FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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: 18,414,295 shares of Common Stock as of November 1, 2001
TABLE OF CONTENTS FORM 10-Q <TABLE> <CAPTION> Part I Page No. -------- <S> <C> Item 1 Financial Statements (Unaudited) 3 Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 4 Consolidated Statements of Operations for the three months ended September 30, 2001 and 2000 5 Consolidated Statements of Operations for the nine months ended September 30, 2001 and 2000 6 Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2001 and the year ended December 31, 2000 7 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 8 Notes to Consolidated Financial Statements 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3 Quantitative and Qualitative Disclosure About Market Risk 25 Part II Item 2 Changes in Securities and Use of Proceeds 26 Item 6 Exhibits and Reports on Form 8-K 26 Signatures 27 </TABLE> 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 consolidated 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> September 30, December 31, Assets 2001 2000 ------- ------------- ------------ <S> <C> <C> Real estate: Rental properties: Land and land improvements $ 291,754 $ 289,796 Buildings and improvements 878,727 866,612 ------------- ----------- 1,170,481 1,156,408 Less accumulated depreciation (146,928) (119,499) ------------- ----------- 1,023,553 1,036,909 Investments 92,813 65,703 Real estate under development 79,800 38,231 ------------- ----------- 1,196,166 1,140,843 Cash and cash equivalents-unrestricted 12,341 6,600 Cash and cash equivalents-restricted 17,458 18,965 Notes receivable from investees and related parties 102,165 77,081 Notes and other receivables 33,085 24,062 Prepaid expenses and other assets 6,816 7,654 Deferred charges, net 5,968 6,644 ------------- ----------- $ 1,373,999 $ 1,281,849 ============= =========== Liabilities and Stockholders' Equity ------------------------------------ Mortgage notes payable $ 565,138 $ 502,066 Lines of credit 107,767 93,469 Accounts payable and accrued liabilities 33,964 30,430 Dividends payable 16,619 14,538 Other liabilities 6,435 6,539 Deferred gain -- 5,002 ------------- ----------- Total liabilities 729,923 652,044 Minority interests 251,028 238,130 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, 18,512,575 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 431,136 428,433 Distributions in excess of accumulated earnings (38,090) (36,760) ------------- ----------- Total stockholders' equity 393,048 391,675 ------------- ----------- $ 1,373,999 $ 1,281,849 ============= =========== </TABLE> See accompanying notes to the consolidated unaudited financial statements. 4
ESSEX PROPERTY TRUST, INC. Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> Three months ended ----------------------------- September 30, September 30, 2001 2000 ------------- ------------- <S> <C> <C> Revenues: Rental $ 44,838 $ 42,587 Other property 1,372 1,131 ------------ ------------ Total property 46,210 43,718 Interest and other 5,553 3,640 ------------ ------------ Total revenues 51,763 47,358 ------------ ------------ Expenses: Property operating expenses Maintenance and repairs 2,829 2,630 Real estate taxes 3,140 2,815 Utilities 2,309 2,140 Administrative 3,689 3,508 Advertising 655 657 Insurance 307 253 Depreciation and amortization 9,197 8,689 ------------ ------------ 22,126 20,692 Interest 10,105 8,345 Amortization of deferred financing costs 143 160 General and administrative 1,838 2,215 ------------ ------------ Total expenses 34,212 31,412 ------------ ------------ Income before gain related to sale of real estate and minority interests 17,551 15,946 Gain related to sale of real estate 3,788 -- ------------ ------------ Income before minority interests 21,339 15,946 Minority interests (6,440) (5,697) ------------ ------------ Net income $ 14,899 $ 10,249 ============ ============ Per share data: Basic: Net income $ 0.81 $ 0.56 ============ ============ Weighted average number of shares outstanding during the period 18,491,144 18,328,001 ============ ============ Diluted: Net income $ 0.79 $ 0.54 ============ ============ Weighted average number of shares outstanding during the period 21,093,631 20,891,729 ============ ============ Dividend per share $ 0.70 $ 0.61 ============ ============ </TABLE> See accompanying notes to the consolidated unaudited financial statements. 5
ESSEX PROPERTY TRUST, INC. Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> Nine months ended ----------------------------- September 30, September 30, 2001 2000 ------------- ------------- <S> <C> <C> Revenues: Rental $ 134,473 $ 118,489 Other property 4,295 3,236 ------------ ------------ Total property 138,768 121,725 Interest and other 14,149 7,581 ------------ ------------ Total revenues 152,917 129,306 ------------ ------------ Expenses: Property operating expenses Maintenance and repairs 8,496 7,194 Real estate taxes 9,182 8,276 Utilities 7,290 6,163 Administrative 10,934 10,280 Advertising 2,013 1,669 Insurance 802 723 Depreciation and amortization 26,950 22,306 ------------ ------------ 65,667 56,611 Interest 29,166 20,620 Amortization of deferred financing costs 510 479 General and administrative 5,566 4,510 ------------ ------------ Total expenses 100,909 82,220 ------------ ------------ Income before gain related to sale of real estate and minority interests 52,008 47,086 Gain related to sale of real estate 3,788 4,022 ------------ ------------ Income before minority interests 55,796 51,108 Minority interests (18,320) (17,836) ------------ ------------ Net income 37,476 33,272 Preferred stock dividends -- (246) ------------ ------------ Net income available to common stockholders $ 37,476 $ 33,026 ============ ============ Per share data: Basic: Net income $ 2.03 $ 1.82 ============ ============ Weighted average number of shares outstanding during the period 18,460,790 18,169,655 ============ ============ Diluted: Net income $ 2.00 $ 1.79 ============ ============ Weighted average number of shares outstanding during the period 21,003,100 18,610,593 ============ ============ Dividend per share $ 2.10 $ 1.77 ============ ============ </TABLE> See accompanying notes to the consolidated unaudited financial statements. 6
ESSEX PROPERTY TRUST, INC Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2000 (Unaudited) (Dollars and shares in thousands) <TABLE> <CAPTION> Distributions Additional in excess of Preferred stock Common stock 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 -- -- 95 -- 2,703 -- 2,703 Net income -- -- -- -- -- 37,476 37,476 Dividends declared -- -- -- -- -- (38,806) (38,806) ------- ---------- ---------- --------- --------- ---------- --------- Balances at September 30, 2001 -- $ -- 18,512 $ 2 $431,136 $ (38,090) $ 393,048 ======= ========== ========== ========= ========= ========== ========= </TABLE> See accompanying notes to the consolidated unaudited financial statements. 7
ESSEX PROPERTY TRUST, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> Nine months ended ----------------------------- September 30, September 30, 2001 2000 ------------- ------------- Net cash provided by operating activities: $ 81,371 $ 67,501 ------------- ------------- Cash flows from investing activities: <S> <C> <C> Additions to real estate (17,445) (69,193) 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 1,507 (637) Additions to notes receivable from investees, related parties and other receivables (49,798) (60,700) Repayment of notes receivable from investees, related parties and other receivables 13,792 3,615 Additions to real estate under development (34,495) (33,326) Net contribution to investments in corporations and limited partnerships (27,296) (4,241) ------------- ------------- Net cash used in investing activities (97,748) (133,180) ------------- ------------- Cash flows from financing activities: Proceeds from mortgage and other notes payable and lines of credit 226,903 234,544 Repayment of mortgage and other notes payable and lines of credit (155,677) (127,439) Additions to deferred charges (140) (1,232) Net proceeds from stock options exercised and shares issued through dividend reinvestment plan 2,703 2,929 Contributions from minority interest partners 6,000 -- Distributions to minority interest partners (18,087) (17,332) Redemption of operating partnership units (2,555) (218) Dividends paid (37,029) (31,197) ------------- ------------- Net cash provided by financing activities 22,118 60,055 ------------- ------------- Net increase in cash and cash equivalents 5,741 (5,624) Cash and cash equivalents at beginning of period 6,600 12,348 ------------- ------------- Cash and cash equivalents at end of period $ 12,341 $ 6,724 ============= ============= Supplemental disclosure of cash flow information: Cash paid for interest, net of $2,353 and $1,779 capitalized $ 26,507 $ 19,803 ============= ============= Supplemental disclosure of non-cash investing and financing activities: Issuance of Operating Partnership Units in connection with the purchase of real estate $ 10,381 $ 2,365 ============= ============= Real estate under development transferred to rental properties $ -- $ 89,483 Exchange of notes receivable from investees for investments $ 8,347 $ -- ============= ============= Contribution of real estate in exchange for notes receivable and investments $ 22,463 $ -- ============= ============= Consolidation of previously unconsolidated investment $ 8,087 $ 2,771 ============= ============= Mortgage note payable assumed in connection with purchase of real estate $ 6,144 $ 53,900 ============= ============= Exchange of investment for note receivable from investee $ 1,501 $ -- ============= ============= </TABLE> See accompanying notes to the consolidated unaudited financial statements. 8
Notes to Consolidated Financial Statements September 30, 2001 and 2000 (Unaudited) (Dollars in thousands, except per share and per unit amounts) (1) Organization and Basis of Presentation -------------------------------------- The unaudited consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2000. The unaudited consolidated financial statements for the three and nine months ended September 30, 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 89.0%, 89.6% and 89.6% general partnership interest as of September 30, 2001, December 31, 2000 and September 30, 2000, respectively. As of September 30, 2001, the Company operates and has ownership interests in 87 multifamily properties (containing 19,918 units) and two commercial properties (with approximately 56,000 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) Private Equity Fund ------------------- On July 11, 2001, Essex Apartment Value Fund, L.P. (the "Fund"), an investment fund organized by the Company, had its initial closing with three institutional investors. The Fund will acquire, develop, and manage multifamily properties located in California, Oregon, and Washington. The Fund's objective is to add value through rental growth and appreciation, using the Company's development, redevelopment and asset management capabilities. The total equity committed to the Fund by investors, including the Operating Partnership, at the initial closing was $105,000. Subsequent to September 30, 2001, the Fund obtained an equity commitment from an additional institutional investor bringing total equity commitments to approximately $145,000. An affiliate of the Company, Essex VFGP, L.P., is the Fund's general partner (the "General Partner"). The Operating Partnership owns a 99% limited partner interest in the General Partner. Additional closings are expected to occur as investors who have been offered the opportunity to invest in the Fund make their determinations before the final closing date of January 15, 2002. The Fund is currently anticipated to have total capital commitments of between $200,000 and $250,000 and will utilize leverage of between 60% to 65% of the value of the underlying real estate portfolio. Including the additional equity commitment received subsequent to September 30, 2001, the Company, through the General Partner, has a 34.38% interest in the Fund on economic terms identical to the other investors with respect to capital invested. Though the Company expects its interest in the Fund to be diluted as a result of future closings, the Company is committed to invest an amount equal to at least 20% of the aggregate capital committed to the Fund. 9
Notes to Consolidated Financial Statements September 30, 2001 and 2000 (Unaudited) (Dollars in thousands, except per share and per unit amounts) Since August 2000 the General Partner has acquired several properties in anticipation of the Fund's formation. These properties include six apartment properties having 1,377 apartment units and two development land parcels on which approximately 368 units are planned for construction. These properties have an aggregate purchase price of approximately $123,000. In addition, five of the properties are encumbered by non-recourse mortgages in the aggregate amount of approximately $70,000. On September 20, 2001, ownership interests in one of these properties, Andover Park Apartments, a 240-unit apartment community located in Beaverton, Oregon was transferred to the Fund. In conjunction with this transfer, the Fund entered into a new $12,525 long-term non-recourse mortgage secured by this previously unencumbered property. The loan bears interest at a fixed rate of 6.66% and is due in September 2011. The General Partner anticipates that ownership interests in the remaining properties will be transferred to the Fund in the fourth quarter of 2001. The net investments in these remaining properties are carried on the Company's balance sheet as investments and notes receivable from investees and related parties. In addition to distributions with respect to its share of the Fund's invested capital, the General Partner (1) will receive distributions from the Fund in the annual amount of 1% of the Fund's committed capital, payable quarterly for managing the Fund's operations, and (2) may receive over the life of the Fund incentive distributions up to 20% of the cumulative net profits on all of the Fund's investments, if the Fund exceeds certain financial return benchmarks, including a minimum 10% compounded annual return on the investors' total capital contributions. The General Partner will also be paid fees consistent with industry standards for its property management, development and redevelopment services with respect to the Fund's investments. The General Partner will not receive transaction fees, such as acquisition, disposition, financing or similar fees, in connection with the operation of the Fund. Subject to specific exceptions, the Fund will generally be the Company's exclusive investment vehicle for new investments until the earlier of (i) the date at least 90% of the Fund's aggregate capital commitments have been invested or committed or reserved for investments or (ii) December 31, 2003. The exceptions are: (1) properties acquired to complete transactions intended to qualify for non-recognition under Section 1031 of the Internal Revenue, (2) transactions involving properties with 75 units or less, (3) transactions which require equity securities of the Company, including convertible or exchangeable securities, with a value of at least $750,000, (4) follow-on investments and re-building of properties which have been destroyed or damaged, (5) land leases with remaining terms of less than 35 years; and (6) other transactions which are prohibited from being consummated on behalf of the Fund due to express restrictions or diversification limitations. The company is not prohibited from utilizing its development and redevelopment capabilities to improve properties that it currently owns or acquires pursuant to the preceding exceptions. The Company's senior executives, Keith Guericke, Michael Schall, John Eudy, Craig Zimmerman and John Burkart, serve as the Fund's investment committee and are required to devote such time as is reasonably necessary to achieve the objectives of the Fund. Investors have the right to suspend their capital commitments to the Fund if two or more of these executives are no longer actively involved in the management of the Fund. John Burkart serves as the portfolio manager and is committed to devote substantially all of his time to the Fund during the investment period. The Fund also has a five-person advisory committee representing the investors. (B) Acquisition Activities of the Fund ---------------------------------- On August 13, 2001 the Fund purchased Marbrisas Apartments, a 500-unit apartment community located in Chula Vista, California for a contract price of $62,000. In conjunction with this transaction the Fund assumed a $39,989, 7.99% fixed rate, secured loan which matures in July 2005. 10
Notes to Consolidated Financial Statements September 30, 2001 and 2000 (Unaudited) (Dollars in thousands, except per share and per unit amounts) (C) Disposition Activities ---------------------- On September 21,2001, two partnerships in which EMC is a 1% general partner and the Operating Partnership holds a 1% special limited partnership interest sold to an unrelated third party its remaining three retail centers, Canby Square, Garrison Square and Powell Villa located in the Portland, Oregon metropolitan area for a contract price of $14,527. The Company recognized a previously deferred gain of $3,788, net of disposition related costs, related to this transaction. In conjunction with this sale, in a tax deferred exchange transaction, these two partnerships acquired on September 28, 2001, Capri at Sunny Hills, a 100-unit apartment community located in Fullerton, California for a contract price of $16,650. (D) 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 September 30, 2001, the Company has ownership interests in five development communities, with an aggregate of 1,274 multifamily units. During the third quarter, the Company reached stabilized operations at one property, Tierra Vista, a 404-unit apartment community located in Oxnard, California. (E) 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 September 30, 2001, the Company has ownership interests in five redevelopment communities, which contain an aggregate of 1,178 units with total originally projected investment of $24,304 of which approximately $10,020 remains to be expended. During the third quarter, the Company reached stabilized operations at one property, Hillcrest Park, a 608-unit apartment community located in Newbury Park, California. (F) Other ----- In September 1999, the Company formed a program in which directors and management of the Company can participate indirectly in an investment in the Company's common stock. Pursuant to the program, in 1999, the participants entered into a swap agreement with a securities broker whereby the securities broker acquired, in open market transactions, 223,475 shares of the Company's common stock. The agreement by its terms expires in September 2004 at which time the settlement amount is determined by comparing the original purchase price of the stock plus interest at a rate of LIBOR plus 1.5% to the termination date market value of the shares and all dividends received during the investment period. In the last week of August 2001, the directors and management effected an early termination of the agreement with respect to 40,718 shares of the total 223,475 shares, realizing a gain of approximately $18 per share. Participants are obligated for any termination or settlement shortfall. The Company is a guarantor of participant obligations under the program. (G) Subsequent Event - Equity Transaction ------------------------------------- In October 2001, the Operating Partnership acquired 100,700 shares of the Company's outstanding Common Stock. The weighted average exercise price paid for the shares was $47.88. The amount paid for the shares will be reflected as a reduction of the common stock and additional-paid-in-capital in the Company's consolidated balance sheets for the quarter ended December 31, 2001. 11
Notes to Consolidated Financial Statements September 30, 2001 and 2000 (Unaudited) (Dollars in thousands, except per share and per unit amounts) (H) Subsequent Event - Investments ------------------------------ On November 1, 2001, the Company acquired ownership interests in partnerships which own the following five multifamily properties: Villa Angelina 256 units Placentia, CA Valley Park Apartments 160 units Fountain Valley, CA Hearthstone Apartments 140 units Santa Ana, CA Treehouse Apartments 164 units Santa Ana, CA Montejo Apartments 124 units Garden Grove, CA Four of the properties are individually encumbered by non-recourse mortgages, with a cumulative balance of $39,809, each with a fixed interest rate of 6.98% and due date of December 2010. One property, Hearthstone Apartments, is encumbered by two non-recourse mortgages, aggregating to $10,177 and having a weighted average interest rate of 7.01% and both with a due date of June 2009. Each multifamily asset is owned by a limited partnership. The Company's investment is in the form of a 1% special limited partnership interest and the 1% sole general partnership interest. The other limited partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain conditions, the Company may elect to deliver an aggregate of 461,163 shares of the Company's common stock in lieu of the combined partnerships cash redemption obligation. The Company's interests in these properties are accounted for under the equity method of accounting. 12
Notes to Consolidated Financial Statements September 30, 2001 and 2000 (Unaudited) (Dollars in thousands, except per share and per unit amounts) (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 September 30, 2001 and 2000 totaled $747 and $447, respectively, and $1,665 and $950 for the nine months ended September 30, 2001 and 2000, respectively. The allocation is reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of operations. Interest and other income includes interest income of $1,280 and $235 for the three months ended September 30, 2001 and 2000, respectively, and $3,498 and $534 for the nine months ended September 30, 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 $564 and $358 for the three months ended September 30, 2001 and 2000, respectively, and $1,332 and $1,389 for the nine months ended September 30, 2001 and 2000, respectively. Notes receivable from investees and related parties as of September 30, 2001 and December 31, 2000 consist of the following: <TABLE> <CAPTION> September 30, December 31, ------------- ------------ Notes receivable from joint ventures investees: 2001 2000 ---- ---- <S> <C> <C> Notes receivable from VFGP L.P.'s, secured, bearing interest from 9% to Prime + 3%, due 2001-2010 $ 40,412 $ 47,840 Receivables from VFGP L.P.'s, non interest bearing, due on demand 8,904 4,804 Note receivable from Highridge Apartments, secured, bearing interest at 9%, due March 2008 -- 1,047 Note receivable from Highridge Apartments, secured, bearing interest at 10%, due on demand 2,950 2,950 Notes receivable from Fidelity 1, secured, bearing interest from 7% to LIBOR + 2.5%, due 2002-2004 44,617 5,613 Receivables from Down REIT entities, non interest bearing, due on demand -- 8,281 Receivable from Newport Beach North LLC and Newport Beach South LLC, non interest bearing, due on demand 1,423 1,753 Receivable from City Heights LP, non interest bearing, due on demand -- 865 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 3,226 3,295 -------- -------- $102,165 $ 77,081 ======== ======== </TABLE> 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. 13
Notes to Consolidated Financial Statements September 30, 2001 and 2000 (Unaudited) (Dollars in thousands, except per share and per unit amounts) (4) New Accounting Pronouncements ----------------------------- 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. In July 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and also specifies the criteria that intangible assets acquired in a business combination must meet in order to be recognized and reported apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company does not expect the adoption of Statements 141 and 142 to have a material effect on the financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends APB Opinion No. 30, "Reporting Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequent Occurring Events and Transactions." SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. The Company will adopt SFAS No. 144 effective January 1, 2002. The Company has determined that the adoption of SFAS No. 144 will not have a material impact on the Company's financial statements. 14
Notes in Consolidated Financial Statements September 30, 2001 and 2000 (Unaudited) (Dollars in thousands, except per share and 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 September 30, 2001 September 30, 2000 ------------------------------------------------------------------------------------------------- Revenues <S> <C> <C> Northern California $ 16,477 $ 15,446 Southern California 18,376 17,551 Pacific Northwest 11,357 10,721 -------- -------- Total segment revenues 46,210 43,718 Interest and other income 5,553 3,640 -------- -------- Total revenues $ 51,763 $ 47,358 ======== ======== Net operating income: Northern California $ 12,701 11,952 Southern California 12,785 12,167 Pacific Northwest 7,795 7,596 -------- -------- Total segment net operating income 33,281 31,715 Interest and other income 5,553 3,640 Depreciation and amortization (9,197) (8,689) Interest (10,105) (8,345) Amortization of deferred financing costs (143) (160) General and administrative (1,838) (2,215) -------- -------- Income before gain on the sales of real estate, minority interests and extraordinary item $ 17,551 $ 15,946 ======== ======== </TABLE> <TABLE> <CAPTION> Nine months ended September 30, 2001 September 30, 2000 ------------------------------------------------------------------------------------------------- Revenues <S> <C> <C> Northern California $ 50,072 $ 41,636 Southern California 54,561 50,096 Pacific Northwest 34,135 29,993 --------- ---------- Total segment revenues 138,768 121,725 Interest and other income 14,149 7,581 --------- ---------- Total revenues $ 152,917 $ 129,306 ========= ========== Net operating income: Northern California $ 38,750 32,166 Southern California 37,812 34,580 Pacific Northwest 23,489 20,674 --------- ---------- Total segment net operating income 100,051 87,420 Interest and other income 14,149 7,581 Depreciation and amortization (26,950) (22,306) Interest (29,166) (20,620) Amortization of deferred financing costs (510) (479) General and administrative (5,566) (4,510) --------- ---------- Income before gain on the sales of real estate, minority interests and extraordinary item $ 52,008 $ 47,086 ========= ========== </TABLE> 15
Notes in Consolidated Financial Statements September 30, 2001 and 2000 (Unaudited) (Dollars in thousands, except per share and per unit amounts) (5) Segment Information (continued) ------------------------------- <TABLE> <CAPTION> September 30, 2001 December 31, 2000 ---------------------------------------------------------------------------------------- Assets: <S> <C> <C> Northern California $ 304,029 $ 289,839 Southern California 457,571 478,835 Pacific Northwest 261,953 268,235 -------------- ---------------- Total segment net real estate assets 1,023,553 1,036,909 Non-segment assets 350,446 244,940 -------------- ---------------- Total assets $ 1,373,999 $ 1,281,849 ============== ================ </TABLE> (6) Net Income Per Share -------------------- <TABLE> <CAPTION> Three months ended Three months ended September 30, 2001 September 30, 2000 ------------------------------------ ------------------------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount <S> <C> <C> <C> <C> <C> <C> Net Income $ 14,899 $ 10,249 Less: dividends on preferred stock - - --------- --------- Basic: Income available to common stockholders 14,899 18,491 $ 0.81 10,249 18,328 $ 0.56 --------- ------ ======== --------- -------- ======== Effect of Dilutive Securities: Convertible limited partnership units 1,832 2,288 1,069 2,136 Convertible preferred stock - - - 41 Stock options - 314 - 386 --------- ------ --------- -------- Diluted: Income available to common Stockholders plus assumed conversions $ 16,731 21,093 $ 0.79 $ 11,318 20,891 $ 0.54 ========= ====== ======== ========= ======== ======== </TABLE> <TABLE> <CAPTION> Nine months ended Nine months ended September 30, 2001 September 30,2000 ------------------------------- ------------------------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount <S> <C> <C> <C> <C> <C> <C> Net Income $ 37,476 $ 33,272 Less: dividends on preferred stock - (246) --------- --------- Basic: Income available to common stockholders 37,476 18,461 $ 2.03 33,026 18,170 $ 1.82 --------- ------ ======== --------- -------- ======== Effect of Dilutive Securities: Convertible limited partnership units 4,506 2,219 - -(1) Convertible preferred stock - - 245 154 Stock options - 323 - 287 --------- ------ --------- -------- Diluted: Income available to common Stockholders plus assumed conversions $ 41,982 21,003 $ 2.00 $ 33,272 18,611 $ 1.79 ========= ====== ======== ========= ======== ======== </TABLE> (1) Securities not included because they were anti-dilutive. 16
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 and nine months ended September 30, 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 September 30, 2001, December 31, 2000 and September 30, 2000, owned an 89.0%, 89.6% and 89.6% 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 the Company's expectations as to the total capital commitments of the Essex Apartment Value Fund and the acquisition activities of that fund, 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 total capital commitments and acquisition activities of the Essex Apartment Value Fund will be less than anticipated, 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 and nine months ended September 30, 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). 17
Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund managed by the Company and will be, subject to specific exceptions, the Company's exclusive investment vehicle for new investments until the Fund's committed capital has been invested or committed for investments, or if earlier, December 31, 2003. The Fund is currently anticipated to have total capital commitments of between $200 million and $250 million and will utilize leverage of between 60% to 65% of the value of the underlying real estate portfolio. The Company is committed to invest an amount equal to or greater than 20% of the aggregate capital committed to the Fund. In addition, Essex will be compensated by the Fund for its asset management, property management, development and redevelopment services and may receive incentive distributions if the Fund exceeds certain financial return benchmarks. 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 71 multifamily residential properties and its headquarter and regional office buildings. Of the multifamily properties acquired since the IPO, 14 are located in Northern California, 37 are located in Southern California, 15 are located in the Seattle, Washington metropolitan area and five are located in the Portland, Oregon metropolitan area. In total, these acquisitions consist of 15,607 multifamily units with total capitalized acquisition costs of approximately $1,306.5 million. Additionally since its IPO, the Company has developed and has ownership interests in 9 multifamily development properties that have reached stabilized operations. These development properties consist of 1,944 units with total capitalized development costs of $236.8 million. As part of its active portfolio management strategy, the Company has disposed of, since its IPO, eight 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 $118.7 million resulting in total net realized gains of approximately $25.8 million. The Company is currently developing five multifamily residential communities, with an aggregate of 1,044 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 $156.7 million. As of September 30, 2001, together with its joint venture partners, the Company's remaining development commitment is approximately $68.1 million. Results of Operations Comparison of the Three Months Ended September 30, 2001 to the Three Months - --------------------------------------------------------------------------- Ended September 30, 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 September 30, 2001 and 2000) was 94.7% and 97.0%, for the three months ended September 30, 2001 and 2000, respectively. "Financial occupancy" is defined as the percentage resulting from dividing actual rental income by total possible rental income. Total possible rental income is determined by valuing occupied units at contractual rents and vacant units at market rents. The regional breakdown of financial occupancy for the multifamily Quarterly Same Store Properties for the three months ended September 30, 2001 and 2000 are as follows: September 30, 2001 September 30, 2000 ------------------ ------------------ Southern California 95.4% 96.4% Northern California 94.6% 98.0% Pacific Northwest 94.4% 96.4% 18
Total Revenues increased by $4,405,000 or 9.3% to $51,763,000 in the third quarter of 2001 from $47,358,000 in the third 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 Number of September 30, Dollar Percentage ------------- Properties 2001 2000 Change Change ---------- ---- ---- ------ ------ (Dollars in thousands) <S> <C> <C> <C> <C> <C> Revenues Property revenues Quarterly Same Store Properties Southern California 17 $ 12,269 $ 11,726 $ 543 4.6% Northern California 14 14,075 13,532 543 4.0 Pacific Northwest 20 9,481 9,343 138 1.5 -- -------- --------- --------- ------- Properties 51 35,825 34,601 1,224 3.5 Property revenues properties acquired/disposed of subsequent June 30, 2000 10,385 9,117 1,268 13.9 -------- --------- --------- ------- Total property revenues (1) 46,210 43,718 2,492 5.7 -------- --------- --------- ------- Interest and other income 5,553 3,640 1,913 52.6 -------- --------- --------- ------- Total revenues $ 51,763 $ 47,358 $ 4,405 9.3% ======== ========= ========= ======= </TABLE> (1) Also includes two commercial properties, redevelopment communities, and development communities. As set forth in the above table, $1,268,000 of the $4,405,000 net increase in total revenues is attributable to properties acquired or disposed of subsequent to June 30, 2000, redevelopment communities, development communities and two commercial properties. During this period, the Company acquired interests in nine multifamily properties, one commercial property, and reached stabilized operations at two development communities (the "Quarterly Acquisition Properties"). Of the increase in total revenues, $1,224,000 is attributable to increases in property revenues from the Quarterly Same Store Properties. Property revenues from the Quarterly Same Store Properties increased by approximately 3.5% to $35,825,000 in the third quarter of 2001 from $34,601,000 in the third quarter of 2000. The majority of this increase was attributable to the 14 Quarterly Same Store Properties located in Northern California and the 17 Quarterly Same Store Properties located in Southern California. The property revenues of the Quarterly Same Store Properties in Northern California increased by $543,000 or 4.0% to $14,075,000 in the third quarter of 2001 from $13,532,000 in the third quarter of 2000. The property revenues of the Quarterly Same Store Properties in Southern California increased by $543,000 or 4.6% to $12,269,000 in the third quarter of 2001 from $11,726,000 in the third quarter of 2000. The $543,000 increase in Northern California is primarily attributable to rental rate increases as offset by a decrease in financial occupancy to 94.6% in the third quarter of 2001 from 98.0% in the third quarter of 2000. The $543,000 increase in Southern California is primarily attributable to rental rate increases as offset by a decrease in financial occupancy to 95.4% in the third quarter of 2001 from 96.4% in the third quarter of 2000. The 20 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 $138,000 or 1.5% to $9,481,000 in the third quarter of 2001 from $9,343,000 in the third quarter of 2000. The $138,000 increase is primarily attributable to rental rate increases as offset by a decrease in financial occupancy to 94.4% in the third quarter of 2001 from 96.4% in the third quarter of 2000. The increase in total revenue also reflects an increase of $1,913,000 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. 19
Total Expenses increased by $2,800,000 or approximately 8.9% to $34,212,000 in the third quarter of 2001 from $31,412,000 in the third quarter of 2000. Interest expense increased by $1,760,000 or 21.1% to $10,105,000 in the third quarter of 2001 from $8,345,000 in the third 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 $926,000 or 7.7% to $12,929,000 in the third quarter of 2001 from $12,003,000 in the third quarter of 2000. Of such increase, $312,000 was attributable to the Quarterly Acquisition Properties. Depreciation and amortization increased by $508,000 or approximately 5.9% to $9,197,000 in the third quarter of 2001 from $8,689,000 in the third quarter of 2000, primarily due to the acquisition of assets. 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 decreased by $377,000 in the third quarter of 2001 from the amount for the third quarter of 2000. This decrease is largely due to an increase in the allocation of general and administrative expenses to EMC and an increase in bonus expense in the third quarter of 2000 as partially offset by additional staffing requirements resulting from the growth of the Company. Net income increased by $4,650,000 to $14,899,000 in the third quarter of 2001 from $10,249,000 in the third quarter of 2000. Net income for the third quarter of 2001 included recognition of previously deferred gain (net of disposition related costs) relating to the sale of real estate of $3,788,000. No gains on sale were recognized in the third quarter of 2000. The remainder of the increase is attributable to the net contribution of the Quarterly Acquisition Properties and the increase in net operating income from the Quarterly Same Store Properties. Comparison of the Nine Months Ended September 30, 2001 to the Nine Months Ended - -------------------------------------------------------------------------------- September 30, 2000 - ------------------- Average financial occupancy rates of the Company's multifamily Same Store Properties (properties owned by the Company for each of the nine months September 30, 2001 and 2000) was 95.5% and 96.8%, for the nine months ended September 30, 2001 and 2000, respectively. "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 Same Store Properties for the nine months ended September 30, 2001 and 2000 are as follows: September 30, September 30, 2001 2000 ---- ---- Southern California 95.6% 96.3% Northern California 95.8% 97.8% Pacific Northwest 95.0% 95.9% 20
Total Revenues increased by $23,611,000 or 18.3% to $152,917,000 in the nine months ended September 30, 2001 from $129,306,000 in the nine months ended September 30, 2000. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the Same Store Properties. <TABLE> <CAPTION> Nine Months Ended Number of September 30, Dollar Percentage ------------- Properties 2001 2000 Change Change ---------- ---- ---- ------ ------ (Dollars in thousands) <S> <C> <C> <C> <C> <C> Revenues Property revenues Same Store Properties Southern California 15 $ 32,461 $ 30,555 $ 1,906 6.2% Northern California 14 43,106 38,539 4,567 11.9 Pacific Northwest 19 26,969 26,001 968 3.7 -- -------- --------- --------- ------- Properties 48 102,536 95,095 7,441 7.8 Property revenues properties acquired/disposed of subsequent December 31, 1999 36,232 26,630 9,602 36.1 -------- --------- --------- ------- Total property revenues (1) 138,768 121,725 17,043 14.0 -------- --------- --------- ------- Interest and other income 14,149 7,581 6,568 86.6 -------- --------- --------- ------- Total revenues $152,917 $ 129,306 $ 23,611 18.3% ======== ========= ========= ======= </TABLE> (1) Also includes two commercial properties, redevelopment communities, and development communities. As set forth in the above table, $9,602,000 of the $23,611,000 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 fifteen multifamily properties and reached stabilized operations at six development communities (the "Post 1999 Acquisition Properties") and disposed of one multifamily property (the "Post 1999 Disposition Properties"). Of the increase in total revenues, $7,441,000 is attributable to increases in property revenues from the Same Store Properties. Property revenues from the Same Store Properties increased by approximately 7.8% to $102,536,000 in the nine months ended September 30, 2001 from $95,095,000 in the nine months ended September 30, 2000. The majority of this increase was attributable to the 14 Same Store Properties located in Northern California. The property revenues of the Same Store Properties in Northern California increased by $4,567,000 or 11.9% to $43,106,000 in the nine months ended September 30, 2001 from $38,539,000 in the nine months ended September 30, 2000. This $4,567,000 increase is primarily attributable to rental rate increases offset by a decrease in financial occupancy to 95.8% in the nine months ended September 30, 2001 from 97.8% in the nine months ended September 30, 2000. The 15 Same Store Properties located in Southern California accounted for the next largest regional component of the Same Store Property revenue increase. The property revenues of these properties increased by $1,906,000 or 6.2% to $32,461,000 in the nine months ended September 30, 2001 from $30,555,000 in the nine months ended September 30, 2000. The $1,906,000 increase is attributable to rental rate increases as offset by a decrease in financial occupancy to 95.6% in the nine months ended September 30, 2001 from 96.3% in the nine months ended September 30, 2000. The 19 multifamily residential properties located in the Pacific Northwest also contributed to the Same Store Properties property revenues increase. The property revenues of these properties increased by $968,000 or 3.7% to $26,969,000 in the nine months ended September 30, 2001 from $26,001,000 in the nine months ended September 30, 2000. The $968,000 increase is primarily attributable to rental rate increases and as offset be a decrease in financial occupancy to 95.0% in the nine months ended September 30, 2001 from 95.9% in the nine months ended September 30, 2000. The increase in total revenue also reflected an increase of $6,568,000 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. 21
Total Expenses increased by $18,689,000 or approximately 22.7% to $100,909,000 in the nine months ended September 30, 2001 from $82,220,000 in the nine months ended September 30, 2000. Interest expense increased by $8,546,000 or 41.4% to $29,166,000 in the nine months ended September 30, 2001 from $20,620,000 in the nine months ended September 30, 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 $4,412,000 or 12.9% to $38,717,000 in the nine months ended September 30, 2001 from $34,305,000 in the nine months ended September 30, 2000. Of such increase, $2,902,000 was attributable to the Post 1999 Acquisition Properties and the Post 1999 Disposition Properties. Depreciation and amortization increased by $4,644,000 or approximately 20.8% to $26,950,000 in the nine months ended September 30, 2001 from $22,306,000 in the nine months ended September 30, 2000, primarily due to the acquisition of assets. 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 $1,056,000 in the nine months ended September 30, 2001 from the amount for the nine months ended September 30, 2000. This increase was 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 increased by $4,204,000 to $37,476,000 in the nine months ended September 30, 2001 from $33,272,000 in the nine months ended September 30, 2000. This increase was primarily due to the net contribution of the Post 1999 Acquisition Properties and the increase in net operating income from the Same Store Properties. Liquidity and Capital Resources At September 30, 2001 the Company had $12,341,000 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 September 30, 2001 the Company had $77,767,000 outstanding on this line of credit, which bore an interest rate of approximately 4.0%. A second line of credit in the amount of $30,000,000 matures in August 2002, with an option to extend for one year thereafter. Outstanding balances, on this second line bear interest based on a tiered rate structure currently at LIBOR plus 1.175%. At September 30, 2001 the Company had $30,000,000 outstanding on this line of credit, which bore an interest rate of approximately 4.0%. 22
In addition to the unsecured lines of credit, the Company had $565,138,000 of secured indebtedness at September 30, 2001. Such indebtedness consisted of $506,318,000 in fixed rate debt with interest rates varying from 6.8% to 8.3% and maturity dates ranging from 2001 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 third 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 $5,741,000 from $6,600,000 as of December 31, 2000 to $12,341,000 as of September 30, 2001. This increase was primarily a result of $81,371,000 net cash provided by operating activities and $22,118,000 of net cash provided by financing activities, which was offset in part by $97,748,000 of net cash used in investing activities. Of the $22,118,000 of net cash provided by financing activities, $226,903,000 was received in proceeds from mortgage and other notes payable and lines of credit, which was off set by $155,677,000 in repayments of mortgage and other notes payable and lines of credit, and $37,029,000 in dividends/distributions paid. The $97,748,000 of net cash used in investing activities was primarily a result of $49,798,000 in additions to notes receivable and investments made to finance real estate property acquisitions by the Company's investees, related party notes and other receivables, $34,495,000 used to fund real estate under development, and $17,445,000 used to purchase and upgrade rental properties which was offset in part by $15,987,000 in proceeds received from contribution of real estate to corporate investee. 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 five multifamily residential communities, with an aggregate of 1,274 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 $156,700,000. As of September 30, 2001, the Company's remaining commitment to fund the estimated cost to complete is approximately $68,100,000. 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. 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. 23
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 and nine months ended September 30, 2001 and 2000. <TABLE> <CAPTION> Three months ended Nine months ended ------------------ ----------------- September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Income before gain on the sales of real estate and minority interests $ 17,551,000 $ 15,946,000 $ 52,008,000 $ 47,086,000 Adjustments: Depreciation and amortization 9,197,000 8,689,000 26,950,000 22,306,000 Unconsolidated joint ventures 1,209,000 1,232,000 3,647,000 3,295,000 Minority interests (1) (4,608,000) (4,602,000) (13,814,000) (14,105,000) ------------ ------------ ------------ Funds From Operations $ 23,349,000 $ 21,265,000 $ 68,791,000 $ 58,582,000 ============ ============ ============ ============ Weighted average number shares outstanding diluted (1) 21,093,631 20,891,729 21,003,100 20,658,467 ============ ============ ============ ============ </TABLE> (1) Assumes conversion of all outstanding operating partnership interests in the Operating Partnership. Minority interests have been adjusted to reflect such conversion. 24
Item 3: Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- The Company is exposed to interest rate changes primarily as a result of its lines 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 September 30, 2001 as interest rates and other terms are consistent with yields currently available to the Company for similar instruments. <TABLE> <CAPTION> For Year Ended: 2001 2002 2003 2004 2005 Thereafter Total -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Fixed rate debt (In thousands) Amount $ 937 12,381 21,879 4,020 36,076 431,025 $ 506,318 Average interest rate 7.3% 7.0% 7.0% 7.3% 6.8% 6.8% Variable rate LIBOR debt (In thousands) Amount $ -- 107,767 -- -- -- 58,820(1) $ 166,587 Average interest -- 4.0% -- -- -- 5.1% </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 September 30, 2001. 25
Part II Other Information ------- ----------------- Item 2: Changes in Securities and Use of Proceeds On November 1, 2001, the Company acquired ownership interests in partnerships which own the following five multifamily properties: Villa Angelina, Valley Park Apartments, Hearthstone Apartments, Treehouse Apartments, and Montejo Apartments. Each property is owned by a separate limited partnership in which the Company has a 1% special limited partnership interest and the 1% sole general partnership interest. The other limited partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain condition, the Company may elect to deliver an aggregate of 461,163 shares of the Company's common stock in lieu of the combined partnerships' redemption obligation. This private placement of limited partnerships interests was completed pursuant to the exemption from registration set forth 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 26
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) November 9, 2001 ---------------- Date 27