-----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, SXdZ/wkggQvdWygAnCCoLpfPhAkcVdPjseMx08zBDVQ+Z7I+DYWQJmtd0t+dRHz3 nRJVR7nK+/Ysy3lWZKx6sQ== 0000912057-96-026054.txt : 19961115 0000912057-96-026054.hdr.sgml : 19961115 ACCESSION NUMBER: 0000912057-96-026054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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: 96661801 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 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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: 8,805,500 shares of Common Stock with $.0001 par value as of November 12, 1996 Page 1 INDEX Exhibit Number Description Page Number - ------- ----------- ----------- PART I: FINANCIAL INFORMATION Item 1: Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheet as of September 30, 1996 and December 31, 1995 4 Condensed Consolidated Statement of Operations for the three months ended September 30, 1996 and 1995 5 Condensed Consolidated Statement of Operations for the nine months ended September 30, 1996 and 1995 6 Condensed Consolidated Statement of Stockholders' Equity from January 1, 1994 through September 30, 1996 7 Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 1996 and 1995 8 Notes to Condensed Consolidated Financial Statements 9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 19 PART II: OTHER INFORMATION Item 2: Changes in Securities 23 Item 4: Submission for Matters to a Vote of Security Holders 24 Item 6: Exhibits and Reports on Form 8-K 25 Signatures 26 Page 2 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 statements of operations, stockholders' equity and 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 ESSEX PROPERTY TRUST, INC. Condensed Consolidated Balance Sheet (Unaudited) (Dollars in thousands) September 30, December 31, ASSETS 1996 1995 ------------- ------------ Real estate: Rental properties: Land and land improvements $ 78,409 $ 61,738 Buildings and improvements 266,495 222,620 ---------- --------- 344,904 284,358 Less accumulated depreciation (45,296) (40,281) ---------- --------- 299,608 244,077 Investments 8,576 8,656 ---------- --------- 308,184 252,733 Cash and cash equivalents 6,238 3,983 Notes and other related party receivables 3,319 4,780 Notes and other receivables 5,105 5,130 Prepaid expenses and other assets 4,706 1,944 Deferred charges, net 2,903 5,090 ---------- --------- $ 330,455 $ 273,660 ---------- --------- ---------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes payable $ 129,176 $ 136,061 Lines of credit 7,500 18,463 Accounts payable and accrued liabilities 8,866 2,964 Dividends payable 4,834 3,455 Other liabilities 1,984 1,565 ---------- --------- Total liabilities 152,360 162,508 Minority interest 25,363 26,423 Stockholders' equity: 8.75% Convetible Preferred Stock, Series 1996A: $.0001 par value, 1,600,000 and none authorized and 800,000 and none issued and outstanding - - Common stock, $.0001 par value, per share, 668,400,000 and 670,000,000 authorized, 8,805,500 and 6,275,000 issued and outstanding 1 1 Excess stock, $.0001 par value per share, 330,000,000 shares authorized, no shares issued or outstanding Additional paid-in capital 184,100 112,070 Accumulated deficit (31,369) (27,342) ---------- --------- Total stockholders' equity 152,732 84,729 ---------- --------- $ 330,455 $ 273,660 ---------- --------- ---------- --------- See accompanying notes to the unaudited financial statements. Page 4 ESSEX PROPERTY TRUST, INC. Condensed Consolidated Statement of Operations (Unaudited) (Dollars in thousands, except per share amounts) Three months ended --------------------------------- September 30, December 31, 1996 1995 ------------- ------------ Revenues: Rental $ 12,119 $ 10,387 Interest and other income 704 597 ----------- ---------- 12,823 10,984 ----------- ---------- Expenses: Property operating expenses Maintenance and repairs 1,113 980 Real estate taxes 924 831 Utilities 791 726 Administrative 713 636 Advertising 161 67 Insurance 190 143 Depreciation and amortization 2,276 2,037 ----------- ---------- 6,168 5,420 ----------- ---------- Interest 2,828 2,725 Amortization of deferred financing costs 103 311 General and administrative 416 360 Loss from hedge termination 3 26 ----------- ---------- Total expenses 9,518 8,842 ----------- ---------- Net income before gain on sales of real estate, minority interest and extraordinary item 3,305 2,142 Gain on sales of real estate 71 0 ----------- ---------- Net income before minority interest and extraordinary item 3,376 2,142 Minority interest (672) (554) ----------- ---------- Income before extraordinary item 2,704 1,588 Extraordinary item: Loss on early extinguishment of debt (472) 0 ----------- ---------- Net income $ 2,232 $ 1,588 ----------- ---------- ----------- ---------- Per share data: Net income per share form operations before extraordinary item $ 0.33 $ 0.25 Extraordinary item - debt extinguishment (0.06) 0.00 ----------- ---------- Net income per share $ 0.27 $ 0.25 ----------- ---------- ----------- ---------- Weighted average number of shares outstanding during the period 7,611,139 6,275,000 ----------- ---------- ----------- ---------- See accompanying notes to the unaudited financial statements. Page 5 ESSEX PROPERTY TRUST, INC. Condensed Consolidated Statement of Operations (Unaudited) (Dollars in thousands, except per share amounts) Nine months ended --------------------------------- September 30, September 30, 1996 1995 ------------- ------------ Revenues: Rental $ 34,123 $ 31,112 Interest and other income 2,008 1,706 ------------- ------------ 36,131 32,818 ------------- ------------ Expenses: Property operating expenses Maintenance and repairs 3,218 2,898 Real estate taxes 2,693 2,533 Utilities 2,276 2,240 Administrative 1,967 1,965 Advertising 451 216 Insurance 482 414 Depreciation and amortization 6,513 6,008 ------------- ------------ 17,600 16,274 ------------- ------------ Interest 8,738 8,198 Amortization of deferred financing costs 529 1,023 General and administrative 1,279 1,083 Loss from hedge termination 42 39 ------------- ------------ Total expenses 28,188 26,617 ------------- ------------ Net income before gain on sales of real estate, minority interest and extraordinary item 7,943 6,201 Gain on sales of real estate 2,480 789 ------------- ------------ Net income before minority interest and extraordinary item 10,423 6,990 Minority interest (1,772) (1,755) ------------- ------------ Income before extraordinary item 8,651 5,235 Extraordinary item: Loss on early extinguishment of debt (3,317) (154) ------------- ------------ Net income $ 5,334 $ 5,081 ------------- ------------ ------------- ------------ Per share data: Net income per share form operations before extraordinary item $ 1.26 $ 0.83 Extraordinary item - debt extinguishment (0.50) (0.02) ------------- ------------ Net income per share $ 0.76 $ 0.81 ------------- ------------ ------------- ------------ Weighted average number of shares outstanding during the period 6,720,380 6,275,000 ------------- ------------ ------------- ------------ See accompanying notes to the unaudited financial statements. Page 6 ESSEX PROPERTY TRUST, INC. Consolidated Statement of Stockholders' Equity For the nine months ended September 30, 1996 and the years ended December 31, 1995, 1994 and 1993 (Dollars and shares in thousands)
Retained Preferred stock Common stock Additional earnings/ --------------------- ---------------------- paid - in (Accumulated Shares Amount Shares Amount capital deficit) Total ------- -------- ------- --------- ----------- ------------ --------- Balance at December 31, 1992 - $ - - $ - $ - $ 8,844 $ 8,844 Contributions - - - - - 100 100 Distributions - - - - - (1,139) (1,139) Net loss - - - - - (33) (33) ------- -------- ------- --------- ----------- ------------ --------- Balance at December 31, 1993 - - - - - 7,772 7,772 Distributions - - - - - (1,273) (1,273) Net income through June 12, 1994 - - - - - 152 152 ------- -------- ------- --------- ----------- ------------ --------- Balance at June 12, 1994 - - - - - 6,651 6,651 Net proceeds from the initial public offering - - 6,275 1 112,070 - 112,071 Effect of the initial public offering - - - - - (5,658) (5,658) Recognition of minority interest - - - - - (25,889) (25,889) ------- -------- ------- --------- ----------- ------------ --------- Balances after the reorganization and offering - - 6,275 1 112,070 (24,896) 87,175 Net income - - - - - 3,266 3,266 Dividends declared - - - - - (5,742) (5,742) ------- -------- ------- --------- ----------- ------------ --------- 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 sale 800 - - - 18,025 - 18,025 Net proceeds from follow-on public offering - - 2,530 - 53,996 - 53,996 Net proceeds from options exercised - - 1 - 9 - 9 Net income - - - - - 5,334 5,334 Dividends declared - - - - - (9,361) (9,361) ------- -------- ------- --------- ----------- ------------ --------- Balances at September 30, 1996 800 $ - 8,806 $ 1 $184,100 $(31,369) $152,732 ------- -------- ------- --------- ----------- ------------ --------- ------- -------- ------- --------- ----------- ------------ ---------
See accompanying notes to the unaudited financial statements. Page 7 ESSEX PROPERTY TRUST, INC. Condensed Consolidated Statement of Cash Flows (Unaudited) (Dollars in thousands)
Nine months ended --------------------------------- September 30, September 30, 1996 1995 ------------- ------------ Net cash provided by operating activities $ 16,844 $ 13,950 Cash flows from investing activities: Additions to real estate investments (72,640) (1,992) Dispositions of real estate investments 13,327 4,569 Investments in corporations and joint ventures 425 (4,262) ------------- ------------ Net cash used in investing activities (58,888) (1,685) Cash flows from financing activities: Proceeds from mortgages, other notes payable and lines of credit 64,383 16,400 Repayment of mortgages, other notes payable and lines of credit (82,231) (18,423) Additions to deferred charges (979) (608) Additions to notes and other related party receivables/payables (4,636) - Repayment of notes and other related party receivables/payables 6,097 (160) Net proceeds from convertible preferred stock sale 18,025 - Net proceeds from follow-on common stock offering 54,005 - Distribution to partners/dividends to shareholders (10,365) (10,244) ------------- ------------ Net cash provided by (used in) financing activities 44,299 (13,035) ------------- ------------ Net increase (decrease) in cash and cash equivalents 2,255 (770) Cash and cash equivalents at beginning of period 3,983 2,411 ------------- ------------ Cash and cash equivalents at end of period $ 6,238 $ 1,641 ------------- ------------ ------------- ------------ Supplemental diclosure of cash flow information Cash paid for interest $ 8,945 $ 8,238 ------------- ------------ ------------- ------------ Supplemental disclosure of non-cash investing and financing activity Dividends declared and payable $ 4,834 $ 3,455 ------------- ------------ ------------- ------------
See accompanying notes to the unaudited financial statements. Page 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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. ("Essex" or 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/A2 for the year ended December 31, 1995. The consolidated financial statements for the three months and nine months ended September 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 the Operating Partnership, owning 82.6% and 77.2% interests as of September 30, 1996 and 1995, respectively. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. (2) SIGNIFICANT TRANSACTION (A) EQUITY TRANSACTIONS (i) On June 20, 1996, the Company entered into an 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 Partner ship, 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 $8,500 and loaned the Company an additional $11,500. This loan was exchanged for 460,000 shares of Convertible Preferred Stock at $25 per share upon stockholder approval of the transaction on September 27, 1996. 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 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) On August 14, 1996, the Company sold 2.2 million shares of Common Stock in a follow-on public offering for $22.75 per share. In addition, on August 20, 1996, the underwriters for this offering exercised their "over-allotment" option and purchased an additional 330,000 shares at $22.75 per share. Upon completion of this follow-on offering the Company used the proceeds to increase its ownership interest in the Operating Partnership from approximately 77.2% to 82.6%. Page 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (iii) On September 18, 1996, the Board of Directors of the Company voted to increase the dividend to an annualized rate of $1.74 per share, from $1.70 per share and declared a quarterly cash dividend of $.435 per share to be paid to stockholders of record as of September 30, 1996. (B) ACQUISITIONS (i) On August 23,1996, the Company completed its acquisition of Camarillo Oaks Apartments, a 371 unit apartment community in Camarillo, California for a contract price of $20,750. The property offers a full amenity package including swimming pools, spa, sauna and picnic areas. Essex utilized proceeds from the equity transactions and the sale of a property in the second quarter of 1996 to fund this acquisition. Subsequent to September 30, 1996, the Company placed $19,420 of tax-exempt financing on the property. (ii) On August 30, 1996, the Company acquired Landmark Apartments, a 285 unit apartment community in Hillsboro, Oregon for a contract price of $17,700. The amenities at the community include a swimming pool, indoor Jacuzzi, racquetball court, and fitness center. Essex utilized proceeds from the equity transactions to fund this purchase. (iii) On August 30, 1996, the Company acquired Eastridge Apartments, a 188 unit apartment community in San Ramon, California for an approximate price of $19,200. The community features a fitness center, spa, pool and security perimeter. Essex utilized proceeds from the equity transactions to fund this purchase. (C) DEVELOPMENT ACTIVITIES (i) Essex previously entered into a partnership for the purpose of developing Jackson School Village, a 200 unit apartment community in Hillsboro, Oregon. The lease up on this project started in early August 1996 with substantial completion of the project anticipated by the end of the year. (ii) The Company has entered into a letter agreement with Fairfield Properties to form a partnership that will construct 374 apartment units in Milpitas, California. The partnership agreement is near completion and estimates the total project cost to be $45,500. Essex has entered into a contract to purchase the land for this development for approximately $10,900. The purchase contract requires Essex to acquire the site within 90 days after the completion of the entitlement phase of this project, currently anticipated to be approximately March 1997. The land is expected to be contributed to the partnership upon closing the land purchase. (D) DISPOSITIONS (i) Essex has entered into a contract to sell its six neighborhood shopping centers for $22,200. The contract is subject to a number of contingencies and there is no assurance that such sale will be completed. (E) DEBT RELATED TRANSACTIONS (i) On August 14, 1996, Essex repaid a $9,938 LIBOR based variable rate loan which had an interest rate swap agreement fixing the interest rate at 6.69%. Essex wrote off approximately $383 in deferred financing and interest rate protection costs associated with this loan. Essex utilized proceeds from the equity transactions to fund this payoff. (ii) On August, 14, 1996, Essex repaid a $7,224, 8.5% fixed rate loan which was assumed upon the purchase of Treetops Apartments on January 31, 1996. Essex wrote off approximately $64 in deferred financing costs related to this transaction. Essex utilized proceeds from the equity transactions to fund this payoff. Page 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (iii) On August 22, 1996, the City of Freemont issued $9,800 in variable rate tax-exempt demand bonds related to the financing of Treetops Apartments. The 30 year bonds, which mature August, 2026, were enhanced by FNMA and achieved a Standard & Poor's rating of AAA/A-1+. The bonds credit enhancement is secured by Treetops Apartments, a 172 unit apartment community located in Fremont, California. The bonds have a seven year interest rate cap at 7.0%. Essex will use approximately $925 on the bond proceeds to renovate the property. The net proceeds will be used for property acquisitions and/or debt repayments. (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 nine months ended September 30, 1996 totaled $465 and $1,321, 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 $169 and $509 for the three and nine months ended September 30, 1996, respectively and $170 and $505 for the three and nine months ended September 30, 1995, respectively. Included in other income for the three and nine months ended September 30, 1996 is interest income of $212 and $729, 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 $282 and $652 were earned for the three and nine month periods ended September 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 nine months ended September 30, 1996 was $28, and $85, respectively, and is included in administrative expense in the accompanying consolidated statements of operations. Page 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Notes and other related party receivables as of September 30, 1996 and December 31, 1995 consist of the following: September 30, December 31, 1996 1995 ---- ---- Notes receivable from Essex Sacramento Corporation bearing interest at 9% due on demand $ 1,466 $ 2,566 Notes receivable from Essex Fidelity I Corporation interest at 9% due on demand 226 974 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 1,127 740 -------- -------- $ 3,319 $ 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. During the three and nine months ended September 30, 1996, the Company paid brokerage commissions totaling $0 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 financial statements. (4) PRO FROMA FINANCIAL INFORMATION In 1996, Essex consummated five property acquisitions and two property dispositions with independent third parties in "arms-lengths" transactions. One property acquisition was acquired on November 7, 1996 subsequent to the quarter ended September 30, 1996. The property, Meadowood Apartments, was built in 1986 and contains 320 apartment units with 264,500 square feet located in Simi Valley, California. The contract price was $25,740. The seller was an unrelated third party. Essex assumed $17,733 in tax exempt bonds with a 6.455% interest rate. The interest rate on bonds is fixed through February 2008 at which time they will be repriced at the market rate at that time. The bonds mature in January 2026. The balance of the purchase price was funded by the October 24, 1996 issuance of $19,420 in variable rate tax exempt bonds issued by the City of Camarillo in connection with the financing of Camarillo Oaks Apartments. The Camarillo bonds carry a "AAA" rating and are enhanced by Fannie Mae and mature in October 2026. The bonds have a seven year interest rate cap at 7%. The following unaudited pro forma condensed consolidated balance sheet as of September 30, 1996 and the statements of operations for the nine months ended September 30, 1996 and for the year ended December 31, 1995 are presented as if the 1996 property acquisitions and disposition had occurred on January 1, 1995. Page 12 Proforma financial statements table of contents: Page ---- Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996 14 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1996 15 Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1995 16 Notes to Pro Forma Condensed Consolidated Financial Statements 17 Page 13 ESSEX PROPERTY TRUST, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (Unaudited) (Dollars in thousands, except shares and per share amounts)
PRO FORMA ADJUSTMENTS (2) ACQUISITION HISTORICAL PROPERTY PRO FORMA ------------ --------------- ----------- ASSETS Real estate Rental properties Land and land improvements $ 78,409 $ 6,435 $ 84,844 Buildings and improvements 266,495 19,305 285,800 ---------- ---------- ---------- 344,904 25,740 370,644 Less accumulated depreciation (45,296) (45,296) ---------- ---------- ---------- 299,608 25,740 325,348 Investments 8,576 8,576 ---------- ---------- ---------- 308,184 25,740 333,924 Cash and cash equivalents 6,238 2,463 8,701 Notes and other receivables 8,424 8,424 Other assets 7,609 1,450 9,059 ---------- ---------- ---------- $ 330,455 $ 29,653 $ 360,108 ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes payable $ 129,176 37,153 166,329 Lines of credit 7,500 (7,500) 0 Accounts payable and accrued liabilities 8,866 8,866 Dividends payable 4,834 4,834 Other liabilities 1,984 1,984 ---------- ---------- ---------- Total liabilities 152,360 29,653 182,013 Minority interest 25,363 25,363 STOCKHOLDERS' EQUITY 8.75% convertible preferred stock, series 1996A, $.001 par value, 1,600,000 authorized, 800,000 issued and outstanding - - Common stock, $.0001 par value, 668,400,000 shares authorized, 8,805,500 shares issued and outstanding 1 1 Additional paid in capital 184,100 184,100 Accumlulated deficit (31,369) (31,369) ---------- ---------- ---------- 152,732 0 152,732 ---------- ---------- ---------- $ 330,455 $ 29,653 $ 360,108 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to Pro Forma financial statements Page 14 ESSEX PROPERTY TRUST, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (Unaudited) (Dollars in thousands, except shares and per share amounts)
PRO FORMA ADJUSTMENTS (3) ---------------------------- ACQUISITION DISPOSITION HISTORICAL PROPERITIES PROPERITIES PRO FORMA ---------- ----------- ----------- ---------- REVENUES Rental $ 34,123 $ 7,240 $ 701 $ 40,662 Interest and other income 2,008 145 8 2,145 ---------- --------- -------- --------- 36,131 7,385 709 42,807 EXPENSES Property operating expenses Maintenance and repairs 3,218 657 55 3,820 Real estate taxes 2,693 667 69 3,291 Utilities 2,276 459 26 2,709 Administrative 1,967 407 48 2,326 Advertising 451 115 6 560 Insurance 482 93 11 564 Depreciation and amortization 6,513 1,459 106 7,866 ---------- --------- -------- --------- 17,600 3,857 321 21,136 Interest 8,738 1,283 180 9,841 Amortization of deferred financing costs 529 18 8 539 General and administrative 1,279 0 0 1,279 Loss from hedge termination 42 0 0 42 ---------- --------- -------- --------- Total expenses 28,188 5,158 509 32,837 ---------- --------- -------- --------- Income before gain on sales of real estate, minority interest and extraordinary item 7,943 2,227 200 9,970 Gain on sales of real estate 2,480 0 0 2,480 ---------- --------- -------- --------- Income before minority interest and extraordinary item 10,423 2,227 200 12,450 Minority interest (1,772) (386) (35) (2,123) ---------- --------- -------- --------- Income before extraordinary item 8,651 1,841 165 10,327 Extraordinary item (3,317) 0 0 (3,317) ---------- --------- -------- --------- Net income $ 5,334 $ 1,841 $ 165 $ 7,010 ---------- --------- -------- --------- ---------- --------- -------- --------- PER SHARE DATA Net income per share from operations before extraordinary item $ 1.26 $ 1.17 Extraordinary item - debt extinguishment (0.50) (0.37) ---------- --------- Net income per share $ 0.76 $ 0.80 ---------- --------- ---------- --------- Weighted average number of shares outstanding during the period 6,720,380 8,805,500 ---------- --------- ---------- --------- SUPPLEMENTAL INFORMATION - FUNDS FROM OPERATIONS Income before minority interest and extraordinary item $ 10,423 $ 2,227 $ 200 $ 12,450 Adjustments Depreciation and amortization 6,513 1,459 106 7,866 Adjustment for unconsolidated joint ventures 379 0 0 379 Non-recurring items, including gain on sales of real estate and loss from hedge termination (2,438) 0 0 (2,438) Minority interest - Pathways (416) 0 (416) ---------- --------- -------- --------- Funds from operations $ 14,461 $ 3,686 $ 306 $ 17,841 ---------- --------- -------- --------- ---------- --------- -------- ---------
See accompanying notes to Pro Forma financial statements Page 15 ESSEX PROPERTY TRUST, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 (Unaudited) (Dollars in thousands, except shares and per share amounts)
PRO FORMA ADJUSTMENTS (3) ---------------------------- ACQUISITION DISPOSITION HISTORICAL PROPERITIES PROPERITIES PRO FORMA ---------- ----------- ----------- ---------- REVENUES Rental $ 41,640 $ 12,617 $ 1,813 $ 52,444 Interest and other income 2,300 232 23 2,509 ---------- --------- -------- --------- 43,940 12,849 1,836 54,953 EXPENSES Property operating expenses Maintenance and repairs 3,811 1,133 171 4,773 Real estate taxes 3,371 1,156 191 4,336 Utilities 2,974 795 133 3,636 Administrative 2,592 732 121 3,203 Advertising 299 184 34 449 Insurance 557 154 26 685 Depreciation and amortization 8,007 2,403 286 10,124 ---------- --------- -------- --------- 21,611 6,557 962 27,206 Interest 10,928 2,194 474 12,648 Amortization of deferred financing costs 1,355 34 23 1,366 General and administrative 1,527 0 0 1,527 Loss from hedge termination 288 0 0 288 ---------- --------- -------- --------- Total expenses 35,709 8,785 1,459 43,035 ---------- --------- -------- --------- Income before gain on sales of real estate, minority interest and extraordinary item 8,231 4,064 377 11,918 Gain on sales of real estate 6,013 0 (2,872) 8,885 ---------- --------- -------- --------- Income before minority interest and extraordinary item 14,244 4,064 (2,495) 20,803 Minority interest (3,486) (705) (65) (4,126) ---------- --------- -------- --------- Income before extraordinary item 10,758 3,359 (2,560) 16,677 Extraordinary item (154) 0 0 (154) ---------- --------- -------- --------- Net income $ 10,604 $ 3,359 (2,560) $ 16,523 ---------- --------- -------- --------- ---------- --------- -------- --------- PER SHARE DATA Net income per share from operations before extraordinary item $ 1.71 $ 1.90 Extraordinary item - debt extinguishment (0.02) (0.02) ---------- --------- Net income per share $ 1.69 $ 1.88 ---------- --------- ---------- --------- Weighted average number of shares outstanding during the period 6,275,000 8,805,000 ---------- --------- ---------- --------- SUPPLEMENTAL INFORMATION - FUNDS FROM OPERATIONS Income before minority interest and extraordinary item $ 14,244 $ 4,064 (2,495) $ 20,803 Adjustments Depreciation and amortization 8,007 2,403 286 10,124 Adjustment for unconsolidated joint ventures 121 0 0 121 Non-recurring items, including gain on sales of real estate and loss from hedge termination (5,725) 0 2,872 (8,597) Minority interest - Pathways (527) 0 (527) ---------- --------- -------- --------- Funds from operations $ 16,120 $ 6,467 663 $ 21,924 ---------- --------- -------- --------- ---------- --------- -------- ---------
See accompanying notes to Pro Forma financial statements Page 16 ESSEX PROPERTY TRUST, INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (Unaudited) (Dollars in thousands, except shares and per share amounts) (1) OVERVIEW Between January 31, 1996 and November 7, 1996, Essex consummated five property acquisitions and two property dispositions with independent third parties in "arms-lengths" transactions. Below is a summary of property acquisitions and disposition whose effects are incorporated into the unaudited pro forma financial statements as of January 1, 1995. 1996 ACQUISITIONS On January 31, 1996, Essex acquired Treetops Apartments which was built in 1978 and contains 172 apartment units with 131,200 square feet and is located in Fremont, California. The contract price was $10,725. Essex funded this acquisition by assuming an existing 8.5% fixed interest rate mortgage in the amount of $7,266 and the remainder was funded by Essex's lines of credit. On August 14, 1996, Essex repaid the mortgage on the property with the proceeds from its secondary common stock offering. On August 22, 1996, Essex completed a $9,800 tax exempt bond financing on the property. On August 23, 1996, Essex completed its acquisition of Camarillo Oaks Apartments for a contract price of $20,750. Camarillo Oaks is a 371-unit apartment property consisting of approximately 303,800 square feet located in Camarillo, California. Essex utilized proceeds from its August 14, 1996 offering of common stock and from the sale of a property to complete the acquisition. On October 24, 1996, Essex completed a $19,420 tax exempt bond financing on the property. On August 30, 1996, Essex acquired Eastridge Apartments which was built in 1988 and contains 188 apartment units with 174,100 square feet located San Ramon, California. The contract price was approximately $19,200. The price includes the cost relating to the retirement of a land lease which occurred on September 27, 1996. Essex utilized proceeds from its August 14, 1996 offering of common stock to complete the acquisition. On August 30 1996, Essex acquired Landmark Apartments which was built in 1990 and contains 285 apartment units with 282,900 square feet located in Hillsboro, Oregon. The contract price was $17,700. Essex utilized proceeds from its August 14, 1996 offering of common stock to complete the acquisition. On November 7, 1996, Essex acquired Meadowood Apartments, which was built in 1986 and contains 320 apartment units with 264,500 square feet located in Simi Valley, California. The contract price was $25,740. Essex assumed $17,733 in tax exempt bonds at a 6.455% interest rate. The bonds have a fixed interest rate through February 2008, at which time they will be repriced. The bonds mature in January 2026. The balance of the purchase price was funded by $19,420 of 30 year variable rate tax exempt bonds issued by the City of Camarillo in connection with Camarillo Oaks Apartments. The excess of the Camarillo bond proceeds not used to fund this acquisition went to fully pay off $7,500 outstanding on the Company's lines of credit. Page 17 ESSEX PROPERTY TRUST, INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (Unaudited) (Dollars in thousands, except shares and per share amounts) 1996 DISPOSITIONS On April 30, 1996, Essex sold Viareggio Apartments, a 116-unit, 89,615 square foot apartment community located in San Jose, California. The gross sales price was $10,610, resulting in a net gain of approximately $2,266. Essex used the proceeds to reduce indebtedness and to facilitate the acquisition of Camarillo Oaks. On June 21, 1996, Essex sold Westbridge Apartments, a 92-unit, 104,560 square foot apartment community 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 outstanding indebtedness. (2) PRO FORMA BALANCE SHEET ADJUSTMENTS The pro forma condensed consolidated balance sheet as of September 30, 1996 includes pro forma adjustments for property acquisitions subsequent to September 30, 1996. Real estate investments were increased by $25,740 based on the contracted acquisition price of Meadowood Apartments. It is assumed that 75% of the increase in real estate investment will be allocated to buildings and improvements for purposes of depreciation. (3) PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS The pro forma condensed consolidated statement of operations for the nine months ended September 30, 1996 and for the twelve months ended December 31, 1995 include the following Proforma adjustments: For Treetops Apartments, acquired on January 31, 1996, pro forma adjustment was made by taking its eight months actual operating results through August 31, 1996 and annualizing them for their inclusion in either the nine months ended September 30, 1996 and the twelve months ended December 31, 1995 Pro Forma Statement of Operations. For Viareggio Apartments and Westbridge Apartments, the Pro Forma Statements of Operations reflects the elimination of the actual results of operations. The twelve month ended December 31, 1995 Pro Forma Statement of Operation reflects the gain on sale of these properties as if the sales had occurred on January 1, 1995. For the properties, Camarillo Oaks Apartments, Eastridge Apartments, Landmark Apartments and Meadowood Apartment, based on their short period actual operating results and in the case of Meadowood Apartments being acquired subsequent to September 30, 1996, their budgeted operating results were included in the nine months ended September 30, 1996 or the twelve months ended December 31, 1995 Pro Forma Statements of Operations based on their respective internal operating budgets. Page 18 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion is based primarily on the consolidated financial statements of Essex Property Trust, Inc. ("Essex" or the "Company") as of September 30, 1996 and 1995 and for the three months and nine months ended September 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 September 30, 1996 and 1995, owned 82.6% and 77.2% general partnership interest in the Operating Partnership, respectively. 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," and elsewhere in the quarterly report on Form 10-Q which are not historical facts may be considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, those risks and special consideration set forth in Essex's other SEC filings 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 nine months ended September 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 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 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 of. Essex benefits from such fees indirectly through receipt of preferred stock dividend from and by allocation of related expenses to EMC. In general, Essex believes, however, that there will be fewer opportunities to acquire portfolios of non-performing assets in the future. Page 19 Average financial occupancy rates of the Company's multifamily properties on a same-property basis for the three months ended September 30, 1996 and 1995 increased to 97.2% from 96.8%, respectively. The region breakdown is as follows: September 30, September 30, 1996 1995 ---- ---- Northern California 98.7% 98.7% Seattle Metropolitan 95.9% 94.5% Southern California 95.8% 95.4% The Company's retail and commercial properties were 95% occupied (based on square footage) as of September 30, 1996. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995 TOTAL REVENUES increased by $1,839,000 or 16.7% to $12,823,000 in the third quarter of 1996 from $10,984,000 in the third quarter of 1995. Rental revenues increased by $1,732,000 or 16.7% to $12,119,000 in the third quarter of 1996 from $10,387,000 in the third quarter of 1995. Of the $1,732,000 increase approximately $1,081,000 was the net effect of properties acquired or disposed of in 1995 or 1996, 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 $908,000 to $9,003,000 in the third quarter of 1996 from $8,095,000 in the third quarter of 1995. Rental revenue increased by $781,000 during the third quarter of 1996 from the amount in the third quarter of 1995 for the Properties located in Southern California. Approximately $736,000 of this increase is attributable to the acquisition of a property in this region during the third quarter of 1996. Commercial property rental revenue increased $43,000 for the third quarter of 1996 from the amount in the third quarter of 1995 as a result of increased occupancy. TOTAL EXPENSES increased by $676,000 or approximately 7.6% to $9,518,000 in the third quarter of 1996 from $8,842,000 in the third quarter of 1995. Interest expense increased by $103,000 or 3.8% to $2,828,000 in the third quarter of 1996 from $2,725,000 in the third 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, exclusive of depreciation and amortization increased by $509,000 or 15.1% to $3,892,000 in the third quarter of 1996 from $3,383,000 in the third quarter of 1995. Of such increase, $379,000 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 $56 in the third quarter of 1996 from the third quarter of 1995. NET INCOME AFTER MINORITY INTEREST increased by $644,000 to $2,232,000 in the third quarter of 1996 from $1,588,000 in the third quarter of 1995. Net income includes a $472,000 loss on early extinguishment of debt and a $71,000 of gain on the sales of real estate. The increase in net income was primarily a result of same property net operating income increases over the prior year and the net contribution of properties acquired during 1996. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 TOTAL REVENUES increased by $3,313,000 or 10.1% to $36,131,000 in the first nine months of 1996 from $32,818,000 in the first nine months of 1995. Rental revenues increase by $3,011,000 or 9.7% to Page 20 $34,123,000 in the first nine months of 1996 from $31,112,000 in the first nine months of 1995. Of the $3,011,000 increase approximately $1,209,000 was the net effect of 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 $1,912,000 to $26,214,000 in the first nine months of 1996 from $24,302,000 in the first nine months of 1995. Rental revenue increased by $865,000 during the first nine months of 1996 from the amount in the first nine months of 1995 for the Properties located in southern California. Approximately $736,000 of this increase is attributable to the acquisition of a property in this region during the third quarter of 1996. Commercial property rental revenue increased $234,000 for the first nine months of 1996 from the amount for the third quarter of 1995 as a result of increased occupancy. TOTAL EXPENSES increased by $1,571,000 or approximately 5.9% to $28,188,000 in the first nine months of 1996 from $26,617,000 in the first nine months of 1995. Interest expense increased by $540,000 or 6.6% to $8,738,000 in the first nine months of 1996 from $8,198,000 in the first nine 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, exclusive of depreciation and amortization, increased by $821,000 or 8.0% to $11,087,000 in the first nine months of 1996 from $10,266,000 in the first nine months of 1995. Of such increase, $408,000 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 $196,000 in the first nine months of 1996 from the first nine months of 1995. NET INCOME AFTER MINORITY INTEREST increased by $253,000 to $5,334,000 in the first nine months of 1996 from $5,081,000 in the first nine months of 1995. The increase of $253,000 was reduced by the loss on the early extinguishment of debt which was $3,163,000 greater than such loss in the same period in 1995 and which was partially offset by gain on the sales of real estate that was $1,691,000 greater than the gain in the same period as 1995. The increase in net income, net of the loss on the early extinguishment of debt and gain on the sales of real estate is primarily due to same property net operating income increases over the prior period and contributions made by properties acquired in 1996. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, Essex had $6,238,000 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, amounts available on lines of credit, 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 $25,700,000. The Company is currently negotiating an increase in the available amount of its lines of credit. At September 30, 1996 Essex had $7,500,000 outstanding on its lines of credit, with interest rates during the year ranging from 7.2% to 7.5%. Essex's cash balance increased $2,255,000 from $3,983,000 as of December 31, 1995 to $6,238,000 as of September 30, 1996. This increase in cash was a result of $16,844,000 net cash provided by operating activities, and $44,299,000 in net cash provided by financing activities, which was decreased by $58,888,000 net cash used in investing activities. The $58,888,000 net cash used in investing activities is a result of $72,640,000 used to purchase and upgrade rental properties as offset in part by $13,327,000 provided by the disposition of real estate. The significant components which contributed to the $44,299,000 net cash provided by financing activities was a result of $54,005,000 net proceeds from the follow-on common stock offering, $18,025,000 net proceeds from the sale of Convertible Preferred Stock, $64,383,000 of proceeds from mortgages, other notes payable and line of credit as offset by $82,231,000 of repayments of mortgages, other notes payable and lines of credit and $10,365,000 of dividends/distributions paid. Page 21 As of September 30, 1996, Essex's combined outstanding indebtedness under mortgages and lines of credit consisted of $93,295,000 in fixed rate debt, (such component includes variable rate indebtedness subject to interest rate swap agreements), $12,480,000 in debt based on the Federal Home Loan Bank's 11th District Cost of Funds index ("the 11th District Debt"), $23,400,000 of debt represented by tax exempt variable rate demand bonds, of which $9,800,000 is capped at a maximum interest rate of 7.0%, and $7,500,000 of debt is based on The London Interbank Offered Rates ("LIBOR"). 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%. 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 tax-exempt bond financings. 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 Real Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P. (collectively "Tiger/Westbrook") as part of a private placement of $40,000,000 in Convertible Preferred Stock. On September 27, 1996 the stockholders approved the transaction, resulting in the exchange of the $11,500,000 loan for an additional 460,000 shares of Convertible Preferred Stock. The Company may require Tiger/Westbrook to purchase up to an additional $20,000,000 of Convertible Preferred Stock at any time prior to June 20, 1997. 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 a public offering of its common stock. On August 20, 1996 the Company completed the issuance of 2,530,000 shares of its common stock (including 330,000 shares of common stock sold pursuant to the underwriters exercise of their over-allotment option) at a price of $22.75 per share. The net proceeds were used primarily to fund property acquisitions. After completion of this follow-on offering the Company has the capacity pursuant to its shelf registration to issue up to $42,442,500 of equity securities. The Company will utilize the proceeds of public offerings of shares of common stock, sales of Convertible Preferred Stock to Tiger/Westbrook, availability under its lines of credit, and cash balances to fund its 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). 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 Page 22 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 September 30, 1996 and 1995. Three months ended ------------------------------------------- September 30, 1996 September 30, 1995 ------------------ ------------------ Income before minority interest and extraordinary item $ 3,376,000 $ 2,142,000 Adjustments: Depreciation & Amortization 2,276,000 2,037,000 Adjustment for Unconsolidated Joint Venture 130,000 51,000 Non-recurring Items, including gain on sales of real estate and loss from hedge termination (68,000) 26,000 Minority Interest - Pathways (144,000) (123,000) ------------ -------------- Funds from Operations- fully diluted $ 5,570,000 $ 4,133,000 ------------ -------------- ------------ -------------- Weighted average number of shares outstanding-fully diluted (1) 9,878,075 8,130,000 ------------ -------------- ------------ -------------- (1) Assumes conversion of all outstanding shares of Convertible Preferred Stock and 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. This loan was exchanged for 460,000 shares of Convertible Preferred Stock upon stockholder approval of the transaction which occurred on September 27, 1996. 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. Page 23 The terms, rights and preference of the Convertible Preferred Stock are set forth in 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. A summary of such terms, rights and preferences was set forth in Item 2 of the Company's Report or Form 10-Q for the quarter ended June 30, 1996. ITEM 4: SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS At the Special Meeting of Stockholders on September 27, 1996, the stockholders approved the following proposals: (1) The proposal to approve the sale and issuance of up to 1,600,000 shares of the Company's 8.75% Convertible Preferred Stock, Series 1996A ("the Convertible Preferred Stock") was approved (4,843,114 votes for and 378,838 votes against or withheld). (2) The proposal to amend the ownership limitation provisions in the Company's Charter was approved (4,835,570 votes for and 386,411 votes against or withheld). The third proposal submitted at the Special Stockholders Meeting concerned certain proposed amendments to the Company's Charter to provide for changes in the composition of the Board of Directors in the event of the breach of certain protective provisions in the Charter relating to the Convertible Preferred Stock. This proposal, which requires a 66% affirmative vote for passage, has not yet been approved by the stockholders. The Special Stockholders Meeting was adjourned to December 17, 1996 in order to obtain additional votes from the stockholders in connection with this third proposal. Page 24 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS 3.1 First Amendment to Articles of Amendment and Restatement of Essex Property Trust, Inc. 10.1 Letter Agreement with Tiger/Westbrook entities re: Limitations on Ownership of Stock of the Company. 12.1 Statement of Competition of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend 27.1 Article 5 Financial Data Schedule (EDGAR Filing Only). B. REPORTS ON FORM 8-K On September 11, 1996, Essex filed a current report on Form 8-K, which described 1996 property acquisitions and disposition and included pro forma financial statements as if the 1996 property acquisitions and dispositions had occurred on January 1, 1995. On October 17, 1996, Essex filed Form 8-K/A (to the report which was filed on September 11, 1996) regarding 1996 property acquisitions and dispositions to include combined historical summary of gross income and direct operating expenses for the year ended December 31, 1995 for such 1996 property acquisitions. Page 25 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) Date November 13, 1996 Page 26 EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 STATE OF MARYLAND STATE DEPARTMENT OF ASSESSMENTS AND TAXATION 301 WEST PRESTON STREET BALTIMORE, MARYLAND 21201 DATE: OCTOBER 02, 1996 THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT FOR ESSEX PROPERTY TRUST, INC. WERE RECEIVED AND APPROVED FOR RECORD ON OCTOBER 2, 1996 AT 3:17 PM. FEE PAID: 79.00 [SEAL] WILLIAM B MARKER CHARTER SPECIALIST FIRST AMENDMENT TO ARTICLES OF AMENDMENT AND RESTATEMENT OF ESSEX PROPERTY TRUST, INC. THIS IS TO CERTIFY THAT: 1. Essex Property Trust, Inc., a Maryland corporation (the "Corporation"), desires to amend its charter as provided below. II. The Articles of Amendment and Restatement of the Corporation filed with the State Department of Assessments and Taxation on June 1, 1994, as amended hereby, constitutes all of the provisions of the charter of the Corporation currently in effect. III. The amendments to the charter of the Corporation as set forth below have been duly advised by the Board of Directors and approved by the stockholders of the Corporation as required by law. IV. The undersigned President acknowledges these Articles of Amendment to be the corporate act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties of perjury. THEREFORE, the charter of the Corporation is hereby amended as follows: Article EIGHTH (a)(1) is amended as follows: The definition of "Ownership Limit" is amended to delete the word "stock", wherever such word appears, and add the term "Equity Stock" in its place. The definition of "Person" is amended to delete the phrase "and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended" at the end of such definition. The following definition is added to Article EIGHTH (a)(1): "Exempt Person" shall mean any Person exempt from the Ownership Limit or the Existing Holder Limit pursuant to Article EIGHTH (a)(9) from time to time." Article Eighth (a)(2)(A) and (B) are amended to add "with respect to the exemption of a Person exempt from the Ownership Limit or otherwise" after "Article EIGHTH" and before ", from the date", and to add "or an Exempt Person" before the close of the parenthetical that begins "(other than an Existing Holder". Article Eighth (a)(3)(A) is amended to add "or an Exempt Person" before the close of the parenthetical that begins "(other than an Existing Holder". Article EIGHTH (a)(9), is replaced in its entirety with the following: (9) "EXCEPTION." The Board of Directors may exempt a Person from the Ownership Limit or Existing Holder Limit, thereby permitting such Person's Beneficial or Consecutive Ownership of Equity Stock to exceed the Ownership Limit or Existing Holder Limit, if (i) such Person is not an individual for purposes of Section 542(a)(2) of the Code (provided that, for such purposes, the rules of Code Section 856(h)(3)(A) shall apply) or (ii) is an underwriter that participates in a public offering of the Equity Stock for a period of 90 days following the purchase by such underwriter of the Equity Stock, conditioned upon (i) the Corporations's prior receipt of an opinion of counsel or a ruling from the Internal Revenue Service, in each case to the effect that such Person's exemption from the Ownership Limit or Exiting Holder Limit will not cause the Corporation (A) to be closely held within the meaning of Section 856(a)(6) of the Code, (B) to be Beneficially Owned by fewer than 100 persons within the meaning of Section 856(a)(5) of the Code, and (C) to receive any amounts excluded from "rent from real property" for purposes of Section 856(c) of the Code by application of Section 856(d)(2)(B) of the Code, (ii) the Board of Directors obtaining such representations from such Person as are reasonably necessary to ascertain that no individual's Beneficial Ownership will violate the Ownership Limit or the Existing Holder Limit as a result of such Person's Beneficial Ownership (provided that, for purposes of such representations, the rules contained in Section 856(h)(3)(A) of the Code shall apply), and (iii) such Person agreeing that any individual's violation or attempted violation of the Ownership Limit or Existing Holder Limit because of such Person's Beneficial Ownership (provided that, for purposes of such agreement, the rules of Section 856(h)(3)(A) of the Code will apply) will result in the portion of such Person's Equity Stock causing such violation or attempted violation to be converted to Excess Stock in accordance with subparagraph (a)(3) of this Article EIGHTH unless such Person has previously obtained an exemption from the Board of Directors in accordance with this Article EIGHTH (a)(9) with respect to such Person's Equity Stock causing such violation or attempted violation; provided that, any exemption from the Ownership Limit or Existing Holder Limit pursuant to this Article EIGHTH(a)(9) that would allow a Person to Beneficially Own or Constructively Own shares of Equity Stock of the Corporation with an aggregate value that is greater than 25.0% of the value of the outstanding shares of Equity Stock of the Corporation shall not be based solely on the receipt of an opinion of counsel but shall require a receipt of ruling from the Internal Revenue Service. IN WITNESS WHEREOF, the Corporation has caused this First Amendment to Articles of Amendment and Restatement to be signed in its name and on its behalf by its President and attested to by its Secretary on this 27th day of September, 1996. ATTEST: ESSEX PROPERTY TRUST, INC. /S/ Michael J. Schall By: /S/ Keith R. Guericke - ----------------------------------- ------------------------------------- Michael J. Schall Keith R. Guericke, President EX-10.1 3 EXHIBIT 10.1 EXHIBIT 10.1 ESSEX PROPERTY TRUST, INC. 777 California Avenue Palo Alto, CA 94304 October 21, 1996 Tiger/Westbrook Real Estate Fund, L.P. Tiger/Westbrook Real Estate Co-Investment Partnership, L.P. c/o Westbrook Real Estate Partners, L.L.C. 599 Lexington Avenue Suite 3800 New York, NY 10022 Re: Limitations on Ownership of Stock of Essex Property Trust, Inc. (the "Company") ------------------------------------------- Gentlemen: In connection with the transactions contemplated by that certain Stock Purchase Agreement dated as of June 20, 1996, as amended (the "Stock Purchase Agreement"), between the Company and Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P. (collectively, together with any nominee or nominees in whose name securities may be held, "Buyer"), the Company has solicited and obtained the approval of the stockholders of the Company to an amendment to the charter of the Company (the "Charter") that makes certain modifications to the ownership limitations set forth in the Charter to, among other things, facilitate the transactions contemplated by the Stock Purchase Agreement (the "Charter Amendment"). The details of the Charter Amendment are more particularly described under Proposal 2 of the Proxy Statement of the Company dated September 5, 1996 (the "Proxy Statement"), prepared and submitted by the Company to its stockholders in preparation for the special meeting of the stockholders at which the stockholders of the Company approved, among other things, the Charter Amendment. As more particularly set forth in the Proxy Statement, the Charter Amendment provides that the Board of Directors (as defined in the Charter) may exempt holders of the Company's Equity Stock (as defined in the Charter) (other than individuals for the purposes of Section 542(a)(2) of the Code [as defined in the Charter]) from the Ownership Limit or Existing Holder Limit (as both such terms are defined in the Charter) conditioned upon, among other things, the receipt by the Company of an opinion of counsel to the effect that such holder's exemption and Beneficial Ownership of Equity Stock (as such term is defined in the Charter) will not cause the Company to violate certain requirements of the Code for maintaining the Company as a real October 21, 1996 Page 2 estate investment trust ("REIT") under the Code (the "REIT Requirements"). The Charter Amendment provides, in addition, that any exemption that would allow a holder to Beneficially Own or Constructively Own (as both such terms are defined in the Charter) shares of the Company's Equity Stock with an aggregate value that is greater than 25% of the value of the outstanding shares of stock of the Company (the "25% Limit") shall require a ruling (an "IRS Ruling") from the Internal Revenue Service ("IRS") authorizing such exemption, in addition to the other requirements of the Charter Amendment. The Company and the Buyer now wish to provide for certain obligations of the Company and the Buyer in connection with any request for an IRS Ruling made by any holder (other than the Buyer) pursuant to the Charter Amendment. Accordingly, the Company and the Buyer hereby agree as follows: 1. If in compliance with the requirements of the Charter Amendment, an IRS Ruling is required to be obtained with respect to the proposed acquisition (the "Proposed Acquisition") of Equity Stock by any stockholder or proposed stockholder of the Company (other than the Buyer or an affiliate of the Buyer) (the "Third Party"), the Company shall promptly notify (the "Company Notice") the Buyer in writing of the Proposed Acquisition. The Company Notice shall (x) identify the Third Party and (y) set forth the maximum aggregate value of the Third Party's permitted Beneficial Ownership of Equity Stock (assuming completion of the Proposed Acquisition) as a percentage of the aggregate value of the outstanding shares of Equity Stock (as such percentage may be adjusted pursuant to paragraph 5 below, the "Holder Percentage Ownership Limit"). The Buyer shall have fifteen (15) business days after delivery of the Company Notice in which to notify the Company in writing (the "Election Notice") that the Buyer elects to cause a request to be made for the Buyer Ruling (as hereinafter defined) and to otherwise proceed to obtain an exemption from the Ownership Limit, in the manner described in the succeeding paragraphs, provided however, the Buyer shall have no rights, and the Company shall have no obligations, hereunder with regard to the Proposed Acquisition, unless, as of the date of delivery of the Election Notice, (a) if the average of the last reported sale prices per share of the Company's Common Stock (as defined in the Stock Purchase Agreement), as determined by the provisions of Section 5(e)(vii) of the Articles Supplementary, filed July 1, 1996, for the Company's 8.75% Convertible Preferred Stock, Series 1996A (the "Articles Supplementary"), on each of the ten (10) consecutive Trading Days (as defined in the Articles Supplementary) preceding the date on which the Buyer delivers the Election Notice (the "Average Closing Price") is equal to or less than $23.00, Buyer and those of its affiliates that are controlled by Westbrook Real Estate Partners, L.L.C., considered together as a whole (collectively, the "Buyer Entities"), hold no less than $10 million in value of such Common Stock (calculated by multiplying the number of shares of such Common Stock held by the Buyer Entities [assuming conversion of all shares of Preferred Stock (as defined in the Stock Purchase Agreement) held by the Buyer Entities into shares of such Common Stock at the Conversion Price (as defined in the Articles Supplementary)] by the Average Closing Price), or (b) if the Average Closing Price is greater than $23.00, the Buyer Entities hold no less than $25 million in value of such Common Stock (calculated by multiplying the number of shares of such Common Stock held by the Buyer October 21, 1996 Page 3 Entities [assuming conversion of all shares of Preferred Stock held by the Buyer Entities into shares of such Common Stock at the Conversion Price] by the Average Closing Price), provided that if, prior to June 20, 1997, such Average Closing Price is greater than $23.00, the value of the Common Stock held by the Buyer Entities shall be calculated as if Buyer purchased all 1,600,000 shares of Preferred Stock contemplated to be purchased by Buyer under the Stock Purchase Agreement (excluding, however, any shares of Preferred Stock actually purchased by Buyer and subsequently transferred to any person or entity other than a Buyer Entity). In the event that the Company does not receive the Election Notice within the fifteen (15) business days prescribed by the preceding sentence, the Buyer shall be deemed to have irrevocably and forever waived all of its rights pursuant to this paragraph as to the Proposed Acquisition triggering the Election Notice (but not as to any future Proposed Acquisition). 2. If the Buyer makes the election described in the previous paragraph, the Company shall (a) promptly, but in no event later than the date on which the Buyer Ruling Request (as hereinafter defined) is filed, recommend to the Board of Directors that, conditioned upon the Company's receipt of the Buyer Ruling, an opinion of counsel and such undertakings and other items required by the Charter Amendment, and subject to the terms of this agreement, the Board of Directors issue an exemption from the Ownership Limit to the Buyer, increasing the Buyer's maximum permitted ownership of Equity Stock to the Holder Percentage Ownership Limit, as the same may be adjusted pursuant to paragraph 3 hereof and (b) file a request for a ruling from the IRS, authorizing the Buyer to own Equity Stock up to the Holder Percentage Ownership Limit (the "Buyer Ruling Request"). The Company shall file the Buyer Ruling Request concurrently with the request for a ruling from the IRS authorizing the Third Party to own Equity Stock up to the Holder Percentage Ownership Limit (the "Third Party Ruling Request"), provided that the Buyer shall (without limiting Buyer's cooperation obligations under paragraph 3 below) have provided all information it is required to provide for the Buyer Ruling Request and shall have approved the Buyer Ruling Request by the later of (a) the date that the Third Party Ruling Request is prepared to be filed or (b) fifteen (15) business days after the Company's receipt of the Election Notice. The Company shall use to file the Buyer Ruling Request and obtain the IRS Ruling approving the Buyer Ruling Request, as the same may be modified pursuant to paragraph 5 below (the "Buyer Ruling"), the greater of (i) the efforts it is required by contract with the Third Party to file the Third Party Ruling Request and obtain the IRS Ruling approving the Third Party Ruling Request, as the same may be modified pursuant to paragraph 5 below (the "Third Party Ruling"), and (ii) the actual efforts it uses to file the Third Party Ruling Request and obtain the Third Party Ruling. Notwithstanding the foregoing, the Buyer acknowledges and agrees that, subject to paragraph 5 below, (a) any failure to obtain the Buyer Ruling shall not affect the validity of the Third Party Ruling as to the Proposed Acquisition (if obtained) or delay, impair or otherwise affect, in any manner, the consummation of the Proposed Acquisition, and (b) any failure to obtain the Third Party Ruling shall not affect the validity of the Buyer Ruling (if obtained) or delay, impair or otherwise affect, in any manner, the purchase by the Buyer of any shares of Equity Stock permitted pursuant to the exemption under the Charter Amendment granted to the Buyer by the Board pursuant to the Buyer Ruling. October 21, 1996 Page 4 3. Buyer agrees to promptly cooperate with the Company in its preparation of all documents required in connection with the Buyer Ruling Request and the obtainment of the Buyer Ruling, including, providing information as to the nature of Buyer's investors, provided that any representations required to be made by Buyer to the Company shall not differ materially from Buyer's August 1996 representations to the Company in connection with the Company's August 1996 IRS ruling request relating to Buyer and provided further that Buyer may refuse to provide information if it reasonably believes that doing so would be adverse to its interests. Notwithstanding, the foregoing, if the IRS requires Buyer to provide information or representations that Buyer is not required to provide pursuant to the previous sentence, and Buyer refuses to provide any such information or representations, the Company's obligation to file the Buyer Ruling Request and/or to obtain the Buyer Ruling shall immediately and automatically terminate. The Company shall promptly provide the Buyer with copies of any and all correspondence and other items received from the IRS or delivered by the Company to the IRS in connection with the filing and processing of the Buyer Ruling Request (and, if and to the extent not limited or prohibited by any confidentiality arrangement between the Third Party and the Company, the Third Party Ruling Request). Prior to any material communication with the IRS initiated by the Company in connection with the Buyer Ruling Request, the Company shall notify (orally or in writing) the Buyer of the reason for and the general nature of such communication. 4. If the Buyer Ruling is not obtained prior to the later of (a) the date which is six (6) months after the date on which the Company submits to the IRS the Buyer Ruling Request, (b) the date, if any, on or prior to which the Company has agreed with the Third Party to obtain the Third Party Ruling, or (c) if no such date has been agreed upon between the Company and the Third Party, the date on which (x) the Company withdraws the Third Party Ruling Request, (y) the date on which the Third Party Ruling is received by the Company or (z) the date on which the IRS denies or rejects the Third Party Ruling Request, the Company shall have no further obligation to obtain the Buyer Ruling and any and all rights of the Buyer with respect to the Buyer Ruling or with respect to the Proposed Acquisition (but not with respect to any future Proposed Acquisition) shall immediately and automatically terminate and be of no further force or effect and neither party shall have any further rights or obligations with respect thereto (other than the Company's and the Buyer's obligations under paragraph 10 below). 5. Notwithstanding anything to the contrary set forth in paragraph 2 above, the Holder Percentage Ownership Limit shall be adjusted as follows: if the Third Party Ruling Request or the Buyer Ruling Request is, or both are, denied by the IRS or, if, with respect to the Third Party Ruling, the Buyer Ruling or both, the IRS approves an exemption from the Ownership Limit that is lower than the Holder Percentage Ownership Limit requested in the Third Party Ruling Request and/or the Buyer Ruling Request, in either case due in whole or in part (but for no other reason) to a determination by the IRS that the granting of both the requested Buyer Ruling, in full, and the requested Third Party Ruling, in full, could cause the Company to violate the REIT Requirements, the Holder Percentage Ownership Limit shall, at the option of Buyer (the "Buyer Option"), to be exercised no later than four (4) business days after Buyer's receipt of notice of October 21, 1996 Page 5 such denial or determination by the IRS (provided that Buyer's failure to exercise the Buyer Option within such period shall constitute an election by Buyer not to exercise the Buyer Option), and if approved by the IRS, be reduced by the amount required by the IRS to grant the Third Party Ruling and the Buyer Ruling, such that the Holder Percentage Ownership Limit, as adjusted, does not permit any holder of Equity Stock to cause the Company to violate the REIT Requirements. If Buyer timely exercises the Buyer Option, Buyer and the Company shall promptly and reasonably cooperate to appropriately amend the Buyer Ruling Request and to cause the Third Party Ruling Request to be amended, as necessary, and to provide all other documents, as and to the extent required by the IRS to issue the Third Party Ruling and the Buyer Ruling, in each case providing for the reduced Holder Percentage Ownership Limit. Notwithstanding the foregoing, if (a) the reduction in the Holder Percentage Ownership Limit is required due to the Buyer Ruling Request (or any documents or information provided to the IRS in connection therewith), including, without limitation, due to the ownership structure of Buyer or the nature of the beneficial owners of Buyer, (b) Buyer timely exercises the Buyer Option and the IRS approves that the Holder Percentage Ownership Limit as reduced, (c) pursuant to the terms of the Proposed Acquisition, the Third Party has a binding obligation to purchase Equity Stock from the Company (and not from a third party, pursuant to a private sale or purchases on the secondary market or otherwise), the amount of which Equity Stock is reduced (the value of the amount of Equity Stock subject to such reduction, the "Reduction Amount") due to the reduction in the Holder Percentage Ownership Limit, and (d) the Holder Percentage Ownership Limit (prior to any adjustment hereunder) was determined by the Company and the Third Party pursuant to a good faith expectation (assuming that no Buyer Ruling Request would be made) that the IRS would approve the Third Party Ruling without any adjustment hereunder; then, as and when such purchases would have been required by the Third Party pursuant to the Proposed Acquisition, the Buyer Entities shall, collectively, in the aggregate, purchase (on the secondary market or otherwise) shares of Equity Stock (either in the form of Common Stock or such other Equity Stock as mutually agreed upon between Buyer and the Company) equal in value to the Reduction Amount, provided, however, that the Buyer Entities' obligations to make such purchase shall be subject to the satisfaction (or waiver) of all conditions precedent to the Third Party's obligation to purchase all shares of Equity Stock required to be purchased by the Third Party pursuant to the Proposed Transaction (other than any condition relating to a reduction in the Holder Percentage Ownership Limit contemplated by this paragraph 5). Buyer's failure to exercise the Buyer Option, as and when required by this paragraph 5, shall immediately and automatically terminate Buyer's rights hereunder to obtain the Buyer Ruling with respect to the Proposed Acquisition, and thereupon, the Company may modify and/or resubmit the Third Party Ruling Request, in its entirety, and undertake any and all efforts to obtain the Third Party Ruling. 6. The exemption from the Ownership Limit granted to Buyer by the Board of Directors pursuant to paragraph 2 above, if granted, shall be on substantially the same terms and subject to the same restrictions, limitations and conditions (but no other restrictions, limitations or conditions) as the exemption granted to the Third Party by the Board of Directors, including, without limitation, as to minimum Equity Stock ownership requirements, if any, and the ability of the Board of Directors to revoke, limit or modify the exemption, if any, provided that (a) October 21, 1996 Page 6 Buyer shall not be required to purchase any Equity Stock other than Common Stock, unless otherwise agreed by Buyer and the Company (it being understood that, if the exemption granted to the Third Party requires the purchase by the Third Party of any Equity Stock other than Common Stock or such exemption otherwise contains terms or conditions relating to Equity Stock other than Common Stock, unless otherwise agreed to by Buyer and the Company, the exemption granted to Buyer shall be adjusted to refer to equivalent values of Common Stock), and (b) such exemption shall not provide for Buyer's permitted Beneficial Ownership of Equity Stock to be reduced below that permitted by any previous exemption from the Ownership Limit granted to Buyer by the Board of Directors. 7. Without limiting the provisions of paragraph 6 above, if the terms of the Proposed Acquisition require the Third Party to purchase shares of Equity Stock in excess (the number of such excess shares, the "Excess") of the shares of Equity Stock required to raise the value of the Third Party's ownership of Equity Stock above the 25% Limit, on or prior to the later of (a) 270 days after the date of the Buyer Ruling, or (b) the date on which the Third Party is required to complete such purchase (as such date may be waived or extended by the Company and/or the Third Party), Buyer shall purchase shares of Common Stock (or such other Equity Stock as may be agreed by Buyer and the Company) equal in value to the Excess. 8. The request for the Buyer Ruling and all documents and information required in connection therewith shall be in form and substance reasonably satisfactory to Buyer. Subject to the confidentiality requirements of the stockholder or proposed stockholder subject to the Proposed Acquisition, the Company shall promptly provide to the Buyer copies of the Third Party Ruling Request. 9. Nothing in this Agreement shall require the Company to sell shares of Equity Stock directly or indirectly to the Buyer (or provide to the Buyer any preemptive rights or options with respect to the same). 10. If a Buyer Ruling is required by this Agreement, the Company shall prepare the Buyer Ruling and bear the costs it incurs in connection with the preparation, filing and obtainment of the Buyer Ruling. As provided for in the Agreement, the Buyer may review the Buyer Ruling and it shall bear the costs it incurs in connection with such review (including, without limitation, the costs of any counsel and/or consultants it retains). If either party hereto fails to perform any of its obligations under this Agreement or if a dispute arises between the parties hereto concerning the meaning or interpretation of any provision of this Agreement, then the defaulting party or the party not prevailing in such dispute shall pay any and all costs and expenses incurred by the other party on account of such default and/or in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys' fees and disbursements. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Agreement shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Agreement and to survive and not be merged into any such judgment. October 21, 1996 Page 7 11. Without limiting any remedies of the Company, at law or in equity, Buyer's failure to purchase shares of Equity Stock pursuant to the terms of this Agreement, as and when required hereunder, shall cause this Agreement to immediately and automatically terminate and be of no further force or effect. 12. Time is of the essence with respect to the performance by each of the party's hereto of their respective obligations hereunder. 13. This agreement, incorporates by reference, as if specifically set forth herein, all of the provisions of Article 9 of the Stock Purchase Agreement, other than Sections 9.7, 9.11, 9.13 and 9.14 thereof. As used in such Article 9, the term "Agreement" shall mean this agreement. 14. This agreement shall automatically terminate and be of no further force or effect (a) if at any time the Buyer Entities own less than 40,000 shares of Preferred Stock or 46,000 shares of Common Stock, or (b) on the later of (i) the first date on which no shares of Preferred Stock are outstanding, and (ii) December 31, 2001. 15. Except as required by the transactions contemplated herein, none of the rights, responsibilities or obligations of any of the parties hereto may be assigned. Subject to the preceding sentence, this Agreement shall be binding on and inure to the benefit of the parties hereto, their successors and assigns. Very truly yours, ESSEX PROPERTY TRUST, INC. By: /s/ KEITH R. GUERICKE --------------------------------- Keith R. Guericke President October 21, 1996 Page 8 ACCEPTED AND AGREED TO AS OF OCTOBER 21, 1996: TIGER/WESTBROOK REAL ESTATE FUND, L.P. By: Tiger/Westbrook Real Estate Partners Management, L.L.C., its general partner By: Westbrook Real Estate Partners, L.L.C., its managing member By: /s/ PAUL D. KAZILIONIS ------------------------------------ Name: Paul D. Kazilionis Title: Managing Member By: /s/ WILLIAM H. WALTON, III ------------------------------------ Name: William H. Walton, III Title: Managing Member TIGER/WESTBROOK REAL ESTATE CO- INVESTMENT PARTNERSHIP, L.P. By: Tiger/Westbrook Real Estate Partners Management, L.L.C., its general partner By: Westbrook Real Estate Partners, L.L.C., its managing member By: /s/ PAUL D. KAZILIONIS ------------------------------------ Name: Paul D. Kazilionis Title: Managing Member By: /s/ WILLIAM H. WALTON, III ------------------------------------ Name: William H. Walton, III Title: Managing Member EX-12.1 4 EXHIBIT 12.1 EXHIBIT 12.1 ESSEX PROPERTY TRUST, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS (in thousands, except ratios)
ESSEX PROPERTY TRUST, INC. ----------------------------------------------- PERIOD OF 9 MONTHS ENDED YEAR ENDED JUNE 13, 1994 SEPTEMBER 30, DECEMBER 31, TO DECEMBER 31, 1996 1995 1994 --------------- ------------ -------------- EARNINGS: Income before extraordinary item and minority interest $ 10,423 $ 8,231 $ 4,397 Interest expense 8,738 10,928 4,304 Amortization of deferred financing costs 529 1,355 773 Capitalized interest 84 92 - --------- ---------- ------- TOTAL EARNINGS $ 19,774 $ 20,606 $ 9,474 FIXED CHARGES: Interest expense $ 8,738 $ 10,928 $ 4,304 Convertible preferred stock dividends 197 - - Amortization of deferred financing costs 529 1,355 773 Capitalized interest 84 92 - --------- ---------- ------- TOTAL FIXED CHARGES AND PREFERRED STOCK DIVIDENDS $ 9,548 $ 12,375 $ 5,077 --------- ---------- ------- RATIO OF EARNINGS TO FIXED CHARGES (EXCLUDING PREFERRED STOCK DIVIDENDS) 2.11 1.67 1.87 --------- ---------- ------- --------- ---------- ------- RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS 2.07 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 Convertible preferred stock dividends - - - - Amortization of deferred financing costs 96 219 218 216 Capitalized interest - - - - -------- -------- -------- -------- TOTAL FIXED CHARGES AND PREFERRED STOCK DIVIDENDS $ 6,020 $ 12,121 $ 13,442 $ 14,978 -------- -------- -------- -------- RATIO OF EARNINGS TO FIXED CHARGES (EXCLUDING PREFERRED STOCK DIVIDENDS) 1.06 1.03 0.83 0.76 -------- -------- -------- -------- -------- -------- -------- -------- RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS 1.06 1.03 0.83 0.76 -------- -------- -------- -------- -------- -------- -------- -------- FIXED CHARGES IN EXCESS ON EARNINGS - - 2,344 3,582 -------- -------- -------- -------- -------- -------- -------- --------
EX-27.1 5 EXHIBIT 27.1 (FDS)
5 This schedule contains summary financial information extracted from Essex Property Trust, Inc. quarterly report for the period ended September 30, 1996. 1,000 3-MOS DEC-31-1995 SEP-30-1996 6,238 0 8,424 0 0 19,368 344,904 45,296 330,455 15,684 136,676 1 0 0 152,731 330,455 0 12,823 0 6,168 1,091 0 2,931 3,376 0 3,376 0 401 0 0 0.27 0.28
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