-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PNcTBiWXoCjlLQxlcuiCZcAQa09/gdLd6lH0ffhHSzcf6KLp0k8j6xuMLNB9Stcc WHpdZmGAYBTftLf/O14gLQ== 0001012870-00-001780.txt : 20000331 0001012870-00-001780.hdr.sgml : 20000331 ACCESSION NUMBER: 0001012870-00-001780 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX PORTFOLIO LP CENTRAL INDEX KEY: 0001053059 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-44467-01 FILM NUMBER: 588751 BUSINESS ADDRESS: STREET 1: 777 CALIFORNIA AVE CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154943700 MAIL ADDRESS: STREET 1: 777 CALIFORNIA AVENUE CITY: PALO ALTO STATE: CA ZIP: 94304 10-K405 1 FORM 10-K405 FOR PERIOD ENDING 12/31/1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 333-44467-01 ESSEX PORTFOLIO, L.P. --------------------- (Exact name of registrant as specified in its charter) Maryland 77-0369575 -------- ---------- (State or other jurisdiction of (I.R.S. Employer 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) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X] LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part IV, Item 14, on page number 29. DOCUMENTS INCORPORATED BY REFERENCE: The following document is incorporated by reference in Part III of the Annual Report on Form 10K: Proxy statement for the annual meeting of stockholders of Essex Property Trust, Inc. to be held April 25, 2000. TABLE OF CONTENTS FORM 10-K Page No. -------- PART I Item 1 Business................................................ 3 Item 2 Properties.............................................. 16 Item 3 Legal Proceedings....................................... 18 Item 4 Submission of Matters to a Vote of Security Holders..... 19 PART II Item 5 Recent Sales of Unregistered Securities................. 19 Item 6 Summary Financial and Operating Data.................... 19 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 22 Item 7A Quantitiative and Qualitative Disclosures About Market Risk............................................ 28 Item 8 Financial Statements and Supplementary Data............. 28 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 28 PART III Item 10 Directors and Executive Officers of the Registrant...... 28 Item 11 Executive Compensation.................................. 28 Item 12 Security Ownership of Certain Beneficial Owners and Management......................................... 28 Item 13 Certain Relationships and Related Transactions.......... 28 PART IV Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K.................................... 29 Signatures....................................................... S-1 PART I As used herein, the terms "Company" and "Essex" mean Essex Property Trust, Inc., a Maryland real estate investment trust, those entities controlled by Essex Property Trust, Inc. and Predecessors of Essex Property Trust, Inc., unless the context indicates otherwise and the term "Operating Partnership" refers to Essex Portfolio, L.P., a California limited partnership, formed on March 15, 1994 as to which the Company owns an approximate 89.7% general partnership interest, as of December 31, 1999 (except with regard to the section entitled "Other Matters/Risk Factors," below, wherein all reference to the "Company" shall be deemed to be references to the Company and the Operating Partnership, unless the context indicates otherwise). FORWARD LOOKING STATEMENTS Certain statements in this Report on Form 10-K which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Operating Partnership's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Operating Partnership's expectation as to the timing of completion of current development projects, expectation as to the total projected costs and rental rates 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, 2000, potential acquisitions and developments, the anticipated performance of existing properties, future acquisitions and developments and statements regarding the Operating Partnership's financing activities. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the actual completion of development projects will be subject to delays, that the total projected costs of current development projects will exceed expectations, that such development projects will not be completed, that future cash flows will be inadequate to meet operating requirements and/or will be insufficient to provide for dividend payments in accordance with REIT requirements, that the actual non-revenue generating capital expenditures will exceed the Operating Partnership's current expectations, as well as those risks, special considerations, and other factors discussed under the caption "Other Matters/Risk Factors" in Item 1 of this Report on Form 10-K for the year ended December 31, 1999, and those other risk factors and special considerations set forth in the Operating Partnership's other filings with the Securities and Exchange Commission (the "SEC") which may cause the actual results, performance or achievements of the Operating Partnership to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. ITEM 1. BUSINESS Description of Business Essex Portfolio, L.P. (the "Operating Partnership") was formed in March 1994 and commenced operations on June 13, 1994, when the Company, the general partner of the Operating Partnership, completed its initial public offering (the "Offering") in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds from the Offering of $112.1 million were used by the Company to acquire a 77.2% interest in the Operating Partnership. The Company has elected to be treated as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 (the "Code") as amended. The Company conducts substantially all of its activities through the Operating Partnership. The Company currently owns an approximate 89.7% general partnership interest and senior member of the Company's management and certain outside investors own approximately 10.3% limited partnership interest in the Operating Partnership. As the sole general partner of the Operating Partnership, the Company has control over the management of the Operating Partnership and over each of the Properties. The Operating Partnership is engaged in the ownership, acquisition, development and management of multifamily apartment communities. The Operating Partnership's multifamily portfolio consists of ownership interests in 68 properties (comprising 15,106 apartment units), 30 of which are located in Southern California (Los Angeles, Ventura, Orange and San Diego counties), 16 of which are located in Northern California (the San Francisco Bay Area) and 22 of which are located in the Pacific Northwest (18 in the Seattle metropolitan area and 4 in the Portland, Oregon metropolitan area). The Operating Partnership also has ownership interests in an office building located in Northern California (Palo Alto) which houses the Operating Partnership's headquarters, and three retail shopping centers located in the Pacific Northwest (the "Commercial Properties," and together with the Operating Partnership's 68 multifamily residential properties, the "Properties"). The Operating Partnership and affiliated entities and joint ventures also have entered into commitments for the development of 1,904 units in nine multifamily communities; five in Northern California, two in Southern California and two in the Pacific Northwest. Business Objectives The Operating Partnership's primary business objective is to maximize funds from operations and total returns to stockholders through active property and portfolio management including redevelopment of properties. The Operating Partnership's strategies include: . Active Property Marketing and Management. Maximize, on a per share basis, cash available for distribution and the capital appreciation of its property portfolio through active property marketing and management and, if applicable, redevelopment. . Selected Expansion of Property Portfolio. Increase, on a per share basis, cash available for distribution through the acquisition and development of multifamily residential properties in selected major metropolitan areas located in the west coast region of the United States. . Optimal Portfolio Asset Allocations. Produce predictable financial performance through a portfolio asset allocation program that seeks to increase or decrease the investments in each market based on changes in regional economic and local market conditions. . Management of Capital and Financial Risk. Optimize the Operating Partnership's capital and financial risk positions by maintaining a conservative leverage ratio and minimizing the Operating Partnership's cost of capital. The Company evaluates financing alternatives including alternative financing sources through joint ventures broadening the Operating Partnership's access to capital. Business Principles The Operating Partnership was founded on, has followed, and intends to continue to follow the business principles set forth below: Property Management. Through its long-standing philosophy of active property management and a customer satisfaction approach, coupled with a discipline of internal cost control, the Operating Partnership seeks to retain tenants, maximize cash flow, enhance property values and compete effectively for new tenants in the marketplace. The Operating Partnership's regional portfolio managers are accountable for overall property operations and performance. They supervise on-site managers, provide training for the on-site staff, monitor fiscal performance against budgeted expectations, monitor property performance against the performance of competing properties in the area, prepare operating and capital budgets for executive approval, and implement new strategies focused on enhancing tenant satisfaction, increasing revenue, controlling expenses, and creating a more efficient operating environment. Business Planning and Control. Real estate investment decisions are accompanied by a multiple year plan, to which executives and other managers responsible for obtaining future financial performance must agree. Performance versus plan serves as a significant factor in determining compensation. Property Type Focus. The Operating Partnership focuses on acquisition and development of multifamily residential communities, containing between 75 and 600 units. These types of properties offer attractive opportunities because such properties (i) are often mispriced by real estate sellers and buyers who lack the Operating Partnership's ability to obtain and use real-time market information, (ii) provide opportunities for value enhancement since many of these properties have been owned by parties that are either inadequately capitalized or lack the professional property management expertise of the Operating Partnership. Geographic Focus. The Operating Partnership focuses its property investments in markets that meet the following criteria: . Major Metropolitan Areas. The Operating Partnership focuses on metropolitan areas having a regional population in excess of one million people. Real estate markets in these areas are typically characterized by a relatively greater number of buyers and sellers and are, therefore, more liquid. Liquidity is an important element for implementing the Operating Partnership's strategy of varying its portfolio in response to changing market conditions. . Supply Constraints. The Operating Partnership believes that properties located in real estate markets with limited development or redevelopment opportunities are well suited to produce increased rental income. When evaluating supply constraints, The Operating Partnership reviews: (i) availability of developable land sites on which competing properties could be readily constructed; (ii) political barriers to growth resulting from a restrictive local political environment regarding development and redevelopment (such an environment, in addition to the restrictions on development itself, is often associated with a lengthy development process and expensive development fees); and (iii) physical barriers to growth, resulting from natural limitations to development, such as mountains or waterways. . Rental Demand Created by High Cost of Housing. The Operating Partnership concentrates on markets in which the cost of renting is significantly lower than the cost of owning a home. In such markets, rent levels are higher and operating expenses and capital expenditures, as a percentage of rent, are lower in comparison with markets that have a lower cost of owning a home. . Job Proximity. The Operating Partnership believes that most renters select housing based on its proximity to their jobs and on related commuting factors. The Operating Partnership obtains local area information relating to its residential properties and uses this information when making multifamily residential property acquisition decisions. The Operating Partnership also reviews the location of major employers relative to its portfolio and potential acquisition properties. Following the above criteria, the Operating Partnership is currently pursuing investment opportunities in selected markets of Northern and Southern California and the Pacific Northwest. Active Portfolio Management Through Regional Economic Research and Local Market Knowledge. The Operating Partnership was founded on the belief that the key elements of successful real estate investment and portfolio growth include extensive regional economic research and local market knowledge. The Operating Partnership utilizes its economic research and local market knowledge to make appropriate portfolio allocation decisions that it believes result in better overall operating performance and lower portfolio risk. The Operating Partnership maintains and evaluates: . Regional Economic Data. The Operating Partnership evaluates and reviews regional economic factors for the markets in which it owns properties and where it considers expanding its operations. The Operating Partnership's research focuses on regional and sub-market supply and demand, economic diversity, job growth, market depth and the comparison of rental price to single-family housing prices. . Local Market Conditions. Local market knowledge includes (i) local factors that influence whether a sub-market is desirable to tenants; (ii) the extent to which the area surrounding a property is improving or deteriorating; and (iii) local investment market dynamics, including the relationship between the value of a property and its yield, the prospects for capital appreciation and market depth. Recognizing that all real estate markets are cyclical, the Operating Partnership regularly evaluates the results of regional economic and local market research and adjusts portfolio allocations accordingly. The Operating Partnership actively manages the allocation of assets within its portfolio. The Operating Partnership seeks to increase its portfolio allocation in markets projected to have economic growth and to decrease such allocations in markets projected to have declining economic conditions. Likewise, the Operating Partnership also seeks to increase its portfolio allocation in markets that have attractive property valuations and to decrease such allocations in markets that have inflated valuations and low relative yields. Although the Operating Partnership is generally a long-term investor, it does not establish defined or preferred holding periods for its Properties. Current Business Activities As of December 31, 1999, the 89.7% general partnership interest in the Operating Partnership is owned by the Company. The approximate 10.3% limited partnership interests in the Operating Partnership are owned by directors, officers and employees of the Company and certain third-party investors. As the sole general partner of the Operating Partnership, the Company has operating control over the management of the Operating Partnership and each of the Properties. From time to time, the Operating Partnership may invest in properties through the acquisition of an interest in another entity, based upon the criteria described above. The Operating Partnership does not plan to invest in any securities of other entities not engaged in real estate activities. The Company, which includes its share of the Operating Partnership's income and expenses on its tax returns, 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. In order to maintain compliance with REIT tax rules, 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"). The Company owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of the Company own 100% of EMC's 1,000 shares of common stock. In July 1999, the Operating Partnership completed the sale of 2,000,000 units of its 9.30% Series D Cumulative Redeemable Preferred Units to two related institutional investors in a private placement, at a price of $25.00 per unit. The net proceeds from this sale were approximately $48,925,000. In September 1999, the Operating Partnership completed the sale of 2,200,000 units of its 9.25% Series E Cumulative Redeemable Preferred Units to an institutional investor in a private placement, at a price of $25.00 per unit. The net proceeds from this sale were approximately $53,400,000. During 1999, WBP I Holding Corp. (formerly known as "Tiger/Westbrook Real Estate Fund, L.P."), and WBP II Holding Corp. (formerly known as "Tiger/Westbrook Real Estate Co-Investment Partnership, L.P.") (collectively, "Tiger/Westbrook") converted 1,415,313 shares of its ownership in the Company's 8.75% Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock") into 1,617,501 shares of Common Stock. At December 31, 1999, Tiger Westbrook owned 184,687 shares of Convertible Preferred Stock. In March 1999, the Company's Board of Directors authorized the Operating Partnership to purchase up to 500,000 shares of the Company's Common Stock, or approximately 3% of the issued and outstanding Common Stock of the Company, at a total price per share not to exceed $29.00 in the open market or through negotiated or block transactions. During 1999, the Operating Partnership purchased 261,900 shares of the Company's outstanding Common Stock. The weighted average price paid for the shares was $27.17. In September 1999, the Operating Partnership formed a program in which directors and management of the Operating Partnership can participate indirectly in an investment in the Company's common stock. The participants have entered into a swap agreement with a securities broker whereby the securities broker has acquired, in open market transactions, 223,475 shares of the Company's common stock. The agreement terminates in five years at which time the settlement amount is determined by comparing the original purchase price of the stock plus interest at a rate of LIBOR plus 1.5% to the termination date market value of the shares and all dividends received during the investment period. In certain circumstances the participants may be required to provide collateral to the securities broker. The Operating Partnership has guaranteed performance of the participants with respect to any obligations relating to the swap agreement. Acquisitions During 1999, the Operating Partnership acquired ownership interests in nine multifamily properties consisting of 2,450 units with an aggregate purchase price of approximately $213,700,000. These investments were primarily funded by sales of preferred units and issuance of common units by the Operating Partnership, the contribution of equity from joint venture partners, cash generated from operations, proceeds from the dispositions of properties, proceeds from new and assumed loans and the Operating Partnership's line of credit. Of the nine properties purchased in 1999, eight properties (2,351 units) are located in Southern California and one (99 units) is located in Northern California. Multifamily property ownership interests acquired in 1999 are as follows: Purchase Price Property Name Location Units (in millions) - -------------------------------------------------------------------------------- Southern California Coronado at Newport South (1) Newport Beach, CA 715 $ 64.0 Coronado at Newport North (1) Newport Beach, CA 732 62.0 Avondale at Warner Center Woodland Hills, CA 446 35.0 Loraine Glendale, CA 132 13.5 Columbus Glendale, CA 83 7.7 Fairways (2) Newport Beach, CA 74 7.5 Glenbrook Pasadena, CA 84 7.0 Euclid Pasadena, CA 85 6.7 Northern California Mt. Sutro Terrace (3) San Francisco, CA 99 10.3 - -------------------------------------------------------------------------------- Total Acquisitions 2,450 $ 213.7 ================================================================================ - ---------- (1) The Operating Partnership holds an approximate 49.9% ownership interest in the joint venture that owns this property. (2) The Operating Partnership purchased a leasehold interest in this property with a remaining term of 28 years. (3) The Operating Partnership holds an approximate 46% ownership interest in the joint venture that owns this property. In October 1999, the Operating Partnership entered into a joint venture and received an approximate 49.9% equity interest (Coronado at Newport joint venture). The Operating Partnership contributed its investment of Coronado at Newport North to the joint venture. At the same time, the partners purchased Coronado at Newport Beach South. Generally, profit and loss is allocated to the partners in accordance with their ownership interests. In addition to its equity earnings, the Operating Partnership is entitled to management and redevelopment fees from the joint venture and incentive payments based on the financial success of the joint venture. In December 1999, the Operating Partnership entered into a joint venture and received an approximate 20% equity interest. The Operating Partnership contributed its investment in Riverfront Apartments, Casa Mango Apartments, and Westwood Apartments into the joint venture (AEW joint venture). The Operating Partnership also contributed land and development rights for a development community located in Oxnard, California. Generally, profit and loss are allocated to the partners in accordance with their ownership interests. In addition to its equity earnings, the Operating Partnership is entitled to management and development fees from the joint venture and incentive payments based on the financial success of the joint venture. Dispositions In 1999, the Operating Partnership sold its former headquarters building and one multifamily property located in Southern California for an aggregate sales price of $29,500,000. The proceeds were used to fund acquisitions of multifamily properties, and to repay borrowings under the Operating Partnership's line of credit. Development Development communities are defined by the Operating Partnership 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. As of December 31, 1999, the Operating Partnership had nine development communities, with an aggregate of 1,904 multifamily units. During 1999, the Operating Partnership announced three new development communities and also reached stabilized operations at two apartment properties containing 480 units that were previously reported as development communities. In connection with the properties currently under development, the Operating Partnership has directly, or in some cases through its joint venture entities, entered into contractual construction related commitments with unrelated third parties. As of December 31, 1999, the Operating Partnership is committed to fund approximately $78,700,000. The following table sets forth information regarding the development communities at December 31, 1999.
Project Estimated Project Cost Cost (1) Incurred (1) As of As of Projected/ 12/31/99 12/31/99 Actual Development Communities Location Units (in millions) (in millions) Stabilization - ---------------------------------------------------------------------------------------------------- Presale transactions (2) The Carlyle San Jose, CA 132 $ 19.0 $ .5 March 2000 Waterford San Jose, CA 238 36.0 .8 July 2000 Joint Venture transactions (3) Fountain Court Seattle, WA 320 34.0 34.0 March 2000 Vintage @ the Rose Oxnard, CA 404 54.7 18.7 February 2002 Direct Development (4) Bel Air (Canyon Point) San Ramon, CA 114 18.2 18.1 January 2000 Mirabella (Marina View) Marina del Rey, CA 188 33.7 32.1 March 2000 Station Park Pleasant Hill, CA 106 15.3 14.9 January 2000 Perry Creek Bothell, WA 132 15.0 8.2 December 2000 Essex at Lake Merritt Oakland, CA 270 63.2 8.4 December 2002 - --------------------------------------------------------------------------------------------------- Total Development Communities 1,904 $ 289.1 $ 135.7 ===================================================================================================
- ---------- (1) Project estimated cost and cost incurred as of December 31, 1999 includes total estimated and incurred costs for the development projects. (2) The Operating Partnership has contracted with independent third parties to acquire these projects upon completion based on a formula as defined in the presale purchase agreements. (3) The Operating Partnership is a 51% and 20% partner in the entities which are developing Fountain Court and Vintage @ the Rose, respectively. (4) The Operating Partnership is the sole owner of these development projects. The Operating Partnership intends to continue to pursue the development of multifamily communities to the extent that the market conditions and the specific project terms are considered favorable. Redevelopment Redevelopment communities are defined by the Operating Partnership as existing properties owned or recently acquired which have been targeted for investment by the Operating Partnership with the expectation of increased financial returns. Redevelopment communities typically have apartment units that are under construction and as a result, may have less than stabilized operations. The Operating Partnership is entitled to receive redevelopment fee income on the joint venture redevelopment communities. As of December 31, 1999, the Operating Partnership had the following seven redevelopment communities.
Estimated Renovation Cost (5) At December 31, 1999 Projected Redevelopment Communities (1) Location Units (in millions) Completion - --------------------------------------------------------------------------------------------------------- Coronado @ Newport North (2) Newport Beach, CA 732 $ 13.6 December 2001 Hillcrest Park Newbury Park, CA 608 9.6 June 2001 Westwood (3) Cupertino, CA 116 2.7 December 2000 Hampton Place (Loraine) Glendale, CA 132 2.3 September 2000 Windsor Terrace Pasadena, CA 122 1.9 June 2000 Hampton Court (Columbus) Glendale, CA 83 1.6 September 2000 Foothill/Twincreeks (4) San Ramon, CA 176 .4 June 2000 - --------------------------------------------------------------------------------------------------------- Total Redevelopment Communities 1,969 $ 32.1 =========================================================================================================
- ---------- (1) The Operating Partnership owns 100% of each redevelopment community unless otherwise noted. (2) The Operating Partnership holds an approximate 49.9% interest in the joint venture that owns this property. (3) The Operating Partnership holds a 20% interest in the joint venture that owns this property. (4) The redevelopment for this property includes renovation of the leasing center only. (5) Represents the projected cost of renovation of the apartment community excluding the original cost of land and buildings. Offices and Employees The Operating Partnership is headquartered in Palo Alto, California, and has regional offices in Seattle, Washington, Portland, Oregon, Calabasas, California and Tustin, California. As of December 31, 1999, the Operating Partnership had approximately 542 employees. Environmental Matters Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on, or in such property. Such laws often impose liability without regard as to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances or wastes also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility to which such substances or wastes were sent, whether or not such facility is owned or operated by such person. In addition, certain environmental laws impose liability for release of asbestos-containing materials ("ACMs"), into the air, and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Operating Partnership could be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and costs related to injuries of persons and property. All of the Properties have been subjected to preliminary environmental assessments, including a review of historical and public data ("Phase I assessments"), by independent environmental consultants. Phase I assessments generally consist of an investigation of environmental conditions at the Property, including a preliminary investigation of the site, an identification of publicly known conditions occurring at properties in the vicinity of the site, an investigation as to the presence of polychlorinated biphenyl's ("PCBs"), ACMs and above-ground and underground storage tanks presently or formerly at the sites, and preparation and issuance of written reports. As a result of information collected in the Phase I assessments, certain of the Properties were subjected to additional environmental investigations, including, in a few cases, soil sampling or ground water analysis to further evaluate the environmental conditions of those Properties. The environmental studies revealed the presence of groundwater contamination on certain of the Properties. Certain of these Properties had contamination which was reported to have migrated on-site from adjacent industrial manufacturing operations, and one Property was previously occupied by an industrial user that was identified as the source of contamination. The environmental studies noted that certain of the Properties are located adjacent to and possibly down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such Properties. The environmental studies also noted that contamination existed at certain Properties because of the former presence of underground fuel storage tanks that have been removed. There are asbestos-containing material in a number of the properties, primarily in the form of ceiling texture, floor tiles and adhesives, which are generally in good condition. At properties where radon, hydrogen sulfide and methane have been identified as a potential concern, the Operating Partnership has implemented remediating measures and/or additional testing. Based on its current knowledge, the Operating Partnership does not believe that future liabilities associated with asbestos, radon, hydrogen sulfide or methane will be material. Based on the information contained in the environmental studies, the Operating Partnership believes that the costs, if any, it might bear as a result of environmental contamination or other conditions at these Properties would not have a material adverse effect on the Operating Partnership's financial condition, result of operations, or liquidity. Certain Properties that have been sold by the Operating Partnership were identified as having potential groundwater contamination. While the Operating Partnership does not anticipate any losses or costs related to groundwater contamination on Properties that have been sold, it is possible that such losses or costs may materialize in the future. Except with respect to one Property, the Operating Partnership has no indemnification agreements from third parties for potential environmental clean-up costs at its Properties. The Operating Partnership has no way of determining at this time the magnitude of any potential liability to which it may be subject arising out of unknown environmental conditions or violations with respect to the properties formerly owned by the Operating Partnership. No assurance can be given that existing environmental studies with respect to any of the Properties reveal all environmental liabilities, that any prior owner or operator of a Property did not create any material environmental condition not known to the Operating Partnership, or that a material environmental condition does not otherwise exist as to any one or more of the Properties. The Operating Partnership has no insurance coverage for the types of environmental liabilities described above. Insurance The Operating Partnership carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties. There are, however, certain types of extraordinary losses for which the Operating Partnership does not have insurance. All of the Properties are located in areas that are subject to earthquake activity. The Operating Partnership has obtained earthquake insurance for all the Properties. This earthquake insurance is subject to an aggregate limit of $40.0 million payable upon a covered loss in excess of a $7.5 million self-insured retention amount and a 5% deductible. The Operating Partnership may selectively exclude properties from being covered by earthquake insurance based on management's evaluation of the following factors: (i) the availability of coverage on terms acceptable to the Operating Partnership, (ii) the location of the property and the amount of seismic activity affecting that region, and, (iii) the age of the property and building codes in effect at the time of construction. Despite earthquake coverage on all of the Operating Partnership's Properties, should a property sustain damage as a result of an earthquake, the Operating Partnership may incur losses due to deductibles, co-payments and losses in excess of applicable insurance, if any. Although the Operating Partnership carries certain insurance for non-earthquake damages to its properties and liability insurance, the Operating Partnership may still incur losses due to uninsured risks, deductibles, co-payments or losses in excess of applicable insurance coverage. Competition The Operating Partnership's Properties compete for tenants with similar properties primarily on the basis of location, rent charged, services provided, and the design and condition of the improvements. Competition for tenants from competing properties affects the amount of rent charged as well as rental growth rates, vacancy rates, deposit amounts, and the services and features provided at each property. While economic conditions are generally stable in the Operating Partnership's target markets, a prolonged economic downturn could have a material adverse effect on the Operating Partnership's financial position, results of operations or liquidity. The Operating Partnership also experiences competition when attempting to acquire properties that meet its investment criteria. Such competing buyers include domestic and foreign financial institutions, other REIT's, life insurance companies, pension funds, trust funds, partnerships and individual investors. Working Capital The Operating Partnership expects to meet its short-term liquidity requirements by using its working capital, cash generated from operations, and its amounts available on its line of credit. The Operating Partnership believes that its future net cash flows will be adequate to meet operating requirements and to provide for payment of dividends by the Company in accordance with REIT qualification requirements. The Operating Partnership has credit facilities in the committed amount of approximately $100,000,000. At December 31, 1999 the Operating Partnership had an outstanding balance of $10,500,000 under these facilities. OTHER MATTERS/RISK FACTORS Debt Financing At December 31, 1999, the Company had approximately $384,108,000 of indebtedness (including $91,820,000 of variable rate indebtedness, of which $58,820,000 is capped at interest rates ranging from 7.1% to 7.3%). Essex is subject to the risks normally associated with debt financing, including the following: . cash flow may not be sufficient to meet required payments of principal and interest; . inability to refinance existing indebtedness on encumbered Properties; and . the terms of any refinancing may not be as favorable as the terms of existing indebtedness. Uncertainty of Ability to Refinance Balloon Payments At December 31, 1999, the Company had an aggregate of approximately $384,108,000 of mortgage debt and line of credit borrowings, some of which are subject to balloon payments of principal. The Company does not expect to have sufficient cash flows from operations to make all of such balloon payments when due under these mortgages and the line of credit borrowings. At December 31, 1999, these mortgages and the line of credit borrowings had the following scheduled maturity dates: 2000 - $53.7 million; 2001 - $2.8 million; 2002 - $24.8 million; 2003 - $30.5 million, 2004 - $2.7 million, 2005 and thereafter - $269.6 million. The Company may not be able to refinance such mortgage indebtedness. The Properties subject to these mortgages could be foreclosed upon or otherwise transferred to the mortgagee. This could mean a loss to the Company of income and asset value. Alternatively, the Company may be required to re-finance the debt at higher interest rates. If the Company is unable to make such payments when due, a mortgage lender could foreclose on the property securing the mortgage, which could have a material adverse effect on the financial condition and results of operations of the Company. Risk Of Rising Interest Payments At December 31, 1999, the Company had approximately $58,820,000 of long-term variable rate indebtedness bearing interest at a floating rate tied to the rate of short-term tax exempt securities (which matures at various dates from 2014 through 2026) and $10,500,000 of variable rate indebtedness under its line of credit bearing interest at 1.15% over LIBOR and $22,500,000 of variable rate indebtedness under a construction loan bearing interest at 2.00% over LIBOR (both of which mature in 2000). Although the $58,820,000 of long-term variable rate indebtedness is subject to an interest rate protection agreement, which may reduce the risks associated with fluctuations in interest rates, an increase in interest rates may have an adverse effect on net income and results of operations of the Company. Risk That Interest Rate Hedging Arrangements Cannot Be Refinanced Or Replaced The Company has, from time to time, entered into agreements to reduce the risks associated with increases in interest rates, and may continue to do so. Although these agreements may partially protect against rising interest rates, these agreements also may reduce the benefits to the Company when interest rates decline. There can be no assurance that any such hedging arrangements can be refinanced or that the Company will be able to enter into other hedging arrangements to replace existing ones if interest rates decline. Furthermore, interest rate movements during the term of interest rate hedging arrangements may result in a gain or loss on the Company's investment in the hedging arrangement. In addition, if a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, the Company may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the hedging arrangement may subject the Company to increased credit risks. In order to minimize counterparty credit risk, the Company's policy is to enter into hedging arrangements only with large financial institutions that maintain an investment grade credit rating. Acquisition Activities: Risks That Acquisitions Will Fail To Meet Expectations The Company intends to continue to acquire multifamily residential properties. There are risks that acquired properties will fail to perform as expected. Estimates of future income, expenses and the costs of improvements necessary to allow the Company to market an acquired property as originally intended may prove to be inaccurate. In addition, the Company expects to finance future acquisitions, in whole or in part, under various forms of secured or unsecured financing or through the issuance of partnership units by the Company or additional equity by the Company. The use of equity financing, rather than debt, for future developments or acquisitions could dilute the interest of the Company's existing stockholders. If new acquisitions are financed under existing lines of credit, there is a risk that, unless substitute financing is obtained, further availability under the lines of credit for new development may not be available or may be available only on disadvantageous terms. Also, the Company may not be able to refinance its existing lines of credit upon maturity, or the terms of such refinancing may not be as favorable as the terms of the existing indebtedness. Further, acquisitions of properties are subject to the general risks associated with real estate investments. See "Adverse Effect to Property Income and Value Due to General Real Estate Investment Risks." Risks That Development Activities Will Be Delayed Or Not Completed The Company pursues multifamily residential property development projects from time to time. Development projects generally require various governmental and other approvals, the receipt of which cannot be assured. The Company's development activities generally entail certain risks, including the following: . funds may be expended and management's time devoted to projects that may not be completed; . construction costs of a project may exceed original estimates possibly making the project economically unfeasible; . development projects may be delayed due to, among other things, adverse weather conditions; . occupancy rates and rents at a completed project may be less than anticipated; and . expenses at a completed development may be higher than anticipated. These risks may reduce the funds available for distribution to the Company's stockholders. Further, the development of properties is also subject to the general risks associated with real estate investments. See "Adverse Effect to Property Income and Value Due to General Real Estate Investment Risks." The Geographic Concentration Of The Properties And Fluctuations In Local Markets May Adversely Impact Income Significant amounts of rental revenues for the year ended December 31, 1999, were derived from Properties concentrated 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). As a result of this geographic concentration, if a local property market performs poorly, the income from the Properties in that market could decrease. As a result of such a decrease in income, the Company may be unable to pay expected dividends to the Company's stockholders. The performance of the economy in each of these areas affects occupancy, market rental rates and expenses and, consequently impacts the income generated from the Properties and their underlying values. The financial results of major local employers may also impact the cash flow and value of certain of the Properties. Economic downturns in the local markets in which the Company owns properties could have a negative impact on the financial condition and results from operations of the Company. Competition In The Multifamily Residential Market May Adversely Affect Operations And The Rental Demand For the Company's Properties There are numerous housing alternatives that compete with the multifamily Properties in attracting residents. These include other multifamily rental apartments and single family homes that are available for rent in the markets in which the Properties are located. The Properties also compete for residents with new and existing homes and condominiums that are for sale. If the demand for the Company's Properties is reduced or if competitors develop and/or acquire competing properties on a more cost-effective basis, rental rates may drop, which may have a material adverse affect on the financial condition and results of operations of the Company. The Company also faces competition from other real estate investment trusts, businesses and other entities in the acquisition, development and operation of properties. Some of the competitors are larger and have greater financial resources than the Company. This competition may result in increased costs of properties the Company acquires and/or develops. Debt Financing On Properties May Result In Insufficient Cash Flow Where possible, the Company intends to continue to use leverage to increase the rate of return on its investments and to provide for additional investments that the Company could not otherwise make. There is a risk that the cash flow from the Properties will be insufficient to meet both debt payment obligations and the distribution requirements of the real estate investment trust provisions of the Internal Revenue Code of 1986, as amended. The Company may obtain additional debt financing in the future, through mortgages on some or all of the Properties. These mortgages may be recourse, non-recourse, or cross-collateralized. As of December 31, 1999, the Company had 34 properties encumbered by debt. Of the 34 properties, 20 are secured by deeds of trust relating solely to those properties, and with respect to the remaining 14 properties, three cross-collateralized mortgages are secured by eight properties, three properties, and three properties, respectively. The holders of this indebtedness will have a claim against these Properties and to the extent indebtedness is cross-collateralized, lenders may seek to foreclose upon properties which are not the primary collateral for their loan. This may, in turn, accelerate other indebtedness secured by Properties. Foreclosure of Properties would cause a loss to the Company of income and asset value. Increase In Dividend Requirements As A Result Of Preferred Stock May Lead To A Possible Inability To Sustain Dividends In 1996, the Company sold its 8.75% convertible preferred stock, Series 1996A (the "Convertible Preferred Stock") to Westbrook Real Estate Fund I, L.P. (formerly known as Tiger/Westbrook Real Estate Fund, L.P.) and Westbrook Real Estate Co-Investment Partnership I, L.P. (formerly know as Tiger/Westbrook Real Estate Company Investment Partnership L.P.). Westbrook Real Estate Fund, L.P. and Westbrook Real Estate Co-Investment Partnership I, L.P. are collectively referred to herein as "Westbrook". In 1998 and 1999, the Operating Partnership issued $210 million in aggregate of Series B Cumulative Redeemable Preferred Units (the "Series B Preferred Units"), Series C Cumulative Redeemable Preferred Units, (the "Series C Preferred Units"), Series D Cumulative Redeemable Preferred Units (the "Series D Preferred Units") and Series E Cumulative Redeemable Preferred Units (the "Series E Preferred Units"). The Series B Preferred Units, the Series C Preferred Units, the Series D Preferred Units and the Series E Preferred Units are collectively referred to herein as the "Preferred Units". The terms of the Convertible Preferred Stock provides that dividends may be paid on shares of Common Stock only if full, cumulative cash dividends have been paid on all shares of Convertible Preferred Stock in an annual amount equal to the greater of (i) $2.1875 per share (8.75% of the $25.00 per share price), or (ii) the dividends (on an as-converted basis) paid with the respect to the Common Stock plus, in both cases, any accumulated but unpaid dividends on the Convertible Preferred Stock. The terms of the preferred stock into which each series of Preferred Units are exchangeable provide for certain cumulative preferential cash distributions per each share of preferred stock. These terms also provide that while such preferred stock is outstanding, no distributions may be authorized, declared or paid on the Common Stock unless all distributions accumulated on all shares of such preferred stock have been paid in full. The distributions payable on such preferred stock and on the Convertible Preferred Stock may impair the Company's ability to pay dividends on its Common Stock. If the Company wishes to issue any Common Stock in the future (including, upon exercise of stock options), the funds required to continue to pay cash dividends at current levels will be increased. The Company's ability to pay dividends will depend largely upon the performance of the Properties and other properties that may be acquired in the future. The Company's ability to pay dividends on the Company's stock is further limited by the Maryland General Corporation Law. Under the Maryland General Corporation Law, the Company may not make a distribution on stock if, after giving effect to such distribution, either: . the Company would not be able to pay its indebtedness as it becomes due in the usual course of business; or . the Company's total assets would be less than its total liabilities. If the Company cannot pay dividends on its stock, its status as a real estate investment trust may be jeopardized. Existing Registration Rights And Preemptive Rights May Have An Adverse Effect On The Market Price Of The Shares Registration rights are held by the senior members of the Company's management and certain outside investors (collectively, the "Founders") who as of December 31, 1999 owned approximately 10.3% limited partnership interests in the Operating Partnership. These rights include certain "demand" and "piggyback" registration rights with respect to shares of Common Stock issuable in connection with the exchange of their limited partnership interests in the Operating Partnership. The aggregate 10.3% limited partnership interests held by the Founders in the Operating Partnership is exchangeable for an aggregate of 2,082,381 shares of Common Stock. In addition, the Company has invested in certain real estate partnerships. Certain partners in such limited partnerships have the right to have their limited partnership interests in such partnerships redeemed for cash or, at the Company's option, for 757,113 shares of Common Stock. These partners also have certain "demand" and "piggyback" registration rights with respect to the shares of Common Stock that may be issued in exchange for such limited partnership interests. All of the registration rights discussed above could materially adversely affect the market price for the shares of Common Stock. In addition, the holders of the Convertible Preferred Stock have preemptive rights to purchase a pro rata share of shares of Common Stock that may be offered in the future. These preemptive rights could have a material adverse effect on the market price for the shares of Common Stock. The Influence of Executive Officers, Directors and Significant Stockholders and the Consent Requirements Of The Holders Of the Convertible Preferred Stock May Be Detrimental To Holders of Common Stock As of December 31, 1999, George M. Marcus, the Chairman of the Company's Board of Directors, beneficially owned 1,981,655 shares of Common Stock (including shares issuable upon exchange of limited partnership interests in the Operating Partnership and assuming exercise of all vested options). This represents approximately 11.0% of the outstanding shares of Common Stock. Mr. Marcus currently does not have majority control over the Company. However, he currently has, and likely will continue to have, significant influence with respect to the election of directors and approval or disapproval of significant corporate actions. Consequently, his influence could result in decisions that do not reflect the interests of all stockholders of the Company. Under the partnership agreement of the Operating Partnership, the consent of the holders of limited partnership interests is generally required for any amendment of the agreement and for certain extraordinary actions. Through their ownership of limited partnership interests and their positions in the Company, the Company's directors and executive officers, including Messrs. Marcus and Millichap, have substantial influence on the Company. Consequently, their influence could result in decisions that do not reflect the interests of all stockholders of the Company. The holders of the Convertible Preferred Stock have certain consent rights to actions the Company may take. The Company may not, among other things, make certain revisions to its corporate structure and operations, without the approval of holders of two-thirds of the outstanding shares of Convertible Preferred Stock, voting as a separate class. This includes (i) revisions that would affect the rights, priority and preferences of the Convertible Preferred Stock, (ii) the merger or consolidation of the Company or the Operating Partnership with another entity, (iii) the sale of all or substantially all of the Company's assets, (iv) changing the geographic concentration of the portfolio of Properties, and (v) undergoing a change in control of either the Company or the Operating Partnership. The Voting Rights Of Preferred Stock May Allow Holders Of Preferred Stock To Impede Actions That Otherwise Benefit Holders Of Common Stock In general, the holders of the preferred stock into which the Operating Partnership's Preferred Units are exchangeable do not have any voting rights. However, if full distributions are not made on any outstanding preferred stock for six quarterly distributions periods, the holders of preferred stock who have not received distributions, voting together as a single class, will have the right to elect two additional directors to serve on the Company's Board of Directors. These voting rights continue until all distributions in arrears and distributions for the current quarterly period on the preferred stock have been paid in full. At that time, the holders of the preferred stock are divested of these voting rights, and the term and office of the directors so elected immediately terminates. In addition, the Company may not authorized or create any class of series of stock that ranks senior to this preferred stock with respect to (1) the payment of dividends, (2) rights upon liquidation, dissolution or winding-up of the Company, or (3) amend, alter or repeal the provisions of the Company's Charter or Bylaws, that would materially and adversely affect these rights without the consent of the holders of two-thirds of the outstanding shares of each series of preferred stock (as applicable), each voting separately as a single class. Also, while any shares of preferred stock are outstanding, the Company may not (1) merge or consolidate with another entity, or (2) transfer substantially all of its assets to any corporation or other entity, without the affirmative vote of the holders of at least two-thirds of each series of preferred stock, each voting separately as a class, unless the transaction meets certain criteria. These voting rights of the preferred stock may allow holders of preferred stock to impede or veto actions by the Company that would otherwise benefit the holders of the Company's Common Stock. Exemption Of Westbrook and George Marcus From The Maryland Business Combination Law May Allow Certain Transactions Between The Company And Westbrook And/Or George Marcus To Proceed Without Compliance With Such Law The Maryland General Corporation Law establishes special requirements for "business combinations" between a Maryland corporation and "interested stockholders" unless exemptions are applicable. An interested stockholder is any person who beneficially owns ten percent or more of the voting power of the then-outstanding voting stock. Among other things, the law prohibits for a period of five years a merger and other similar transactions between the Company and an interested stockholder unless the Board of Directors approved the transaction prior to the party becoming an interested stockholder. The five year period runs from the most recent date on which the interested stockholder became an interested stockholder. The law also requires a supermajority stockholder vote for such transactions after the end of the five year period. This means that the transaction must be approved by at least: . 80% of the votes entitled to be cast by holders of outstanding voting shares; and . 66% of the votes entitled to be cast by holders of outstanding voting shares other than shares held by the interested stockholder with whom the business combination is to be effected. However, as permitted by the statute, the Board of Directors irrevocably has elected to exempt any business combination by the Company with Westbrook and its affiliates from the "business combination" provision of the Maryland General Corporation Law. In addition, the Board of Directors similarly exempted George M. Marcus, William A. Millichap, who are the chairman and a director of the Company, respectively, and The Marcus & Millichap Company ("M&M") or any entity owned or controlled by Messrs Marcus and Millichap and M&M. Consequently, the five-year prohibition and the super-majority vote requirement described above will not apply to any business combination between the Company and either Westbrook (or its affiliates), Mr. Marcus, Mr. Millichap, or M&M. As a result, the Company may in the future enter into business combinations with Westbrook (or its affiliates) or Messrs Marcus and Millichap and M&M, without compliance with the super-majority vote requirements and other provisions of the Maryland General Corporation Law. Anti-Takeover Provisions Contained In The Operating Partnership Agreement, Charter, Bylaws, The Convertible Preferred Stock And Certain Provisions Of Maryland Law Could Delay, Defer Or Prevent A Change In Control Of the Company While the Company is the sole general partner of the Operating Partnership, and generally has full and exclusive responsibility and discretion in the management and control of the Operating Partnership, certain provisions of the Operating Partnership's Partnership Agreement place limitations on the Company's ability to act with respect to the Operating Partnership. Such limitations could delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for the stock or otherwise be in the best interest of the stockholders or that could otherwise adversely affect the interest of the stockholders. The Partnership Agreement provides that if the limited partners own at least 5% of the outstanding units of limited partnership interest in the Operating Partnership, the Company cannot, without first obtaining the consent of a majority-in-interest of the limited partners in the Operating Partnership, transfer all or any portion of the Company's general partner interest in the Operating Partnership to another entity. Such limitations on the Company's ability to act may result in the Company being precluded from taking action that the Board of Directors believes is in the best interests of the Company's stockholders. In addition, as of December 31, 1999, two individuals together held more than 50% of the outstanding units of limited partnership interest in the Operating Partnership, allowing such actions to be blocked by a small number of limited partners. The Company's charter authorizes the issuance of additional shares of Common Stock or preferred stock and the setting of the preferences, rights and other terms of such preferred stock without the approval of the holders of the Common Stock. The Company must obtain the approval of the holders of two-thirds of the outstanding shares of Convertible Preferred Stock in order to authorize, create or issue any class or series of stock that ranks equal or senior to the Convertible Preferred Stock. Although the Company has no intention to issue any additional shares of Convertible Preferred Stock or other preferred stock at the present time, the Company may, subject to the consent of the holders of Convertible Preferred Stock, establish one or more series of preferred stock that could delay, defer or prevent a transaction or a change in control of the Company. Such a transaction might involve a premium price for the Company's stock or otherwise be in the best interests of the holders of Common Stock. Also, such a class of preferred stock could have dividend, voting or other rights that could adversely affect the interest of holders of Common Stock. The Company's charter, as well as its stockholder rights plan, also contains other provisions that may delay, defer or prevent a transaction or a change in control of the Company that might be in the best interest of the Company's stockholders. The Company's stockholder rights plan is designed, among other things, to prevent a person or group from gaining control of the Company without offering a fair price to all of the Company's stockholders. Also, the Bylaws may be amended by the Board of Directors (subject to the consent of the holders of the Convertible Preferred Stock in certain circumstances) to include provisions that would have a similar effect, although the Company presently has no such intention. The Charter provides that the Company must obtain the approval of the holders of the Convertible Preferred Stock holding two-thirds of the outstanding shares of Convertible Preferred Stock before the Company or the Operating Partnership may merge or consolidate with any other entity or sell all or substantially all of the assets. Also, the terms of the Convertible Preferred Stock require that the Company must obtain the approval of the holders of more than 50% of the outstanding shares of Convertible Preferred Stock before undergoing a change in control (as defined in the Charter). Additionally, the Charter contains ownership provisions limiting the transferability and ownership of shares of capital stock, which may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company. For example, subject to receiving an exemption from the Board of Directors, potential acquirers may not purchase more than 6% percent in value of the stock (other than qualified pension trusts which can acquire 9.9%). This may discourage tender offers that may be attractive to the holders of Common Stock and limit the opportunity for stockholders to receive a premium for their shares of Common Stock. In addition, the Maryland General Corporations Law restricts the voting rights of shares deemed to be "control shares." Under the Maryland General Corporations Law, "control shares" are those which, when aggregated with any other shares held by the acquirer, entitle the acquirer to exercise voting power within specified ranges. Although the Bylaws exempt the Company from the control share provisions of the Maryland General Corporations Law, the provisions of the Bylaws may be amended or eliminated by the Board of Directors at any time in the future, provided that it obtains the approval of the holders of two-thirds of the outstanding shares of the Convertible Preferred Stock. Moreover, any such amendment or elimination of such provision of the Bylaws may result in the application of the control share provisions of the Maryland General Corporations Law not only to control shares which may be acquired in the future, but also to control shares previously acquired. If the provisions of the Bylaws are amended or eliminated, the control share provisions of the Maryland General Corporations Law could delay, defer or prevent a transaction or change in control of the Company that might involve a premium price for the stock or otherwise be in the best interests of its stockholders. The Company's Guarantee of the Director and Executive Stock Purchase Program May Lead to Liability For the Company. In September 1999, the Company formed a program in which directors and managment of the Company can participate indirectly in an investment in the Company's Common Stock. The participants have entered into a swap agreement with a securities broker whereby the securities broker has acquired, in open market transactions, 223,475 shares of the Company's Common Stock. The agreement terminates in five years, or earlier under certain circumstances, at which time the settlement amount is determined by comparing the original purchase price of the stock plus interest at a rate of LIBOR plus 1.5% to the termination date market value of the shares and all dividends received during the investment period. In certain circumstances the participants may be required to provide collateral to the securities broker. The Company has guaranteed performance of the participants with respect to any obligations relating to the swap agreement. Due to this guarantee, if the swap agreement, upon its termination, results in a net loss to participants, the Company could be liable for paying the loss. Further, if collateral is required to be advanced to the securities broker, the Company could be obligated to make such advances, which in turn could be costly to the Company. Bond Compliance Requirements May Limit Income From Certain Properties At December 31, 1999, the Company had approximately $58.8 million of tax-exempt financing relating to the Inglenook Court Apartments, Wandering Creek Apartments, Treetops Apartments, Meadowood Apartments and Camarillo Oaks Apartments. This tax-exempt financing subjects these Properties to certain deed restrictions and restrictive covenants. The Company expects to engage in tax-exempt financings in the future. In addition, the Internal Revenue Code of 1986, as amended, (the "Code") and its related regulations impose various restrictions, conditions and requirements excluding interest on qualified bond obligations from gross income for federal income tax purposes. The Code also requires that at least 20% of apartment units be made available to residents with gross incomes that do not exceed 50% of the median income for the applicable family size as determined by the Housing and Urban Development Department of the federal government. In addition to federal requirements, certain state and local authorities may impose additional rental restrictions. These restrictions may limit income from the tax-exempt financed properties if the Company is required to lower rental rates to attract residents who satisfy the median income test. If the Company does not reserve the required number of apartment homes for residents satisfying these income requirements, the tax-exempt status of the bonds may be terminated, the obligations under the bond documents may be accelerated and the Company may be subject to additional contractual liability. Adverse Effect To Property Income And Value Due To General Real Estate Investment Risks Real property investments are subject to a variety of risks. The yields available from equity investments in real estate depend on the amount of income generated and expenses incurred. If the Properties do not generate sufficient income to meet operating expenses, including debt service and capital expenditures, cash flow and ability to make distributions to stockholders will be adversely affected. The performance of the economy in each of the areas in which the Properties are located affects occupancy, market rental rates and expenses. Consequently, the income from the Properties and their underlying values may be impacted. The financial results of major local employers may have an impact on the cash flow and value of certain of the Properties as well. Income from the Properties may be further adversely affected by, among other things, the following factors: . the general economic climate; . local economic conditions in which the Properties are located, such as oversupply of space or a reduction in demand for rental space; . the attractiveness of the Properties to tenants; . competition from other available space; . the Company's ability to provide for adequate maintenance and insurance; and . increased operating expenses. Also, as leases on the Properties expire, tenants may enter into new leases on terms that are less favorable to the Company. Income and real estate values may also be adversely affected by such factors as applicable laws (e.g., the Americans With Disabilities Act of 1990 and tax laws), interest rate levels and the availability and terms of financing. In addition, real estate investments are relatively illiquid and, therefore, the Company's ability to vary its portfolio promptly in response to changes in economic or other conditions may be adversely affected. The Company's Joint Ventures And Joint Ownership Of Properties And Partial Interests In Corporations And Limited Partnerships Could Limit the Company's Ability To Control Such Properties And Partial Interests Instead of purchasing properties directly, the Company has invested and may continue to invest as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, it is possible that the co-venturer in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with the Company's business interests or goals, or be in a position to take action contrary to the Company's instructions or requests, or to Company policies or objectives. Consequently, a co-venturer's actions might subject property owned by the joint venture to additional risk. Although the Company seeks to maintain sufficient control of any joint venture to achieve its objectives, the Company may be unable to take action without the Company's joint venture partners' approval, or joint venture partners could take actions binding on the joint venture without consent. Additionally, should a joint venture partner become bankrupt, the Company could become liable for such partner's share of joint venture liabilities. From time to time the Company, invests in corporations, limited partnerships or other entities that have been formed for the purpose of acquiring, developing or managing real property. In certain circumstances, the Company's interest in a particular entity may be less than a majority of the outstanding voting interests of that entity. Therefore, the Company's ability to control the daily operations of such an entity may be limited. Furthermore, the Company may not have the power to remove a majority of the board of directors (in the case of a corporation) or the general partner or partners (in the case of a limited partnership) of such an entity in the event that its operations conflict with the Company's objectives. In addition, the Company may not be able to dispose of its interests in such an entity. In the event that such an entity becomes insolvent, the Company may lose up to its entire investment in and any advances to the entity. Investments In Mortgages And Other Real Estate Securities The Company may invest in securities related to real estate which could adversely affect its ability to make distributions to stockholders. The Company may purchase securities issued by entities which own real estate and may also invest in mortgages. These mortgages may be first, second or third mortgages that may or may not be insured or otherwise guaranteed. The Company anticipates that such investment in mortgage receivables will not in the aggregate be significant. In general, investments in mortgages include the following risks: . that the value of mortgaged property may be less than the amounts owed; . that interest rates payable on the mortgages may be lower than the Company's cost of funds; and . in the case of junior mortgages, that foreclosure of a senior mortgage would eliminate the junior mortgage. If any of the above were to occur, cash flows from operations and the Company's ability to make expected dividends to stockholders could be adversely affected. Possible Environmental Liabilities Investments in real property create a potential for environmental liabilities on the part of the owner of such real property. The Company carries certain insurance coverage for this type of environmental risk. The Company has conducted environmental studies which revealed the presence of groundwater contamination at certain properties; such contamination at certain of these properties was reported to have migrated on-site from adjacent industrial manufacturing operations. The former industrial users of the properties were identified as the source of contamination. The environmental studies noted that certain properties are located adjacent to any possible down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such properties. The environmental studies also noted that at certain of these properties, contamination existed because of the presence of underground fuel storage tanks, which have been removed. In general, in connection with the ownership, operation, financing, management and development of real properties, the Company may be potentially liable for removal or clean-up costs, as well as certain other costs and environmental liabilities. The Company may also be subject to governmental fines and costs related to injuries to persons and property. General Uninsured Losses The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties. There are, however, certain types of extraordinary losses for which the Company does not have insurance. Certain of the Properties are located in areas that are subject to earthquake activity. The Company has obtained certain limited earthquake insurance coverage. The Company may sustain losses due to insurance deductibles, co-payments on insured losses or uninsured losses, or losses in excess of applicable coverage. Changes In Real Estate Tax And Other Laws Generally the Company does not directly pass through costs resulting from changes in real estate tax laws to residential property tenants. The Company also does not generally pass through increases in income, service or other taxes, to tenants under leases. These costs may adversely affect funds from operations and the ability to make distributions to stockholders. Similarly, compliance with changes in (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions or (ii) rent control or rent stabilization laws or other laws regulating housing may result in significant unanticipated expenditures, which would adversely affect funds from operations and the ability to make distributions to stockholders. Changes In Financing Policy; No Limitation On Debt The Company has adopted a policy of maintaining a debt-to-total-market- capitalization ratio of less than 50%. The calculation of debt-to-total-market- capitalization is as follows : total property indebtedness -------------------------------------- = debt-to-total-market-capitalization total property indebtedness + total equity market capitalization As used in the above formula, total market capitalization is equal to the aggregate market value of the outstanding shares of Common Stock (based on the greater of current market price or the gross proceeds per share from public offerings of the outstanding shares plus any undistributed net cash flow), assuming the conversion of all limited partnership interests in the Operating Partnership into shares of Common Stock and the conversion of all shares of Convertible Preferred Stock into shares of Common Stock and the gross proceeds of the preferred units of the Operating Partnership. Based on this calculation (including the current market price and excluding undistributed net cash flow), the Company's debt-to-total-market-capitalization ratio was approximately 29.7% as of December 31, 1999. The organizational documents of the Company do not limit the amount or percentage of indebtedness that may be incurred. Accordingly, the Board of Directors could change current policies and the policies of the Company regarding indebtedness. If these policies were changed, the Company could incur more debt, resulting in an increased risk of default on the obligations of the Company, and an increase in debt service requirements that could adversely affect the financial condition and results of operations of the Company. Such increased debt could exceed the underlying value of the Properties. Failure To Qualify As A Real Estate Investment Trust The Company has operated as a qualified real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 1994. Although the Company believes that it has operated in a manner which satisfies the real estate investment trust qualification requirements, no assurance can be given that the Company will continue to do so. A real estate investment trust is generally not taxed on its net income distributed to its stockholders. It is required to distribute at least 95% of its taxable income to maintain qualification as a real estate investment trust. Qualification as a real estate investment trust involves the satisfaction of numerous requirements (some on an annual or quarterly basis) established under the highly technical and complex Internal Revenue Code of 1986, as amended, provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within the Company's control. If the Company fails to qualify as a real estate investment trust in any taxable year, it would generally be subject to federal and state income tax (including any applicable alternative minimum tax) at corporate rates on its taxable income for such year. Moreover, unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a real estate investment trust for the four taxable years following the year of disqualification. This treatment would reduce net earnings available for investment or distribution to stockholders because of the additional tax liability for the years involved. In addition, distributions would no longer be required to be made. OTHER MATTERS Certain Policies of the Operating Partnership The Operating Partnership intends to continue to operate in a manner that will not subject it to regulation under the Investment Act of 1940. The Company has in the past five years and may in the future (i) issue securities senior to its Common Stock, (ii) fund acquisition activities with borrowings under its line of credit and (iii) offer shares of Common Stock and/or units of limited partnership interest in the Operating Partnership as partial consideration for property acquisitions. The Operating Partnership from time to time acquires partnership interests in partnerships and joint ventures, either directly or indirectly through subsidiaries of the Operating Partnership, when such entities' underlying assets are real estate. In general, the Operating Partnership does not (i) underwrite securities of other issuers or (ii) actively trade in loans or other investments. The Operating Partnership primarily invests in multifamily properties 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 Operating Partnership currently intends to continue to invest in multifamily properties in such regions, but may change such policy without a vote of the stockholders. The policies discussed above may be reviewed and modified from time to time by the Board of Directors of the Company. ITEM 2. PROPERTIES The Operating Partnership's property portfolio (including partial ownership interests) consists of the following 72 Properties: 68 multifamily residential Properties containing 15,106 apartment units, one office building, which houses the Operating Partnership's headquarters, with approximately 17,400 square feet and three retail properties with approximately 236,000 square feet. 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 Operating Partnership's multifamily Properties accounted for approximately 97% of the Operating Partnership's revenues for the year ended December 31, 1999. The 68 multifamily residential Properties had an average occupancy rate (based on "Financial Occupancy", which refers to the percentage resulting from dividing actual rents by total possible rents as determined by valuing occupied units at contractual rates and vacant units at market rents) during the year ended December 31, 1999 of approximately 96%. As of December 31, 1999, the headquarters building was 100% occupied by the Operating Partnership and the three retail centers had an occupancy rate of 99%. With respect to stabilized multifamily properties with sufficient operating history, occupancy figures are based on Financial Occupancy. With respect to commercial properties or properties which have not yet stabilized or have insufficient operating history, occupancy figures are based on " Physical Occupancy" which refers to the percentage resulting from dividing leased and occupied square footage by rentable square footage. For the year ended December 31, 1999, none of the Operating Partnership's Properties had book values equal to 10% or more of total assets of the Operating Partnership or gross revenues equal to 10% or more of aggregate gross revenues of the Operating Partnership. Multifamily Residential Properties The Operating Partnership's multifamily Properties are generally suburban garden apartments and townhomes comprising multiple clusters of two and three story buildings situated on three to fifteen acres of land. The multifamily properties have on average 222 units, with a mix of studio, one, two and some three bedroom units. A wide variety of amenities are available at each apartment community, including, covered parking, wood-burning fireplaces, swimming pools, clubhouses with complete fitness facilities, volleyball and playground areas and tennis courts. Most of the multifamily Properties are designed for and marketed to people in white-collar or technical professions. The Operating Partnership selects, trains and supervises a full team of on-site service and maintenance personnel. The Operating Partnership believes that its customer service approach enhances its ability to retain tenants and that its multifamily Properties were built well and have been maintained well since acquisition. Office Buildings The Operating Partnership's corporate headquarters are located in a two-story office building with approximately 17,400 square feet located at 925 East Meadow Drive, Palo Alto, California. The Operating Partnership acquired this property in 1997. The following tables describe the Operating Partnership's Properties as of December 31, 1999. The first table describes the Operating Partnership's multifamily residential properties and the second table describes the Operating Partnership's commercial properties.
RENTABLE SQUARE YEAR YEAR MULTIFAMILY RESIDENTIAL PROPERTIES (1) LOCATION UNITS FOOTAGE BUILT ACQUIRED OCCUPANCY(2) - ---------------------------------------------------------------------------------------------------------------------- NORTHERN CALIFORNIA Bristol Commons (3) Sunnyvale, CA 188 142,668 1989 1995 98% Eastridge San Ramon, CA 188 174,104 1988 1996 96% Foothill Gardens San Ramon, CA 132 155,100 1985 1997 94% Marina Cove (4) Santa Clara, CA 292 250,294 1974 1994 98% Mt. Sutro Terrace (5) San Francisco, CA 99 64,095 1973 1999 98% Oak Pointe Sunnyvale, CA 390 294,180 1973 1988 98% Plumtree Santa Clara, CA 140 113,260 1975 1994 97% The Shores (3) San Ramon, CA 348 275,888 1988 1995 96% Stevenson Place Fremont, CA 200 146,296 1971 1982 98% Summerhill Commons Newark, CA 184 139,012 1987 1987 98% Summerhill Park Sunnyvale, CA 100 78,584 1988 1988 96% Treetops (3) Fremont, CA 172 131,270 1978 1996 97% Twin Creeks San Ramon, CA 44 51,700 1985 1997 94% Westwood (6) Cupertino, CA 116 135,288 1963 1998 96%(7) Wimbledon Woods Hayward, CA 560 462,400 1975 1998 94% Windsor Ridge Sunnyvale, CA 216 161,892 1989 1989 97% --- ------- --- 3,369 2,776,031 97% PACIFIC NORTHWEST SEATTLE, WASHINGTON METROPOLITAN AREA Anchor Village (8) Mukilteo, WA 301 245,928 1981 1997 90% Bridle Trails (3) Kirkland, WA 92 73,448 1986 1997 97% Brighton Ridge Renton, WA 264 201,300 1986 1996 95% Castle Creek Newcastle, WA 216 191,935 1997 1997 93% Emerald Ridge Bellevue, WA 180 144,036 1987 1994 96% Evergreen Heights Kirkland, WA 200 188,340 1990 1997 94% Foothill Commons (3) Bellevue, WA 360 288,317 1978 1990 94% Inglenook Court Bothell, WA 224 183,624 1985 1994 96% Laurels at Mill Creek Mill Creek, WA 164 134,360 1981 1996 96% Maple Leaf (3) Seattle, WA 48 35,584 1986 1997 94% The Palisades (3) Bellevue, WA 192 159,792 1977 1990 98% Park Hill @ Issaquah (9) Issaquah, WA 245 277,778 1999 1999 85%(10) Sammamish View Bellevue, WA 153 133,590 1986 1994 96% Spring Lake (3) Seattle, WA 69 42,325 1986 1997 95% Stonehedge Village (3) Bothell, WA 196 214,872 1986 1997 94% Wandering Creek Kent, WA 156 124,366 1986 1995 95% Wharfside Pointe Seattle, WA 142 119,290 1990 1994 94% Woodland Commons (3) Bellevue, WA 236 172,316 1978 1990 95% PORTLAND, OREGON METROPOLITAN AREA Jackson School Village (11) Hillsboro, OR 200 196,896 1996 1996 84% Landmark Hillsboro, OR 285 282,934 1990 1996 94% Meadows at Cascade Park Vancouver, WA 198 199,377 1989 1997 93% Village at Cascade Park Vancouver, WA 192 178,144 1989 1997 93% --- ------- --- 4,313 3,788,552 95% SOUTHERN CALIFORNIA Avondale @ Warner Center Woodland Hills, CA 446 331,072 1970 1999 90% The Bluffs II (12) San Diego, CA 224 126,744 1974 1997 97% Bunker Hill (3) Los Angeles, CA 456 346,672 1968 1998 95% Camarillo Oaks (3) Camarillo, CA 564 459,072 1985 1996 97% Casa Mango (6) Del Mar, CA 96 88,112 1981 1997 97% Cochran Apartments Los Angeles, CA 58 51,468 1989 1998 96% Hampton Court (Columbus) (3) Glendale, CA 83 71,573 1974 1999 88%(7) Coronado @ Newport North (11) Newport Beach, CA 732 459,677 1968 1999 83%(7) Coronado @ Newport South (11) Newport Beach, CA 715 498,716 1968 1999 92%(7) Euclid Pasadena, CA 85 69,295 1972 1999 96% Fairways (3)(13) Newport Beach, CA 74 107,160 1972 1999 95% Glenbrook Pasadena, CA 84 73,101 1972 1999 95% Highridge (8) Rancho Palos, CA 255 290,250 1972 1997 95% Hillsborough Park La Habra, CA 235 215,510 1999 1999 99%(10) Hillcrest Park (Mirabella) Newbury Park, CA 608 521,968 1973 1998 97%(7)
Huntington Breakers (3) HuntingtonBeach,CA 342 241,763 1984 1997 97% Kings Road Los Angeles, CA 196 132,112 1979 1997 96% Hampton Place (Loraine) (3) Glendale, CA 132 141,591 1999 1970 88%(7) Meadowood (3) Simi Valley, CA 320 264,568 1986 1996 98% Monterra Del Mar (Windsor Terrace) Pasadena, CA 122 74,475 1972 1997 88%(7) Park Place Los Angeles, CA 60 48,000 1988 1997 96% Pathways Long Beach, CA 296 197,720 1975 1991 96% Riverfront (6) San Diego, CA 229 231,006 1990 1997 98% Tara Village Tarzana, CA 168 173,600 1972 1997 98% Trabuco Villas Lake Forest, CA 132 131,032 1985 1997 97% Villa Rio Vista Anaheim, CA 286 242,410 1968 1985 96% Villa Scandia Ventura, CA 118 71,160 1971 1997 99% Village Apartments Oxnard, CA 122 122,120 1974 1997 98% Wilshire Promenade Fullerton, CA 128 108,470 1992 1997 97% Windsor Court Los Angeles, CA 58 46,600 1988 1997 96% -- ------ --- 7,424 5,937,017 96% ----- --------- TOTAL/WEIGHTED AVERAGE 15,106 12,501,600 96% ====== ========== ---
NUMBER RENTABLE YEAR YEAR PROPERTY NAME(1) LOCATION OF SQUARE BUILT ACQUIRED OCCUPANCY(2) TENANTS FOOTAGE - ----------------------------------------------------------------------------------------------------------------------- OFFICE BUILDINGS 925 East Meadow Drive Palo Alto, CA 1 17,404 1988 1997 100% ---- SHOPPING CENTERS Canby Square (8) Canby, OR 18 102,403 1976 1990 95% Powell Villa Center (8) Portland, OR 8 63,645 1959 1990 100% Garrison Square (8) Vancouver, WA 15 69,790 1962 1990 100% -- ------ ---- Total Shopping Centers 41 235,838 -- ------- Total Commercial Properties 42 253,242 99% == ======= ---
- ---------- (1) Unless otherwise specified, the Operating Partnership has a 100% ownership interest in each Property. (2) For multifamily residential Properties, occupancy rates are based on Financial Occupancy for the year ended December 31, 1999; for the Commercial Properties, occupancy rates are based on Physical Occupancy as of December 31, 1999. (3) This Property is owned by a single asset limited partnership in which the Operating Partnership has a minimum 99.0% limited partnership interest. (4) A portion of this Property on which 84 units are presently located is subject to a ground lease, which, unless extended, will expire in 2028. (5) The Operating Partnership has an approximate 46% limited partnership interest in this property. (6) The Operating Partnership has a 20.0% ownership interest in this property (7) Financial occupancy does not include the impact of units that were offline and not occupied due to redevelopment activity at this property. (8) The Operating Partnership has a 1.0% limited partnership interest in this property. (9) The Operating Partnership has as approximate 45% limited partnership interest in this property. (10) Financial occupancy on development properties that have reached stabilization is computed from the date of stabilization through December 31, 1999 (11) The Operating Partnership has an approximate 49.9% ownership interest in this property. (12) The Operating Partnership has an 84.0% limited partnership interest in this property. (13) This property is subject to a ground lease, which, unless extended, will expire in 2027. ITEM 3. LEGAL PROCEEDINGS Neither the Operating Partnership nor any of the Properties is presently subject to any material litigation nor, to the Operating Partnership's knowledge, is there any material litigation threatened against the Operating Partnership or the Properties. The Properties are subject to certain routine litigation and administrative proceedings arising in the ordinary course of business, which, taken together, are not expected to have a material adverse impact on the Operating Partnership's financial position results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1999, no matters were submitted to a vote of security holders. PART II ITEM 5. RECENT SALES OF UNREGISTERED SECURITIES In July 1999, the Operating Partnership sold 2,000,000 of its 9.30% Series D Cumulative Redeemable Preferred Units (the "Series D Preferred Units"), to two related institutional investor in return for a total contribution to the Operating Partnership of $50 million. The Series D Preferred Units will become exchangeable, on a one for one basis, in whole or in part at any time ten year after the issue date (or earlier under certain circumstances) for shares of the Company's 9.30% Series D Cumulative Redeemable Preferred Stock, par value $.0001 per share (the "Series D Preferred Stock"). Pursuant to the terms of a registration rights agreement, entered into in connection with this private placement, the holders of Series D Preferred Stock will have certain rights to cause the Company to register such shares of Series D Preferred Stock. In September 1999, the Operating Partnership sold 2,200,000 of its 9.25% Series E Cumulative Redeemable Preferred Units (the "Series E Preferred Units") to an institutional investor in a private placement, in return for a total contribution of $55 million. The Series E Preferred Units will become exchangeable, on a one for one basis, in whole or in part at any time ten years after the issue date (or earlier under certain circumstances) for shares of the Company's 9.25% Series E Cumulative Redeemable Preferred Stock, par value $.0001 per share (the "Series E Preferred Stock"). Pursuant to the terms of a registration rights agreement, entered into in connection with this private placement, the holders of Series E Preferred Stock will have certain rights to cause the Company to register such shares of Series E Preferred Stock. The Series D Preferred Units and the Series E Preferred Units were issued by the Operating Partnership in privately negotiated transactions to accredited institutional investors in reliance on the exemption provided by Section 4(2) of the Securities Act. ITEM 6. SUMMARY FINANCIAL AND OPERATING DATA The following tables set forth summary financial and operating information for the Operating Partnership from January 1, 1995 through December 31, 1999.
As of December 31, --------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- -------- (Dollars in thousands, except per unit amounts) OPERATING DATA: Revenues Rental................................ $ 137,262 $ 119,397 $ 79,936 $ 47,780 $ 41,640 Other property income................. 3,165 2,645 1,464 756 702 Interest and other income............. 5,618 3,217 3,169 2,157 1,598 --------- --------- -------- -------- -------- Total revenues................... 146,045 125,259 84,569 50,693 43,940 --------- --------- -------- -------- -------- EXPENSES Property operating expenses........... 41,706 37,933 25,826 15,505 13,604 Depreciation and amortization......... 26,150 21,948 13,992 8,855 8,007 Amortization of deferred financing costs..................... 566 718 509 639 1,355 General and administrative............ 4,263 3,765 2,413 1,717 1,527 Other expenses........................ - 930 138 42 288 Interest.............................. 21,268 19,374 12,659 11,442 10,928 --------- --------- -------- -------- -------- Total expenses.................... 93,953 84,668 55,537 38,200 35,709 --------- --------- -------- -------- -------- Income before gain on sales, minority. 52,092 40,591 29,032 12,493 8,231 interests and extraordinary item Gain on sales of real estate.......... 9,524 9 5,114 2,477 6,013 Minority interests.................... (549) (462) (463) (386) (352) Extraordinary item-loss on early extinguishment of debt............. (214) (4,718) (361) (3,441) (154) --------- --------- -------- -------- -------- Net income............................... 60,853 35,420 33,322 11,143 13,738 ========= ========= ======== ======== ======== Net income per unit - diluted............ $ 2.37 $ 1.41 $ 1.94 $ 1.15 $ 1.69 ========= ========= ======== ======== ======== Weighted average common units outstanding -diluted (in thousands) 20,513 18,682 17,149 9,203 8,130
As of December 31, --------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- -------- BALANCE SHEET DATA: Investment in real estate (before accumulated depreciation)............ 929,076 889,964 730,987 393,809 284,358 Net investment in real estate.......... 832,471 812,175 702,716 354,715 244,077 Real estate under development.......... 120,414 53,213 20,234 - - Total assets........................... 1,062,313 931,796 738,835 417,174 273,660 Total property indebtedness............ 384,108 361,515 276,597 153,205 154,524 Partners' capital...................... 623,603 517,281 424,402 247,046 109,941
As of December 31, --------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- -------- OTHER DATA: Debt service coverage ratio (1)....... 4.7x 4.3x 4.4x 2.9x 2.6x Gross operating margin (2)............ 70% 68% 68% 68% 67% Average same property monthly rental rate per apartment unit (3) (4)........................ $ 950 $ 944 $ 852 $ 798 $ 749 Average same property monthly operating expenses per apartment unit (3) (5).............. $ 259 $ 256 $ 257 $ 248 $ 241 Total multifamily units (at end of period).................. 15,106 12,267 10,700 6,624 4,868 Multifamily residential property occupancy rate(6)................... 96% 96% 96% 97% 97% Total properties (at end of period)... 72 63 59 36 30
(1) Debt service coverage ratio represents earnings before interest expense, taxes, depreciation and amortization ("EBITDA") divided by interest expense. (2) Gross operating margin represents rental revenues and other property income less property operating expenses, exclusive of depreciation and amortization divided by rental revenues and other property income. (3) Same property apartment units are those units that the Operating Partnership has consolidated for the entire two years ended as of the end of the period set forth. Same property apartment units vary at each year end. Percent changes in averages per unit do not correspond to total same property revenues and expense percent changes as discussed in Item 7 - Management's Discussion and Analysis. (4) Average same property monthly rental rate per apartment unit represents total scheduled rent for the same property apartment units for the period (actual rental rates on occupied apartment units plus market rental rates on vacant apartment units) divided by the number of such apartment units and further divided by the number of months in the period. (5) Average same property monthly expenses per apartment unit represents total monthly operating expenses, exclusive of depreciation and amortization, for the same property apartment units for the period divided by the total number of such apartment units and further divided by the number of months in the period. (6) Occupancy rates are based on Financial Occupancy which refers to the percentage resulting from dividing actual rents by total possible rents as determined by valuing occupied units at contractual rates and vacant units at market rates. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based on the consolidated financial statements of the Operating Partnership as of and for the years ended December 31, 1999, 1998 and 1997. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. The Operating Partnership holds, directly or indirectly, substantially all of the Company's assets and conducts substantially all of the Company's operations. The Company is the sole general partner of the Operating Partnership and as of December 31, 1999, 1998 and 1997 owned an 89.7%, 89.9% and 89.9% general partnership interest in the Operating Partnership, respectively. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Annual Report which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Operating Partnership's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Operating Partnership's expectation as to the timing of completion of current development projects, expectation as to the total projected costs 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, 2000, potential acquisitions and developments, the anticipated performance of existing properties, future acquisitions and developments and statements regarding the Operating Partnership's financing activities. Such forward- looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the actual completion of development projects will be subject to delays, that the total projected costs of current development projects will exceed expectations, that such development projects will not be completed, that future cash flows will be inadequate to meet operating requirements and/or will be insufficient to provide for dividend payments in accordance with REIT requirements, that the actual non-revenue generating capital expenditures will exceed the Operating Partnership's current expectations, as well as those risks, special considerations, and other factors discussed under the caption "Other Matters/Risk Factors" in Item 1 of this Annual Report on Form 10-K for the year ended December 31, 1999, and those other risk factors and special considerations set forth in the Operating Partnership's other filings with the Securities and Exchange Commission (the "SEC") which may cause the actual results, performance or achievements of the Operating Partnership to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. GENERAL BACKGROUND The Operating Partnership's property revenues are generated primarily from multifamily property operations, which accounted for greater than 96% of its property revenues for the years ended December 31, 1999, 1998, and 1997. The Operating Partnership's 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 level of the Operating Partnership's portfolio has exceeded 95% for the last five years. Since the Operating Partnership began operations in 1994, the Operating Partnership has acquired ownership interests in 58 multifamily residential properties and its headquarters building, of which 12 are located in Northern California, 29 are located in Southern California, 14 are located in the Seattle Metropolitan Area and 3 are located in the Portland Metropolitan Area. In total, these acquisitions consist of 11,954 units with total capitalized acquisition costs of approximately $950.7 million. Additionally, since it began operations in 1994, the Operating Partnership has acquired ownership interests in three multifamily development properties that have reached stabilized operations. These development properties consist of 680 units with total capitalized development costs of $63.5 million. As part of its active portfolio management strategy, the Operating Partnership has disposed of, since it began operations in 1994, seven multifamily residential properties (five in Northern California, one in Southern California and one in the Pacific Northwest) consisting of a total of 915 units, six retail shopping centers in the Portland, Oregon metropolitan area and its former headquarters building located in Northern California at an aggregate gross sales price of approximately $100.6 million resulting in a net realized gain of approximately $21.6 million and a deferred gain of $5.0 million. The Operating Partnership is developing nine multifamily residential communities, with an aggregate of 1,904 multifamily units. In connection with these development projects, the Operating Partnership has directly, or in some cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties for approximately $234,500,000. As of December 31, 1999, the Operating Partnership's remaining development commitment is approximately $78,700,000. RESULTS OF OPERATIONS Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998. - --------------------------------------------------------------------------- Average financial occupancy rates of the Operating Partnership's multifamily Same Store Properties (properties consolidated by the Operating Partnership for each of the years ended December 31, 1999 and 1998) increased to 96.4% for the year ended December 31, 1999 from 96.0% for the year ended December 31, 1998. Financial occupancy is defined as the percentage resulting from dividing actual rental income by total possible rental income. Total possible rental income is determined by valuing occupied units at contractual rates and vacant units at market rents. The regional breakdown of financial occupancy for the Same Store Properties for the years ended December 31, 1999 and 1998 are as follows:
December 31, December 31, 1999 1998 ------------ ------------ Northern California 97.2% 96.9% Southern California 97.1% 96.5% Pacific Northwest 94.9% 94.5%
Total Revenues increased by $20,786,000 or 16.6% to $146,045,000 in 1999 from $125,259,000 in 1998. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the Same Store Properties.
Years Ended Number of December 31, Dollar Percentage ------------------- Properties 1999 1998 Change Change ---------- -------- -------- ------- ----------- (dollars in thousands) Revenues Property revenues Same Store Properties Northern California 12 $ 37,506 $ 35,943 $ 1,563 4.3% Pacific Northwest 18 30,946 29,611 1,335 4.5 Southern California 12 30,042 27,942 2,100 7.5 -- -------- -------- ------- ---------- Total property revenues Same Store Properties 42 98,494 93,496 4,998 5.4 == Property revenues properties acquired/disposed of subsequent to January 1, 1998 (1) 41,933 28,546 13,387 46.9 -------- -------- ------- ---------- Total property revenues 140,427 122,042 18,385 15.1 -------- -------- ------- ---------- Interest and other income 5,618 3,217 2,401 74.6 -------- -------- ------- ---------- Total revenues $146,045 $125,259 $20,786 16.6% ======== ======== ======= ==========
(1) Also includes one commercial property, redevelopment communities and development communities. As set forth in the above table, $13,387,000 of the $20,786,000 net increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 1998, the commercial property, redevelopment communities and development communities. During this period, the Operating Partnership acquired interests in 11 properties and achieved stabilized operations at one development community, (the "Acquisition Properties"), and disposed of two multifamily properties, three retail shopping centers and one commercial property (the "Disposition Properties"). Of the increase in total revenues, $4,998,000 is attributable to increases in property revenues from the Same Store Properties. Property revenues from the Same Store Properties increased by approximately 5.4% to $98,494,000 in 1999 from $93,496,000 in 1998. A significant portion of this increase was attributable to the 12 multifamily Same Store Properties located in Southern California, the property revenues of which increased by $2,100,000 or 7.5 % to $30,042,000 in 1999 from $27,942,000 in 1998. This $2,100,000 increase is primarily attributable to rental rate increases and an increase in average financial occupancy to 97.1% in 1999 from 96.5% in 1998. The 12 multifamily Same Store Properties located in Northern California accounted for the next largest contribution to the Same Store Properties revenues increase. The property revenues of these properties increased by $1,563,000 or 4.3% to $37,506,000 in 1999 from $35,943,000 in 1998. This $1,563,000 increase is primarily attributable to rental rate increases, and an increase in average financial occupancy to 97.2% in 1999 from 96.9% in 1998. The 18 multifamily Same Store Properties located in the Pacific Northwest accounted for the next largest contribution to the Same Store Properties revenues increase. The property revenues of these properties increased by $1,335,000 or 4.5% to $30,946,000 in 1999 from $29,611,000 in 1998. This $1,335,000 increase is attributable to rental rate increases, and an increase in financial occupancy to 94.9% in 1999 from 94.5% in 1998. The increase in total revenue also reflected an increase of $2,401,000 attributable to interest and other income, which primarily relates to income and fees earned on the Operating Partnership's investments in joint ventures and interest income earned on outstanding notes receivable and cash balances. Total Expenses increased by $9,285,000 or approximately 11.0% to $93,953,000 in 1999 from $84,668,000 in 1998. The most significant factor contributing to this increase was the growth in the Operating Partnership's multifamily portfolio from 54 properties (10,700 units) at January 1, 1998 to 68 properties (15,106 units) at December 31, 1999. Interest expense increased by $1,894,000 or 9.8% to $21,268,000 in 1999 from $19,374,000 in 1998. Such interest expense increase was primarily due to the net addition of mortgage debt in connection with property acquisitions and investments, which was offset by an increase in the capitalization of interest charges on the Operating Partnership's development and redevelopment communities of $1,678,000 or approximately 48.0% to $5,172,000 from $3,494,000 in 1998. Property operating expenses, exclusive of depreciation and amortization, increased by $3,773,000 or 9.9% to $41,706,000 in 1999 from $37,933,000 in 1998. Of such increase, $4,093,000 is attributable to properties acquired or disposed of subsequent to January 1, 1998, which was offset by a decrease in operating expenses for the Same Store Properties. Property operating expenses, exclusive of depreciation and amortization, as a percentage of property revenues were 29.7% for 1999 and 31.1% for 1998. General and administrative expenses represent the costs of the Operating Partnership's various acquisition and administrative departments as well as corporate and partnership administration and non-operating expenses. Such expenses increased by $498,000 in 1999 from the amount incurred in 1998. This increase is largely due to additional staffing requirements resulting from the growth of the Operating Partnership. General and administrative expenses as a percentage of total revenues were 2.9 % for 1999 and 3.0% for 1998. Net income increased by $17,236,000 to $ 43,564,000 in 1999 from $26,328,000 in 1998. Net income included an extraordinary loss on early extinguishment of debt of $214,000 in 1999 compared to $4,718,000 in 1998. Net income for 1999 also included a gain on sales of real estate of $9,524,000 as compared with $9,000 in 1998. Net operating income of the Acquisition Properties and the increase in net operating income from the Same Store Properties also contributed to the increase in net income. Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997. - --------------------------------------------------------------------------- Average financial occupancy rates of the Operating Partnership's multifamily 1998/1997 Same Store Properties (properties consolidated by the Operating Partnership for each of the years ended December 31, 1998 and 1997) decreased to 96.2% for the year ended December 31, 1998 from 96.6% for the year ended December 31, 1997. The regional breakdown of financial occupancy for the 1998/1997 Same Store Properties for the years ended December 31, 1998 and 1997 are as follows:
December 31, December 31, 1998 1997 ------------ ------------ Northern California 96.9% 97.1% Southern California 95.8% 95.2% Pacific Northwest 95.2% 96.4%
Total Revenues increased by $40,690,000 or 48.1% to $125,259,000 in 1998 from $84,569,000 in 1997. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the 1998/1997 Same Store Properties.
Years Ended Number of December 31, Dollar Percentage ------------------ Properties 1998 1997 Change Change ---------- -------- -------- ------- ----------- (dollars in thousands) Revenues Property revenues 1998/1997 Same Store Properties Northern California 11 $ 33,397 $30,627 $ 2,770 9.0% Pacific Northwest 11 21,035 19,510 1,525 7.8 Southern California 3 8,509 8,085 424 5.2 -- -------- ------- ------- ---------- Total property revenues 1998/1997 Same Store Properties 25 62,941 58,222 4,719 8.1 == Property revenues properties acquired/disposed of subsequent to January 1, 1997 59,101 23,178 35,923 155.0 -------- ------- ------- ---------- Total property revenues 122,042 81,400 40,642 49.9 -------- ------- ------- ---------- Interest and other income 3,217 3,169 48 1.5 -------- ------- ------- ---------- Total revenues $125,259 $84,569 $40,690 48.1% ======== ======= ======= ==========
As set forth in the above table, $35,923,000 of the $40,690,000 net increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 1997. During this period, the Operating Partnership acquired 35 properties, (the "1998/1997 Acquisition Properties"), and disposed of two multifamily properties and six retail shopping centers, (the "1998/1997 Disposition Properties"). Of the increase in total revenues, $4,719,000 is attributable to increases in property revenues from the 1998/1997 Same Store Properties. Property revenues from the 1998/1997 Same Store Properties increased by approximately 8.1% to $62,941,000 in 1998 from $58,222,000 in 1997. The majority of this increase was attributable to the 11 multifamily 1998/1997 Same Store Properties located in Northern California, the property revenues of which increased by $2,770,000 or 9.0% to $33,397,000 in 1998 from $30,627,000 in 1997. This $2,770,000 increase is primarily attributable to rental rate increases, which were offset in part by a decrease in average financial occupancy to 96.9% in 1998 from 97.1% in 1997. The 11 multifamily 1998/1997 Same Store Properties located in the Pacific Northwest accounted for the next largest contribution to this 1998/1997 Same Store Property revenues increase. The property revenues of these properties increased by $1,525,000 or 7.8% to $21,035,000 in 1998 from $19,510,000 in 1997. This $1,525,000 increase is primarily attributable to rental rate increases, which were offset in part by a decrease in average financial occupancy to 95.2% in 1998 from 96.4% in 1997. The three multifamily 1998/1997 Same Store Properties located in Southern California accounted for the next largest contribution to this 1998/1997 Same Store Property revenues increase. The property revenues of these properties increased by $424,000 or 5.2% to $8,509,000 in 1998 from $8,085,000 in 1997. This $424,000 increase is attributable to rental rate increases, and an increase in financial occupancy to 95.8% in 1998 from 95.2% in 1997. The increase in total revenue also reflected an increase of $48,000 attributable to interest and other income. Total Expenses increased by $29,131,000 or approximately 52.5% to $84,668,000 in 1998 from $55,537,000 in 1997. The most significant factor contributing to this increase was the growth in the Operating Partnership's multifamily portfolio from 29 properties (6,624 units) at January 1, 1997 to 58 properties (12,267 units) at December 31, 1998. Interest expense increased by $6,715,000 or 53.0% to $19,374,000 in 1998 from $12,659,000 in 1997. Such interest expense increase was primarily due to the net addition of mortgage debt in connection with property and investment acquisitions. Property operating expenses, exclusive of depreciation and amortization, increased by $12,107,000 or 46.9% to $37,933,000 in 1998 from $25,826,000 in 1997. Of such increase, $12,356,000 is attributable to properties acquired or disposed of subsequent to January 1, 1997, which was offset by a decrease in operating expenses for the Same Store Properties. Property operating expenses, exclusive of depreciation and amortization, as a percentage of property revenues were 31.1% for 1998 and 31.7% for 1997. General and administrative expenses represent the costs of the Operating Partnership's various acquisition and administrative departments as well as corporate and partnership administration and non-operating expenses. Such expenses increased by $1,352,000 in 1998 from the 1997 amount. This increase is largely due to additional staffing requirements resulting from the growth of the Operating Partnership. General and administrative expenses as a percentage of total revenues were 3.0% for 1998 and 2.9% for 1997. Net income decreased by $2,988,000 to $26,328,000 in 1998 from $29,316,000 in 1997. Net income included an extraordinary loss on early extinguishment of debt of $4,718,000 in 1998 compared to $361,000 in 1997. Net income for 1998 also included a gain on sales of real estate of $9,000 compared with $5,114,000 in 1997. The net effect of these items were offset by the net contribution of the 1998/1997 Acquisition Properties and an increase in net operating income from the Same Store Properties, as offset by a decrease in net operating income attributable to the 1998/1997 Disposition Properties. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Operating Partnership had $12,348,000 of unrestricted cash and cash equivalents. The Operating Partnership expects to meet its short- term liquidity requirements by using its working capital, cash generated from operations, and amounts available under lines of credit. The Operating Partnership believes that its current net cash flows will be adequate to meet operating requirements and to provide for payment of dividends by the Company in accordance with REIT qualification requirements. The Operating Partnership expects to meet its long-term liquidity requirements relating to property acquisitions and development (beyond the next 12 months) by using a combination of some or all of the following sources; working capital, amounts available on lines of credit, net proceeds from public and private debt and equity issuances, and proceeds from the disposition of properties that may be sold from time to time. There can, however, be no assurance that the Operating Partnership will have access to the debt and equity markets in a timely fashion to meet such future funding requirements or that future working capital and borrowings under the lines of credit will be available, or if available, will be sufficient to meet the Operating Partnership's requirements or that the Operating Partnership will be able to dispose of properties in a timely manner and under terms and conditions that the Operating Partnership deems acceptable. The Operating Partnership has a $100,000,000 unsecured line of credit. Outstanding balances under the line of credit bear interest at the bank's reference rate or at the Operating Partnership's option, 1.15% over the LIBOR rate. The line of credit matures in June 2000. At December 31, 1999 the Operating Partnership had $10,500,000 outstanding on its line of credit, with interest rates during 1999 ranging from 6.0% to 8.1%. The Operating Partnership intends to replace or renew this facility prior to its expiration. In addition to the unsecured line of credit, the Operating Partnership had $373,608,000 of secured indebtedness at December 31, 1999. Such indebtedness consisted of $314,788,000 in fixed rate debt with interest rates varying from 6.4% to 8.8% and maturity dates ranging from 2000 to 2026. The indebtedness also includes $58,820,000 of tax exempt variable rate demand bonds with interest rates paid during 1999 ranging from approximately 4.7% to 5.4% and maturity dates ranging from 2020 to 2026. The tax exempt variable rate demand bonds are capped at interest rates ranging from 7.1% to 7.3%. The Operating Partnership's unrestricted cash balance increased $9,800,000 from $2,548,000 as of December 31, 1998 to $12,348,000 as of December 31, 1999. The Operating Partnership generated $83,566,000 in cash from operating activities, used $120,781,000 of cash in investing activities and obtained $47,015,000 of cash from financing activities. Of the $120,781,000 net cash used in investing activities, $88,305,000 was used to purchase and upgrade rental properties and $74,608,000 was used to fund real estate under development; these expenditures were offset by $63,421,000 of proceeds received from the disposition of rental properties. The $47,015,000 net cash provided by financing activities was primarily a result of $241,150,000 of proceeds from mortgages and other notes payable and lines of credit, $102,340,000 net proceeds from preferred units sales, as offset by $229,771,000 of repayments of mortgages and other notes payable and lines of credit, and $57,069,000 of dividends/distributions paid. Non-revenue generating capital expenditures are improvements and upgrades that extend the useful life of the property and are not related to preparing a multifamily property unit to be rented to a tenant. For the year ended December 31, 1999, non-revenue generating capital expenditures totaled approximately $3,793,000 or $315 per weighted average occupancy unit. The Operating Partnership expects to incur approximately $320 per weighted average occupancy unit in non-revenue generating capital expenditures for the year ended December 31, 2000. These expenditures do not include the improvements required in connection with the origination of mortgage loans, expenditures for acquisition properties' renovations and improvements which are expected to generate additional revenue, and renovation expenditures required pursuant to tax-exempt bond financings. The Operating Partnership expects that cash from operations and/or its lines of credit will fund such expenditures. However, there can be no assurance that the actual expenditures incurred during 2000 and/or the funding thereof will not be significantly different than the Operating Partnership's current expectations. The Operating Partnership is currently developing nine multifamily residential projects, with an aggregate of 1,904 multifamily units. Such projects involve certain risks inherent in real estate development. See "Other Matters/ Risk Factors--Risk that Development Activities Will be Delayed or Not Completed" in Item 1 of this Annual Report on Form 10-K for the year ended December 31, 1999. In connection with these development projects, the Operating Partnership has directly, or in some cases through its joint venture partners entered into contractual construction related commitments with unrelated third parties for approximately $234,500,000. As of December 31, 1999, the Operating Partnership's remaining commitment to fund the estimated cost to complete is approximately $78,700,000. The Operating Partnership expects to fund such commitments by using a combination of some or all of the following sources; its working capital, amounts available on its lines of credit, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of properties, if any. On July 28, 1999, the Operating Partnership completed the sale of 2,000,000 units of its 9.30% Series D Cumulative Redeemable Preferred Units to two institutional investors at a price of $25.00 per unit. The net proceeds from this sale were approximately $48,925,000. On September 3, 1999, the Operating Partnership completed the sale of 2,200,000 units of its 9.25% Series E Cumulative Redeemable Preferred Units to two institutional investors at a price of $25.00 per unit. The net proceeds from this sale were approximately $53,400,000. The net proceeds from these sales were used primarily to reduce outstanding balances under the Operating Partnership's line of credit. Pursuant to existing shelf registration statements, the Operating Partnership has the capacity to issue up to $342,000,000 of equity securities and the Operating Partnership has the capacity to issue up to $250,000,000 of debt securities. The Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Operating Partnership primarily in short-term investment grade securities or is used by the Operating Partnership to reduce balances outstanding under its line of credit. YEAR 2000 COMPLIANCE The date is now past January 1, 2000 and the Operating Partnership has not experienced any immediate adverse impact from the transition to the year 2000. However, the Operating Partnership cannot provide assurance that its vendors have not or will not be affected in a manner that is not yet apparent. The Operating Partnership uses software, computer technology and other services provided by third party vendors that may fail due to year 2000 issues. This failure may involve significant time and expense, and uncorrected problems could potentially harm the Operating Partnership's operations. Therefore, the Operating Partnership will continue to monitor its year 2000 compliance and the year 2000 compliance of its vendors. FUNDS FROM OPERATIONS Industry analysts generally consider Funds from Operations ("Funds from Operations") an appropriate measure of performance of an equity REIT. The company, the sole general partner in the Operating Partnership, has elected to be treated as a REIT under the code. Generally, Funds from Operations adjusts the net income of equity REITS for non-cash charges such as depreciation and amortization of rental properties and non-recurring gains or losses. Management considers Funds from Operations to be a useful financial performance measurement of an equity REIT because, together with net income and cash flows, Funds from Operations provides investors with an additional basis to evaluate the performance of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. Funds from Operations does not represent net income or cash flows from operations as defined by generally accepted accounting principles (GAAP) and is not intended to indicate whether cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the REIT's operating performance or to cash flows as a measure of liquidity. Funds from Operations does not measure whether cash flow is sufficient to fund all cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations also does not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Operating Partnership's calculation of Funds from Operations. The following table sets forth the Operating Partnership's calculation of Funds from Operations for 1999, 1998 and 1997.
For the quarter ended For the year ------------------------------------------------------------ ended 12/31/99 12/31/99 9/30/99 6/30/99 3/31/99 ------------- ----------- ----------- ----------- ----------- Income before gain on sale of real estate, minority interests and extraordinary item...... $ 52,092,000 $14,641,000 $13,426,000 $12,335,000 $11,690,000 Adjustments: Depreciation and amortization................... 26,150,000 6,774,000 7,084,000 6,247,000 6,045,000 Adjustments for unconsolidated joint ventures................................ 1,790,000 691,000 366,000 366,000 367,000 Minority interests (1)............................ (13,061,000) (4,685,000) (3,616,000) (2,397,000) (2,363,000) ------------ ----------- ----------- ----------- ----------- Funds from Operations............................. $ 66,971,000 $17,421,000 $17,260,000 $16,551,000 $15,739,000 ============ =========== =========== =========== =========== Weighted average number shares outstanding diluted (1).................... 20,513,398 20,554,096 20,573,866 20,476,092 20,496,718
For the quarter ended ------------------------------------------------------------ For the year ended 12/31/98 12/31/98 9/30/98 6/30/98 3/31/98 ------------- ----------- ----------- ----------- ----------- Income before gain on sale of real estate, minority interests and extraordinary item...... $ 40,591,000 $10,933,000 $ 9,998,000 $10,005,000 $ 9,655,000 Adjustments: Depreciation and amortization................... 21,948,000 6,072,000 5,575,000 5,632,000 4,669,000 Adjustments for unconsolidated joint ventures................................ 1,393,000 366,000 365,000 366,000 296,000 Non-recurring items: Provision for litigation loss................. 930,000 - 930,000 - - Minority interests (1)............................ (6,367,000) (2,014,000) (1,754,000) (1,692,000) (907,000) ------------ ----------- ----------- ----------- ----------- Funds from Operations............................. $ 58,495,000 $15,357,000 $15,114,000 $14,311,000 $13,713,000 ============ =========== =========== =========== =========== Weighted average number shares outstanding diluted (1).................... 20,510,988 20,522,910 20,523,466 20,549,875 20,550,845
For the quarter ended ------------------------------------------------------------ For the year ended 12/31/97 12/31/97 9/30/97 6/30/97 3/31/97 ------------ ----------- ----------- ----------- ----------- Income before gain on sale of real estate, minority interests and extraordinary item..... $ 29,032,000 $ 8,483,000 $ 7,899,000 $ 6,907,000 $ 5,743,000 Adjustments: Depreciation and amortization.................. 13,992,000 4,129,000 3,555,000 3,220,000 3,088,000 Adjustments for unconsolidated joint ventures............................... 941,000 251,000 242,000 448,000 - Non-recurring items: Loss from hedge termination.................. 138,000 138,000 - - - Minority interests (1)......................... (603,000) (162,000) (161,000) (142,000) (138,000) ------------ ----------- ----------- ----------- ----------- Funds from operations............................ $ 43,500,000 $12,839,000 $11,535,000 $10,433,000 $ 8,693,000 ============ =========== =========== =========== =========== Weighted average number shares outstanding diluted (1)................... 17,152,990 19,435,950 17,860,753 16,624,396 14,557,019
(1) Assumes conversion of all outstanding operating partnership interests in the Operating Partnership and Convertible Preferred Stock, Series 1996A, into shares of the Company's Common Stock. Minority interests have been adjusted to reflect such conversion. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Operating Partnership is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Operating Partnership's real estate investment portfolio and operations. The Operating Partnership's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Operating Partnership borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Operating Partnership does not enter into derivative or interest rate transactions for speculative purposes. The Operating Partnership's interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes. The Operating Partnership believes that the principal amounts of the Operating Partnership's mortgage notes payable and line of credit approximate fair value as of December 31, 1999 as interest rates are consistent with yields currently available to the Operating Partnership for similar instruments.
For the Year Ended December 31 --------------------------------------------- (In thousands) 2000 2001 2002 2003 2004 Thereafter Total ------- ----- ------ ------ ----- ---------- -------- Fixed rate debt............... $43,196 2,763 24,832 30,482 2,697 210,818 $314,788 Average interest rate......... 7.10% 7.09% 7.09% 7.03% 7.00% 6.99% Variable rate LIBOR debt...... $10,500 - - - - 58,820(1) $ 69,320 Average interest rate......... 6.59% - - - - 5.50%
(1) Capped at interest rates ranging from 7.1% to 7.3% At December 31, 1999 the Operating Partnership had four forward treasury contracts for an aggregate notional amount of $60,000,000, fixing the 10 year treasury rate at between 6.15%-6.26% which limits interest rate exposure on certain future debt financing and will be settled in 2000. Subsequent to December 31, 1999, three of the four contracts were sold, resulting in a net realized gain of approximately $920,000. The value of the unsold contract as of December 31, 1999 was $403,000. The four forward treasury contracts represent the derivative exposures that exist as of December 31, 1999. The Operating Partnership's ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Operating Partnership's hedging strategies at that time and interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on April 25, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on April 25, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on April 25, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on April 25, 2000. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) Financial Statements and Report of KPMG LLP, independent auditors Page ---- (1) Consolidated Financial Statements Independent Auditors' Report F-2 Balance Sheets: Essex Portfolio, L.P., as of December 31, 1999 and December 31, 1998 F-3 Statements of Operations: Essex Portfolio, L.P., for the years ended December 31, 1999, 1998 and 1997 F-4 Statements of Partners' Capital: Essex Portfolio, L.P., for the years ended December 31, 1999, 1998 and 1997 F-5 Statements of Cash Flows: Essex Portfolio, L.P., for the years ended December 31, 1999, 1998 and 1997. F-6 Notes to Consolidated Financial Statements F-7 (2) Financial Statement Schedule: Real Estate and Accumulated Depreciation Essex Portfolio, L.P. for the year ended December 31, 1999 F-26
(B) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1999. (C) Exhibits INDEPENDENT AUDITORS' REPORT The Board of Directors Essex Portfolio, L.P.: We have audited the accompanying consolidated balance sheets of Essex Portfolio, L.P. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, partners' capital and cash flows for each of the years in the three-year period ended December 31, 1999. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement schedule of Real Estate and Accumulated Depreciation as of December 31, 1999. These consolidated financial statements and the financial statement schedule are the responsibility of the management of Essex Portfolio, L.P. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Essex Portfolio, L.P. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. San Francisco, California February 4, 2000 F-2 ESSEX PORTFOLIO, L.P Consolidated Balance Sheets December 31, 1999 and 1998 (Dollars in thousands)
ASSETS 1999 1998 ---------- ---------- Real estate: Rental properties: Land and land improvements............................. $ 234,497 $ 219,115 Buildings and improvements............................. 694,579 670,849 ---------- ---------- 929,076 889,964 Less accumulated depreciation.............................. (96,605) (77,789) ---------- ---------- 832,471 812,175 Investments ............................................... 47,992 10,590 Real estate under development.............................. 120,414 53,213 ---------- ---------- 1,000,877 875,978 Cash and cash equivalents - unrestricted ..................... 12,348 2,548 Cash and cash equivalents - restricted ....................... 17,216 15,532 Notes and other related party receivables .................... 13,654 10,450 Notes and other receivables .................................. 9,001 18,809 Prepaid expenses and other assets ............................ 3,495 3,444 Deferred charges, net ........................................ 5,722 5,035 ---------- ---------- $1,062,313 $ 931,796 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Mortgage notes payable ....................................... $ 373,608 $ 325,822 Lines of credit .............................................. 10,500 35,693 Accounts payable and accrued liabilities ..................... 28,379 28,601 Distributions payable ........................................ 13,248 11,145 Other liabilities ............................................ 5,594 5,301 Deferred gain ................................................ 5,002 5,002 ---------- ---------- Total liabilities ................................. 436,331 411,564 Minority interests ........................................... 2,379 2,951 Partners' capital: General partner: Common equity.......................................... 383,379 352,295 Preferred equity....................................... 4,314 37,505 ---------- ---------- 387,693 389,800 ---------- ---------- Limited partners: Common equity.......................................... 31,420 25,331 Preferred equity....................................... 204,490 102,150 ---------- ---------- 235,910 127,481 ---------- ---------- Total partners' capital................................... 623,603 517,281 ---------- ---------- Commitments and contingencies $1,062,313 $931,796
See accompanying notes to consolidated financial statements F-3 ESSEX PORTFOLIO, L.P. Consolidated Statements of Operations Years ended December 31, 1999, 1998 and 1997 (Dollars in thousands, except per unit amounts)
1999 1998 1997 ------------ ----------- ----------- Revenues: Rental........................................................ $ 137,262 $ 119,397 $ 79,936 Other property income......................................... 3,165 2,645 1,464 ------------ ----------- ----------- Total property revenues....................... 140,427 122,042 81,400 Interest and other income..................................... 5,618 3,217 3,169 ------------ ----------- ----------- Total revenues................................ 146,045 125,259 84,569 ------------ ----------- ----------- Expenses: Property operating expenses: Maintenance and repairs................................... 9,222 8,972 6,814 Real estate taxes......................................... 10,271 9,109 6,340 Utilities................................................. 8,532 7,809 5,074 Administrative............................................ 10,582 9,228 5,514 Advertising............................................... 2,187 1,742 1,225 Insurance................................................. 912 1,073 859 Depreciation and amortization............................. 26,150 21,948 13,992 ------------ ----------- ----------- 67,856 59,881 39,818 Interest...................................................... 21,268 19,374 12,659 Amortization of deferred financing costs...................... 566 718 509 General and administrative.................................... 4,263 3,765 2,413 Loss from hedge termination................................... -- -- 138 Provision for litigation loss................................. -- 930 -- ------------ ----------- ----------- Total expenses................................ 93,953 84,668 55,537 ------------ ----------- ----------- Income before gain on sales of real estate, minority interests and extraordinary item. 52,092 40,591 29,032 Gain on sales of real estate....................................... 9,524 9 5,114 Minority interests................................................. (549) (462) (463) ------------ ----------- ----------- Income before extraordinary item.............. 61,067 40,138 33,683 Extraordinary loss on early extinguishment of debt................. (214) (4,718) (361) ------------ ----------- ----------- Net income.................................... 60,853 35,420 33,322 Dividends on preferred units - general partner..................... (1,333) (3,500) (2,681) Dividends on preferred units - limited partner..................... (12,238) (5,595) -- ------------ ----------- ----------- Net income available to common units.......... $ 47,282 $ 26,325 $ 30,641 ============ =========== =========== Per Operating Partnership Common Unit data: Basic: Income before extraordinary item available to common units......................................... $ 2.43 $ 1.68 $ 2.00 Extraordinary item - debt extinguishment.................. (0.01) (0.25) (0.02) ------------ ----------- ----------- Net income.................................... $ 2.42 $ 1.43 $ 1.98 ============ =========== =========== Weighted-average number of partnership units outstanding during the period........................ 19,543,341 18,504,427 15,509,218 ============ =========== =========== Diluted: Income before extraordinary item available to common units......................................... $ 2.38 $ 1.66 $ 1.96 Extraordinary item - debt extinguishment.................. (0.01) (0.25) (0.02) ------------ ----------- ----------- Net income.................................... $ 2.37 $ 1.41 $ 1.94 ============ =========== =========== Weighted-average number of partnership units outstanding during the period........................ 20,513,398 18,682,416 17,149,600 ============ =========== =========== Distributions per Operating Partnership common unit................ $ 2.15 $ 1.95 $ 1.77 ============ =========== ===========
See accompanying notes to consolidated financial statements. F-4 ESSEX PORTFOLIO, L.P. Consolidated Statements of Partners' Capital Years ended December 31, 1999, 1998 and 1997 (Dollars and units in thousands)
GENERAL PARTNER LIMITED PARTNER -------------------------------------- ------------------------------------- PREFERRED PREFERRED COMMON EQUITY EQUITY COMMON EQUITY EQUITY --------------------- --------- -------------------- --------- UNITS AMOUNTS AMOUNT UNITS AMOUNTS AMOUNT TOTAL ------- ------- --------- ------ ------- -------- ------ Balances at December 31, 1996....................... 11,592 $ 205,302 $ 17,505 1,855 $ 24,239 $ -- $ 247,046 Contribution - net proceeds from preferred stock....... -- -- 20,000 -- -- -- 20,000 Contribution - net proceeds from common stock.......... 4,995 154,012 -- -- -- -- 154,012 Contribution - net proceeds from options exercised..... 28 686 -- -- -- -- 686 Contributions - net proceeds from partners.............. -- -- -- 18 543 -- 543 Net income...................... -- 26,636 2,681 -- 4,005 -- 33,322 Partners' distributions......... -- (25,226) (2,681) -- (3,300) -- (31,207) ------- ------- --------- ------ ------- -------- ------ Balances at December 31, 1997....................... 16,615 361,410 37,505 1,873 25,487 -- 424,402 Contribution - net proceeds from preferred units....... -- -- -- -- -- 102,150 102,150 Contribution - net proceeds from options exercised..... 24 464 -- -- -- -- 464 Contribution - net proceeds from dividend reinvestment plan.......... 2 10 -- -- -- -- 10 Contributions - net proceeds from partners.............. -- -- -- -- -- -- -- Net income...................... -- 22,829 3,500 -- 3,496 5,595 35,420 Partners' distributions......... -- (32,418) (3,500) -- (3,652) (5,595) (45,165) ------- ------- --------- ------ ------- -------- ------ Balances at December 31, 1998....................... 16,641 352,295 37,505 1,873 25,331 102,150 517,281 Contribution - net proceeds from preferred units....... -- -- -- -- -- 102,340 102,340 Contribution - net proceeds from options exercised..... 53 930 -- -- -- -- 930 Shares issued from conversion of Convertible Preferred Stock...................... 1,618 33,191 (33,191) -- -- -- -- Redemption of limited partner common units............... -- -- -- (65) (2,101) -- (2,101) Issuance of limited partner common units............... -- -- -- 274 7,469 -- 7,469 Common units purchased by Operating Partnership... (262) (7,119) -- -- -- -- (7,119) Net income...................... -- 42,231 1,333 -- 5,051 12,238 60,853 Partners' distributions......... -- (38,149) (1,333) -- (4,330) (12,238) (56,050) ------- ------- --------- ------ ------- -------- ------ Balances at December 31, 1999....................... 18,050 $ 383,379 $ 4,314 2,082 $ 31,420 $ 204,490 $ 623,603 ====== ======= ========= ====== ======= ======== ======= See accompanying notes to consolidated financial statements.
F-5 ESSEX PORTFOLIO, L.P. Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997 (Dollars in thousands)
1999 1998 1997 ------------ ----------- ----------- Cash flows from operating activities: Net income.......................................................... $ 60,853 $ 35,420 $ 33,322 Minority interests.................................................. 549 462 463 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sales of real estate.............................. (9,524) (9) (5,114) Equity in (income) loss of limited partnerships........... (1,389) (276) 209 Loss on early extinguishment of debt...................... 214 4,718 361 Loss from hedge termination............................... -- -- 138 Depreciation and amortization............................. 26,150 21,948 13,992 Amortization of deferred financing costs.................. 566 718 509 Changes in operating assets and liabilities: Other receivables.................................... 621 (10,207) (1,377) Prepaid expenses and other assets.................... (393) 336 (158) Accounts payable and accrued liabilities............. 5,626 4,831 2,738 Other liabilities.................................... 293 1,093 1,815 ------------ ----------- ----------- Net cash provided by operating activities....... 83,566 59,034 46,898 ------------ ----------- ----------- Cash flows from investing activities: Additions to rental properties...................................... (88,305) (163,019) (247,886) Dispositions of rental properties................................... 63,421 26,354 15,470 Increase in restricted cash......................................... (1,684) (10,049) (3,831) Additions to related party notes and other receivables.............. (6,084) (5,616) (28,761) Repayments of related party notes and other receivables............. 16,504 4,430 21,859 Net (contributions to) distributions from investments in corporations and limited partnerships.......................... (30,025) 1,255 620 Additions to real estate under development.......................... (74,608) (33,256) (27,422) ------------ ----------- ----------- Net cash used in investing activities........... (120,781) (179,901) (269,951) ------------ ----------- ----------- Cash flows from financing activities: Proceeds from mortgage and other notes payable and lines of credit.. 241,150 349,540 204,931 Repayment of mortgage and other notes payable and lines of credit... (229,771) (283,065) (164,580) Additions to deferred charges....................................... (1,253) (2,345) (752) Net proceeds from preferred unit sales.............................. 102,340 102,150 -- Contributions from stock offerings - general partner................ -- -- 174,012 Payment of offering related costs................................... (93) (323) (711) Contributions from stock options exercised and shares issued through dividend reinvestment plan - general partner........... 930 474 686 General partner shares purchased by limited partner................. (7,119) -- Redemption of limited partner units................................. (2,100) -- -- Net payments made in connection with costs related to the early extinguishment of debt................................... -- (4,086) -- Distributions to limited partners and minority interest............. (18,435) (8,138) (3,910) Distributions to general partner.................................... (38,634) (35,074) (25,046) ------------ ----------- ----------- Net cash provided by financing activities....... 47,015 119,133 184,630 ------------ ----------- ----------- Net (decrease) increase in cash and cash equivalents..................... 9,800 (1,734) (38,423) Cash and cash equivalents at beginning of period......................... 2,548 4,282 42,705 ------------ ----------- ----------- Cash and cash equivalents at end of period............................... $ 12,348 $ 2,548 $ 4,282 ============ =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest, net of $5,172, $3,494 and $1,276 capitalized.................................................... $ 15,860 $ 18,947 $ 12,384 ============ =========== =========== Supplemental disclosure of noncash investing and financing activities: Real estate under development transferred to rental properties...... $ 21,700 -- -- ============ =========== =========== Mortgage note payable assumed in connection with the purchase of real estate................................................. $ 15,800 $ 18,443 $ 83,041 ============ =========== =========== Issuance of limited partner common units in connection with the purchase of real estate........................................ $ 7,469 $ -- $ -- ============ =========== =========== Consolidation of Fountain Court Apartment Associates, L.P.: Real estate under development.................................. $ 32,452 $ -- $ -- ============ =========== =========== Notes payable and other liabilities............................ $ 27,000 $ -- $ -- ============ =========== =========== During 1999, the Operating Partnership contributed $43,077 of real estate and real estate under development subject to $27,300 of notes payable in exchange for a $4,437 note receivable and a $11,340 investment in the AEW joint venture. See accompanying notes to consolidated financial statements.
F-6 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (1) ORGANIZATION AND BASIS OF PRESENTATION Essex Portfolio, L.P. (the Operating Partnership) was formed in March 1994 and commenced operations on June 13, 1994, when Essex Property Trust, Inc. (the Company), the general partner in the Operating Partnership (the General Partner), completed its initial public offering (the Offering) in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds of the Offering of $112,071 were used by the General Partner to acquire a 77.2% interest in the Operating Partnership. The Operating Partnership holds the assets and liabilities and conducts the operating activities of the Company. The Company has elected to be treated as a real estate investment trust (REIT) under the Internal Revenue Code of 1986 (the Code), as amended. The limited partners own an aggregate 10.3% interest in the Operating Partnership at December 31, 1999. The limited partners may convert their interests into shares of common stock of the Company or cash (based upon the trading price of the common stock at the conversion date). The Company has reserved 2,082,381 shares of common stock for such conversions. These conversion rights may be exercised by the limited partners at any time through 2024. The consolidated financial statements include the financial statements of Essex Portfolio, L.P. and the financial statements of certain limited partnerships which own multifamily properties in which the Operating Partnership has a controlling financial interest. Such limited partnerships are managed by the Operating Partnership and are controlled by the Operating Partnership as the majority limited partner pursuant to the terms of the respective partnership agreement. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Operating Partnership operates and has ownership interests in 68 multifamily properties (containing 15,106 units) and four 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 (Seattle, Washington and Portland, Oregon metropolitan areas). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) REAL ESTATE RENTAL PROPERTIES Rental properties are recorded at cost less accumulated depreciation. Depreciation on rental properties has been provided over estimated useful lives ranging from 3 to 40 years using the straight-line method. Maintenance and repair expenses are charged to operations as incurred. Asset replacements and improvements are capitalized and depreciated over their estimated useful lives. (Continued) F-7 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) Certain rental properties are pledged as collateral for the related mortgage notes payable. When the Operating Partnership determines that a property is held for sale, it discontinues the periodic depreciation of that property in accordance with the provisions of Statement of Financial Accounting Standards No. 121 (SFAS 121). Assets held for sale are reported at the lower of the carrying amount or estimated fair value less costs to sell. In addition, whenever events or changes in circumstances indicate that the carrying amount of a property held for investment may not be fully recoverable, the carrying amount will be evaluated. If the sum of the property's expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property, then the Operating Partnership will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. No impairment has been recorded through December 31, 1999. No properties are classified as held for sale as of December 31, 1999. (b) INVESTMENTS The Operating Partnership consolidates or accounts for its investments in joint ventures and corporations under the equity method of accounting based on its ownership interests in those entities. Under the equity method of accounting, the investment is carried at cost of acquisition, plus the Operating Partnership's equity in undistributed earnings or losses since acquisition. (c) REVENUES Rental revenue is reported on the accrual basis of accounting. (d) INCOME TAXES No provision for income taxes has been made as the Operating Partnership's taxable income or loss is reportable on the tax returns of the individual partners based on their proportionate interest in the Operating Partnership. (e) INTEREST RATE PROTECTION, SWAP, AND FORWARD CONTRACTS The Operating Partnership will from time to time use interest rate protection, swap and forward contracts to reduce its interest rate exposure on current or identified future debt transactions. Amounts paid in connection with such contracts are capitalized and amortized over the term of the contract or related debt. If the original contract is terminated, the gain or loss on termination is deferred and amortized over the remaining term of the contract. If the related debt is repaid, the unamortized portion of the deferred amount is charged to income or the contract is marked to market, as appropriate. The Operating Partnership's policy is to manage interest rate risk for existing or anticipated borrowings. (Continued) F-8 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (f) DEFERRED CHARGES Deferred charges are principally comprised of mortgage loan fees and costs which are amortized over the terms of the related mortgage notes in a manner which approximates the effective interest method. (g) INTEREST The Operating Partnership capitalized $5,172, $3,494 and $1,276 of interest related to the development of real estate during 1999, 1998 and 1997, respectively. (h) MINORITY INTEREST Minority interest for 1999 represents a 15% interest in three San Diego multifamily properties and a 49% interest in one Pacific Northwest multifamily property, held by outside investors. (i) CASH EQUIVALENTS AND RESTRICTED CASH Highly liquid investments with maturities of three months or less when purchased are classified as cash equivalents. Restricted cash relates to reserve requirements in connection with the Operating Partnership's tax exempt variable rate bond financings and a guarantee the Operating Partnership has made on a first mortgage loan held by one of its joint venture partnerships. (j) RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1997 balances to conform with the 1999 presentation. (k) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (l) NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Financial Accounting Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. The Operating Partnership will adopt SFAS 133 for interim periods beginning in 2001, the effective date of SFAS 133, as amended. Management believes that the adoption of these statements will not have a material impact on the Operating Partnership's financial position or results of operations. (Continued) F-9 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (3) EQUITY TRANSACTIONS During 1998 and 1999, the Operating Partnership sold cumulative redeemable preferred units to certain institutional investors in private placements as follows: PRICE PER DESCRIPTION DATE UNITS UNIT NET PROCEEDS ----------------- -------------- ----------- ------- -------------- 7.875% Series B February 1998 1,200,000 $50.00 $58,275 7.875% Series B April 1998 400,000 50.00 19,500 9.125% Series C November 1998 500,000 50.00 24,375 9.30% Series D July 1999 2,000,000 25.00 48,925 9.25% Series E September 1999 2,200,000 25.00 53,400 Preferred units issued in connection with the above transactions are included in minority interests in the accompanying consolidated balance sheet. During 1999, Westbrook Real Estate Fund I, L.P. (formerly known as Tiger/Westbrook Real Estate Fund, L.P.), and Westbrook Real Estate Co-Investment Partnership I, L.P. (formerly known as Tiger/Westbrook Real Estate Co-Investment Partnership, L.P.) (collectively, Tiger/Westbrook) converted 1,415,313 shares of its ownership in the Company's 8.75% convertible preferred stock, Series 1996A (the Convertible Preferred Stock) into 1,617,501 shares of the Company's common stock. The Company has filed a shelf registration statement covering Tiger/Westbrook's resale of all shares of its common stock issuable upon conversion of its convertible preferred stock. The shelf registration statement was declared effective by the Securities and Exchange Commission in December 1998. As of December 31, 1999, Tiger/Westbrook owned 184,687 shares of Convertible Preferred Stock. Pursuant to existing shelf registration statements, the Company has the capacity to issue up to $342,000 of equity securities and the Operating Partnership has the capacity to issue up to $250,000 of debt securities. (Continued) F-10 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars and shares in thousands, except for per unit amounts) (4) PER UNIT DATA Basic income per unit before extraordinary item and diluted income per share before extraordinary item were calculated as follows for the years@ ended December 31:
1999 1998 1997 --------------------------- ---------------------------- ---------------------------- WEIGHTED PER- WEIGHTED PER- WEIGHTED PER- AVERAGE SHARE AVERAGE SHARE AVERAGE SHARE INCOME UNITS AMOUNT INCOME UNITS AMOUNT INCOME UNITS AMOUNT ------- ------ ---------- --------- ------- ------- --------- ------- -------- Income before extraordinary item $ 61,067 40,138 33,683 Less: dividends on preferred units (13,571) (9,095) (2,681) -------- ------ -------- Basic: Income before extraordinary item available to common units 47,496 19,543 $ 2.43 31,043 18,504 $ 1.68 31,002 15,509 $ 1.98 ========== ====== ======= Effect of Dilutive Securities: Convertible preferred units 1,333 786 -- --(/1/) 2,681 1,400 Options (2) -- 184 -- 178 -- 240 ------- ------ ------ ------- -------- ------ Diluted: Income before extraordinary item available to common units plus assumed conversions $ 48,829 20,513 $ 2.38 31,043 18,682 $ 1.66 33,683 17,149 $ 1.96 ======= ====== ========== ====== ======= ====== ======== ====== =======
- ---------- (1) Securities not included because they were anti-dilutive. (2) The following options are not included in the diluted earnings per share calculation because the options' exercise price was greater than the average market price of the general partner common units for the year and, therefore, the effect would be antidilutive: 1999 1998 1997 ---------------- --------------- --------- Number of options 295 332 -- Range of exercise prices $31.875 - 34.750 $30.125 -34.250 -- (Continued) F-11 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (5) REAL ESTATE (a) RENTAL PROPERTIES Rental properties consist of the following as of December 31, 1999 and 1998:
LAND AND LAND BUILDING AND ACCUMULATED IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION ----------------- ----------------- ---------------- ---------------- December 31, 1999: Multifamily properties $ 232,732 $ 690,955 $ 923,687 $ 96,357 Commercial properties 1,765 3,624 5,389 248 ----------------- ----------------- ---------------- ---------------- $ 234,497 $ 694,579 $ 929,076 $ 96,605 ================= ================= ================ ================ December 31, 1998: Multifamily properties $ 217,337 $ 651,818 $ 869,155 $ 73,638 Commercial properties 1,778 19,031 20,809 4,151 ----------------- ----------------- ---------------- ---------------- $ 219,115 $ 670,849 $ 889,964 $ 77,789 ================= ================= ================ ================
The properties are located in California, Washington and Oregon. The operations of the properties could be adversely affected by a recession, general economic downturn or a natural disaster in the areas where the properties are located. During the year ended December 31, 1999, the Operating Partnership sold one property to an unrelated third party for $11,100 resulting in a gain of $3,085. The Operating Partnership also sold one property for a gross sales price of $18,400 resulting in a gain of $4,708 to an entity controlled by a member of the Operating Partnership's Board of Directors, following unanimous approval of the independent board members of the Operating Partnership's Board of Directors. During the year ended 1999, the Operating Partnership sold an 80% interest in three properties and land with development rights to a newly formed joint venture. The Operating Partnership received a 20% interest in the joint venture for contributing its remaining 20% interest in these properties. The 80% interest was sold for $58,098, resulting in a gain on the sale of $1,731. During the year ended December 31, 1998, four properties were sold to third parties for $26,354 resulting in a gain of $9 and a deferred gain of $5,002. During the year ended December 31, 1997, the Operating Partnership sold four properties to third parties for $15,470 resulting in a gain of $5,114. The Operating Partnership utilized Internal Revenue Code Section 1031 to defer the majority of the taxable gains resulting from these sales. (Continued) F-12 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) For the years ended December 31, 1999, 1998 and 1997, depreciation expense on real estate was $25,808, $21,890 and $13,913, respectively. (b) INVESTMENTS In October 1999, the Operating Partnership entered into two separate joint venture entities and received an approximate 49.9% equity interest. Together with the joint venture partners, the Operating Partnership formed two separate private REITs, Newport Beach North, Inc. and Newport Beach South, Inc. Newport Beach North, Inc. and Newport Beach South, Inc. own an approximate 99.65% interest in Newport Beach North, LLC and Newport Beach South, LLC, respectively. The Operating Partnership contributed its investment of Coronado at Newport - North, an acquisition made in the third quarter of 1999, to Newport Beach North, LLC. At the same time, the partners in Newport Beach South, LLC purchased Coronado at Newport - South, a 715-unit apartment community located in Newport Beach, California, for a contract price of $64,500. The two entities have identical ownership structures, and generally, profit and loss are allocated to the partners in accordance with their ownership interests. In addition to its equity earnings, the Operating Partnership is entitled to management and redevelopment fees from the joint venture and incentive payments based on the financial success of the joint venture. In connection with formation of the two joint ventures, the entities obtained non-recourse debt financing for $34,100 and $37,600 for Newport Beach North, LLC and Newport Beach South, LLC, respectively. The loans bear interest at LIBOR plus 2.25% and mature in 2002. The joint venture entities plan to invest a total of approximately $28,000 additionally into the properties for exterior and interior renovation and such investment is intended to be funded through additional advances under the loans referred to above. In December 1999, the Operating Partnership entered into a joint venture and received an approximate 20% equity interest in the joint venture. The Operating Partnership contributed its investment in Riverfront Apartments, Casa Mango Apartments, and Westwood Apartments into the joint venture (AEW joint venture). The Operating Partnership also contributed land and development rights for a development community located in Oxnard, California. Generally, profit and loss are allocated to the partners in accordance with their ownership interests. In addition to its equity earnings, the Operating Partnership is entitled to management and development fees from the joint venture and incentive payments based on the financial success of the joint venture. In connection with its formation, the AEW joint venture assumed two mortgage loans the Operating Partnership previously had outstanding on the Casa Mango and Riverfront properties for $7,300 and $20,000, respectively. The loans bear interest at a fixed rate of 7.4% and mature in 2009. (Continued) F-13 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) Investments which are accounted for under the equity method consist of the following as of December 31, 1999 and 1998:
1999 1998 ---------------- ---------------- Investments in joint ventures: Direct and indirect LLC member interests of approximately 49.9% in Newport Beach North, LLC and Newport Beach South, LLC......................................................... $ 28,435 $ -- Limited partnership interest of 20% in AEW joint ventures..... 11,341 -- Class A Member interest of 45% in Park Hill LLC............... 5,516 3,978 Limited partnership interest of 49.9% in Jackson School Village, L.P................................................ 2,649 2,473 Limited partnership interest of 46% in Mt. Sutro Terrace Associates, L.P............................................. 2,223 -- Limited partnership interest of 1% in Portland Shopping Centers (1)................................................. (234) (183) Limited partnership interest of 1% in Anchor Village Apartments (1).............................................. (889) (691) Limited partnership interest of 1% in Highridge Apartments (1)......................................................... (1,570) (987) Limited partnership interest of 51% in Fountain Court Apartment Associates, L.P................................... -- 5,352 ---------------- ---------------- 47,471 9,942 ---------------- ---------------- Investments in corporations: Essex Management Corporation - 19,000 shares of preferred stock....................................................... 190 190 Essex Fidelity I Corporation - 31,800 shares of preferred stock....................................................... 331 331 ---------------- ---------------- 521 521 ---------------- ---------------- Other investments................................................. -- 127 ---------------- ---------------- $ 47,992 $ 10,590 ================ ================
(1) The negative balances result from excess distributions and allocations over investment cost basis. The Operating Partnership can receive profits and losses different from its partnership interest. (Continued) F-14 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (6) NOTES FROM INVESTEES AND OTHER RELATED PARTY RECEIVABLES Notes receivable from joint venture investees and other related party receivables consist of the following as of December 31, 1999 and 1998:
1999 1998 --------------- ---------------- Notes receivable from joint venture investees: 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 -- Note receivable from Fidelity I, secured, bearing interest at 8%, due on demand....................................... -- 1,358 Notes receivable from Fidelity I and JSV, secured, bearing interest at 9.5 - 10%, due 2015............................ 800 800 Receivable from Highridge Apartments, non-interest bearing, due on demand.............................................. 3,624 2,928 Receivable from Las Hadas, non-interest bearing, due on demand..................................................... 1,209 1,209 Receivable from Anchor Village, non-interest bearing, due on demand..................................................... 1,282 933 Other related party receivables: Loans to officers, bearing interest at 8%, due April 2006.... 633 500 Other related party receivables, substantially all due on demand..................................................... 2,109 1,675 --------------- ---------------- $ 13,654 $ 10,450 =============== ================
The Operating Partnership's officers and directors do not have a substantial economic interest in these joint venture investees. Other related party receivables consist primarily of accrued interest income on related party notes receivable and loans to officers, advances and accrued management fees from joint venture partnerships, and unreimbursed expenses due from EMC. (Continued) F-15 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (7) NOTES AND OTHER RECEIVABLES Notes and other receivables consist of the following as of December 31, 1999 and 1998:
1999 1998 --------------- ---------------- Receivable from AEW, non-interest bearing, due on demand.......... $ 5,529 $ -- Receivable from Newport Beach North and South LLC................. 429 -- Note receivable from the co-tenants in the Pathways property, secured, interest payable monthly at 9%, principal due June 2001.......................................................... -- 4,452 Note receivable from R&V Management, secured, bearing interest at 12.04%, principal due March 1999........................... -- 7,879 Note receivable from R&V Management, secured, bearing interest at 10.0%, principal due June 2000............................. -- 2,814 Other receivables................................................. 3,043 3,664 --------------- ---------------- $ 9,001 $ 18,809 =============== ================
(8) RELATED PARTY TRANSACTIONS The Operating Partnership 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). The Company owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of the Company own 100% of EMC's 1,000 shares of common stock. All general and administrative expenses of the Company, the Operating Partnership and EMC are initially borne by the Operating Partnership, with a portion subsequently allocated to EMC based on a business unit allocation methodology, formalized and approved by management and the Board of Directors. Expenses allocated to EMC for the years ended December 31, 1999, 1998 and 1997 totaled $545, $545 and $987, respectively, and are reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of operations. Included in rental revenue in the accompanying consolidated statements of operations are rents earned from space leased to Marcus & Millichap Company (M&M) including operating expense reimbursements of $851, $833 and $709 for the years ended December 31, 1999, 1998 and 1997, respectively. The Chairman of M&M is the Chairman of the Company. The commercial property which M&M occupied was sold in September 1999 to an entity controlled by a member of the Company's Board of Directors, following approval of the independent members of the Board of Directors. (Continued) F-16 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) During the years ended December 31, 1999, 1998 and 1997, the Operating Partnership paid brokerage commissions totaling $105, $0 and $590 to M&M on the purchase and sales of real estate. The commissions are either capitalized as a cost of acquisition or are reflected as a reduction of the gain on sales of real estate in the accompanying consolidated statements of operations. EMC is entitled to receive a percentage of M&M brokerage commissions on certain transactions in which the Operating Partnership is a party. Interest and other income include interest income of $705, $1,027 and $1,286 for the years ended December 31, 1999, 1998 and 1997, respectively, which was earned principally on the notes receivable from related party partnerships in which the Operating Partnership owns an ownership interest (Joint Ventures). Interest and other income also includes management fee income and investment income earned by the Company from its Joint Ventures of $561, $623 and $139 for the years ended December 31, 1999, 1998 and 1997, respectively. (Continued) F-17 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (9) MORTGAGE NOTES PAYABLE Mortgage notes payable consist of the following as of December 31, 1999 and 1998:
1999 1998 ------------ ------------ Mortgage note payable to a pension fund, secured by deeds of trust, bearing interest at 6.62%, interest only payments due monthly through October 2001, principal and interest payments due monthly thereafter, final principal payment of $90,596 due in October 2008. Under certain conditions this loan can be converted to an unsecured note payable.......................................................... $ 100,000 $ 100,000 Mortgage notes payable, secured by deeds of trust, bearing interest at rates ranging from 6.885% to 8.055%, principal and interest payments due monthly, and maturity dates ranging from December 2000 through March 2008............................................................ 145,106 96,214 Multifamily housing mortgage revenue bonds secured by deeds of trust on rental properties and guaranteed by collateral pledge agreements, payable monthly at a variable rate as defined in the Loan Agreement (approximately 3.5% for December 1999 and 1998), plus credit enhancement and underwriting fees ranging from approximately 1.2 to 1.9%. The bonds are convertible to a fixed rate at the Operating Partnership's option. Among the terms imposed on the properties, which are security for the bonds, is that twenty percent of the units are subject to tenant income qualification criteria. Principal balances are due in full at various maturity dates from July 2014 through October 2026. These bonds are subject to interest rate protection agreements through August 2003, limiting the interest rate with respect to such bonds to a maximum interest rate of 7.1% to 7.3%. 58,820 58,820 Mortgage notes payable, secured by deeds of trust, bearing interest at rates ranging from 7.0% to 8.78%, principal and interest payments due monthly, and maturity dates ranging from December 2002 through April 2005. Under certain conditions this loan can be converted to an unsecured note payable................................................ 44,158 44,788 Multifamily housing mortgage revenue bonds secured by deed of trust on a rental property and guaranteed by a collateral pledge agreement, bearing interest at 6.455%, principal and interest payments due monthly, final principal payment of $14,800 due January 2026. Among the terms imposed on the property, which is security for the bonds, is that twenty percent of the units are subject to tenant income qualification criteria. The interest rate will be repriced in February 2008 at the then current tax-exempt bond rate................ 17,030 17,273 Multifamily housing mortgage revenue bonds secured by deed of trust on rental property, bearing interest at 7.69%, principal and interest installments due monthly through June 2018. Among the terms imposed on the property, which is security for the bonds, is that twenty percent of the units are subject to tenant income qualifications criteria............................................... 8,494 8,727 ------------ ----------- $ 373,608 $ 325,822 ============ ===========
(Continued) F-18 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) The aggregate scheduled maturities of mortgage notes payable are as follows: 2000............................... $ 43,196 2001............................... 2,763 2002............................... 24,832 2003............................... 30,482 2004............................... 2,697 Thereafter......................... 269,638 -------------------- $ 373,608 ==================== In October 1997, the Operating Partnership entered into four forward treasury contracts for an aggregate notional amount of $60,000, locking the 10-year treasury rate at between 6.15%-6.26%. These contracts are to limit the interest rate exposure on identified future debt financing requirements relating to real estate under development and the refinancing of a $18,101 fixed rate loan. These contracts will be settled no later than June 2000. Subsequent to December 31, 1999, three of the four contracts were sold, resulting in a net realized gain of approximately $920. The value of the unsold contract as of December 31, 1999 was $403. In addition, the Operating Partnership has entered into various other contracts to limit its interest rate exposure on debt related transactions. During 1999, 1998 and 1997, the Operating Partnership charged to expense $0, $0 and $138, respectively, of costs relating to the termination of such contracts. During the years ended December 31, 1999, 1998 and 1997, the Operating Partnership refinanced various mortgages and incurred a loss on the early extinguishment of debt of $214, $4,718 and $361 related to the write off of the unamortized mortgage loan fees and prepayment penalties. (10) LINE OF CREDIT The Operating Partnership has an unsecured $100,000 line of credit with a commercial bank with interest payable monthly at the bank's reference rate or at the Operating Partnership's option, 1.15% over the LIBOR rate, which expires June 2000. As of December 31, 1999 and 1998, the Operating Partnership had $10,500 and $35,693 outstanding under its line of credit. The amount available under the line of credit is reduced by $684, the amount outstanding under letters of credit obtained by the Operating Partnership. As of December 31, 1999, the thirty-day LIBOR rate was approximately 5.8%, and the prime rate was 8.5%. (11) LEASING ACTIVITY Rental revenues of the Operating Partnership include revenues received from its majority-owned apartment properties, which are rented under short-term leases (generally, lease terms of three to twelve months). Due to the short-term nature of the leases, future minimum rental activity is not disclosed by the Operating Partnership. (Continued) F-19 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (12) FAIR VALUE OF FINANCIAL INSTRUMENTS Management believes that the carrying amounts of mortgage notes payable, lines of credit, notes and other related party receivables approximate fair value as of December 31, 1999 and 1998, because interest rates and yields for these instruments are consistent with yields currently available to the Operating Partnership for similar instruments. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable, other liabilities and dividends payable approximate fair value as of December 31, 1999 and 1998 due to the short-term maturity of these instruments. See note 9 for fair value disclosure of interest rate risk management contracts. (13) SEGMENT INFORMATION In accordance with Financial Accounting Standards Board No. 131, Disclosures about Segments of an Enterprise and Related Information (FAS 131), the Operating Partnership defines its reportable operating segments as the three geographical regions in which its multifamily residential properties are located, Northern California, Southern California, and the Pacific Northwest. Non-segment revenues and net operating income included in the following schedule consists of revenue generated from the two commercial properties. Also excluded from segment revenues is interest and other corporate income. Other non-segment assets include investments, real estate under development, cash, receivables and other assets. The accounting policies of the segments are the same as those described in note 1. The Operating Partnership evaluates performance based upon net operating income from the combined properties in each segment. (Continued) F-20 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the years ended and as of December 31, 1999, 1998 and 1997:
YEAR ENDED --------------------------------------- 1999 1998 1997 ------------ ----------- ----------- Revenues: Northern California..................... $ 46,960 $ 42,078 $ 33,481 Southern California..................... 58,371 45,252 20,026 Pacific Northwest....................... 33,316 32,137 23,356 ------------ ----------- ----------- Total segment revenues............. 138,647 119,467 76,863 Non-segment property revenues............... 1,780 2,575 4,537 Interest and other income................... 5,618 3,217 3,169 ------------ ----------- ----------- Total revenues..................... $ 146,045 $ 125,259 $ 84,569 ============ =========== =========== Net operating income: Northern California..................... $ 35,962 $ 31,681 $ 24,664 Southern California..................... 40,122 29,758 12,955 Pacific Northwest....................... 22,284 21,138 14,916 ------------ ----------- ----------- Total segment net operating income. 98,368 82,577 52,535 Non-segment net operating income............ 353 1,532 3,039 Interest and other income................... 5,618 3,217 3,169 Depreciation and amortization............... (26,150) (21,948) (13,992) Interest.................................... (21,268) (19,374) (12,659) Amortization of deferred financing costs.... (566) (718) (509) General and administrative.................. (4,263) (3,765) (2,413) Loss from hedge termination................. -- -- (138) Provision for litigation loss............... -- (930) -- ------------ ----------- ----------- Income before gain on the sales of real estate, minority interests, and extraordinary item.......... $ 52,092 $ 40,591 $ 29,032 ============ =========== =========== Assets: Northern California..................... $ 216,946 $ 241,676 $ 175,116 Southern California..................... 415,374 355,077 257,714 Pacific Northwest....................... 195,011 198,761 213,125 ------------ ----------- ----------- Total segment net real estate assets 827,331 795,514 645,955 Non-segment net real estate assets.......... 5,140 16,661 26,992 ------------ ----------- ----------- Net real estate assets............. 832,471 812,175 672,947 Non-segment assets.......................... 229,842 119,621 65,888 ------------ ----------- ----------- Total assets....................... $1,062,313 $ 931,796 $ 738,835 ============ =========== ===========
(Continued) F-21 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for 1999 and 1998:
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ---------------- ---------------- ---------------- --------------- 1999: Total revenues before gain on the sales of real estate................... $ 39,512 37,745 34,898 33,890 ================ ================ ================ =============== Gain on the sales of real estate................... $ 4,816 4,708 -- -- ================ ================ ================ =============== Extraordinary item.. $ (124) -- (90) -- ================ ================ ================ =============== Net income.......... $ 19,271 17,962 12,076 11,544 ================ ================ ================ =============== Per unit data: Net income: Basic.................. $ 0.73 0.72 0.51 0.46 ================ ================ ================ =============== Diluted................ $ 0.70 0.71 0.50 0.46 ================ ================ ================ =============== 1998: Total revenues before gain on the sales of real estate................... $ 33,088 32,651 31,684 27,836 ================ ================ ================ =============== Gain on the sales of real estate................... $ -- 9 -- -- ================ ================ ================ =============== Extraordinary item.. $ (3,912) (806) -- -- ================ ================ ================ =============== Net income.......... $ 6,894 9,096 9,884 9,546 ================ ================ ================ =============== Per unit data: Net income: Basic.................. $ 0.23 0.36 0.41 0.43 ================ ================ ================ =============== Diluted................ $ 0.23 0.36 0.40 0.42 ================ ================ ================ ===============
(15) 401(K) PLAN The Operating Partnership has a 401(k) pension plan (the Plan) for all full time employees who have completed one year of service. Employees may contribute up to 23% of their compensation, limited by the maximum allowed under Section 401(k) of the Internal Revenue Code. The Operating Partnership matches the employee contributions for non-highly compensated personnel, up to 50% of their compensation to a maximum of five hundred dollars (per individual) per year. Operating Partnership contributions to the Plan were approximately $58, $46 and $41 for the years ended December 31, 1999, 1998 and 1997. (Continued) F-22 ESSEX PORTFOLIO, L.P. Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (Dollars in thousands, except for per share amounts) (16) COMMITMENTS AND CONTINGENCIES A commercial bank has issued on behalf of the Operating Partnership various letters of credit relating to financing and development transactions for an aggregate amount of $684 which expired January 2000. The Operating Partnership is developing nine multifamily residential projects, which are anticipated to have an aggregate of approximately 1,904 multifamily units. The Operating Partnership expects that such projects will be completed during the next two years. In connection with these projects, the Operating Partnership has directly, or in some cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties. As of December 31, 1999, the Operating Partnership is committed to fund approximately $78,700 relating to these projects. Investments in real property create a potential for environmental liabilities on the part of the owner of such real property. The Operating Partnership carries no express insurance coverage for this type of environmental risk. The Operating Partnership has conducted environmental studies which revealed the presence of groundwater contamination at certain properties; such contamination at certain of these properties was reported to have migrated on-site from adjacent industrial manufacturing operations. The former industrial users of the properties were identified as the source of contamination. The environmental studies noted that certain properties are located adjacent to and possibly down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such properties. The environmental studies also noted that at certain of these properties, contamination existed because of the presence of underground fuel storage tanks, which have been removed. Based on the information contained in the environmental studies, the Operating Partnership believes that the costs, if any, it might bear as a result of environmental contamination or other conditions at these properties would not have a material adverse effect on the Operating Partnership's financial position, results of operations, or liquidity. The Operating Partnership is involved in various lawsuits arising out of the ordinary course of business and certain other legal matters. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Operating Partnership's financial position, results of operations or liquidity. In September 1999, the Operating Partnership formed a program in which directors and management of the Operating Partnership can participate indirectly in an investment in the Company's common stock. The participants have entered into a swap agreement with a securities broker whereby the securities broker has acquired, in open market transactions, 223,475 shares of the Company's common stock. The agreement terminates in five years at which time the settlement amount is determined by comparing the original purchase price of the stock plus interest at a rate of LIBOR plus 1.5% to the termination date market value of the shares and all dividends received during the investment period. In certain circumstances, the participants may be required to provide collateral to the securities broker. The Operating Partnership has guaranteed performance of the participants with respect to any obligations relating to the swap agreement. In September 1999, the Operating Partnership formed a program in which directors and management of the Operating Partnership can participate indirectly in an investment in the general partner common stock. The participants have entered into a swap agreement with a securities broker whereby the securities broker has acquired, in open market transactions, 223,475 shares of the general partner common stock. The agreement terminates in five years at which time the settlement amount is determined by comparing the original purchase price of the stock plus interest at a rate of LIBOR plus 1.5% to the termination date market value of the shares and all dividends received during the investment period. In certain circumstances, the participants may be required to provide collateral to the securities broker. The Operating Partnership has guaranteed performance of the participants with respect to any obligations relating to the swap agreement. F-23 ESSEX PORTFOLIO, L.P. Real Estate and Accumulated Depreciation December 31, 1999 (Dollars in thousands)
INITIAL COST COSTS -------------------------- CAPITALIZED BUILDINGS SUBSEQUENT AND TO PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION - ----------------------------- ----- ----------------- ----------- -------- ------------ ----------- Encumbered multifamily properties Summerhill Park ..... 100 Sunnyvale, CA $ $ 2,654 $ 4,918 $ 433 Oak Pointe .......... 390 Sunnyvale, CA 4,842 19,776 4,589 Summerhill Commons .. 184 Newark, CA 1,608 7,582 792 Pathways ............ 296 Long Beach, CA 4,083 16,757 7,758 Villa Rio Vista ..... 286 Anaheim, CA 3,013 12,661 2,101 Foothill Commons .... 360 Bellevue, WA 2,435 9,821 2,510 Woodland Commons .... 236 Bellevue, WA 2,040 8,727 1,353 Palisades ........... 192 Bellevue, WA 1,560 6,242 1,522 ----------- -------- ------------ ----------- 100,000 22,235 86,484 21,058 Wharfside Pointe .... 142 Seattle, WA 2,245 7,020 726 Emerald Ridge ....... 180 Bellevue, WA 3,449 7,801 653 Sammamish View ...... 153 Bellevue, WA 3,324 7,501 515 ----------- -------- ------------ ----------- 19,201 9,018 22,322 1,894 ----------- -------- ------------ ----------- Brighton Ridge ...... 264 Renton, WA 2,623 10,800 595 Landmark ............ 285 Hillsboro, OR 3,655 14,200 686 Eastridge ........... 188 San Ramon,CA 6,068 13,628 303 ----------- -------- ------------ ----------- 27,418 12,346 38,628 1,584 ----------- -------- ------------ ----------- Bridle Trails ....... 92 Kirkland, WA 4,191 1,500 5,930 100 Bunker Hill Towers .. 456 Los Angeles, CA 18,122 11,498 27,871 445 Camarillo Oaks ...... 564 Camarillo, CA 27,915 10,953 25,254 3,234 Columbus ............ 83 Glendale, CA 4,540 2,407 5,672 181 Evergreen Heights ... 200 Kirkland, WA 8,949 3,566 13,395 332 Euclid .............. 85 Pasadena, CA 2,884 2,202 4,794 189 Glenbrook ........... 84 Pasadena, CA 4,474 2,312 4,923 140 Huntington Breakers . 342 Huntington Beach, CA 23,409 9,306 22,720 398 Inglenook Court ..... 224 Bothell, WA 8,300 3,467 7,881 1,330 Lorraine ............ 132 Glendale, CA 8,378 4,288 11,081 -- Maple Leaf .......... 48 Seattle, WA 2,048 805 3,283 54 Meadowood ........... 320 Simi Valley, CA 17,030 7,852 18,592 622 Spring Lake ......... 69 Seattle, WA 2,243 838 3,399 65 Stonehedge Village .. 196 Bothell, WA 9,065 3,167 12,603 433 The Bluffs .......... 224 San Diego, CA 8,357 3,405 7,743 176 The Shores (5) ...... 348 San Ramon, CA 18,101 8,789 18,252 (450) Treetops ............ 172 Fremont, CA 9,800 3,520 8,182 875 Wandering Creek ..... 156 Kent, WA 5,300 1,285 4,980 870 Wilshire Promenade .. 128 Fullerton, CA 7,764 3,118 7,385 230 Windsor Ridge ....... 216 Sunnyvale, CA 13,619 4,017 10,315 563 ----------- -------- ------------ ----------- 351,108 131,894 371,689 34,323 ----------- -------- ------------ ----------- Unencumbered multifamily properties Avondale at Warner Center .............. 446 Woodland Hills, CA 10,536 24,522 72 Bristol Commons ..... 188 Sunnyvale, CA 5,278 11,853 792 Castle Creek ........ 216 Newcastle, WA 4,149 16,028 736 Fairway (3) ......... 74 Newport Beach, CA 2,374 5,476 96 Foothill/Twincreeks . 176 San Ramon, CA 5,875 13,992 887 Hillsborough Park ... 235 La Habra, CA 6,291 15,455 23 Kings Road .......... 196 Los Angeles, CA 4,023 9,527 182 Marina Cove (4) ..... 292 Santa Clara, CA 5,320 16,431 1,333 Meadows @ Cascade ... 198 Vancouver, WA 2,261 9,070 378 Hillcrest Park ...... 608 Newbury Park, CA 15,318 40,601 712 Park Place/ Windsor Court/Cochran 176 Los Angeles, CA 4,965 11,806 231 Plumtree ............ 140 Santa Clara, CA 3,090 7,421 523 Stevenson Place ..... 200 Fremont, CA 996 5,582 5,789 Tara Village ........ 168 Tarzana, CA 3,178 7,535 393 The Laurels ......... 164 Mill Creek, WA 1,559 6,430 291 The Village ......... 122 Oxnard, CA 2,349 5,579 156 Trabucco Villas ..... 132 Lake Forest, CA 3,638 8,640 388 Villa Scandia ....... 118 Ventura, CA 1,570 3,912 152 Village @ Cascade ... 192 Vancouver, WA 2,103 8,753 118 Wimbledon Woods ..... 560 Hayward, CA 9,883 37,670 619 Monterra del Mar .... 122 Pasadena, CA 2,188 5,263 3,420 ------ ----------- -------- ------------ ----------- 12,118 351,108 228,838 643,235 51,614 ====== ----------- -------- ------------ -----------
GROSS AMOUNT CARRIED AT CLOSE OF PERIOD -------------------------------------- LAND BUILDINGS AND AND PROPERTY UNITS LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL(1) - ----------------------------- ----- ----------------- ------------ ------------ -------- Encumbered multifamily properties Summerhill Park ..... 100 Sunnyvale, CA $ 2,655 $ 5,350 $ 8,005 Oak Pointe .......... 390 Sunnyvale, CA 4,845 24,362 29,207 Summerhill Commons .. 184 Newark, CA 1,518 8,464 9,982 Pathways ............ 296 Long Beach, CA 6,163 22,435 28,598 Villa Rio Vista ..... 286 Anaheim, CA 2,986 14,789 17,775 Foothill Commons .... 360 Bellevue, WA 2,438 12,328 14,766 Woodland Commons .... 236 Bellevue, WA 2,042 10,078 12,120 Palisades ........... 192 Bellevue, WA 1,562 7,762 9,324 ------------ ------------ -------- 24,209 105,568 129,777 Wharfside Pointe .... 142 Seattle, WA 2,253 7,738 9,991 Emerald Ridge ....... 180 Bellevue, WA 3,447 8,456 11,903 Sammamish View ...... 153 Bellevue, WA 3,329 8,011 11,340 ------------ ------------ -------- 9,029 24,205 33,234 ------------ ------------ -------- Brighton Ridge ...... 264 Renton, WA 2,654 11,364 14,018 Landmark ............ 285 Hillsboro, OR 3,697 14,844 18,541 Eastridge ........... 188 San Ramon,CA 6,089 13,910 19,999 ------------ ------------ -------- 12,440 40,118 52,558 ------------ ------------ -------- Bridle Trails ....... 92 Kirkland, WA 1,529 6,001 7,530 Bunker Hill Towers .. 456 Los Angeles, CA 11,628 28,186 39,814 Camarillo Oaks ...... 564 Camarillo, CA 11,017 28,424 39,441 Columbus ............ 83 Glendale, CA 2,408 5,852 8,260 Evergreen Heights ... 200 Kirkland, WA 3,645 13,648 17,293 Euclid .............. 85 Pasadena, CA 2,375 4,810 7,185 Glenbrook ........... 84 Pasadena, CA 2,430 4,945 7,375 Huntington Breakers . 342 Huntington Beach, CA 9,312 23,112 32,424 Inglenook Court ..... 224 Bothell, WA 3,474 9,204 12,678 Lorraine ............ 132 Glendale, CA 4,288 11,081 15,369 Maple Leaf .......... 48 Seattle, WA 825 3,317 4,142 Meadowood ........... 320 Simi Valley, CA 7,895 19,171 27,066 Spring Lake ......... 69 Seattle, WA 857 3,445 4,302 Stonehedge Village .. 196 Bothell, WA 3,196 13,007 16,203 The Bluffs .......... 224 San Diego, CA 3,439 7,885 11,324 The Shores (5) ...... 348 San Ramon, CA 7,099 19,492 26,591 Treetops ............ 172 Fremont, CA 3,576 9,001 12,577 Wandering Creek ..... 156 Kent, WA 1,296 5,839 7,135 Wilshire Promenade .. 128 Fullerton, CA 3,137 7,596 10,733 Windsor Ridge ....... 216 Sunnyvale, CA 4,019 10,876 14,895 ------------ ------------ -------- 133,123 404,783 537,906 ------------ ------------ -------- Unencumbered multifamily properties Avondale at Warner Center .............. 446 Woodland Hills, CA 10,556 24,574 35,130 Bristol Commons ..... 188 Sunnyvale, CA 5,283 12,640 17,923 Castle Creek ........ 216 Newcastle, WA 4,818 16,095 20,913 Fairway (3) ......... 74 Newport Beach, CA 2,402 5,544 7,946 Foothill/Twincreeks . 176 San Ramon, CA 5,940 14,814 20,754 Hillsborough Park ... 235 La Habra, CA 6,290 15,479 21,769 Kings Road .......... 196 Los Angeles, CA 4,030 9,702 13,732 Marina Cove (4) ..... 292 Santa Clara, CA 5,322 17,762 23,084 Meadows @ Cascade ... 198 Vancouver, WA 2,334 9,375 11,709 Hillcrest Park ...... 608 Newbury Park, CA 15,746 40,885 56,631 Park Place/ Windsor Court/Cochran 176 Los Angeles, CA 5,014 11,988 17,002 Plumtree ............ 140 Santa Clara, CA 3,091 7,943 11,034 Stevenson Place ..... 200 Fremont, CA 998 11,369 12,367 Tara Village ........ 168 Tarzana, CA 3,210 7,896 11,106 The Laurels ......... 164 Mill Creek, WA 1,595 6,685 8,280 The Village ......... 122 Oxnard, CA 2,393 5,691 8,084 Trabucco Villas ..... 132 Lake Forest, CA 3,841 8,825 12,666 Villa Scandia ....... 118 Ventura, CA 1,592 4,042 5,634 Village @ Cascade ... 192 Vancouver, WA 2,151 8,823 10,974 Wimbledon Woods ..... 560 Hayward, CA 10,346 37,826 48,172 Monterra del Mar .... 122 Pasadena, CA 2,657 8,214 10,871 ------ ------------ ------------ -------- 12,118 232,732 690,955 923,687 ====== ------------ ------------ --------
DEPRECIABLE ACCUMULATED DATE OF DATE LIVES PROPERTY UNITS LOCATION DEPRECIATION CONSTRUCTION ACQUIRED (YEARS) - ----------------------------- ----- ----------------- ------------ ------------ -------- ----------- Encumbered multifamily properties Summerhill Park ..... 100 Sunnyvale, CA $ 1,814 1988 09/88 3-40 Oak Pointe .......... 390 Sunnyvale, CA 10,359 1973 12/88 3-30 Summerhill Commons .. 184 Newark, CA 2,861 1987 07/87 3-40 Pathways ............ 296 Long Beach, CA 5,519 1975 02/91 3-30 Villa Rio Vista ..... 286 Anaheim, CA 7,742 1968 07/85 3-30 Foothill Commons .... 360 Bellevue, WA 4,847 1978 03/90 3-30 Woodland Commons .... 236 Bellevue, WA 3,854 1978 03/90 3-30 Palisades ........... 192 Bellevue, WA 3,310 1969/1977(2) 05/90 3-30 ------------ 40,306 Wharfside Pointe .... 142 Seattle, WA 1,592 1990 06/94 3-30 Emerald Ridge ....... 180 Bellevue, WA 1,646 1987 11/94 3-30 Sammamish View ...... 153 Bellevue, WA 1,468 1986 11/94 3-30 ------------ 4,706 ------------ Brighton Ridge ...... 264 Renton, WA 1,066 1986 12/96 3-30 Landmark ............ 285 Hillsboro, OR 1,679 1990 08/96 3-30 Eastridge ........... 188 San Ramon,CA 1,564 1988 08/96 3-30 ------------ 4,309 ------------ Bridle Trails ....... 92 Kirkland, WA 452 1986 10/97 3-30 Bunker Hill Towers .. 456 Los Angeles, CA 1,627 1968 03/98 3-30 Camarillo Oaks ...... 564 Camarillo, CA 2,555 1985 07/96 3-30 Columbus ............ 83 Glendale, CA 116 1974 06/99 3-30 Evergreen Heights ... 200 Kirkland, WA 1,157 1990 06/97 3-30 Euclid .............. 85 Pasadena, CA 112 1972 04/99 3-30 Glenbrook ........... 84 Pasadena, CA 115 1972 04/99 3-30 Huntington Breakers . 342 Huntington Beach, CA 1,700 1984 10/97 3-30 Inglenook Court ..... 224 Bothell, WA 2,428 1985 10/94 3-30 Lorraine ............ 132 Glendale, CA 207 1970 06/99 3-30 Maple Leaf .......... 48 Seattle, WA 240 1986 10/97 3-30 Meadowood ........... 320 Simi Valley, CA 2,105 1986 11/96 3-30 Spring Lake ......... 69 Seattle, WA 241 1986 10/97 3-30 Stonehedge Village .. 196 Bothell, WA 604 1986 10/97 3-30 The Bluffs .......... 224 San Diego, CA 666 1974 06/97 3-30 The Shores (5) ...... 348 San Ramon, CA 1,879 1988 01/97 3-30 Treetops ............ 172 Fremont, CA 1,219 1978 01/96 3-30 Wandering Creek ..... 156 Kent, WA 939 1986 11/95 3-30 Wilshire Promenade .. 128 Fullerton, CA 762 1992 01/97 3-30 Windsor Ridge ....... 216 Sunnyvale, CA 3,118 1989 03/89 3-40 ------------ 71,563 ------------ Unencumbered multifamily properties Avondale at Warner Center .............. 446 Woodland Hills, CA 229 1989 01/97 3-30 Bristol Commons ..... 188 Sunnyvale, CA 1,220 1989 01/97 3-30 Castle Creek ........ 216 Newcastle, WA 673 1997 12/97 3-30 Fairway (3) ......... 74 Newport Beach, CA 103 1972 06/99 3-30 Foothill/Twincreeks . 176 San Ramon, CA 1,379 1985 02/97 3-30 Hillsborough Park ... 235 La Habra, CA 182 1999 09/99 3-30 Kings Road .......... 196 Los Angeles, CA 799 1979 06/97 3-30 Marina Cove (4) ..... 292 Santa Clara, CA 3,694 1974 06/94 3-30 Meadows @ Cascade ... 198 Vancouver, WA 685 1988 11/97 3-30 Hillcrest Park ...... 608 Newbury Park, CA 2,613 1973 03/98 3-30 Park Place/ Windsor Court/Cochran 176 Los Angeles, CA 736 1988 08/97 3-30 Plumtree ............ 140 Santa Clara, CA 1,668 1975 02/94 3-30 Stevenson Place ..... 200 Fremont, CA 4,631 1971 04/82 3-30 Tara Village ........ 168 Tarzana, CA 777 1972 01/97 3-30 The Laurels ......... 164 Mill Creek, WA 657 1981 12/96 3-30 The Village ......... 122 Oxnard, CA 473 1974 07/97 3-30 Trabucco Villas ..... 132 Lake Forest, CA 660 1985 10/97 3-30 Villa Scandia ....... 118 Ventura, CA 349 1971 06/97 3-30 Village @ Cascade ... 192 Vancouver, WA 598 1995 12/97 3-30 Wimbledon Woods ..... 560 Hayward, CA 2,234 1975 03/98 3-30 Monterra del Mar .... 122 Pasadena, CA 433 1972 09/97 3-30 ------ ------------ 12,118 96,356 ====== ------------
ESSEX PORTFOLIO, L.P. Real Estate and Accumulated Depreciation December 31, 1999 (Dollars in thousands)
GROSS AMOUNT TOTAL INITIAL COST COSTS CARRIED AT CLOSE OF PERIOD RENTABLE -------------------- CAPITALIZED ---------------------------- SQUARE BUILDINGS AND SUBSEQUENT TO LAND AND BUILDINGS AND PROPERTY FOOTAGE LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION IMPROVEMENTS IMPROVEMENTS TOTAL(1) -------- -------- -------- ----------- -------- ------------- ------------- ------------- ------------- -------- Commercial properties 925 East Meadow.. 17,404 Palo Alto, -- 1,401 3,172 816 1,765 3,624 5,389 -------- CA ----------- -------- ------------- ------------- ------------- ------------- -------- 17,404 -- 1,401 3,172 816 1,765 3,624 5,389 ======== ----------- -------- ------------- ------------- ------------- ------------- -------- Total multifamily and commercial properties $351,108 $230,239 $646,407 $52,430 $214,497 $694,579 $929,076 (6) ----------- -------- ------------- ------------- ------------- ------------- --------
DEPRECIABLE ACCUMULATED DATE OF DATE LIVES PROPERTY DEPRECIATION CONSTRUCTION ACQUIRED (YEARS) -------- ------------ ------------ -------- ------------ Commercial properties 925 East Meadow ...... 249 1984 11/97 3-30 -------- 249 -------- $ 96,605 ========
(1) The aggregate cost for federal income tax purposes is $764,618. (2) Phase I was built in 1969 and Phase II was built in 1977. (3) The land is leased pursuant to a ground lease expiring 2027. (4) A portion of land is leased pursuant to a ground lease expiring in 2028. (5) A portion of The Shores land value was allocated to real estate under development for the Bel Air (formerly Canyon Point) development project in the amount of $1,757. (6) Not included on above schedule is the construction loan for the Fountain Court development project in the amount of $22,500. A summary of activity for real estate and accumulated depreciation is as follows:
1999 1998 1997 --------- --------- --------- Real estate: Balance at beginning of year $ 889,964 $ 730,987 $ 393,809 Improvements ............... 5,554 12,200 4,533 Acquisition of real estate . 193,634 169,934 345,750 Disposition of real estate . (160,076) (23,157) (13,105) --------- --------- --------- Balance at end of year ..... $ 929,076 $ 889,964 $ 730,987 ========= ========= =========
1999 1998 1997 -------- -------- -------- Accumulated depreciation: Balance at beginning of year ...... $ 77,789 $ 58,040 $ 47,631 Dispositions ...................... (7,334) (2,183) (3,504) Depreciation expense - Acquisitions 1,377 2,888 2,086 Depreciation expense .............. 24,773 19,044 11,827 -------- -------- -------- Balance at end of year ............ $ 96,605 $ 77,789 $ 58,040 ======== ======== ========
SIGNATURE --------- Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Essex Portfolio, L.P. (Registrant) By: Essex Property Trust, Inc. Its: General Partner Dated: March 30, 2000 By: /s/ Michael J. Schall --------------------------------------- Michael J. Schall Executive Vice President and Chief Financial Officer and Director (Principal Financial Officer) SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the date indicated. Dated March 30, 2000 /s/ George M. Marcus --------------------------------------- George M. Marcus Chairman of the Board Dated March 30, 2000 /s/ Keith R. Guericke --------------------------------------- Keith R. Guericke President and Chief Executive Officer and Vice Chairman Dated March 30, 2000 /s/ Michael J. Schall --------------------------------------- Michael J. Schall Chief Financial Officer Executive, Vice President and Director Dated March 30, 2000 /s/ Mark J. Mikl --------------------------------------- Mark J. Mikl Vice President and Controller (Principal Accounting Officer) Dated March 30, 2000 /s/ William A. Millichap --------------------------------------- William A. Millichap Director Dated March 30, 2000 /s/ Gary P. Martin --------------------------------------- Gary P. Martin Director Dated March 30, 2000 /s/ Robert E. Larson --------------------------------------- Robert E. Larson Director Dated March 30, 2000 /s/ Thomas E. Randlett --------------------------------------- Thomas E. Randlett Director Dated March 30, 2000 /s/ Anthony Downs --------------------------------------- Anthony Downs Director Dated March 30, 2000 /s/ David Brady --------------------------------------- David Brady Director Dated March 30, 2000 /s/ Issie N. Rabinovitch --------------------------------------- Issie N. Rabinovitch Director Dated March 30, 2000 /s/ Willard H. Smith --------------------------------------- Willard H. Smith Director II-2 Exhibit No. Document Page - ----------- -------- ---- 3.1 Articles of Amendment and Restatement of Essex dated June 22, 1995, attached as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1995, and incorporated herein by reference. -- 3.2 Articles Supplementary of Essex Property Trust, Inc. for the 8.75% Convertible Preferred Stock, Series 1996A, attached as Exhibit 3.1 to the Company's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 3.3 First Amendment to Articles of Amendment and Restatement of Essex Property Trust, Inc., attached as Exhibit 3.1 to the Company's 10-Q as of September 30, 1996, and incorporated herein by reference. -- 3.4 Certificate of Correction to Exhibit 3.2 dated December 20, 1996. (1) 3.5 Amended and Restated Bylaws of Essex Property Trust, Inc., attached as Exhibit 3.2 to the Company's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 3.6 Certificate of Amendment of the Bylaws of Essex Property Trust, Inc., dated December 17, 1996. (1) 3.7 Articles Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 7.875% Series B Cumulative Redeemable Preferred Stock, filed with the State of Maryland on February 10, 1998, attached as Exhibit 3.1 to the Company's Current Report on Form 8-K, filed March 3, 1998, and incorporated herein by reference. -- 3.8 Articles Supplementary reclassifying 500,000 shares of Common Stock as 500,000 shares of 9-1/8% Series C Cumulative Redeemable Preferred Stock, filed with the State of Maryland on November 25, 1998. (2) 3.9 Certificate of Correction to Exhibit 3.2 dated February 12, 1999. (2) 3.10 Articles Supplementary reclassifying 6,617,822 shares of Common Stock as 6,617,822 shares of Series A Junior Participating Preferred Stock, filed with the State of Maryland on November 13, 1998, attached as Exhibit 4.0 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. -- 3.11 Articles Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 9.30% Series D Cumulative Redeemable Preferred Stock, filed with the State of Maryland on July 30, 1999, attached as Exhibit 3.1 to the Company's 10-Q as of June 30, 1999 and incorporated herein by reference. -- 3.12 Articles Supplementary reclassifying 2,200,000 shares of Common Stock as 2,200,000 shares of 9.25% Series E Cumulative Redeemable Preferred Stock, filed with the State of Maryland on September 9, 1999, attached as Exhibit 3 1 to the Company's 10-Q as of September 30, 1999 and incorporated herein by reference. -- 4.0 Rights Agreement, dated as of November 11, 1998, between Essex Property Trust, Inc., and BankBoston, N.A., as Rights Agent, including all exhibits thereto, attached as Exhibit 1 to the Company's Registration Statement filed on Form 8-A dated November 12, 1998, and incorporated herein by reference. -- 10.1 Essex Property Trust, Inc. 1994 Stock Incentive Plan (amended and restated as of April 3, 1997 and previously known as the 1994 Employee Stock Incentive Plan), attached as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference.* -- 10.2 First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference. -- 10.3 First Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated February 6, 1998, attached as Exhibit 10.1 to the Company's Current Report on Form 8-K , filed March 3, 1998, and incorporated herein by reference. -- 10.4 Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated April 20, 1998, attached as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed April 23, 1998, and incorporated herein by reference. -- 10.5 Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated November 24, 1998. (2) 10.6 Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated July 28, 1999, attached as Exhibit 10.1 to the Company's 10-Q as of June 30, 1999 and incorporated herein by reference. -- 10.7 Fifth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated September 3, 1999, attached as Exhibit 10.1 to the Company's 10-Q as of September 30, 1999 and incorporated herein by reference. -- 10.8 Form of Essex Property Trust, Inc. 1994 Non-Employee and Director Stock Incentive Plan, attached as Exhibit 10.3 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.9 Form of Essex Property Trust, Inc. 1994 Employee Stock Incentive Plan, attached as Exhibit 10.2 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.10 Form of Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan, attached as Exhibit 10.4 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference.* -- 10.11 Form of Non-Competition Agreement between Essex and each of Keith R. Guericke and George M. Marcus, attached as Exhibit 10.5 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference.* -- 10.12 Termination of Non-Compete Agreement between Essex Property Trust, Inc. and George M. Marcus attached as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. -- 10.13 Contribution Agreement by and among Essex, the Operating Partnership and the Limited Partners in the Operating Partnership, attached as Exhibit 10.6 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.14 Form of Indemnification Agreement between Essex and its directors and officers, attached as Exhibit 10.7 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.15 Stock Purchase Agreement dated as of June 20, 1996 by and between Essex Property Trust, Inc. and Tiger/Westbrook Real Estate Fund L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P., attached as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 10.16 Amendment No. 1 to Stock Purchase Agreement dated as of July 1, 1996 by and between Essex Property Trust, Inc. and Tiger/Westbrook Real Estate Fund, L.P. and Tiger/ Westbrook Real Estate Co-Investment Partnership, L.P., attached as Exhibit 10.2 to the Company's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 10.17 First Amendment to Investor Rights Agreement dated July 1, 1996 by and between George M. Marcus and The Marcus & Millichap Company, attached as Exhibit 10.3 to the Company's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 10.18 Agreement by and among M&M, M&M REIBC and the Operating Partnership and Essex regarding Stock Options attached as Exhibit 10.14 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.19 Co-Brokerage Agreement by and among Essex, the Operating Partnership, M&M REIBC and Essex Management Corporation attached as Exhibit 10.15 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.20 General Partnership Agreement of Essex Washington Interest Partners attached as Exhibit 10.16 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.21 Form of Management Agreement between the Operating Partnership and Essex Management Corporation regarding the retail Properties attached as Exhibit 10.18 to the Company's Registration Statement on Form S-11 (Registration No 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.22 Form of Investor Rights Agreement between Essex and the Limited Partner of the Operating Partnership attached as Exhibit 10.26 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.23 Registration Rights Agreement, dated as of June 20, 1996, attached as Exhibit 10.8 to Essex's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 10.24 Letter Agreement, dated July 1, 1996, among Essex Property Trust, Inc., Essex Portfolio, L.P., Tiger/ Westbrook Real Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P., attached as Exhibit 10.9 to the Company's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 10.25 Letter Agreement with Tiger/Westbrook entities re: Limitations on Ownership of Stock of the Company, attached as Exhibit 10.1 to the Company's 10-Q as of September 30, 1996, and incorporated herein by reference. -- 10.26 Phantom Stock Unit Agreement for Mr. Guericke, attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.* -- 10.27 Phantom Stock Unit Agreement for Mr. Schall, attached as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.* -- 10.28 Replacement Promissory Note (April 15, 1996) and Pledge Agreement for Mr. Guericke, attached as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. -- 10.29 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Guericke, attached as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. -- 10.30 Replacement Promissory Note (April 30, 1996) and Pledge Agreement for Mr. Schall, attached as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. -- 10.31 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Schall, attached as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. -- 10.32 First Amended and Restated Agreement of Limited Partnership of Western-Highridge I Investors, effective as of May 13, 1997, attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. -- 10.33 Registration Rights Agreement, effective as of May 13, 1997, by and between the Company and the limited partners of Western-Highridge I Investors, Irvington Square Associates, Western-Palo Alto II Investors, Western Riviera Investors, and Western-San Jose III Investors, attached as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. -- 10.34 $100,000,000 Promissory Note between Essex Portfolio, L.P., and Essex Morgan Funding Corporation, attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference. -- 12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends -- 21.1 List of Subsidiaries of Essex Property Trust, Inc. -- 23.1 Consent of Independent Public Accountants. -- 27.1 Article 5 Financial Data Schedule (Edgar Filing Only) -- (1) Incorporated by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (2) Incorporated by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. * Management contract or compensatory plan or agreement. EX-12.1 2 SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.1 ESSEX PORTFOLIO, L.P. SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands, except ratios)
YEARS ENDED DECEMBER 31 ------------------------------- 1999 1998 1997 ------- ------- ------- EARNINGS: Income before minority interests and extraordinary item ................................. $61,616 $40,600 $34,146 Interest expense ......................................... 21,268 19,374 12,659 Amortization of deferred financing costs ................. 566 718 509 ------- ------- ------- TOTAL EARNINGS ........................................... $83,450 $60,692 $47,314 ======= ======= ======= FIXED CHARGES: Interest expense ......................................... $21,268 $19,374 $12,659 Convertible preferred stock dividends .................... 1,333 3,500 2,681 Perpetual preferred unit distributions ................... 12,238 5,595 -- Amortization of deferred financing costs ................. 566 718 509 Capitalized interest ..................................... 5,172 3,494 1,276 ------- ------- ------- TOTAL FIXED CHARGES AND PREFERRED STOCK DIVIDENDS ........................................ $40,577 $32,681 $17,125 ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES (EXCLUDING PREFERRED STOCK DIVIDENDS) .................... 3.09 X 2.57 X 3.28 X ======= ======= ======= RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS .......................... 2.06 X 1.86 X 2.76 X ======= ======= =======
EX-21.1 3 LIST OF SUBSIDIARIES EXHIBIT 21.1 List of Subsidiaries 1. Essex Portfolio, L.P., a California limited partnership 2. Essex Management Corporation, a California corporation 3. Essex-Palisades Facilitator, a California limited partnership 4. Essex Sunpointe Limited, a California limited partnership 5. Essex Washington Interest Partners, a California general partnership 6. Essex San Ramon Partners L.P., a California limited partnership 7. Essex Bristol Partners, L.P., a California limited partnership 8. Essex Fidelity I Corporation, a California corporation 9. Essex Camarillo Corporation, a California corporation 10. Essex Camarillo L.P., a California limited partnership 11. Essex Meadowood Corporation, a California corporation 13. Essex Meadowood, L.P., a California limited partnership 12. Essex Bunker Hill Corporation, a California corporation 24. Essex Bunker Hill, L.P., a California limited partnership 14. Essex Treetops Corporation, a California corporation 15. Essex Treetops, L.P., a California limited partnership 16. Essex Bluffs, L.P., a California limited partnership 17. Essex Huntington Breakers, L.P., a California limited partnership 18. Essex Stonehedge, L.P., a California limited partnership 19. Essex Bridle Trails, L.P., a California limited partnership 20. Essex Spring Lake, L.P., a California limited partnership 21. Essex Maple Leaf, L.P., a California limited partnership 23. Fountain Court Apartment Associates, L.P., a Washington limited partnership 24. Essex Fountain Court, LLC, a Washington limited liability company 25. Essex Inglenook Court, LLC, a Delaware limited liability company 26. Essex Wandering Creek, LLC, a Delaware limited liability company 27. Essex Fairways, LLC, a California limited liability company 28. Essex Columbus, LLC, a Delaware limited liability company 29. Essex Lorraine, LLC, a Delaware limited liability company 30. Essex Glenbrock, LLC, a Delaware limited liability company 31. Essex Euclid, LLC, a Delaware limited liability company 32. Essex Lorraine, Inc. a California corporation 33. Essex Columbus, Inc. a California corporation EX-23.1 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 Consent of Independent Public Accountants General Partner Essex Portfolio, L.P.: We consent to incorporation by reference in the registration statement on Form S-3 (No. 333-44467) of Essex Portfolio, L.P. our report dated February 4, 2000, relating to the consolidated balance sheets of Essex Portfolio, L.P. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, partners' capital and cash flows of Essex Portfolio, L.P. and subsidiaries for each of the years in the three-year period ended December 31, 1999. and the related financial statement schedule, which report appears in the December 31, 1999 annual report on Form 10-K of Essex Portfolio, L.P. KPMG LLP San Francisco, California March 30, 2000 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Essex Portfolio, L.P. report for the year ended December 31, 1999. 1000 12-MOS DEC-31-1999 DEC-31-1999 29,564 0 22,655 0 0 55,714 1,049,490 96,605 1,062,313 47,221 384,108 0 0 0 623,603 1,062,313 0 146,045 0 67,856 4,829 0 21,268 61,067 0 61,067 0 214 0 60,853 2.42 2.37
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