FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 333-44467-01
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as specified in its Charter)
Maryland 77-0369575
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 East Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices)
(Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months for such shorter period that the Registrant was required
to file such report, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
-----
TABLE OF CONTENTS
FORM 10-Q
Part I Page No.
-------
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000 4
Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000 5
Consolidated Statements of Partners' Capital
for the three months ended March 31, 2001
and the year ended December 31, 2000 6
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and 2000 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosure About Market Risk 20
Part II
Item 2 Changes in Securities and Use of Proceeds 21
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
2
Part I Financial Information
---------------------
Item 1: Financial Statements (Unaudited)
--------------------------------
Essex Portfolio, L.P., a California limited partnership, (the "Operating
Partnership") effectively holds the assets and liabilities and conducts
the operating activities of Essex Property Trust, Inc. ("Essex" or the
"Company"). Essex Property Trust, Inc., a real estate investment trust
incorporated in the State of Maryland, is the sole general partner of
the Operating Partnership.
The information furnished in the accompanying consolidated unaudited
balance sheets, statements of operations, partners' capital and cash
flows of the Company reflects all adjustments which are, in the opinion
of management, necessary for a fair presentation of the aforementioned
financial statements for the interim periods.
The accompanying unaudited financial statements should be read in
conjunction with the notes to such financial statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
3
ESSEX PORTFOLIO, L.P.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
March 31, December 31,
Assets 2001 2000
------ ------------------- ----------------------
Real estate:
Rental properties:
Land and land improvements $ 287,842 $ 289,796
Buildings and improvements 862,242 866,612
------------------- ----------------------
1,150,084 1,156,408
Less accumulated depreciation (128,325) (119,499)
------------------- ----------------------
1,021,759 1,036,909
Investments 69,751 65,703
Real estate under development 50,678 38,231
------------------- ----------------------
1,142,188 1,140,843
Cash and cash equivalents-unrestricted 11,827 6,600
Cash and cash equivalents-restricted 18,430 18,965
Notes receivable from investees and other related parties 66,971 77,081
Notes and other receivables 26,487 24,062
Prepaid expenses and other assets 6,492 7,654
Deferred charges, net 6,638 6,644
------------------- ----------------------
$ 1,279,033 $ 1,281,849
=================== ======================
Liabilities and Partners' Capital
---------------------------------
Mortgage notes payable $ 539,171 $ 502,066
Lines of credit 44,733 93,469
Accounts payable and accrued liabilities 26,873 30,430
Distributions payable 16,495 14,538
Other liabilities 6,375 6,539
Deferred gain 5,002 5,002
------------------- ----------------------
Total liabilities 638,649 652,044
Minority interests 6,337 364
Partners' capital:
General Partner:
Common equity 390,796 391,675
Preferred equity - -
------------------- ----------------------
390,796 391,675
Limited Partners:
Common equity 38,761 33,276
Preferred equity 204,490 204,490
------------------- ----------------------
243,251 237,766
------------------- ----------------------
Total partners' capital 634,047 629,441
------------------- ----------------------
Total liabilities and partners' capital $ 1,279,033 $ 1,281,849
=================== ======================
See accompanying notes to the consolidated unaudited financial statements.
4
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit amounts)
Three months ended
-------------------------------------------------
March 31, March 31,
2001 2000
---------------------- ---------------------
Revenues:
Rental $ 44,591 $ 36,846
Other property 1,459 954
---------------------- ---------------------
Total property 46,050 37,800
Interest and other 4,060 1,736
---------------------- ---------------------
Total revenues 50,110 39,536
---------------------- ---------------------
Expenses:
Property operating expenses
Maintenance and repairs 2,741 2,151
Real estate taxes 3,081 2,598
Utilities 2,489 2,056
Administrative 3,623 3,332
Advertising 710 497
Insurance 262 221
Depreciation and amortization 8,826 6,667
---------------------- ---------------------
21,732 17,522
Interest 9,424 5,808
Amortization of deferred financing costs 160 159
General and administrative 1,874 1,125
---------------------- ---------------------
Total expenses 33,190 24,614
---------------------- ---------------------
Income before gain on the sales of real estate
and minority interests 16,920 14,922
Gain on the sales of real estate - 4,022
---------------------- ---------------------
Income before minority interests 16,920 18,944
Minority interests (25) (146)
---------------------- ---------------------
Net income 16,895 18,798
Dividends on preferred units-general partner - (117)
Dividends on preferred units-limited partner (4,580) (4,580)
---------------------- ---------------------
Net income available to common units $ 12,315 $ 14,101
====================== =====================
Per operating partnership unit data:
Basic:
Net income $ 0.60 $ 0.70
====================== =====================
Weighted average number of partnership
units outstanding during the period 20,539,690 20,146,833
====================== =====================
Diluted:
Net income $ 0.59 $ 0.69
====================== =====================
Weighted average number of partnership
units outstanding during the period 20,922,186 20,578,898
====================== =====================
Distributions per Operating Partnership common unit $ 0.70 $ 0.55
====================== =====================
See accompanying notes to the consolidated unaudited financial statements.
5
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
For the three months ended March 31, 2001 and the
year ended December 31, 2000
(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,
1999 18,050 $383,379 $4,314 2,082 $31,420 $204,490 $623,603
------ -------- ------ ----- ------- -------- --------
S
Contribution-net proceeds
from options exercised 156 3,344 - - - - 3,344
Common units issued from
conversion of Convertible
Preferred Stock 211 4,314 (4,314) - - - -
Redemption of limited partner
common units - - - (12) (555) - (555)
Issuance of limited partner
common units - - - 59 2,365 - 2,365
Net income - 44,105 245 - 5,062 18,319 67,731
Partners' distributions - (43,467) (245) - (5,016) (18,319) (67,047)
------ -------- ------ ----- ------- -------- --------
Balances at December 31,
2000 18,417 391,675 - 2,129 33,276 204,490 629,441
Contribution-net proceeds
from options exercised 39 990 - - - - 990
Redemption of limited partner
common units - - - (42) (2,210) - (2,210)
Issuance of limited partner
common units - - - 158 8,000 - 8,000
Net income - 11,049 - - 1,266 4,580 16,895
Partners' distributions - (12,918) - - (1,571) (4,580) (19,069)
------ -------- ------ ----- ------- -------- --------
Balances at March 31,
2001 18,456 $390,796 $ - 2,245 $38,761 $204,490 $634,047
====== ======== ====== ===== ======= ======== ========
6
ESSEX PORTFOLIO, L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three months ended
-------------------------------------------
March 31, March 31,
2001 2000
------------------ -----------------
Net cash provided by operating activities: $ 22,877 $ 22,032
------------------ -----------------
Cash flows from investing activities:
Additions to real estate (8,139) (5,548)
Proceeds received from the disposition of real estate - 31,302
Proceeds received from contribution of real estate to
corporate investee 15,987 -
Decrease / (increase) in restricted cash 535 (866)
Additions to notes receivable from investees, other related
parties and other receivables (6,547) (2,000)
Repayment of notes receivable from investees, other related
parties and other receivables 12,401 2,036
Additions to real estate under development (6,447) (9,526)
Net (contribution to) / distributions from investments
in corporations and limited partnerships (1,325) (605)
------------------ -------------------
Net cash provided by investing activities 6,465 14,793
------------------ -------------------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 72,000 17,000
Repayment of mortgage and other notes payable
and lines of credit (83,631) (28,191)
Additions to deferred charges (154) -
Net proceeds from stock options exercised and shares
issued through dividend reinvestment plan 990 1,080
Contributions from minority interest partners 6,000 -
Distributions to minority interest and limited partners (5,879) (5,768)
Redemption of operating partnership units (2,207) (164)
Distributions to general partner (11,234) (10,044)
------------------ -------------------
Net cash used in financing activities (24,115) (26,087)
------------------ -------------------
Net (decrease) in cash and cash equivalents 5,227 10,738
Cash and cash equivalents at beginning of period 6,600 12,348
------------------ -------------------
Cash and cash equivalents at end of period $ 11,827 $ 23,086
================== ===================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of $722 and
$656 capitalized $ 9,742 $ 3,446
================== ===================
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of Operating Partnership Units in
connection with the purchase of real estate $ 8,000 $ -
================== =====================
Exchange of related party notes receivable for investments $ 8,347 $ -
================== =====================
Contribution of real estate in exchange for notes receivable $ 6,571 $ -
================== =====================
Consolidation of previously unconsolidated investment $ 6,000 $ -
================== =====================
See accompanying notes to consolidated unaudited financial statements.
7
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(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, 2000.
The Company is the sole general partner in the Operating Partnership, owning
an 89.2%, 89.6% and 89.7% general partnership interest as March 31, 2001,
December 31, 2000 and March 31, 2000, respectively.
As of March 31, 2001, the Operating Partnership operates and has ownership
interests in 83 multifamily properties (containing 18,673 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 March 22, 2001, in connection with the acquisition of The Carlyle
Apartments in April 2000, Essex issued 158,202 Operating Partnership units
convertible into Common Stock at the option of the holder. This was the
final payment and was based on an amount that provides Essex with a targeted
yield on the property. Total consideration paid for the property was
$26,500.
8
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(B) Development Communities
--- -----------------------
The Operating Partnership defines development communities as new apartment
properties that are being constructed or are newly constructed and in a
phase of lease-up and have not yet reached stabilized operations. At March
31, 2001, the Operating Partnership has ownership interests in six
development communities, with an aggregate of 1,673 multifamily units.
During the first quarter, the Operating Partnership announced one new
development community, Parker Ranch, in which the Operating Partnership has
entered into a joint venture agreement to develop a 324 unit multifamily
community in Simi Valley, California. The Operating Partnership has a 50%
partnership interest in this venture.
In connection with the properties currently under development, the Operating
Partnership has directly, or in some cases through its joint ventures,
entered into contractual construction related commitments with unrelated
third parties. At March 31, 2001, the Operating Partnership, together with
its joint venture partners, is committed to fund approximately $102,000
under these commitments.
(C) Redevelopment Communities
--- -------------------------
The Operating Partnership defines redevelopment communities as existing
properties owned or recently acquired which have been targeted for
investment by the Operating Partnership with the expectation of increased
financial returns through property improvement. Redevelopment communities
typically have apartment units that are not available for rent and, as a
result, may have less than stabilized operations. At March 31, 2001, the
Operating Partnership has ownership interests in four redevelopment
communities, which contain an aggregate of 1,632 units with total originally
projected investment of $27,343 of which approximately $6,500 remains to be
expended.
(D) Debt Transactions
--- -----------------
On January 31, 2001 Essex VFGP, Inc. (VFGP), one of the Operating
Partnership's corporate investees, entered into three separate long-term
non-recourse mortgages totaling $28,530. Each loan is secured by one
property. These properties were previously unencumbered. The loans bear
interest at fixed rates ranging from 6.945% to 7.090% and are due in
February 2011. The properties encumbered were Hunt Club, El Encanto and
Rosebeach Apartments. VFGP plans to contribute these properties, together
with others, to a joint venture that it is planning to form in the future.
The Operating Partnership's investment in these assets is reflected in the
Operating Partnership's consolidated financial statements as notes
receivable from investees and other related parties and investments.
On March 12, 2001, the Operating Partnership entered into a $56,000 long-
term non-recourse mortgage secured by a previously unencumbered property.
The loan bears interest at a fixed rate of 6.76% and is due in March 2011.
The proceeds from these loans were used to repay a variable rate
construction loan (approximately $18,000) and to reduce outstanding balances
under the Operating Partnership's unsecured lines of credit.
9
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(E) Other Items
---------------
On March 1, 2001 the Operating Partnership purchased Clarewood Office
Building, an approximately 39,000 square foot office building in Woodland
Hills, California for a contract price of $4,500. The Operating Partnership
plans to initially occupy approximately 7,000 square feet. The Operating
Partnership's employees that will occupy this space with be certain Southern
California property operations, development, redevelopment and accounting
personnel. The building has eleven third party tenants occupying
approximately 28,700 feet. The largest single tenant occupies approximately
10,900 square feet.
Acquisition and development and redevelopment and other activities for the
first quarter of 2001 were funded through the issuance of Operating
Partnership interests and financings as noted above and the Operating
Partnership's lines of credit.
(3) Related Party Transactions
--------------------------
All general and administrative expenses of the Company, the Operating
Partnership and Essex Management Corporation, an unconsolidated preferred
stock subsidiary of the Company ("EMC"), are initially borne by the
Operating Partnership, with a portion subsequently allocated to EMC.
Expenses allocated to EMC for the three months ended March 31, 2001 and 2000
totaled $430 and $233, respectively. The allocation is reflected as a
reduction in general and administrative expenses in the accompanying
consolidated statements of operations.
Other income includes interest income of $901 and $122 for the three months
ended March 31, 2001 and 2000, respectively. The majority of interest income
was earned on the notes receivable investees. Other income also includes
management fee income and investment income from the Operating Partnership's
investees of $344 and $474 for the three months ended March 31, 2001 and
2000, respectively.
10
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
Notes receivables from investees and other related parties as of March 31,
2001 and December 31, 2000 consist of the following:
March 31, December 31,
------------ ------------
2001 2000
------------ ------------
Notes receivable from joint ventures investees:
Notes receivable from VFGP L.P.'s, secured,
bearing interest at 9% - Prime + 3%, due 2001-2010 $ 40,413 $ 47,840
Note receivable from Highridge Apartments, secured,
bearing interest at 9%, due March 2008 1,047 1,047
Note receivable from Highridge Apartments, secured,
bearing interest at 10%, due on demand 2,950 2,950
Note receivable from Fidelity 1, secured
bearing interest at LIBOR = 2.5%, due 2004 6,511 5,613
Receivables from Down REIT entities, noninterest bearing,
due on demand - 8,281
Receivable from Newport Beach North LLC and Newport Beach
South LLC, noninterest bearing, due on demand 2,179 1,753
Receivable from City Heights LP, noninterest bearing,
due on demand 865 865
Receivables from VFGP L.P.s, non interest bearing, due on demand 8,422 4,804
Other related party receivables:
Loans to officers, secured, bearing interest at 8%, due April 2006 633 633
Other related party receivables, substantially due on demand 3,951 3,295
------------ ------------
$ 66,971 $ 77,081
============ ============
Other related party receivables consist primarily of accrued interest income
on notes receivable from joint venture investees and loans to officers,
advances and accrued management fees from joint venture investees and
unreimbursed expenses due from EMC.
(4) New Accounting Pronouncements
-----------------------------
The Operating Partnership has adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities." effective January 1, 2001. Under the
SFAS 133 derivative instruments are required to be included in the balance
sheet at fair value. The changes in the fair value of the derivatives are
accounted for depending on the use of the derivative and whether it has
been designated and qualifies as a part of hedging relationship. If the
hedged exposure is a cash flow exposure, the effective portion of the gain
or loss on the derivative instrument is reported initially as a component
of other comprehensive income and subsequently reclassified into earnings
when the forecasted transaction affects earnings. The ineffective portion
of the gain or loss is reported in earnings immediately. The difference
between a derivative's previous carrying amount and its fair value is
recorded as a transition adjustment, which will be allocated between net
income and other comprehensive income based on the entity's strategy for
assessing the effectiveness of the hedge.
11
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
During 1996 and 1999, the Operating Partnership purchased interest rate cap
contracts in order to reduce the risks associated with increases in
interest rates on its tax exempt variable rate demand bonds. The Operating
Partnership has the right to receive cash if interest rates increase above
a specified level. The purpose of the caps is to hedge the exposure to
variability in expected future interest cash flows above a fixed interest
rate, and, accordingly, they are accounted for as cash flow hedges under
SFAS 133. The Operating Partnership determines the fair value of the caps
and assesses the ineffectiveness of the hedge based on changes in the time
value of the caps. As of January 1, 2001, there were no changes in the
intrinsic value of the caps since the date the caps were purchased, and the
changes in fair value of the caps is attributable entirely to changes in
time value. The amortized cost of the cap contracts exceeded their fair
value by approximately $450,000, which resulted in a transition adjustment
(charge to earnings) of that amount in the quarter ended March 31, 2001.
(5) Segment Information
-------------------
The Operating Partnership defines its reportable operating segments as the
three geographical regions in which its properties are located: Northern
California, Southern California and the Pacific Northwest. Excluded from
segment revenues are interest and other corporate income. Other non-segment
assets include investments, real estate under development, cash,
receivables and other assets. The revenues, net operating income, and
assets for each of the reportable operating segments are summarized as
follows for the periods presented.
Three months ended
March 31, 2001 March 31, 2000
-------------- --------------
Revenues
Northern California $ 16,727 $ 12,636
Southern California 17,936 15,773
Pacific Northwest 11,387 9,391
-------------- --------------
Total segment revenues 46,050 37,800
Interest and other income 4,060 1,736
-------------- --------------
Total revenues $ 50,110 $ 39,536
============== ==============
Net operating income:
Northern California $ 13,017 9,824
Southern California 12,343 10,690
Pacific Northwest 7,784 6,431
-------------- --------------
Total segment net operating income 33,144 26,945
Interest and other income 4,060 1,736
Depreciation and amortization (8,826) (6,667)
Interest (9,424) (5,808)
Amortization of deferred financing costs (160) (159)
General and administrative (1,874) (1,125)
-------------- --------------
Income before gain on the sales of real
estate, minority interests and
extraordinary item $ 16,920 $ 14,922
============== ==============
March 31, 2001 December 31, 2000
-------------- ------------------
Assets:
Northern California $ 295,711 $ 289,839
Southern California 459,952 478,835
Pacific Northwest 266,096 268,235
-------------- ------------------
Total segment net real estate assets 1,021,759 1,036,909
Non-segment assets 257,274 244,940
-------------- ------------------
Total assets $ 1,279,033 $ 1,281,849
============== ==================
12
Notes to Consolidated Financial Statements
March 31, 2001 and 2000
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(6) Net Income Per Unit
Three months ended Three months ended
March 31, 2001 March 31, 2000
----------------------------------- -----------------------------------
Weighted Per Weighted Per
Average Unit Average Unit
Income Units Amount Income Units Amount
Net Income $11,049 $ 12,750
Less: dividends on general and limited
partner preferred equity - (117)
------- -----------
Basic:
Income available to
common units 11,049 18,427 $ 0.60 12,633 18,068 $ 0.70
------- ------- ------- ---------- ------ ------
Effect of Dilutive Securities:
Convertible limited partnership
units - - (1) - - (1)
Convertible preferred stock - - 117 211
Stock options - 383 - 221
------- ------- ---------- ------
Diluted:
Income available to common
units plus assumed
conversions $11,049 18,810 $ 0.59 $ 12,750 18,500 $ 0.69
======= ======= ======= ========== ====== ======
_____________________________
(1) Securities not included because they were anti-dilutive.
13
Item 2: Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations
---------------------
The following discussion is based primarily on the consolidated unaudited
financial statements of Essex Portfolio, L.P. (the "Operating Partnership") for
the three and nine months ended March 31, 2001 and 2000. 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 presentation of financial position and operating 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 March 31, 2001, December 31, 2000 and March 31, 2000,
owed an 89.2%, 89.6% and 89.7% 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, 2001, 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, 2000, 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 99% of its
property revenues for the three months ended March 31, 2001 and 2000. 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.
14
Since the Operating Partnership began operations in June 1994, the Operating
Partnership has acquired ownership interests in 68 multifamily residential
properties and its headquarters building. Of the multifamily properties
acquired since the Operating Partnership began operations, 145 are located in
Northern California, 35 are located in Southern California, 15 are located in
the Seattle, Washington metropolitan area and four is located in the Portland,
Oregon metropolitan area. In total, these acquisitions consist of 14,767
multifamily units with total capitalized acquisition costs of approximately
$1,181.5 million. Additionally since it began operations, the Operating
Partnership has developed and has ownership interests in eight multifamily
development properties that have reached stabilized operations. These
development properties consist of 1,540 units with total capitalized development
costs of $180.6 million. As part of its active portfolio management strategy,
the Operating Partnership has disposed of, since it began operations, 8
multifamily residential properties (six in Northern California, one in Southern
California and one in the Pacific Northwest) consisting of a total of 1,021
units, 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 $116.4 million resulting in total net realized gains of
approximately $27.2 million and a deferred gain of $5.0 million.
The Operating Partnership is currently developing six multifamily residential
communities, with an aggregate of 1,673 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 $208.4
million. As of March 31, 2001, together with its joint venture partners, the
Operating Partnership's remaining development commitment is approximately $101.5
million.
Results of Operations
Comparison of the Three Months Ended March 31, 2001 to the Three Months Ended
- -----------------------------------------------------------------------------
March 31, 2000
- --------------
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 March 31, 2001 and 2000) was 96.2% for the
three months ended March 31, 2001 and 96.2% for the three months ended March 31,
2000. "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 March 31,
2001 and 2000 are as follows:
March 31, March 31,
2001 2000
---- ----
Southern California 95.7% 96.3%
Northern California 97.0% 97.3%
Pacific Northwest 95.4% 94.6%
15
Total Revenues increased by $10,574,000 or 26.7% to $50,110,000 in the first
quarter of 2001 from $39,536,000 in the first quarter of 2000. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to the Quarterly Same Store Properties.
Three Months Ended
March 31,
Number of ------------------------------ Dollar Percentage
Properties 2001 2000 Change Change
---------- ------------ ------------ ------------ -----------
Revenues
Property revenues Quarterly
Same Store Properties
Southern California 17 $ 11,381 $ 10,666 $ 715 6.7%
Northern California 14 14,478 12,212 2,266 18.6
Pacific Northwest 19 8,999 8,409 590 7.0
---------- ------------ ------------ ------------ -----------
Properties 50 34,858 31,287 3,571 11.4
----------
Property revenues properties
acquired/disposed of
subsequent to December 31, 1999 11,192 6,513 4,679 71.8
------------ ------------ ------------ -----------
Total property revenues (1) 46,050 37,800 8,250 21.8
------------ ------------ ------------ -----------
Interest and other income 4,060 1,736 2,324 133.9
------------ ------------ ------------ -----------
Total revenues $ 50,110 $ 39,536 $ 10,574 26.7%
============ ============ ============ ===========
__________________________________
(1) Also includes two commercial properties, redevelopment communities, and
development communities.
As set forth in the above table, $4,679,000 of the $10,574,000 net increase in
total revenues is attributable to properties acquired or disposed of subsequent
to December 31, 1999, redevelopment communities, development communities and two
commercial properties. During this period, the Operating Partnership acquired
interests in twelve multifamily properties and reached stabilized operations at
five development communities (the "Quarterly Acquisition Properties") and
disposed of one multifamily property (the "Quarterly Disposition Properties").
Of the increase in total revenues, $3,571,000 is attributable to increases in
property revenues from the Quarterly Same Store Properties. Property revenues
from the Quarterly Same Store Properties increased by approximately 11.4% to
$34,858,000 in the first quarter of 2001 from $31,287,000 in the first quarter
of 2000. The majority of this increase was attributable to the 14 Quarterly
Same Store Properties located in Northern California. The property revenues of
the Quarterly Same Store Properties in Northern California increased by
$2,266,000 or 18.6% to $14,478,000 in the first quarter of 2001 from $12,212,000
in the first quarter of 2000. This $2,266,000 increase is primarily
attributable to rental rate increases offset by a decrease in financial
occupancy to 97.0% in the first quarter of 2001 from 97.3% in the first quarter
of 2000. The 17 Quarterly Same Store Properties located in Southern California
accounted for the next largest regional component of the Quarterly Same Store
Property revenue increase. The property revenues of these properties increased
by $715,000 or 6.7% to $11,381,000 in the first quarter of 2001 from $10,666,000
in the first quarter of 2000. The $715,000 increase is attributable to rental
rate increases offset by a decrease in financial occupancy to 95.7% in the first
quarter of 2001 from 96.3% in the first quarter of 2000. The 19 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 $590,000 or 7.0% to $8,999,000 in the
first quarter of 2001 from $8,409,000 in the first quarter of 2000. The
$590,000 increase is primarily attributable to rental rate increase and an
increase in financial occupancy to 95.4% in the first quarter of 2001 from 94.6%
in the first quarter of 2000. The increase in total revenue also reflected an
increase of $2,324,000 attributable to interest and other income, which
primarily relates to interest income on notes receivables and income earned on
the Operating Partnership's joint venture investments.
16
Total Expenses increased by $8,576,000 or approximately 34.8% to $33,190,000 in
the first quarter of 2001 from $24,614,000 in the first quarter of 2000.
Interest expense increased by $3,616,000 or 62.3% to $9,424,000 in the first
quarter of 2001 from $5,808,000 in the first quarter of 2000. Such increase was
primarily due to the net addition of outstanding mortgage debt in connection
with property and investment acquisitions which was offset in part by
capitalization of interest charges relating to the Operating Partnership's
development and redevelopment communities. Property operating expenses,
exclusive of depreciation and amortization, increased by $2,051,000 or 18.9% to
$12,906,000 in the first quarter of 2001 from $10,855,000 in the first quarter
of 2000. Of such increase, $1,525,000 was attributable to the Quarterly
Acquisition Properties and the Disposition Properties. Depreciation and
amortization increased by $2,159,000 or approximately 32.4% to $8,826,000 in the
first quarter of 2001 from $6,667,000 in the first quarter of 2000, primarily
due to the acquisition of assets during that period.
General and administrative expenses represent 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 $749,000 in the first quarter of 2001 from the amount for the first quarter
of 2000. This increase is largely due to additional staffing requirements
resulting from the growth of the Operating Partnership as offset by an increase
in the allocation of general and administrative expenses to EMC.
Net income decreased by $1,701,000 to $11,049,000 in the first quarter of 2001
from $12,750,000 in the first quarter of 2000. This decrease is primarily
attributable to the gain on the sales of real estate of $4,022,000 in the first
quarter of 2000. There was no gain on the sales of real estate in the first
quarter of 2001. This decrease was offset by the net contribution of the
Quarterly Acquisition Properties and the increase in net operating income from
the Quarterly Same Store Properties.
Liquidity and Capital Resources
At March 31, 2001 the Operating Partnership had $11,827,000 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 qualification 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 its line 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 its line 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 two outstanding unsecured lines of credit for an
aggregate amount of $150,000,000. The first line, in the amount of $120,000,000,
matures in May 2002, with an option to extend it for one year thereafter.
Outstanding balances under this line of credit bear interest at a rate which
uses a tiered rate structure tied to the Operating Partnership's corporate
ratings, if any, and leverage rating which has been priced at LIBOR plus 1.15%
during its term. At March 31, 2001 the Operating Partnership had $44,733,000
outstanding on this line of credit. A second line of credit in the amount of
$30,000,000 matures in August 2001, with an option to extend for one year
thereafter. Outstanding balances, if any, on this second line bear interest
based on a tiered rate structure currently at LIBOR plus 1.175%. At March 31,
2001 the Operating Partnership had no outstanding balances on this line of
credit. During the quarter ended March 31, 2001, the Operating Partnership had
outstanding balances which bore interest rates of approximately 5.9%.
17
In addition to the unsecured line of credit, the Operating Partnership had
$539,171,000 of secured indebtedness at March 31, 2001. Such indebtedness
consisted of $480,351,000 in fixed rate debt with interest rates varying from
6.6% to 8.8% and maturity dates ranging from 2002 to 2026. The indebtedness
also included $58,820,000 of debt represented by tax exempt variable rate demand
bonds with interest rates paid during the first quarter of 2001 ranging from
4.0% to 5.5% and maturity dates ranging from 2020 to 2026. The tax-exempt
variable rate demand bonds are capped at interest rates ranging from 7.1% to
7.3%.
The Operating Partnership's unrestricted cash balance increased by $5,227,000
from $6,600,000 as of December 31, 2000 to $11,827,000 as of March 31, 2001.
This increase was primarily a result of net cash provided by operating
activities and $6,465,000 of net cash provided by investing activities, which
was offset by $24,115,000 if net cash used in financing activities. Of the
$24,115,000 of net cash used in financing activities, $83,631,000 were
repayments of mortgage and other notes payable and lines of credit, which was
off set by $72,000,000 received in proceeds from mortgage and other notes
payable and lines of credit and $11,234,000 of dividends/distributions paid.
The $6,465,000 of net cash provided by investing activities was primarily a
result of $15,987,000 in proceeds received from contribution of real estate to
corporate investee, $12,401,000 of additions to related party notes and other
receivables, which was offset by $8,139,000 used to purchase and upgrade rental
properties.
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 $330 per weighted average occupancy unit in non-
revenue generating capital expenditures for the year ended December 31, 2001.
These expenditures do not include the improvements required in connection with
the origination of mortgage loans, expenditures for renovations and improvements
on recently acquired properties 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 2001 and/or the funding
thereof will not be significantly different than the Operating Partnership's
current expectations.
The Operating Partnership is developing six multifamily residential communities,
with an aggregate of 1,673 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, 2000. 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 a total amount of approximately $208,400,000. As of March 31, 2001,
the Operating Partnership's remaining commitment to fund the estimated cost to
complete is approximately $101,500,000. 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. During the first quarter of
2001, the Operating Partnership announced one new development project.
Pursuant to existing shelf registration statements, the Company has the capacity
to issue up to $342,000,000 of equity securities and the Operating Partnership
has the capacity to issue up to $250,000,000 of debt securities.
The Operating Partnership pays quarterly 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 line of credit.
18
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 code. Generally, Funds From Operations adjusts
the net income of equity REITs for non-cash charges such as depreciation and
amortization of rental properties, gains/losses on sales of real estate property
and extraordinary items. 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 ended March 31, 2001 and 2000.
Three months ended
--------------------------
March March
------------ ------------
31, 2001 31, 2000
------------ ------------
Income before gain on the sales of
real estate and minority interests $16,920,000 $14,922,000
Adjustments:
Depreciation and amortization 8,826,000 6,667,000
Unconsolidated joint ventures 1,237,000 1,009,000
Minority interests (1) (4,605,000) (4,726,000)
----------- -----------
Funds From Operations $22,378,000 $17,872,000
=========== ===========
Weighted average number
shares outstanding diluted (1) 20,922,186 20,578,898
=========== ===========
______________________
(1) Assumes conversion of all outstanding operating partnership interests in
the Operating Partnership. Minority interests have been adjusted to reflect
such conversion.
19
Item 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Operating Partnership is exposed to interest rate changes primarily as a
result of its line of credit and long-term debt used to maintain liquidity and
fund capital expenditures and expansion of the Operating Partnership's real
estate investment portfolio and operations. The Operating Partnership's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives the Operating Partnership borrows primarily at fixed
rates and may enter into derivative financial instruments such as interest rate
swaps, caps and treasury locks in order to mitigate its interest rate risk on a
related financial instrument. The Operating Partnership does not enter into
derivative or interest rate transactions for speculative purposes.
The Operating Partnership's interest rate risk is monitored using a variety of
techniques. The table below presents the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes. The Operating Partnership believes
that the principal amounts of the Operating Partnership's mortgage notes payable
and line of credit approximate fair value as of March 31, 2001 as interest rates
and other terms are consistent with yields currently available to the Operating
Partnership for similar instruments.
For Year Ended: 2001 2002 2003 2004 2005 Thereafter Total
- --------------- ------- ------ ------ ------ ------ ---------- ---------
Fixed rate debt (In thousands)
Amount $ 2,372 11,396 20,842 2,888 34,861 407,992 $ 480,351
Average interest rate 7.3% 7.2% 7.2% 7.3% 6.8% 6.8%
Variable rate LIBOR debt (In thousands)
Amount $ - 44,733 - - - 58,820 (1) $ 103,553
Average interest - 6.0% - - - 5.50%
______________________
(1) Capped at interest rates ranging from 7.1% to 7.3%.
The Operating Partnership does not have any exposures related to forward
contracts at March 31, 2001.
20
Part II Other Information
- ------- -----------------
Item 2: Changes in Securities and Use of Proceeds
Recent sales of unregistered securities
---------------------------------------
On March 22, 2001, in connection with the acquisition of The
Carlyle Apartments in April 2000, Essex issued 158,202 Operating
Partnership units, which are convertible into common stock of
Essex at the option of the holder. This private placement of
operating partnership units 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
--------
None
B. Reports on Form 8-K
-------------------
None
21
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESSEX PROPERTY TRUST, INC.
/S/ MARK J. MIKL
----------------
Mark J. Mikl, Vice President
and Controller
(Authorized Officer and
Principal Accounting Officer)
May 10, 2001
------------
Date
22