
systems as the millennium (Year 2000) approaches. The Year 2000 problem is
pervasive and complex, as virtually every computer operation will be affected by
the rollover of the two digit year value to 00. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. 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 results of
operations. As of September 30, 1999, no compliance costs have been incurred by
the Operating Partnership that would not otherwise been incurred in the normal
course of maintenance of the Operating Partnership's information systems. The
costs of any future assessment and remediation will be charged to 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.
21
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
Operating Partnership's presentation of Funds From Operations. The following
table sets forth the Operating Partnership's calculation of Funds from
Operations for the three and nine months ended September 30, 1999 and 1998.
Three months ended Nine months ended
------------------ -----------------
September 30 September 30 September 30 September 30
------------- ------------- ------------- -------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Income before
minority interests and
extraordinary item $13,426,000 $ 9,998,000 $37,454,000 $29,658,000
Adjustments:
Depreciation & amortization 7,084,000 5,575,000 19,376,000 15,876,000
Adjustment for unconsolidated
joint ventures 366,000 365,000 1,102,000 1,027,000
Provision for litigation loss -- 930,000 -- 930,000
Minority interests (1) (3,616,000) (1,754,000) (8,378,000) (4,353,000)
----------- ----------- ----------- -----------
Funds From Operations $17,260,000 $15,114,000 $49,554,000 $43,138,000
=========== =========== =========== ===========
Weighted average number
shares outstanding diluted (1) 20,573,866 20,523,466 20,500,206 20,516,925
=========== =========== =========== ===========
(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
22
fair value as of September 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)
$1,052 21,034 3,114 25,206 30,870 239,367 $320,643
Average interest rate 7.04% 7.04% 6.63% 6.63% 5.93% 5.93%
Variable rate LIBOR debt (In thousands)
$ - 57,200 - - - 58,820(1) $116,020
Average interest rate - 6.34% - - - 5.50%
(1) $45,220,000 is capped at maximum interest rates ranging from 7.1% to 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
6.15%-6.26% which limits interest rate exposure on certain future debt financing
and which will be settled in 2000. The fair value of these contracts as of
September 30, 1999 is approximately $635,000. Fair value represents the
estimated payments that would be made to terminate the agreement at September
30, 1999.
The four forward treasury contracts represent the exposures that exist as of
September 30, 1999. As firm commitments do not exist as of September 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 September 3, 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 2,200,000
9.25% Series E 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 $55 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 9.25% Series E
Cumulative Redeemable Preferred Stock, par value $.0001 per share (the
"Series E Preferred Stock"). Pursuant to the terms of a registration
rights agreement, entered into in connection with this private
placement, the holders of Series E Preferred Stock will have certain
rights to cause the Company to register such shares of Series E
Preferred Stock. On September 7, 1999, the Company filed Articles
Supplementary reclassifying 2,200,000 shares of its Common Stock, par
value $.0001 per share, as 2,200,000 shares of Series E Preferred Stock
and setting forth the rights, preference and privileges of the Series E
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) of the Securities Act of
1933, as amended.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
--------
3.1 Articles Supplementary reclassifying 2,200,000 shares of Common Stock
as 2,200,000 shares of 9.25% Series E Cumulative Redeemable Preferred
Stock, filed with the State of Maryland on September 9, 1999.
10.1 Fifth Amendment to the First Amended and Restated Agreement of
Limited Partnership of Essex Portfolio, L.P., dated September 3,
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 PORTFOLIO, L.P.
A California Limited Partnership
By: Essex Property Trust, Inc.
Its: General Partner
/s/ Mark J. Mikl, Controller
-------------------------------
Mark J. Mikl, Controller
(Authorized Officer and
Principal Accounting Officer)
November 12, 1999
---------------------
Date
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