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. 1-13106 ESSEX PROPERTY TRUST, INC. (Exact name of Registrant as specified in its Charter) Maryland 77-0369576 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 925 East Meadow Drive, Palo Alto, California 94303 (Address of principal executive offices) (Zip code) (650) 494-3700 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months for such shorter period that the Registrant was required to file such report, and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: 18,456,841 shares of Common Stock as of May 1, 2001
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 Stockholders' Equity 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" or the "Company" means Essex Property Trust, Inc., a real estate investment trust incorporated in the State of Maryland, or where the context otherwise requires, Essex Portfolio, L.P., a limited partnership in which Essex Property Trust, Inc. is the sole general partner. The information furnished in the accompanying consolidated unaudited balance sheets, statements of operations, stockholders' equity and cash flows of the Company reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned financial statements for the interim periods. The accompanying unaudited financial statements should be read in conjunction with the notes to such financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 3
ESSEX PROPERTY TRUST, INC. Consolidated Balance Sheets (Unaudited) (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> March 31, December 31, Assets 2001 2000 ------ -------- ------------ <S> <C> <C> 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 Stockholders' Equity ------------------------------------ Mortgage notes payable $ 539,171 $ 502,066 Lines of credit 44,733 93,469 Accounts payable and accrued liabilities 26,873 30,430 Dividends 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 249,588 238,130 Stockholders' equity: 8.75% Convertible Preferred Stock, Series 1996A: $.0001 par value, no shares authorized, issued and outstanding - - Common stock, $.0001 par value, 656,682,178 and 656,682,178 authorized, 18,455,841 and 18,417,013 issued and outstanding 2 2 Cumulative redeemable preferred stock; $.0001 par value, no shares issued and outstanding: 7.875% Series B 2,000,000 shares authorized - - 9.125% Series C 500,000 shares authorized - - 9.30% Series D 2,000,000 shares authorized - - 9.25% Series E 2,200,000 shares authorized - - Excess stock, $.0001 par value, 330,000,000 shares authorized and no shares issued and outstanding - - Additional paid-in capital 429,423 428,433 Distributions in excess of accumulated earnings (38,629) (36,760) -------------- -------------- Total stockholders' equity 390,796 391,675 -------------- -------------- $ 1,279,033 $ 1,281,849 ============== ============== See accompanying notes to the consolidated unaudited financial statements. </TABLE>
ESSEX PROPERTY TRUST, INC. Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> Three months ended --------------------------------- March 31, March 31, 2001 2000 --------- -------- <S> <C> <C> 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 (5,871) (6,194) ------------ ------------ Net income 11,049 12,750 Preferred stock dividends - (117) ------------ ------------ Net income available to common stockholders $ 11,049 $ 12,633 ============ ============ Per share data: Basic: Net income $ 0.60 $ 0.70 ============ ============ Weighted average number of shares outstanding during the period 18,427,644 18,067,694 ============ ============ Diluted: Net income $ 0.59 $ 0.69 ============ ============ Weighted average number of shares outstanding during the period 18,810,140 18,499,759 ============ ============ Dividend per share $ 0.70 $ 0.55 ============ ============ See accompanying notes to the consolidated unaudited financial statements. </TABLE>
ESSEX PROPERTY TRUST, INC. Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2001 and the year ended December 31, 2000 (Unaudited) (Dollars and shares in thousands) <TABLE> <CAPTION> Distributions Preferred stock Common stock Additional in excess of --------------- --------------- paid-in accumulated Shares Amount Shares Amount capital earnings Total ------ ------ ------ ------ ------------ ---------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 1999 185 $ 1 18,050 $ 2 $ 425,089 $ (37,399) $ 387,693 Shares issued on conversion of Convertible Preferred Stock (185) (1) 211 - - (1) Net proceeds from options exercised - - 156 3,344 - 3,344 Net income - - - - 44,353 44,353 Dividends declared - - - - (43,714) (43,714) -------- -------- ------- ----- ---------- --------- --------- Balances at December 31, 2000 - - 18,417 2 428,433 (36,760) 391,675 Net proceeds from options exercised - - 39 990 - 990 Net income - - - - 11,049 11,049 Dividends declared - - - - (12,918) (12,918) -------- -------- ------- ----- ---------- --------- --------- Balances at March 31, 2001 - $ - 18,456 $ 2 $ 429,423 $ (38,629) $ 390,796 ======== ======== ======= ===== ========== ========= ========= See accompanying notes to the consolidated unaudited financial statements </TABLE>
ESESSEX PROPERTY TRUST, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> Three months ended ------------------------------------------ March 31, March 31, 2001 2000 ----------------- --------------- <S> <C> <C> 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 (6,547) (9,526) Net contribution to 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 partners (5,879) (5,768) Redemption of operating partnership units (2,207) (164) Dividends paid (11,234) (10,044) ----------------- --------------- Net cash used in financing activities (24,115) (26,087) ----------------- --------------- Net increase 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. </TABLE>
Notes to Consolidated Financial Statements March 31, 2001 and 2000 (Unaudited) (Dollars in thousands, except for per share an per unit amounts) (1) Organization and Basis of Presentation -------------------------------------- The unaudited consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2000. The unaudited consolidated financial statements for the three months ended March 31, 2001 and 2000 include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating assets of the Company). The Company is the sole general partner in the Operating Partnership, owning an 89.2%, 89.6% and 89.7% general partnership interest as of March 31, 2001, December 31, 2000 and March 31, 2000, respectively. As of March 31, 2001, the Company 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. (B) Development Communities ---------------------------- The Company 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 Company has ownership interests in six development communities, with an aggregate of 1,673 multifamily units. During the first quarter, the Company announced one new development community, Parker Ranch, in which the Company has entered into a joint venture agreement to develop a 324 unit multifamily community in Simi Valley, California. The Company has a 50% partnership interest in this venture. 8
Notes to Consolidated Financial Statements March 31, 2001 and 2000 (Unaudited) (Dollars in thousands, except for per share an per unit amounts) In connection with the properties currently under development, the Company 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 Company, together with its joint venture partners, is committed to fund approximately $102,000 under these commitments. (C) Redevelopment Communities ------------------------------ The Company defines redevelopment communities as existing properties owned or recently acquired which have been targeted for investment by the Company 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 Company 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 Company'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 Company's investment in these assets is reflected in the Company's consolidated financial statements as notes receivable from investees and other related parties and investments. On March 12, 2001, the Company 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 Company's unsecured lines of credit. (E) Other Items --------------- On March 1, 2001 the Company purchased Clarewood Office Building, an approximately 39,000 square foot office building in Woodland Hills, California for a contract price of $4,500. The Company plans to initially occupy approximately 7,000 square feet. The Company'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. 9
Notes to Consolidated Financial Statements March 31, 2001 and 2000 (Unaudited) (Dollars in thousands, except for per share an per unit amounts) 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 Company's lines of credit. (3) Related Party Transactions -------------------------- All general and administrative expenses of the Company and Essex Management Corporation, an unconsolidated preferred stock subsidiary of the Company ("EMC"), are initially borne by the Company, with a portion subsequently allocated to EMC. Expenses allocated to EMC for the three months ended 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 from investees. Other income also includes management fee income and investment income from the Company's investees of $344 and $474 for the three months ended March 31, 2001 and 2000, respectively. Notes receivables from investees and other related parties as of March 31, 2001 and December 31, 2000 consist of the following: <TABLE> <CAPTION> March 31, December 31, --------- ------------ Notes receivable from joint ventures investees: 2001 2000 ---- ---- <S> <C> <C> 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 ============ ============ </TABLE> 10
Notes to Consolidated Financial Statements March 31, 2001 and 2000 (Unaudited) (Dollars in thousands, except for per share an per unit amounts) 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 Company 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. During 1996 and 1999, the Company 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 Company 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 Company 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. 11
Notes to Consolidated Financial Statements March 31, 2001 and 2000 (Unaudited) (Dollars in thousands, except for per share an per unit amounts) (5) Segment Information ------------------- The Company 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. <TABLE> <CAPTION> Three months ended March 31, 2001 March 31, 2000 --------------- ------------------ <S> <C> <C> 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 ========== ========== </TABLE> 12
Notes to Consolidated Financial Statements March 31, 2001 and 2000 (Unaudited) (Dollars in thousands, except for per share an per unit amounts) (6) Net Income Per Share -------------------- <TABLE> <CAPTION> Three months ended Three months ended March 31, 2001 March 31, 2000 --------------------------- ----------------------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount <S> <C> <C> <C> <C> <C> <C> Net Income $11,049 $12,750 Less: dividends on preferred stock - (117) ------- --------- Basic: Income available to common stockholders 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 stockholders plus assumed conversions $11,049 18,810 $0.59 $12,750 18,500 $0.69 ======= ====== ======= ========= ======== ====== </TABLE> (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 Property Trust, Inc. ("Essex" or the "Company") for the three 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 statement of the results and all such adjustments are of a normal recurring nature. Substantially all of the assets of the Company are held by, and substantially all operations are conducted through, Essex Portfolio, L.P. (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, owned an 89.2%, 89.6% and 89.7% general partnership interest in the Operating Partnership, respectively. The Company has elected to be treated as a real estate investment trust (a "REIT") for federal income tax purposes. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in the quarterly report on Form 10-Q which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company's expectation as to the timing of completion of current development projects, beliefs as to the adequacy of future cash flows to meet operating requirements, and to provide for dividend payments in accordance with REIT requirements and expectations as to the amount of non-revenue generating capital expenditures for the year ended December 31, 2001, potential acquisitions and developments, the anticipated performance of existing properties, future acquisitions and developments and statements regarding the Company's financing activities. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the actual completion of development projects will be subject to delays, that such development projects will not be completed, that future cash flows will be inadequate to meet operating requirements and/or will be insufficient to provide for dividend payments in accordance with REIT requirements, that the actual non-revenue generating capital expenditures will exceed the Company's current expectations, as well as those risks, special considerations, and other factors discussed under the caption "Other Matters/Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000, and those other risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (the "SEC") which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. General Background The Company's property revenues are generated primarily from multifamily property operations, which accounted for greater than 99% of its property revenues for the three months ended March 31, 2001 and 2000. The Company's multifamily properties (the "Properties") are located in Northern California (the San Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and San Diego counties) and the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas). The average occupancy levels of the Company's portfolio has exceeded 95% for the last five years. 14
The Company has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes, commencing with the year ended December 31, 1994. The Company provides some of its fee-based asset management and disposition services as well as third-party property management and leasing services through Essex Management Corporation ("EMC"), in order to maintain compliance with REIT tax rules. The Company owns 100% of EMC's 19,000 shares of Series A non-voting Preferred Stock and 5,662 shares of Series B non-voting Preferred Stock. Executives of the Company own 100% of EMC's 1,000 shares of Common Stock. Since the Company's initial public offering (the "IPO") in June 1994, the Company has acquired ownership interests in 68 multifamily residential properties and its headquarter and regional office buildings. Of the multifamily properties acquired since the IPO, 14 are located in Northern California, 35 are located in Southern California, 15 are located in the Seattle, Washington metropolitan area and four are 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 its IPO, the Company 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 Company has disposed of, since its IPO, 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 Company is currently developing six multifamily residential communities, with an aggregate of 1,673 multifamily units. In connection with these development projects, the Company has directly, or in some cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties for approximately $208.4 million. As of March 31, 2001, together with its joint venture partners, the Company'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 Company's multifamily Quarterly Same Store Properties (properties owned by the Company 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. <TABLE> <CAPTION> Three Months Ended March 31, Number of --------- Dollar Percentage Properties 2001 2000 Change Change ---------- ---- ---- ------ ------ <S> <C> <C> <C> <C> <C> 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% ======= ======= ======= ========== </TABLE> (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 Company 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 Company'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 Company'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 Company'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 Company 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 Company had $11,827,000 of unrestricted cash and cash equivalents. The Company expects to meet its short-term liquidity requirements by using its working capital, cash generated from operations and amounts available under lines of credit. The Company believes that its 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 Company expects to meet its long-term funding requirements relating to property acquisition and development (beyond the next 12 months) by using working capital, amounts available from 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 Company will have access to the debt and equity markets in a timely fashion to meet such future funding requirements or that future working capital, and borrowings under its line of credit will be available, or if available, will be sufficient to meet the Company's requirements or that the Company will be able to dispose of properties in a timely manner and under terms and conditions that the Company deems acceptable. The Company has 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 Company corporate ratings, if any, and leverage rating which has been priced at LIBOR plus 1.15% during its term. At March 31, 2001 the Company 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 Company had no outstanding balances on this line of credit. During the quarter ended March 31, 2001, the Company had outstanding balances which bore interest rates of approximately 5.9%. 17
In addition to the unsecured line of credit, the Company 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 Company'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 Company 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 Company expects that cash from operations and/or its lines of credit will fund such expenditures. However, there can be no assurance that the actual expenditures incurred during 2001 and/or the funding thereof will not be significantly different than the Company's current expectations. The Company 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 Company's Annual Report on Form 10-K for the year ended December 31, 2000. In connection with these development projects, the Company has directly, or in some cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties for a total amount of approximately $208,400,000. As of March 31, 2001, the Company's remaining commitment to fund the estimated cost to complete is approximately $101,500,000. The Company 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 Company 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 Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in short-term investment grade securities or is used by the Company to reduce balances outstanding under its 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. 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 Company's presentation of Funds From Operations. The following table sets forth the Company's calculation of Funds from Operations for the three ended March 31, 2001 and 2000. <TABLE> <CAPTION> Three months ended -------------------------- March March ------------ ------------ 31, 2001 31, 2000 ------------ ------------ <S> <C> <C> 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 =========== =========== </TABLE> (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 Company is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes. The Company's interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes. The Company believes that the principal amounts of the Company's mortgage notes payable and line of credit approximate fair value as of March 31, 2001 as interest rates and other terms are consistent with yields currently available to the Company for similar instruments. <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> <C> 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% </TABLE> (1) Capped at interest rates ranging from 7.1% to 7.3%. The Company 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 -------- 4.1 Amendment to Rights Agreement 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