-----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, BE+M4Et/vlhjwkB+YXHR74U0dfMY4vMX9ZWqzc90Yu07k8L7PdZx1W/ET3JbatsW xMm2aKS9lZCjDH02k0lmdg== 0000912057-96-017671.txt : 19960816 0000912057-96-017671.hdr.sgml : 19960816 ACCESSION NUMBER: 0000912057-96-017671 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13106 FILM NUMBER: 96611978 BUSINESS ADDRESS: STREET 1: 7777 CALIFORNIA AVE CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154943700 MAIL ADDRESS: STREET 1: 755 PAGE MILL RD CITY: PALO ALTO STATE: CA ZIP: 94304 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- FORM 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ----------------- ----------------- COMMISSION FILE NO. 1-13106 ESSEX PROPERTY TRUST, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 77-0369576 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 777 CALIFORNIA AVENUE, PALO ALTO, CALIFORNIA 94304 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (415) 494-3700 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORT, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO APPLICABLE ONLY TO CORPORATE ISSUERS: INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. 6,275,000 SHARES OF COMMON STOCK, $.0001 PAR VALUE AS OF JUNE 30, 1996 - -------------------------------------------------------------------------------- Page 1 of 18 INDEX Exhibit Number Description Page Number - ------- ----------- ----------- PART I: FINANCIAL INFORMATION Item 1: Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheet of Essex Property Trust, Inc. as of June 30, 1996 and December 31, 1995 4 Condensed Consolidated Statement of Operations of Essex Property Trust, Inc. for the three months ended June 30, 1996 and 1995 5 Condensed Consolidated Statement of Operations of Essex Property Trust, Inc. for the six months ended June 30, 1996 and 1995 6 Condensed Consolidated Statement of Cash Flows of Essex Property Trust, Inc. for the six months ended June 30, 1996 and 1995 7 Notes to Condensed Consolidated Financial Statements 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II: OTHER INFORMATION Item 2: Changes in Securities 15 Item 6: Exhibits and Reports on Form 8-K 16 Signatures 19 Page 2 of 18 PART I FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) "Essex" means Essex Property Trust, Inc., a real estate investment trust incorporated in the State of Maryland, or where the context otherwise requires, Essex Portfolio, L.P., a partnership in which Essex Property Trust, Inc. is the sole general partner. The information furnished in the accompanying condensed consolidated balance sheet, condensed consolidated statement of operations and condensed consolidated statement of cash flows of Essex reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned financial statements for the interim periods. The accompanying unaudited financial statements should be read in conjunction with the notes to such financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. Page 3 of 18 ESSEX PROPERTY TRUST, INC. CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Dollars in thousands) June 30, December 31, 1996 1995 ---------- ---------- ASSETS Real estate: Rental properties: Land and land improvements $ 62,525 $ 61,738 Buildings and improvements 223,188 222,620 ---------- ---------- 285,713 284,358 Less accumulated depreciation (43,041) (40,281) ---------- ---------- 242,672 244,077 Investments 8,589 8,656 ---------- ---------- 251,261 252,733 Cash and cash equivalents 5,710 3,983 Notes and other related party receivables 4,351 4,780 Notes and other receivables 5,068 5,130 Prepaid expenses and other assets 4,224 1,944 Deferred charges, net 2,875 5,090 ---------- ---------- $ 273,489 $ 273,660 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes payable 141,792 136,061 Lines of credit 12,843 18,463 Accounts payable and accrued liabilities 5,574 2,964 Dividends payable 3,455 3,455 Other liabilities 1,668 1,565 ---------- ---------- Total liabilities 165,332 162,508 Minority interest 25,660 26,423 Stockholders' equity: Common stock, $.0001 par value, 670,000,000 shares authorized, 6,275,000 shares issued and outstanding 1 1 Additional paid-in capital 112,070 112,070 Accumulated deficit (29,574) (27,342) ---------- ---------- Total stockholders' equity 82,497 84,729 ---------- ---------- $ 273,489 $ 273,660 ---------- ---------- ---------- ---------- See accompanying notes to the unaudited financial statements. Page 4 of 18 ESSEX PROPERTY TRUST, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Dollars in thousands, except shares per share amounts) Three months ended ------------------ June 30, June 30, 1996 1995 ---------- ---------- Revenues: Rental $ 11,053 $ 10,418 Interest and other income 701 493 ---------- ---------- 11,754 10,911 ---------- ---------- Expenses: Property operating expenses: Maintenance and repairs 1,070 933 Real estate taxes 883 853 Utilities 728 746 Administrative 628 654 Advertising 139 79 Insurance 145 135 Depreciation and amortization 2,047 1,991 ---------- ---------- 5,640 5,391 ---------- ---------- Interest 3,009 2,753 Amortization of deferred financing costs 181 349 General and administrative 466 358 Loss from hedge termination 18 13 ---------- ---------- Total expenses 9,314 8,864 ---------- ---------- Net income before gain on sales of real estate, minority interests and extraordinary item 2,440 2,047 Gain on sales of real estate 2,409 789 ---------- ---------- Net income before minority interest and extraordinary item 4,849 2,836 Minority interest (1,025) (676) ---------- ---------- Income before extraordinary item 3,824 2,160 Extraordinary item: Loss on early extinguishment of debt (665) (154) ---------- ---------- Net income $ 3,159 $ 2,006 ---------- ---------- ---------- ---------- Per share data: Net income per share from operations before extraordinary item $ .61 .34 Extraordinary item -- debt extinguishment (.10) ( .02) ---------- ---------- Net income per share $ .51 $ .32 ---------- ---------- ---------- ---------- Weighted average number of shares outstanding during the period 6,275,000 6,275,000 ---------- ---------- ---------- ---------- See accompanying notes to the unaudited financial statements. Page 5 of 18 ESSEX PROPERTY TRUST, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Dollars in thousands, except shares per share amounts) Six months ended ---------------- June 30, June 30, 1996 1995 ---------- ---------- Revenues: Rental $ 22,004 $ 20,725 Interest and other income 1,304 1,109 ---------- ---------- 23,308 21,834 ---------- ---------- Expenses: Property operating expenses: Maintenance and repairs 2,105 1,918 Real estate taxes 1,769 1,702 Utilities 1,485 1,514 Administrative 1,254 1,329 Advertising 290 149 Insurance 292 271 Depreciation and amortization 4,237 3,971 ---------- ---------- 11,432 10,854 ---------- ---------- Interest 5,910 5,473 Amortization of deferred financing costs 426 712 General and administrative 863 723 Loss from hedge termination 39 13 ---------- ---------- Total expenses 18,670 17,775 ---------- ---------- Net income before gain on sales of real estate, minority interests and extraordinary item 4,638 4,059 Gain on sales of real estate 2,409 789 ---------- ---------- Net income before minority interest and extraordinary item 7,047 4,848 Minority interest (1,100) (1,201) ---------- ---------- Income before extraordinary item 5,947 3,647 Extraordinary item: Loss on early extinguishment of debt (2,845) (154) ---------- ---------- Net income $ 3,102 $ 3,493 ---------- ---------- ---------- ---------- Per share data: Net income per share from operations before extraordinary item $ .95 .58 Extraordinary item - debt extinguishment (.45) ( .02) ---------- ---------- Net income per share $ .50 $ .56 ---------- ---------- ---------- ---------- Weighted average number of shares outstanding during the period 6,275,000 6,275,000 ---------- ---------- ---------- ---------- See accompanying notes to the unaudited financial statements. Page 6 of 18 ESSEX PROPERTY TRUST, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in Thousands) Six months ended June 30, 1996 June 30, 1995 ------------- ------------- Net cash provided by operating activities $ 8,073 $ 8,663 Cash flows from investing activities: Additions to real estate investments (13,417) (1,381) Dispositions of real estate investments 13,506 4,569 Investments in corporations and joint ventures 390 (3,099) ---------- ---------- Net cash provided by investing activities 479 89 Cash flows from financing activities: Proceeds from mortgages, other notes payable and lines of credit 47,083 16,400 Repayment of mortgages, other notes payables and lines of credit (46,972) ( 19,381) Additions to deferred charges (590) (542) Additions to notes and other related party receivables/payables 2,679 - Repayment of notes and other related party receivables/payables (2,117) (309) Distribution to partners/dividends to shareholders (6,908) (6,788) ---------- ---------- Net cash used in financing activities (6,825) (10,620) ---------- ---------- Net increase (decrease) in cash and cash equivalents 1,727 (1,868) Cash and cash equivalents at beginning of period 3,983 2,411 ---------- ---------- Cash and cash equivalents at end of period $ 5,710 $ 543 ---------- ---------- ---------- ---------- Supplemental disclosure of cash flow information Cash paid for interest $ 5,951 $ 5,550 ---------- ---------- ---------- ---------- Supplemental disclosure of non-cash investing and financing activity Dividends declared and payable $ 3,455 $ 3,394 ---------- ---------- ---------- ---------- See accompanying notes to the unaudited financial statements. Page 7 of 18 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (1) ORGANIZATION AND BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of Essex Property Trust, Inc. (the "Company") are prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 1995. The consolidated financial statements for the three months and six months ended June 30, 1996 and 1995 include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating assets of the Company). The Company is the sole general partner in and owns 77.2% of the Operating Partnership. The limited partners own an aggregate 22.8% interest in the Operating Partnership. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. (2) SIGNIFICANT TRANSACTIONS The following significant transactions occurred during the quarter ended June 30, 1996: (A) Dispositions (i) On April 30, 1996, Essex sold Viareggio Apartments, a 116 unit apartment community located in San Jose, California. The gross sales price was $10,610, resulting in a net gain of approximately $2,195. Essex used the proceeds to reduce indebtedness and to facilitate the acquisition of Camarillo Oaks Apartments in the third quarter of 1996. (ii) On June 21, 1996, Essex sold Westbridge Apartments, a 92 unit apartment community located in Yuba City, California. The gross sales price was $3,700, resulting in a net gain of approximately $214. Essex used the proceeds to reduce indebtedness. (iii) Essex entered into contract to sell its six neighborhood shopping centers for a contract price of $22,500. The sale is subject to a number of contingencies and there is no assurance that such sale will be completed. (B) Debt related transactions (i) On June 30, 1996, Essex repaid a $7,917 LIBOR based variable rate loan. Essex wrote off approximately $665 in deferred financing costs and costs associated with a related interest rate swap agreement. (C) Recent Developments (i) On June 20, 1996, the Company entered into a definitive agreement to sell up to $40,000 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 the first phase Page 8 of 18 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) of this transaction, Tiger/Westbrook on July 1, 1996 purchased 340,000 shares of Convertible Preferred Stock for an aggregate purchase price of $8,500 and loaned the Company an additional $11,500, which loan will be exchanged for shares of Convertible Preferred Stock upon stockholder approval of the transaction. Upon such stockholder approval and as a part of the second phase of this transaction, Tiger/Westbrook is obligated to purchase up to an additional $20,000 of Convertible Preferred Stock as requested by Essex on or prior to June 20, 1997. 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 Essex's common stock (the "Common Stock") plus, in both cases, any accumulated but unpaid dividends on the Convertible Preferred Stock. After 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 next three-month period, an additional 25% of the Convertible Preferred Stock is convertible. The conversion price per share of Convertible Preferred Stock is $21.875, subject to adjustment under certain circumstances. (ii) In late July 1996, the Company commenced an underwritten follow-on public offering of shares of its common stock. All of the shares in the offering are being sold by the Company and will be issued pursuant to a shelf registration statement that was previously filed by the Company with the Securities and Exchange Commission. On August 8, 1996, the follow-on offering was priced at $22.75 per share of Common Stock with the number of shares in the offering set at 2,200,000 shares (not including 330,000 shares that may be sold pursuant to the exercise of the underwriters over allotment option), and is anticipated to close on August 14, 1996. (3) RELATED PARTY TRANSACTIONS Since June 13, 1994, all general and administrative expenses of the Company and Essex Management Corporation ("EMC") have been initially borne by the Company, with a portion subsequently allocated to EMC. Expenses allocated to EMC for the three and six months ended June 30, 1996 totaled $431 and $856, respectively, and are reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of operations. Included in rental income in the accompanying consolidated statements of operations is related party rents earned from space leased to The Marcus & Millichap Company ("M&M"), including operating expense reimbursements, of $170 and $340 for the three and six months ended June 30, 1996, respectively and $170 and $335 for the three and six months ended June 30, 1995, respectively. Included in other income for the three and six months ended June 30, 1996 is interest income of $273 and $517, respectively, which were earned principally under notes receivable from Essex Fidelity I Corporation, Essex Sacramento Corporation, Essex Marina Cove, L.P., and Pathways. In addition, management fees and equity income of $233 and $370 were earned for the three and six month periods ended June 30, 1996, respectively, from Essex Bristol Partners, L.P., Essex San Ramon Partners, L.P. and Essex Marina Cove, L.P. Since June 13, 1994, EMC has provided property management services to the Company's neighborhood shopping centers. The fee paid by the Company for the three and six months ended June 30, 1996 was $29, and $57, respectively, and is included in administrative expense in the accompanying consolidated statements of operations. Page 9 of 18 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1995 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Notes and other related party receivables as of June 30, 1996 and December 31, 1995 consist of the following:
June 30, December 31, 1996 1995 -------- -------- Notes receivable from Essex Sacramento Corporation, bearing interest at 9% due on demand $ 1,866 $ 3,540 Note receivable from Essex Fidelity I Corporation interest at 9% due on demand 226 --- Notes receivable from Essex Marina Cove, L.P. bearing interest at 12% due on demand 850 ---- Notes receivable from Essex Fidelity I Corporation and Jackson School Village, L.P. bearing interest at 9.5% - 10%, due 2015 500 500 Other related party receivables 909 740 -------- -------- $ 4,351 $ 4,780 -------- -------- -------- --------
Other related party receivables consist primarily of unreimbursed expenses due from EMC, accrued interest income on related party notes receivables and acquisition cost-related reimbursements due from Essex San Ramon Partners, L.P. As of June 30, 1996 and December 31, 1995, the Company has payables to related parties totaling $33 and $217, respectively, representing temporary borrowings and unreimbursed expenses. During the three and six months ended June 30, 1996, the Company paid brokerage commissions totaling $312 and $562, respectively to M&M in connection with the purchase and disposition of real estate. The commissions are reflected as an increased cost on the purchase of real estate or a reduction in the gain on sale in the accompanying condensed consolidated balance sheet. Page 10 of 18 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based primarily on the consolidated financial statements of Essex Property Trust, Inc. ("Essex" or the "Company") as of June 30, 1996 and 1995 and for the three months and six months ended June 30, 1996 and 1995. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. These financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results and all such adjustments are of a normal recurring nature. Substantially all the assets of Essex are held by, and substantially all operations conducted through, Essex Portfolio, L.P. (the "Operating Partnership"). Essex is the sole general partner of the Operating Partnership and, as of June 30, 1996 and 1995, owned a 77.2% general partnership interest in the Operating Partnership. The Company qualifies as a real estate investment trust (a "REIT") for Federal income tax purposes. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," section constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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 further results, performance or achievements expressed or implied by such forward-looking statements. GENERAL BACKGROUND Essex's revenues are generated primarily from multifamily residential, retail and commercial property operations, which accounted for 94% and 95% of its revenues for the six months ended June 30, 1996 and 1995, respectively. Essex's properties (the "Properties") are located in California, Oregon and Washington. Occupancy levels of Essex's multifamily residential Properties in these markets have generally remained high (averaging over 95% for the last five years). Essex has qualified as a real estate investment trust ("REIT") for federal income tax purposes, commencing with the year ending December 31, 1994. In order to maintain compliance with REIT tax rules, Essex provides 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. Essex has been actively engaged in the business of acquiring and managing portfolios of non-performing assets along with institutional investors. Asset management services resulting from these portfolios are provided by EMC, typically for the term that is required to acquire, reposition and dispose of the portfolio. Asset management agreements usually provide for a base management fee calculated as a percentage of the gross asset value of the portfolio under management, and an incentive fee based upon the overall financial performance of the portfolio. Accordingly, the fees earned as a result of these contracts fluctuate as assets are acquired and disposed. In general, Essex believes, however, that there will be fewer opportunities to acquire portfolios of non-performing assets in the future. Average financial occupancy rates of the Company's multifamily properties on a same-property basis for the three months ended June 30, 1996 and 1995 were as follows: June 30, June 30, 1996 1995 -------- -------- Northern California 98.6% 98.2% Seattle Metropolitan 95.9% 94.2% Southern California 96.6% 95.4% Page 11 of 18 The Company's retail and commercial properties were 93% occupied (based on square footage) as of June 30, 1996. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1996 TO THE THREE MONTHS ENDED JUNE 30, 1995 TOTAL REVENUES increased by $843,000 or 7.7% to $11,754,000 in the second quarter of 1996 from $10,911,000 in the second quarter of 1995. Rental revenues increased by $635,000 or 6.1% to $11,053,000 in the second quarter of 1996 from $10,418,000 in the second quarter of 1995. Approximately $62,000 of the increase in rental revenues was attributable to the Properties acquired or disposed of in 1995 and with the remainder of the increase relating to rental rate and occupancy level increases at properties owned by the Company during the periods being compared. Rental revenues from the San Francisco Bay Area and Seattle multifamily residential Properties increased by $532,000 to $8,647,000 in the second quarter of 1996 from $8,115,000 in the second quarter of 1995. Rental revenue increased by $47,000 during the second quarter of 1996 from the amount in the second quarter of 1995 for the two Properties located in Southern California. Commercial property rental revenue increased $56,000 for the second quarter of 1996 from the amount for the second quarter of 1995 as a result of increased occupancy. TOTAL EXPENSES increased by $450,000 or approximately 5.1% to $9,314,000 in the second quarter of 1996 from $8,864,000 in the second quarter of 1995. Interest expense increased by $256,000 or 9.3% to $3,009,000 in the second quarter of 1996 from $2,753,000 in the second quarter of 1995. 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, which include maintenance and repairs, real estate taxes, advertising, utilities, and on-site administrative expenses, increased by $193,000 or 5.7% to $3,593,000 in the second quarter of 1996 from $3,400,000 in the second quarter of 1995. Of such increase, $18,000 was attributable to Properties acquired or disposed of in 1995 and 1996. 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 $108,000 in the second quarter of 1996 from the second quarter of 1995. NET INCOME AFTER MINORITY INTEREST increased by $1,153,000 to $3,159,000 in the second quarter of 1996 from $2,006,000 in the second quarter of 1995. The increase in net income was largely the result of an increased revenue on gain on the sales of real estate of $2,409,000, partially offset by an extraordinary charge of $665,000 related to the early extinguishment of debt. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 TO THE SIX MONTHS ENDED JUNE 30, 1995 TOTAL REVENUES increased by $1,474,000 or 6.8% to $23,308,000 in the first six months of 1996 from $21,834,000 in the first six months of 1995. Rental revenues increased by $1,279,000 or 6.2% to $22,004,000 in the first six months of 1996 from $20,725,000 in the first six months of 1995. Approximately $128,000 of the increase in rental revenues was attributable to the Properties acquired or disposed of in 1995 and 1996 with the remainder of the increase primarily relating to rental rate and occupancy level increases at properties owned by the Company during the periods being compared. Rental revenues from the San Francisco Bay Area and Seattle multifamily residential Properties increased by $1,004,000 to $17,211,000 in the first six months of 1996 from $16,207,000 in the first six months of 1995. Rental revenue increased by $84,000 during the first six months of 1996 from the amount in the first six months of 1995 for the two Properties located in Southern California. Commercial property rental revenue increased $191,000 for the first six months of 1996 from the amount for the second quarter of 1995 as a result of increased occupancy. TOTAL EXPENSES increased by $895,000 or approximately 5.0% to $18,670,000 in the first six months of 1996 from $17,775,000 in the first six months of 1995. Interest expense increased by $437,000 or 8.0% to $5,910,000 in the first six months of 1996 from $5,473,000 in the first six months of 1995. 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, which include maintenance and repairs, real estate taxes, advertising, utilities, and on-site administrative expenses, increased by $312,000 or 4.5% Page 12 of 18 to $7,195,000 in the first six months of 1996 from $6,883,000 in the first six months of 1995. Of such increase, $29,000 was attributable to Properties acquired or disposed in 1995 and 1996. 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 $140,000 in the first six months of 1996 from the first six months of 1995. NET INCOME AFTER MINORITY INTEREST decreased by $391,000 to $3,102,000 in the first six months of 1996 from $3,493,000 in the first six months of 1995. The decrease in net income was largely the result of an extraordinary charge of $2,845,000 related to the early extinguishment of debt, partially offset by gain on the sales of real estate of $2,409,000. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996, Essex had $5,710,000 in cash and cash equivalents. The Company expects to meet its short-term liquidity requirements by using this working capital, the proceeds from its sale of Convertible Preferred Stock (as defined below) and any portion of net cash flow from operations not currently 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 $17,600,000. The Company is currently negotiating to increase the committed amount of one of its lines of credit, which, upon such increase would result in the Company having an aggregate committed amount under all lines of credit of $39,000,000. At June 30, 1996 Essex had $12,843,000 outstanding on its lines of credit, with interest rates generally ranging from 7.4% to 7.5%. Essex's cash balance increased $1,727,000 from $3,983,000 as of December 31, 1995 to $5,710,000 as of June 30, 1996. This increase in cash was the result of $8,073,000 net cash provided by operating activities, increased by $479,000 net cash provided by investing activities and reduced by $6,825,000 in net cash used by financing activities. The significant components which contributed to the $479,000 net cash provided by investing activities was $13,506,000 provided by the disposition of real estate as offset by $13,417,000 used to purchase and upgrade rental properties. The significant components which contributed to the $6,825,000 net cash used by financing activities were $47,083,000 of proceeds from mortgages, other notes payable and lines of credit as offset by $46,972,000 of repayments of mortgages, other notes payable and lines of credit and $6,908,000 of dividends/distribution paid. As of June 30, 1996, the combined outstanding indebtedness under mortgages and lines of credit consisted of $128,531,000 in fixed rate debt, (such component includes variable rate indebtedness subject to interest rate swap agreements), $12,505,000 in debt based on the Federal Home Loan Bank's 11th District Cost of Funds index ("the 11th District Debt"), $13,600,000 of debt represented by tax exempt variable rate demand bonds. Essex's 11th District Debt is subject to maximum annual payment adjustments of 7.5% and a maximum interest rate during the term of the loans of 13%. In May 1995, Essex entered into an interest rate swap agreement extending through June 1999. The interest rate swap agreement fixes the thirty-day LIBOR rate at 5.79% for mortgage notes payable with aggregate balances of $22,838,000 as of June 30, 1996. Essex expects to incur approximately $1,450,000 or $300 per weighted average occupancy unit in non-revenue generating capital expenditures for the year ended December 31, 1996. These expenditures do not include the improvements required in connection with Northwestern Mutual mortgage loans and renovation expenditures required pursuant to the requirements related to the tax-exempt variable rate demand bonds. Essex expects that cash from operations and/or the lines of credit will fund such expenditures. 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. On July 1, 1996, the Company sold 340,000 shares of its 8.75% Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock") for $8,500,000 and borrowed $11,500,000 from Tiger/Westbrook. Upon Page 13 of 18 stockholder approval of the transaction, the $11,500,000 loan will be automatically exchanged for an additional 460,000 shares of Convertible Preferred Stock. In the event that stockholder approval of the transaction is not obtained and the Internal Revenue Service does not approve the transaction on or before December 16, 1996, the $11,500,000 loan will be payable no later than April 30, 1997. Upon stockholder approval of the transaction, the Company may require Tiger/Westbrook to purchase up to an additional $20,000,000 of Convertible Preferred Stock any time prior to June 20, 1997. The Company expects to utilize the proceeds of the follow-on public offering of shares of common stock funds available from the sale of Convertible Preferred Stock to Tiger/Westbrook, availability under its lines of credit, and cash balances to fund its current and future property acquisition and development activities. Essex expects to meet certain long-term liquidity requirements such as scheduled debt maturities and repayment of short-term financing of acquisition and development activities through the issuance of long-term secured and unsecured debt and offerings by Essex of additional equity securities (or limited partnership interests in the Operating Partnership). On March 7, 1996, the Company filed a shelf registration statement for up to $100,000,000 of Common Stock, preferred stock, depository shares and warrants to purchase common and preferred stock. The shelf registration statement was declared effective by the Securities and Exchange Commission on June 6, 1996. In late July 1996, the Company commenced an underwritten follow-on public offering of shares of its common stock. On August 8, 1996, the follow-on offering was priced at $22.75 per share of Common Stock with the number of shares in the offering set at 2,200,000 shares (not including 330,000 shares that may be sold pursuant to the exercise of the underwriters over allotment option), and is anticipated to close on August 14, 1996. FUNDS FROM OPERATIONS Industry analysts generally consider Funds from Operations an appropriate measure of performance of an equity REIT. Generally, Funds from Operations adjusts the net income of equity REITs for non-cash charges such as depreciation and amortization 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 ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. Funds from Operations does not represent net income or cash flows from operations as defined by 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 Operating Partnership's operating performance or to cash flows as a measure of liquidity. Funds from Operations does not measure whether cash flow is sufficient to fund all cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations also does not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Company's calculation of Funds from Operations. The following table sets forth Essex's calculation of actual Funds from Operations for the quarter ended June 30, 1996 and 1995. Three months ended --------------------------------- June 30, 1996 June 30, 1995 ------------- ------------- Income before minority interest and extraordinary item $ 4,849,000 $ 2,836,000 Adjustments: Depreciation & Amortization 2,047,000 2,000,000 Adjustment for Unconsolidated Joint Venture 130,000 0 Non-recurring Items, including gain on sales of real estate and loss from hedge termination (2,391,000) (776,000) Minority Interest - Pathways (132,000) (129,000) ----------- ----------- Funds from Operations $ 4,503,000 $ 3,931,000 ----------- ----------- ----------- ----------- Number of Shares (1) 8,130,000 8,130,000 Page 14 of 18 (1) Assumes conversion of all outstanding operating partnership interests in the Operating Partnership into shares of Essex's common stock. The National Association of Real Estate Investment Trusts ("NAREIT"), a leading industry trade group, has approved a revised definition of Funds from Operations, which provides that the amortization of deferred financing costs is no longer added back to net income to calculate Funds from Operations. Essex has adopted the revised NAREIT definition of Funds from Operations as of January 1, 1996 and has restated prior year amounts for consistency. PART II OTHER INFORMATION ITEM 2: CHANGES IN SECURITIES On June 20, 1996, the Company entered into a definitive agreement to sell up to $40.0 million 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 the first phase of this transaction, Tiger/Westbrook on July 1, 1996 purchased 340,000 shares of Convertible Preferred Stock for an aggregate purchase price of $8.5 million and loaned the Company an additional $11.5 million, which loan will be exchanged for shares of Convertible Preferred Stock upon stockholder approval of the transaction. Upon such stockholder approval and as part of the second phase of this transaction, Tiger/Westbrook is obligated to purchase up to an additional $20.0 million of Convertible Preferred Stock as requested by Essex on or prior to June 20, 1997. Dividends may be authorized, declared and paid on shares of Common Stock in any fiscal quarter only if full cumulative dividends have been paid on, or authorized and set apart on all shares of Convertible Preferred Stock for all prior dividends through and including the end of such quarter. Holders of shares of Convertible Preferred stock are entitled to receive annual cumulative cash dividends, payable quarterly, in an amount equal to the greater or (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. After 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 next three-month period, an additional 25% of the authorized shares of Convertible Preferred Stock is convertible. The conversion price per share of Convertible Preferred Stock is $21.875, subject to adjustment under certain circumstances. The Convertible Preferred Stock ranks senior to the Common Stock with respect to the payments of dividends and amounts upon liquidation, dissolution or winding up of the Company. Except as indicated below with respect to the election of directors of the Company, certain amendments to the Company's articles of incorporation, as amended and supplemented (the "Charter") and certain other specified matters, the holders of shares of Convertible Preferred Stock have no voting rights. The holders of the Convertible Preferred Stock as a class ordinarily have the right to elect one director. In the event of a breach of certain protective provisions (a "Charter Breach") set forth in the Articles Supplementary pertaining to the Convertible Preferred Stock (the "Articles Supplementary"), the holders of the Convertible Preferred Stock will be entitled to elect an aggregate of four directors and in the event of Dividend Default as defined in the Articles Supplementary, the holders of Convertible Preferred Stock will be entitled to elect an aggregate of five directors. The approval of holders of two-thirds of the outstanding shares of Convertible Preferred Stock is required to (i) increase the number of authorized shares of Convertible Preferred Stock, (ii) create or issue any class of stock ranking prior to or on a parity with the Convertible Preferred Stock, (iii) amend or alter the Company's Charter or Bylaws in a manner that would adversely Page 15 of 18 affect the holders of Convertible Preferred Stock, (iv) effect a voluntary liquidation, dissolution or winding up of the Company, the sale of substantially all of the assets of the Company, the merger or consolidation of the Company and (v) for certain other specified matters. In addition, the approval of holders of a majority of the outstanding shares of Convertible Preferred Stock is required for the Company (i) to sell certain specified amounts of its assets, (ii) to make certain specified major changes in its business and (iii) to effect any change in control of the Company of the Operating Partnership. Pursuant to the terms of the stock purchase agreement pertaining to the Convertible Preferred Stock, Tiger/Westbrook has the preemptive right to purchase a pro rata share, based on its holding of Convertible Preferred Stock on a converted basis, of any future issuance by the Company of any stock. In addition, the holders of Convertible Preferred Stock have certain registration rights pursuant to which they may cause the Company to register Convertible Preferred Stock and/or Common Stock issuable upon the conversion of Convertible Preferred Stock. The Company intends to seek stockholder approval for the sale of up to $40.0 million of Convertible Preferred Stock to Tiger/Westbrook in September, 1996. The foregoing summary of the sale and terms of the Convertible Preferred Stock does not purport to be complete and is subject to and qualified in its entirety by the Articles Supplementary and the other exhibits that were filed with the Company's Current Report on Form 8- K, filed on July 16, 1996, which are incorporated herein by reference. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS -------- 1.1 Purchase Agreement dated as of August 8, 1996, among Essex Property Trust, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Raymond James & Associates, Inc., and Sutro & Co. Incorporated, as representatives of several underwriters. (1) 1.2 Pricing Agreement dated as of August 8, 1996, among Essex Property Trust, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Raymond James & Associates, Inc., and Sutro & Co. Incorporated, as representatives of several underwriters. (1) 3.1 Articles Supplementary of Essex Property Trust, Inc. for the 8.75% Convertible Preferred Stock, Series 1996A (2) 3.2 Amended and Restated Bylaws of Essex Property Trust, Inc. (2) 10.1 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. (2) 10.2 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. (2) 10.3 First Amendment to Investor Rights Agreement dated July 1, 1996 by and between George M Marcus and The Marcus & Millichap Company (2) 10.4 Loan Facility Agreement dated as of June 20, 1996 among Essex Property Trust, Inc. and T/W Essex Funding, L.L.C. (2) 10.5 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. (2) Page 16 of 18 10.6 Guarantee dated as of June 20, 1996 of Essex Portfolio, L.P. to T/W Essex Funding, L.L.C. (2) 10.7 Reaffirmation of Guarantee dated as of July 1, 1996 by Essex Portfolio, L.P. (2) 10.8 Registration Rights Agreement, dated as of June 20, 1996 (2) 10.9 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. (2) 12.1 Schedule of Confirmation Ratio of Earnings to Fixed Charges Page 18 27.1 Article 5 Financial Data Schedule (EDGAR Filing Only) --- 99.1 Press Release, dated July 1, 1996 (2) 99.2 Press Release, dated June 27, 1996 (2) _____________________ (1) Incorporated by reference to the identically numbered exhibit is the Company's Current Report on Form 8-K, filed August 13, 1996. (2) Incorporated by reference to the identically numbered exhibit is the Company's Current Report on Form 8-K, filed July 16, 1996. B. REPORTS ON FORM 8-K On July 16, 1996, Essex filed a current report on Form 8-K, which described its sale of 8.75% Convertible Preferred Stock, Series 1996A and which included as exhibits certain agreements and other documents relating to such sale. On August 13, 1996, Essex filed a current report on Form 8-K, which included as exhibits the Purchase Agreement and Pricing Agreement pertaining to Essex's pending follow-on offering of Common Stock. Page 17 of 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESSEX PROPERTY TRUST, INC. /s/ Mark J. Mikl ------------------------------ Mark J. Mikl, Controller (Principal Accounting Officer) 8/13/96 ------------------------------ Date Page 18 of 18 EX-12.1 2 EXHIBIT 12.1 Exhibit 12.1 ESSEX PROPERTY TRUST, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (in thousands, except ratios)
ESSEX PROPERTY TRUST, INC. --------------------------------------------- PERIOD OF 6 MONTHS ENDED YEAR ENDED JUNE 13, 1994 JUNE 30, DECEMBER 31, TO DECEMBER 31, 1996 1995 1994 -------------- ------------ --------------- EARNINGS: Income before extraordinary item and minority interest $ 4,638 $ 8,231 $ 4,397 Interest expense 5,910 10,928 4,304 Amortization of deferred financing costs 426 1,355 773 Capitalized interest 56 92 - ------------ ----------- ------------ TOTAL EARNINGS $ 11,030 $ 20,606 $ 9,474 FIXED CHARGES: Interest expense $ 5,910 $ 10,928 $ 4,304 Amortization of deferred financing costs 426 1,355 773 Capitalized interest 56 92 - ------------ ----------- ------------ TOTAL FIXED CHARGES $ 6,392 $ 12,375 $ 5,077 ------------ ----------- ------------ RATIO OF EARNINGS TO FIXED CHARGES 1.73 1.67 1.87 ------------ ----------- ------------ ------------ ----------- ------------ FIXED CHARGES IN EXCESS ON EARNINGS - - - ------------ ----------- ------------ ------------ ----------- ------------ ESSEX PARTNERS PROPERTIES ------------------------------------------------------------ PERIOD OF JANUARY 1, 1994 YEAR ENDED YEAR ENDED YEAR ENDED TO JUNE 12, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 1991 --------------- ------------ ------------ ------------ EARNINGS: Income before extraordinary item and minority interest $ 332 $ 387 (2,344) (3,582) Interest expense 5,924 11,902 13,224 14,762 Amortization of deferred financing costs 96 219 218 216 Capitalized interest - - - - --------------- ------------ ------------ ------------ TOTAL EARNINGS $ 6,352 $ 12,508 $ 11,098 $ 11,396 FIXED CHARGES: Interest expense $ 5,924 $ 11,902 $ 13,224 $ 14,762 Amortization of deferred financing costs 96 219 218 216 Capitalized interest - - - - --------------- ------------ ------------ ------------ TOTAL FIXED CHARGES $ 6,020 $ 12,121 $ 13,442 $ 14,978 --------------- ------------ ------------ ------------ RATIO OF EARNINGS TO FIXED CHARGES 1.06 1.03 0.83 0.76 --------------- ------------ ------------ ------------ --------------- ------------ ------------ ------------ FIXED CHARGES IN EXCESS ON EARNINGS - - 2,344 3,582 --------------- ------------ ------------ ------------ --------------- ------------ ------------ ------------
EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Essex Property Trust, Inc. quarterly report for the period ended June 30, 1996. 3-MOS DEC-31-1995 JUN-30-1996 5,710 0 9,419 0 0 19,353 285,713 (43,041) 273,489 10,697 154,635 0 0 1 82,497 273,489 0 11,754 0 5,640 1,509 0 3,190 3,824 0 3,824 0 1,744 0 3,159 0.51 0.51
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