-----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, QoXFYIwEmHJADfjFuqC670JJcCe0/IkQuZFDxjfyBiZe7nj6RUR6QeGlfNhZLLr+ DT8rKdNMadlw6GOAtN9EqQ== 0000891618-98-001429.txt : 19980401 0000891618-98-001429.hdr.sgml : 19980401 ACCESSION NUMBER: 0000891618-98-001429 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX PROPERTY TRUST INC CENTRAL INDEX KEY: 0000920522 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 770369576 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13106 FILM NUMBER: 98580466 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-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-13106 ESSEX PROPERTY TRUST, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 77-0369576 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
925 E. 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.0001 par value New York Stock Exchange
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 the Form 10-K. [ ] As of March 25, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant was $547,432,836. The aggregate market value was computed with reference to the closing price on the New York Stock Exchange on such date. This calculation does not reflect a determination that persons are affiliates for any other purpose. As of March 25, 1998, 16,625,410 shares of Common Stock ($.0001 par value) were outstanding. LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part IV, Item 14, on page number 28. DOCUMENTS INCORPORATED BY REFERENCE: The following document is incorporated by reference in Part III of the Annual Report on Form 10-K: Proxy statement for the annual meeting of stockholders of Essex Property Trust, Inc. to be held April 28, 1998. ================================================================================ 2 TABLE OF CONTENTS FORM 10-K
PAGE NO. -------- PART I Item 1 Business.................................................... 1 Item 2 Properties.................................................. 12 Item 3 Legal Proceedings........................................... 15 Item 4 Submission of Matters to a Vote of Security Holders......... 15 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters......................................... 16 Item 6 Summary Financial and Operating Data........................ 19 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 21 Item 8 Financial Statements and Supplemental 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......................................................... 28 Signatures........................................................... 30
i 3 PART I ITEM 1. BUSINESS DESCRIPTION OF BUSINESS The Company is a self-administered and self-managed equity real estate investment trust ("REIT") that was formed in 1994 to continue and expand the real estate investment and management operations conducted by Essex Property Corporation since 1971. The Company's multifamily residential portfolio consists of ownership interests in 54 properties comprising 10,700 apartment units, of which 19 properties are located in Southern California, 13 are located in the San Francisco Bay Area, 18 are located in the Seattle metropolitan area, and four are located in Portland, Oregon metropolitan area. The Company also owns three retail properties, which are located in the Portland, Oregon metropolitan area and which the Company presently considers to be held for sale, and two office buildings located in Palo Alto, California, one of which houses the Company's headquarters (collectively, the "Commercial Properties," and together with the Company's 54 multifamily residential properties, the "Properties"). Essex was incorporated in the state of Maryland in March 1994. On June 13, 1994, Essex commenced operations with the completion of an 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 $112.1 million were used to acquire an approximate 77.2% general partnership interest in Essex Portfolio, L.P. (the "Operating Partnership"). The Company conducts substantially all of its activities through the Operating Partnership. The Company currently owns an approximate 89.9% general partnership interest and senior members of the Company's management and certain outside investors own an approximate 10.1% 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. All references to "Essex" or the "Company" in this report refer to Essex Property Trust, Inc. and those entities owned or controlled by Essex Property Trust, Inc., including the Operating Partnership. Unless otherwise specified, information about Essex and the properties refers to the operations of Essex after the completion of the Offering and the operations of Essex Property Corporation ("EPC") prior to the completion of the Offering. Essex was formed to continue and expand the real estate investment and management operations conducted by EPC since 1971. Since its inception, Essex has successfully acquired, developed, managed and/or disposed of a combination of approximately 187 property and portfolio assets in seven major metropolitan markets in the western United States at an aggregate investment in excess of $1.2 billion. Such properties have included various types of commercial property, with a focus on multifamily residential property. Essex's multifamily residential property investments have involved an aggregate of more than 19,780 apartment units. BUSINESS OBJECTIVES The Company's primary business objective is to maximize Funds from Operations and total returns to stockholders through continued active leasing, property management and active portfolio management. The Company'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. - 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 throughout the west coast 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. 1 4 - Management of Capital and Financial Risk. Optimize Essex's capital and financial risk positions by maintaining a conservative leverage ratio, evaluating financing alternatives on an on-going basis and minimizing Essex's cost of capital. BUSINESS PRINCIPLES Essex 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, Essex seeks to retain tenants, maximize cash flow, enhance property values and compete effectively for new tenants in the marketplace. Essex's regional portfolio managers are accountable for overall property operations and performance. They supervise on-site managers, 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. Essex has established in-house training programs for its on-site staff. 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 in writing. Performance versus plan serves as a significant factor in determining compensation. Property Type Focus. The Company focuses on acquisition of multifamily residential communities, containing between 75 and 600 units. The Company believes that these types of properties offer attractive opportunities because such properties (i) are often mispriced by real estate sellers and buyers who lack Essex'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 either are inadequately capitalized or lack the professional property management expertise of Essex, and (iii) can be readily exchanged or sold during periods of changing market conditions due to the relatively large pool of prospective and qualified buyers for such properties. Geographic Focus. The Company focuses its property investments in markets that meet the following criteria: - Major Metropolitan Areas. Essex 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 Company's strategy of varying its portfolio in response to changing market conditions. - Supply Constraints. Essex believes that properties located in real estate markets with limited development or redevelopment opportunities are well-suited to produce increased rental income. In evaluating supply constraints, Essex 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. Essex 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, as a percentage of rent, are lower in comparison with markets that have a lower cost of housing. - Job Proximity. Essex believes that most renters select housing based on its proximity to their jobs and on related commuting factors and desire to remain within a specified travel distance from their jobs. Essex obtains community information relating to its residential properties and uses this information when making multifamily residential property acquisition decisions. Essex also reviews the location of major employers relative to its portfolio and potential acquisition properties. 2 5 Following the above criteria, the Company is currently pursuing investment opportunities in selected markets of Northern and Southern California, the Seattle Metropolitan Area and the Portland, Oregon Metropolitan Area. Active Portfolio Management Through Regional Economic Research and Local Market Knowledge. Essex 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. Essex 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. Essex maintains and evaluates: - Regional Economic Data. Essex evaluates and reviews regional economic factors for the markets in which it owns properties and where it considers expanding its operations. Essex'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, Essex regularly evaluates the results of regional economic and local market research and adjusts asset acquisitions and portfolio allocations accordingly. Essex actively manages the allocation of assets within its portfolio. Essex 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, Essex 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 Essex is generally a longterm investor, it does not establish defined or preferred holding periods for its Properties. CURRENT BUSINESS ACTIVITIES Essex conducts substantially all of its activities through the Operating Partnership, of which Essex owns an approximate 89.9% general partnership interest. An approximate 10.1% limited partnership interest in the Operating Partnership is owned by directors, officers and employees of Essex and certain third-party investors. As the sole general partner of the Operating Partnership, Essex has operating control over the management of the Operating Partnership and each of the Properties. From time to time, the Company may invest in Properties through the acquisition of an interest in another entity, based upon the criteria described above. The Company does not plan to invest in any securities of other entities not engaged in real estate activities. Three of the multifamily residential Properties located in the State of Washington are owned by partnerships in which the Operating Partnership owns a 99% general partnership interest and Essex Washington Interests Partners ("EWIP") owns the remaining 1% Partnership interest. The Operating Partnership owns a 99% general partnership interest in EWIP and Essex owns the remaining 1% general partnership interest. EWIP was organized in March 1994 as a California general partnership. Ten of the Operating Partnership's properties are owned by single asset limited partnerships of which Essex Portfolio, L.P. has a minimum 99% limited partnership interest. The maximum 1% general partnership interest is owned by Essex Management Corporation ("EMC") or a corporation of which EMC owns 100% of the voting common stock. Three of the Operating Partnerships properties are owned by single asset partnerships of which Essex Portfolio, L.P. has an 84% limited partnership interest, EMC has a 1% general partnership interest; the remaining 15% is owned by an unrelated third party. The Operating Partnership owns a 49.9% limited partnership in Jackson School Village L.P., ("JSV") which was formed to develop and operate a 200 unit apartment community. The unrelated third party general partner in JSV provides development services to the partnership. The Company holds a 1% limited partnership interest in seven partnerships which collectively own two multifamily properties. These investments were made under arrangements whereby EMC became the general partner and the existing partners were, granted the right to require the applicable partnership to redeem their interests for cash. Subject to certain conditions, the Company may, however, elect to deliver an equivalent number of shares of the Company's Common Stock in satisfaction of the applicable partnership's cash redemption obligation. 3 6 Essex 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, Essex provides some of its fee-based asset management and disposition services as well as third- party property management and leasing services through EMC. Essex owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of Essex own 100% of EMC's 1,000 shares of common stock. On June 20, 1996, the Company entered into a definitive agreement to sell 1,600,000 shares or $40,000,000 of the Company's 8.75% Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock") at $25.00 per share to Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-investment Partnership, L.P. (collectively, "Tiger/Westbrook"). In September 1996, Tiger/Westbrook completed the purchase of 800,000 shares of Convertible Preferred Stock and, in June 1997, Tiger/Westbrook purchased the remaining 800,000 shares. Holders of shares of Convertible Preferred Stock are entitled to receive annual cumulative cash dividends, payable quarterly, in an amount equal to the greater of (i) $2.1875 per share (8.75% of the $25.00 per share price) or (ii) the dividends (subject to adjustment) paid with respect to the Common Stock plus, in both cases, any accumulated but unpaid dividends on the Convertible Preferred Stock. As of March 20, 1998 all of the 1.6 million authorized shares of Convertible Preferred Stock are convertible into common stock at the option of the holder. The conversion price per share of Convertible Preferred Stock is $21.875, subject to adjustment under certain circumstances. In August 1996, Essex sold 2,530,000 shares of common stock in a public offering for $22.75 per share. In December 1996, Essex sold 2,783,000 shares of common stock in a public offering for $27.75 per share. In March 1997, Essex completed the sale of 2,000,000 shares of its common stock to Cohen & Steers at a price of $29.13 per share. In September 1997, the Company completed a public offering of 1,495,000 shares of its common stock at a price of $31.00 per share. In December 1997, the Company completed a public offering of 1,500,000 shares of common stock at a price of $35.50 per share. The Company contributed the net proceeds from each of the offerings and sales to the Operating Partnership and, as a result of such contributions, the Company increased its ownership interest in the Operating Partnership to an approximate 89.9% general partnership interest. Subsequent to December 31, 1997, the Operating Partnership completed the sale of 1,200,000 units of its 7.875% Series B Cumulative Redeemable Preferred units to an institutional investor in a private placement at a price of $50.00 per unit. The Operating Partnership utilized the proceeds of these equity transactions to fund the acquisition and development of multifamily properties, to reduce outstanding indebtedness, and for general corporate purposes. ACQUISITIONS During 1997, Essex acquired ownership interests in twenty-seven multifamily properties consisting of 4,213 units for an aggregate contract purchase price of approximately $317.1 million. These investments were primarily funded by the equity transactions completed in 1997. Sixteen properties (2,525 units) are located in Southern California, seven of these properties (1,122 units) are located in the greater Seattle metropolitan area, two (176 units) are located in Northern California, and two (390 units) are located in the greater Portland, Oregon metropolitan area. Multifamily property ownership interests acquired in 1997 are as follows:
NAME LOCATION UNITS PURCHASE PRICE ---- -------- ----- --------------- (IN MILLIONS) SOUTHERN CALIFORNIA PROPERTIES Camarillo Oaks.................... Camarillo, CA 193 $ 12.0 Casa del Mar...................... Pasadena, CA 96 6.1 Casa Mango........................ San Diego, CA 96 9.9 Huntington Breakers............... Huntington Beach, CA 342 30.4 Kings Road........................ Los Angeles, CA 196 12.9 Park Place/Windsor Court.......... Los Angeles, CA 118 11.0 Riverfront Apartments............. San Diego, CA 228 28.1 Highridge(1)...................... Rancho Palos Verdes, CA 255 25.3 Tara Village...................... Tarzana, CA 168 10.3
4 7
NAME LOCATION UNITS PURCHASE PRICE ---- -------- ----- --------------- (IN MILLIONS) The Bluffs II..................... San Diego, CA 224 10.7 The Village....................... Oxnard, CA 122 7.7 Trabuco Villas.................... Lake Forest, CA 132 11.9 Villa Scandia..................... Ventura, CA 118 5.2 Wilshire Promenade................ Fullerton, CA 128 10.3 Windsor Terrace................... Pasadena, CA 109 7.1 ----- ------ 2,525 $198.9 SEATTLE METROPOLITAN AREA Anchor Village(1)................. Mukilteo, WA 301 $ 13.1 Bridle Trails..................... Kirkland, WA 92 6.6 Castle Creek...................... Newcastle, WA 216 20.0 Evergreen Heights................. Kirkland, WA 200 15.8 Maple Leaf........................ Seattle, WA 48 3.8 Spring Lake....................... Seattle, WA 69 3.9 Stonehedge Village................ Bothell, WA 196 14.2 ----- ------ 1,122 $ 77.4 PORTLAND METROPOLITAN AREA Meadows at Cascade Park........... Vancouver, WA 198 $ 11.1 Village at Cascade Park........... Vancouver, WA 192 10.4 ----- ------ 390 $ 21.5 NORTHERN CALIFORNIA Foothill Gardens/Twin Creeks...... San Ramon, CA 176 $ 19.2 ----- ------ Total................... 4,213 $317.1 ===== ======
- --------------- (1) The Company holds a 1% limited partner interest in the partnerships which own these multifamily properties. These investments were made under arrangements whereby EMC became the general partner and the existing partners were granted the right to require the applicable partnership to redeem their interests for cash. Subject to certain conditions, the Company may, however, elect to deliver an equivalent number of shares of the Company's Common Stock in satisfaction of the applicable partnership's cash redemption obligation. DISPOSITIONS In 1997, Essex sold one Northern California multifamily property and three Portland retail properties for an aggregate net sales price of $15,470,000. The proceeds were used to fund acquisitions of multifamily properties. DEVELOPMENT The Company has approved six development projects comprising of 1,330 multifamily units and having an approximate projected cost of $150,000,000 to be completed over the next two years. In August 1997, Essex entered into a partnership which has acquired a 15 acre site located in Issaquah, Washington. The partnership is developing a 245 unit multifamily community on this site. Essex has contributed $3,500,000 to the partnership in return for a 45% ownership interest in it. The estimated total capitalized cost is $25,300,000. Essex has the option to purchase the property within five years of completion. The partnership began development on this project in August 1997. In September 1997, Essex broke ground on the Fountain Court Property, located in Seattle, Washington, which is anticipated to consist of a 320 unit multifamily community. Essex has contributed $4,000,000 to the joint venture in return for a 49% ownership interest in it. A $22,500,000 construction loan commitment has been obtained. Essex's partner in this joint venture is a local Seattle developer. In accordance with the terms of the agreement, in the year 2000 the Operating Partnership is to purchase its partners' 51% interest, resulting in an estimated total capitalized cost for Fountain Court of $31,350,000. 5 8 In September 1997, Essex purchased a 2.5 acre site located in Marina Del Rey, California, on which it intends to build a multifamily property of up to 188 units. The estimated total capitalized cost for the community is $28,900,000. Essex expects to begin development of the project in May 1998. In September 1997, Essex purchased a 14.8 acre site located in La Habra, California. Essex plans to develop Hillsborough Park Apartments, a 235 unit multifamily community, on this site. The estimated total capitalized cost is $19,100,000. Essex began development of the project in March 1998. In December 1997, Essex entered into a contract to purchase a 238 unit multifamily community currently under construction in San Jose, California. The estimated total capitalized cost for the community is $36,100,000. Essex's acquisition is scheduled to close upon completion of the project in March 1999. In December 1997, Essex acquired a 2.6-acre parcel of land in Walnut Creek, California for approximately $2.5 million. Essex intends to construct an approximate 106 unit multifamily community at an estimated total capitalized cost of approximately $11,400,000. Construction is anticipated to begin in the spring of 1998. As part of its previous acquisition of The Shores Property, Essex acquired an adjacent 8.1-acre parcel of land which is zoned for additional apartment development. Essex is developing on this parcel approximately 100 additional apartment units as an expansion to The Shores Property. It is anticipated that the development of additional units at The Shores will produce an attractive incremental return from the Property as a result of (i) an increase in the number of units available for rent with no additional land cost and (ii) the utilization of the existing leasing office, staff and amenities for the new units. Essex will begin construction of the additional units in 1998. The estimated total capitalized cost of this project is approximately $13,100,000. This project is still in its entitlement phase. OFFICES AND EMPLOYEES Essex is headquartered in Palo Alto, California, and has regional offices in Seattle, Washington, Portland, Oregon, West Lake Village, California and Tustin, California. As of December 31, 1997, Essex had approximately 370 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 such liability without regard 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, financial results, management and development of real properties, Essex 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 6 9 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 presence of underground fuel storage tanks which have been removed. There are asbestos-containing materials 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 has been identified as a potential concern, Essex has implemented remediating measures and additional testing. Based on its current knowledge, the Company does not believe that future liabilities associated with asbestos and radon will be material. Based on the information contained in the environmental studies, Essex 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 Essex's financial condition, result of operations, or liquidity. Certain Properties which have been sold by the Company were identified as having potential groundwater contamination. While the Company does not anticipate any losses or costs related to groundwater contamination on Properties which have been sold, it is possible that such losses or costs may materialize in the future. Except with respect to one Property, Essex has no indemnification agreements from third parties for potential environmental clean-up costs at its Properties. Essex 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 Essex. 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 Company, or that a material environmental condition does not otherwise exist as to any one or more of the Properties. Essex has no insurance coverage for the types of environmental liabilities described above. INSURANCE 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. All of the Properties are located in areas that are subject to earthquake activity, including 34 Properties in California, 19 Properties in Washington and 6 Properties in Oregon. Essex has obtained earthquake insurance for all the Properties. This earthquake insurance is subject to an aggregate limit of $25.0 million payable upon a covered loss in excess of a $5.0 million self-insured retention amount and a 15% deductible. Essex 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 Essex, (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. In addition, despite earthquake coverage on all of its Properties placed in service, should a property sustain damage as a result of an earthquake, Essex may incur losses due to deductibles, co-payments or losses in excess of applicable insurance, if any. Although Essex carries certain insurance for non-earthquake damages to its properties and liability insurance, Essex may still incur losses due to uninsured risks, deductibles, co-payments or losses in excess of applicable insurance. COMPETITION Essex'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 7 10 stable in Essex's target markets, a prolonged economic downturn could have a material adverse effect on Essex's financial position, results of operations or liquidity. Essex 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 Company expects to meet its short-term liquidity requirements by using working capital, amounts available on lines of credit, and any portion of net cash flow from operations not required for distributions. The Company believes that its future net cash flows will be adequate to meet operating requirements and to provide for payment of distributions by the Company in accordance with REIT requirements. Essex has credit facilities in the committed amount of approximately $75,110,000. At December 31, 1997 Essex had an outstanding balance of $27,600,000 under these facilities. OTHER MATTERS Essex's operating results may be affected by the matters discussed above under the captions "Environmental Matters" and "Insurance" as well as by the following factors: Debt Financing; Risk of Uncertainty of Ability to Refinance Balloon Payments and Risk of Rising Interest Payments. Essex is subject to the risks normally associated with debt financing, including the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest, that the Company will not be able to refinance existing indebtedness on the encumbered Properties or that the terms of such refinancing will not be as favorable as the terms of existing indebtedness. As of December 31, 1997, Essex had outstanding approximately $276.6 million of indebtedness (including $58.8 million of variable rate mortgage investments), of which $251.7 million is secured by certain of the Properties. Essex is not expected to have sufficient cash flows to make all of the balloon payments of principal when due under its mortgage indebtedness and lines of credit which were, as of December 31, 1997, an aggregate of approximately $276.6 million. As of December 31, 1997, such mortgage indebtedness and lines of credit have the following scheduled maturity dates: 1998 -- $31.7 million; 1999 -- $4.5 million; 2000 -- $4.8 million; 2001 -- $60.9 million; 2002 and thereafter -- $174.7 million. As a result, Essex will be subject to risks that it will not be able to refinance such mortgage indebtedness and the mortgaged properties could be foreclosed upon by or otherwise transferred to the mortgagee with a consequent loss of income and asset value to Essex, or, that the indebtedness, if any, refinanced will have higher interest rates. An inability to make such payments when due could cause the mortgage lender to foreclose on the Properties securing the mortgage, which would have a material adverse effect on Essex. As of December 31, 1997, Essex had approximately $58.8 million of variable rate mortgage indebtedness, which bears interest at a floating rate tied to the rate of short-term tax exempt securities. Although approximately $29.2 million of such 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 would have an adverse effect on Essex's net income and results of operations. Acquisition Activities; Risks that Acquisitions Will Fail to Meet Expectations. The Company intends to actively continue to acquire multifamily residential properties. Acquisitions of such properties entail risks that investments will fail to perform in accordance with expectations. Estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate. The Company anticipates that future acquisitions will be financed, in whole or in part, under existing credit facilities or loan commitments or other lines of credit or other forms of secured or unsecured financing or through the issuance of partnership units by the Operating Partnership or additional equity by the Company. The use of equity financing, rather than debt, for future developments or acquisitions could have a diluting effect on the interest of existing shareholders of the Company. 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 acquisitions may not be available or may be available only on disadvantageous terms. In addition, there is a risk that upon the maturity of such existing lines of credit, the lines of credit will not be able to be refinanced or that the terms of such refinancing will not be as favorable as the terms of the existing 8 11 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". Development Activities; Risks that Developments Will Be Delayed or Not Completed. The Company pursues multifamily residential property development projects. Such projects generally require various governmental and other approvals, the receipt of which cannot be assured. The Company's development activities will entail certain risks, including the expenditure of funds on and devotion of management's time to projects which may not come to fruition; the risk that construction costs of a project may exceed original estimates, possibly making the project not economical; the risk that a development project may experience delays due to, among other things, adverse weather conditions; the risk that occupancy rates and rents at a completed project will be less that anticipated; and the risk that expenses at a completed development will be higher than anticipated. These risks may result in a development project causing a reduction in the funds available for distribution. Further, development of properties is 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 may Adversely Impact Essex's Income Due to Fluctuations in Local Markets. Approximately 43%, 25%, 26% and 6% of Essex's rental revenues for the year ended December 31, 1997 were derived from Properties located in the San Francisco Bay Area, the Seattle metropolitan area, Southern California and the Portland metropolitan area, respectively. As a result of this geographic concentration, if a local property market performs poorly, the income from the Properties in that market could decrease and, in turn, the ability of the Company to make expected dividends to stockholders could be adversely affected. The performance of the economy in each of these areas affects occupancy, market rental rates and expenses and, consequently, has an impact on the income from the Properties and their underlying values. The financial results of major local employers may have an impact on the cash flow and value of certain of the Properties. Competition in the Multifamily Residential Market May Adversely Affect the Company's Operations and the Demand for the Company's Properties. There are numerous housing alternatives that compete with the multifamily Properties in attracting residents. The multifamily Properties compete directly with 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. In addition, other competitors for development and acquisitions of properties may have greater resources than the Company. If such competition results in a reduced demand for the Company's Properties or if the Company's competitors develop and/or acquire competing properties on a more cost-effective basis than the Company, the Company may experience a drop in rental rates, which may have a material adverse effect on the Company's financial position and results of operations. The Company faces competition from other REITs, businesses and other entities in the acquisition, development, operation of its properties. Some of the Company's competitors are larger and have greater financial resources than the Company. This competition may result in a higher cost for properties the Company wishes to acquire and/or develop. 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 allow the Company to make more investments than it otherwise could. Such use of leverage presents an additional element of risk in the event that the cash flow from the Properties is insufficient to meet both debt payment obligations and the distribution requirements of the REIT provisions of the Code. To the extent the Company or Operating Partnership determines to obtain additional debt financing in the future, it may do so through mortgages on some or all of its properties. These mortgages may be on recourse, non-recourse, or cross-collateralized bases. As of December 31, 1997, the Company had mortgages on 15 Properties which were secured by deeds of trust relating solely to those Properties, one mortgage which was cross-collateralized by 8 Properties and two mortgages each of which were cross-collateralized by 3 Properties. The Company also held a line of credit that was secured by 6 Properties. Holders of indebtedness which is so secured 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, which may, in turn, result in acceleration of other 9 12 indebtedness secured by Properties. Foreclosure of Properties would result in a loss of income and asset value to the Operating Partnership and the Company. Bond Compliance Requirements May Limit the Company's Income from Certain Properties. As of December 31, 1997 the Company had approximately $60.3 million of tax-exempt financing relating to its Inglenook Court Apartments, Wandering Creek Apartments, Treetops Apartments, Meadowood Apartments and Camarillo Oaks Apartments. The tax-exempt financing subjects these Properties to certain deed restrictions and restrictive covenants. The Company expects to engage in tax-exempt financing in the future. In addition, the Internal Revenue Code of 1986, as amended (the "Code") and the regulations promulgated thereunder impose various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on qualified bond obligations, including requirements 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. The bond compliance requirements and the requirements of any future tax-exempt bond financing utilized by the Company may have the effect of limiting the Company's income from the tax-exempt financed properties if the Company is required to lower its rental rates to attract residents who satisfy the median income test. If the required number of apartment homes are not reserved for residents satisfying these income requirements, the tax-exempt status of the bonds may be terminated, the obligations of the Company under the bond documents may be accelerated and other contractual remedies against the Company may be available. 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, Essex's cash flow and ability to make distributions to its stockholders will be adversely affected. The performance of the economy in each of the areas which the Properties are located affects occupancy, market rental rates and expenses and, consequently, has an impact on the income from the Properties and their underlying values. The financial results of major local employers may have an impact on the cash flow and value of certain Properties. Income from the Properties may be further adversely affected by, among other things, 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 ability of Essex to provide for adequate maintenance and insurance and increased operating expenses. There is also the risk that as leases on the Properties expire, tenants will enter into new leases on terms that are less favorable to Essex. 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, will tend to limit the ability of Essex to vary its portfolio promptly in response to changes in economic or other conditions. Joint Ventures and Joint Ownership of Properties and Interests in Corporations and Limited Partnerships Could Limit the Company's Ability to Control Such Properties. Instead of purchasing properties directly, the Company may invest as a co-venturer or acquire interests in corporations and limited partnerships. Joint venturers often have equal control over the operation of the joint venture assets. Therefore, such investments may, under certain circumstances, involve risks such as the possibility that the co-venturer in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with the business interests or goals of the Company, or be in a position to take action contrary to the instructions or the requests of the Company or contrary to the Company's policies or objectives. Consequently, actions by a co-venturer might result in subjecting property owned by the joint venture to additional risk. Although the Company seeks to maintain sufficient control of any joint venture to permit the Company's objectives to be achieved, it may be unable to take action without the approval of its joint venture partners or its joint venture partners could take actions binding on the joint venture without the Company's consent. Additionally, should a joint venture partner become bankrupt, the Company could become liable for such partner's share of joint venture liabilities. 10 13 From time to time, the Company, through the Operating Partnership, invests in corporations or limited partnerships which have been formed for the purpose of acquiring or managing real property. In certain circumstances, the Operating Partnership's interest in a particular entity may be less than a majority of the outstanding voting interests of that entity. Therefore, the Operating Partnership's ability to control the daily operations of such an entity may be limited. Furthermore, the Operating Partnership 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) in the event that the operations of such an entity conflict with the Operating Partnership's objectives. In addition, the Operating Partnership's ability to dispose of its interests in such an entity may be limited. In the event that such an entity becomes insolvent, the Operating Partnership may lose up to its entire investment in the entity. Investments in Mortgages. The Company may invest in mortgages (first, second or third mortgages which may or may not be insured by the Federal Housing Administration or guaranteed by the Veterans Administration or otherwise guaranteed), in part as a strategy for ultimately acquiring the underlying property. In general, investments in mortgages include the risk that the value of mortgaged property may be less than the amounts owed, the risk that interest rates payable on the mortgages may be lower than the Company's cost of funds, and, in the case of junior mortgages, the risk 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. The Company anticipates that such investment in mortgage receivable will not in the aggregate be significant. In March 1997, the Company acquired a mortgage receivable for approximately $785,000 which had an outstanding balance of approximately $885,000 as of December 31, 1997, and is secured by a multifamily property. This mortgage receivable represents the only mortgage receivable investment of the Company as of the date hereof. Changes in Real Estate Tax and Other Laws. Costs resulting from changes in real estate tax laws generally are not directly passed through to residential property tenants and increases in income, service or other taxes, generally are also not passed through to tenants under leases and may adversely affect the Company's funds from operations and its 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 reduction in revenue or unanticipated expenditures, which would adversely affect the Company's funds from operations and its ability to make distributions to stockholders. Changes in Financing Policy; No Limitation on Debt. Essex has adopted a policy of maintaining a debt-to-total-marketcapitalization ratio of less than 50%. Essex calculates the debt-to-total-market capitalization ratio based on the ratio of total property indebtedness to the sum of (i) 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 its 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 (ii) the total property indebtedness. Based on this calculation, Essex's debt-to-total-marketcapitalization ratio was 28% as of December 31, 1997. The organizational documents of the Company and the Operating Partnership do not limit the amount or percentage of indebtedness that may incur. Accordingly, the Board of Directors of the Company could change the current policies of the Company and the Operating Partnership regarding indebtedness. If these policies were changed, the Company and the Operating Partnership could become more highly leveraged, resulting in an increased risk of default on the obligations of the Company and the Operating Partnership and in an increase in debt service requirements that could adversely affect the financial condition, results of operations and liquidity of the Company. Such increased leverage could exceed the underlying value of the Properties. Failure to Qualify as a REIT. The Company has operated so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 1994. Although the Company believes that it has operated in a manner which satisfies the REIT qualification requirements, no assurance can be given that the Company will continue to do so. A REIT is generally not taxed on its net income distributed to its stockholders so long as it annually distributes to its stockholders at least 95% of its taxable income. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual or quarterly basis) established under highly technical and complex provisions of the Code, 11 14 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. CERTAIN POLICIES OF THE COMPANY The Company intends to continue to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. The Company has in the past three 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 Company from time to time acquires partnership interests in partnerships, either directly or indirectly through subsidiaries of the Company, when such partnership's underlying assets are real estate. In general, the Company does not (i) underwrite securities of other issuers or (ii) actively trade in loans or other investments. The Company primarily invests in multifamily properties in the Southern California area, San Francisco Bay Area, Seattle metropolitan area and Portland, Oregon metropolitan area. The Company also owns three retail properties located in the Portland, Oregon area and two office buildings located in the San Francisco Bay Area. The Company currently intends to continue to invest in multifamily properties in such regions, but may change such policy without a vote of the stockholders. The Company may, under certain circumstances, purchase its shares of Common Stock in the open market or otherwise. The Board of Directors has no present intention of causing the Company to repurchase any of the shares of Common Stock, and any such action would be taken only in conformity with applicable federal and state laws and the requirements for qualifying as a real estate investment trust under the Code and the Treasury Regulations. The Company's policies with respect to the policies discussed above may be reviewed and modified from time to time by the Board of Directors without the vote of the stockholders. ITEM 2. PROPERTIES PORTFOLIO OVERVIEW Essex's property portfolio (including partial ownership interests) consists of the following 59 Properties: (i) 54 multifamily residential Properties containing 10,70 apartment units, (ii) three neighborhood shopping centers containing approximately 236,000 rentable square feet of space and (iii) two office buildings, one of which houses the Company's headquarters, with approximately 62,000 rentable square feet of space. The Properties are located in California, Washington, and Oregon. Essex's multifamily residential Properties accounted for approximately 94% of Essex's rental revenues for the year ended December 31, 1997. The 54 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, 1997 of approximately 96%. As of December 31, 1997, the three retail Properties had an occupancy rate (based on "Physical Occupancy" which relates to leased and occupied square footage divided by rentable square footage) of approximately 97%, and the two office buildings had an occupancy rate (based on leased and occupied square footage) of 100%. With respect to stabilized multifamily properties with sufficient operating history, occupancy is represented as Financial Occupancy. With respect to commercial properties or properties which have not yet stabilized or which have insufficient operating history, occupancy is represented as Physical Occupancy. For the year ended December 31, 1997, none of the Company's Properties had book values equal to 10% or more of total assets of the Company or gross revenues equal to 10% or more of aggregate gross revenues of the Company. 12 15 THE LOCATION AND TYPE OF THE COMPANY'S PROPERTIES
NUMBER OF OCCUPANCY RENTAL PERCENTAGE OF PROPERTY TYPE PROPERTIES LOCATION SIZE RATE(1) REVENUE PORTFOLIO(2) ------------- ---------- -------- ---- --------- ------- ------------- Multifamily Residential Properties 13 San Francisco South Bay 2,594 units 97% $32,972 41% 18 Seattle Metropolitan area 3,433 units 96% 20,27 25% 19 Southern California 3,798 units 95% 19,610 25% 4 Portland, Oregon 875 units 93% 2,577 3% Metropolitan Area -- --------------- --- Subtotal 54 10,700 units 94% Neighborhood Shopping Centers 3 Portland, Oregon 235,838 sq. ft. 97% 2,829 4% Metropolitan Area Office Buildings 2 San Francisco South Bay 62,231 sq. ft. 100% 1,678 2% -- ------- --- TOTAL 59 $79,936 100% == ======= ===
- --------------- (1) For multifamily residential Properties, occupancy rates are based on Financial Occupancy for the year ended December 31, 1997; for the Commercial Properties, occupancy rates are based on Physical Occupancy as of December 31, 1997. (2) Based upon rental revenues for the year ended December 31, 1997. MULTIFAMILY RESIDENTIAL PROPERTIES Essex has ownership interests in 54 multifamily residential apartment communities containing 10,700 units. The majority of these Properties are suburban garden apartments or townhomes comprising multiple clusters of two- and three-story buildings situated on three to fifteen acres of land. The multifamily Properties have on average 198 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 swimming pools, clubhouses, covered parking, and cable television. Many Properties offer additional amenities, such as fitness centers, volleyball and playground areas, tennis courts and wood-burning fireplaces. Most of Essex's apartment communities are designed for and marketed to people in white-collar or technical professions. Essex selects, trains and supervises a full team of on-site service and maintenance personnel. Essex believes that its customer-service approach enhances its ability to retain tenants and that its multifamily residential Properties were built well and have been maintained well. NEIGHBORHOOD SHOPPING CENTERS AND OFFICE BUILDINGS Essex's three neighborhood shopping centers are in the Portland, Oregon metropolitan area. These neighborhood shopping centers contain an aggregate of approximately 236,000 rentable square feet of space and, as of December 31, 1997, had an occupancy rate, based on Physical Occupancy, of approximately 97%. These Properties are located in certain sub-markets in Portland. The tenants include a mix of national, regional and local retailers. Essex acquired the neighborhood shopping centers as a portfolio in 1990 and since that time has implemented an expansion, renovation and re-leasing program. Essex considers these properties to be held for sale. Essex also owns a prepaid ground leasehold interest in the office building that houses its corporate headquarters. Essex acquired this Property in 1986 and redeveloped it in 1988. This building has approximately 45,000 rentable square feet of space and is a multi-tenant, one-story office building, located at 777 California Avenue in the Stanford Research Park in Palo Alto, California. Essex currently occupies approximately 6,000 square feet of this building, The Marcus & Millichap Company occupies approximately 16,000 square feet and the remaining two tenants occupy approximately 23,000 square feet. The land on which this building is located is owned by Stanford University, and Essex owns a ground leasehold interest in the building and underlying land. The ground lease for this building is prepaid until its expiration in 2054, and, unless the lease is extended, the land, together with all improvements thereon, will revert to Stanford University in 2054. In November 1997 the Company purchased an approximate 17,400 rentable square foot two-story office building located at 925 E. Meadow Drive, Palo Alto, California. The building was constructed in 1984. The 13 16 Company relocated its corporate headquarters to approximately 15,400 square feet of this building in March 1998. The remaining 2,000 square feet is being leased to an unrelated third party tenant. The following tables describe Essex's Properties as of December 31, 1997. The first table describes Essex's multifamily residential Properties and the second table describes Essex's Commercial Properties.
RENTABLE MULTIFAMILY RESIDENTIAL SQUARE YEAR YEAR PROPERTIES(1) LOCATION UNITS FOOTAGE BUILT ACQUIRED OCCUPANCY(2) ----------------------- -------- ----- -------- ----- -------- ------------ Northern California The Apple Fremont, CA 200 146,296 1971 1982 94% Bristol Commons(3) Sunnyvale, CA 188 142,668 1989 1997 98% Eastridge San Ramon, CA 188 174,104 1988 1996 94% Foothill Gardens San Ramon, CA 132 155,100 1985 1997 96% Marina Cove(4) Santa Clara, CA 292 250,294 1974 1994 98% Oak Pointe Sunnyvale, CA 390 294,180 1973 1988 97% Plumtree Santa Clara, CA 140 113,260 1975 1994 97% The Shores(3) San Ramon, CA 348 275,888 1988 1997 95% Summerhill Commons Newark, CA 184 139,012 1987 1987 97% Treetops(3) Fremont, CA 172 131,270 1978 1996 98% Twin Creeks San Ramon, CA 44 51,700 1985 1997 96% Windsor Ridge Sunnyvale, CA 216 161,892 1989 1989 97% ----- --------- -- 2,594 2,114,248 97% SEATTLE METROPOLITAN AREA Anchor Village(5) Mukilteo, WA 301 245,928 1981 1997 94% Bridle Trails(3) Kirkland, WA 92 73,448 1986 1997 94% Brighton Ridge Renton, WA 264 201,300 1986 1996 94% Castle Creek Newcastle, WA 216 191,935 1997 1997 (6) Emerald Ridge Bellevue, WA 180 144,036 1987 1994 98% Evergreen Heights Kirkland, WA 200 188,340 1990 1997 95% Foothills Commons Bellevue, WA 360 288,317 1978 1990 97% Inglenook Court Bothell, WA 224 183,624 1985 1994 98% Laurels at Mill Creek Mill Creek, WA 164 134,360 1981 1996 97% Maple Leaf(3) Seattle, WA 48 35,584 1986 1997 97% The Palisades Bellevue, WA 192 159,792 1977 1990 96% Sammamish View Bellevue, WA 153 133,590 1986 1994 95% Santa Fe Ridge Silverdale, WA 240 262,340 1993 1994 85% Spring Lake(3) Seattle, WA 69 42,325 1986 1997 99% Stonehedge Village(3) Bothell, WA 196 214,872 1986 1997 96% Wandering Creek Kent, WA 156 124,366 1986 1995 96% Wharfside Pointe Seattle, WA 142 119,290 1990 1994 98% Woodland Commons Bellevue, WA 236 172,316 1978 1990 98% ===== ========= == 3,433 2,915,763 96% SOUTHERN CALIFORNIA The Bluffs II(7) San Diego, CA 224 126,744 1974 1997 98% Camarillo Oaks(3) Camarillo, CA 564 459,072 1985 1996 94% Casa del Mar Pasadena, CA 96 61,308 1972 1998 96% Casa Mango(7)(8) Del Mar, CA 96 88,112 1981 1997 98% Highridge(5) Rancho Palos Verde, CA 255 290,250 1972 1997 95% Huntington Breakers(3) Huntington Beach, CA 342 241,763 1984 1997 95% Kings Road Los Angeles, CA 194 132,112 1979 1997 99% Meadowood(3) Simi Valley, CA 320 264,568 1986 1996 97% Park Place Los Angeles, CA 60 48,000 1988 1997 95% Pathways(9) Long Beach, CA 296 197,720 1975 1991 97% Riverfront(7)(8) San Diego, CA 229 231,006 1990 1997 90% Tara Village Tarzana, CA 168 173,600 1972 1997 94% Trabuco Villas Lake Forest, CA 132 131,032 1985 1997 96% Villa Rio Vista Anaheim, CA 286 242,410 1968 1985 94% Villa Scandia Ventura, CA 118 71,160 1971 1997 96% Village Apartments Oxnard, CA 122 122,120 1974 1997 98% Wilshire Promenade Fullerton, CA 128 108,470 1992 1997 99% Windsor Court Los Angeles, CA 58 46,600 1988 1997 95% Windsor Terrace Pasadena, CA 110 68,325 1972 1997 94% ----- --------- -- 3,798 3,104,372 95%
14 17
RENTABLE MULTIFAMILY RESIDENTIAL SQUARE YEAR YEAR PROPERTIES(1) LOCATION UNITS FOOTAGE BUILT ACQUIRED OCCUPANCY(2) ----------------------- -------- ----- -------- ----- -------- ------------ PORTLAND, OREGON METROPOLITAN AREA Jackson School Village(10) Hillsboro, OR 200 196,896 1996 1996 84% Landmark Hillsboro, OR 285 282,934 1990 1996 87% Meadows at Cascade Park Vancouver, WA 198 199,377 1988 1997 95% Village at Cascade Park(8) Vancouver, WA 1989 1997 97% ----- --------- -- 875 857,351 93% ----- --------- -- Total/Weighted Average 10,700 8,991,734 96% ===== ========= == NEIGHBORHOOD SHOPPING CENTERS Canby Square Canby, OR 16 102,403 1976 1990 94% Powell Villa Center Portland, OR 9 63,645 1959 1990 97 Garrison Square Vancouver, WA 13 69,790 1962 1990 100 ----- --------- -- Subtotal 38 235,835 97% Office Buildings 777 California Avenue(11) Palo Alto, CA 3 44,827 1988(12) 1986 100 925 East Meadow Drive Palo Alto, CA 1 17,404 1984 1997 100 ----- --------- -- Total/Weighted Average 42 298,069 100% ===== ========= ==
- --------------- (1) Unless otherwise specified, the Company 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, 1997; for the Commercial Properties, occupancy rates are based on Physical Occupancy as of December 31, 1997. (3) This Property is owned by a single asset limited partnership in which the Company has a minimum 99% 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 Company has a 1% limited partnership interest in this Property. (6) This Property was developed in 1997 and has not yet achieved a stabilized occupancy level. This Property had an occupancy rate of 48% based on Physical Occupancy as of December 31, 1997. (7) The Company has an 84% limited partnership interest in this property. (8) Purchased in late December 1997, occupancy rate is based on Physical Occupancy as of December 31, 1997. (9) The Company has a 69% ownership interest in this Property (10) The Company has a 49.9% ownership interest in this Property. (11) The Company owns a ground leasehold interest in the building and the land on which the headquarters building is located. The ground lease is prepaid until its expiration in 2054, and, unless the lease is extended, the land, together with all improvements thereon, will revert to the owner in 2054. (12) Represents the completion date for a major renovation. ITEM 3. LEGAL PROCEEDINGS Neither Essex nor any of the Properties is presently subject to any material litigation nor, to Essex's knowledge, is there any material litigation threatened against Essex 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 Essex's financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1997, no matters were submitted to a vote of security holders. 15 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The shares of the Company's common stock are traded on the New York Stock Exchange ("NYSE") under the symbol ESS. MARKET INFORMATION The Company's common stock has been traded on the NYSE since June 13, 1994. The high, low and closing price per share of common stock reported on the NYSE for the quarters indicated are as follows:
QUARTER ENDED HIGH LOW CLOSE ------------- ------- ------- ------- December 31, 1997............................. $37.500 $32.812 $35.000 September 30, 1997............................ $35.062 $30.500 $34.812 June 30, 1997................................. $32.375 $27.625 $32.125 March 31, 1997................................ $30.875 $28.500 $29.875 December 31, 1996............................. $29.375 $24.625 $29.375 September 30, 1996............................ $24.875 $21.375 $24.875 June 30, 1996................................. $22.500 $19.375 $21.500 March 31, 1996................................ $21.250 $18.750 $20.750
The closing price as of March 25, 1998 was $35.562. HOLDERS The approximate number of holders of record of the shares of the Company's common stock was 105 as of March 25, 1998. This number does not include stockholders whose shares are held in trust by other entities. The actual number of stockholders is greater than this number of holders of record. RETURN OF CAPITAL Under provisions of the Internal Revenue Code of 1986, as amended, the portion of cash dividends that exceed earnings and profits is a return of capital. The return of capital is generated due to the deduction of non-cash expenses, primarily depreciation, in the determination of earnings and profits. The status of the cash dividends distributed for the years ended December 31, 1997, 1996 and 1995 for tax purposes is as follows:
1997 1996 1995 ------ ------ ------ Taxable portion.................................. 100.00% 58.00% 69.00% Return of capital................................ 0.00% 42.00% 31.00% ------ ------ ------ 100.00% 100.00% 100.00% ====== ====== ======
The most significant factor that caused the reduction of the 1997 return of capital percentage over 1996 was that in 1997 the Company's earnings grew at a greater rate than the growth rates of its dividend payments. 16 19 DIVIDENDS AND DISTRIBUTIONS Since its initial public offering, the Company has paid regular quarterly dividends to its stockholders. From inception, the Company paid the following dividends:
QUARTER ENDED AMOUNT QUARTER ENDED AMOUNT - ------------- ------- ------------- ------- 06/30/94 $0.0800 03/31/96 $0.4250 09/30/94 $0.4175 06/30/96 $0.4250 12/31/94 $0.4175 09/30/96 $0.4350 03/31/95 $0.4175 12/31/96 $0.4350 06/30/95 $0.4175 03/31/97 $0.4350 09/30/95 $0.4250 06/30/97 $0.4350 12/30/95 $0.4250 09/30/97 $0.4500 12/31/97 $0.4500
Future distributions by the Company will be at the discretion of the Board of Directors and will depend on the actual funds from operations of the company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. There are currently no contractual restrictions on the Company's present or future ability to pay dividends. RECENT SALES OF UNREGISTERED SECURITIES In June 1997, the Company completed the second phase of a private placement transaction whereby in that month 800,000 shares of the Company's 8.75% Convertible Preferred Stock, Series 1996A (the "1996A Preferred Stock") were issued 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, L.P.) (collectively, the "Westbrook Entities") for a purchase price of $25.00 per share, representing an aggregate investment of $20 million. The purchase price for the 1996A Preferred Stock was paid in cash. The 1996A Preferred Stock is convertible into common stock of the Company at an initial conversion price per share of $21.875, subject to adjustment as more fully provided in the Company's Charter. The 1996A Preferred Stock was issued by the Company in a privately negotiated transaction to the Westbrook Entities, who are accredited investors, in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). Effective January 7,1998, Essex Management Corporation, a California corporation ("EMC") and an affiliate of the Company, as general partner, and Essex Portfolio, L.P., a California limited partnership (the "Operating Partnership", as to which the Company is the general partner), as special limited partner, entered into (a) a First Amended and Restated Agreement of Limited Partnership of Western-Las Hadas Investors, and (b) a Second Amended and Restated Agreement of Limited Partnership of Western-Seven Trees Investors (collectively, the "Las Hadas Partnerships"), pursuant to which the existing Las Hadas Partnerships were reorganized for the purposes of acquiring the properties owned by the Las Hadas Partnerships. In connection with the reorganization, 268,631 units of limited partnership interest ("Units") in the Las Hadas Partnerships were issued to the existing partners of the Las Hadas Partnerships, all of whom the Company believes qualify as accredited investors, pursuant to an exemption from registration provided in Regulation D under the Securities Act. Under the terms of the agreements of limited partnership of these Partnerships, holders of Units have the right to require the applicable partnership to redeem their Units for cash, subject to certain conditions. Subject to certain conditions, the Company may, however, elect to deliver an equivalent number of unregistered shares of the Company's Common Stock to the holders of the Units in satisfaction of the applicable Partnership's obligation to redeem the units for cash, upon which delivery, the holders will have certain rights to require the Company to register the shares of Common Stock pursuant to the Securities Act. On February 6, 1998, the Operating Partnership completed the private placement of 1,200,000 units of its 7.875% Series B Preferred Limited Partnership Units (the "Series B Preferred Units"), representing a limited partnership interest in the Operating Partnership, to an institutional investor in return for a contribution to the Operating Partnership of $60 million. The Series B Preferred Units will become exchangeable, on a one for one basis, in whole or in part at any time on or after the February 1998 completion of the private placement (or earlier under certain circumstances) for shares of the Company's 7.875% Series B Cumulative 17 20 Redeemable Preferred Stock, par value $.0001 per share (the "Series B Preferred Stock"). Pursuant to the terms of a registration rights agreement, entered into in connection with this private placement, the holders of Series B Preferred Stock will have certain rights to cause the Company to register such shares of Series B Preferred Stock. The Series B Preferred Units were issued by the Operating Partnership in a privately negotiated transaction to an accredited, institutional investor in reliance on the exemption provided by Section 4(2) of the Securities Act. Other sales of unregistered securities by the Company during 1997 are set forth in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 18 21 ITEM 6. SUMMARY FINANCIAL AND OPERATING DATA The following tables set forth summary financial and operating information (i) for the Company from June 13, 1994 (completion of the Company's IPO) through December 31, 1997, (ii) on a pro forma basis for the Company for the year ended December 31, 1994 and (iii) on a historical combined basis for the period from January 1, 1993 through June 12, 1994 for the 20 properties in which the original limited partners in the Operating Partnership previously held ownership interests, combined with the financial and operating information of Essex Property Corporation ("EPC"). The unaudited pro forma financial and operating information for the year ended December 31, 1994 is based on the ownership and operation of the 23 properties owned at the time of the Company's initial public offering (the "IPO") (including the properties acquired as of the IPO) combined with the financial and operating information of EPC and is presented as if the following had occurred on January 1, 1994: (i) the IPO was completed, (ii) the Company qualified as a REIT, (iii) the Company used the net proceeds from the IPO and the debt incurred in connection with the IPO to fund a series of asset acquisitions and mortgage repayments in connection with the IPO, and (iv) Essex Management Corporation ("EMC") was formed and certain property and asset management contracts were assigned to EMC (such pro forma adjustments, the "IPO Pro Forma Adjustments"). The pro forma financial and operating information should not be considered indicative of actual results that would have been achieved had the transactions occurred on the dates or for the periods indicated and do not purport to indicate results of operations as of any future date or for any future period. The following table should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and with all of the financial statements and notes thereto.
YEAR YEAR YEAR JUNE 13, ENDED ENDED ENDED 1994 - DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 1994 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA: REVENUES Rental........................... $79,936 $47,780 $41,640 $19,499 Property and asset management.... -- -- -- -- Other............................ 4,633 2,913 2,300 914 ------- ------- ------- ------- Total revenues................. 84,569 50,693 43,940 20,413 EXPENSES Property operating expenses...... 25,826 15,505 13,604 6,452 Depreciation and amortization.... 13,992 8,855 8,007 4,030 Amortization of deferred financing costs................ 509 639 1,355 773 General and administrative....... 2,413 1,717 1,527 457 Property and asset management.... -- -- -- -- Other expenses................... 138 42 288 -- Interest......................... 12,659 11,442 10,928 4,304 ------- ------- ------- ------- Total expenses................. 55,537 38,200 35,709 16,016 ------- ------- ------- ------- Income before gain on sales, minority interests, provision for income taxes and extraordinary item............................. 29,032 12,493 8,231 4,397 Gain on sales.................... 5,114 2,477 6,013 Minority interests............... (4,469) (2,648) (3,486) (1,131) Provision for income taxes....... -- -- -- -- Extraordinary item -- loss on early extinguishment of debt... (361) (3,441) (154) -- ------- ------- ------- ------- Net income (loss) after minority interests........................ $29,316 $ 8,881 $10,604 $ 3,266 ======= ======= ======= ======= PRO FORMA JANUARY 1, YEAR YEAR ENDED 1994 - ENDED DECEMBER 31, JUNE 12, DECEMBER 31, 1994(1) 1994 1993 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA: REVENUES Rental........................... $34,154 $12,742 $26,509 Property and asset management.... 257 1,794 3,277 Other............................ 1,582 275 643 ------- ------- ------- Total revenues................. 35,993 14,811 30,429 EXPENSES Property operating expenses...... 11,414 4,267 9,348 Depreciation and amortization.... 7,047 2,598 5,537 Amortization of deferred financing costs................ 1,407 96 219 General and administrative....... 804 306 688 Property and asset management.... -- 974 1,396 Other expenses................... -- 314 952 Interest......................... 7,086 5,924 11,902 ------- ------- ------- Total expenses................. 27,758 14,479 30,042 ------- ------- ------- Income before gain on sales, minority interests, provision for income taxes and extraordinary item............................. 8,235 332 387 Gain on sales.................... Minority interests............... (1,938) 87 161 Provision for income taxes....... -- (267) (581) Extraordinary item -- loss on early extinguishment of debt... -- -- -- ------- ------- ------- Net income (loss) after minority interests........................ $ 6,297 $ 152 $ (33) ======= ======= =======
19 22
YEAR YEAR YEAR JUNE 13, ENDED ENDED ENDED 1994 - DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 1994 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income (loss) per share -- diluted(2)....................... $ 1.92 $ 1.12 $ 1.69 $ 0.52 ======= ======= ======= ======= Weighted average common stock outstanding -- diluted (in thousands)....................... 15,285 7,348 6,275 6,275 ======= ======= ======= ======= PRO FORMA JANUARY 1, YEAR YEAR ENDED 1994 - ENDED DECEMBER 31, JUNE 12, DECEMBER 31, 1994(1) 1994 1993 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income (loss) per share -- diluted(2)....................... $ 1.00 -- -- ======= ======= ======= Weighted average common stock outstanding -- diluted (in thousands)....................... 6,275 -- -- ======= ======= =======
AS OF DECEMBER 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA: Investment in real estate (before accumulated depreciation)........ $730,987 $393,809 $284,358 $282,344 $186,447 Net investment in real estate...... 702,716 354,715 244,077 248,232 158,873 Total assets....................... 738,835 417,174 273,660 269,065 171,287 Total property indebtedness........ 276,597 153,205 154,524 150,019 152,501 Stockholders' equity............... 398,915 222,807 84,729 84,699 7,772 BALANCE SHEET DATA: Investment in real estate (before accumulated depreciation)........ Net investment in real estate...... Total assets....................... Total property indebtedness........ Stockholders' equity...............
YEAR YEAR YEAR JUNE 13, PRO FORMA YEAR ENDED ENDED ENDED 1994 - YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1995 1994 1994(1) 1993 ------------ ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) OTHER DATA: Debt service coverage ratio(3)..... 4.4x 2.9x 2.6x 3.1x 3.4x 1.5x Gross operating margin(4).......... 68% 68% 67% 67% 67% 67% Average same-property monthly rental rate per apartment unit(5)(6)....................... $ 852 $ 798 $ 749 $ 715 -- -- Average same-property monthly operating expenses per apartment unit(5)(7)....................... $ 257 $ 248 $ 241 $ 234 -- -- Total multi-family units (at end of period).......................... 10,700 6,624 4,868 4,410 4,410 2,817 Multi-family residential property occupancy rate(8)................ 96% 97% 97% 96% 96% 95% Total properties (at end of period).......................... 59 36 30 29 29 20 OTHER DATA: Debt service coverage ratio(3)..... Gross operating margin(4).......... Average same-property monthly rental rate per apartment unit(5)(6)....................... Average same-property monthly operating expenses per apartment unit(5)(7)....................... Total multi-family units (at end of period).......................... Multi-family residential property occupancy rate(8)................ Total properties (at end of period)..........................
- --------------- (1) The unaudited pro forma financial and operating information for the year ended December 31, 1994 is based on the ownership and operations of the 23 properties owned at the time of the Company's initial public offering (the "IPO") (including the properties acquired as of the IPO) combined with the financial and operating information of EPC and is presented as if the following had occurred on January 1, 1994; (I) the IPO was completed. (ii) Essex qualified as a REIT, (iii) Essex used the net proceeds from the IPO and debt incurred in connection with the IPO to fund a series of asset acquisitions and mortgage repayments in connection with the IPO and (iv) EMC was formed and certain property and asset management contracts were assigned to it. (2) Per share amounts are presented only for the periods subsequent to June 13, 1994 and the pro forma 1994 period and are based upon respective amounts divided by the weighted average outstanding shares on the applicable dates. (3) Debt service coverage ratio represents earnings before interest, taxes, depreciation and amortization ("EBITDA") divided by interest expense. (4) Gross operating margin represents rental revenues less property operating expenses divided by rental revenues. (5) Same-property apartment units are those units which the Company has owned for the entire two years ended as of the end of the period set forth. (6) 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. (7) Average same-property monthly expenses per apartment unit represents total monthly operating expenses 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. (8) 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 for the period in question), during the period presented. Financial Occupancy rates exclude occupancy rates for the Casa Mango, Riverfront, Village at Cascade Park and Castle Creek properties because they were acquired in late December 1997. 20 23 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 Essex Property Trust, Inc. ("Essex or the "Company") as of and for the years ended December 31, 1997, 1996 and 1995. The following discussion compares Essex's results of operations for the years ended December 31, 1997, 1996, and 1995. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. Substantially all the assets of Essex are held by, and substantially all operations are conducted through, Essex Portfolio, L.P. (the "Operating Partnership"). Essex is the sole general partner and as of December 31, 1997 owned an approximate 89.9% general partnership interest in the Operating Partnership and as of December 31, 1996 and 1995, owned a general partner interest in the Operating Partnership of approximately 86.2% and 77.2%, respectively. Certain statements in the Report on Form 10-K and in this Management's Discussion and Analysis of Financial Condition and Results of Operations contain 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. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Essex to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially include the risk factors set forth in Item 1 under the caption "Business -- Other Matters" in this Annual Report on Form 10-K, the risk factors set forth in Essex's other filings with the Securities and Exchange Commission, changes in general economic conditions, and changes in the assumptions used in making such forward-looking statements. GENERAL BACKGROUND Essex's revenues are generated primarily from multifamily and commercial property rental income, which accounted for 95%, 94%, and 95% of Essex's revenues for the years ended December 31, 1997, 1996, and 1995, respectively. Such properties are located in California, Washington and Oregon. Occupancy levels for Essex's multifamily properties in these markets have generally remained high (averaging approximately 95% over the last five years). During 1997, Essex acquired ownership interests in twenty-seven multifamily properties consisting of 4,213 units for an aggregate contract price of approximately $317.1 million. These investments were primarily funded by the equity transactions completed in 1997. Sixteen (2,525 units) are located in Southern California, seven of these properties (1,122 units) are located in the greater Seattle metropolitan area, two (176 units) are located in Northern California, and two (390 units) are located in the greater Portland, Oregon metropolitan area. In 1997, Essex sold one Northern California multifamily property and three Portland retail properties for an aggregate net sales price of $15,470,000. The proceeds were used to fund acquisitions of multifamily properties. The Company has committed approximately $150,000,000 relating to six development projects comprising approximately 1,330 multifamily units to be completed over the next two years. Essex 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, Essex 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"). Essex owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of Essex own 100% of EMC's 1,000 shares of common stock. 21 24 Average financial occupancy rates for the year ended December 31, 1997 for Essex's multifamily properties are as follows: Northern California.......................... 97.3% Seattle, Washington.......................... 96.4% Southern California.......................... 95.0% Portland, Oregon............................. 92.6%
The commercial properties were 97.2% occupied (based on square footage) as of December 31, 1997. RESULTS OF OPERATIONS COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996 Total Revenues increased by $33,876,000 or 66.8% to $84,569,000 in 1997 from $50,693,000 in 1996. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to properties that Essex owned for both 1997 and 1996 ("the Same Store Properties").
YEARS ENDED DECEMBER 31, NUMBER OF ------------------ PERCENTAGE PROPERTIES 1997 1996 DOLLAR CHANGE CHANGE ---------- ------- ------- ------------- ---------- (DOLLARS IN THOUSANDS) Rental income Same Store Properties Northern California............ 7 $19,142 $16,791 $ 2,351 14.0% Seattle Metropolitan........... 9 15,433 14,476 957 6.6 Southern California............ 2 4,872 4,780 92 1.9 Retail and commercial.......... 4 3,964 3,934 30 0.7 -- ------- ------- ------- ----- Total Same Store 22 Properties.............. 43,411 39,981 3,430 8.6% Properties acquired/disposed of subsequent to January 1, 1996..... 36,525 7,799 28,726 368.3% ------- ------- ------- ----- Total rental income................. 79,936 47,780 32,156 67.3 Other income........................ 4,633 2,913 1,720 59.0 ------- ------- ------- ----- Total revenues...................... $84,569 $50,693 $33,876 66.8% ======= ======= ======= =====
As set forth in the above table, $28,726,000 of the $33,876,000 increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 1996. During this period, Essex acquired interests in thirty seven properties, (the "Acquisition Properties"), and disposed of three multifamily properties and three retail shopping centers. Of the increase in total revenues, $3,430,000 is attributable to increases in rental income from the Same Store Properties. Rental income from the Same Store Properties increased by approximately 8.6% to $43,411,000 in 1997 from $39,981,000 in 1996. The majority of this increase was attributable to the seven multifamily Same Store Properties located in Northern California, the rental income of which increased by $2,351,000 or 14.0% to $19,142,000 in 1997 from $16,791,000 in 1996. This $2,351,000 increase is primarily attributable to rental rate increases which were offset by a decrease in average financial occupancy to 97.3% for the year ended December 31, 1997 from 98.2% for the year ended December 31,1996. The nine multifamily residential properties located in the Seattle metropolitan area accounted for the next largest contribution to this Same Store Properties rental income increase. The rental income of these properties increased by $957,000 or 6.6% to $15,433,000 in 1997 from $14,476,000 in 1996. This $957,000 increase is attributable to rental rate increases as well as increases in average financial occupancy which increased to 96.6% for 1997 from 95.6% in 1996. The increase in total revenue also included an increase of $1,720,000 attributable to interest and other income. The most significant component of this $1,720,000 increase was an increase in interest income of $1,402,000 which was largely due to an increase in notes receivable. 22 25 Total Expenses increased by $17,337,000 or approximately 45.4% to $55,537,000 in 1997 from $38,200,000 in 1996. The most significant factor contributing to this increase is the growth in Essex's multifamily portfolio from 29 properties, (6,624 units) at the end of 1996 to 54 properties, (10,700 units) at December 31, 1997. Interest expense increased by $1,217,000 or 10.6% to $12,659,000 in 1997 from $11,442,000 in 1996. Such interest expense increase was primarily due to the net addition of outstanding mortgage debt in connection with property and investment acquisitions. Property operating expenses, exclusive of depreciation and amortization, increased by $10,321,000 or 66.6% to $25,826,000 in 1997 from $15,505,000 in 1996. Of such increase, $10,046,000 is attributable to properties acquired or disposed of subsequent to January 1, 1996. Property operating expenses, exclusive of depreciation and amortization as a percentage of rental revenues was 32.3% for 1997 and 32.5% for 1996. General and administrative expenses represent the costs of Essex's various acquisition and administrative departments as well as corporate and partnership administration and non-operating expenses. Such expenses increased by $696,000 in 1997 from the 1996 amount. This increase is largely due to additional staffing requirements resulting from the growth of Essex. General and administrative expenses as a percentage of total revenues was 2.9% for 1997 and 3.4% for 1996. Net income increased by $20,435,000 to $29,316,000 in 1997 from $8,881,000 in 1996. The increase in net income was primarily a result of the net contribution of acquisitions and dispositions, the increase in income from the Same Store Properties, the increase in the gain on sales of real estate of $2,637,000 to $5,114,000 in 1997 from $2,477,000 in 1996 and a reduction in extraordinary loss on early extinguishment of debt of $3,080,000 to $361,000 in 1997 from $3,441,000 in 1996. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995. Total Revenues increased by $6,753,000 or 15.4% to 50,693,000 in 1996 from $43,940,000 in 1995. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to properties that Essex owned for both 1996 and 1995 ("1996/1995 Same Store Properties").
YEARS ENDED DECEMBER 31, NUMBER OF ------------------ PERCENTAGE PROPERTIES 1997 1996 DOLLAR CHANGE CHANGE ---------- ------- ------- ------------- ---------- (DOLLARS IN THOUSANDS) Rental income 1996/1995 Same Store Properties Northern California............ 8 $17,975 $16,430 $1,545 9.4% Seattle Metropolitan........... 8 13,430 12,853 577 4.5 Southern California............ 2 4,780 4,597 183 4.0 Retail and commercial.......... 7 4,821 4,550 271 5.9 -- ------- ------- ------ ----- Total 1996/1995 Same Store Properties.............. 25 41,006 38,430 2,576 6.7% Properties acquired/disposed of subsequent to January 1, 1995..... 6,774 3,210 3,564 111.0% ------- ------- ------ ----- Total rental income................. 47,780 41,640 6,140 14.7 Other income........................ 2,913 2,300 613 26.7 ------- ------- ------ ----- Total revenues...................... $50,693 $43,940 $6,753 15.4% ======= ======= ====== =====
As set forth in the above table, $3,564,000 of the $6,753,000 increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 1995. During this period, Essex acquired interests in eight properties, and disposed of two multifamily properties. Of the increase in total revenues, $2,576,000 is attributable to increases in rental income from the 1996/ 1995 Same Store Properties. Rental income from the 1996/1995 Same Store Properties increased by approximately 6.7% to $41,006,000 in 1996 from $38,430,000 in 1995. The majority of this increase was attributable to the eight multifamily 1996/1995 Same Store Properties located in Northern California, the rental income of which increased by $1,545,000 or 9.4% to $17,975,000 in 1996 from $16,430,000 in 1995. This $1,545,000 increase is primarily attributable to rental rate increases and financial occupancy for this 23 26 region increasing to 98.6% for 1996 from 98.4% in 1995. The eight multifamily residential properties located in the Seattle metropolitan area was the next largest regional contribution to this 1996/1995 Same Store Properties rental income increase. The rental income of these properties increased by $577,000 or 4.5% to $13,430,000 in 1996 from $12,853,000 in 1995. This $577,000 increase is attributable to rental rate increases and financial occupancy for this region which increased to 95.8% in 1996 from 95.6% in 1995. The increase in total revenue also reflected an increase of $613,000 attributable to other income. The most significant components were an increase in joint venture income of $437,000 and an increase in interest income of $154,000 which was largely due to an increase in notes receivable. Total Expenses increased by $2,491,000 or approximately 7.0% to $38,200,000 in 1996 from $35,709,000 in 1995. Interest expense increased by $514,000 or 4.7% to $11,442,000 in 1996 from $10,928,000 in 1995. Such interest expense increase was primarily due to the net addition of outstanding mortgage debt in connection with property acquisitions. Property operating expenses, exclusive of depreciation and amortization, increased by $1,901,000 or 14.0% to $15,505,000 in 1996 from $13,604,000 in 1995. Property operating expenses, exclusive of depreciation and amortization, as a percentage of rental revenues was 32.5% for 1996 and 32.7% for 1995. Of such increase, $1,293,000 was attributable to the properties acquired or disposed of subsequent to January 1, 1995. General and administrative expenses represent the costs of Essex's various acquisition and administrative departments as well as partnership administration and non-operating expenses. Such expenses increased by $190,000 in 1996 from the amount for 1995. This increase is largely due to additional staffing requirements resulting from the growth of Essex. General and administrative expenses as a percentage of total revenues was 3.4% for 1996 and 3.5% for 1995. Net income decreased by $1,723,000 to $8,881,000 in 1996 from $10,604 ,000 in 1995. The decrease in the net income was primarily due to an extraordinary charge of $3,441,000 related to the early extinguishment of debt, net reduction in gains on sale of real estate of $3,536,000 from $6,013,000 in 1995 to $2,477,000 in 1996, partially offset by the net contribution of the acquisition properties and an increase in net operating income from the 1996/1995 Same Store Properties. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, Essex had $4,282,000 of unrestricted cash and cash equivalents. The Company expects to meet its short-term liquidity requirements (during the next 12 months) by using working capital, amounts available on lines of credit, and any net cash flow from operations not distributed. The Company 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 requirements. Essex has credit facilities in the committed amount of approximately $75,110,000. At December 31, 1997 Essex had an outstanding balance of $27,600,000 on its lines of credit. Essex expects to meet its long-term liquidity requirements (beyond the next 12 months) by using working capital, amounts available on lines of credit, any portion of undistributed net cash flow, net proceeds from public and private debt and equity offerings, and proceeds from the disposition of properties that may be sold from time to time. There can, however, be no assurance that Essex will have access to the debt and equity markets in a timely fashion to meet long-term liquidity requirements or that future working capital, net cash flow and borrowings under the lines of credit will be available, or if available, will be sufficient to meet Essex's needs. Essex's total cash balances decreased $38,423,000 from $42,705,000 as of December 31, 1996 to $4,282,000 as of December 31, 1997. This decrease was primarily a result of $263,049,000 of cash used in investing activities, which was offset by $46,898,000 of cash provided by operating activities, and $177,728,000 of cash provided by financing activities. Of the $263,049,000 net cash used in investing activities, $247,886,000 was used to purchase and upgrade rental properties, and $27,442,000 was used to fund real estate under development, which was offset by $15,470,000 of proceeds received from the disposition of one multifamily and three retail properties. The $177,728,000 net cash provided by financing activities was primarily a result of $204,931,000 of proceeds from mortgages and other notes payable and lines of credit, $174,012,000 net proceeds from stock offerings, (including $20,000,000 of net proceeds from a convertible preferred stock sale) and $21,859,000 of repayments of related party notes and other receivables as offset by $164,580,000 of 24 27 repayments of mortgages and other notes payable and lines of credit, $28,761,000 issued in related party notes and other receivables and $28,956,000 of dividends/distributions paid. As of December 31, 1997, Essex's outstanding indebtedness under mortgages and lines of credit of consisted of $190,177,000 in fixed rate debt, $27,600,000 of variable rate debt and $58,820,000 of debt represented by tax exempt variable rate demand bonds, of which $29,220,000 is capped at a maximum interest rate of 7.2%. As of December 31, 1997, 35 of the Company's majority owned properties were encumbered by debt. The total amount of the outstanding debt is $276,597,000. The agreements underlying these encumbrances contain customary restrictive covenants which Essex believes do not have a material adverse effect on its operations. Currently, Essex is in compliance with such covenants. As of December 31, 1997, the Company had mortgages on 17 Properties which were secured by deeds of trust relating solely to those Properties, one mortgage which was cross-collateralized by 8 Properties and two mortgages each of which were cross- collateralized by 3 Properties. The Company also held a line of credit that was secured by 6 properties. For the year ended December 31, 1997, non-revenue generating capital expenditures totaled approximately $2,270,000 or an annualized $291 per weighted average occupancy unit. Essex expects to incur approximately $300 per weighted average occupancy unit in non-revenue generating capital expenditures for the year ended December 31, 1998. These expenditures do not include the improvements required by lenders in connection with the origination of mortgage loans, improvements to acquisition properties to correct physical deficiencies, expenditures that Essex expects to generate additional revenues, and renovation expenditures required pursuant to tax-exempt bond financings. Essex expects that cash from operations and/or the lines of credit will fund such expenditures. However, there can be no assurance that the actual expenditures incurred during 1998 and/or the funding thereof will not be significantly different than that of the Company's current expectations. Essex is developing six multifamily residential projects, which are anticipated to have an aggregate of approximately 1,330 multifamily units. Essex expects that such projects will be completed during the next two years (1998 and 1999). Such projects involve certain risks inherent in real estate development. In connection with these development projects, the Operating Partnership has directly, or in cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties for approximately $77 million. Essex expects to fund such commitments with some combination of its lines of credit, net proceeds from public and/or private debt and equity offerings and any portion of undistributed net cash flow. Essex pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in short-term investment grade securities or is used by the Company to reduce balances outstanding under its lines of credit. In September 1996, Essex sold $20,000,000 of its 8.75% Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock") to Tiger/Westbrook Real Estate Fund, L.P., and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P., (collectively "Tiger/Westbrook"). On June 20, 1997, the Company completed the second phase of the this transaction with the sale of an additional $20,000,000 of its Convertible Preferred Stock to Tiger/Westbrook. During 1996, Essex sold shares of Common Stock in public offerings in August and December. In connection with the August and December 1996 offerings, Essex sold 2,530,000 and 2,783,000 shares at $22.75 and $27.75 per share, respectively. The net proceeds received for these two transactions were $53,996,000 and $72,468,000, respectively. During 1997, Essex sold additional shares of Common Stock in public offerings in March, September and December. In connection with the March, September and December 1997 offerings, Essex sold 2,000,000, 1,495,000 and 1,500,000 shares at $29.13, $31.00 and $35.50 per share, respectively. The net proceeds received for these transactions were $58,119,000, $46,080,000 and $49,814,000, respectively. Subsequent to December 31, 1997, Essex Portfolio, L.P. (the "Operating Partnership") completed the sale of 1,200,000 units of its 7.875% Series B Cumulative Redeemable Preferred Units to an institutional investor in a private placement at a price of $50.00 per unit. Such units are convertible into non-voting 25 28 preferred stock of Essex after ten years from the February 1998 completion of the sale or earlier under certain circumstances. The Operating Partnership utilized the proceeds of this transaction to fund the acquisition of multifamily properties, to reduce outstanding indebtedness and for general corporate purposes. Subsequent to December 31, 1997, Essex and the Operating Partnership filed a registration statement (the "January 1998 Shelf Registration Statement") with the Securities and Exchange Commission (the "SEC") to register $100,000,000 of equity securities of Essex and $250,000,000 of debt securities of the Operating Partnership. Prior to the filing of the January 1998 Shelf Registration Statement, Essex had approximately $42,000,000 of capacity remaining on a previously filed registration statement which registered shares of common stock, preferred stock, depository shares and warrants to purchase common and preferred stock. The Company is currently evaluating appropriate courses of action regarding "year 2000" compliance. The Company has contacted its current software vendor and has determined that an upgraded package will be available for implementation. Total costs are not expected to have a material impact on operations. FUNDS FROM OPERATIONS Industry analysts generally consider Funds from Operations an appropriate alternative measure of performance of an equity REIT. Generally, Funds from Operations adjusts net income for non-cash charges such as depreciation and amortization and non-recurring gains or losses. Management generally 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 and its ability 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 does not necessarily indicate that 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 Company'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 stockholders. Funds from Operations also does not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Company's calculation of Funds from Operations. The following table sets forth Essex's calculation of actual Funds from Operations for 1997, 1996 and 1995.
FOR THE YEAR FOR THE QUARTER ENDED ENDED ------------------------------------------------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1997 1997 1997 1997 1997 ------------ ------------ ------------- ----------- ---------- Income before minority interest....................... $33,785,000 $ 8,213,000 $12,612,000 $ 7,217,000 $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 0 Non-recurring items Gains of the sales of real estate.................... (5,114,000) 13,000 (4,713,000) (414,000) 0 Other non-recurring items(1).................. 499,000 395,000 0 104,000 0 Minority interest.............. (603,000) (162,000) (161,000) (142,000) (138,000) ----------- ----------- ----------- ----------- ---------- Funds from operations -- NAREIT "revised definition"........ $43,500,000 $12,839,000 $11,535,000 $10,433,000 $8,693,000 =========== =========== =========== =========== ========== Weighted average number of Shares -- diluted(2)........... 17,152,990 19,435,950 17,860,753 16,624,396 14,557,019
26 29
FOR THE YEAR FOR THE QUARTER ENDED ENDED ------------------------------------------------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1996 1996 1996 1996 1996 ------------ ------------ ------------- ----------- ---------- Income before minority interest....................... $11,529,000 $ 4,423,000 $ 2,904,000 $ 4,184,000 $ 18,000 Adjustments: Depreciation and amortization................ 8,855,000 2,342,000 2,276,000 2,047,000 2,190,000 Adjustments for unconsolidated joint ventures.............. 508,000 129,000 130,000 130,000 119,000 Non-recurring items Gains of the sales of real estate.................... (2,477,000) 3,000 (71,000) (2,409,000) 0 Other non-recurring items(1).................. 3,483,000 124,000 475,000 683,000 2,201,000 Minority interest -- Pathways........ (560,000) (144,000) (144,000) (132,000) (140,000) ----------- ----------- ----------- ----------- ---------- Funds from operations NAREIT "revised definition"........ $21,338,000 $ 6,877,000 $ 5,570,000 $ 4,503,000 $4,388,000 =========== =========== =========== =========== ========== Weighted average number of Shares -- diluted(2)........... 9,533,269 11,942,857 9,878,075 8,130,000 8,130,000
FOR THE YEAR FOR THE QUARTER ENDED ENDED ------------------------------------------------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1995 1995 1995 1995 1995 ------------ ------------ ------------- ----------- ---------- Income before minority interest....................... $14,090,000 $ 7,254,000 $ 2,142,000 $ 2,682,000 $2,012,000 Adjustments: Depreciation and amortization................ 8,007,000 1,999,000 2,037,000 2,000,000 1,973,000 Adjustments for unconsolidated joint ventures.............. 121,000 68,000 51,000 0 0 Non-recurring items Gains of the sales of real estate.................... (6,013,000) (5,224,000) 0 (789,000) 0 Other non-recurring items(1).................. 442,000 249,000 26,000 167,000 0 Minority interest -- Pathways........ (527,000) (155,000) (123,000) (129,000) (120,000) ----------- ----------- ----------- ----------- ---------- Funds from operations -- NAREIT "revised definition"........ $16,120,000 $ 4,191,000 $ 4,133,000 $ 3,931,000 $3,865,000 =========== =========== =========== =========== ========== Weighted average number of Shares -- diluted(2)........... 8,130,000 8,130,000 8,130,000 8,130,000 8,130,000
- --------------- (1) Other non-recurring items for the years ended December 31, 1997, 1996 and 1995 consists of $138,000, $42,000 and $288,000 of loss from hedge termination and $361,000, $3,441,000 and $154,000 of loss on the early extinguishment of debt, respectively. These non-recurring items are excluded from the Funds from Operations calculation since they are non-operational in nature, infrequent in occurrence and inclusion would distort the comparative measurement of the Company's performance over time. (2) Assumes conversion of all outstanding operating partnership interests in the Operating Partnership and Convertible Preferred Stock into shares of Essex's common stock. Also includes common stock equivalents. The National Association of Real Estate Investment Trusts ("NAREIT"), a leading industry group, has approved a revised definition of Funds from Operations, which provides, in part, that the amortization of deferred financing costs is no longer to be added back to net income in the calculation of Funds for Operations. Consistent with the NAREIT recommendation Essex has adopted this new definition beginning in 1996. The following table sets forth Essex's calculation of actual Funds from Operations for 1997, 1996 and 1995 using the revised definition. 27 30 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 28, 1998. 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 28, 1998. 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 28, 1998. 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 28, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Report of KPMG Peat Marwick LLP, independent auditors
PAGE ---- Independent Auditors' Report................................ F-1 Consolidated Financial Statements: Balance Sheets as of December 31, 1997 and 1996............. F-2 Statements of Operations for the years ended December 31, 1997, 1996 and 1995....................................... F-3 Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.......................... F-4 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995....................................... F-5 Notes to Consolidated Financial Statements.................. F-6
(b) Reports on Form 8-K On December 1, 1997, the Company filed a Current Report on Form 8-K regarding (i) its 1997 acquisitions, including the acquisition of the following properties: (a) Stonehedge Village, (b) Bridle Trails, (c) Spring Lake, (d) Maple Leaf, (e) Trabuco Villas, (f) Meadows at Cascade Park, and (g) Palo Alto, California office building that will house the Company's corporate headquarters, (ii) the pending acquisition of the following properties: (a) Village at Cascade Park, (b) Casa Mango, and (c) Castle Creek, and (iii) the disposition of the following properties: (a) Countrywood, and (b) Riviera Plaza. 28 31 On December 6, 1997, the Company filed a Current Report on Form 8-K with respect to its public offering of 1,500,000 shares of Common Stock. (c) Exhibits. The Exhibit Index attached hereto is incorporated into this Item 14(c) by reference. 29 32 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 PROPERTY TRUST, INC. (Registrant) Dated: March 30, 1998 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, 1998 /s/ GEORGE M. MARCUS ---------------------------------------------- George M. Marcus Chairman of the Board Dated: March 30, 1998 /s/ KEITH R. GUERICKE ---------------------------------------------- Keith R. Guericke President and Chief Executive Officer and Vice Chairman Dated: March 30, 1998 /s/ MICHAEL J. SCHALL ---------------------------------------------- Michael J. Schall Chief Financial Officer Executive, Vice President and Director Dated: March 30, 1998 /s/ MARK J. MIKL ---------------------------------------------- Mark J. Mikl Controller (Principal Accounting Officer) Dated: March 30, 1998 /s/ WILLIAM A. MILLICHAP ---------------------------------------------- William A. Millichap Director Dated: March 30, 1998 /s/ GARY P. MARTIN ---------------------------------------------- Gary P. Martin Director Dated: March 30, 1998 /s/ ROBERT E. LARSON ---------------------------------------------- Robert E. Larson Director Dated: March 30, 1998 /s/ ROBERT E. LARSON ---------------------------------------------- Robert E. Larson Director
30 33 Dated: March 30, 1998 /s/ THOMAS E. RANDLETT ---------------------------------------------- Thomas E. Randlett Director Dated: March 30, 1998 /s/ ANTHONY DOWNS ---------------------------------------------- Anthony Downs Director Dated: March 30, 1998 /s/ DAVID BRADY ---------------------------------------------- Director Dated: March 30, 1998 /s/ ISSIE N. RABINOVITCH ---------------------------------------------- Issie N. Rabinovitch Director Dated: March 30, 1998 /s/ WILLARD H. SMITH ---------------------------------------------- Willard H. Smith Director Dated: March 30, 1998 /s/ GREGORY J. HARTMAN ---------------------------------------------- Gregory J. Hartman Director
31 34 INDEPENDENT AUDITORS' REPORT The Board of Directors Essex Property Trust, Inc.: We have audited the accompanying consolidated balance sheets of Essex Property Trust, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. 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, 1997. These consolidated financial statements and the financial statement schedule are the responsibility of the management of Essex Property Trust, Inc. 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 Property Trust, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, 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. /s/ KPMG Peat Marwick LLP San Francisco, California January 30, 1998 F-1 35 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (DOLLARS IN THOUSANDS) ASSETS
1997 1996 -------- -------- Real estate: Rental properties: Land and land improvements............................. $182,416 $ 90,557 Buildings and improvements............................. 548,571 303,252 -------- -------- 730,987 393,809 Less accumulated depreciation............................. (58,040) (47,631) -------- -------- 672,947 346,178 Investments............................................... 2,347 8,537 Real estate under development............................. 27,422 -- -------- -------- 702,716 354,715 Cash and cash equivalents................................... 4,282 42,705 Restricted cash............................................. 6,093 4,194 Notes and other related party receivables................... 9,264 2,362 Notes and other receivables................................. 8,602 5,293 Prepaid expenses and other assets........................... 3,838 3,745 Deferred charges, net....................................... 4,040 4,160 -------- -------- $738,835 $417,174 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes payable...................................... $248,997 $153,205 Lines of credit............................................. 27,600 -- Accounts payable and accrued liabilities.................... 21,337 7,346 Dividends payable........................................... 9,189 6,286 Other liabilities........................................... 4,208 2,249 -------- -------- Total liabilities................................. 311,331 169,086 Minority interests.......................................... 28,589 25,281 Stockholders' equity: 8.75% Convertible preferred stock, series 1996A: $.0001 par value, 1,600,000 and 1,600,000 authorized; 1,600,000 and 800,000 issued and outstanding in 1997 and 1996, respectively........................................... 1 1 Common stock, $.0001 par value, 668,400,000 and 668,400,000 shares authorized; 16,614,687 and 11,591,650 shares issued and outstanding, in 1997 and 1996, respectively........................................... 2 1 Excess stock, $.0001 par value, 330,000,000 shares authorized; no shares issued or outstanding........................ -- -- Additional paid-in capital................................ 430,804 256,106 Accumulated deficit....................................... (31,892) (33,301) -------- -------- Total stockholders' equity........................ 398,915 222,807 -------- -------- $738,835 $417,174 ======== ========
See accompanying notes to consolidated financial statements. F-2 36 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 ----------- ---------- ---------- Revenues: Rental.............................................. $ 79,936 $ 47,780 $ 41,640 Interest and other income........................... 4,633 2,913 2,300 ----------- ---------- ---------- 84,569 50,693 43,940 ----------- ---------- ---------- Expenses: Property operating expenses: Maintenance and repairs.......................... 6,814 4,341 3,811 Real estate taxes................................ 6,340 3,790 3,371 Utilities........................................ 5,074 3,175 2,974 Administrative................................... 5,514 2,911 2,592 Advertising...................................... 1,225 653 299 Insurance........................................ 859 635 557 Depreciation and amortization.................... 13,992 8,855 8,007 ----------- ---------- ---------- 39,818 24,360 21,611 Interest............................................ 12,659 11,442 10,928 Amortization of deferred financing costs............ 509 639 1,355 General and administrative.......................... 2,413 1,717 1,527 Loss from hedge termination......................... 138 42 288 ----------- ---------- ---------- Total expenses................................... 55,537 38,200 35,709 ----------- ---------- ---------- Income before gain on sales of real estate, minority interests and extraordinary item...... 29,032 12,493 8,231 Gain on sales of real estate.......................... 5,114 2,477 6,013 Minority interests.................................... (4,469) (2,648) (3,486) ----------- ---------- ---------- Income before extraordinary item................. 29,677 12,322 10,758 Extraordinary loss on early extinguishment of debt.... (361) (3,441) (154) ----------- ---------- ---------- Net income.................................. $ 29,316 $ 8,881 $ 10,604 =========== ========== ========== Per share data: Basic: Net income before extraordinary item............. $ 1.98 $ 1.61 $ 1.71 Extraordinary item - debt extinguishment......... (0.02) (0.48) (0.02) ----------- ---------- ---------- Net income.................................. $ 1.96 $ 1.13 $ 1.69 =========== ========== ========== Weighted average number of shares outstanding during the period.............................. 13,644,906 7,283,124 6,275,000 =========== ========== ========== Diluted: Net income before extraordinary item............. $ 1.94 $ 1.59 $ 1.71 Extraordinary item -- debt extinguishment........ (0.02) (0.47) (0.02) ----------- ---------- ---------- Net income.................................. $ 1.92 $ 1.12 $ 1.69 =========== ========== ========== Weighted average number of shares outstanding during the period.............................. 15,285,288 7,347,528 6,275,000 =========== ========== ==========
See accompanying notes to consolidated financial statements. F-3 37 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS AND SHARES IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------- --------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------ ------ ---------- ----------- -------- Balances at December 31, 1994.......... -- $-- 6,275 $ 1 $112,070 $(27,372) $ 84,699 Net income............................. -- -- -- -- -- 10,604 10,604 Dividends declared..................... -- -- -- -- -- (10,574) (10,574) ----- --- ------ --- -------- -------- -------- Balances at December 31, 1995.......... -- -- 6,275 1 112,070 (27,342) 84,729 Net proceeds from preferred stock offering............................. 800 1 -- -- 17,504 -- 17,505 Net proceeds from common stock offerings............................ -- -- 5,313 -- 126,464 -- 126,464 Net proceeds from options exercised.... -- -- 4 -- 68 -- 68 Net income............................. -- -- -- -- -- 8,881 8,881 Dividends declared..................... -- -- -- -- -- (14,840) (14,840) ----- --- ------ --- -------- -------- -------- Balances at December 31, 1996.......... 800 1 11,592 1 256,106 (33,301) 222,807 Net proceeds from preferred stock offering............................. 800 -- -- -- 20,000 -- 20,000 Net proceeds from common stock offerings............................ -- -- 4,995 1 154,012 -- 154,013 Net proceeds from options exercised.... -- -- 28 -- 686 -- 686 Net income............................. -- -- -- -- -- 29,316 29,316 Dividends declared..................... -- -- -- -- -- (27,907) (27,907) ----- --- ------ --- -------- -------- -------- Balances at December 31, 1997.......... 1,600 $ 1 16,615 $ 2 $430,804 $(31,892) $398,915 ===== === ====== === ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 38 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
1997 1996 1995 -------- -------- -------- Cash flows from operating activities: Net income............................................... $ 29,316 $ 8,881 $ 10,604 Minority interests....................................... 4,469 2,047 3,003 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sales of real estate.......................... (5,114) (2,477) (6,013) Equity in income (loss) of limited partnerships....... 209 (546) (92) Loss on early extinguishment of debt.................. 361 3,441 154 Loss from hedge termination........................... 138 42 62 Depreciation and amortization......................... 13,992 8,855 8,007 Amortization of deferred financing costs.............. 509 639 1,355 Changes in operating assets and liabilities: Other receivables................................... (1,377) (163) (48) Prepaid expenses and other assets................... (158) (2,110) (561) Accounts payable and accrued liabilities............ 2,738 842 (73) Other liabilities................................... 1,815 684 197 -------- -------- -------- Net cash provided by operating activities........ 46,898 20,135 16,595 -------- -------- -------- Cash flows from investing activities: Additions to rental properties........................... (247,886) (101,429) (9,516) Increase in restricted cash.............................. (1,899) (4,194) -- Issuance of notes receivable............................. 1,932) (3,909) (500) Repayments of notes receivable........................... -- 6,327 333 Investments in corporations and limited partnerships..... 620 665 (7,426) Dispositions of real estate.............................. 15,470 13,350 12,147 Additions to real estate under development............... (27,422) -- -- -------- -------- -------- Net cash used in investing activities............ (263,049) (89,190) (4,962) -------- -------- -------- Cash flows from financing activities: Proceeds from mortgage and other notes payable and lines of credit............................................. 204,931 91,253 21,700 Repayment of mortgage and other notes payable and lines of credit............................................. (164,580) (110,305) (17,195) Additions to deferred charges............................ (752) (2,530) (930) Additions to related party notes and other receivables... (761) -- -- Repayments of related party notes and other receivables........................................... 21,859 -- -- Net proceeds from stock offerings........................ 174,012 143,969 -- Increase (decrease) in offering related accounts payable............................................... (711) 1,140 -- Net proceeds from stock options exercised................ 686 68 -- Net payments made in connection with costs related to the early extinguishment of debt.......................... -- (620) -- Distributions to minority interest/partners.............. (3,910) (3,189) (3,123) Dividends paid........................................... (25,046) (12,009) (10,513) -------- -------- -------- Net cash provided by (used in) financing activities... 177,728 107,777 (10,061) -------- -------- -------- Net increase (decrease) in cash and cash equivalents....... (38,423) 38,722 1,572 Cash and cash equivalents at beginning of period........... 42,705 3,983 2,411 -------- -------- -------- Cash and cash equivalents at end of period................. $ 4,282 $ 42,705 $ 3,983 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized....... $ 12,384 $ 11,575 $ 10,927 ======== ======== ======== Supplemental disclosure of non-cash investing and financing activities: Mortgage note payable assumed in connection with purchase of real estate............................. $ 83,041 $ 17,733 $ -- ======== ======== ======== Dividends payable..................................... $ 9,189 $ 6,286 $ 3,455 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 39 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (1) ORGANIZATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements present the accounts of Essex Property Trust, Inc. (the Company) which include the accounts of the Company and Essex Portfolio, L.P. (the Operating Partnership, which holds the operating assets of the Company). The Company was incorporated in the state of Maryland in March 1994. On June 13, 1994, the Company commenced operations with the completion of an 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 $112,070 were used to acquire a 77.2% general partnership interest in the Operating Partnership. The limited partners own an aggregate 10.1% interest in the Operating Partnership at December 31, 1997. The limited partners may convert their interests into shares of common stock or cash (based upon the trading price of the common stock at the conversion date). The Company has reserved 1,873,473 shares of common stock for such conversions. These conversion rights may be exercised by the limited partners at any time through 2024. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Real Estate Rental Properties Rental properties are recorded at cost less accumulated depreciation. Depreciation on rental properties has been provided over the estimated useful lives of 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. Certain rental properties are pledged as collateral for the related mortgage notes payable. In the normal course of business, when the Company determines that a property is held for sale, it discontinues the periodic depreciation of that property in accordance with the provisions of SFAS 121. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell. In addition, whenever events or changes in circumstances indicate that the carrying amount of a property to be held 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 Company 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, 1997. Real Estate Investments The Company accounts for its investments in joint ventures and corporations under the equity method of accounting. Cash Equivalents and Restricted Cash Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents. Restricted cash relates to reserve requirements in conjunction with the Company's tax exempt variable rate bond financings. F-6 40 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenues For multi-family properties, rental revenue is reported on the accrual basis of accounting. For the retail and corporate properties, rental income is recognized on the straight-line basis over the terms of the leases. Accrued rent receivable relating to such leases has been included in other assets in the accompanying consolidated balance sheets. Interest During 1997, the Company capitalized $1,276 of interest related to the development of real estate. 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. Interest Rate Protection, Swap, and Forward Contracts The Company 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 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 Company's policy is to manage interest rate risk for existing or anticipated borrowings. As indicated above, there was no exposure to unmatched positions at December 31, 1997. Income Taxes Generally in any year in which the Company qualifies as a real estate investment trust (REIT) under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the Code), it is not subject to federal income tax on that portion of its income that it distributes to stockholders. No provision for federal income taxes has been made in the accompanying consolidated financial statements for each of the three years in the period ended December 31, 1997, as the Company believes it qualifies under the code as a REIT and has made distributions during the periods in excess of taxable income. Federal taxable income of the Company prior to the dividend paid deductions for the years ended December 31, 1997, 1996 and 1995, was: $21,800, $7,141 and $7,295, respectively. The difference between net income for financial reporting purposes and taxable income results primarily from different methods of depreciation and gains on property dispositions. The status of the cash dividends distributed for the years ended December 31, 1997, 1996 and 1995 for tax purposes is as follows:
1997 1996 1995 ---- ---- ---- Taxable portion................................... 100% 58% 69% Return of capital................................. -- 42 31 --- --- --- 100% 100% 100% === === ===
F-7 41 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) The most significant component causing the reduction of the return of capital percentage for 1997 was earnings growing at a faster rate than dividends paid. Stock Based Compensation The Company applies APB Opinion 25 and related Interpretations in accounting for its stock based compensation plans. 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. Reclassifications Certain reclassifications have been made to the 1996 and 1995 balances to conform with the 1997 presentation. New Accounting Pronouncements The Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." These statements, which are effective for periods beginning after December 15, 1997, expand or modify disclosures and, accordingly, will have no impact on the Company's reported financial position, results of operations or cash flows. (3) EQUITY TRANSACTIONS During 1997, the Company sold additional shares of Common Stock on March 31, 1997, September 10, 1997 and December 8, 1997. In connection with these offerings, the Company sold 2,000,000, 1,495,000 and 1,500,000 shares at $29.13, $31.00 and $35.50 per share, respectively. The net proceeds received for these transactions was $58,119, $46,080 and $49,814, respectively. During 1996, the Company sold additional shares of Common Stock on August 14, 1996 and December 24, 1996. In connection with these offerings, the Company sold 2,530,000 and 2,783,000 shares at $22.75 and $27.75 per share, respectively. The net proceeds received for these two transactions was $53,996 and $72,468, respectively. On June 20, 1996, the Company entered into an agreement to sell up to $40,000 of the 8.75% Convertible Preferred Stock, Series 1996A (the Convertible Preferred Stock) at $25.00 per share to Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P. (collectively, Tiger/Westbrook). In accordance with the agreement, on July 1, 1996, Tiger/Westbrook purchased 340,000 shares of Convertible Preferred Stock for an aggregate purchase price of $8,500 and loaned the Company an additional $11,500. This loan was exchanged for 460,000 shares of Convertible Preferred Stock at $25.00 per share on September 27, 1996 upon receiving stockholder approval. Tiger/Westbrook purchased an additional $20,000 of Convertible Preferred Stock, in accordance with the agreement on June 20, 1997. The outstanding Convertible Preferred Stock is entitled to receive annual cumulative cash dividends paid quarterly in an amount equal to the greater of (i) 8.75% of the per share price or (ii) the dividends (subject to F-8 42 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) adjustment) paid with respect to the Common Stock plus, in both cases, any accumulated but unpaid dividends on the Convertible Preferred Stock. Subsequent to June 20, 1997, 25% of the 1.6 million authorized shares of Convertible Preferred Stock is convertible into Common Stock at the option of the holder, and thereafter, at the beginning of each of the next three-month periods, an additional 25% of the Convertible Preferred Stock is convertible. The conversion price per share is $21.875, subject to certain adjustments as defined in the agreement. Under certain circumstances, if, after June 20, 2001, the Company requires a mandatory conversion of all of the Convertible Preferred Stock, but under no other circumstances, each of the holders of the Convertible Preferred Stock may cause the Company to redeem any or all of such holder's shares of Convertible Preferred Stock. (4) PER SHARE DATA Basic income per share before extraordinary item and diluted income per share before extraordinary item were calculated as follows for the years ended December 31:
1997 1996 1995 ------------------------------ ------------------------------ ------------------------------ WEIGHTED PER- WEIGHTED PER- WEIGHTED PER- AVERAGE SHARE AVERAGE SHARE AVERAGE SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT ------ -------- ------ ------ -------- ------ ------ -------- ------ Income before extraordinary item......................... $29,677 $12,322 $10,758 Less: preferred stock dividends.................... (2,681) (635) -- ------- ------- ------- Basic: Income available to common stockholders............. 26,996.. 13,645 $ 1.98 11,687 7,283 $ 1.61 10,758 6,275 $ 1.71 ========= ========= ========= Effect of Dilutive Securities: Convertible limited partnership units(1)..... -- -- -- -- -- -- Convertible preferred stock.................... 2,681.. 1,400 -- --(1) -- -- Stock options.............. -- 240 -- 64 -- -- ------- -------- ------- -------- ------- -------- Diluted: Income available to common stockholders plus assumed conversions.............. $29,677 15,285 $ 1.94 $11,687 7,347 $ 1.59 $10,758 6,275 $ 1.71 ======= ======== ========= ======= ======== ========= ======= ======== =========
- --------------- (1) Conversion not considered as effect would be anti-dilutive. F-9 43 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (5) REAL ESTATE Rental Properties Rental properties consists of the following at December 31, 1997 and 1996:
LAND AND LAND BUILDINGS AND ACCUMULATED IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION ------------- ------------- ----- ------------ December 31, 1997: Apartment properties.................. $178,326 $520,649 $698,975 $53,021 Retail and corporate.................. 4,090 27,922 32,012 5,019 -------- -------- -------- ------- $182,416 $548,571 $730,987 $58,040 ======== ======== ======== ======= December 31, 1996: Apartment properties.................. $ 86,491 $274,241 $360,732 $41,627 Retail and corporate.................. 4,066 29,011 33,077 6,004 -------- -------- -------- ------- $ 90,557 $303,252 $393,809 $47,631 ======== ======== ======== =======
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. At December 31, 1997, the Company's three retail properties in Portland Oregon with a carrying amount of $10,500 are held for sale. These properties consist of approximately 235,838 square feet of retail space which contributed $2,301 to revenues and $1,724 to net income in 1997. During the year ended December 31, 1997, the Company sold four properties to third parties for $15,470 resulting in a gain of $5,114. During the year ended December 31, 1996, the Company sold two properties to third parties for $13,350, resulting in a gain of $2,477. During the year ended December 31, 1995, the Company sold two properties to third parties for $12,147, resulting in a gain of $6,013. The Company utilized Internal Revenue Code Section 1031 to defer the majority of the taxable gains resulting from these sales. For the years ended December 31, 1997, 1996, and 1995, depreciation expense on real estate was $13,913, $8,820 and $7,978, respectively, and amortization of capitalized leasing commissions was $79, $35, and $29, respectively. Investments The Operating Partnership owns all of the 19,000 shares of the non-voting preferred stock of Essex Management Corporation (EMC). Management of the Company owns 100 percent of the common stock of EMC. EMC was formed to provide property and asset management services to various partnerships not controlled by the Company, along with the neighborhood shopping centers owned by the Company. The Company accounts for its investment in EMC on the equity method of accounting. The Operating Partnership owns all of the 62,500 and 31,800 shares of non-voting preferred stock of Essex Sacramento, Inc. (Sacramento) and Essex Fidelity I Corporation (Fidelity I), respectively. Management of the Company owns 100 percent of the common stock of Sacramento and Fidelity I. Sacramento and Fidelity I hold a 68% and 32% partnership interest respectively, in Essex Fidelity Sacramento Partners (EFSP). EFSP owns a 20 percent equity interest in Blythe, Limited Partnership, which was formed to acquire, manage and dispose of a portfolio of mortgages and real estate purchased from a federal savings bank and owns a 20 percent equity interest in Golden Bear Homes I - IV, Limited Partnerships, which were formed to acquire, manage and dispose of residential real properties purchased from a third party asset management F-10 44 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) company. Both Blythe, Limited Partnership and Golden Bear Homes I - IV, Limited Partnerships have completed their chartered business plan and are in the process of being liquidated. The Company accounts for its investments in Sacramento and Fidelity I on the equity method of accounting. The shares of non-voting preferred stock in EMC, Sacramento and Fidelity I are entitled to a preferential dividend of $0.80 per share per annum. Through these preferred stock investments, the Operating Partnership will be eligible to receive a preferential liquidation value of $10.00 per share plus all cumulative and unpaid dividends. During 1995, the Operating Partnership acquired limited partnership interests in Essex Bristol Partners (Bristol), Essex San Ramon Partners (San Ramon) and Jackson School Village, L.P. (JSV). Bristol and San Ramon were formed to acquire, own and operate multi-family rental properties located in Sunnyvale and San Ramon, California, respectively. JSV was formed to develop and operate a 200-unit garden style apartment community in Hillsboro, Oregon. The general partner in JSV provides development services to the partnership. The Company accounts for its investment in JSV on the equity method of accounting. Prior to January 30, 1997, the Company accounted for its investment in Bristol and San Ramon on the equity method of accounting. On January 30, 1997, the Company purchased the ownership interest of its joint venture partner, Acacia Capital Corporation (Acacia), in Bristol and San Ramon, and is now the sole owner of these properties. The Company acquired Acacia's approximate 55% ownership interest in these properties for $7,900. Concurrent with the purchase of Acacia's ownership interest, these properties, their underlying debt and their operations have been consolidated into the Company's financial statements. The debt consolidated into the balance sheet consists of an $18,520, 7.25% fixed rate loan secured by the San Ramon property, due in December 2000, and a $12,298, 7.54% fixed rate loan, with interest fixed pursuant to an interest rate swap agreement, secured by the Bristol property and due in June 2002. In April 1997, the Company repaid the loan secured by the Bristol property with a portion of the proceeds from its sale of 2,000,000 shares of Common Stock. In May of 1997, the Company invested as a limited partner in two existing partnerships which owned multi-family properties: Anchor Village Apartments ("Anchor Village"), a 301 unit apartment community located in Mukilteo, Washington and Highridge Apartments ("Highridge"), a 255 unit apartment community located in Ranchos Palos Verdes, California. Anchor Village was valued at $13,100 and Highridge was valued at $25,300. These investments were made under arrangements whereby EMC became the general partner and the existing partners were granted rights of redemption for their interests. Such partners can request to be redeemed and the Company can elect to redeem for cash or by issuing shares its common stock. Conversion values will be based on 98 percent of the market value of the Company's shares at the time of redemption multiplied the number of shares stipulated under the above arrangements. The Company accounts for its investments in these properties on the equity method of accounting. F-11 45 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Investments consists of the following as of December 31, 1997 and 1996:
1997 1996 ------ ------- Investments in joint ventures: Limited partnership interest of 49.9% in Jackson School Village, L.P........................ $2,259 $ 2,032 Limited partnership interest of 1% in Highridge Apartments............................... (409) -- Limited partnership interest of 1% in Anchor Village Apartments.......................... (270) -- Limited partnership interest of 45% in Essex Bristol Partners............................. -- 1,921 Limited partnership interest of 45% in Essex San Ramon Partners........................... -- 3,436 ------ ------- 1,580 7,389 ------ ------- 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 Essex Sacramento Corporation -- 62,500 shares of preferred stock.................................... 122 627 ------ ------- 643 1,148 ------ ------- Other investments.......................................... 124 -- ------ ------- $2,347 $ 8,537 ====== =======
(6) RECEIVABLES Receivables consists of the following at December 31, 1997 and 1996:
1997 1996 ------ ------ Notes and other related party receivables: Note receivable from Highridge Apartments secured bearing interest at 9%, due March, 2008....................... $2,750 $ -- Note receivable from Fidelity I and Sacramento, secured, bearing interest at 9%, due on demand................. -- 718 Note receivable from Fidelity I, secured, bearing interest at 12%, due December 1998.................... 1,580 -- Notes receivable from Fidelity I and JSV, secured, bearing interest at 9.5 -- 10%, due 2015.............. 726 726 ------ ------ Receivable from Highridge Apartments, non-interest bearing, due on demand................................ 1,699 -- ------ ------ Loans to officers, bearing interest at 8%, due April 2006.................................................. 375 250 Other related party receivables, substantially due on demand................................................ 2,134 668 ------ ------ $9,264 $2,362 ====== ======
F-12 46 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 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. The Company's officers and directors do not have a substantial economic interest in these related party entities.
1997 1996 ------ ------ Notes and other receivables: Note receivable from the co-tenants in the Pathways property, secured, interest payable monthly at 9%, principal due June 2001............................... $4,596 $4,728 Other receivables........................................ 4,006 565 ------ ------ $8,602 $5,293 ====== ======
(7) RELATED PARTY TRANSACTIONS All general and administrative expenses of the Company and EMC are initially borne by the Company, with a portion subsequently allocated to EMC based on a business unit allocation methodology, formalized and approved by management and the board of directors. Management believes the business unit allocation methodology so applied is reasonable. Expenses allocated to EMC for the years ended December 31, 1997, 1996 and 1995 totaled $987, $1,752 and $2,116, respectively, and are reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of operations. EMC provides property management services to the Company's neighborhood shopping centers. The fees paid by the Company for the years ended December 31, 1997, 1996 and 1995, were $80, $113 and $108, respectively, and are included in administrative expense in the accompanying consolidated statements of operations. Included in rental revenue in the accompanying consolidated statements of operations are rents earned from space leased to Marcus & Millichap (M&M), including operating expense reimbursements, of $709, $681 and $675 for the years ended December 31, 1997, 1996 and 1995, respectively. During the years ended December 31, 1997, 1996 and 1995, the Company paid brokerage commissions totaling $590, $312 and $405 to M&M on the sales of real estate. The commissions 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 Company is a party. The Board of Directors of the Company periodically reviews the calculation of this percentage. Included in other income for the years ended December 31, 1997, 1996 and 1995 are $139, $820 and $183, respectively, representing dividends from EMC and Essex Sacramento and management fees and equity income (loss) from Essex Bristol Partners, Essex San Ramon Partners, Jackson School Village, Highridge Apartments and Anchor Village Apartments. Interest income includes $1,286, $214 and $358 earned principally on the notes receivable from Essex Fidelity I, Essex Sacramento, the partnerships which collectively own Highridge and the partnerships which collectively own Anchor Village and the partnerships which collectively own a 30.7% minority interest in Pathways Apartments for the years ended December 31, 1997, 1996 and 1995, respectively. F-13 47 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (8) MORTGAGE NOTES PAYABLE Mortgage notes payable consist of the following at December 31, 1997 and 1996:
1997 1996 -------- -------- Mortgage notes payable to a mutual life insurance company, secured by deeds of trust, bearing interest at 7.45%, interest only payments due through June 1996, monthly principal and interest installments due thereafter, final principal payment of $40,800 due June 2001.................. $ 48,078 $ 50,240 Multifamily housing demand mortgage revenue bonds secured by deed of trust on rental property, bearing interest at 7.69%, principal and interest installments due monthly, remaining principal due 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..................................... 8,915 -- Multifamily housing demand 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 3.9% for December 1997), plus credit enhancement and underwriting fees of approximately 1.9%. The bonds are convertible to a fixed rate. 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. Bonds in the aggregate of $29,220 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 7.2%........................................................ 58,820 42,820 Mortgage note payable to a life insurance company, secured by deed of trust, bearing interest at 8.78%, principal and interest payments due monthly, final principal payment of $8,500 due December 2002. Under certain conditions this loan can be converted to an unsecured note payable...................................... 9,320 -- Mortgage note payable to a mutual life insurance company, secured by deeds of trust, bearing interest at 7.5%, principal and interest payments due monthly, final principal payment of $18,200 due March 2003........................... 19,845 19,991 Mortgage note payable to a life insurance company, secured by deeds of trust, bearing interest at 7.08%, principal and interest payments due monthly, final principal payment of $25,500 due January 2005. Under certain conditions this loan can be converted to an unsecured note payable............... 28,800 -- Mortgage notes payable to a life insurance company, secured by deed of trust, bearing interest at 8.93%, interest only payments due through March 1997, monthly principal and interest installments due thereafter, final principal payment of $6,900 due April 2005. Under certain conditions this loan can be converted to an unsecured note payable..... 8,027 8,100
F-14 48 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
1997 1996 -------- -------- Note payable to a life insurance company, bearing interest at 7.25%, secured by deed of trust, interest only payments due through January 1, 1998, thereafter principal and interest payments monthly, final principal payment of $18,000 due December 2000................................... $ 18,520 $ -- Mortgage note payable to a commercial bank, secured by deed of trust, bearing interest at 7.09%, principal and interest payments due monthly, final principal payment of $11,600 due March 2006.................................................. 14,104 14,321 Four mortgage notes payable to a mortgage finance company bearing interest from 7.985% to 8.055%, secured by deeds of trust, principal and interest payments due monthly, remaining principal due March 2007.......................... 17,885 -- Multifamily housing demand 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 current tax-exempt bond rate........ 17,483 17,733 -------- -------- $248,997 $153,205 ======== ========
The aggregate scheduled maturities of mortgage notes payable are as follows:
YEAR ENDING DECEMBER 31, ------------ 1998............................ $ 4,110 1999............................ 4,455 2000............................ 4,803 2001............................ 60,935 2002............................ 24,128 Thereafter...................... 150,566 -------- $248,997 ========
In October 1997, the Company entered into five forward treasury contracts for an aggregate notional amount of $67,500, locking the 10 year treasury rate at between 6.16% - 6.26%. These contracts are to limit the interest rate exposure on identified future debt financing requirements relating to real estate under development and a maturity of an $18,520 fixed rate loan. These contracts will be settled no later than June 2000. If the contracts were settled as of December 31, 1997, the Company would be obliged to pay approximately $1,316. The Company has a LIBOR based swap contract for a notional amount of $12,298, fixing the one month LIBOR rate at 6.14%. This contract was originally purchased to cover a variable rate loan which was paid off in March 1997. The Company has kept this contract in place to limit its interest rate exposure on borrowings on its LIBOR based lines of credit. If this contract were settled as of December 31 ,1997, the Company would be obligated to pay approximately $91. F-15 49 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) In addition, the Company has entered into various other contracts to limit its interest rate exposure on debt related transactions. During 1997, 1996 and 1995, the Company charged $-0-, $42, and $62 to income representing amortization of deferred costs. During 1997, 1996 and 1995, the Company charged $183, $-0-, and $226 of costs relating to the termination of unmatched positions taken. During the years ended December 31, 1997, 1996 and 1995, the Company refinanced various mortgages and incurred a loss on the early extinguishment of debt of $361, $3,441 and $154 related to the write off of the unamortized loan fees and prepayment penalties. (9) LINES OF CREDIT As of December 31, 1997 and 1996, the Company had the following balances outstanding under lines of credit with commercial banks:
1997 1996 ------- ---- Secured $25,110 line of credit, interest payable monthly at 1% over the banks' prime rate or at the Company's option, 1.5% over the LIBOR rate, expiring April 1998............ $ 2,600 $-- Two unsecured, aggregate $50,000 lines of credit, interest payable monthly at .50% over the bank's prime rate or at the Company's option, 1.5% over the LIBOR rate, expiring March 1998............................................... 25,000 -- ------- --- $27,600 $-- ======= ===
As of December 31, 1997, the thirty-day LIBOR rate was approximately 5.8%, and the prime rate was 8.5%. (10) LEASING ACTIVITY The rental operations of the Company include apartment properties, which are rented under short term leases (generally, lease terms of three to twelve months), and retail properties and the headquarters building, which are rented under cancelable and noncancelable operating leases, certain of which contain renewal options. Future minimum rental activity for the apartment properties is not included in the following schedule due to the shortterm nature of the leases. Future minimum rentals due under noncancelable operating leases with tenants of the retail properties and the headquarters building are as follows:
YEAR ENDING DECEMBER 31, ------------ 1998............................. $ 3,030 1999............................. 2,705 2000............................. 2,205 2001............................. 1,957 2002............................. 976 Thereafter......................... 4,892 ------- $15,765 =======
Included in this schedule is $556 due from M&M in 1998 and $248 due through May 1999. In addition to minimum rental payments, retail and headquarters building tenants pay reimbursements for their pro rata share of specified operating expenses. Such amounts totaled $905, $964 and $1,018 for the F-16 50 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) years ended December 31, 1997, 1996 and 1995, respectively, and are included as rental revenue and operating expenses in the accompanying consolidated statements of operations. Certain of these leases also provide for the payment of additional rent based on a percentage of the tenants' revenues. (11) FAIR VALUE OF FINANCIAL INSTRUMENTS Management believes that the carrying amounts of its financial instruments, which include cash and cash equivalents, restricted cash, notes and other receivables, mortgage notes payable, lines of credit, accounts payable, and dividends payable approximate fair value as of December 31, 1997 and 1996, because interest rates and yields for these instruments are consistent with yields currently available to the Company for similar instruments. (12) STOCK OPTION PLANS The Company has adopted the Essex Property Trust, Inc. 1994 Stock Incentive Plan to provide incentives to attract and retain officers, directors and key employees. The Stock Incentive Plan provides for the grants of options to purchase a specified number of shares of common stock or grants of restricted shares of common stock. Under the Stock Incentive Plan, the total number of shares available for grant is approximately 875,400. The Board of Directors (the Board) may adjust the aggregate number and type of shares reserved for issuance. Participants in the Stock Incentive Plans are selected by the Compensation Committee of the Board, which is comprised of independent directors. The Compensation Committee is authorized to establish the exercise price; however, the exercise price cannot be less than 100 percent of the fair market value of the common stock on the grant date. The Company's options have a life of ten years. Option grants fully vest between one year and five years after the grant date. In connection with the Offering, the Company provided a one-time grant of options to M&M to purchase 220,000 shares of common stock through June 1999 at the initial public offering price of $19.50 per share pursuant to an agreement whereby Marcus & Millichap Real Estate Investment Brokerage Company, a subsidiary of M&M, will provide real estate transaction, trend and other information to the Company for a period of ten years. The Company has also reserved 406,500 shares of common stock in connection with the Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan. There was no activity in this plan during 1997, 1996 and 1995. The Company applies APB Opinion 25 and related Interpretations in accounting for its stock based compensation plans. Accordingly, no compensation cost has been recognized for its plans. Had compensation cost for the Company's plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method of FASB Statement 123, the Company's net income and net income per share for the years ended December 31, 1997, 1996 and 1995 would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 ------- ------ ------- Net income..................... As reported $29,316 $8,881 $10,604 Pro forma 29,216 8,820 10,566
For the years ended December 31, 1997, 1996, and 1995, the effect of determining compensation cost consistent with FASB Statement No. 123 on basic and diluted earnings per share was not material. F-17 51 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants: risk-free interest rates ranging from 5.79% to 6.88% in 1997 and from 5.52% to 6.92% in 1996 and 1995; expected lives of 4 years for 1997, 1996, and 1995; expected volatility of 17.40% for 1997 and 15.13% for 1996 and 1995; and dividend yield of 6% for 1997, 1996 and 1995. A summary of the status of the Company's option plans as of December 31, 1997, 1996 and 1995 and changes during the years ended on those dates is presented below:
1997 1996 1995 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- ------- -------- ------- -------- Outstanding at beginning of year.... 529,450 $ 19.08 538,950 $ 18.93 444,950 $ 19.44 Granted................ 324,905 33.02 14,000 24.55 100,400 16.72 Exercised.............. (23,286) 17.95 (6,750) 19.07 -- -- Forfeited.............. (2,855) 22.91 (16,750) 18.89 (6,400) 19.21 ------- ------- ------- Outstanding at end of year................. 828,214 24.57 529,450 19.08 538,950 18.93 ======= ======= ======= Options exercisable at year end............. 284,575 $ 19.23 202,975 $ 19.13 104,010 $ 19.39 Weighted-average fair value of options granted during the year................. $ 3.56 $ 2.40 $ 1.67
The following table summarized information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING ----------------------------------------- OPTIONS EXERCISABLE WEIGHTED -------------------------------- NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE --------------- -------------- ----------- -------- -------------- -------------- $ 15.01 to 20.00........ 490,314 6.6 years $18.99 280,790 $ 19.16 20.01 to 25.00........ 10,000 8.5 years 23.23 2,533 22.70 25.01 to 30.00........ 81,900 9.2 years 29.25 1,333 27.88 30.01 to 35.00........ 246,000 9.8 years 34.21 -- -- ------- ------- 828,214 $24.57 284,656 $ 19.23 ======= =======
On January 1, 1997, the Company granted 13,277 Stock Units under the Company's Phantom Stock Unit Agreement to two of the Company's executives. The market value at the date of grant was $29.27 per share. The units vest in installments in accordance with the vesting schedule set forth in the Phantom Stock Unit Agreement such that the units will be fully vested on January 1, 2002. At that time, the Company expects to issue to the executives the number of shares of common stock equal to the number of units vested, or at the Company's option, an equivalent amount in cash. Dividends are paid by the Company on the vested and unvested portion of shares. For the year ended December 31, 1997, compensation cost was $19 related to this plan. F-18 52 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for 1997 and 1996:
QUARTER QUARTER QUARTER QUARTER ENDED ENDED ENDED ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1997 Total revenues before gain on sale of real estate.................................... $18,551 $19,580 $21,975 $24,463 Gain (loss) on sale of real estate.......... -- 414 4,713 (13) ------- ------- ------- ------- Total revenues.............................. $18,551 $19,994 $26,688 $24,450 ======= ======= ======= ======= Extraordinary item.......................... $ -- $ (104) $ -- $ (257) ======= ======= ======= ======= Net income.................................. $ 4,868 $ 6,254 $10,967 $ 7,227 ======= ======= ======= ======= Per share data: Net income: Basic.................................. $ 0.39 $ 0.43 $ 0.73 $ 0.41 ======= ======= ======= ======= Diluted................................ $ 0.39 $ 0.43 $ 0.69 $ 0.41 ======= ======= ======= ======= Market price: High................................... $ 30.87 $ 32.37 $ 35.06 $ 37.50 ======= ======= ======= ======= Low.................................... $ 28.50 $ 27.62 $ 30.50 $ 32.81 ======= ======= ======= ======= Close.................................. $ 29.87 $ 32.12 $ 34.81 $ 35.00 ======= ======= ======= ======= Dividends declared........................ $ .435 $ .435 $ .450 $ .450 ======= ======= ======= ======= 1996 Total revenues before gain on sale of real estate.................................... $11,554 $11,754 $12,823 $14,562 Gain (loss) on sale of real estate.......... -- 2,409 71 (3) ------- ------- ------- ------- Total revenues.............................. $11,554 $14,163 $12,894 $14,559 ======= ======= ======= ======= Extraordinary item.......................... $(2,180) $ (665) $ (472) $ (124) ======= ======= ======= ======= Net income (loss)........................... $ (57) $ 3,159 $ 2,232 $ 3,547 ======= ======= ======= ======= Per share data: Net income: Basic.................................. $ (0.01) $ 0.51 $ 0.28 $ 0.35 ======= ======= ======= ======= Diluted................................ $ (0.01) $ 0.51 $ 0.27 $ 0.35 ======= ======= ======= ======= Market price: High................................... $ 21.25 $ 22.50 $ 24.87 $ 29.37 ======= ======= ======= ======= Low.................................... $ 18.75 $ 19.37 $ 21.37 $ 24.62 ======= ======= ======= ======= Close.................................. $ 20.75 $ 21.50 $ 24.87 $ 29.37 ======= ======= ======= ======= Dividends declared........................ $ .425 $ .425 $ .435 $ .435 ======= ======= ======= =======
F-19 53 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (14) 401(K) PLAN The Company 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, to the maximum allowed under Section 401(k) of the Internal Revenue Code. The Company matches the employee contributions for non- highly compensated personnel, up to 50% of their compensation to a maximum of five hundred dollars per year. Company contributions to the Plan were approximately $41, $27, and $37 for the years ended December 31, 1997, 1996, and 1995. (15) COMMITMENTS AND CONTINGENCIES A commercial bank has issued on behalf of the Company various letters of credit relating to financing and development transactions for an aggregate amount of $9,931 which expire between July 1998 and June 2002. The Company identifies and evaluates prospective investments on a continuous basis. In connection therewith, the Company initiates letters of intent and extends offers on a regular basis. At December 31, 1997, the Company had one commitment to fund an acquisition for $37,400. The Company is developing six multifamily residential projects, which are anticipated to have an aggregate of approximately 1,330 multifamily units. Essex expects that such projects will be completed during the next two years. In connection with these projects, the Operating Partnership has directly, or in cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties for $77 million. Investments in real property create a potential for environmental liabilities on the part of the owner of such real property. The Company carries no express 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 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 Company 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 Company's financial condition or results of operations. The Company 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 Company's financial position, results of operations or liquidity. (16) SUBSEQUENT EVENT Subsequent to December 31, 1997, the Company completed the sale of 1,200,000 units of its 7.875% Series B Cumulative Redeemable Preferred Units to an institutional investor in a private placement, at a price of $50.00 per unit. The net proceeds of this offering were used to pay off lines of credit and will be used to fund acquisition and development of additional multifamily properties. F-20 54 SCHEDULE 1 PAGE 1 OF 3 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
INITIAL COST COSTS ----------------------- CAPITALIZED BUILDING AND SUBSEQUENT TO PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION -------- ----- -------- ----------- ------- ------------- ------------- Apartments: The Apple(5) 200 Fremont, CA $ $ 995 $ 5,582 $1,173 Plumtree(5) 140 Santa Clara, CA $ 3,090 7,421 287 ------ ------- ------- ------ -- 4,086 13,003 1,380 ------ ------- ------- ------ Summerhill Park 100 Sunnyvale, CA 2,654 4,918 315 Oak Pointe 390 Sunnyvale, CA 4,842 19,776 3,746 Summerhill Commons 184 Newark, CA 1,608 7,582 389 Pathways 296 Long Beach, CA 4,083 16,757 421 Villa Rio Vista 286 Anaheim, CA 3,013 12,661 1,266 Foothill Commons 360 Bellevue, WA 2,435 9,821 1,485 Woodland Commons 236 Bellevue, WA 2,040 3,727 735 Palisades 192 Bellevue, WA 1,560 6,242 2,069 ------ ------- ------- ------ 48,078 22,235 86,484 9,424 ------ ------- ------- ------ Marina Cove(3) 292 Santa Clara, CA -- 5,320 16,431 950 ------ ------- ------- ------ Santa Fe Ridge 240 Silverdale, WA 8,027 4,137 7,925 224 ------ ------- ------- ------ Wharfside Pointe 142 Seattle, WA 2,245 7,020 381 Emerald Ridge 180 Bellevue, WA 3,449 7,801 236 Sammanish View 153 Bellevue, WA 3,324 7,501 120 ------ ------- ------- ------ 19,845 9,018 22,321 737 ------ ------- ------- ------ Inglenook Court 214 Bothell, WA 8,300 3,467 7,881 996 ------ ------- ------- ------ Brighton Ridge 264 Renton, WA 2,625 10,800 500 Landmark Apartments 285 Hillsboro, OR 3,655 14,200 208 Eastridge Apartments 188 San Ramon, CA 6,068 13,628 278 ------ ------- ------- ------ 28,000 12,346 38,628 986 ------ ------- ------- ------ Camarillo Oaks 564 Camarillo, CA 28,335 10,953 25,254 1,201 ------ ------- ------- ------ Windsor Ridge 216 Sunnyvale, CA 14,104 4,017 10,315 291 ------ ------- ------- ------ Wandering Creek 156 Kent, WA 5,300 1,285 4,980 544 ------ ------- ------- ------ Treetops 172 Fremont, CA 9,800 3,520 8,182 711 ------ ------- ------- ------ GROSS AMOUNT CARRIED AT CLOSE OF PERIOD -------------------------------------- DEPRECIABLE LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL($) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS) -------- ------------ ------------ -------- ------------ ------------ -------- ----------- Apartments: The Apple(5) $ 996 $ 6,755 $ 7,751 $ 4,064 1971 4/82 3-30 Plumtree(5) 3,090 7,628 10,718 996 1975 2/94 3-30 ------- ------- -------- ------- 4,086 14,383 18,469 5,060 ------- ------- -------- ------- Summerhill Park 2,654 5,233 7,887 1,411 1988 9/88 3-40 Oak Pointe 4,842 23,522 28,364 8,052 1973 12/88 3-30 Summerhill Commons 1,587 8,062 9,579 2,246 1987 7/87 3-40 Pathways 4,081 17,178 21,261 4,158 1975 2/91 3-30 Villa Rio Vista 2,954 13,956 16,940 6,364 1968 7/85 3-30 Foothill Commons 2,435 11,304 13,739 3,640 1978 3/90 3-30 Woodland Commons 2,040 9,462 11,502 2,935 1976 3/90 3-30 Palisades 1,560 7,311 8,871 2,412 1969/1977(2) 5/90 3-30 ------- ------- -------- ------- 22,115 96,028 118,143 31,118 ------- ------- -------- ------- Marina Cove(3) 5,320 16,981 22,301 2,156 1974 6/94 3-30 ------- ------- -------- ------- Santa Fe Ridge 4,142 8,144 12,286 747 1993 10/94 3-30 ------- ------- -------- ------- Wharfside Pointe 2,252 7,394 9,646 922 1990 6/94 3-30 Emerald Ridge 3,445 8,041 11,486 939 1987 11/94 3-30 Sammanish View 3,328 7,617 10,945 825 1986 11/94 3-30 ------- ------- -------- ------- 9,025 23,012 32,077 2,686 ------- ------- -------- ------- Inglenook Court 3,472 8,872 12,344 1,306 1985 10/94 3-30 ------- ------- -------- ------- Brighton Ridge 2,652 11,271 13,923 360 1986 12/95 3-30 Landmark Apartments 3,695 14,368 18,063 639 1990 08/96 3-30 Eastridge Apartments 6,087 13,887 19,974 616 1988 08/96 3-30 ------- ------- -------- ------- 12,431 39,526 51,960 1,615 ------- ------- -------- ------- Camarillo Oaks 10,902 26,509 37,411 890 1985 07/96 3-30 ------- ------- -------- ------- Windsor Ridge 4,017 10,613 14,630 2,404 1989 01/89 3-30 ------- ------- -------- ------- Wandering Creek 1,294 5,515 6,809 416 1986 11/95 3-30 ------- ------- -------- ------- Treetops 3,524 8,839 12,413 580 1978 01/96 3-30 ------- ------- -------- -------
F-21 55 SCHEDULE 1 PAGE 2 OF 3 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
INITIAL COST COSTS ----------------------- CAPITALIZED BUILDING AND SUBSEQUENT TO PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION -------- ----- -------- ----------- ------- ------------- ------------- Foothill/Twincreeks 176 San Ramon, CA -- 5,875 13,992 168 ------ ------- ------- ------ Bristol Commons 188 Sunnyvale, CA -- 5,278 11,853 450 ------ ------- ------- ------ The Shores 348 San Ramon, CA 18,520 8,789 18,252 769 ------ ------- ------- ------ The Laurela 164 Mill Creek, WA -- 1,599 6,430 210 ------ ------- ------- ------ Meadowood 320 Simi Valley, CA 17,483 7,852 18,592 229 ------ ------- ------- ------ Casa Del Mar 96 Pasadena, CA -- 1,857 4,713 32 ------ ------- ------- ------ Huntington Breakers 342 Huntington Beach, CA 16,000 9,306 22,720 32 ------ ------- ------- ------ Kings Road 194 Los Angeles, CA -- 4,023 9,527 65 ------ ------- ------- ------ Park Place/ Windsor Court 118 Los Angeles, CA -- 3,343 7,881 61 ------ ------- ------- ------ Tara Village 168 Tarzana, CA -- 3,178 7,535 192 ------ ------- ------- ------ The Bluffs 224 San Diego, CA -- 3,405 7,743 41 ------ ------- ------- ------ The Village Apartments 122 Oxnard, CA -- 2,349 5,579 57 ------ ------- ------- ------ Trabuco Villas 132 Lake Forest, CA -- 3,638 8,640 97 ------ ------- ------- ------ Villa Scandia 118 Ventura, CA -- 1,570 3,912 55 ------ ------- ------- ------ Wilshire Promenade 128 Fullerton, CA -- 3,118 7,385 76 ------ ------- ------- ------ Windsor Terrace 110 Pasadena, CA -- 2,188 5,263 180 ------ ------- ------- ------ Casa Mango 96 San Diego, CA -- 3,011 7,006 22 ------ ------- ------- ------ Riverfront 229 San Diego, CA -- 8,637 20,119 27 ------ ------- ------- ------ Bridle Trails 92 Kirkland, WA 4,271 1,500 5,930 26 ------ ------- ------- ------ Castle Creek 216 Newcastle, WA -- 4,149 16,028 1 ------ ------- ------- ------ Evergreen Heights 200 Kirkland, WA 9,320 3,566 13,395 65 ------ ------- ------- ------ Maple Leaf 48 Seattle, WA 2,087 805 3,285 17 ------ ------- ------- ------ Meadows at Cascade 198 Vancouver, WA -- 2,261 9,070 24 ------ ------- ------- ------ Spring Lake 69 Seattle, WA 2,286 838 3,399 19 ------ ------- ------- ------ Stonehedge Village 195 Bethel, WA 9,241 3,167 12,603 30 ------ ------- ------- ------ Village at Cascade 192 Vancouver, WA -- 2,101 8,753 19 ----- ------ ------- ------- ------ 9,944 ===== GROSS AMOUNT CARRIED AT CLOSE OF PERIOD -------------------------------------- DEPRECIABLE LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL($) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS) -------- ------------ ------------ -------- ------------ ------------ -------- ----------- Foothill/Twincreeks 5,939 14,096 20,035 389 1985 02/97 3-30 ------- ------- -------- ------- Bristol Commons 5,283 12,298 17,581 396 1989 01/97 3-30 ------- ------- -------- ------- The Shores 8,853 18,957 27,110 613 1988 01/97 3-30 ------- ------- -------- ------- The Laurela 1,593 6,606 8,199 214 1981 12/96 3-30 ------- ------- -------- ------- Meadowood 7,892 18,781 26,673 691 1985 11/96 3-30 ------- ------- -------- ------- Casa Del Mar 1,870 4,732 6,602 79 1972 06/97 3-30 ------- ------- -------- ------- Huntington Breakers 9,307 22,751 32,038 126 1984 10/97 3-30 ------- ------- -------- ------- Kings Road 4,028 9,587 13,615 136 1979 06/97 3-30 ------- ------- -------- ------- Park Place/ Windsor Court 3,371 7,914 11,285 88 1988 08/97 3-30 ------- ------- -------- ------- Tara Village 3,202 7,703 10,905 231 1972 01/97 3-30 ------- ------- -------- ------- The Bluffs 3,416 7,773 11,189 130 1974 06/97 3-30 ------- ------- -------- ------- The Village Apartments 2,385 5,600 7,985 78 1974 07/97 3-30 ------- ------- -------- ------- Trabuco Villas 3,659 8,716 12,375 53 1985 10/97 3-30 ------- ------- -------- ------- Villa Scandia 1,591 3,946 5,537 66 1971 06/97 3-30 ------- ------- -------- ------- Wilshire Promenade 3,136 7,443 10,579 227 1982 01/97 3-30 ------- ------- -------- ------- Windsor Terrace 2,300 5,531 7,831 45 1972 09/97 3-30 ------- ------- -------- ------- Casa Mango 3,021 7,018 10,039 -- 1981 12/97 3-30 ------- ------- -------- ------- Riverfront 8,652 20,131 28,783 -- 1990 12/97 3-30 ------- ------- -------- ------- Bridle Trails 1,514 5,942 7,456 34 1986 10/97 3-30 ------- ------- -------- ------- Castle Creek 4,138 16,040 20,178 -- 1997 12/97 3-30 ------- ------- -------- ------- Evergreen Heights 3,577 13,449 17,026 223 1990 06/97 3-30 ------- ------- -------- ------- Maple Leaf 811 3,294 4,103 16 1985 08/97 3-30 ------- ------- -------- ------- Meadows at Cascade 2,270 9,085 11,355 25 1988 11/97 3-30 ------- ------- -------- ------- Spring Lake 844 3,012 4,236 18 1986 10/97 3-30 ------- ------- -------- ------- Stonehedge Village 3,183 12,617 15,800 42 1986 10/97 3-30 ------- ------- -------- ------- Village at Cascade 2,110 8,765 10,875 -- 3-30 ------- ------- -------- -------
F-22 56 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
TOTAL INITIAL COSTS COSTS RENTABLE ---------------------- CAPITALIZED SQUARE BUILDING AND SUBSEQUENT TO PROPERTY FOOTAGE LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION -------- -------- -------- ----------- ------- ------------ ------------- Commercial: 925 East Meadow 17,404 Palo Alto, CA $ $ 1,401 $ 3,172 $ 144 -------- ------- -------- ------- 777 California(4)(5) 44,827 Palo Alto, CA -- -- 6,700 8,661 -------- ------- -------- ------- Retail: Canby Square(5) 102,403 Canby, OR $ $ 801 $ 2,507 $ 1,819 Powell Villa Center(5) 63,645 740 1,393 1,235 Garrison Square(5) 69,790 Vancouver, WA 1,004 1,676 759 ------- -------- ------- -------- ------- 235,838 -- 2,545 5,576 3,813 ------- -------- ------- -------- ------- 298,069 $248,997 $81,695 $516,456 $32,836 ======= ======== ======= ======== ======= GROSS AMOUNT CARRIED AT CLOSE OF PERIOD ---------------------------------------- DEPRECIABLE LAND AND BUILDINGS AND ACCUMULATED DATE OF DATE LIVES PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS) -------- ------------ -------------- -------- ------------ ------------ -------- ----------- Commercial: 925 East Meadow $ 1,545 $ 3,172 $ 4,717 $ 9 1984 11/97 3-30 -------- -------- -------- ------- 777 California(4)(5) -- 15,361 15,361 3,575 1987 7/86 3-30 -------- -------- -------- ------- Retail: Canby Square(5) $ 802 $ 4,325 $ 5,127 $ 479 1976 1/90 3-30 Powell Villa Center(5) 739 2,629 3,368 472 1959 1/90 3-30 Garrison Square(5) 1,004 2,435 3,439 485 1962 1/90 3-30 -------- -------- -------- ------- 2,545 9,389 11,935 1,436 -------- -------- -------- ------- $182,416 $548,571 $730,987 $58,040 ======== ======== ======== =======
- --------------- (1) The aggregate cost for federal income tax purposes is $504,093. (2) Phase I was built in 1969 and Phase II was built in 1977. (3) A portion of land is leased pursuant to a ground lease expiring in 2028. (4) Land is leased pursuant to a ground lease expiring in 2054. (5) These properties secure the Company's $25,110 line of credit. A summary of activity for real estate and accumulated depreciation is as follows:
1997 1996 1995 -------- -------- -------- Real estate: Balance at beginning of year................. $393,809 $284,358 $282,344 Improvements................................. 4533 3,406 3,193 Acquisition of real estate................... 345,750 118,107 6,265 Disposition of real estate................... (13,105) (12,062) (7,444) -------- -------- -------- Balance at end of year....................... $730,987 $393,809 $284,358 ======== ======== ======== 1997 1996 1995 ------- ------- ------- Real estate: Accumulated depreciation: Balance at beginning of year................. Balance at beginning of year................... $47,631 $40,281 $34,112 Improvements................................. Dispositions................................... (3,504) (1,470) (1,809) Acquisition of real estate................... Depreciation expense -- Acquisitions........... 2,086 905 -- Disposition of real estate................... Depreciation expense........................... 11,827 7,915 7,978 ------- ------- ------- Balance at end of year....................... Balance at end of year......................... $58,040 $47,631 $40,281 ======= ======= =======
F-23 57 EXHIBIT INDEX
EXHIBIT # DOCUMENT PAGE - --------- -------- ---- 3.1 Articles of Amendment and Restatement of Essex dated June 22, 1995, attached as Exhibit 3.1 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and hereby 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 Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby 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 Essex's 10-Q as of September 30, 1996, and hereby incorporated herein by reference............................ -- 3.4 Certificate of Correction dated December 20, 1996........... (2) 3.5 Amended and Restated Bylaws of Essex Property Trust, Inc., attached as Exhibit 3.2 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference................................................ -- 3.6 Certificate of Amendment of the Bylaws of Essex Property Trust, Inc., dated December 17, 1996........................ (2) 3.7 Articles Supplementary for the 7.875% Series B Cumulative Redeemable Preferred Stock, attached as Exhibit 3.1 to Essex's Current Report on Form 8-K, filed March 3, 1998, and hereby 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 Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and hereby 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 Essex's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and hereby incorporated herein by reference................................................... -- 10.3 Form of Essex Property Trust, Inc. 1994 Non-Employee and Director Stock Incentive Plan.*............................. (1) 10.4 Form of the Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan.*............................................. (1) 10.5 Form of Non-Competition Agreement between Essex and each of Keith R. Guericke and George M. Marcus.*.................... (1) 10.6 Contribution Agreement by and among Essex, the Operating Partnership and the Limited Partners in the Operating Partnership................................................. (1) 10.7 Form of Indemnification Agreement between Essex and its directors and officers...................................... (1) 10.8 Commitment Letter between Northwestern Mutual Life Insurance Company and the Operating Partnership....................... (1) 10.9 First Amendment to First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated February 6,1998, attached as Exhibit 10.1 to Essex's Current Report on Form 8-K, filed March 3, 1998, and hereby incorporated herein by reference......................................... --
58
EXHIBIT # DOCUMENT PAGE - --------- -------- ---- 10.10 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 Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference................. -- 10.11 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 Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference................................................... -- 10.12 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 Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference..................... -- 10.13 Leasehold agreement between Houghton Mifflin Company and Stanford University dated as of February 1, 1955, as amended..................................................... (1) 10.14 Agreement by and among M&M, M&M REIBC and the Operating Partnership and Essex regarding Stock Options............... (1) 10.15 Co-Brokerage Agreement by and among Essex, the Operating Partnership, M&M REIBC and Essex Management Corporation..... (1) 10.16 General Partnership Agreement of Essex Washington Interest Partners.................................................... (1) 10.17 Form of Office Lease between the Operating Partnership and the Marcus and Millichap Company............................ (1) 10.18 Form of Management Agreement between the Operating Partnership and Essex Management Corporation regarding the retail Properties........................................... (1) 10.19 Form of Amended and Restated Agreement among Tenants-in-Common regarding Pathways Property............... (1) 10.20 Form of Promissory Note made by Gilroy Associates and San Pablo Medical Investors in favor of the Operating Partnership................................................. (1) 10.21 Loan Facility Agreement dated as of June 20, 1996 among Essex Property Trust, Inc. and T/W Essex Funding, L.L.C., attached as Exhibit 10.4 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference................................................ -- 10.22 Amendment No. 1 to Loan Facility Agreement dated as of July 1, 1996 by and between Essex Property Trust, Inc. and T/W Essex Funding, L.L.C., attached as Exhibit 10.5 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference..................... -- 10.23 Guarantee dated as of June 20, 1996 of Essex Portfolio, L.P. to T/W Essex Funding, L.L.C. attached as Exhibit 10.6 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference........... -- 10.24 Reaffirmation of Guarantee dated as of July 1, 1996 by Essex Portfolio, L.P., attached as Exhibit 10.7 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference............................ --
59
EXHIBIT # DOCUMENT PAGE - --------- -------- ---- 10.25 Revised Exhibit A to Forms of Holdback Funding Agreements between Northwestern Mutual Life Insurance Company and the Operating Partnership and partnerships (in which the Operating Partnership is the general partner) that own certain of the Washington Properties........................ (1) 10.26 Form of Investor Rights Agreement between Essex and the Limited Partners of the Operating Partnership............... (1) 10.27 Promissory notes for $3,400,000, $10,000,000 and $42,000,000 evidencing amounts payable to Northwestern mutual Life Insurance Company, attached as Exhibit 10.5 to Essex's Quarterly Report on Form 10-Q for the quarter end June 30, 1994 and hereby incorporated herein by reference............ -- 10.28 Revolving credit agreement between Essex and Bank of America, attached as Exhibit 10.4 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and hereby incorporated herein by reference..................... -- 10.29 Interest rate protection agreement dated June 10, 1994, attached as Exhibit 10.6 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and hereby incorporated herein by reference............................ -- 10.30 Promissory Note dated February 13, 1996, executed by the Operating Partnership to the order of The Northwestern Mutual Life Insurance Company, in the principal amount of $20,200,000, attached as Exhibit 10.43 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, and hereby incorporated herein by reference................. -- 10.31 Form of Promissory Note to be made by San Pablo Medical Investors, Ltd. and Gilroy Associates in favor of the Operating Partnership and forms of documents relating thereto..................................................... (1) 10.32 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 hereby incorporated herein by reference................................................ -- 10.33 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 Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference................. -- 10.34 Letter Agreement with Tiger/Westbrook entities re: Limitations on Ownership of Stock of the Company, attached as Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and hereby incorporated herein by reference............................ -- 10.35 Commercial Promissory Note Secured by Deed of Trust dated January 29, 1996, executed by the Operating Partnership to the order of Union Bank, in the principal amount of $14,475,000, attached as Exhibit 10.44 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, and hereby incorporated herein by reference................. -- 10.36 Phantom Stock Unit Agreement for Mr. Guericke, attached as Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and hereby incorporated herein by reference.*....................................... -- 10.37 Phantom Stock Unit Agreement for Mr. Schall, attached as Exhibit 10.2 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and hereby incorporated herein by reference.*....................................... --
60
EXHIBIT # DOCUMENT PAGE - --------- -------- ---- 10.38 Replacement Promissory Note (April 15, 1996) and Pledge Agreement for Mr. Guericke, attached as Exhibit 10.3 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and hereby incorporated herein by reference................................................... -- 10.39 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Guericke, attached as Exhibit 10.4 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and hereby incorporated herein by reference................. -- 10.40 Replacement Promissory Note (April 30, 1996) and Pledge Agreement for Mr. Schall, attached as Exhibit 10.5 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and hereby incorporated herein by reference................................................... -- 10.41 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Schall, attached as Exhibit 10.6 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and hereby incorporated herein by reference................. -- 10.42 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 Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and hereby incorporated herein by reference............................ -- 10.43 First Amended and Restated Agreement of Limited Partnership of Irvington Square Associates, effective as of May 13, 1997, attached as Exhibit 10.2 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and hereby incorporated herein by reference............................ -- 10.44 Fourth Amended and Restated Agreement of Limited Partnership of Western-Palo Alto II Investors, effective as of May 13, 1997, attached as Exhibit 10.3 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and hereby incorporated herein by reference............................ -- 10.45 Fourth Amended and Restated Agreement of Limited Partnership of Western Riviera Investors, effective as of May 13, 1997, attached as Exhibit 10.4 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and hereby incorporated herein by reference............................ -- 10.46 Fourth Amended and Restated Agreement of Limited Partnership of Western-San Jose III Investors, effective as of May 13, 1997, attached as Exhibit 10.5 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and hereby incorporated herein by reference............................ -- 10.47 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 Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and hereby incorporated herein by reference................................................... -- 10.48 Ninth Modification Agreement to the Amended and Restated Revolving Loan Agreement, attached as Exhibit 10.2 to Essex's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and hereby incorporated herein by reference................................................... -- 11.1 Schedule regarding Computation of Earnings Per Share........ 63 12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends....................... 64
61
EXHIBIT # DOCUMENT PAGE - --------- -------- ---- 21.1 List of Subsidiaries of Essex Property Trust, Inc........... 65 23.1 Consent of Independent Certified Public Accountants......... 66 27.1 Article 5 Financial Data Schedule (Edgar Filing Only)....... --
- --------------- (1) Incorporated by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994. (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, 1996. * Management contract or compensatory plan or agreement. EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 ESSEX PROPERTY TRUST, INC. SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE (Dollars in thousands except per share amounts)
Years ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- BASIC: Net income $ 29,316 $ 8,881 $ 10,604 Less: Dividends on 8.75% Convertible Preferred Stock, Series 1996A 2,681 635 0 =========== =========== =========== Net income applicable to common stockholders $ 26,635 $ 8,246 $ 10,604 =========== =========== =========== Weighted average shares outstanding 13,644,906 7,283,124 6,275,000 Weighted average shares of dilutive stock options using average stock price under the treasury stock method 0 0 0 =========== =========== =========== Weighted average shares used in net income per share calculation 13,644,906 7,283,124 6,275,000 =========== =========== =========== Net income per share $ 1.96 $ 1.13 $ 1.69 =========== =========== =========== DILUTED: Adjusted shares - basic, from above 13,644,906 7,283,124 -- Weighted average shares issuable upon conversion of the 8.75% Convertible Preferred Stock, Series 1996A 1,400,235 -- -- Additional weighted average shares of dilutive stock options using end of period stock price under the treasury stock method 240,147 64,404 -- =========== =========== =========== Weighted average number of common shares - assuming full dilution 15,285,288 7,347,528 N/A =========== =========== =========== Earnings per common share - assuming full dilution $ 1.92 $ 1.12(1) N/A(2) =========== =========== ===========
(1) For 1996, the 8.75% Convertible Preferred Stock, Series 1996A were antidilutive and accordingly, the results of the basic earnings per share is reported for earnings per common share - assuming full dilution. (2) Not applicable before 1996. The 8.75% Convertible Preferred Stock, Series 1996A was issued in July, 1996. EX-12.1 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 ESSEX PROPERTY TRUST, INC. SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (in thousands, except ratios)
YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 ------- ------- ------- EARNINGS: Income before extraordinary items and minority interests $34,146 $14,970 $14,244 Interest expense 12,659 11,442 10,928 Amortization of deferred financing costs 509 639 1,355 ------- ------- ------- TOTAL EARNINGS $47,314 $27,051 $26,527 ------- ------- ------- FIXED CHARGES: Interest expense $12,659 $11,442 $10,928 Amortization of deferred financing costs 509 639 1,355 Capitalized interest 1,276 115 92 Convertible preferred stock dividends 2,681 635 -- ------- ------- ------- SUBTOTAL (FIXED) 14,444 12,196 12,375 ------- ------- ------- TOTAL FIXED CHARGES AND PREFERRED STOCK DIVIDENDS $17,125 $12,831 $12,375 RATIO OF EARNINGS TO FIXED CHARGES (EXCLUDING PREFERRED STOCK DIVIDENDS) 3.28X 2.22X 2.14X ======= ======= ======= RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS 2.76X 2.11X 2.14X ======= ======= =======
EX-21.1 4 LIST OF SUBSIDIARIES 1 SCHEDULE 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 Sacramento Corporation, a California corporation 9. Essex Fidelity I Corporation, a California corporation 10. Essex Camarillo Corporation, a California corporation 11. Essex Camarillo L.P., a California limited partnership 12. Essex Meadowood Corporation, a California corporation 13. Essex Meadowood, 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 22. Essex Riverfront, L.P., a California limited partnership 23. Essex Casa Mango, L.P., a California limited partnership
EX-23.1 5 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 1 Exhibit 23.1 Consent of Independent Certified Public Accountants The Board of Directors Essex Property Trust, Inc.; We consent to incorporation by reference in the registration statements on Form S-3 (Nos. 333-44467 and 333-21989) and the registration statement on Form S-8 (No. 33-84830) of Essex Property Trust, Inc. of our report dated January 30, 1998, relating to the consolidated balance sheets of Essex Property Trust, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows of Essex Property Trust, Inc. and subsidiaries for the years ended December 31, 1997, 1996 and 1995 and the related financial statement schedule, which report appears in the December 31, 1997, annual report on Form 10-K. We also consent to the reference to our firm under the heading "Experts" in each prospectus, statements. KPMG Peat Marwick LLP San Francisco, California March 31, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Essex Property Trust, Inc. year ended report for the twelve months ended December, 1997. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 10,375 0 17,866 0 0 32,079 738,835 58,040 738,835 34,734 276,597 0 2 1 398,915 738,835 0 89,683 0 39,818 6,882 0 13,306 29,677 0 29,677 0 361 0 29,316 1.96 1.92 As it relates to this schedule, Primary means Basic.
-----END PRIVACY-ENHANCED MESSAGE-----