-----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, LbfwSMy4UTLab/0vXqNQ5tUP5jRxKFtse+UaiGE5Q1JBK0nIzCHP7EdNncfp/TEV EGDv3UfBP70qVggUFv4Pzw== 0001012870-99-000923.txt : 19990402 0001012870-99-000923.hdr.sgml : 19990402 ACCESSION NUMBER: 0001012870-99-000923 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 001-13106 FILM NUMBER: 99579972 BUSINESS ADDRESS: STREET 1: 925 EAST MEADOW DR CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 6504943700 MAIL ADDRESS: STREET 1: 925 EAST MEADOW DRIVE CITY: PALO ALTO STATE: CA ZIP: 94303 10-K405 1 FORM 10-K405 FOR PERIOD ENDED DECEMBER 31, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-13106 ---------------- ESSEX PROPERTY TRUST, INC. (Exact name of registrant as specified in its charter) Maryland 77-0369576 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
925 East Meadow Drive, Palo Alto, California 94303 (Address of principal executive offices) (Zip code) (650) 494-3700 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.0001 par value New York Stock Exchange Rights to purchase Series A Junior Participating New York Stock Exchange Preferred Stock, par value $.0001
Securities registered pursuant to Section 12(g) of the Act: None ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X] As of March 25, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant was $284,155,992. For purposes of calculating the preceeding amount only, all directors, executive offiers, and shareholders holding 5% or more of the registrant's common stock are assumed to be affilates. The aggregate market value was computed with reference to the closing price on the New York Stock Exchange on such date. This calculation does not reflect a determination that persons are affiliates for any other purpose. As of March 25, 1999, 16,742,616 shares of Common Stock ($.0001 par value) were outstanding. LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part IV, Item 14, on page number 40. DOCUMENTS INCORPORATED BY REFERENCE: The following document is incorporated by reference in Part III of the Annual Report on Form 10K: Proxy statement for the annual meeting of stockholders of Essex Property Trust, Inc. to be held April 27, 1999. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS FORM 10-K
Page No. -------- PART I Item 1 Business................................................ 3 Item 2 Properties.............................................. 22 Item 3 Legal Proceedings....................................... 24 Item 4 Submission of Matters to a Vote of Security Holders..... 24 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters.................................... 25 Item 6 Summary Financial and Operating Data.................... 27 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 29 Item 7A Quantitative and Qualitative Disclosures About Market Risk................................................... 38 Item 8 Financial Statements and Supplementary Data............. 38 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 38 PART III Item 10 Directors and Executive Officers of the Registrant...... 39 Item 11 Executive Compensation.................................. 39 Item 12 Security Ownership of Certain Beneficial Owners and Management............................................. 39 Item 13 Certain Relationships and Related Transactions.......... 39 PART IV Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K............................................... 40 Signatures.............................................. 41
2 PART I Forward Looking Statements Certain statements in this Report on Form 10-K which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company's expectation as to the timing of completion of current development projects, beliefs as to the adequacy of future cash flows to meet operating requirements and to provide for dividend payments in accordance with REIT requirements, and expectations as to the amount of future revenues, expenses, and uses of cash resulting from future activities including non- revenue generating capital expenditures and capital improvement projects, acquisitions and developments, the performance of existing properties and the Company's financing activities. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the actual completion of development projects will be subject to delays, that such development projects will not be completed, that future cash flows will be inadequate to meet operating requirements and/or will be sufficient to provide for dividend payments in accordance with REIT requirements, the actual cost of non-revenue generating capital expenditures and capital improvement programs will exceed the Company's current expectations, as well as those risks, special considerations, and other factors discussed under the caption "Other Matters/Risk Factors" in Item 1 in this Report on Form 10-K, and those other risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Item 1. Business Description of Business Essex Property Trust, Inc. ("the Company" or "Essex") is a self- administered and self-managed equity real estate investment trust ("REIT") engaged in the ownership, acquisition, development and management of multifamily apartment communities. The Company's multifamily portfolio consists of ownership interests in 58 properties (comprising 12,267 apartment units), 22 of which are located in Southern California (Los Angeles, Ventura, Orange and San Diego counties), 15 of which are located in Northern California (the San Francisco Bay Area) and 21 of which are located in the Pacific Northwest (17 in the Seattle metropolitan area and 4 in the Portland, Oregon metropolitan area). The Company also has ownership interests in two office buildings located in Northern California (Palo Alto), one of which houses the Company's headquarters, and three retail shopping centers located in the Pacific Northwest (the "Commercial Properties," and together with the Company's 58 multifamily residential properties, the "Properties"). The Company also has entered into commitments for the development of 1,578 units in eight multifamily communities: four in Northern California, two in Southern California and two in the Pacific Northwest. The Company was incorporated in the state of Maryland in March 1994. On June 13, 1994, the Company commenced operations with the completion of an initial public offering ("the Offering") in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds of the Offering of $112.1 million were used to acquire an approximate 77.2% general partnership interest in Essex Portfolio, L.P. (the "Operating Partnership"). The Company conducts substantially all of its activities through the Operating Partnership. The Company currently owns an approximate 89.9% general partnership interest and senior members of the Company's management and certain outside investors own approximately 10.1% limited partnership interests in the Operating Partnership. As the sole general partner of the Operating Partnership, the Company has control over the management of the Operating Partnership and over each of the Properties. 3 Business Objectives The Company's primary business objective is to maximize Funds from Operations and total returns to stockholders through active property and portfolio management including redevelopment of properties. The Company's strategies include: . Active Property Marketing and Management. Maximize, on a per share basis, cash available for distribution and the capital appreciation of its property portfolio through active property marketing and management and, if applicable, redevelopment. . Selected Expansion of Property Portfolio. Increase, on a per share basis, cash available for distribution through the acquisition and development of multifamily residential properties in selected major metropolitan areas located in the west coast region of the United States. . Optimal Portfolio Asset Allocations. Produce predictable financial performance through a portfolio asset allocation program that seeks to increase or decrease the investments in each market based on changes in regional economic and local market conditions. . Management of Capital and Financial Risk. Optimize the Company's capital and financial risk positions by maintaining a conservative leverage ratio, evaluating financing alternatives on an on-going basis and minimizing the Company's cost of capital. Business Principles The Company was founded on, has followed, and intends to continue to follow the business principles set forth below: Property Management. Through its long-standing philosophy of active property management and a customer satisfaction approach, coupled with a discipline of internal cost control, the Company seeks to retain tenants, maximize cash flow, enhance property values and compete effectively for new tenants in the marketplace. The Company's regional portfolio managers are accountable for overall property operations and performance. They supervise on-site managers, provide training for the on site staff, monitor fiscal performance against budgeted expectations, monitor property performance against the performance of competing properties in the area, prepare operating and capital budgets for executive approval, and implement new strategies focused on enhancing tenant satisfaction, increasing revenue, controlling expenses, and creating a more efficient operating environment. Business Planning and Control. Real estate investment decisions are accompanied by a multiple year plan, to which executives and other managers responsible for obtaining future financial performance must agree in writing. Performance versus plan serves as a significant factor in determining compensation. Property Type Focus. The Company focuses on acquisition and development of multifamily residential communities, containing between 75 and 600 units. These types of properties offer attractive opportunities because such properties (i) are often mispriced by real estate sellers and buyers who lack the Company's ability to obtain and use real-time market information, (ii) provide opportunities for value enhancement since many of these properties have been owned by parties that are either inadequately capitalized or lack the professional property management expertise of the Company. Geographic Focus. The Company focuses its property investments in markets that meet the following criteria: . Major Metropolitan Areas. The Company focuses on metropolitan areas having a regional population in excess of one million people. Real estate markets in these areas are typically characterized by a relatively greater number of buyers and sellers and are, therefore, more liquid. Liquidity is an important element for implementing the Company's strategy of varying its portfolio in response to changing market conditions. 4 . Supply Constraints. The Company believes that properties located in real estate markets with limited development or redevelopment opportunities are well-suited to produce increased rental income. When evaluating supply constraints, The Company reviews: (i) availability of developable land sites on which competing properties could be readily constructed; (ii) political barriers to growth resulting from a restrictive local political environment regarding development and redevelopment (such an environment, in addition to the restrictions on development itself, is often associated with a lengthy development process and expensive development fees); and (iii) physical barriers to growth, resulting from natural limitations to development, such as mountains or waterways. . Rental Demand Created by High Cost of Housing. The Company concentrates on markets in which the cost of renting is significantly lower than the cost of owning a home. In such markets, rent levels are higher and operating expenses and capital expenditures, as a percentage of rent, are lower in comparison with markets that have a lower cost of owning a home. . Job Proximity. the Company believes that most renters select housing based on its proximity to their jobs and on related commuting factors. The Company obtains local area information relating to its residential properties and uses this information when making multifamily residential property acquisition decisions. The Company also reviews the location of major employers relative to its portfolio and potential acquisition properties. Following the above criteria, the Company is currently pursuing investment opportunities in selected markets of Northern and Southern California and the Pacific Northwest. Active Portfolio Management Through Regional Economic Research and Local Market Knowledge. The Company was founded on the belief that the key elements of successful real estate investment and portfolio growth include extensive regional economic research and local market knowledge. The Company utilizes its economic research and local market knowledge to make appropriate portfolio allocation decisions that it believes result in better overall operating performance and lower portfolio risk. The Company maintains and evaluates: . Regional Economic Data. The Company evaluates and reviews regional economic factors for the markets in which it owns properties and where it considers expanding its operations. The Company's research focuses on regional and sub-market supply and demand, economic diversity, job growth, market depth and the comparison of rental price to single-family housing prices. . Local Market Conditions. Local market knowledge includes (i) local factors that influence whether a sub-market is desirable to tenants; (ii) the extent to which the area surrounding a property is improving or deteriorating; and (iii) local investment market dynamics, including the relationship between the value of a property and its yield, the prospects for capital appreciation and market depth. Recognizing that all real estate markets are cyclical, the Company regularly evaluates the results of regional economic and local market research and adjusts portfolio allocations accordingly. The Company actively manages the allocation of assets within its portfolio. The Company seeks to increase its portfolio allocation in markets projected to have economic growth and to decrease such allocations in markets projected to have declining economic conditions. Likewise, the Company also seeks to increase its portfolio allocation in markets that have attractive property valuations and to decrease such allocations in markets that have inflated valuations and low relative yields. Although the Company is generally a long-term investor, it does not establish defined or preferred holding periods for its Properties. Current Business Activities The Company conducts substantially all of its activities through the Operating Partnership, of which it owns an approximate 89.9% general partnership interest. The approximate 10.1% limited partnership interests in the Operating Partnership are owned by directors, officers and employees of the Company and certain third-party investors. As the sole general partner of the Operating Partnership, the Company has operating control over the management of the Operating Partnership and each of the Properties. From time to time, the Company may invest 5 in properties through the acquisition of an interest in another entity, based upon the criteria described above. The Company does not plan to invest in any securities of other entities not engaged in real estate activities. The Company has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes, commencing with the year ended December 31, 1994. In order to maintain compliance with REIT tax rules, the Company provides some of its fee-based asset management and disposition services as well as third-party property management and leasing services through Essex Management Corporation ("EMC"). The Company owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of the Company own 100% of EMC's 1,000 shares of common stock. The Company owns a 1% limited partnership interest in two partnerships that acquired three retail properties from the Company. These investments were made under arrangements whereby EMC became the general partner and the other limited partners were granted the right to require the applicable partnership to redeem their interests for cash. Subject to certain conditions, the Company may, however, elect to deliver an equivalent number of shares of the Company's common stock in satisfaction of the applicable partnership's cash redemption obligation. In February and April 1998, the Operating Partnership sold 1,200,000 and 400,000 units, respectively of its 7.875% Series B Cumulative Redeemable Preferred Units to an institutional investor in a private placement, at a price of $50.00 per unit. The net proceeds from these offerings were $58,275,000 and $19,500,000 respectively. In November 1998, the Operating Partnership sold 500,000 units of its 9.125% Series C Cumulative Redeemable Preferred Units to an institutional investor in a private placement, at a price of $50.00 per unit. The net proceeds from this offering were $24,375,000. Acquisitions During 1998, the Company acquired ownership interests in five multifamily properties consisting of 1,798 units with a total capitalized acquisition cost (including expected renovation costs and adjusted for closing costs) of approximately $166,995,000. These investments were primarily funded by sales of preferred units by the Operating Partnership, cash generated from operations, dispositions of properties and working capital. Of the five properties purchased in 1998, three properties (1,122 units) are located in Southern California and two (676 units) are located in Northern California. Multifamily property ownership interests acquired in 1998 are as follows:
Name Location Units Purchase Price ---- -------- ----- -------------- (in thousands) Southern California Mirabella.............................. Newbury Park, CA 608 $ 50,500 Bunker Hill............................ Los Angeles, CA 456 36,523 Cochran Apartments..................... Los Angeles, CA 58 5,400 Northern California Wimbledon Woods........................ Hayward, CA 560 44,000 Westwood............................... Cupertino, CA 116 19,850 ----- -------- Total................................ 1,798 $156,273 ===== ========
Dispositions In 1998, Essex sold one Pacific Northwest multifamily property and disposed of the three Pacific Northwest retail properties for a net sales price of $26,354,000. The proceeds were used to fund acquisitions of multifamily properties. 6 Development The Company is currently developing eight development projects that are expected to have an aggregate of 1,578 multifamily units and an aggregate estimated development cost, including capitalized interest and overhead costs, of $204,700,000. Such projects are anticipated to be substantially completed during 1999. Park @ Issaquah This development is a 245 unit multifamily community located in Issaquah, Washington. This Project will feature spacious units, direct access garages and specialized interior features. The community will include a pool, spa, exercise room and video theater. As of December 31, 1998, approximately 40% of the units were completed. Of the units completed, approximately 50% have been leased through December 31, 1998. The Company expects to achieve stabilized occupancy (defined as the month in which the multifamily community has a physical occupancy of 95%) in July 1999. The project is being developed by Park Hill LLC (the "LLC"). The Company has a 45% ownership interest in the LLC. According to the terms of the partnership agreement, the Company is responsible for the leasing and management of the operations of the property. The Company has the option to purchase the remaining 55% interest after August 31, 2003. The purchase price will be calculated based on operating results, as defined in the LLC agreement. Fountain Court This development is a 320 unit multifamily community located in Seattle, Washington. This project offers views of downtown Seattle and Puget Sound. Unit amenities include microwaves, washer/dryers, European style cabinetry and ceramic tile entryways. This community will also offer a health club, spa, indoor lap pool, exercise room and entertainment center. The project is a six-story building and occupancy is expected to commence in April 1999. The project is being developed by Fountain Court Apartment Associates, L.P. The Company has a 51% limited partnership interest in this entity. In accordance with the terms of the agreement, in the year 2000, the Company has the option to purchase the remaining 49% interest for a fixed purchase price. Hillsborough Park This development is a 235 unit multifamily community located in La Habra, California. This community will offer a pool, spa, tennis courts and an exercise room. Individual units will have patios or balconies, vaulted ceilings, washer/dryers, microwave ovens and individual garages. The project consists of 15 buildings and is expected to be completed in phases starting in March 1999 through June 1999. The project is being developed solely by the Company. Waterford Place This development is a 238 unit multifamily community located in San Jose, California. This community will feature a fitness center, pool, spa, business center and gated security access. Each unit will feature fireplaces, washer/dryers, and computer workstations with dedicated, high- speed data transmission lines. In 1997, the Company entered into a contract with an unrelated third party to purchase the development 18 months after completion, as defined in the contract. Completion is estimated to be November 1999. The unrelated third party is responsible for the development, leasing and management of the project until the Company purchases the development. Bel Air This development is a 114 unit multifamily community located in San Ramon, California. This project is adjacent to The Shores property that was acquired by the Company in 1995. The units offers direct access garages, nine- foot ceilings, individual entry and the majority of units have golf course views. The project consists of 24 buildings and is expected to be completed in phases starting in March 1999 through May 1999. Occupancy is scheduled to begin in April 1999. The project is being developed solely by the Company. The Carlyle This development is a 132 unit multifamily community located in San Jose, California. The community features a pool, spa, exercise facility, clubhouse, business center, as well as gated access and available garages. Each unit is equipped with state of the art wiring systems for today's high- tech renter, a washer/dryer and ceiling fans. In May 1998, the Company entered into a contract with an unrelated third party to purchase the development 18 months after completion, as defined in the contract. Completion is estimated to be August 1999. The unrelated third party is responsible for the development, leasing and management of the project until the Company purchases the development. 7 Marina View This development is a 188 unit multifamily community located in Marina del Rey, California. This project will feature controlled access underground parking, a pool, spa, fitness center, entertainment center and business center. Units will have tiled fireplaces, microwaves, washer/dryer hook-ups, ceiling fans and harbor views. The project is a single building and is expected to be completed with occupancy beginning in August 1999. This project is being developed solely by the Company. Station Park This development is a 106 unit multifamily community in Walnut Creek, California. This project will offer amenities including high-speed data transmission lines and internet access, attached garages and washer/dryers. The community will also offer a pool, spa, exercise facility, business center and community room. The project is four buildings and is expected to be completed in phases from June 1999 through August 1999. This project is being developed solely by the Company. The Company intends to continue to pursue the development of multifamily communities to the extent that the market conditions and the specific project terms are considered favorable. Offices and Employees The Company is headquartered in Palo Alto, California, and has regional offices in Seattle, Washington, Portland, Oregon, West Lake Village, California and Tustin, California. As of December 31, 1998, the Company had approximately 470 employees. In February 1999, the Company entered into an agreement with Mr. Marcus, its Chairman, which replaces and terminates a non-competition agreement that Mr. Marcus entered into in 1994 in connection with the Company's initial public offering. Under the February 1999 agreement, Mr. Marcus must generally give the Company notice of any contract, which he or his affiliates enter into, for the purchase of a multifamily property in excess of 100 units. If the Company has submitted a written offer for the same property, then the Company at its option may require Mr. Marcus to assign his or his affiliate's contracts to the Company. Environmental Matters Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on, or in such property. Such laws often impose such liability without regard as to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances or wastes also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility to which such substances or wastes were sent, whether or not such facility is owned or operated by such person. In addition, certain environmental laws impose liability for release of asbestos-containing materials ("ACMs"), into the air, and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company could be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and costs related to injuries of persons and property. All of the Properties have been subjected to preliminary environmental assessments, including a review of historical and public data ("Phase I assessments"), by independent environmental consultants. Phase I assessments generally consist of an investigation of environmental conditions at the Property, including a preliminary investigation of the site, an identification of publicly known conditions occurring at properties in the vicinity of the site, an investigation as to the presence of polychlorinated biphenyl's ("PCBs"), ACMs and above-ground and underground storage tanks presently or formerly at the sites, and preparation and issuance of written reports. As a result of information collected in the Phase I assessments, certain of the Properties were 8 subjected to additional environmental investigations, including, in a few cases, soil sampling or ground water analysis to further evaluate the environmental conditions of those Properties. The environmental studies revealed the presence of groundwater contamination on certain of the Properties. Certain of these Properties had contamination which was reported to have migrated on-site from adjacent industrial manufacturing operations, and one Property was previously occupied by an industrial user that was identified as the source of contamination. The environmental studies noted that certain of the Properties are located adjacent to and possibly down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such Properties. The environmental studies also noted that contamination existed at certain Properties because of the former presence of underground fuel storage tanks that have been removed. There are asbestos-containing material in a number of the properties, primarily in the form of ceiling texture, floor tiles and adhesives, which are generally in good condition. At properties where radon has been identified as a potential concern, the Company has implemented remediating measures and additional testing. Based on its current knowledge, the Company does not believe that future liabilities associated with asbestos and radon will be material. Based on the information contained in the environmental studies, the Company believes that the costs, if any, it might bear as a result of environmental contamination or other conditions at these Properties would not have a material adverse effect on the Company's financial condition, result of operations, or liquidity. Certain Properties that have been sold by the Company were identified as having potential groundwater contamination. While the Company does not anticipate any losses or costs related to groundwater contamination on Properties that have been sold, it is possible that such losses or costs may materialize in the future. Except with respect to one Property, the Company has no indemnification agreements from third parties for potential environmental clean-up costs at its Properties. The Company has no way of determining at this time the magnitude of any potential liability to which it may be subject arising out of unknown environmental conditions or violations with respect to the properties formerly owned by the Company. No assurance can be given that existing environmental studies with respect to any of the Properties reveal all environmental liabilities, that any prior owner or operator of a Property did not create any material environmental condition not known to the Company, or that a material environmental condition does not otherwise exist as to any one or more of the Properties. The Company has no insurance coverage for the types of environmental liabilities described above. Insurance The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties. There are, however, certain types of extraordinary losses for which the Company does not have insurance. All of the Properties are located in areas that are subject to earthquake activity. the Company has obtained earthquake insurance for all the Properties. This earthquake insurance is subject to an aggregate limit of $40.0 million payable upon a covered loss in excess of a $7.5 million self- insured retention amount and a 5% deductible. The Company may selectively exclude properties from being covered by earthquake insurance based on management's evaluation of the following factors: (i) the availability of coverage on terms acceptable to the Company, (ii) the location of the property and the amount of seismic activity affecting that region, and, (iii) the age of the property and building codes in effect at the time of construction. Despite earthquake coverage on all of its Properties placed in service, should a property sustain damage as a result of an earthquake, the Company may incur losses due to deductibles, co-payments or losses in excess of applicable insurance, if any. Although the Company carries certain insurance for non-earthquake damages to its properties and liability insurance, the Company may still incur losses due to uninsured risks, deductibles, co-payments or losses in excess of applicable insurance coverage. Competition The Company's Properties compete for tenants with similar properties primarily on the basis of location, rent charged, services provided, and the design and condition of the improvements. Competition for tenants from 9 competing properties affects the amount of rent charged as well as rental growth rates, vacancy rates, deposit amounts, and the services and features provided at each property. While economic conditions are generally stable in the Company's target markets, a prolonged economic downturn could have a material adverse effect on the Company's financial position, results of operations or liquidity. The Company also experiences competition when attempting to acquire properties that meet its investment criteria. Such competing buyers include domestic and foreign financial institutions, other REIT's, life insurance companies, pension funds, trust funds, partnerships and individual investors. Working Capital The Company expects to meet its short-term liquidity requirements by using working capital, amounts available on lines of credit, and any portion of net cash flow from operations not required for distribution. The Company believes that its future net cash flows will be adequate to meet operating requirements and to provide for payment of distributions by the Company in accordance with REIT requirements. The Company has credit facilities in the committed amount of approximately $110,000,000. At December 31, 1998 the Company had an outstanding balance of $35,693,000 under these facilities. Other Matters/Risk Factors Debt Financing At December 31, 1998, the Company had approximately $361,515,000 of indebtedness (including $94,513,000 of variable rate indebtedness), of which $325,822,000 was secured by certain properties. The Company is subject to the risks normally associated with debt financing, including the following: . cash flow may not be sufficient to meet required payments of principal and interest; . inability to refinance existing indebtedness on encumbered Properties; and . the terms of any refinancing may not be as favorable as the terms of existing indebtedness. Uncertainty of Ability to Refinance Balloon Payments At December 31, 1998, the Company had an aggregate of approximately $361,515,000 of mortgage debt and lines of credit, some of which are subject to balloon payments of principal. The Company does not expect to have sufficient cash flows from operations to make all of such balloon payments when due under these mortgages and lines of credit. At December 31, 1998, these mortgages and lines of credit had the following scheduled maturity dates: 1999--$2.4 million; 2000--$56.0 million; 2001--$2.4 million; 2002-- $24.5 million; 2003--$30.1 million, 2004 and thereafter--$246.1 million. As a result, the Company may not be able to refinance such mortgage indebtedness. The Properties subject to these mortgages could be foreclosed upon or otherwise transferred to the mortgagee. This could mean a loss to the Company of income and asset value. Alternatively, the Company may be required to re- finance the debt at higher interest rates. If the Company is unable to make such payments when due, a mortgage lender could foreclose on the property securing the mortgage, which could have a material adverse effect on the financial condition and results of operations of the Company. Risk Of Rising Interest Payments At December 31, 1998, the Company had approximately $58,820,000 of long- term variable rate indebtedness bearing interest at a floating rate tied to the rate of short-term tax exempt securities (which matures at various dates from 2014 through 2026) and $35,693,000 of variable rate indebtedness under its line of credit bearing interest at 1.15% over LIBOR (which matures in 2000). Although approximately $29,220,000 of the $58,820,000 long-term variable rate indebtedness is subject to an interest rate protection agreement, which may reduce the risks associated with fluctuations in interest rates, an increase in interest rates may have an adverse effect on net income and results of operations of the Company. 10 Risk That Interest Rate Hedging Arrangements Cannot Be Refinanced Or Replaced The Company has, from time to time, entered into agreements to reduce the risks associated with increases in interest rates, and may continue to do so. Although these agreements may partially protect against rising interest rates, these agreements also may reduce the benefits to the Company when interest rates decline. There can be no assurance that any such hedging arrangements can be refinanced or that the Company will be able to enter into other hedging arrangements to replace existing ones if interest rates decline. Furthermore, interest rate movements during the term of interest rate hedging arrangements may result in a gain or loss on our investment in the hedging arrangement. In addition, if a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, the Company may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the hedging arrangement may subject the Company to increased credit risks. In order to minimize counterparty credit risk, the Company policy is to enter into hedging arrangements only with large financial institutions that maintain an investment grade credit rating. Acquisition Activities: Risks That Acquisitions Will Fail To Meet Expectations The Company intends to continue to acquire multifamily residential properties. There are risks that acquired properties will fail to perform as expected. Estimates of the costs of improvements necessary to allow the Company to market an acquired property as originally intended may prove to be inaccurate. In addition, the Company expects to finance future acquisitions, in whole or in part, under various forms of secured or unsecured financing or through the issuance of partnership units by the Operating Partnership or additional equity by the Company. The use of equity financing, rather than debt, for future developments or acquisitions could dilute the interest of the Company's existing stockholders. If new acquisitions are financed under existing lines of credit, there is a risk that, unless substitute financing is obtained, further availability under the lines of credit for new development may not be available or may be available only on disadvantageous terms. Also, the Company may not be able to refinance our existing lines of credit upon maturity, or the terms of such refinancing may not be as favorable as the terms of the existing indebtedness. Further, acquisitions of properties are subject to the general risks associated with real estate investments. See "Adverse Effect to Property Income and Value Due to General Real Estate Investment Risks." Risks That Development Activities Will Be Delayed Or Not Completed The Company pursues multifamily residential property development projects from time to time. Development projects generally require various governmental and other approvals, the receipt of which cannot be assured. The Company's development activities generally entail certain risks, including the following: . funds may be expended and management's time devoted to projects that may not be completed; . construction costs of a project may exceed original estimates possibly making the project economically unfeasible; . development projects may be delayed due to, among other things, adverse weather conditions; . occupancy rates and rents at a completed project may be less than anticipated; and . expenses at a completed development may be higher than anticipated. These risks may reduce the funds available for distribution to the Company's stockholders. Further, the development of properties is also subject to the general risks associated with real estate investments. See "--Adverse Effect to Property Income and Value Due to General Real Estate Investment Risks." The Geographic Concentration Of The Properties And Fluctuations In Local Market May Adversely Impact Income Significant amounts of rental revenues for the year ended December 31, 1998, were derived from Properties concentrated in the San Francisco Bay Area, the Seattle metropolitan area, Southern California and the Portland 11 metropolitan area. As a result of this geographic concentration, if a local property market performs poorly, the income from the Properties in that market could decrease. As a result of such a decrease in income, the Company may be unable to pay expected dividends to the Company's stockholders. The performance of the economy in each of these areas affects occupancy, market rental rates and expenses and, consequently impacts the income generated from the Properties and their underlying values. The financial results of major local employers may also impact the cash flow and value of certain of the Properties. Economic downturns in the local markets in which the Company owns properties could have a negative impact on the financial condition and results from operations of the Company. Competition In The Multifamily Residential Market May Adversely Affect Operations And The Rental Demand For the Company's Properties There are numerous housing alternatives that compete with the multifamily Properties in attracting residents. These include other multifamily rental apartments and single family homes that are available for rent in the markets in which the Properties are located. The Properties also compete for residents with new and existing homes and condominiums that are for sale. In addition, other competitors for development and acquisitions of properties may have greater resources than the Company. If the demand for the Company's Properties is reduced or if competitors develop and/or acquire competing properties on a more cost-effective basis, rental rates may drop, which may have a material adverse affect on the financial condition and results of operations of the Company. The Company also faces competition from other real estate investment trusts, businesses and other entities in the acquisition, development and operation of properties. Some of the competitors are larger and have greater financial resources than the Company. This competition may result in increased costs of properties the Company acquires and/or develops. Debt Financing On Properties May Result In Insufficient Cash Flow Where possible, the Company intends to continue to use leverage to increase the rate of return on its investments and to provide for additional investments that the Company could not otherwise make. There is a risk that the cash flow from the Properties will be insufficient to meet both debt payment obligations and the distribution requirements of the real estate investment trust provisions of the Internal Revenue Code of 1986, as amended. The Company may obtain additional debt financing in the future, through mortgages on some or all of the Properties. These mortgages may be recourse, non-recourse, or cross-collateralized. As of December 31, 1998, the Company had 33 properties encumbered by debt. Of the 33 properties, 18 are secured by deeds of trust relating solely to those properties, with respect to the remaining 15 properties, three cross-collateralized mortgages are secured by eight properties, three properties, and three properties, respectively, and the Company's $10 million line of credit is secured by one property. The holders of this indebtedness will have a claim against these Properties and to the extent indebtedness is cross-collateralized, lenders may seek to foreclose upon properties which are not the primary collateral for their loan. This may, in turn, accelerate other indebtedness secured by Properties. Foreclosure of Properties would cause a loss to the Company of income and asset value. Increase In Dividend Requirements As A Result Of The Convertible Preferred Stock, Series B Preferred Stock, And Series C Preferred Stock May Lead to a Possible Inability To Sustain Dividends In 1996, the Company sold $40.0 million of its 8.75% convertible preferred stock, Series 1996A (the "Convertible Preferred Stock") at $25.00 per share to Westbrook Real Estate Fund I, L.P. (formerly known as Tiger/Westbrook Real Estate Fund, L.P.), and Westbrook Real Estate Co-Investment Partnership I, L.P. (formerly known as Tiger/Westbrook Real Estate Co-Investment Partnership, L.P.). Westbrook Real Estate Fund, L.P. and Westbrook Real Estate Co- Investment Partnership I, L.P. are collectively referred to herein as "Westbrook. On January 6, 1999, these entities converted 87,500 shares of the Convertible Preferred Stock into 100,000 shares of Common Stock and they presently own 1,512,500 shares of Convertible Preferred Stock. The Company has filed a registration statement covering Tiger/Westbrook's resale of all shares of common stock 12 issuable upon conversion of the Convertible Preferred Stock and the registration statement was declared effective by the Securities and Exchange Commission in December 1998. On February 6 and April 20, 1998, the Operating Partnership completed the private placement of a total of 1,600,000 units of 7.875% Series B Cumulative Redeemable Preferred Units (the "Series B Preferred Units"), representing a limited partnership interest in the Operating Partnership, to an institutional investor. The Series B Preferred Units will become exchangeable, on a one for one basis, in whole or in part at any time on or after February 6, 2008 (or earlier under certain circumstances) for shares of the Company's 7.875% Series B Cumulative Redeemable Preferred Stock, par value $.0001 per share (the "Series B Preferred Stock"). The Operating Partnership may redeem the Series B Preferred Units on or after February 6, 2003. Also, on November 24, 1998, the Operating Partnership completed the private placement of 500,000 units of 9.125% Series C Cumulative Redeemable Preferred Units (the "Series C Preferred Units"), representing a limited partnership interest in the Operating Partnership, to an institutional investor. The Series C Preferred Units will become exchangeable, on a one for one basis, in whole or in part at any time on or after November 24, 2008 (or earlier under certain circumstances) for shares of the Company's 9 1/8% Series C Cumulative Redeemable Preferred Stock, par value $.0001 per share (the "Series C Preferred Stock"). The Operating Partnership may redeem the Series C Preferred Units on or after November 24, 2003. The cash dividends payable on the Convertible Preferred Stock substantially increase the cash that must be paid out before dividends may be paid on the Common Stock. Dividends may be paid on shares of Common Stock in any fiscal quarter only if full, cumulative cash dividends have been paid on all shares of Convertible Preferred Stock in the annual amount equal to the greater of (i) $2.1875 per share (8.75% of the $25.00 per share price), or (ii) the dividends (on an as-converted basis) paid with respect to the Common Stock plus, in both cases, any accumulated but unpaid dividends on the Convertible Preferred Stock. Further, if any of the Series B Preferred Units are exchanged for shares of Series B Preferred Stock, the holders of Series B Preferred Stock will be entitled to receive cumulative preferential cash distributions equal to $3.9375 (7.875% of the $50.00 liquidation preference) per share of Series B Preferred Stock. For any period of time that any Series B Preferred Stock is outstanding, no distribution may be authorized, declared or paid on the Common Stock or any class or series of other stock of the Corporation ranking junior to the Series B Preferred Stock unless all distributions accumulated on all Series B Preferred Stock have been paid in full. Also, if any of the Series C Preferred Units are exchanged for shares of Series C Preferred Stock, the holders of Series C Preferred Stock will be entitled to receive cumulative preferential cash distributions equal to $4.5625 (9.125% of the $50.00 liquidation preference) per share of Series C Preferred Stock. For any period of time that any Series C Preferred Stock is outstanding, no distribution may be authorized, declared or paid on the Common Stock or any class or series of other stock of the Corporation ranking junior to the Series C Preferred Stock unless all distributions accumulated on all Series C Preferred Stock have been paid in full. The dividends payable on the Series B Preferred Stock and Series C Preferred Stock would further increase the cash that must be paid out before dividends may be paid on the Common Stock. The 1,512,500 outstanding shares of Convertible Preferred Stock Series 1996A are convertible at the option of the holder into shares of Common Stock. If, after June 20, 2001, the Company requires a mandatory conversion of all of the Convertible Preferred Stock, each of the holders of the Convertible Preferred Stock may cause the Company to redeem any or all of their shares of Convertible Preferred Stock. Such a redemption would decrease the amount of cash available to pay cash dividends on the Common Stock. When there ceases to be in excess of 40,000 shares of Convertible Preferred Stock outstanding, we may purchase all of the outstanding shares of Convertible Preferred Stock from the holders. If the Company wishes to issue any Common Stock in the future (including, upon exercise of stock options), the funds required to continue to pay cash dividends at current levels will be increased. The Company's ability to pay dividends will depend largely upon the performance of the Properties and other properties that may be acquired in the future. 13 The Company's ability to pay dividends on the Company's stock is further limited by the Maryland General Corporation Law. Under the Maryland General Corporation Law, the Company may not make a distribution on stock if, after giving effect to such distribution, either . the Company would not be able to pay its indebtedness as it becomes due in the usual course of business; or . the Company's total assets would be less than its total liabilities. If the Company cannot pay dividends on its stock, it's status as a real estate investment trust may be jeopardized. Existing Registration Rights And Preemptive Rights May Have An Adverse Effect On The Market Price Of The Shares Registration rights are held by the senior members of the Company's management and certain outside investors (collectively, the "Founders") who as of December 31, 1998 owned approximately 10.1% limited partnership interests in the Operating Partnership. These rights include certain "demand" and "piggyback" registration rights with respect to shares of Common Stock issuable in connection with the exchange of their limited partnership interests in the Operating Partnership. The aggregate 10.1% limited partnership interests held by the Founders in the Operating Partnership is exchangeable for an aggregate of 1,873,473 shares of Common Stock. In addition, the Operating Partnership has invested in certain real estate partnerships. Certain partners in such limited partnerships have the right to have their limited partnership interests in such partnerships redeemed for cash or, at our option, for 779,400 shares of Common Stock. These partners also have certain "demand" and "piggyback" registration rights with respect to the shares of Common Stock that may be issued in exchange for such limited partnership interests. All of the registration rights discussed above could materially adversely affect the market price for the shares of Common Stock. In addition, the holders of the Convertible Preferred Stock have preemptive rights to purchase a pro rata share of shares of Common Stock that may be offered in the future. These preemptive rights could have a material adverse effect on the market price for the shares of Common Stock. Conversion Of The Convertible Preferred Stock May Lead to Substantial Dilution To The Holders Of Common Stock The shares of Convertible Preferred Stock are convertible, at the option of the holders, into the number of shares of Common Stock that is determined based on the number and price of common shares issued. As of December 31, 1998, the then conversion price was $21.875 per share and, therefore, each share of Convertible Preferred Stock was convertible into approximately 1.14 shares of Common Stock. All the shares issuable upon conversion of all of the Convertible Preferred Stock are covered by an existing shelf registration statement, which would allow such shares to be resold into the public market. In order to protect the holders of the Convertible Preferred Stock against dilution, the conversion price may be reduced in certain circumstances, including if Common Stock is issued at a price below the conversion price. Such reduction in the conversion price could increase the dilution to holders of shares of Common Stock if and when the Convertible Preferred Stock is converted into shares of Common Stock. The proportionate ownership, voting power and earnings per share of the holders of Common Stock could be substantially diluted in the event that a substantial number of additional shares of Common Stock and/or Preferred Stock are issued, either upon conversion of the Convertible Preferred Stock, in connection with future acquisitions or otherwise. Concentration Of Voting Power And Consent Requirements Of The Holders Of the Convertible Preferred Stock May Be Detrimental To Holders of Common Stock As of December 31, 1998, George M. Marcus, the Chairman of the Company's Board of Directors, beneficially owned 1,953,187 shares of Common Stock (including shares issuable upon exchange of limited partnership interests in the Operating Partnership and assuming exercise of all vested options). This represents 14 approximately 10.5% of the outstanding shares of Common Stock. Mr. Marcus currently does not have majority control over the Company. However, he currently has, and likely will continue to have, significant influence with respect to the election of directors and approval or disapproval of significant corporate actions. The holders of the Convertible Preferred Stock have certain consent rights to actions the Company may take. The Company may not, among other things, make certain revisions to its corporate structure and operations, without the approval of holders of two-thirds of the outstanding shares of Convertible Preferred Stock, voting as a separate class. This includes (i) revisions that would affect the rights, priority and preferences of the Convertible Preferred Stock, (ii) the merger or consolidation of the Company or the Operating Partnership with another entity, (iii) the sale of all or substantially all of the Company's assets, (iv) changing the geographic concentration of the portfolio of Properties, and (v) undergoing a change in control of either the Company or the Operating Partnership. The Company's Charter provides that the holders of the Convertible Preferred Stock, voting as a class, have the right to elect one member of the Board of Directors. The holders of the Convertible Preferred Stock elected Gregory J. Hartman to the Board of Directors. Mr. Hartman is a managing principal of Westbrook Real Estate Partners, L.L.C., the managing member of the sole general partner of Westbrook. Under certain circumstances, the holders of the Convertible Preferred Stock will be entitled to elect up to four additional directors. Such circumstances include the Company's failure to pay quarterly dividends on the Convertible Preferred Stock for four quarters and the breach of certain provisions of the Charter and bylaws affecting the holders of the Convertible Preferred Stock. Moreover, the Company may not authorize or create any class or series of stock that ranks equal or senior to the Convertible Preferred Stock with respect to (i) the payment of dividends or (ii) amounts upon liquidation, dissolution or winding up without the consent of the holders of two-thirds of the outstanding shares of Convertible Preferred Stock, voting separately as a single class. The interests of the holders of the Convertible Preferred Stock, and indirectly the director or directors elected by the holders of the Convertible Preferred Stock, may differ from or conflict with the interests of the holders of Common Stock. In addition, upon conversion of the Convertible Preferred Stock into shares of Common Stock, the holders of Convertible Preferred Stock would hold approximately 8.9% of all outstanding shares of Common Stock (assuming exchange of all partnership interests in the Operating Partnership into shares of Common Stock), assuming that such conversion took place on December 31, 1998. Consequently, upon such conversion, the holders of Convertible Preferred Stock would, as a class, be the second largest stockholder in the Company and could have considerable influence with respect to the election of directors and the approval or disapproval of significant corporate actions. In view of the substantial influence of the holders of the Convertible Preferred Stock over the Company's affairs, it should be noted that interests of the holders of the Convertible Preferred Stock do not necessarily coincide with those of the holders of the Common Stock. Therefore, actions by the holders of the Convertible Preferred Stock will not necessarily be in the best interests of the holders of Common Stock. Certain Voting Rights Of The Series B Preferred Stock And Series C Preferred Stock In general, the holders of the Series B Preferred Stock and Series C Preferred Stock do not have any voting rights. However, if full distributions are not made on any Series B Preferred Stock or Series C Preferred Stock for six quarterly distribution periods, the holders of Series B Preferred Stock or Series C Preferred Stock (as applicable) who have not received distributions, voting together as a single class, will have the right to elect two additional directors to serve on the Company's Board of Directors. These voting rights continue until all distributions in arrears and distributions for the current quarterly period on the Series B Preferred Stock and/or Series C Preferred Stock have been paid in full. At that time, the holders of the Series B Preferred Stock and/or Series C Preferred Stock are divested of these voting rights, and the term and office of the directors so elected immediately terminates. 15 In addition, the Company may not authorize or create any class or series of stock that ranks senior to the Series B Preferred Stock or Series C Preferred Stock with respect to (1) the payment of dividends, (2) rights upon liquidation, dissolution or winding-up of the Company, or amend, alter or repeal the provisions of the Company's Charter or Bylaws, that would materially and adversely affect these rights without the consent of the holders of two-thirds of the outstanding shares of Series B Preferred Stock or Series C Preferred Stock (as applicable) each voting separately as a single class. Also, while any shares of the Series B Preferred Stock or Series C Preferred Stock are outstanding, the Company may not (1) merge or consolidate with another entity, or (2) a transfer substantially all of its assets to any corporation or other entity, without the affirmative vote of the holders of at least two-thirds of the Series B Preferred Stock and Series C Preferred Stock, each voting separately as a class, unless the transaction meets certain criteria. Exemption Of Westbrook and George Marcus From The Maryland Business Combination Law May Allow Certain Transactions Between The Company And Westbrook And/Or George Marcus To Proceed Without Compliance With Such Law The Maryland General Corporation Law establishes special requirements for "business combinations" between a Maryland corporation and "interested stockholders" unless exemptions are applicable. An interested stockholder is any person who beneficially owns ten percent or more of the voting power of the then-outstanding voting stock. Among other things, the law prohibits for a period of five years a merger and other similar transactions between the Company and an interested stockholder unless the Board of Directors approved the transaction prior to the party becoming an interested stockholder. The five year period runs from the most recent date on which the interested stockholder became an interested stockholder. The law also requires a supermajority stockholder vote for such transactions after the end of the five year period. This means that the transaction must be approved by at least: . 80% of the votes entitled to be cast by holders of outstanding voting shares; and . 66% of the votes entitled to be cast by holders of outstanding voting shares other than shares held by the interested stockholder with whom the business combination is to be effected. However, as permitted by the statute, the Board of Directors irrevocably has elected to exempt any business combination by the Company with Westbrook and its affiliates from the "business combination" provision of the Maryland General Corporation Law. In addition, the Board of Directors similarly exempted George M. Marcus, William A. Millichap, who are the chairman and a director of the Company, respectively, and The Marcus & Millichap Company ("M&M") or any entity owned or controlled by Messrs Marcus and Millichap and M&M. Consequently, the five-year prohibition and the super-majority vote requirement described above will not apply to any business combination between the Company and either Westbrook (or its affiliates), Mr. Marcus, Mr. Millichap, or M&M. As a result, the Company may in the future enter into business combinations with Westbrook (or its affiliates) or Messrs Marcus and Millichap and M&M, without compliance with the super-majority vote requirements and other provisions of the Maryland General Corporation Law. Influence of Executive Officers, Directors And Significant Stockholders Under the partnership agreement of the Operating Partnership, the consent of the holders of limited partnership interests is generally required for any amendment of the agreement and for certain extraordinary actions. Through their ownership of limited partnership interests and their positions in the Company, the Company's directors and executive officers, including Messrs. Marcus and Millichap, have substantial influence on the Company. Consequently, their influence could result in decisions that do not reflect the interests of all stockholders of the Company. 16 Anti-Takeover Provisions Contained In The Operating Partnership Agreement, Charter, Bylaws, The Convertible Preferred Stock And Certain Provisions Of Maryland Law Could Delay, Defer Or Prevent A Change In Control Of the Company While the Company is the sole general partner of the Operating Partnership, and generally has full and exclusive responsibility and discretion in the management and control of the Operating Partnership, certain provisions of the Operating Partnership's Partnership Agreement place limitations on the Company's ability to act with respect to the Operating Partnership. Such limitations could delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for the stock or otherwise be in the best interest of the stockholders or that could otherwise adversely affect the interest of the stockholders. The Partnership Agreement provides that if the limited partners own at least 5% of the outstanding units of limited partnership interest in the Operating Partnership, the Company cannot, without first obtaining the consent of a majority-in-interest of the limited partners in the Operating Partnership, transfer all or any portion of the Company's general partner interest in the Operating Partnership to another entity. Such limitations on the Company's ability to act may result in the Company being precluded from taking action that the Board of Directors believes is in the best interests of the Company's stockholders. In addition, as of December 31, 1998, two individuals together held more than 50% of the outstanding units of limited partnership interest in the Operating Partnership, allowing such actions to be blocked by a small number of limited partners. The Company's charter authorizes the issuance of additional shares of Common Stock or preferred stock and to set the preferences, rights and other terms of such preferred stock without the approval of the holders of the Common Stock. The Company must obtain the approval of the holders of two- thirds of the outstanding shares of Convertible Preferred Stock in order to authorize, create or issue any class or series of stock that ranks equal or senior to the Convertible Preferred Stock. Although the Company has no intention to issue any additional shares of Convertible Preferred Stock or other preferred stock at the present time, the Company may, subject to the consent of the holders of Convertible Preferred Stock, establish one or more series of preferred stock that could delay, defer or prevent a transaction or a change in control of the Company. Such a transaction might involve a premium price for the Company's stock or otherwise be in the best interests of the holders of Common Stock. Also, such a class of preferred stock could have dividend, voting or other rights that could adversely affect the interest of holders of Common Stock. The Company's charter, as well as its stockholder rights plan, also contains other provisions that may delay, defer or prevent a transaction or a change in control of the Company that might be in the best interest of the Company's stockholders. The Company's stockholder rights plan is designed, among other things, to prevent a person or group from gaining control of the Company without offering a fair price to all of the Company's stockholders. Also, the Bylaws may be amended by the Board of Directors (subject to the consent of the holders of the Convertible Preferred Stock in certain circumstances) to include provisions that would have a similar effect, although the Company presently has no such intention. The Charter provides that the Company must obtain the approval of the holders of the Convertible Preferred Stock holding two-thirds of the outstanding shares of Convertible Preferred Stock before the Company or the Operating Partnership may merge or consolidate with any other entity or sell all or substantially all of the assets. Also, the terms of the Convertible Preferred Stock require that the Company must obtain the approval of the holders of more than 50% of the outstanding shares of Convertible Preferred Stock before undergoing a change in control (as defined in the Charter). Additionally, the Charter contains ownership provisions limiting the transferability and ownership of shares of capital stock, which may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company. For example, subject to receiving an exemption from the Board of Directors, potential acquirers may not purchase more than 6% percent in value of the stock (other than qualified pension trusts which can acquire 9.9%). This may discourage tender offers that may be attractive to the holders of Common Stock and limit the opportunity for stockholders to receive a premium for their shares of Common Stock. In addition, the Maryland General Corporations Law restricts the voting rights of shares deemed to be "control shares." Under the Maryland General Corporations Law, "control shares" are those which, when aggregated with any other shares held by the acquirer, entitle the acquirer to exercise voting power within 17 specified ranges. Although the Bylaws exempt the Company from the control share provisions of the Maryland General Corporations Law, the provisions of the Bylaws may be amended or eliminated by the Board of Directors at any time in the future, provided that it obtains the approval of the holders of two- thirds of the outstanding shares of the Convertible Preferred Stock. Moreover, any such amendment or elimination of such provision of the Bylaws may result in the application of the control share provisions of the Maryland General Corporations Law not only to control shares which may be acquired in the future, but also to control shares previously acquired. If the provisions of the Bylaws are amended or eliminated, the control share provisions of the Maryland General Corporations Law could delay, defer or prevent a transaction or change in control of the Company that might involve a premium price for the stock or otherwise be in the best interests of its stockholders. Bond Compliance Requirements May Limit Income From Certain Properties At December 31, 1998, the Company had approximately $58.8 million of tax- exempt financing relating to the Inglenook Court Apartments, Wandering Creek Apartments, Treetops Apartments, Meadowood Apartments and Camarillo Oaks Apartments. The tax-exempt financing subjects these Properties to certain deed restrictions and restrictive covenants. The Company expects to engage in tax- exempt financings in the future. In addition, the Internal Revenue Code of 1986, as amended, and its related regulations impose various restrictions, conditions and requirements excluding interest on qualified bond obligations from gross income for federal income tax purposes. The Internal Revenue Code of 1986, as amended, also requires that at least 20% of apartment units be made available to residents with gross incomes that do not exceed 50% of the median income for the applicable family size as determined by the Housing and Urban Development Department of the federal government. In addition to federal requirements, certain state and local authorities may impose additional rental restrictions. These restrictions may limit income from the tax-exempt financed properties if the Company is required to lower rental rates to attract residents who satisfy the median income test. If the Company does not reserve the required number of apartment homes for residents satisfying these income requirements, the tax-exempt status of the bonds may be terminated, the obligations under the bond documents may be accelerated and the Company may be subject to additional contractual liability. Adverse Effect To Property Income And Value Due To General Real Estate Investment Risks Real property investments are subject to a variety of risks. The yields available from equity investments in real estate depend on the amount of income generated and expenses incurred. If the Properties do not generate sufficient income to meet operating expenses, including debt service and capital expenditures, cash flow and ability to make distributions to stockholders will be adversely affected. The performance of the economy in each of the areas in which the Properties are located affects occupancy, market rental rates and expenses. Consequently, the income from the Properties and their underlying values may be impacted. The financial results of major local employers may have an impact on the cash flow and value of certain of the Properties as well. Income from the Properties may be further adversely affected by, among other things, the following factors: . the general economic climate; . local economic conditions in which the Properties are located, such as oversupply of space or a reduction in demand for rental space; . the attractiveness of the Properties to tenants; . competition from other available space; . the Company's ability to provide for adequate maintenance and insurance; . increased operating expenses. Also, as leases on the Properties expire, tenants may enter into new leases on terms that are less favorable to the Company. Income and real estate values may also be adversely affected by such factors as applicable laws 18 (e.g., the Americans With Disabilities Act of 1990 and tax laws), interest rate levels and the availability and terms of financing. In addition, real estate investments are relatively illiquid and, therefore, the Company's ability to vary its portfolio promptly in response to changes in economic or other conditions may be adversely affected. Joint Ventures And Joint Ownership Of Properties And Partial Interests In Corporations And Limited Partnerships Could Limit the Company's Ability To Control Such Properties And Partial Interests Instead of purchasing properties directly, the Company has invested and may continue to invest as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, it is possible that the co-venturer in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with the Company's business interests or goals, or be in a position to take action contrary to the Company's instructions or requests, or to Company policies or objectives. Consequently, a co-venturer's actions might subject property owned by the joint venture to additional risk. Although the Company seeks to maintain sufficient control of any joint venture to achieve its objectives, the Company may be unable to take action without the Company's joint venture partners' approval, or joint venture partners could take actions binding on the joint venture without consent. Additionally, should a joint venture partner become bankrupt, the Company could become liable for such partner's share of joint venture liabilities. From time to time, the Company, through the Operating Partnership, invests in corporations, limited partnerships or other entities that have been formed for the purpose of acquiring, developing or managing real property. In certain circumstances, the Operating Partnership's interest in a particular entity may be less than a majority of the outstanding voting interests of that entity. Therefore, the Operating Partnership's ability to control the daily operations of such an entity may be limited. Furthermore, the Operating Partnership may not have the power to remove a majority of the board of directors (in the case of a corporation) or the general partner or partners (in the case of a limited partnership) of such an entity in the event that its operations conflict with the Operating Partnership's objectives. In addition, the Operating Partnership may not be able to dispose of its interests in such an entity. In the event that such an entity becomes insolvent, the Operating Partnership may lose up to its entire investment in and any advances to the entity. Investments In Mortgages The Company may invest in mortgages, in part as a strategy for ultimately acquiring the underlying property. These mortgages may be first, second or third mortgages that may or may not be insured or otherwise guaranteed. The Company anticipates that such investment in mortgage receivables will not in the aggregate be significant. In general, investments in mortgages include the following risks: . that the value of mortgaged property may be less than the amounts owed; . that interest rates payable on the mortgages may be lower than the Company's cost of funds; and . in the case of junior mortgages, that foreclosure of a senior mortgage would eliminate the junior mortgage. If any of the above were to occur, cash flows from operations and the Company's ability to make expected dividends to stockholders could be adversely affected. Possible Environmental Liabilities Under various federal, state and local laws, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of these substances, or the failure to properly clean them up, may adversely affect the owner's or operator's ability to sell or rent the property. It may also limit the ability to borrow money using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances 19 may also be liable for the costs of removal or clean-up of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injuries associated with asbestos-containing materials. Therefore, in connection with the ownership, operation, financing, management and development of real properties, the Company may be potentially liable for removal or clean-up costs, as well as certain other costs. The Company may also be subject to governmental fines and costs related to injuries to persons and property. General Uninsured Losses The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties. There are, however, certain types of extraordinary losses for which the Company does not have insurance. Further, certain of the Properties are located in areas that are subject to earthquake activity. Although the Company has obtained certain limited earthquake insurance coverage, should a Property sustain damage as a result of an earthquake, the Company may sustain losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Changes In Real Estate Tax And Other Laws Generally the Company does not directly pass through costs resulting from changes in real estate tax laws to residential property tenants. The Company also does not generally pass through increases in income, service or other taxes, to tenants under leases. These costs may adversely affect funds from operations and the ability to make distributions to stockholders. Similarly, compliance with changes in (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions or (ii) rent control or rent stabilization laws or other laws regulating housing may result in significant unanticipated expenditures, which would adversely affect the funds from operations and the ability to make distributions to stockholders. Changes In Financing Policy; No Limitation On Debt The Company has adopted a policy of maintaining a debt-to-total-market- capitalization ratio of less than 50%. The calculation of debt- to-total- market-capitalization is as follows: total property indebtedness ____________________________________ = debt-to-total-market-capitalization total property indebtedness + total equity market capitalization As used in the above formula, total market capitalization is equal to the aggregate market value of the outstanding shares of Common Stock (based on the greater of current market price or the gross proceeds per share from public offerings of the outstanding shares plus any undistributed net cash flow), assuming the conversion of all limited partnership interests in the Operating Partnership into shares of Common Stock and the conversion of all shares of Convertible Preferred Stock into shares of Common Stock and the gross proceeds of the preferred units of the Operating Partnership. Based on this calculation (including the current market price and excluding undistributed net cash flow), the Company's debt-to-total-market-capitalization ratio was approximately 33.7% as of December 31, 1998. The Company's organizational documents and the organizational documents of the Operating Partnership do not limit the amount or percentage of indebtedness that may be incurred. Accordingly, the Board of Directors could change current policies and the policies of the Operating Partnership regarding indebtedness. If these policies were changed, the Company and the Operating Partnership could incur more debt, resulting in an increased risk of default on the Company obligations and the obligations of the Operating Partnership, and an increase in debt service requirements that could adversely affect the financial condition and results of operations of the Company. Such increased debt could exceed the underlying value of the Properties. 20 Failure To Qualify As A Real Estate Investment Trust The Company has operated as a qualified real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 1994. Although the Company believes that it has operated in a manner which satisfies the real estate investment trust qualification requirements, no assurance can be given that the Company will continue to do so. A real estate investment trust is generally not taxed on its net income distributed to its stockholders. It is required to distribute at least 95% of its taxable income to maintain qualification as a real estate investment trust. Qualification as a real estate investment trust involves the satisfaction of numerous requirements (some on an annual or quarterly basis) established under the highly technical and complex Internal Revenue Code of 1986, as amended, provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within the Company's control. If the Company fails to qualify as a real estate investment trust in any taxable year, it would generally be subject to federal and state income tax (including any applicable alternative minimum tax) at corporate rates on its taxable income for such year. Moreover, unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a real estate investment trust for the four taxable years following the year of disqualification. This treatment would reduce net earnings available for investment or distribution to stockholders because of the additional tax liability for the years involved. In addition, distributions would no longer be required to be made. Other Matters Certain Policies of the Company The Company intends to continue to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. The Company has in the past four years and may in the future (i) issue securities senior to its Common Stock, (ii) fund acquisition activities with borrowings under its line of credit and (iii) offer shares of Common Stock and/or units of limited partnership interest in the Operating Partnership as partial consideration for property acquisitions. The Company from time to time acquires partnership interests in partnerships, either directly or indirectly through subsidiaries of the Company, when such partnership's underlying assets are real estate. In general, the Company does not (i) underwrite securities of other issuers or (ii) actively trade in loans or other investments. The Company primarily invests in multifamily properties in the Southern California area, San Francisco Bay Area, Seattle metropolitan area and the Portland, Oregon metropolitan area. The Company currently intends to continue to invest in multifamily properties in such regions, but may change such policy without a vote of the stockholders. The policies discussed above may be reviewed and modified from time to time by the Board of Directors without the vote of the stockholders. 21 Item 2. Properties Portfolio Overview The Company's property portfolio (including partial ownership interests) consists of the following 63 Properties: 58 multifamily residential Properties containing 12,267 apartment units, two office buildings, one of which houses the Company's headquarters, with approximately 62,000 square feet and three retail properties with approximately 236,000 square feet. The Properties are located in Northern California (the San Francisco bay area), Southern California and the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas). The Company's multifamily Properties accounted for approximately 97% of the Company's revenues for the year ended December 31, 1998. The 58 multifamily residential Properties had an average occupancy rate (based on "Financial Occupancy", which refers to the percentage resulting from dividing actual rents by total possible rents as determined by valuing occupied units at contractual rates and vacant units at market rents) during the year ended December 31, 1998 of approximately 96%. As of December 31, 1998, the two office buildings had an occupancy rate (based on leased and occupied square footage) of 100% and the three retail centers had an occupancy rate of 98%. With respect to stabilized multifamily properties with sufficient operating history, occupancy figures are based on Financial Occupancy. With respect to commercial properties or properties which have not yet stabilized or have insufficient operating history, occupancy figures are based on "Physical Occupancy" which refers to the percentage resulting from dividing leased and occupied square footage by rentable square footage. For the year ended December 31, 1998, none of the Company's Properties had book values equal to 10% or more of total assets of the Company or gross revenues equal to 10% or more of aggregate gross revenues of the Company. Multifamily Residential Properties These Properties are generally suburban garden apartments and townhomes comprising multiple clusters of two- and three-story buildings situated on three to fifteen acres of land. The multifamily properties have on average 211 units, with a mix of studio, one-, two- and some three-bedroom units. A wide variety of amenities are available at each apartment community, including swimming pools, clubhouses, covered parking, and cable television. Many Properties offer additional amenities, such as fitness centers, volleyball and playground areas, tennis courts and wood-burning fireplaces. Most of the multifamily Properties are designed for and marketed to people in white-collar or technical professions. The Company selects, trains and supervises a full team of on-site service and maintenance personnel. The Company believes that its customer-service approach enhances its ability to retain tenants and that its multifamily Properties were built well and have been maintained well since acquisition. Office Buildings The Company's corporate headquarters are located in a two-story office building with approximately 17,400 square feet located at 925 East Meadow Drive, Palo Alto, California. The Company acquired this property in 1997 and relocated its corporate headquarters to approximately 15,400 square feet of this building in March 1998. The remaining 2,000 square feet is leased to an unrelated third party tenant. The Company also owns a prepaid ground leasehold interest in its office building at 777 California Avenue in the Stanford Research Park in Palo Alto, California. This building has approximately 45,000 rentable square feet of space and is a multi-tenant, one-story office building. The Marcus & Millichap Company (an affiliate of Mr. Marcus, the Company's chairman) occupies approximately 23,000 square feet and the remaining two tenants occupy approximately 22,000 square feet. The ground lease for this building is prepaid until its expiration in 2054, and, unless the lease is extended, the land, together with all improvements thereon, will revert to the owner in 2054. 22 The following tables describe the Company's Properties as of December 31, 1998. The first table describes the Company's multifamily residential Properties and the second table describes the Company's Commercial Properties.
Rentable Multifamily Residential Square Year Year Properties (1) Location Units Footage Built Acquired Occupancy(2) - ----------------------- -------- ------ ---------- ----- -------- ------------ Northern California Bristol Commons(3)...... Sunnyvale, CA 188 142,668 1989 1995 98% Eastridge............... San Ramon, CA 188 174,104 1988 1996 97% Foothill Gardens........ San Ramon, CA 132 155,100 1985 1997 96% Marina Cove(4).......... Santa Clara, CA 292 250,294 1974 1994 98% Oak Pointe.............. Sunnyvale, CA 390 294,180 1973 1988 98% Plumtree................ Santa Clara, CA 140 113,260 1975 1994 97% The Shores(3)........... San Ramon, CA 348 275,888 1988 1995 97% Stevenson Place......... Fremont, CA 200 146,296 1971 1982 95% Summerhill Commons...... Newark, CA 184 139,012 1987 1987 97% Summerhill Park......... Sunnyvale, CA 100 78,584 1988 1988 97% Treetops(3)............. Fremont, CA 172 131,270 1978 1996 98% Twin Creeks............. San Ramon, CA 44 51,700 1985 1997 96% Westwood(3)............. Cupertino, CA 116 135,288 1963 1998 92% Wimbledon Woods......... Hayward, CA 560 462,400 1975 1998 97% Windsor Ridge........... Sunnyvale, CA 216 161,892 1989 1989 96% ------ ---------- --- 3,270 2,711,936 97% Pacific Northwest Seattle, Washington Metropolitan Area Anchor Village(5)....... Mukilteo, WA 301 245,928 1981 1997 94% Bridle Trails(3)........ Kirkland, WA 92 73,448 1986 1997 98% Brighton Ridge.......... Renton, WA 264 201,300 1986 1996 94% Castle Creek............ Newcastle, WA 216 191,935 1997 1997 92%(11) Emerald Ridge........... Bellevue, WA 180 144,036 1987 1994 98% Evergreen Heights....... Kirkland, WA 200 188,340 1990 1997 95% Foothill Commons(3)..... Bellevue, WA 360 288,317 1978 1990 95% Inglenook Court......... Bothell, WA 224 183,624 1985 1994 96% Laurels at Mill Creek... Mill Creek, WA 164 134,360 1981 1996 96% Maple Leaf(3)........... Seattle, WA 48 35,584 1986 1997 96% The Palisades (3)....... Bellevue, WA 192 159,792 1977 1990 97% Sammamish View.......... Bellevue, WA 153 133,590 1986 1994 96% Spring Lake(3).......... Seattle, WA 69 42,325 1986 1997 97% Stonehedge Village(3)... Bothell, WA 196 214,872 1986 1997 91% Wandering Creek......... Kent, WA 156 124,366 1986 1995 92% Wharfside Pointe........ Seattle, WA 142 119,290 1990 1994 97% Woodland Commons(3)..... Bellevue, WA 236 172,316 1978 1990 95% Pacific Northwest Portland, Oregon Metropolitan Area Jackson School Village(8)............. Hillsboro, OR 200 196,896 1996 1996 84% Landmark................ Hillsboro, OR 285 282,934 1990 1996 93% Meadows at Cascade Park................... Vancouver, WA 198 199,377 1989 1997 91% Village at Cascade Park................... Vancouver, WA 192 178,144 1989 1997 88% ------ ---------- --- 4,068 3,510,774 94% Southern California The Bluffs II(6)........ San Diego, CA 224 126,744 1974 1997 98% Bunker Hill(3).......... Los Angeles, CA 456 346,672 1968 1998 97% Camarillo Oaks(3)....... Camarillo, CA 564 459,072 1985 1996 97% Casa del Mar............ Pasadena, CA 96 61,308 1972 1997 97% Casa Mango(6)........... Del Mar, CA 96 88,112 1981 1997 97% Cochran Apartments...... Los Angeles, CA 58 51,468 1989 1998 96% Highridge(5)............ Rancho Palos, CA 255 290,250 1972 1997 95% Huntington Breakers(3).. Huntington Beach, CA 342 241,763 1984 1997 97% Kings Road.............. Los Angeles, CA 196 132,112 1979 1997 97% Meadowood(3)............ Simi Valley, CA 320 264,568 1986 1996 97% Mirabella............... Newbury Park, CA 608 521,968 1973 1998 92% Park Place.............. Los Angeles, CA 60 48,000 1988 1997 96% Pathways(7)............. Long Beach, CA 296 197,720 1975 1991 96% Riverfront(6)........... San Diego, CA 229 231,006 1990 1997 97% Tara Village............ Tarzana, CA 168 173,600 1972 1997 97% Trabuco Villas.......... Lake Forest, CA 132 131,032 1985 1997 96% Villa Rio Vista......... Anaheim, CA 286 242,410 1968 1985 94% Villa Scandia........... Ventura, CA 118 71,160 1971 1997 97% Village Apartments...... Oxnard, CA 122 122,120 1974 1997 98% Wilshire Promenade...... Fullerton, CA 128 108,470 1992 1997 97% Windsor Court........... Los Angeles, CA 58 46,600 1988 1997 96% Windsor Terrace......... Pasadena, CA 117 74,475 1972 1997 97% ------ ---------- --- 4,929 4,030,630 96% ------ ---------- --- Total/Weighted Average.. 12,267 10,253,340 96% ====== ==========
23
Number Rentable of Square Year Year Property Name(1) Location Tenants Footage Built Acquired Occupancy(2) ---------------- -------- ------- -------- ----- -------- ------------ Office Buildings 777 California Avenue(9).............. Palo Alto, CA 3 44,827 1988(10) 1986 100% 925 East Meadow Drive... Palo Alto, CA 2 17,404 1984 1997 100% --- ------- --- Total Office Buildings.......... 5 62,231 100% Shopping Centers Canby Square(5)......... Canby, OR 17 102,403 1976 1990 96% Powell Villa Center(5).. Portland, OR 14 63,645 1959 1990 98% Garrison Square(5)...... Vancouver, WA 8 69,790 1962 1990 100% --- ------- --- Total Shopping Centers............ 39 235,838 98% --- ------- 44 298,069 === =======
- -------- (1) Unless otherwise specified, the Company has a 100% ownership interest in each Property. (2) For multifamily residential Properties, occupancy rates are based on Financial Occupancy for the year ended December 31, 1998; for the Commercial Properties, occupancy rates are based on Physical Occupancy as of December 31, 1998. (3) This Property is owned by a single asset limited partnership in which the Company has a minimum 99.0% limited partnership interest. (4) A portion of this Property on which 84 units are presently located is subject to a ground lease, which, unless extended, will expire in 2028. (5) The Company has a 1.0% limited partnership interest in this property. (6) The Company has an 84.0% limited partnership interest in this property. (7) The Company has a 69.3% ownership interest in this property (8) The Company has a 49.9% ownership interest in this property. (9) The Company owns a ground leasehold interest in the building and the land on which the building is located. The ground lease is prepaid until its expiration in 2054, and, unless the lease is extended, the land, together with all improvements thereon, will revert to the owner in 2054. (10) Represents a major renovation completion date. (11) This property was in lease-up during the first three quarters of 1998. Occupancy rate represents Financial Occupancy for the property for the fourth quarter of 1998. Item 3. Legal Proceedings Neither the Company nor any of the Properties is presently subject to any material litigation nor, to the Company's knowledge, is there any material litigation threatened against the Company or the Properties. The Properties are subject to certain routine litigation and administrative proceedings arising in the ordinary course of business, which, taken together, are not expected to have a material adverse impact on the Company's financial position results of operations or liquidity. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1998, no matters were submitted to a vote of security holders. 24 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The shares of the Company's common stock are traded on the New York Stock Exchange ("NYSE") under the symbol ESS. Market Information The Company's common stock has been traded on the NYSE since June 13, 1994. The high, low and closing price per share of common stock reported on the NYSE for the quarters indicated are as follows:
Quarter Ended High Low Close ------------- ------- ------- ------- December 31, 1998.................................. $31.750 $28.500 $29.750 September 30, 1998................................. $33.500 $26.940 $31.000 June 30, 1998...................................... $34.500 $30.190 $31.000 March 31, 1998..................................... $34.940 $33.250 $34.310 December 31, 1997.................................. $37.500 $32.812 $35.000 September 30, 1997................................. $35.062 $30.500 $34.812 June 30, 1997...................................... $32.375 $27.625 $32.125 March 31, 1997..................................... $30.875 $28.500 $29.875
The closing price as of March 25, 1999 was $27.00. Holders The approximate number of holders of record of the shares of the Company's common stock was 16,742,616 as of March 25, 1999. This number does not include stockholders whose shares are held in trust by other entities. The actual number of stockholders is greater than this number of holders of record. Return of Capital Under provisions of the Internal Revenue Code of 1986, as amended, the portion of cash dividend that exceeds earnings and profits is a return of capital. The return of capital is generated due to the deduction of non-cash expenses, primarily depreciation, in the determination of earnings and profits. The status of the cash dividends distributed for the years ended December 31, 1998, 1997 and 1996 for tax purposes is as follows:
1998 1997 1996 ------ ------ ------ Taxable portion.................................... 85.00% 100.00% 58.00% Return of capital.................................. 15.00% 0.00% 42.00% ------ ------ ------ 100.00% 100.00% 100.00% ====== ====== ======
The most significant factor that caused the reduction of the 1997 return of capital percentage over 1996 was that in 1997 the Company's earnings grew at a greater rate than the growth rate of its dividend payments. The most significant factor that caused an increase in the 1998 return of capital percentage over 1997 was that in 1998 the Company incurred a loss on the early extinguishment of debt of $4,718,000 compared to $361,000 in 1997. 25 Dividends and Distributions Since its initial public offering, the Company has paid regular quarterly dividends to its stockholders. From inception, the Company paid the following dividends per share of common stock:
Quarter Ended 1994 1995 1996 1997 1998 ------------- ------- ------- ------- ------- ------- 3/31............................. N/A $0.4175 $0.4250 $0.4350 $0.4500 6/30............................. $0.0800 $0.4175 $0.4250 $0.4350 $0.5000 9/30............................. $0.4175 $0.4250 $0.4350 $0.4500 $0.5000 12/31............................. $0.4175 $0.4250 $0.4350 $0.4500 $0.5000
Future distributions by the Company will be at the discretion of the Board of Directors and will depend on the actual funds from operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. There are currently no contractual restrictions on the Company's present or future ability to pay dividends. Dividend Reinvestment and Share Purchase Plan The Company has adopted a dividend reinvestment and share purchase plan designed to provide holders of Common Stock with a convenient and economical means to reinvest all or a portion of their cash dividends in shares of Common Stock and to acquire additional shares of Common Stock through voluntary purchases. Boston EquiServe, which serves as the Company's transfer agent, administers the dividend reinvestment and share purchase plan. For a copy of the plan, contact Boston EquiServe at (800) 945-8245. Stockholder Rights Plan The Company's Board recently authorized the adoption of a stockholder rights plan designed to enhance the ability of all of the Company's Stockholders to realize the long-term value of their investment. The rights plan is designed, among other things, to prevent a person or group from gaining control of the Company without offering a fair price to all of the Company's stockholders. On October 13, 1998, the Board declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. Each Right entitles the registered holder to purchase from the Company one one- hundredth of a share of Series A Junior Participating Preferred Stock, par value $.0001 per share, of the Company, at a price of $99.13 per one-hundredth of a share, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of November 11, 1998, between the Company and BankBoston, N.A. as Rights Agent. Recent Sales of Unregistered Securities In January 1998, Essex Management Corporation, a California corporation ("EMC") and an affiliate of the Company, as general partner, and Essex Portfolio, L.P., a California limited partnership (the "Operating Partnership", as to which the Company is the general partner), as special limited partner, entered into (a) a First Amended and Restated Agreement of Limited Partnership of Western-Las Hadas Investors, and (b) a Second Amended and Restated Agreement of Limited Partnership of Western-Seven Trees Investors (collectively, the "Las Hadas Partnerships") pursuant to which the existing Las Hadas Partnerships were reorganized for the purpose of acquiring the properties owned by the Las Hadas Partnerships. In connection with the reorganization, 268,631 units of limited partnership interest ("Units") in the Las Hadas Partnerships were issued to the existing partners of the Las Hadas Partnerships, all of whom the Company believes qualify as accredited investors, pursuant to an exemption from registration provided in Regulation D under the Securities Act. Under the terms of the agreements of limited partnership of these Partnerships, holders of Units have the right to require the applicable partnership to redeem their Units for cash, subject to certain conditions. Subject to certain conditions, 26 the Company may, however, elect to deliver an equivalent number of unregistered shares of the Company's Common Stock to the holders of the Units in satisfaction of the applicable Partnership's obligation to redeem the units for cash, upon which delivery, the holders will have certain rights to require the Company to register the shares of Common Stock pursuant to the Securities Act. In February and April 1998, the Operating Partnership sold 1,200,000 and 400,000, respectively, of its 7.875% Series B Preferred Limited Partnership Units (the "Series B Preferred Units"), to an institutional investor in return for a total contribution to the Operating Partnership of $80 million. The Series B Preferred Units will become exchangeable, on a one for one basis, in whole or in part at any time for shares of the Company's 7.875% Series B Cumulative Redeemable Preferred Stock, par value $.0001 per share (the "Series B Preferred Stock"). Pursuant to the terms of a registration rights agreement, entered into in connection with this private placement, the holders of Series B Preferred Stock will have certain rights to cause the Company to register such shares of Series B Preferred Stock. The Series B Preferred Units were issued by the Operating Partnership in a privately negotiated transaction to an accredited, institutional investor in reliance on the exemption provided by Section 4(2) of the Securities Act. In November 1998, the Operating Partnership sold 500,000 units of its 9.125% Series C Cumulative Redeemable Preferred Units to an institutional investor in a private placement, at a price of $50.00 per unit for a contribution of $25 million. The Operating Partnership utilized the net proceeds from these sales to reduce the Company's outstanding lines of credit balances. Item 6. Summary Financial and Operating Data The following tables set forth summary financial and operating information (i) for the Company from June 13, 1994 (completion of the Company's IPO) through December 31, 1998, and (ii) on a pro forma basis for the Company for the year ended December 31, 1994. The unaudited pro forma financial and operating information for the year ended December 31, 1994 is based on the ownership and operation of the 23 properties owned at the time of the Company's initial public offering (the "IPO") (including the properties acquired as of the IPO) combined with the financial and operating information of EPC and is presented as if the following had occurred on January 1, 1994: (i) the IPO was completed, (ii) the Company qualified as a REIT, (iii) the Company used the net proceeds from the IPO and the debt incurred in connection with the IPO to fund a series of asset acquisitions and mortgage repayments in connection with the IPO, and (iv) Essex Management Corporation ("EMC") was formed and certain property and asset management contracts were assigned to EMC (such pro forma adjustments, the "IPO Pro Forma Adjustments"). 27 The pro forma financial and operating information should not be considered indicative of actual results that would have been achieved had the transactions occurred on the dates or for the periods indicated and do not purport to indicate results of operations as of any future date or for any future period. The following table should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and with all of the financial statements and notes thereto.
June 13, Pro forma Jan. 1 Year ended Year ended Year ended Year ended 1994- Year ended 1994- Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, June 12 1998 1997 1996 1995 1994 1994(1) 1994 ---------- ---------- ---------- ---------- -------- ---------- ------- (Dollars in thousands, except per share amounts) OPERATING DATA: Revenues Rental................. $119,397 $79,936 $47,780 $41,640 $19,499 $34,154 $12,742 Other property income................ 2,645 1,464 756 702 376 633 1,794 Interest and other income................ 3,217 3,169 2,157 1,598 538 1,206 275 -------- ------- ------- ------- ------- ------- ------- Total revenues....... 125,259 84,569 50,693 43,940 20,413 35,993 14,811 Expenses Property operating expenses.............. 37,933 25,826 15,505 13,604 6,452 11,414 4,267 Depreciation and amortization.......... 21,948 13,992 8,855 8,007 4,030 7,047 2,598 Amortization of deferred financing costs................. 718 509 639 1,355 773 1,407 96 General and administrative........ 3,765 2,413 1,717 1,527 457 804 306 Property and asset management............ -- -- -- -- -- -- 974 Other expenses......... 930 138 42 288 -- -- 314 Interest............... 19,374 12,659 11,442 10,928 4,304 7,086 5,924 -------- ------- ------- ------- ------- ------- ------- Total expenses....... 84,668 55,537 38,200 35,709 16,016 27,758 14,479 -------- ------- ------- ------- ------- ------- ------- Income before gain on sales, minority interests, provision for income taxes and extraordinary item.... 40,591 29,032 12,493 8,231 4,397 8,235 332 Gain on sales of real estate................ 9 5,114 2,477 6,013 Minority interests..... (9,554) (4,469) (2,648) (3,486) (1,131) (1,938) 87 Provision for income taxes................. -- -- -- -- -- -- (267) Extraordinary item-- loss on early extinguishment of debt.................. (4,718) (361) (3,441) (154) -- -- -- -------- ------- ------- ------- ------- ------- ------- Net Income.............. $ 26,328 $29,316 $ 8,881 $10,604 $ 3,266 $ 6,297 $ 152 ======== ======= ======= ======= ======= ======= ======= Net income per share-- diluted(2)............. $ 1.36 $ 1.92 $ 1.12 $ 1.69 $ 0.52 $ 1.00 $ -- ======== ======= ======= ======= ======= ======= ======= Weighted average common stock outstanding--diluted (in thousands)........ 16,809 15,285 7,348 6,275 6,275 6,275 -- Cash dividend per common share.................. $ 1.95 $ 1.77 $ 1.72 $ 1.69 $ 0.92 $ -- $ --
As of December 31, -------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Investment in real estate (before accumulated depreciation)....... $889,964 $730,987 $393,809 $284,358 $282,344 Net investment in real estate.... 875,978 702,716 354,715 244,077 248,232 Real estate under development.... 53,213 20,234 -- -- -- Total assets..................... 931,796 738,835 417,174 273,660 269,065 Total property indebtedness...... 361,515 276,597 153,205 154,524 150,019 Stockholders' equity............. 389,800 398,915 222,807 84,729 84,699
June 13, Pro Forma Year ended Year ended Year ended Year ended 1994- Year ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1996 1995 1994 1994(1) ---------- ---------- ---------- ---------- -------- ---------- OTHER DATA: Debt service coverage ratio(3)............... 4.3x 4.4x 2.9x 2.6x 3.1x 3.4x Gross operating margin(4).............. 68% 68% 68% 67% 67% 67% Average same-property monthly rental rate per apartment unit(5)(6)... $ 944 $ 852 $ 798 $ 749 $ 715 $ -- Average same-property monthly operating expenses per apartment unit(5)(7)............. $ 256 $ 257 $ 248 $ 241 $ 234 $ -- Total multifamily units (at end of period)..... 12,267 10,700 6,624 4,868 4,410 4,410 Multifamily residential property occupancy rate(8)...... 96% 96% 97% 97% 96% 96% Total properties (at end of period)............. 63 59 36 30 29 29
28 - -------- (1) The unaudited pro forma financial and operating information for the year ended December 31, 1994 is based on the ownership and operations of the 23 properties owned at the time of the Company's initial public offering (the "IPO") (including the properties acquired as of the IPO) combined with the financial and operating information of EPC and is presented as if the following had occurred on January 1, 1994; (i) the IPO was completed (ii) Essex qualified as a REIT (iii) Essex used the net proceeds from the IPO and debt incurred in connection with the IPO to fund a series of asset acquisitions and mortgage repayments in connection with the IPO and (iv) EMC was formed and certain property and asset management contracts were assigned to it. (2) Per share amounts are presented only for the periods subsequent to June 13, 1994 and the pro forma 1994 period and are based upon respective amounts divided by the weighted average outstanding shares on the applicable dates. (3) Debt service coverage ratio represents earnings before interest expense, taxes, depreciation and amortization ("EBITDA") divided by interest expense. (4) Gross operating margin represents rental revenues less property operating expenses, exclusive of depreciation and amortization divided by rental revenues. (5) Same-property apartment units are those units that the Company has owned for the entire two years ended as of the end of the period set forth. (6) Average same-property monthly rental rate per apartment unit represents total scheduled rent for the same-property apartment units for the period (actual rental rates on occupied apartment units plus market rental rates on vacant apartment units) divided by the number of such apartment units and further divided by the number of months in the period. (7) Average same-property monthly expenses per apartment unit represents total monthly operating expenses, exclusive of depreciation and amortization, for the same-property apartment units for the period divided by the total number of such apartment units and further divided by the number of months in the period. (8) Occupancy rates are based on Financial Occupancy, (which refers to the percentage resulting from dividing actual rents by total possible rents as determined by valuing occupied units at contractual rates and vacant units at market rates for the period in question), during the period presented. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based on the consolidated financial statements of Essex Property Trust, Inc. ("Essex" or the "Company") as of and for the years ended December 31, 1998, 1997 and 1996. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. Substantially all the assets of the Company are held by, and substantially all operations are conducted through, Essex Portfolio, L.P. (the "Operating Partnership"). Essex is the sole general partner of the Operating Partnership and as of December 31, 1998, 1997, and 1996 owned an approximate 89.9%, 89.9% and 86.2% general partnership interest in the Operating Partnership, respectively. The Company has elected to be treated as a real estate investment trust (a "REIT") for federal income tax purposes. 29 General Background The Company's revenues are generated primarily from multifamily property operations, which accounted for 97%, 96%, and 96% of the Company's revenues for the years ended December 31, 1998, 1997, and 1996, respectively. The Company's properties ("the Properties") are located in Northern California (the San Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and San Diego counties) and the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas). Occupancy levels of the multifamily properties in these markets have averaged over 95% for the last five years. Essex has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes, commencing with the year ended December 31, 1994. In order to maintain compliance with REIT tax rules, Essex conducts some of its fee based asset management and disposition services as well as third- party property management and leasing services through Essex Management Corporation ("EMC"). Essex owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of Essex own 100% of EMC's 1,000 shares of common stock. Since the Company's initial public offering (the "IPO") in June 1994, the Company has acquired ownership interests in 48 multifamily residential properties and its headquarters building, of which 11 are located in Northern California, 21 are located in Southern California, 16 are located in the Seattle Metropolitan Area and one is located in the Portland Metropolitan Area. In total, these acquisitions consist of 9,498 units with total capitalized acquisition costs of approximately $716.7 million. As part of its active portfolio management strategy, the Company has sold, since its IPO, six multifamily residential properties (five in Northern California and one in the Pacific Northwest) consisting of a total of 819 units and six retail shopping centers in the Portland, Oregon metropolitan area at an aggregate gross sales price of approximately $71.1 million resulting in a net realized gain of approximately $13.6 million and a deferred gain of $5.0 million. The Company has committed approximately $204,700,000 relating to eight development projects which are expected to contain an aggregate of 1,578 multifamily units and to be completed during 1999. Financial occupancy is defined as the percentage resulting from dividing actual rental income by total possible rental income. Total possible rental income is determined by valuing occupied units at contractual rates and vacant units at market rents. Average financial occupancy rates of the Company's multifamily properties on a same-property basis decreased to 96.2% for the year ended December 31, 1998 from 96.6% for the year ended December 31, 1997. The regional breakdown of financial occupancy on a same-property basis for the years ended December 31, 1998 and 1997 are as follows:
December 31, December 31, 1998 1997 ------------ ------------ Northern California.............................. 96.9% 97.1% Southern California.............................. 95.8% 95.2% Pacific Northwest................................ 95.2% 96.4%
The commercial properties were 100% occupied (based on square footage) as of December 31, 1998 and 1997. 30 RESULTS OF OPERATIONS Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997. Total Revenues increased by $40,690,000 or 48.1% to $125,259,000 in 1998 from $84,569,000 in 1997. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to properties owned by Essex for both 1998 and 1997 ("the Same Store Properties").
YEARS ENDED DECEMBER 31, NUMBER OF ---------------- DOLLAR PERCENTAGE PROPERTIES 1998 1997 CHANGE CHANGE ---------- -------- ------- ------- ---------- (DOLLARS IN THOUSANDS) Property revenues Same Store Properties Northern California.......... 11 $ 33,397 $30,627 $ 2,770 9.0% Pacific Northwest............ 11 21,035 19,510 1,525 7.8 Southern California.......... 3 8,509 8,085 424 5.2 Commercial................... 1 2,040 1,666 374 22.4 --- -------- ------- ------- ----- Total Same Store Property revenues.................. 26 64,981 59,888 5,093 8.5% === Properties acquired/disposed of subsequent to January 1, 1997.......................... 57,061 21,512 35,549 165.3% -------- ------- ------- ----- Total property revenues.... 122,042 81,400 40,642 49.9 Interest and other income...... 3,217 3,169 48 1.5 -------- ------- ------- ----- Total revenues............. $125,259 $84,569 $40,690 48.1% ======== ======= ======= =====
As set forth in the above table, $35,549,000 of the $40,690,000 increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 1997. During this period, Essex acquired interests in 35 properties, (the "Acquisition Properties"), and disposed of two multifamily properties and six retail shopping centers, (the "Disposition Properties"). Of the increase in total revenues, $5,093,000 is attributable to increases in property revenues from the Same Store Properties. Property revenues from the Same Store Properties increased by approximately 8.5% to $64,981,000 in 1998 from $59,888,000 in 1997. The majority of this increase was attributable to the 11 multifamily Same Store Properties located in Northern California, the property revenues of which increased by $2,770,000 or 9.0% to $33,397,000 in 1998 from $30,627,000 in 1997. This $2,770,000 increase is primarily attributable to rental rate increases which were offset in part by a decrease in average financial occupancy to 96.9% in 1998 from 97.1% in 1997. The 11 multifamily Same Store Properties located in the Pacific Northwest accounted for the next largest contribution to this Same Store Properties revenues increase. The property revenues of these properties increased by $1,525,000 or 7.8% to $21,035,000 in 1998 from $19,510,000 in 1997. This $1,525,000 increase is primarily attributable to rental rate increases, which were offset in part by a decrease in average financial occupancy to 95.2% in 1998 from 96.4% in 1997. The three multifamily Same Store Properties located in Southern California accounted for the next largest contribution to this Same Store Properties revenues increase. The property revenues of these properties increased by $424,000 or 5.2% to $8,509,000 in 1998 from $8,085,000 in 1997. This $424,000 increase is attributable to rental rate increases, and an increase in financial occupancy to 95.8% in 1998 from 95.2% in 1997. The increase in total revenue also included an increase of $48,000 attributable to interest and other income. Total Expenses increased by $29,131,000 or approximately 52.5% to $84,668,000 in 1998 from $55,537,000 in 1997. The most significant factor contributing to this increase was the growth in the Company's multifamily portfolio from 29 properties (6,624 units) at January 1, 1997 to 58 properties (12,267 units) at December 31, 1998. Interest expense increased by $6,715,000 or 53.0% to $19,374,000 in 1998 from $12,659,000 in 1997. 31 Such interest expense increase was primarily due to the net addition of mortgage debt in connection with property and investment acquisitions. Property operating expenses, exclusive of depreciation and amortization, increased by $12,107,000 or 46.9% to $37,933,000 in 1998 from $25,826,000 in 1997. Of such increase, $12,356,000 is attributable to properties acquired or disposed of subsequent to January 1, 1997 which was offset by a decrease in operating expenses for the Same Store Properties. Property operating expenses, exclusive of depreciation and amortization, as a percentage of property revenues was 31.1% for 1998 and 31.7% for 1997. General and administrative expenses represent the costs of the Company's various acquisition and administrative departments as well as corporate and partnership administration and non- operating expenses. Such expenses increased by $1,352,000 in 1998 from the 1997 amount. This increase is largely due to additional staffing requirements resulting from the growth of the Company. General and administrative expenses as a percentage of total revenues was 3.0% for 1998 and 2.9% for 1997. Net income decreased by $2,988,000 to $26,328,000 in 1998 from $29,316,000 in 1997. Net income included an extraordinary loss on early extinguishment of debt of $4,718,000 in 1998 compared to $361,000 in 1997. Net income for 1998 also included a gain on sales of real estate of $9,000 compared with $5,114,000 in 1997. The net effect of these items were offset by the net contribution of the Acquisition Properties and an increase in net operating income from the Same Store Properties, as offset by a decrease in net operating income attributable to the Disposition Properties. Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996. Total Revenues increased by $33,876,000 or 66.8% to $84,569,000 in 1997 from $50,693,000 in 1996. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to properties that Essex owned for both 1997 and 1996 ("the 1997/1996 Same Store Properties").
YEARS ENDED NUMBER DECEMBER 31, OF --------------- DOLLAR PERCENTAGE PROPERTIES 1997 1996 CHANGE CHANGE ---------- ------- ------- ------- ---------- (DOLLARS IN THOUSANDS) Property revenues 1997/1996 Same Store Properties Northern California........... 7 $19,451 $17,092 $ 2,359 13.8% Pacific Northwest............. 9 15,737 14,720 1,017 6.9 Southern California........... 2 4,929 4,844 85 1.8 Retail/Commercial............. 4 4,048 4,046 2 0.0 --- ------- ------- ------- ----- Total 1997/1996 Same Store Property revenues.......... 22 44,165 40,702 3,463 8.5% === Properties acquired/disposed of subsequent to January 1, 1996.. 37,235 7,834 29,401 375.3% ------- ------- ------- ----- Total property revenues 81,400 48,536 32,864 67.7 Interest and other income....... 3,169 2,157 1,012 46.9 ------- ------- ------- ----- Total revenues ............. $84,569 $50,693 $33,876 66.8% ======= ======= ======= =====
As set forth in the above table, $29,401,000 of the $33,876,000 increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 1996. During this period, Essex acquired interests in 37 properties, and disposed of three multifamily properties and three retail shopping centers. Of the increase in total revenues, $3,463,000 is attributable to the 1997/1996 Same Store Properties. Property revenues from the 1997/1996 Same Store Properties increased by approximately 8.5% to $44,165,000 in 1997 from $40,702,000 in 1996. The majority of this increase was attributable to the seven multifamily 1997/1996 Same Store Properties located in Northern California, the property revenues of which increased by $2,359,000 or 13.8% to $19,451,000 in 1997 from $17,092,000 in 1996. This $2,359,000 increase is primarily 32 attributable to rental rate increases which were offset by a decrease in average financial occupancy to 97.3% in 1997 from 98.2% in 1996. The nine multifamily 1997/1996 Same Store Properties located in the Pacific Northwest accounted for the next largest contribution to this 1997/1996 Same Store Properties revenues increase. The property revenues of these properties increased by $1,017,000 or 6.9% to $15,737,000 in 1997 from $14,720,000 in 1996. This $1,017,000 increase is attributable to rental rate increases as well as an increase in average financial occupancy to 96.6% for 1997 from 95.6% in 1996. The increase in total revenue also included an increase of $1,012,000 attributable to interest and other income. The most significant component of this $1,012,000 increase was an increase in interest income earned on notes receivable balances. Total Expenses increased by $17,337,000 or approximately 45.4% to $55,537,000 in 1997 from $38,200,000 in 1996. The most significant factor contributing to this increase was the growth in Essex's multifamily portfolio from 23 properties, (4,868 units) at January 1, 1996 to 54 properties, (10,700 units) at December 31, 1997. Interest expense increased by $1,217,000 or 10.6% to $12,659,000 in 1997 from $11,442,000 in 1996. Such interest expense increase was primarily due to the net addition of outstanding mortgage debt in connection with property and investment acquisitions. Property operating expenses, exclusive of depreciation and amortization, increased by $10,321,000 or 66.6% to $25,826,000 in 1997 from $15,505,000 in 1996. Of such increase, $10,046,000 is attributable to properties acquired or disposed of subsequent to January 1, 1996. Property operating expenses, exclusive of depreciation and amortization as a percentage of property revenues was 31.7% for 1997 and 31.9% for 1996. General and administrative expenses represent the costs of the Company's various acquisition and administrative departments as well as corporate and partnership administration and non-operating expenses. Such expenses increased by $696,000 in 1997 from the 1996 amount. This increase is largely due to additional staffing requirements resulting from the growth of the Company. General and administrative expenses as a percentage of total revenues was 2.9% for 1997 and 3.4% for 1996. Net income increased by $20,435,000 to $29,316,000 in 1997 from $8,881,000 in 1996. The increase in net income was primarily a result of the net contribution of acquisitions and dispositions, the increase in property revenues from the 1997/1996 Same Store Properties, the increase in the gain on sales of real estate of $2,637,000 to $5,114,000 in 1997 from $2,477,000 in 1996 and a reduction in extraordinary loss on early extinguishment of debt of $3,080,000 to $361,000 in 1997 from $3,441,000 in 1996. Liquidity and Capital Resources At December 31, 1998, the Company had $2,548,000 of unrestricted cash and cash equivalents. The Company expects to meet its short-term liquidity requirements by using its working capital, cash generated from operations, and amounts available under lines of credit. The Company believes that its 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 $110,000,000 of which $10,000,000 will expire in March 1999 if not renewed. At December 31, 1998 the Company had $35,693,000 outstanding on its lines of credit, with interest rates ranging from 6.4% to 8.5% throughout the year. The Company expects to meet its long-term liquidity requirements relating to property acquisitions and development (beyond the next 12 months) by using working capital, amounts available on lines of credit, net proceeds from public and private debt and equity issuances, and proceeds from the disposition of properties that may be sold from time to time. There can, however, be no assurance that the Company will have access to the debt and equity markets in a timely fashion to meet long-term liquidity requirements or that future working capital and borrowings under the lines of credit will be available, or if available, will be sufficient to meet the Company's requirements or that the Company will be able to dispose of properties in a timely manner and under terms and conditions that the Company deems acceptable. The Company's total cash balances decreased $1,734,000 from $4,282,000 as of December 31, 1997 to $2,548,000 as of December 31, 1998. The Company generated $59,034,000 in cash from operations, used $179,901,000 of cash in investing activities and obtained $119,133,000 of cash from financing activities. Of the 33 $179,901,000 net cash used in investing activities, $163,019,000 was used to purchase and upgrade rental properties, $33,256,000 was used to fund real estate under development and $9,439,000 was used to fund the Company's restricted cash; these expenditures were offset by $26,354,000 of proceeds received from the disposition of one multifamily and three retail properties. The $119,133,000 net cash provided by financing activities was primarily a result of $349,540,000 of proceeds from mortgages and other notes payable and lines of credit, $102,150,000 net proceeds from preferred units sales, as offset by $283,065,000 of repayments of mortgages and other notes payable and lines of credit, and $43,212,000 of dividends/distributions paid. As of December 31, 1998, Essex's outstanding debt was $361,515,000. Such indebtedness consisted of $267,002,000 in fixed rate debt, $35,693,000 of variable rate debt and $58,820,000 of debt represented by tax exempt variable rate demand bonds, of which $29,220,000 is capped at a maximum interest rate of 7.2%. As of December 31, 1998, 33 of the Company's 58 majority-owned properties were encumbered by debt. The agreements underlying these encumbrances contain customary restrictive covenants which the Company believes do not have a material adverse effect on its operations. As of December 31, 1998, the Company is in compliance with such covenants. Also, of the Company's 33 properties encumbered by debt, 18 are secured by deeds of trust relating solely to those properties. With respect to the remaining 15 properties, three cross-collateralized mortgages are secured by eight properties, three properties, and three properties, respectively. The Company's $10 million line of credit is secured by one property. Non-revenue generating capital expenditures are improvements and upgrades that extend the useful life of the asset and are not related to preparing a multifamily property unit to be rented to a tenant. For the year ended December 31, 1998, non-revenue generating capital expenditures totaled approximately $3,498,000 or an annualized $311 per weighted average occupancy unit. The Company expects to incur approximately $315 per weighted average occupancy unit in non-revenue generating capital expenditures for the year ended December 31, 1999. These expenditures do not include the improvements required in connection with the origination of mortgage loans, expenditures for acquisition properties renovations and improvements which are expected to generate additional revenues, and renovation expenditures required pursuant to tax-exempt bond financings. The Company expects that cash from operations and/or its lines of credit will fund such expenditures. However, there can be no assurance that the actual expenditures incurred during 1999 and/or the funding thereof will not be significantly different than the Company's current expectations. The Company is developing eight multifamily residential projects, which are anticipated to combine an aggregate of 1,578 multifamily units. The Company expects that such projects will be substantially completed during 1999. Such projects involve certain risks inherent in real estate development. As of December 31, 1998, the Company's remaining commitment is approximately $95,130,000 relating to these projects. The Company expects to fund such commitments with a combination of its working capital, amounts available on its lines of credit, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of properties, which may be sold from time to time. The Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in short-term investment grade securities or is used by the Company to reduce balances outstanding under its lines of credit. In February 1998 and April 1998, Essex Portfolio, L.P. (the "Operating Partnership") sold 1,200,000 and 400,000 units of its 7.875% Series B Cumulative Redeemable Preferred Units ("Perpetual Preferred Units"), respectively, to an institutional investor in a private placement at a price of $50.00 per unit. The net proceeds from this offering were $58,275,000 and $19,500,000, respectively. Such units are convertible into non-voting preferred stock of the Company after ten years from the completion of the sale or earlier under certain circumstances. The Operating Partnership utilized the proceeds of this transaction to fund the Company's acquisition of multifamily properties, to reduce outstanding indebtedness and for general corporate purposes. 34 In the second quarter of 1998, the Company and the Operating Partnership filed a registration statement (the "1998 Shelf Registration Statement") with the Securities and Exchange Commission (the "SEC") to register $300,000,000 of equity securities of the Company and $250,000,000 of debt securities of the Operating Partnership. The 1998 Shelf Registration Statement was declared effective by the SEC in July 1998. Prior to the filing of the 1998 Shelf Registration Statement, Essex had approximately $42,000,000 of capacity remaining on a previously filed registration statement that registered equity securities of the Company. Thus, combined with the prior Shelf Registration Statement and the 1998 Shelf Registration Statement, the Company has the capacity to issue up to $342,000,000 of equity securities and the Operating Partnership has the capacity to issue up to $250,000,000 of debt securities. In November 1998, the Operating Partnership sold 500,000 units of its 9.125% Series C Cumulative Redeemable Preferred Units to an institutional investor in a private placement, at a price of $50.00 per unit. The net proceeds from this placement were $24,375,000. The Operating Partnership utilized the net proceeds from this placement to reduce balances on the Company's outstanding lines of credit. At December 31, 1998 the Company has outstanding 1,600,000 shares of 8.75% Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock") which was sold to Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P. (collectively "Tiger/Westbrook"). In January 1999, Tiger/Westbrook exercised its option to convert 87,500 shares of the Convertible Preferred Stock into 100,000 shares of common stock. The Company has filed a registration statement covering Tiger/Westbrook's resale of such 100,000 shares of common stock and the registration statement was declared effective by the Securities and Exchange Commission in December 1998. Year 2000 Compliance The Company's State of Readiness. The Company utilizes a number of computer software programs and operating systems across its entire organization, including applications used in financial business systems and various administrative functions. To the extent that the Company's software applications contains source code that are unable to appropriately interpret the upcoming calendar year "2000" and beyond, some level of modification or replacement of such applications will be necessary. The Company currently believes that its "Year 2000" issues are limited to information technology ("IT") systems (i.e., software programs and computer operating systems). There are no significant non-IT systems (i.e., devices used to control, monitor or assist the operation of equipment and machinery), the failure of which would have a material effect on the Company's operations. The Company has also completed its assessment of the Year 2000 compliance issues presented by its IT systems. Employing a team made up of internal personnel, the Company has completed its identification of IT systems that are not yet Year 2000 compliant and has commenced modification or replacement of such systems as necessary, which is expected to be completed by the fourth quarter of 1999. The Company has communicated with third parties with whom it does significant business, such as financial institutions and vendors to determine their readiness for Year 2000 compliance. Based on position statements received by the Company, it appears that the Year 2000 compliance effort being made by third parties with which the Company does significant business is sufficient to avoid a material adverse impact on the Company's liquidity or ongoing results of operations. However, no assurance can be given regarding the cost of their failure to comply. The Company is in the process of developing contingency plans should third parties with which the Company does significant business fail to be Year 2000 compliant. Costs of Addressing the Company's Year 2000 issues. Given the information known at this time about the Company's systems that are non-compliant, coupled with the Company's ongoing, normal course-of-business efforts to upgrade or replace critical systems, as necessary, management does not expect Year 2000 compliance costs to have any material adverse impact on the Company's liquidity or ongoing results of operations. As of December 31, 1998, no compliance costs have been incurred by the Company. The costs of any future assessment and remediation will be paid out of the Company's general and administrative expenses. 35 Risks of the Company's Year 2000 issues. In light of the Company's assessment and remediation efforts to date, and the planned, normal course-of- business upgrades planned by the Company and its vendors, management believes that any residual Year 2000 risk is limited to non-critical business applications and support hardware. No assurance can be given, however, that all of the Company's systems will be year 2000 compliant or that compliance will not have a material adverse effect on the Company's future liquidity or results of operations or ability to service debt. FUNDS FROM OPERATIONS Industry analysts generally consider Funds from Operations ("Funds from Operations") an appropriate measure of performance of an equity REIT. Generally, Funds from Operations adjusts the net income of equity REITS for non-cash charges such as depreciation and amortization of rental properties and non-recurring gains or losses. Management generally considers Funds from Operations to be a useful financial performance measurement of an equity REIT because, together with net income and cash flows, Funds from Operations provides investors with an additional basis to evaluate the performance of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. Funds from Operations does not represent net income or cash flows from operations as defined by generally accepted accounting principles (GAAP) and is not intended to indicate whether cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the REIT's operating performance or to cash flows as a measure of liquidity. Funds from Operations does not measure whether cash flow is sufficient to fund all cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations also does not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Company's calculation of Funds from Operations. The following table sets forth Essex's calculation of Funds from Operations for 1998, 1997 and 1996.
FOR THE YEAR FOR THE QUARTER ENDED ENDED -------------------------------------------------- 12/31/98 12/31/98 9/30/98 6/30/98 3/31/98 -------- ----------- ----------- ----------- ----------- Income before gain on sale of real estate, minority interests and extraordinary item..... $40,591,000 $10,933,000 $ 9,998,000 $10,005,000 $ 9,655,000 Adjustments: Depreciation and amortization......... 21,948,000 6,072,000 5,575,000 5,632,000 4,669,000 Adjustments for unconsolidated joint ventures............. 1,393,000 366,000 365,000 366,000 296,000 Non-recurring items: Provision for litigation loss.... 930,000 -- 930,000 -- -- Minority interests(1)... (6,367,000) (2,014,000) (1,754,000) (1,692,000) (907,000) ----------- ----------- ----------- ----------- ----------- Funds from Operations... $58,495,000 $15,357,000 $15,114,000 $14,311,000 $13,713,000 =========== =========== =========== =========== =========== Weighted average number shares outstanding diluted(1)............. 20,510,988 20,522,910 20,523,466 20,549,875 20,550,845
36
FOR THE FOR THE QUARTER ENDED YEAR ENDED ------------------------------------------------- 12/31/97 12/31/97 9/30/97 6/30/97 3/31/97 ---------- ----------- ----------- ----------- ---------- Income before gain on sale of real estate, minority interests and extraordinary item..... $29,032,000 $ 8,483,000 $ 7,899,000 $ 6,907,000 $5,743,000 Adjustments: Depreciation and amortization......... 13,992,000 4,129,000 3,555,000 3,220,000 3,088,000 Adjustments for unconsolidated joint ventures............. 941,000 251,000 242,000 448,000 -- Non-recurring items: Loss from hedge termination........ 138,000 138,000 -- -- -- Minority interests(1)... (603,000) (162,000) (161,000) (142,000) (138,000) ----------- ----------- ----------- ----------- ---------- Funds from operations... $43,500,000 $12,839,000 $11,535,000 $10,433,000 $8,693,000 =========== =========== =========== =========== ========== Weighted average number shares outstanding diluted(1)............. 17,152,990 19,435,950 17,860,753 16,624,396 14,557,019 FOR THE FOR THE QUARTER ENDED YEAR ENDED ------------------------------------------------- 12/31/96 12/31/96 9/30/96 6/30/96 3/31/96 ----------- ----------- ----------- ----------- ---------- Income before gain on sale of real estate, minority interests and extraordinary item..... $12,493,000 $ 4,550,000 $ 3,305,000 $ 2,440,000 $2,198,000 Adjustments: Depreciation and amortization......... 8,855,000 2,342,000 2,276,000 2,047,000 2,190,000 Adjustments for unconsolidated joint ventures............. 508,000 129,000 130,000 130,000 119,000 Non-recurring items: Loss from hedge termination........ 42,000 -- 3,000 18,000 21,000 Minority interests(1)... (560,000) (144,000) (144,000) (132,000) (140,000) ----------- ----------- ----------- ----------- ---------- Funds from operations... $21,338,000 $ 6,877,000 $ 5,570,000 $ 4,503,000 $4,388,000 =========== =========== =========== =========== ========== Weighted average number shares outstanding diluted(1)............. 9,533,269 11,942,857 9,878,075 8,130,000 8,130,000
- -------- (1) Assumes conversion of all outstanding operating partnership interests in the Operating Partnership into shares of Essex's common stock. Minority interests have been adjusted to reflect such conversion. Also assumes conversion of shares of convertible preferred stock into shares of Essex's common stock. 37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes. The Company's interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes. Management of the Company believes that principal amounts of the Company's mortgage notes payable and line of credit approximate fair value as of December 31, 1998 as interest rates are consistent with yields currently available to the Company for similar instruments.
FOR THE YEAR ENDED DECEMBER 31 ------------------------------------- 1999 2000 2001 2002 2003 THEREAFTER TOTAL ------ ------ ----- ------ ------ ---------- -------- (IN THOUSANDS) Fixed rate debt......... $2,353 20,395 2,429 24,472 30,083 187,270 $267,002 Average interest rate... 7.06% 7.06% 6.56% 6.56% 5.71% 5.71% Variable rate LIBOR debt................... $ -- 35,693 -- -- -- 58,820(1) $ 94,513 Average interest rate... -- 6.20% -- -- -- 5.50%
- -------- (1) $29,220,000 is capped at 7.2% The Company has a LIBOR based swap contract for a notional amount of $12,298,000 fixing the one month LIBOR at 6.14% which limits interest rate exposure on borrowings under the LIBOR based line of credits and matures in 2002. The fair value of this contract as of December 31, 1998 is approximately $392,000. The Company also has four forward treasury contracts for an aggregate notional amount of $60,000,000, locking the 10 year treasury rate at between 6.14%-6.26% which limit interest rate exposure on certain future debt financing and will be settled in 2000. The fair value of these contracts as of December 31, 1998 is approximately $6,016,000. The fair value represents the estimated payments that would be made to terminate the agreement at December 31, 1998. As the table incorporates only those exposures that exist as of December 31, 1998, it does not consider those exposures or positions that could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented therein has limited predictive value. As a result, the Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company's hedging strategies at that time, and interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 38 PART III Item 10. Directors and Executive Officers of the Registrant The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on April 27, 1999. Item 11. Executive Compensation The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on April 27, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on April 27, 1999. Item 13. Certain Relationships and Related Transactions The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on April 27, 1999. 39 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K (A) Financial Statements and Report of KPMG LLP, independent auditors
Page ---- (1) Independent Auditors' Report.................................... F-1 (2) Consolidated Financial Statements Balance Sheets as of December 31, 1998 and December 31, 1997...... F-2 Statements of Operations for the years ended December 31, 1998, 1997 and 1996.................................................... F-3 Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.......................................... F-4 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.................................................... F-5 Notes to Consolidated Financial Statements........................ F-6 (3) Financial Statement Schedule: Real Estate and Accumulated Depreciation for the year ended December 31, 1998............... F-23
(B) Reports on Form 8-K On November 11, 1998, the Company filed a Current Report on Form 8-K regarding the adoption of its Shareholder Rights Plan. (C) Exhibits The Exhibit Index attached hereto is incorporated into this Item 14(c) by reference. 40 SIGNATURE Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ESSEX PROPERTY TRUST, INC. (Registrant) /s/ Michael J. Schall Dated: March 31, 1999 By: _________________________________ Michael J. Schall Executive Vice President and Chief Financial Officer and Director (Principal Financial Officer) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the date indicated.
Signature Title Date --------- ----- ---- /s/ George M. Marcus Chairman of the Board March 31, 1999 ____________________________________ George M. Marcus /s/ Keith R. Guericke President and Chief March 31, 1999 ____________________________________ Executive Officer and Vice Keith R. Guericke Chairman /s/ Michael J. Schall Chief Financial Officer March 31, 1999 ____________________________________ Executive, Vice President Michael J. Schall and Director /s/ Mark J. Mikl Controller (Principal March 31, 1999 ____________________________________ Accounting Officer) Mark J. Mikl /s/ William A. Millichap Director March 31, 1999 ____________________________________ William A. Millichap /s/ Gary P. Martin Director March 31, 1999 ____________________________________ Gary P. Martin /s/ Robert E. Larson Director March 31, 1999 ____________________________________ Robert E. Larson /s/ Thomas E. Randlett Director March 31, 1999 ____________________________________ Thomas E. Randlett
41
Signature Title Date --------- ----- ---- /s/ Anthony Downs Director March 31, 1999 ____________________________________ Anthony Downs /s/ David Brady Director March 31, 1999 ____________________________________ David Brady /s/ Issie N. Rabinovitch Director March 31, 1999 ____________________________________ Issie N. Rabinovitch /s/ Willard H. Smith Director March 31, 1999 ____________________________________ Willard H. Smith /s/ Gregory J. Hartman Director March 31, 1999 ____________________________________ Gregory J. Hartman
42 Independent Auditors' Report The Board of Directors Essex Property Trust, Inc.: We have audited the accompanying consolidated balance sheets of Essex Property Trust, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement schedule of Real Estate and Accumulated Depreciation as of December 31, 1998. These consolidated financial statements and the financial statement schedule are the responsibility of the management of Essex Property Trust, Inc. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Essex Property Trust, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP San Francisco, California January 30, 1999 F-1 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (Dollars in thousands, except per share amounts)
1998 1997 -------- -------- ASSETS ------ Real estate: Rental properties: Land and land improvements............................. $219,115 $182,416 Buildings and improvements............................. 670,849 548,571 -------- -------- 889,964 730,987 Less accumulated depreciation............................ (77,789) (58,040) -------- -------- 812,175 672,947 Investments.............................................. 10,590 9,535 Real estate under development............................ 53,213 20,234 -------- -------- 875,978 702,716 Cash and cash equivalents.................................. 2,548 4,282 Restricted cash............................................ 15,532 6,093 Notes and other related party receivables.................. 10,450 9,264 Notes and other receivables................................ 18,809 8,602 Prepaid expenses and other assets.......................... 3,444 3,838 Deferred charges, net...................................... 5,035 4,040 -------- -------- $931,796 $738,835 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Mortgage notes payable..................................... $325,822 $248,997 Lines of credit............................................ 35,693 27,600 Accounts payable and accrued liabilities................... 28,601 21,337 Deferred gain.............................................. 5,002 -- Dividends payable.......................................... 11,145 9,189 Other liabilities.......................................... 5,301 4,208 -------- -------- Total liabilities.................................... 411,564 311,331 Minority interests......................................... 130,432 28,589 Commitments and contingencies Stockholders' equity: 8.75% Convertible preferred stock, series 1996A: $.0001 par value 1,600,000 authorized; and 1,600,000 issued and outstanding in 1998 and 1997............................ 1 1 Common stock, $.0001 par value, 665,900,000 shares authorized; 16,640,616 and 16,614,687 shares issued and outstanding in 1998 and 1997, respectively.............. 2 2 7.875% Series B cumulative redeemable preferred stock: $.0001 par value, 2,000,000 shares authorized and no shares issued and outstanding in 1998................... -- -- 9.125% Series C cumulative redeemable preferred stock: $.0001 par value, 500,000 shares authorized and no shares outstanding in 1998.............................. -- -- Excess stock, $.0001 par value per share, 330,000,000 shares authorized, no shares issued or outstanding...... -- -- Additional paid-in capital............................... 431,278 430,804 Accumulated deficit...................................... (41,481) (31,892) -------- -------- Total stockholders' equity........................... 389,800 398,915 -------- -------- $931,796 $738,835 ======== ========
See accompanying notes to consolidated financial statements. F-2 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share amounts)
1998 1997 1996 ---------- ---------- --------- Revenues: Rental.................................... $ 119,397 $ 79,936 $ 47,780 Other property income..................... 2,645 1,464 756 ---------- ---------- --------- Total property revenues............... 122,042 81,400 48,536 Interest and other income................. 3,217 3,169 2,157 ---------- ---------- --------- Total revenues........................ 125,259 84,569 50,693 ---------- ---------- --------- Expenses: Property operating expenses: Maintenance and repairs................. 8,972 6,814 4,341 Real estate taxes....................... 9,109 6,340 3,790 Utilities............................... 7,809 5,074 3,175 Administrative.......................... 9,228 5,514 2,911 Advertising............................. 1,742 1,225 653 Insurance............................... 1,073 859 635 Depreciation and amortization........... 21,948 13,992 8,855 ---------- ---------- --------- 59,881 39,818 24,360 Interest.................................... 19,374 12,659 11,442 Amortization of deferred financing costs.... 718 509 639 General and administrative.................. 3,765 2,413 1,717 Loss from hedge termination................. -- 138 42 Provision for litigation loss............... 930 -- -- ---------- ---------- --------- Total expenses........................ 84,668 55,537 38,200 ---------- ---------- --------- Income before gain on sales of real estate, minority interests and extraordinary item................... 40,591 29,032 12,493 Gain on sales of real estate................ 9 5,114 2,477 Minority interests.......................... (9,554) (4,469) (2,648) ---------- ---------- --------- Income before extraordinary item...... 31,046 29,677 12,322 Extraordinary loss on early extinguishment of debt.................................... (4,718) (361) (3,441) ---------- ---------- --------- Net income............................ 26,328 29,316 8,881 Preferred stock dividends................... (3,500) (2,681) (635) ---------- ---------- --------- Net income available to common stockholders......................... $ 22,828 $ 26,635 $ 8,246 ========== ========== ========= Per share data: Basic: Income before extraordinary item available to common stockholders....... $ 1.65 $ 1.98 $ 1.61 Extraordinary item--debt extinguishment......................... (0.28) (0.02) (0.48) ---------- ---------- --------- Net income............................ $ 1.37 $ 1.96 $ 1.13 ========== ========== ========= Weighted average number of shares outstanding during the period.......... 16,630,954 13,644,906 7,283,124 ========== ========== ========= Diluted: Income before extraordinary item available to common stockholders....... $ 1.64 $ 1.94 $ 1.59 Extraordinary item debt extinguishment.. (0.28) (0.02) (0.47) ---------- ---------- --------- Net income............................ $ 1.36 $ 1.92 $ 1.12 ========== ========== ========= Weighted average number of shares outstanding during the period.......... 16,808,943 15,285,288 7,347,528 ========== ========== =========
See accompanying notes to consolidated financial statements. F-3 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1998, 1997 and 1996 (Dollars and shares in thousands)
Preferred stock Common stock Additional ------------- ------------- paid-in Accumulated Shares Amount Shares Amount capital deficit Total ------ ------ ------ ------ ---------- ----------- -------- Balances at December 31, 1995................... -- $-- 6,275 $ 1 $ 112,070 $(27,342) $ 84,729 Net proceeds from preferred stock offering............... 800 1 -- -- 17,504 -- 17,505 Net proceeds from common stock offerings........ -- -- 5,313 -- 126,464 -- 126,464 Net proceeds from options exercised...... -- -- 4 -- 68 -- 68 Net income.............. -- -- -- -- -- 8,881 8,881 Dividends declared...... -- -- -- -- -- (14,840) (14,840) ----- --- ------ --- --------- -------- -------- Balances at December 31, 1996................... 800 1 11,592 1 256,106 (33,301) 222,807 Net proceeds from preferred stock offering............... 800 -- -- -- 20,000 -- 20,000 Net proceeds from common stock offerings........ -- -- 4,995 1 154,013 -- 154,012 Net proceeds from options exercised...... -- -- 28 -- 686 -- 686 Net income.............. -- -- -- -- -- 29,316 29,316 Dividends declared...... -- -- -- -- -- (27,907) (27,907) ----- --- ------ --- --------- -------- -------- Balances at December 31, 1997................... 1,600 1 16,615 2 430,804 (31,892) 398,915 Shares issued from Dividend Reinvestment Plan................... -- -- 2 -- 10 -- 10 Net proceeds from options exercised.............. -- -- 24 -- 464 -- 464 Net income.............. -- -- -- -- -- 26,328 26,328 Dividends declared...... -- -- -- -- -- (35,917) (35,917) ----- --- ------ --- --------- -------- -------- Balances at December 31, 1998................... 1,600 $ 1 16,641 $ 2 $ 431,278 $(41,481) $389,800 ===== === ====== === ========= ======== ========
See accompanying notes to consolidated financial statements. F-4 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (Dollars in thousands)
1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net income................................... $ 26,328 $ 29,316 $ 8,881 Minority interests........................... 9,554 4,469 2,047 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of real estate................ (9) (5,114) (2,477) Equity in (income) loss of limited partnerships.............................. (276) 209 (546) Loss on early extinguishment of debt....... 4,718 361 3,441 Loss from hedge termination................ -- 138 42 Depreciation and amortization.............. 21,948 13,992 8,855 Amortization of deferred financing costs... 718 509 639 Changes in operating assets and liabilities: Other receivables........................ (10,207) (1,377) (163) Prepaid expenses and other assets........ 336 (158) (2,110) Accounts payable and accrued liabilities............................. 4,831 2,738 842 Other liabilities........................ 1,093 1,815 684 --------- --------- --------- Net cash provided by operating activities............................. 59,034 46,898 20,135 --------- --------- --------- Cash flows from investing activities: Additions to rental properties............... (163,019) (247,886) (101,429) Increase in restricted cash.................. (9,439) (1,899) (4,194) Issuance of notes receivable................. (610) (1,932) (3,909) Repayments of notes receivable............... -- -- 6,327 Additions to related party notes and other receivables................................. (5,616) (28,761) -- Repayments of related party notes and other receivables................................. 4,430 21,859 -- Distributions from investments in corporations and limited partnerships....... 1,255 620 665 Dispositions of real estate.................. 26,354 15,470 13,350 Additions to real estate under development... (33,256) (27,422) -- --------- --------- --------- Net cash used in investing activities... (179,901) (269,951) (89,190) --------- --------- --------- Cash flows from financing activities: Proceeds from mortgage and other notes payable and lines of credit................. 349,540 204,931 91,253 Repayment of mortgage and other notes payable and lines of credit......................... (283,065) (164,580) (110,305) Additions to deferred charges................ (2,345) (752) (2,530) Net proceeds from preferred unit sales....... 102,150 -- -- Net proceeds from stock offerings............ -- 174,012 143,969 Payment of offering related costs............ (323) (711) 1,140 Net proceeds from stock options exercised and shares issued through dividend reinvestment plan........................................ 474 686 68 Net payments made in connection with costs related to the early extinguishment of debt........................................ (4,086) -- (620) Distributions to minority interest/partners.. (8,138) (3,910) (3,189) Dividends paid............................... (35,074) (25,046) (12,009) --------- --------- --------- Net cash provided by financing activities............................. 119,133 184,630 107,777 --------- --------- --------- Net (decrease) increase in cash and cash equivalents.................................. $ (1,734) $ (38,423) $ 38,722 Cash and cash equivalents at beginning of period....................................... 4,282 42,705 3,983 --------- --------- --------- Cash and cash equivalents at end of period.... $ 2,548 $ 4,282 $ 42,705 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized................................. $ 18,947 $ 12,384 $ 11,575 ========= ========= ========= Supplemental disclosure of non-cash investing and financing activities: Mortgage note payable assumed in connection with purchase of real estate................ $ 18,443 $ 83,041 $ 17,733 ========= ========= ========= Dividends payable............................ $ 11,145 $ 9,189 $ 6,286 ========= ========= =========
See accompanying notes to consolidated financial statements. F-5 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (1) Organization and Basis of Presentation The accompanying consolidated financial statements present the accounts of Essex Property Trust, Inc. (the Company) which include the accounts of the Company and Essex Portfolio, L.P. (the Operating Partnership, which holds the operating assets of the Company). The Company was incorporated in the state of Maryland in March 1994. On June 13, 1994, the Company commenced operations with the completion of an initial public offering (the Offering) in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds of the Offering of $112,070 were used to acquire a 77.2% general partnership interest in the Operating Partnership. The Company has a 89.9% general partner interest and the limited partners own a 10.1% interest in the Operating Partnership at December 31, 1998. The limited partners may convert their 1,873,473 interests into shares of common stock or cash (based upon the trading price of the common stock at the conversion date). The Company has reserved shares of common stock for such conversions. These conversion rights may be exercised by the limited partners at any time through 2024. The Company operates and has ownership interests in 58 multifamily properties (containing 12,267 units) and five commercial properties (with approximately 290,000 square feet) (collectively, "the Properties"). The Properties are located in Northern California (San Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and San Diego counties), and the Pacific Northwest (Seattle, Washington and Portland, Oregon metropolitan areas). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. (2) Summary of Significant Accounting Policies (a) Real Estate Rental Properties Rental properties are recorded at cost less accumulated depreciation. Depreciation on rental properties has been provided over estimated useful lives ranging from 3 to 40 years using the straight-line method. Maintenance and repair expenses are charged to operations as incurred. Asset replacements and improvements are capitalized and depreciated over their estimated useful lives. Certain rental properties are pledged as collateral for the related mortgage notes payable. When the Company determines that a property is held for sale, it discontinues the periodic depreciation of that property in accordance with the provisions of SFAS 121. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell. In addition, whenever events or changes in circumstances indicate that the carrying amount of a property held for investment may not be fully recoverable, the carrying amount will be evaluated. If the sum of the property's expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property, then the Company will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. No impairment has been recorded through December 31, 1998. No properties are classified as held for sale as of December 31, 1998. (b) Real Estate Investments The Company consolidates or accounts for its investments in joint ventures and corporations under the equity method of accounting based on its ownership interests in those entities. F-6 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (c) Revenues For multifamily properties, rental revenue is reported on the accrual basis of accounting. For commercial properties, rental income is recognized on the straight-line basis over the terms of the leases. Accrued rent receivable relating to such leases has been included in other assets in the accompanying consolidated balance sheets. (d) Income Taxes Generally in any year in which the Company qualifies as a real estate investment trust (REIT) under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the Code), it is not subject to federal income tax on that portion of its income that it distributes to stockholders. No provision for federal income taxes has been made in the accompanying consolidated financial statements for each of the three years in the period ended December 31, 1998, as the Company believes it qualifies under the code as a REIT and has made distributions during the periods in excess of taxable income. Federal taxable income of the Company prior to the dividend paid deductions for the years ended December 31, 1998, 1997 and 1996, was: $26,625, $23,493 and $7,141, respectively. The difference between net income for financial reporting purposes and taxable income results primarily from different methods of depreciation and gains on property dispositions. The status of the cash dividends distributed for the years ended December 31, 1998, 1997 and 1996 for tax purposes is as follows:
1998 1997 1996 ---- ---- ---- Taxable portion.............................................. 85% 100% 58% Return of capital............................................ 15 -- 42 --- --- --- 100% 100% 100% === === ===
The most significant component causing the reduction of the return of capital percentage for 1997 was earnings growing at a faster rate than dividends paid. (e) Interest Rate Protection, Swap, and Forward Contracts The Company will from time to time use interest rate protection, swap and forward contracts to reduce its interest rate exposure on current or identified future debt transactions. Amounts paid in connection with such contracts are capitalized and amortized over the term of the contract or related debt. If the original contract is terminated, the gain or loss on termination is deferred and amortized over the remaining term of the contract. If the related debt is repaid, the unamortized portion of the deferred amount is charged to income or the contract is marked to market, as appropriate. The Company's policy is to manage interest rate risk for existing or anticipated borrowings. (f) Deferred Charges Deferred charges are principally comprised of mortgage loan fees and costs which are amortized over the terms of the related mortgage notes in a manner which approximates the effective interest method. F-7 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (g) Interest The Company capitalized $3,494, $1,276 and $281 of interest related to the development of real estate during 1998, 1997 and 1996, respectively. (h) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (i) Stock Based Compensation The Company applies APB Opinion 25 and related Interpretations in accounting for its stock based compensation plans. (j) Cash Equivalents and Restricted Cash Highly liquid investments with maturities of three months or less when purchased are classified as cash equivalents. Restricted cash relates to reserve requirements in connection with the Company's tax exempt variable rate bond financings and a guarantee the Company has made on a first mortgage loan held by one of its joint venture partnerships. (k) Reclassifications Certain reclassifications have been made to the 1997 and 1996 balances to conform with the 1998 presentation. (l) New Accounting Pronouncements In June 1998, the FASB issued Financial Accounting Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. The Company will adopt SFAS 133 for interim periods beginning in 2000, the effective date of SFAS 133. Management believes that the adoption of these statements will not have a material impact on the Company's financial position or results of operations. (3) Equity Transactions In February and April 1998, the Operating Partnership sold 1,200,000 and 400,000 units, respectively, of its 7.875% Series B Cumulative Redeemable Preferred Units to an institutional investor in a private placement, at a price of $50.00 per unit. The net proceeds from these offerings were $58,275 and $19,500, respectively. In November 1998, the Operating Partnership sold 500,000 units of its 9.125% Series C Cumulative Redeemable Preferred Units to an institutional investor in a private placement, at a price of $50.00 per unit. The net proceeds from this offering were $24,375. Preferred units issued in connection with the above transactions are included in minority interests in the Company's consolidated balance sheet as of December 31, 1998. During 1997, the Company sold additional shares of Common Stock on March 31, 1997, September 10, 1997 and December 8, 1997. In connection with these offerings, the Company sold 2,000,000, 1,495,000 and 1,500,000 shares at $29.13, $31.00 and $35.50 per share, respectively. The net proceeds received from these transactions were $58,119, $46,080 and $49,814, respectively. F-8 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) On June 20, 1996, the Company entered into an agreement to sell up to $40,000 of the 8.75% Convertible Preferred Stock, Series 1996A (the Convertible Preferred Stock) at $25.00 per share to Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P. (collectively, Tiger/Westbrook). In accordance with the agreement, on July 1, 1996 and September 27, 1996, Tiger/Westbrook purchased 340,000 and 460,000 shares, respectively, of Convertible Preferred Stock for an aggregate purchase price of $8,500 and $11,500, respectively. Tiger/Westbrook purchased an additional $20,000 of Convertible Preferred Stock, in accordance with the agreement on June 20, 1997. The outstanding Convertible Preferred Stock is entitled to receive annual cumulative cash dividends paid quarterly in an amount equal to the greater of (i) 8.75% of the per share price or (ii) the dividends (on an as-converted basis) paid with respect to the Common Stock plus, in both cases, any accumulated but unpaid dividends on the Convertible Preferred Stock. As of December 31, 1998, all of the 1.6 million authorized shares of Convertible Preferred Stock is convertible into Common Stock at the option of the holder. The conversion price per share is $21.875, subject to certain adjustments as defined in the agreement. Under certain circumstances, if, after June 20, 2001, the Company requires a mandatory conversion of all of the Convertible Preferred Stock, but under no other circumstances, each of the holders of the Convertible Preferred Stock may cause the Company to redeem any or all of such holder's shares of Convertible Preferred Stock. (4) Per Share Data Basic income per share before extraordinary item and diluted income per share before extraordinary item were calculated as follows for the years ended December 31:
1998 1997 1996 -------------------------- -------------------------- -------------------------- Weighted Per- Weighted Per- Weighted Per- average share average share average share Income shares amount Income shares amount Income shares amount ------- -------- ------ ------- -------- ------ ------- -------- ------ Income before extraordinary item..... $31,046 $29,677 $12,322 Less: dividends on preferred stock........ (3,500) (2,681) (635) ------- ------- ------- Basic: Income available to common stockholders... 27,546 16,631 $1.65 26,996 13,645 $1.98 11,687 7,283 $1.61 ===== ===== ===== Effect of Dilutive Securities: Convertible limited partnership units..... -- -- (1) -- -- (1) -- -- (1) Convertible preferred stock................. -- -- (1) 2,681 1,400 -- -- (1) Stock options.......... -- 178 -- 240 -- 64 ------- ------ ------- ------ ------- ----- Diluted: Income available to common stockholders plus assumed conversions........... $27,546 16,809 $1.64 $29,677 15,285 $1.94 $11,687 7,347 $1.59 ======= ====== ===== ======= ====== ===== ======= ===== =====
- -------- (1) Conversion not considered as effect would be anti-dilutive. F-9 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (5) Real Estate (a) Rental Properties Rental properties consists of the following at December 31, 1998 and 1997:
Land and land Building and Accumulated improvements improvements Total depreciation ------------- ------------ ------- ------------ December 31, 1998: Apartment properties..... $217,337 651,818 869,155 73,638 Commercial properties.... 1,778 19,031 20,809 4,151 -------- ------- ------- ------ $219,115 670,849 889,964 77,789 ======== ======= ======= ====== December 31, 1997: Apartment properties..... $178,326 520,649 698,975 53,021 Commercial and retail properties.............. 4,090 27,922 32,012 5,019 -------- ------- ------- ------ $182,416 548,571 730,987 58,040 ======== ======= ======= ======
The properties are located in California, Washington and Oregon. The operations of the Properties could be adversely affected by a recession, general economic downturn or a natural disaster in the areas where the properties are located. During the year ended December 31, 1998, the Company sold four properties to third parties for $26,354 resulting in a gain of $9 and a deferred gain of $5,002. During the year ended December 31, 1997, the Company sold four properties to third parties for $15,470 resulting in a gain of $5,114. During the year ended December 31, 1996, the Company sold two properties to third parties for $13,350, resulting in a gain of $2,477. The Company utilized Internal Revenue Code Section 1031 to defer the majority of the taxable gains resulting from these sales. For the years ended December 31, 1998, 1997, and 1996, depreciation expense on real estate was $21,890, $13,913 and $8,820, respectively. (b) Investments The Operating Partnership owns all of the 19,000 shares of the non-voting preferred stock of Essex Management Corporation (EMC). Management of the Company owns 100 percent of the common stock of EMC. EMC was formed to provide property and asset management services to various partnerships not controlled by the Company. The Operating Partnership owns 31,800 shares of the non-voting preferred stock of Essex Fidelity I Corporation (Fidelity I). Currently, Fidelity I holds interests in various real estate investments. The shares of non-voting preferred stock in EMC and Fidelity I are entitled to a preferential dividend of $0.80 per share per annum. Through these preferred stock investments, the Operating Partnership will be eligible to receive a preferential liquidation value of $10.00 per share plus all cumulative and unpaid dividends. The Operating Partnership holds a 49.9% limited partnership interest in Jackson School Village, L.P. (JSV) which operates a 200-unit garden style apartment community in Hillsboro, Oregon. The Company holds limited partnership interests in seven partnerships which collectively own two multifamily properties: Anchor Village Apartments ("Anchor Village"), a 301-unit apartment community F-10 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) located in Mukilteo, Washington and Highridge Apartments ("Highridge"), a 255- unit apartment community located in Ranchos Palos Verdes, California. In February 1998 the Company purchased a limited partnership interest in two partnerships which acquired three retail properties from the Company ("Portland Shopping Centers"), which have approximately 236,000 square feet of leasable space located in the Portland, Oregon metropolitan area. These investments were made under arrangements whereby EMC became the general partner and the other limited partners were granted rights of redemption for their interests. Such partners can request to be redeemed and the Company can elect to redeem their rights for cash or by issuing shares of its common stock. Conversion values will be based on 98 percent of the market value of the Company's common stock at the time of redemption multiplied by the number of shares stipulated under the above arrangements. In September 1997 the Company acquired a 49% limited partnership interest in Fountain Court Apartment Associates, L.P. which is developing a 320-unit multifamily community, Fountain Court, located in Seattle, Washington. In October 1998, the Company purchased an additional 2% limited partnership interest. Additionally, the Company paid $2,000 for the option to purchase the remaining 49% interest 18 months subsequent to the occupancy date, as defined in the agreement. In August 1997 the Company acquired a 45% Class A Member interest in Park Hill LLC, whose purpose is the development and operations of a 245-unit multifamily community, Park Hill Apartments, located in Issaquah, Washington. Generally, all capital contributions earn a cumulative preferred return of 12%. Profit and loss are allocated to the Members in accordance with their ownership interests. According to the terms of the Agreement, the Company has the option to purchase the remaining 55% interest after August 31, 2003. The purchase price will be calculated based on operating results, as defined in the Agreement. The Company accounts for its investments in the above entities under the equity method of accounting. Investments consist of the following as of December 31, 1998 and 1997:
1998 1997 ------- ------ Investments in joint ventures: Limited partnership interest of 49.9% in Jackson School Village, L.P. .............................................. $ 2,473 $2,259 Limited partnership interest of 1% in Highridge Apartments(1)............................................... (987) (409) Limited partnership interest of 1% in Anchor Village Apartments(1)............................................... (691) (270) Limited partnership interest of 1% in Portland Shopping Centers(1).................................................. (183) -- Limited partnership interest of 51% in Fountain Court Apartment Associates, L.P. ................................. 5,352 4,137 Class A Member interest of 45% in Park Hill LLC.............. 3,978 3,051 ------- ------ 9,942 8,768 ------- ------ Investments in corporations: Essex Management Corporation--19,000 shares of preferred stock....................................................... 190 190 Essex Fidelity I Corporation--31,800 shares of preferred stock....................................................... 331 331 Essex Sacramento Corporation--62,500 shares of preferred stock....................................................... -- 122 ------- ------ 521 643 ------- ------ Other investments.............................................. 127 124 ------- ------ $10,590 $9,535 ======= ======
- -------- (1) Balance represents the excess of distributions and allocations over cost basis. F-11 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (6) Notes and Other Related Party Receivables Notes receivable from joint venture investees and other related party receivables consist of the following at December 31, 1998 and 1997:
1998 1997 ------- ------ Notes receivable from joint venture investees: Note receivable from Highridge Apartments, secured, bearing interest at 9%, due March 2008................... $ 1,047 $2,750 Note receivable from Fidelity I, secured, bearing interest at 12%, repaid in 1998................................... -- 1,580 Note receivable from Fidelity I, secured, bearing interest at 8%, due on demand..................................... 1,358 -- Notes receivable from Fidelity I and JSV, secured, bearing interest at 9.5-10%, due 2015............................ 800 726 Receivable from Highridge Apartments, non-interest bearing, due on demand................................... 2,928 1,699 Receivable from Las Hadas, non-interest bearing, due on demand................................................... 1,209 -- Receivable from Anchor Village, non-interest bearing, due on demand................................................ 933 -- Other related party receivables: Loans to officers, bearing interest at 8%, due April 2006..................................................... 500 375 Other related party receivables, substantially due on demand................................................... 1,675 2,134 ------- ------ $10,450 $9,264 ======= ======
Other related party receivables consist primarily of accrued interest income on related party notes receivable and loans to officers, advances and accrued management fees from joint venture partnerships, and unreimbursed expenses due from EMC. The Company's officers and directors do not have a substantial economic interest in these related party entities. (7) Notes and Other Receivables Notes and other receivables consist of the following at December 31, 1998 and 1997:
1998 1997 ------- ------ Note receivable from the co-tenants in the Pathways property, secured, interest payable monthly at 9%, principal due June 2001........................................................ $ 4,452 $4,596 Note receivable from R&V Management, secured, bearing interest at 12.04%, principal due March 1999................ 7,879 -- Note receivable from R&V Management, secured, bearing interest at 10.0%, principal due June 2000.................. 2,814 -- Other receivables............................................ 3,664 4,006 ------- ------ $18,809 $8,602 ======= ======
F-12 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (8) Related Party Transactions All general and administrative expenses of the Company and EMC are initially borne by the Company, with a portion subsequently allocated to EMC based on a business unit allocation methodology, formalized and approved by management and the board of directors. Expenses allocated to EMC for the years ended December 31, 1998, 1997 and 1996 totaled $545, $987 and $1,752, respectively, and are reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of operations. Included in rental revenue in the accompanying consolidated statements of operations are rents earned from space leased to Marcus & Millichap (M&M) including operating expense reimbursements of $833, $709 and $681 for the years ended December 31, 1998, 1997 and 1996, respectively. During the years ended December 31, 1998, 1997 and 1996, the Company paid brokerage commissions totaling $0, $590 and $312 to M&M on the purchase and sales of real estate. The commissions are either capitalized as a cost of acquisition or are reflected as a reduction of the gain on sales of real estate in the accompanying consolidated statements of operations. EMC is entitled to receive a percentage of M&M brokerage commissions on certain transactions in which the Company is a party. Other income includes $623, $139 and $820 for the years ended December 31, 1998, 1997 and 1996, respectively, representing dividends from EMC and management fees and equity income (loss) from Jackson School Village, Highridge Apartments, Anchor Village Apartments, and the Portland Shopping Centers. Also included in 1996 are management fees and equity income (loss) from Essex Bristol Partners (Bristol) and Essex San Ramon Partners (San Ramon). In January 1997, Essex acquired the joint venture partners' ownership interest in Bristol and San Ramon. Interest income includes $1,027, $1,286 and $214 for the years ended December 31, 1998, 1997 and 1996, respectively, which was earned principally on the notes receivable from Essex Fidelity I, the partnerships which collectively own Highridge, the partnerships which collectively own Anchor Village and the partnerships which collectively own a 30.7% minority interest in Pathways Apartments. F-13 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (9) Mortgage Notes Payable Mortgage notes payable consist of the following at December 31, 1998 and 1997:
1998 1997 -------- -------- Mortgage note payable to a pension fund, secured by deeds of trust, bearing interest at 6.62%, interest only payments due monthly through October 2001, principal and interest payments due monthly thereafter, final principal payment of $90,596 due in October 2008. Under certain conditions this loan can be converted to an unsecured note payable......... $100,000 $ -- Mortgage notes payable, secured by deeds of trust, bearing interest at rates ranging from 6.885% to 8.055%, principal and interest payments due monthly, and maturity dates ranging from December 2000 through March 2008.............. 96,214 69,554 Multifamily housing mortgage revenue bonds secured by deeds of trust on rental properties and guaranteed by collateral pledge agreements, payable monthly at a variable rate as defined in the Loan Agreement (approximately 3.5% for December 1998), plus credit enhancement and underwriting fees of approximately 1.9%. The bonds are convertible to a fixed rate. Among the terms imposed on the properties, which are security for the bonds, is that twenty percent of the units are subject to tenant income qualification criteria. Principal balances are due in full at various maturity dates from July 2014 through October 2026. Bonds in the aggregate of $29,220 are subject to interest rate protection agreements through August 2003, limiting the interest rate with respect to such bonds to a maximum interest rate of 7.2%...................................... 58,820 58,820 Mortgage notes payable, secured by deeds of trust, bearing interest at rates ranging from 7.0% to 8.78%, principal and interest payments due monthly, and maturity dates ranging from December 2002 through April 2005. Under certain conditions this loan can be converted to an unsecured note payable.................................................... 44,788 38,120 Multifamily housing mortgage revenue bonds secured by deed of trust on a rental property and guaranteed by a collateral pledge agreement, bearing interest at 6.455%, principal and interest payments due monthly, final principal payment of $14,800 due January 2026. Among the terms imposed on the property, which is security for the bonds, is that twenty percent of the units are subject to tenant income qualification criteria. The interest rate will be repriced in February 2008 at the then current tax- exempt bond rate........................................... 17,273 17,483 Multifamily housing mortgage revenue bonds secured by deed of trust on rental property, bearing interest at 7.69%, principal and interest installments due monthly through June 2018. Among the terms imposed on the property, which is security for the bonds, is that twenty percent of the units are subject to tenant income qualifications criteria................................................... 8,727 8,915 Mortgage notes payable to a mutual life insurance company, secured by deeds of trust, bearing interest at 7.45%, interest only payments due through June 1996, monthly principal and interest installments due thereafter......... -- 48,078 Mortgage notes payable to a life insurance company, secured by deed of trust, bearing interest at 8.93%, interest only payments due through March 1997, monthly principal and interest installments due thereafter....................... -- 8,027 -------- -------- $325,822 $248,997 ======== ========
F-14 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) The aggregate scheduled maturities of mortgage notes payable are as follows: Year ending December 31: 1999......................................................... $ 2,353 2000......................................................... 20,395 2001......................................................... 2,429 2002......................................................... 24,472 2003......................................................... 30,083 Thereafter................................................... 246,090 -------- $325,822 ========
In October 1997, the Company entered into four forward treasury contracts for an aggregate notional amount of $60,000, locking the 10 year treasury rate at between 6.14%-6.26%. These contracts are to limit the interest rate exposure on identified future debt financing requirements relating to real estate under development and the refinancing of a $18,327 fixed rate loan. These contracts will be settled no later than June 2000. If these contracts were settled as of December 31, 1998, the Company would be obligated to pay approximately $6,016. Any costs that are incurred when these contracts are settled are expected to be deferred and recognized over the life of the related financing. These forward treasury contracts are not currently required to be reflected in the accompanying consolidated financial statements. Under FAS 133, which becomes effective in 2000, the Company expects to recognize the fair value of these contracts as either assets or liabilities in the financial statements with another comprehensive income charge directly to stockholders' equity. In addition, the Company has entered into various other contracts to limit its interest rate exposure on debt related transactions. During 1998, 1997 and 1996, the Company charged $0, $0 and $42 to income representing amortization of deferred costs. During 1998, 1997 and 1996, the Company charged $0, $138 and $0 of costs relating to the termination of unmatched positions taken. During the years ended December 31, 1998, 1997 and 1996, the Company refinanced various mortgages and incurred a loss on the early extinguishment of debt of $4,718, $361 and $3,441 related to the write off of the unamortized mortgage loan fees and prepayment penalties. (10) Lines of Credit As of December 31, 1998 and 1997, the Company had the following balances outstanding under lines of credit with commercial banks:
1998 1997 ------- ------- Unsecured $100,000 line of credit, interest payable monthly at the bank's reference rate or at the Company's option, 1.15% over the LIBOR rate, expiring June 2000............. $35,693 $25,000 Secured $10,000 line of credit, interest payable monthly at the bank's reference rate or at the Company's option, 1.5% over the LIBOR rate, expiring March 1999.................. -- 2,600 ------- ------- $35,693 $27,600 ======= =======
F-15 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) The Company has a LIBOR based swap contract for a notional amount of $12,298, fixing the one month LIBOR rate at 6.14%. This contract limits the Company's interest rate exposure on borrowings under its LIBOR based lines of credit. This contract expires in June 2002. If this contract were settled as of December 31, 1998, the Company would be obligated to pay approximately $392. As of December 31, 1998, the thirty-day LIBOR rate was approximately 5.06%, and the prime rate was 7.75%. (11) Leasing Activity The rental operations of the Company include apartment properties, which are rented under short term leases (generally, lease terms of three to twelve months), and commercial properties, which are rented under cancelable and noncancelable operating leases, certain of which contain renewal options. Future minimum rental activity for the apartment properties is not included in the following schedule due to the short-term nature of the leases. Future minimum rentals due under noncancelable operating leases with tenants of the commercial properties are as follows: Year ending December 31: 1999........................................................... $1,144 2000........................................................... 703 2001........................................................... 707 2002........................................................... 678 2003........................................................... 558 Thereafter..................................................... 618 ------ $4,408 ======
Included in this schedule is $347 due from M&M through May 1999. The Company expects M&M to exercise their option to renew their lease agreement upon expiration in May 1999. In addition to minimum rental payments, retail (prior to the disposition of these properties in February 1998) and commercial property tenants pay reimbursements for their pro rata share of specified operating expenses. Such amounts totaled $839, $905 and $964 for the years ended December 31, 1998, 1997 and 1996, respectively, and are included as rental revenue and operating expenses in the accompanying consolidated statements of operations. (12) Fair Value of Financial Instruments Management believes that the carrying amounts of mortgage notes payable, lines of credit, notes and other related party receivables approximate fair value as of December 31, 1998 and 1997, because interest rates and yields for these instruments are consistent with yields currently available to the Company for similar instruments. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and dividends payable approximate fair value as of December 31, 1998 and 1997 due to the short-term maturity of these instruments. See Note 8 for fair value disclosure of interest rate risk management contracts. F-16 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (13) Stock Option Plans The Essex Property Trust, Inc. 1994 Stock Incentive Plan provides incentives to attract and retain officers, directors and key employees. The Stock Incentive Plan provides for the grants of options to purchase a specified number of shares of common stock or grants of restricted shares of common stock. Under the Stock Incentive Plan, the total number of shares available for grant is approximately 875,400. The Board of Directors (the Board) may adjust the aggregate number and type of shares reserved for issuance. Participants in the Stock Incentive Plans are selected by the Compensation Committee of the Board, which is comprised of independent directors. The Compensation Committee is authorized to establish the exercise price; however, the exercise price cannot be less than 100 percent of the fair market value of the common stock on the grant date. The Company's options have a life of ten years. Option grants fully vest between one year and five years after the grant date. In connection with the Company's 1994 initial public offering, the Company provided a one-time grant of options to M&M to purchase 220,000 shares of common stock through June 1999 at the initial public offering price of $19.50 per share pursuant to an agreement whereby Marcus & Millichap Real Estate Investment Brokerage Company, a subsidiary of M&M, will provide real estate transaction, trend and other information to the Company for a period of ten years. The Company has also reserved 406,500 shares of common stock in connection with the Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan. There was no activity in this plan during 1998, 1997 and 1996. The Company applies APB Opinion 25 and related interpretations in accounting for its stock based compensation plans. Accordingly, no compensation cost has been recognized for its plans. Had compensation cost for the Company's plans been determined based on the fair value at the grant dates consistent with the method of FASB Statement 123, the Company's net income for the years ended December 31, 1998, 1997 and 1996 would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ------- ------- ------ Net income: As reported....................................... $26,328 $29,316 $8,881 Pro forma......................................... 26,294 29,216 8,820
For the years ended December 31, 1998, 1997, and 1996, the effect of determining compensation cost consistent with FASB Statement No. 123 on basic and diluted earnings per share was not material. The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants: risk-free interest rates ranging from 4.19% to 5.77% in 1998; from 5.79% to 6.88% in 1997 and from 5.52% to 6.92% in 1996; expected lives of 4 years for 1998, 1997, and 1996; volatility of 18.79% for 1998, 17.40% for 1997 and 15.13% for 1996; and dividend yield of 6% for 1998, 1997 and 1996. F-17 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) A summary of the status of the Company's option plans as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below:
1998 1997 1996 ----------------- ----------------- ----------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ------- -------- ------- -------- ------- -------- Outstanding at beginning of year................ 828,214 $ 24.57 529,450 $19.08 538,950 $18.93 Granted................. 110,500 30.92 324,905 33.02 14,000 24.55 Exercised............... (19,950) 18.73 (23,286) 17.95 (6,750) 19.07 Forfeited and canceled.. (9,000) (24.57) (2,855) 22.91 (16,750) 18.89 ------- ------- ------- Outstanding at end of year................... 909,764 25.40 828,214 24.57 529,450 19.08 ======= ======= ======= Options exercisable at year end............... 449,457 21.66 284,575 19.23 202,975 19.13 Weighted-average fair value of options granted during the year................... $3.19 $3.56 $2.40
The following table summarized information about stock options outstanding at December 31, 1998:
Options outstanding Options exercisable ---------------------------------------- ----------------------- Number Weighted Number Weighted outstanding at Weighted average average exercisable at average December 31, remaining exercise December 31, exercise Range of exercise prices 1998 contractual life price 1998 price ------------------------ -------------- ---------------- -------- -------------- -------- $13.70-17.13........... 52,080 6.2 years $15.50 26,880 $15.50 17.14-20.55........... 418,834 5.5 years 19.44 330,629 19.43 20.56-23.98........... 4,000 7.2 years 20.75 2,666 20.75 23.99-27.40........... 5,750 7.7 years 24.88 2,150 24.88 27.41-30.83........... 163,500 9.0 years 29.78 39,332 29.19 30.84-34.25........... 265,600 8.9 years 34.12 47,800 34.25 ------- ------- 909,764 $25.40 449,457 $21.66 ======= =======
Through December 31, 1998, the Company has granted 18,267 stock units under the Company's Phantom Stock Unit Agreement to two of the Company's executives. The units vest in installments in accordance with the vesting schedule set forth in the Phantom Stock Unit Agreement such that the units will be fully vested five years from the date of issuance. At that time, the Company expects to issue to the executives the number of shares of common stock equal to the number of units vested, or at the Company's option, an equivalent amount in cash. Dividends are paid by the Company on the vested and unvested portion of shares. For the years ended December 31, 1998 and 1997, compensation cost was $20 and $19, respectively, related to this plan. (14) Shareholder Rights Plan On November 12, 1998, the Company's Board of Directors adopted a Stockholder Rights Plan. A dividend of one right (a Right) per share of common stock was distributed to stockholders of record on November 21, 1998. Each Right, expiring November 11, 2008, represents a right to buy from the Company 1/100th of a share of Series A Junior Participating Preferred Stock at a price of $99.13 per Right. F-18 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) Generally the Rights will not be exercisable unless a person or group acquires 15 percent or more, or announces an offer that could result in acquiring 15 percent or more, of the Company's common stock unless such person is or becomes the beneficial owner of 15 percent or more of the Company's outstanding common stock and had a contractual right or the approval of the Company's Board of Directors, provided that such percentage shall not be greater than 19.9%. Following an acquisition of 15 percent or more of the Company's common stock, each Right holder, except the 15 percent or more shareholder, has the right to receive, upon exercise, shares of common stock valued at twice the then applicable exercise price of the Right, unless the 15 percent or more shareholder has offered to acquire all of the outstanding shares of the Company under terms that a majority of the independent directors of the Company have determined to be fair and in the best interest of the Company and its shareholders. Similarly, unless certain conditions are met, if the Company engages in a merger or other business combination following a stock acquisition where it does not survive or survives with a change or exchange of its common stock or if 50 percent or more of its assets, earning power or cash flow is sold or transferred, the Rights will become exercisable for shares of the acquiror's stock having a value of twice the exercise price. Generally, Rights may be redeemed for $.01 each (in cash, common stock or other consideration the Company deems appropriate) until the tenth day following a public announcement that a 15 percent or greater position has been acquired of the Company's stock. (15) Segment Information In accordance with Financial Accounting Standards Board No. 131, Disclosures about Segments of an Enterprise and Related Information (FAS 131), the Company defines its reportable operating segments as the three geographical regions in which its multifamily residential properties are located, Northern California, Southern California, and the Pacific Northwest. Non-segment revenues and net operating income included in the following schedule consists of revenue generated from the two commercial properties. Also excluded from segment revenues is interest and other corporate income. Other non-segment assets include investments, real estate under development, cash, receivables and other assets. The accounting policies of the segments are the same as those described in Note 1. The Company evaluates performance based upon net operating income from the combined properties in each segment. F-19 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the years ended and as of December 31, 1998, 1997, and 1996:
Year ended ---------------------------- 1998 1997 1996 -------- -------- -------- Revenues: Northern California............................ $ 42,078 $ 33,481 $ 21,359 Southern California............................ 45,252 20,026 6,836 Pacific Northwest.............................. 32,137 23,356 15,483 -------- -------- -------- Total segment revenues....................... 119,467 76,863 43,678 Non-segment property revenues.................... 2,575 4,537 4,858 Interest and other income........................ 3,217 3,169 2,157 -------- -------- -------- Total revenues............................... $125,259 $ 84,569 $ 50,693 ======== ======== ======== Net operating income: Northern California............................ $ 31,681 $ 24,664 $ 15,476 Southern California............................ 29,758 12,955 4,372 Pacific Northwest.............................. 21,138 14,916 9,676 -------- -------- -------- Total segment net operating income........... 82,577 52,535 29,524 Non-segment net operating income................. 1,532 3,039 3,507 Interest and other income........................ 3,217 3,169 2,157 Depreciation and amortization.................... (21,948) (13,992) (8,855) Interest......................................... (19,374) (12,659) (11,442) Amortization of deferred financing costs......... (718) (509) (639) General and administrative....................... (3,765) (2,413) (1,717) Loss from hedge termination...................... -- (138) (42) Provision for litigation loss.................... (930) -- -- -------- -------- -------- Income before gain on sales of real estate, minority interests, and extraordinary item.. $ 40,591 $ 29,032 $ 12,493 ======== ======== ======== Assets: Northern California............................ $241,676 $175,116 $118,696 Southern California............................ 355,077 257,714 76,055 Pacific Northwest.............................. 198,761 213,125 124,348 -------- -------- -------- Total segment net real estate assets......... 795,514 645,955 319,099 Non-segment net real estate assets............... 16,661 26,992 27,079 -------- -------- -------- Net real estate assets....................... 812,175 672,947 346,178 Non-segment assets............................... 119,621 65,888 70,996 -------- -------- -------- Total assets................................. $931,796 $738,835 $417,174 ======== ======== ========
F-20 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (16) Quarterly Results of Operations (Unaudited) The following is a summary of quarterly results of operations for 1998 and 1997:
Quarter ended Quarter ended Quarter ended Quarter ended December 31 September 30 June 30 March 31 ------------- ------------- ------------- ------------- 1998: Total revenues before gain on sale of real estate.............. $33,088 $32,651 $31,684 $27,836 Gain on sale of real estate.............. -- 9 -- -- ------- ------- ------- ------- Total revenues...... $33,088 $32,660 $31,684 $27,836 ======= ======= ======= ======= Extraordinary item.......... $(3,912) $ (806) -- -- ======= ======= ======= ======= Net income..... $ 4,177 $ 6,678 $ 7,548 $ 7,925 ======= ======= ======= ======= Per share data: Net income: Basic............ $ 0.20 $ 0.35 $ 0.40 $ 0.42 ======= ======= ======= ======= Diluted.......... $ 0.20 $ 0.34 $ 0.40 $ 0.42 ======= ======= ======= ======= Market price: High............. $ 31.75 $ 33.50 $ 34.50 $ 34.94 ======= ======= ======= ======= Low.............. $ 28.50 $ 26.94 $ 30.19 $ 33.25 ======= ======= ======= ======= Close............ $ 29.75 $ 31.00 $ 31.00 $ 34.31 ======= ======= ======= ======= Dividends declared.......... $ 0.500 $ 0.500 $ 0.500 $ 0.450 ======= ======= ======= ======= 1997: Total revenues before gain on sale of real estate.............. $24,463 $21,975 $19,580 $18,551 Gain (loss) on sale of real estate...... (13) 4,713 414 -- ------- ------- ------- ------- Total revenues...... $24,450 $26,688 $19,994 $18,551 ======= ======= ======= ======= Extraordinary item.......... $ (257) $ -- $ (104) $ -- ======= ======= ======= ======= Net income..... $ 7,227 $10,967 $ 6,254 $ 4,868 ======= ======= ======= ======= Per share data: Net income: Basic............ $ 0.41 $ 0.73 $ 0.43 $ 0.39 ======= ======= ======= ======= Diluted.......... $ 0.41 $ 0.69 $ 0.43 $ 0.39 ======= ======= ======= ======= Market price: High............. $ 37.50 $ 35.06 $ 32.37 $ 30.87 ======= ======= ======= ======= Low.............. $ 32.81 $ 30.50 $ 27.62 $ 28.50 ======= ======= ======= ======= Close............ $ 35.00 $ 34.81 $ 32.12 $ 29.87 ======= ======= ======= ======= Dividends declared.......... $ 0.450 $ 0.450 $ 0.435 $ 0.435 ======= ======= ======= =======
F-21 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (Dollars in thousands, except for per share amounts) (17) 401(k) Plan The Company has a 401(k) pension plan (the Plan) for all full time employees who have completed one year of service. Employees may contribute up to 23% of their compensation, to the maximum allowed under Section 401(k) of the Internal Revenue Code. The Company matches the employee contributions for non-highly compensated personnel, up to 50% of their compensation to a maximum of five hundred dollars (per individual) per year. Company contributions to the Plan were approximately $46, $41 and $27 for the years ended December 31, 1998, 1997 and 1996. (18) Commitments and Contingencies A commercial bank has issued on behalf of the Company various letters of credit relating to financing and development transactions for an aggregate amount of $2,604 which expire between July 1999 and May 2005. The Company is developing eight multifamily residential projects, which are anticipated to have an aggregate of approximately 1,578 multifamily units. The Company expects that such projects will be completed during the next two years. In connection with these projects, the Company has directly, or in some cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties. As of December 31, 1998, the Company is committed to fund approximately $95,130 relating to these projects. Investments in real property create a potential for environmental liabilities on the part of the owner of such real property. The Company carries no express insurance coverage for this type of environmental risk. The Company has conducted environmental studies which revealed the presence of groundwater contamination at certain properties; such contamination at certain of these properties was reported to have migrated on-site from adjacent industrial manufacturing operations. The former industrial users of the properties were identified as the source of contamination. The environmental studies noted that certain properties are located adjacent to and possibly down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such properties. The environmental studies also noted that at certain of these properties, contamination existed because of the presence of underground fuel storage tanks, which have been removed. Based on the information contained in the environmental studies, the Company believes that the costs, if any, it might bear as a result of environmental contamination or other conditions at these properties would not have a material adverse effect on the Company's financial position, results of The Company is involved in various lawsuits arising out of the ordinary course of business and certain other legal matters. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. (19) Subsequent Event In accordance with the terms of the Convertible Preferred Stock Agreement, Tiger/Westbrook exercised the option to convert 87,500 shares of the total 1,600,000 outstanding shares of Convertible Preferred Stock into 100,000 shares of common stock on January 6, 1999. F-22 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES Real Estate and Accumulated Depreciation December 31, 1998 (Dollars in thousands)
Gross amount carried at close of Initial cost Costs period --------------------- capitalized ---------------------------------- Buildings subsequent Buildings and to Land and and Property Units Location Encumbrance Land improvements acquisition improvements improvements Total(1) -------- ----- -------- ----------- -------- ------------ ----------- ------------ ------------ -------- Encumbered multifamily properties Summerhill Park 100 Sunnyvale, CA $ $ 2,654 $ 4,918 $ 378 $ 2,654 $ 5,296 $ 7,950 Oak Pointe 390 Sunnyvale, CA 4,842 19,776 4,023 4,844 23,797 28,641 Summerhill 184 Newark, CA 1,608 7,582 623 1,518 8,295 9,813 Commons Pathways 296 Long Beach, CA 4,083 16,757 559 4,085 17,314 21,399 Villa Rio Vista 286 Anaheim, CA 3,013 12,661 1,653 2,985 14,342 17,327 Foothill 360 Bellevue, WA 2,435 9,821 1,894 2,437 11,713 14,150 Commons Woodland 236 Bellevue, WA 2,040 8,727 986 2,042 9,711 11,753 Commons Palisades 192 Bellevue, WA 1,560 6,242 1,314 1,561 7,555 9,116 -------- -------- -------- ------- -------- -------- -------- 100,000 22,235 86,484 11,430 22,126 98,023 120,149 -------- -------- -------- ------- -------- -------- -------- Depreciable Accumulated Date of Date lives Property depreciation construction acquired (years) -------- ------------ -------------- -------- ----------- Encumbered multifamily properties Summerhill Park $ 1,609 1988 9/88 3-40 Oak Pointe 9,184 1973 12/88 3-30 Summerhill 2,546 1987 7/87 3-40 Commons Pathways 4,819 1975 2/91 3-30 Villa Rio Vista 7,019 1968 7/85 3-30 Foothill 4,227 1978 3/90 3-30 Commons Woodland 3,397 1978 3/90 3-30 Commons Palisades 2,844 1969/1977(2) 5/90 3-30 ------------ 35,645 ------------ Wharfside 142 Seattle, WA 2,245 7,020 520 2,252 7,533 9,785 Pointe Emerald Ridge 180 Bellevue, WA 3,449 7,801 410 3,446 8,214 11,660 Sammamish View 153 Bellevue, WA 3,324 7,501 330 3,328 7,827 11,155 -------- -------- -------- ------- -------- -------- -------- 19,520 9,018 22,322 1,260 9,026 23,574 32,600 -------- -------- -------- ------- -------- -------- -------- Brighton Ridge 264 Renton, WA 2,623 10,800 471 2,653 11,241 13,894 Landmark 285 Hillsboro, OR 3,655 14,200 404 3,697 14,562 18,259 Apartments Eastridge 188 San Ramon, CA 6,068 13,628 286 6,088 13,894 19,982 Apartments -------- -------- -------- ------- -------- -------- -------- 27,733 12,346 38,628 1,161 12,438 39,697 52,135 -------- -------- -------- ------- -------- -------- -------- Bridle Trails 92 Kirkland, WA 4,232 1,500 5,930 95 1,528 5,997 7,525 Bunker Hill 456 Los Angeles, CA 18,311 11,498 27,871 349 11,660 28,058 39,718 Towers Camarillo Oaks 564 Camarillo, CA 19,420 10,953 25,254 2,656 11,016 27,847 38,863 Evergreen 200 Kirkland, WA 9,143 3,566 13,395 231 3,644 13,548 17,192 Heights Huntington 342 Huntington Beach, CA 16,000 9,306 22,720 174 9,312 22,888 32,200 Breakers Inglenook Court 224 Bothell, WA 8,300 3,467 7,881 1,139 3,473 9,014 12,487 Maple Leaf 48 Seattle, WA 2,068 805 3,283 46 825 3,309 4,134 Meadowood 320 Simi Valley, CA 17,273 7,852 18,592 480 7,894 19,030 26,924 Spring Lake 69 Seattle, WA 2,265 838 3,399 54 857 3,434 4,291 Stonehedge 196 Bothell, WA 9,156 3,167 12,603 142 3,196 12,716 15,912 Village The Bluffs 224 San Diego, CA 8,464 3,405 7,743 125 3,439 7,834 11,273 The Shores (7) 348 San Ramon, CA 18,327 8,789 18,252 (916) 7,098 19,027 26,125 Treetops 172 Fremont, CA 9,800 3,520 8,182 783 3,576 8,909 12,485 Villa Scandia 118 Ventura, CA 8,727 1,570 3,912 107 1,592 3,997 5,589 Wandering Creek 156 Kent, WA 5,300 1,285 4,980 717 1,295 5,687 6,982 Wilshire 128 Fullerton, CA 7,912 3,118 7,385 173 3,137 7,539 10,676 Promenade Windsor Ridge 216 Sunnyvale, CA 13,871 4,017 10,315 433 4,018 10,747 14,765 -------- -------- -------- ------- -------- -------- -------- 325,822 122,255 349,131 20,639 121,150 370,875 492,025 -------- -------- -------- ------- -------- -------- -------- Wharfside 1,250 1990 6/94 3-30 Pointe Emerald Ridge 1,276 1987 11/94 3-30 Sammamish View 1,135 1986 11/94 3-30 ------------ 3,661 ------------ Brighton Ridge 732 1986 12/96 3-30 Landmark 1,133 1990 08/96 3-30 Apartments Eastridge 1,086 1988 08/96 3-30 Apartments ------------ 2,951 ------------ Bridle Trails 233 1986 10/97 3-30 Bunker Hill 623 1968 3/98 3-30 Towers Camarillo Oaks 1,493 1985 07/96 3-30 Evergreen 676 1990 06/97 3-30 Heights Huntington 890 1984 10/97 3-30 Breakers Inglenook Court 1,866 1985 10/94 3-30 Maple Leaf 126 1986 10/97 3-30 Meadowood 1,388 1986 11/96 3-30 Spring Lake 125 1986 10/97 3-30 Stonehedge 301 1986 10/97 3-30 Village The Bluffs 390 1974 06/97 3-30 The Shores (7) 1,225 1988 01/97 3-30 Treetops 878 1978 01/96 3-30 Villa Scandia 198 1971 06/97 3-30 Wandering Creek 671 1986 11/95 3-30 Wilshire 479 1992 01/97 3-30 Promenade Windsor Ridge 2,744 1989 03/89 3-40 ------------ 56,563 ------------
F-23 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES Real Estate and Accumulated Depreciation--(Continued) December 31, 1998 (Dollars in thousands)
Gross amount carried at close of Initial cost Costs period --------------------- capitalized ---------------------------------- Buildings subsequent Buildings and to Land and and Property Units Location Encumbrance Land improvements acquisition improvements improvements Total(1) -------- ------ -------- ----------- -------- ------------ ----------- ------------ ------------ -------- Unencumbered multifamily properties Bristol Commons 188 Sunnyvale, CA 5,278 11,853 604 5,284 12,451 17,735 Casa Del Mar 96 Pasadena, CA 1,857 4,713 64 1,873 4,761 6,634 Casa Mango 96 San Diego, CA 3,011 7,006 183 3,038 7,162 10,200 Castle Creek 216 Newcastle, WA 4,149 16,028 695 4,817 16,055 20,872 Foothill/Twincreeks 176 San Ramon, CA 5,875 13,992 478 5,940 14,405 20,345 Kings Road 196 Los Angeles, CA 4,023 9,527 116 4,029 9,637 13,666 Marina Cove (3) 292 Santa Clara, CA 5,320 16,431 858 5,322 17,287 22,609 Meadows @ 198 Vancouver, WA 2,261 9,070 230 2,333 9,228 11,561 Cascade Mirabella 608 Newbury Park, CA 15,318 40,601 516 15,729 40,706 56,435 Park 176 Los Angeles, CA 4,965 11,806 157 5,013 11,915 16,928 Place/Windsor Court/Cochran (6) Plumtree 140 Santa Clara, CA 3,090 7,421 392 3,091 7,812 10,903 Riverfront 229 San Diego, CA 8,637 20,119 165 8,658 20,263 28,921 Stevenson Place 200 Fremont, CA 996 5,582 5,019 997 10,600 11,597 Tara Village 168 Tarzana, CA 3,178 7,535 319 3,203 7,829 11,032 The Laurels 164 Mill Creek, WA 1,559 6,430 278 1,594 6,673 8,267 The Village 122 Oxnard, CA 2,349 5,579 114 2,393 5,649 8,042 Apartments Trabucco Villas 132 Lake Forest, CA 3,638 8,640 338 3,841 8,775 12,616 Village @ 192 Vancouver, WA 2,103 8,753 99 2,151 8,804 10,955 Cascade Wimbledon Woods 560 Hayward, CA 9,883 37,670 521 10,334 37,740 48,074 Windsor Terrace 117 Pasadena, CA 2,188 5,263 1,028 2,497 5,982 8,479 Westwood 116 Cupertino, CA 3,989 17,185 85 4,050 17,209 21,259 ------ -------- -------- -------- ------- -------- -------- -------- 11,511 $325,822 $215,922 $620,335 $32,898 $217,337 $651,818 $869,155 ====== ======== ======== ======== ======= ======== ======== ======== Depreciable Accumulated Date of Date lives Property depreciation construction acquired (years) -------- ------------ ------------ -------- ----------- Unencumbered multifamily properties Bristol Commons 794 1989 01/97 3-30 Casa Del Mar 238 1972 06/97 3-30 Casa Mango 240 1981 12/97 3-30 Castle Creek 134 1997 12/97 3-30 Foothill/Twincreeks 865 1985 02/97 3-30 Kings Road 456 1979 06/97 3-30 Marina Cove (3) 2,887 1974 6/94 3-30 Meadows @ 337 1988 11/97 3-30 Cascade Mirabella 1,131 1973 3/98 3-30 Park 444 1988 08/97 3-30 Place/Windsor Court/Cochran (6) Plumtree 1,319 1975 2/94 3-30 Riverfront 682 1990 12/97 3-30 Stevenson Place 4,337 1971 4/82 3-30 Tara Village 489 1972 01/97 3-30 The Laurels 431 1981 12/96 3-30 The Village 266 1974 07/97 3-30 Apartments Trabucco Villas 370 1985 10/97 3-30 Village @ 295 1995 12/97 3-30 Cascade Wimbledon Woods 944 1975 3/98 3-30 Windsor Terrace 226 1972 09/97 3-30 Westwood 190 1963 3/98 3-30 ------------ $73,638 ============
F-24 Schedule 1 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (Dollars in thousands)
Gross annual Initial cost carried at close of period --------------------- Costs ---------------------------------- Total capitalized rentable Buildings subsequent Buildings square and to Land and and Property footage Location Encumbrance Land improvements acquisition improvements Improvements Total(1) -------- -------- ------------- ----------- -------- ------------ ----------- ------------ ------------ -------- Commercial properties 925 East Meadow.. 17,404 Palo Alto, CA -- 1,401 3,172 805 1,762 3,616 5,378 777 California(4)(5).. 44,827 Palo Alto, CA -- -- 6,700 8,731 16 15,415 15,431 ------ -------- -------- -------- ------- -------- -------- -------- 62,231 -- 1,401 9,872 9,536 1,778 19,031 20,809 ------ -------- -------- -------- ------- -------- -------- -------- Total multifamily and commercial properties...... $325,822 $217,323 $630,207 $42,434 $219,115 $670,849 $889,964 ======== ======== ======== ======= ======== ======== ======== Depreciable Accumulated Date of Date lives Property depreciation construction acquired (years) -------- ------------ ------------ -------- ----------- Commercial properties 925 East Meadow.. 145 1984 11/97 3.30 777 California(4)(5).. 4,006 1987 7/86 3.30 ------------ 4,151 ------------ Total multifamily and commercial properties...... $77,789 ============
1998 1997 1996 -------- -------- -------- Real estate: Balance at beginning of year................. $730,987 $393,809 $284,358 Improvements................................. 12,200 4,533 3,406 Acquisition of real estate................... 169,934 345,750 118,107 Disposition of real estate................... (23,157) (13,105) (12,062) -------- -------- -------- Balance at end of year....................... $889,964 $730,987 $393,809 ======== ======== ========
1998 1997 1996 ------- ------- ------- Accumulated depreciation: Balance at beginning of year.................... $58,040 $47,631 $40,281 Dispositions.................................... (2,183) (3,504) (1,470) Depreciation expense--Acquisitions.............. 2,888 2,086 905 Depreciation expense............................ 19,044 11,827 7,915 ------- ------- ------- Balance at end of year.......................... $77,789 $58,040 $47,631 ======= ======= =======
- ---- (1) The aggregate cost for federal income tax purposes is $749,718. (2) Phase I was built in 1969 and Phase II was built in 1977. (3) A portion of land is leased pursuant to a ground lease expiring in 2028. (4) Land is leased pursuant to a ground lease expiring in 2054. (5) This property secures the Operating Partnership's $10,000 line of credit. (6) Cochran Apartments, a 58 unit multifamily community, was purchased in April 1998 and is adjacent to Park Place/Windsor Court. Initial capitalized cost was $5,547. (7) A portion of The Shores land value was allocated to real estate under development for the Canyon Point project in the amount of $1,757. A summary of activity for real estate and accumulated depreciation is as follows: F-25
Exhibit No. Document ------- -------- 3.1 Articles of Amendment and Restatement of Essex dated June 22, -- 1995, attached as Exhibit 3.1 to Essex's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1995, and incorporated herein by reference. 3.2 Articles Supplementary of Essex Property Trust, Inc. for the -- 8.75% Convertible Preferred Stock, Series 1996A, attached as Exhibit 3.1 to Essex's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. 3.3 First Amendment to Articles of Amendment and Restatement of -- Essex Property Trust, Inc., attached as Exhibit 3.1 to Essex's 10-Q as of September 30, 1996, and incorporated herein by reference. 3.4 Certificate of Correction to Exhibit 3.2 dated December 20, (2) 1996. 3.5 Amended and Restated Bylaws of Essex Property Trust, Inc., -- attached as Exhibit 3.2 to Essex's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. 3.6 Certificate of Amendment of the Bylaws of Essex Property Trust, (2) Inc., dated December 17, 1996. 3.7 Articles Supplementary reclassifying 2,000,000 shares of Common -- Stock as 2,000,000 shares of 7.875% Series B Cumulative Redeemable Preferred Stock, filed with the State of Maryland on February 10, 1998, attached as Exhibit 3.1 to Essex's Current Report on Form 8-K, filed March 3, 1998, and incorporated herein by reference. 3.8 Articles Supplementary reclassifying 500,000 shares of Common -- Stock as 500,000 shares of 9 1/8% Series C Cumulative Redeemable Preferred Stock, filed with the State of Maryland on November 25, 1998. 3.9 Certificate of Correction to Exhibit 3.2 dated February 12, -- 1999. 4.0 Articles Supplementary reclassifying 6,617,822 shares of Common -- Stock as 6,617,822 shares of Series A Junior Participating Preferred Stock, filed with the State of Maryland on November 13, 1998. 4.1 Rights Agreement, dated as of November 11, 1998, between Essex -- Property Trust, Inc., and attached as Exhibit 1 to Essex's Registration Statement filed on Form 8-A BankBoston, N.A., as Rights Agent, including all exhibits thereto, dated November 12, 1998, and incorporated herein by reference. 10.1 Essex Property Trust, Inc. 1994 Stock Incentive Plan (amended -- and restated as of April 3, 1997 and previously known as the 1994 Employee Stock Incentive Plan), attached as Exhibit 10.7 to the Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference.* 10.2 First Amended and Restated Agreement of Limited Partnership of -- Essex Portfolio, L.P. attached as Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference. 10.3 First Amendment to the First Amended and Restated Agreement of -- Limited Partnership of Essex Portfolio, L.P. dated February 6, 1998, attached as Exhibit 10.1 to Essex's Current Report on Form 8-K, filed March 3, 1998, and incorporated herein by reference. 10.4 Second Amendment to the First Amended and Restated Agreement of -- Limited Partnership of Essex Portfolio, L.P. dated April 20, 1998, attached as Exhibit 10.1 to Essex's Current Report on Form 8-K, filed April 23, 1998, and incorporated herein by reference. 10.5 Third Amendment to the First Amended and Restated Agreement of -- Limited Partnership of Essex Portfolio, L.P. dated November 24, 1998. 10.6 Form of Essex Property Trust, Inc. 1994 Non-Employee and (1) Director Stock Incentive Plan. 10.7 Form of Essex Property Trust, Inc. 1994 Employee Stock Incentive (1) Plan.
Exhibit No. Document ------- -------- 10.8 Form of Non-Competition Agreement between Essex and each of (1) Keith R. Guericke and George M. Marcus.* 10.9 Termination of Non-Compete Agreement between Essex Property -- Trust, Inc. and George M. Marcus.* 10.10 Contribution Agreement by and among Essex, the Operating (1) Partnership and the Limited Partners in the Operating Partnership. 10.11 Form of Indemnification Agreement between Essex and its (1) directors and officers. 10.12 Stock Purchase Agreement dated as of June 20, 1996 by and -- between Essex Property Trust, Inc. and Tiger/Westbrook Real Estate Fund L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P., attached as Exhibit 10.1 to Essex's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. 10.13 Amendment No. 1 to Stock Purchase Agreement dated as of July 1, -- 1996 by and between Essex Property Trust, Inc. and Tiger/Westbrook Real Estate Fund, L.P. and Tiger/ Westbrook Real Estate Co-Investment Partnership, L.P., attached as Exhibit 10.2 to Essex's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. 10.14 First Amendment to Investor Rights Agreement dated July 1, 1996 -- by and between George M. Marcus and The Marcus & Millichap Company, attached as Exhibit 10.3 to Essex's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. 10.15 Leasehold agreement between Houghton Mifflin Company and (1) Stanford University dated as of February 1, 1955, as amended. 10.16 Agreement by and among M&M, M&M REIBC and the Operating (1) Partnership and Essex regarding Stock Options. 10.17 Co-Brokerage Agreement by and among Essex, the Operating (1) Partnership, M&M REIBC and Essex Management Corporation. 10.18 General Partnership Agreement of Essex Washington Interest (1) Partners. 10.19 Form of Office Lease between the Operating Partnership and the (1) Marcus and Millichap Company. 10.20 Form of Management Agreement between the Operating Partnership (1) and Essex Management Corporation regarding the retail Properties. 10.21 Form of Amended and Restated Agreement among Tenants-in-Common (1) regarding Pathways Property. 10.22 Form of Promissory Note made by Gilroy Associates and San Pablo (1) Medical Investors in favor of the Operating Partnership. 10.23 Form of Investor Rights Agreement between Essex and the Limited (1) Partner of the Operating Partnership. 10.24 Registration Rights Agreement, dated as of June 20, 1996, -- attached as Exhibit 10.8 to Essex's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. 10.25 Letter Agreement, dated July 1, 1996, among Essex Property -- Trust, Inc., Essex Portfolio, L.P., Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P., attached as Exhibit 10.9 to Essex's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. 10.26 Letter Agreement with Tiger/Westbrook entities re: Limitations -- on Ownership of Stock of the Company, attached as Exhibit 10.1 to Essex's 10-Q as of September 30, 1996, and incorporated herein by reference. 10.27 Phantom Stock Unit Agreement for Mr. Guericke, attached as -- Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.*
Exhibit No. Document ------- -------- 10.28 Phantom Stock Unit Agreement for Mr. Schall, attached as Exhibit -- 10.2 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.* 10.29 Replacement Promissory Note (April 15, 1996) and Pledge -- Agreement for Mr. Guericke, attached as Exhibit 10.3 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. 10.30 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. -- Guericke, attached as Exhibit 10.4 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. 10.31 Replacement Promissory Note (April 30, 1996) and Pledge -- Agreement for Mr. Schall, attached as Exhibit 10.5 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. 10.32 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. -- Schall, attached as Exhibit 10.6 to Essex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. 10.33 First Amended and Restated Agreement of Limited Partnership of -- Western-Highridge I Investors, effective as of May 13, 1997, attached as Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. 10.34 First Amended and Restated Agreement of Limited Partnership of -- Irvington Square Associates, effective as of May 13, 1997, attached as Exhibit 10.2 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. 10.35 Fourth Amended and Restated Agreement of Limited Partnership of -- Western-Palo Alto II Investors, effective as of May 13, 1997, attached as Exhibit 10.3 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. 10.36 Fourth Amended and Restated Agreement of Limited Partnership of -- Western Riviera Investor, effective as of May 13, 1997, attached as Exhibit 10.4 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. 10.37 Fourth Amended and Restated Agreement of Limited Partnership of -- Western-San Jose III Investors, effective as of May 13, 1997, attached as Exhibit 10.5 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. 10.38 Registration Rights Agreement, effective as of May 13, 1997, by -- and between the Company and the limited partners of Western- Highridge I Investors, Irvington Square Associates, Western- Palo Alto II Investors, Western Riviera Investors, and Western- San Jose III Investors, attached as Exhibit 10.6 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. 10.39 Ninth Modification Agreement to the Amended and Restated -- Revolving Loan Agreement, attached as Exhibit 10.2 to Essex's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference. 10.40 Revolving Loan Agreement between Essex Portfolio, L.P., a -- California limited partnership and Bank of America National Trust and Savings Association dated as of May 11, 1998, attached as Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, and incorporated herein by reference. 10.41 $100,000,000 Promissory Note between Essex Portfolio, L.P., and -- Essex Morgan Funding Corporation, attached as Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference.
Exhibit No. Document ------- -------- 12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges -- and Preferred Stock Dividends. 21.1 List of Subsidiaries of Essex Property Trust, Inc. -- 23.1 Consent of Independent Public Accountants. -- 27.1 Article 5 Financial Data Schedule (Edgar Filing Only) --
- -------- (1) Incorporated by reference to the identically numbered exhibit to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994. (2) Incorporated by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. * Management contract or compensatory plan or agreement. EX-3.8 2 ART. SUPP. RECLASSIFYING SHARES OF SERIES C STOCK EXHIBIT 3.8 ESSEX PROPERTY TRUST, INC. -------------------------- ARTICLES SUPPLEMENTARY Reclassifying 500,000 shares of Common Stock as 500,000 shares of 9 1/8% SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK Essex Property Trust, Inc., a corporation organized and existing under the laws of Maryland (the "Corporation"), does hereby certify to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to authority conferred upon the Board of Directors of ----- the Corporation by Article FIFTH of its Charter (the "Charter") in accordance with Section 2-105 of the Maryland General Corporation Law (the "MGCL"), the Board of Directors of the Corporation, at a teleconference meeting held on November 24, 1998, duly adopted a resolution reclassifying 500,000 authorized but unissued shares of Common Stock (par value $.0001 per share) as Preferred Stock (par value $.0001 per share), designating such newly reclassified Preferred Stock as 9-1/8% Series C Cumulative Redeemable Preferred Stock, the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption as set forth below and authorizing the issuance of such series of Preferred Stock as set forth below. Upon any restatement of the Charter, Sections 1 through 9 of Article THIRD shall become subsection (g) of Article FIFTH of the Charter. SECOND: The reclassification increases the number of shares ------ classified as 9 1/8% Series C Cumulative Redeemable Preferred Stock from no shares immediately prior to the reclassification to 500,000 shares immediately after the reclassification. The reclassification decreases the number of shares classified as Common Stock (par value $.0001 per share) from 659,782,178 shares immediately prior to the reclassification to 659,282,178 shares immediately after the reclassification. THIRD: Subject in all cases to the provisions of Article EIGHTH of ----- the Charter of the Corporation with respect to Excess Stock, the following is a description of the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of 9 1/8% Series C Cumulative Redeemable Preferred Stock of the Corporation: 9 1/8% Series C Cumulative Redeemable Preferred Stock ----------------------------------------------------- Section 1. Designation and Amount. ---------------------- Of the 659,782,178 authorized shares of Common Stock, 500,000 shares are reclassified and designated "9 1/8% Series C Cumulative Redeemable Preferred Stock (par value $.0001 per share)" (the "Series C Preferred Stock"). Section 2. Rank. The Series C Preferred Stock will, with respect to ---- distributions and rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Corporation, rank senior to all classes or series of Common Stock (as defined in the Charter) and 1 to all classes or series of equity securities of the Corporation now or hereafter authorized, issued or outstanding, other than the 8.75% Convertible Preferred Stock, Series 1996A (the "Series A Preferred Stock") and the 7.875% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock") with which it shall be on a parity and any other class or series of equity securities of the Corporation expressly designated as ranking on a parity with or senior to the Series C Preferred Stock as to distributions and rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Corporation. For purposes of these terms of the Series C Preferred Stock, the term "Parity Preferred Stock" shall be used to refer to the Series A Preferred Stock, the Series B Preferred Stock and any other class or series of equity securities of the Corporation now or hereafter authorized, issued or outstanding expressly designated by the Corporation to rank on a parity with Series C Preferred Stock with respect to distributions and rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Corporation. Section 3. Distributions. ------------- (a) Payment of Distributions. Subject to the rights of holders of ------------------------ Parity Preferred Stock as to the payment of distributions, holders of Series C Preferred Stock will be entitled to receive, when, as and if declared by the Corporation, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate per annum of 9 1/8% of the $50.00 liquidation preference per share of Series C Preferred Stock. Such distributions shall be cumulative, shall accrue from the original date of issuance and will be payable quarterly in arrears (such quarterly periods, for purposes of payment and accrual shall be the quarterly periods ending on the dates specified in this sentence and not calendar quarters), on or before the 15th of February, May, August and November of each year (each a "Preferred Stock Distribution Payment Date"), commencing in each case on the first Preferred Stock Distribution Payment Date after the original date of issuance. The amount of the distribution payable for any period will be computed on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full quarterly period for which distributions are computed, the amount of the distribution payable will be computed on the basis of the actual number of days elapsed in such a 30-day month. If any date on which distributions are to be made on the Series C Preferred Stock is not a Business Day (as defined herein), then payment of the distribution to be made on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. Distributions on the Series C Preferred Stock will be made to the holders of record of the Series C Preferred Stock on the relevant record dates, which, unless otherwise provided by the Corporation with respect to any distribution, will be 15 Business Days prior to the relevant Preferred Stock Distribution Payment Date (each a "Distribution Record Date"). Notwithstanding anything to the contrary set forth herein, each share of Series C Preferred Stock shall also continue to accrue all accrued and unpaid distributions to the exchange date on any Series C Preferred Unit (as defined in the Third Amendment to First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated as of November 24, 1998 (the "Third Amendment")) validly exchanged into such share of Series C Preferred Stock in accordance with the provisions of such Third Amendment. 2 The term "Business Day" shall mean each day, other than a Saturday or a Sunday, which is not a day on which banking institutions in New York, New York are authorized or required by law, regulation or executive order to close. (b) Limitations on Distributions. No distributions on the Series C ---------------------------- Preferred Stock shall be declared or paid or set apart for payment by the Corporation at such time as the terms and provisions of any agreement of the Corporation, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such declaration, payment or setting apart for payment shall be restricted or prohibited by law. (c) Distributions Cumulative. Notwithstanding the foregoing, ------------------------ distributions on the Series C Preferred Stock will accrue whether or not the terms and provisions set forth in Section 3(b) hereof at any time prohibit the current payment of distributions, whether or not the Corporation has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accrued but unpaid distributions on the Series C Preferred Stock will accumulate as of the Preferred Stock Distribution Payment Date on which they first become payable. Accumulated and unpaid distributions will not bear interest. (d) Priority as to Distributions. ---------------------------- (i) So long as any Series C Preferred Stock is outstanding, no distribution of cash or other property shall be authorized, declared, paid or set apart for payment on or with respect to any class or series of Common Stock or any class or series of other stock of the Corporation ranking junior to the Series C Preferred Stock as provided in this Section 3 (such Common Stock or other junior stock, collectively, "Junior Stock"), nor shall any cash or other property be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series C Preferred Stock, any Parity Preferred Stock with respect to distributions or any Junior Stock, unless, in each case, all distributions accumulated on all Series C Preferred Stock and all classes and series of outstanding Parity Preferred Stock as to payment of distributions have been paid in full. The foregoing sentence will not prohibit (i) distributions payable solely in Junior Stock, (ii) the conversion of Junior Stock or Parity Preferred Stock into Junior Stock of the Corporation, (iii) the redemption, purchase or other acquisition of Junior Stock made for purposes of and in compliance with requirements of an employee incentive or benefit plan of the Corporation or any subsidiary of the Corporation, and (iv) purchase by the Corporation of such Series C Preferred Stock, Parity Preferred Stock with respect to distributions or Junior Stock pursuant to Article EIGHTH of the Charter to the extent required to preserve the Corporation's status as a real estate investment trust. (ii) So long as distributions have not been paid in full (or a sum sufficient for such full payment is not irrevocably so set apart) upon the Series C Preferred Stock, all distributions authorized and declared on the Series C Preferred Stock and all classes or series of outstanding Parity Preferred Stock with respect to distributions shall be authorized and declared so that the amount of distributions authorized and declared per share of Series C Preferred Stock and such other classes or series of Parity Preferred Stock shall in all cases bear to 3 each other the same ratio that accrued distributions per share on the Series C Preferred Stock and such other classes or series of Parity Preferred Stock (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such class or series of Parity Preferred Stock do not have cumulative distribution rights) bear to each other. (e) No Further Rights. Holders of Series C Preferred Stock shall not ----------------- be entitled to any distributions, whether payable in cash, other property or otherwise, in excess of the full cumulative distributions described herein. Section 4. Liquidation Preference. ---------------------- (a) Payment of Liquidating Distributions. Subject to the rights of ------------------------------------ holders of Parity Preferred Stock with respect to rights upon any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, the holders of Series C Preferred Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution or the proceeds thereof, after payment or provision for debts and other liabilities of the Corporation, but before any payment or distributions of the assets shall be made to holders of Common Stock or any other class or series of shares of the Corporation that ranks junior to the Series C Preferred Stock as to rights upon liquidation, dissolution or winding-up of the Corporation, an amount equal to the sum of (i) a liquidation preference of $50 per share of Series C Preferred Stock, and (ii) an amount equal to any accumulated and unpaid distributions thereon to the date of payment. In the event that, upon such voluntary or involuntary liquidation, dissolution or winding-up, there are insufficient assets to permit full payment of liquidating distributions to the holders of Series C Preferred Stock and any Parity Preferred Stock as to rights upon liquidation, dissolution or winding-up of the Corporation, all payments of liquidating distributions on the Series C Preferred Stock and such Parity Preferred Stock shall be made so that the payments on the Series C Preferred Stock and such Parity Preferred Stock shall in all cases bear to each other the same ratio that the respective rights of the Series C Preferred Stock and such other Parity Preferred Stock (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such Parity Preferred Stock do not have cumulative distribution rights) upon liquidation, dissolution or winding-up of the Corporation bear to each other. (b) Notice. Written notice of any such voluntary or involuntary ------ liquidation, dissolution or winding-up of the Corporation, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by (i) fax and (ii) by first class mail, postage pre-paid, not less than 30 and not more than 60 days prior to the payment date stated therein, to each record holder of the Series C Preferred Stock at the respective addresses of such holders as the same shall appear on the share transfer records of the Corporation. (c) No Further Rights. After payment of the full amount of the ----------------- liquidating distributions to which they are entitled, the holders of Series C Preferred Stock will have no right or claim to any of the remaining assets of the Corporation. (d) Consolidation, Merger or Certain Other Transactions. The --------------------------------------------------- consolidation or merger or other business combination of the Corporation with or into any corporation, trust or other entity (or of any corporation, trust or other entity with or into the Corporation), or the 4 effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of shall not be deemed to constitute a liquidation, dissolution or winding-up of the Corporation. Section 5. Optional Redemption. ------------------- (a) Right of Optional Redemption. The Series C Preferred Stock may ---------------------------- not be redeemed prior to November 24, 2003. On or after such date, subject to the terms and conditions of any Parity Preferred Stock, the Corporation shall have the right to redeem the Series C Preferred Stock, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' written notice, at a redemption price, payable in cash, equal to $50 per share of Series C Preferred Stock plus accumulated and unpaid distributions to the date of redemption. If fewer than all of the outstanding shares of Series C Preferred Stock are to be redeemed, the shares of Series C Preferred Stock to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional units). Further, in order to ensure that the Corporation remains a qualified real estate investment trust for federal income tax purposes, the Series C Preferred Stock will also be subject to the provisions of Article EIGHTH of the Charter pursuant to which Series C Preferred Stock owned by a stockholder in excess of the Ownership Limit (as defined in the Charter) will be automatically transferred to a Trust (as defined in the Charter) and the Corporation shall have the right to purchase such shares, as provided in Article EIGHTH of the Charter. (b) Limitation on Redemption. ------------------------ (i) The redemption price of the Series C Preferred Stock (other than the portion thereof consisting of accumulated but unpaid distributions) will be payable solely out of the sale proceeds of capital stock of the Corporation and from no other source. For purposes of the preceding sentence, "capital stock" means any equity securities (including Common Stock and Preferred Stock of the Corporation and units of partnership interest of Essex Portfolio, L.P., as to which the Corporation is the general partner), shares, participation or other ownership interests (however designated) and any rights (other than debt securities convertible into or exchangeable for equity securities) or options to purchase any of the foregoing. (ii) The Corporation may not redeem fewer than all of the outstanding shares of Series C Preferred Stock unless all accumulated and unpaid distributions have been paid on all Series C Preferred Stock for all quarterly distribution periods terminating on or prior to the date of redemption; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Series C Preferred Stock or Parity Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series C Preferred Stock or Parity Preferred Stock, as the case may be. (c) Rights to Distributions on Stock Called for Redemption. ------------------------------------------------------ Immediately prior to any redemption of Series C Preferred Stock, the Corporation shall pay, in cash, any accumulated and unpaid distributions through the redemption date, unless a redemption date falls after a Distribution Record Date and prior to the corresponding Preferred Stock Distribution Payment Date, in which case each holder of Series C Preferred Stock at the close of business on such Distribution Record Date shall be entitled to the distributions payable on such shares on the 5 corresponding Distribution Payment Date notwithstanding the redemption of such shares before the Distribution Payment Date. (d) Procedures for Redemption. ------------------------- (i) Notice of redemption will be (i) faxed, and (ii) mailed by the Corporation, postage prepaid, not less than 30 nor more than 60 days prior to the redemption date, addressed to the respective holders of record of the Series C Preferred Stock to be redeemed at their respective addresses as they appear on the transfer records of the Corporation. No failure to give or defect in such notice shall affect the validity of the proceedings for the redemption of any Series C Preferred Stock except as to the holder to whom such notice was defective or not given. In addition to any information required by law or by the applicable rules of any exchange upon which the Series C Preferred Stock may be listed or admitted to trading, each such notice shall state: (i) the redemption date, (ii) the redemption price, (iii) the number of shares of Series C Preferred Stock to be redeemed, (iv) the place or places where such shares of Series C Preferred Stock are to be surrendered for payment of the redemption price, (v) that distributions on the Series C Preferred Stock to be redeemed will cease to accumulate on such redemption date and (vi) that payment of the redemption price and any accumulated and unpaid distributions will be made upon presentation and surrender of such Series C Preferred Stock. If fewer than all of the shares of Series C Preferred Stock held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of shares of Series C Preferred Stock held by such holder to be redeemed. (ii) If the Corporation gives a notice of redemption in respect of Series C Preferred Stock (which notice will be irrevocable) then, by 12:00 noon, New York City time, on the redemption date, the Corporation will deposit irrevocably in trust for the benefit of the Series C Preferred Stock being redeemed funds sufficient to pay the applicable redemption price, plus any accumulated and unpaid distributions, if any, on such shares to the date fixed for redemption, without interest, and will give irrevocable instructions and authority to pay such redemption price and any accumulated and unpaid distributions, if any, on such shares to the holders of the Series C Preferred Stock upon surrender of the Series C Preferred Stock by such holders at the place designated in the notice of redemption. On and after the date of redemption, distributions will cease to accumulate on the Series C Preferred Stock or portions thereof called for redemption, unless the Corporation defaults in the payment thereof. If any date fixed for redemption of Series C Preferred Stock is not a Business Day, then payment of the redemption price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the redemption price or any accumulated or unpaid distributions in respect of the Series C Preferred Stock is improperly withheld or refused and not paid by the Corporation, distributions on such Series C Preferred Stock will continue to accumulate from the original redemption date to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the applicable redemption price and any accumulated and unpaid distributions. 6 (e) Status of Redeemed Stock. Any Series C Preferred Stock that shall ------------------------ at any time have been redeemed shall after such redemption have the status of authorized but unissued Preferred Stock, without designation as to class or series, until such shares are once more designated as part of a particular class or series by the Board. Section 6. Voting Rights. ------------- (a) General. Holders of the Series C Preferred Stock will not have any ------- voting rights, except as set forth below. (b) Right to Elect Directors. If at any time full distributions shall ------------------------ not have been made on any Series C Preferred Stock with respect to any six (6) prior quarterly distribution periods, whether or not consecutive, (a "Preferred Distribution Default"), such that distributions for such six (6) distribution periods have not been fully paid and are outstanding in whole or in part at the same time, the holders of such Series C Preferred Stock, voting together as a single class with the holders of each class or series of Parity Preferred Stock upon which like voting rights have been conferred and are exercisable (other than holders of Parity Preferred Stock who are deemed to be "affiliates" of the Corporation as such term is defined in Rule 144 of the General Rules and Regulations Under the Securities Act of 1933), will have the right to elect two additional directors to serve on the Corporation's Board (the "Preferred Stock Directors"), which shall be in addition to the rights of holders of Series A Preferred Stock to elect directors pursuant to the articles supplementary pertaining to the Series A Preferred Stock, at a special meeting called by the holders of record of at least 10% of the outstanding shares of Series C Preferred Stock or any such class or series of Parity Preferred Stock or at the next annual meeting of stockholders, and at each subsequent annual meeting of stockholders or special meeting held in place thereof, until all such distributions in arrears and distributions for the current quarterly period on the Series C Preferred Stock and each such class or series of Parity Preferred Stock have been paid in full. At any such annual or special meeting, the holders of the Series B Preferred Stock, the Series C Preferred Stock and any subsequently issued series of Parity Preferred Stock upon which like voting rights have been conferred and are exercisable, will be entitled to cast votes for such Preferred Stock Directors on the basis of one vote per $50.00 of liquidation preference to which such class of Parity Preferred Stock is entitled by its terms (excluding amounts in respect of accumulated and unpaid dividends) and not cumulatively. If and when all accumulated distributions and the distribution for the current distribution period on the Series C Preferred Stock shall have been paid in full or irrevocably set aside for payment in full, the holders of the Series C Preferred Stock shall be divested of the voting rights set forth in Section 6(b) herein (subject to revesting in the event of each and every Preferred Distribution Default) and, if all distributions in arrears and the distributions for the current distribution period have been paid in full or irrevocably set aside for payment in full on all other classes or series of Parity Preferred Stock upon which like voting rights have been conferred and are exercisable, the term and office of each Preferred Stock Director so elected shall immediately terminate. Any Preferred Stock Director may be removed at any time with or without cause by the vote of, and shall not be removed otherwise than by the vote of, the holders of record of a majority of the outstanding Series C Preferred Stock when they have the voting rights set forth in Section 6(b) (voting separately as a single class with all other classes or series of Parity Preferred Stock upon which like voting rights have been conferred and are exercisable). So long as a Preferred Distribution Default shall continue, any vacancy in the office of a Preferred Stock Director may 7 be filled by written consent of the Preferred Stock Director remaining in office, or if none remains in office, by a vote of the holders of record of a majority of the outstanding Series C Preferred Stock when they have the voting rights set forth in Section 6(b) (voting separately as a single class with all other classes or series of Parity Preferred Stock upon which like voting rights have been conferred and are exercisable). The Preferred Stock Directors shall each be entitled to one vote per director on any matter. (c) Certain Voting Rights. (i) While any shares of the Series C --------------------- Preferred Stock are outstanding, the Corporation shall not, without the affirmative of the holders of at least two-thirds (2/3) of the Series C Preferred Stock outstanding at the time (i) authorize or create, or increase the authorized or issued amount of, any class or series of shares ranking prior to the Series C Preferred Stock with respect to payment of distributions and rights upon liquidation, dissolution or winding-up or reclassify any authorized shares of the Corporation into any such shares, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such shares, (ii) either amend, alter or repeal the provisions of the Corporation's Charter (including these Articles Supplementary) or Bylaws, that would materially and adversely affect the preferences, other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, or terms and conditions of redemption, of any outstanding shares of the Series C Preferred Stock; provided that any increase in the amount of authorized Preferred Stock or the creation or issuance of any other class or series of Preferred Stock, or any increase in an amount of authorized shares of each class or series, in each case ranking junior or on a parity to the Series C Preferred Stock with respect to payment of distributions or the distribution of assets upon liquidation, dissolution or winding-up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. While any shares of the Series C Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the holders of at least two-thirds (2/3) of the Series C Preferred Stock outstanding at the time consolidate, amalgamate, merge with or into, or convey, transfer or lease its assets substantially as an entirety to, any corporation or other entity, unless (a) the Corporation is the surviving entity and the shares of the Series C Preferred Stock remain outstanding with the terms thereof unchanged, (b) the resulting, surviving or transferee entity is a corporation or other entity organized under the laws of any state and substitutes for the Series C Preferred Stock other preferred stock having substantially the same terms and same rights as the Series C Preferred Stock, including with respect to distributions, voting rights and rights upon liquidation, dissolution or winding-up, or (c) such merger, consolidation, amalgamation or asset transfer does not adversely affect the powers, special rights, preferences and privileges of the holders of the Series C Preferred Stock in any material respect. However, the Corporation may create additional classes of Parity Preferred Stock and Junior Stock, increase the authorized number of shares of Parity Preferred Stock and Junior Stock and issue additional series of Parity Preferred Stock and Junior Stock without the consent of any holder of Series C Preferred Stock. Section 7. Transfer Restrictions. The Series C Preferred Stock shall --------------------- be subject to the provisions of Article EIGHTH of the Charter. Section 8. No Conversion Rights. The holders of the Series C Preferred -------------------- Stock shall not have any rights to convert such shares into shares of any other class or series of stock, or into any other securities of, or interest in, the Corporation, 8 Section 9. No Sinking Fund. No sinking fund shall be established for --------------- the retirement or redemption of Series C Preferred Stock. FOURTH: The Series C Preferred Stock have been classified and ------ designated by the Board under the authority contained in the Charter. FIFTH: These Articles Supplementary have been approved by the Board ----- in the manner and by the vote required by law. SIXTH: The undersigned President of the Corporation acknowledges ----- these Articles Supplementary 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 for perjury. 9 IN WITNESS WHEREOF, these Articles Supplementary are executed on behalf of the Corporation by its President and attested by its Assistant Secretary this ____ day of November, 1998. ESSEX PROPERTY TRUST, INC. By: --------------------------- Keith R. Guericke President [SEAL] Attest: ______________________________ Michael J. Schall Executive Vice President, Chief Financial Officer and Assistant Secretary THE UNDERSIGNED, President of ESSEX PROPERTY TRUST, INC., who executed on behalf of the Corporation, the Articles Supplementary of which this certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Articles Supplementary to be the corporate act of said Corporation and hereby certifies that the matters and facts set forth herein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. By: --------------------------------- Keith R. Guericke President 10 EX-4.0 3 ART. SUPP. RECLASSIFYING SHARES OF SERIES A STOCK EXHIBIT 4.0 ESSEX PROPERTY TRUST, INC. -------------------------- ARTICLES SUPPLEMENTARY Reclassifying 6,617,822 shares of Common Stock as 6,617,822 shares of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK Essex Property Trust, Inc., a corporation organized and existing under the laws of Maryland (the "Corporation"), does hereby certify to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to authority conferred upon the Board of Directors of the ----- corporation by Article FIFTH of its Charter (the "Charter") in accordance with Section 2-208 of the Maryland General Corporation Law (the "MGCL"), the Board of Directors of the Corporation, at a meeting held on October 13, 1998, duly adopted a resolution reclassifying 6,617,822 authorized but unissued shares of Common Stock (par value $.0001 per share) as Preferred Stock (par value $.0001 per share), designating such newly reclassified Preferred Stock as Series A Junior Participating Preferred Stock, with the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption as set forth below and authorizing the issuance of such series of Preferred Stock as set forth below. Upon any restatement of the Charter, Sections ___ through 11 of this Article FIRST shall become subsection (g) of Article FIFTH of the Charter. Section 1. Designation and Amount. The shares of such series shall be ---------------------- designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 6,617,822. Section 2. Dividends and Distributions. --------------------------- a. Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if authorized by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) 60.01 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par 1 value $.0001 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after November 11, 1998 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. b. The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock), provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, dividend of $0.01 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. c. Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Junior ------------- Participating Preferred Stock shall have the following voting rights: 2 a. Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. b. Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. c. (i) If at any time dividend on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors. (ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the 3 Preferred Stock shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred ---- ----- Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this Paragraph (C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (x) the directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Paragraph (C) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of directors shall be such number as may be 4 provided for in the Charter or by-laws irrespective of any increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the Charter or by-laws). Any vacancies on the Board of Directors affected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors. d. Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. -------------------- a. Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock, (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled, (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other 5 relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. b. The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Junior Participatin ----------------- Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be treated by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. -------------------------------------- a. Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount equal to $100 per share of Series A Participating Preferred Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph (3) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. b. In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. 6 In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. c. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter -------------------------- into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate number of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Junior Participating ------------- Preferred Stock shall not be redeemable. Section 9. Ranking. The Series A Junior Participating Preferred Stock ------- shall rank senior to the Common Stock and junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Amendment. At any time when any shares of Series A Junior --------- Participating Preferred Stock are outstanding, neither the Charter of the Corporation nor these Articles Supplementary shall be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. 7 Section 11. Fractional Shares. Series A Junior Participating Preferred ----------------- Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. SECOND: The Series A Junior Participating Preferred Stock has been ------ reclassified by the Board of Directors under a power contained in the Charter. THIRD: These Articles Supplementary have been approved by the Board of ----- Directors in the manner and by the vote required by law. FOURTH: The undersigned acknowledges these Articles Supplementary to be ------ the act of the Corporation and states as to all matters and facts required to be verified under oath that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and such statement is made under the penalties for perjury. IN WITNESS WHEREOF, these Articles Supplementary are executed on behalf of the Corporation by its Vice Chairman of the Board, Chief Executive Officer and President and attested by its Vice President, General Counsel and Secretary this 11th day of November, 1998. ESSEX PROPERTY TRUST, INC. By: /s/ Keith R. Guericke -------------------------- Name: Keith R. Guericke Title: Vice Chairman of the Board, Chief Executive Officer and President (SEAL) Attest: By: /s/ Jordan E. Ritter ------------------------- Name: Jordan E. Ritter Title: Vice President, General Counsel and Secretary 8 EX-10.5 4 THIRD AM. TO RESTATED AGRMT OF LIMITED PARTNERSHIP EXHIBIT 10.5 THIRD AMENDMENT TO FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ESSEX PORTFOLIO, L.P. Dated as of November 24, 1998 This Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portolio, L.P., as amended (the "Partnership Agreement"), dated as of the date shown above (the "Amendment"), is executed by Essex Property Trust, Inc. a Maryland Corporation (the "Company"), as the General Partner and on behalf of the existing Limited Partners of Essex Portfolio, L.P. (the "Partnership") and Belcrest Realty Corporation, a Delaware corporation ("Belcrest") and Belair Real Estate Corporation, a Delaware corporation ("Belair," and together with Belcrest, the "Contributors"). RECITALS WHEREAS, the Partnership was formed pursuant to the Partnership Agreement, which has been amended and restated as of September 30, 1997; WHEREAS, on the date hereof, Contributors have made a Capital Contribution of an aggregate of $25,000,000.00, in cash, to the Partnership in exchange for which Contributors are entitled to receive an aggregate of 500,000 9 1/8% Series C Cumulative Redeemable Preferred Units (the "Series C Preferred Units") of limited partnership interests in the Partnership with rights, preferences, exchange and other rights, voting powers and restrictions, limitations as to distributions, qualifications and terms and conditions as set forth herein; WHEREAS, pursuant to the authority granted to the General Partner under the Partnership Agreement, the General Partner desires to amend the Partnership Agreement to reflect (i) the issuance of the Series C Preferred Units, (ii) the admission of the Contributors as Additional Limited Partners and holders of a certain number of Series C Preferred Units and (iii) certain other matters described herein; WHEREAS, Contributors desire to become a party to the Partnership Agreement as Limited Partners and to be bound by all terms, conditions and other provisions of this Amendment and the Partnership Agreement. NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the General Partner hereby amends the Partnership Agreement as follows: 1 1. Definitions. Capitalized terms used herein, unless otherwise defined ----------- herein, shall have the same meanings as set forth in the Partnership Agreement. 2. Admission of Contributors. Contributors are hereby admitted as ------------------------- Additional Limited Partners in accordance with Section 4.6 of the Partnership Agreement holding such number of Series C Preferred Units as is set forth on Exhibit A, as amended. Contributors each hereby agree to become a party to the Partnership Agreement as a Limited Partner and to be bound by all the terms, conditions and other provisions of the Partnership Agreement, as amended by this Amendment. Pursuant to Section 4.6(b) of the Partnership Agreement, the General Partner hereby consents to the admission of each Contributor as an Additional Limited Partner of the Partnership. The admission of Contributors shall become effective as of the date of this Amendment, which shall also be the date on which the name of each Contributor is recorded on the books and records of the Partnership. 3. Percentage Interest. Section 1.1 of the Partnership Agreement is ------------------- hereby amended to delete the definition of "Percentage Interest" in its entirety and the following definition of "Percentage Interest" is hereby substituted in its place: "Percentage Interest" shall mean, with respect to any Partner other than holders of Series B Preferred Units or Series C Preferred Units, the undivided percentage ownership interest of such Partner in the Partnership, as determined by dividing the number of Partnership Units owned by such Partner by the total number of Partnership Units then outstanding (excluding the Series A Preferred Interest, the Series B Preferred Interest, the Series B Partnership Units, Series C Preferred Interest and Series C Preferred Units). 4. Restatement of Exhibit A and Exhibit M. Exhibit A to the Partnership -------------------------------------- Agreement is amended and restated by replacing such Exhibit A with Exhibit A attached to this Amendment. Exhibit M to the Partnership Agreement is amended and restated by replacing such Exhibit M with Exhibit M attached to this Amendment. 5. Preferred Interest. Section 1.1 of the Partnership Agreement is ------------------ hereby amended to include the following definition of "Series C Preferred Interest" after the definition of "Series B Preferred Interest" and before the definition of "Series A Preferred Stock." "Series C Preferred Interest" shall mean the interest in the Partnership received by the General Partner in connection with the issuance of shares of Series C Preferred Stock, as and when issued, which Series C Preferred Interest includes and shall include the right to receive preferential distributions and certain other rights as set forth in this Agreement. 6. Series C Preferred Stock. Section 1.1 of the Partnership Agreement is ------------------------ hereby amended to include the following definitions of "Series C Preferred Stock" and "Series C Preferred Units" which are hereby inserted after the definition of "Series B Preferred Units" and before the definition of "Stock Incentive Plans": "Series C Preferred Stock" shall mean the preferred stock of the General Partner described in Article FIRST of the Articles Supplementary reclassifying 2 500,000 shares of Common Stock as 500,000 shares of 9 1/8% Series C Cumulative Redeemable Preferred Stock to be filed with the Department on or about November 24, 1998. "Series C Preferred Units" shall mean the 9 1/8% Series C Cumulative Redeemable Preferred Units of limited partnership interests in the Partnership with rights, preferences, exchange and other rights, voting powers and restrictions, limitations as to distributions, qualifications and terms and conditions as set forth in Exhibit O hereto. 7. Distributions. Section 6.2(a) of the Partnership Agreement is hereby ------------- deleted in its entirety, and the following is hereby substituted in the place thereof: "(a) Distributions shall be made in accordance with the following order of priority: (i) First, on a pro rata basis, (based upon the same ratio that -------- accrued distributions per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and per unit of Series B Preferred Units and Series C Preferred Units (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such stock or units do not have cumulative distribution rights) bear to each other) (x) to the General Partner, on account of the Series A Preferred Interest, Series B Preferred Interest and Series C Preferred Interest until the total amount of distributions made pursuant to this Section 6.2(a)(i)(x) equals the total amount of accrued but unpaid dividends (if any) payable with respect to the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock as of the date of such distribution; (y) to the Limited Partners holding Series B Preferred Units, on account of the Series B Preferred Units until the total amount of distributions made pursuant to this Section 6.2(a)(i)(y) equals the total amount of accrued but unpaid dividends (if any) payable with respect to the Series B Preferred Units, in accordance with Exhibit N of the Partnership Agreement, as of the date of such distribution; and (z) to the Limited Partners holding Series C Preferred Units, on account of the Series C Preferred Units until the total amount of distributions made pursuant to this Section 6.2(a)(i)(z) equals the total amount of accrued but unpaid dividends (if any) payable with respect to the Series C Preferred Units, in accordance with Exhibit O of the Partnership Agreement, as of the date of such distribution. (ii) Next, to the Partners, pro rata in accordance with the -------- Partners' then Percentage Interests. Neither the Partnership nor the Limited Partners shall have any obligation to see that any funds distributed to the General Partner pursuant to subparagraph (a)(i) of this Section 6.2 are in turn used by the General Partner to pay dividends on the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock (or any other Preferred Stock) or that funds distributed to the General Partner 3 pursuant to subparagraph (a)(ii) of this Section 6.2 are in turn used by the General Partner to pay dividends on the Common Stock or for any other purpose." 8. Distributions in Kind. Section 8.5 of the Partnership Agreement is --------------------- hereby amended by adding the following sentence to the end of such section: "Notwithstanding the foregoing, the Liquidating Trustee shall not distribute to the holders of Series B Partnership Units, Series C Partnership Units, Series A Preferred Interest, Series B Preferred Interest and Series C Preferred Interest Partnership assets other than cash." 9. Exhibit E. Exhibit E to the Partnership Agreement is hereby deleted --------- --------- in its entirety, and the attached Exhibit E is hereby inserted in the place --------- thereof. 10. Exhibit N. Exhibit N is hereby amended by (i) deleting the word --------- "Stock" in the ninth (9th) line of Section 2G(i) thereof and inserting the word "Units" in lieu thereof; and (ii) inserting the following sentence at the end of said Section 2G(i): "The Series B Preferred Units will become exchangeable at any time in whole or in part at the option of the holders of the Series B Preferred Units if, at any time (i) the Partnership takes the position that the assets and income of the Partnership are such as would not permit the Partnership to satisfy the income and assets tests of Section 856 of the Code if the Partnership were a real estate investment trust within the meaning of the Code; or (ii) any holder of the Series B Preferred Units shall deliver to the Partnership and the Company an opinion of independent counsel reasonably acceptable to the Company to the effect that the assets and income of the Partnership are such as would not permit the Partnership to satisfy the income and assets tests of Section 856 of the Code if the Partnership were a real estate investment trust within the meaning of the Code." 11. Exhibit O. The Partnership Agreement is hereby amended by adding a --------- new exhibit, Exhibit O, a copy of which is attached hereto. Exhibit O is hereby --------- inserted into the Partnership Agreement following Exhibit N. --------- 12. Continuing Effect of Partnership Agreement. Except as modified ------------------------------------------ herein, the Partnership Agreement is hereby ratified and confirmed in its entirety and shall remain and continue in full force and effect, provided, however, that to the extent there shall be a conflict between the provisions of the Partnership Agreement and this Amendment the provisions in this Amendment will prevail. All references in any document to the Partnership Agreement shall mean the Partnership Agreement, as amended hereby. 13. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original and all of which shall constitute one and the same agreement. Facsimile signatures shall be deemed effective execution of this Agreement and may be relied upon as such by the other party. In the event facsimile signatures are delivered, originals of such signatures shall be delivered to the other party within three (3) business days after execution. 4 IN WITNESS WHEREOF, the General Partner and the Contributor have executed this Amendment as of the date indicated above. GENERAL PARTNER ESSEX PROPERTY TRUST, INC., a Maryland corporation as General Partner of Essex Portfolio, L.P. and on behalf of the existing Limited Partners By: ------------------------------------------ Name: Keith R. Guericke Title: Chief Executive Officer & President CONTRIBUTOR: BELCREST REALTY CORPORATION, a Delaware corporation By: ------------------------------------------- Name: ----------------------------------------- Title: ----------------------------------------- 5 BELAIR REAL ESTATE CORPORATION a Delaware Corporation By: ------------------------------------------ Name: ------------------------------------------ Title: ---------------------------------------- 6 EXHIBIT A PARTNERSHIP UNITS (As of November 24, 1998) PARTNERSHIP UNITS -----------------
General Partner: Units - ----------------------------- ---------- Essex Property Trust, Inc. 16,615,924
Limited Partners: - ---------------- 1. Essex Portfolio Management Company 15,941 2. Essex Property Corporation 9,909 3. GMMS Partners 43,414 4. M & M Projects, Inc. 128,138 5. SummerHill Homes 163,447 6. Paula Amanda 1,785 7. Robert and Margaret Arnold 2,242 8. Randall I. Barkan 2,564 9. David Bernstein Revocable Trust 5,771 10. John D. and Robbin Eudy 7,457 11. Kenneth and Angeliki Frangadakis 2,675 12. George and Katherine Frangadakis, 4,697 Trustees Frangadakis Family Revocable Trust 13. Kenneth and Angeliki Frangadakis, 24,334 Trustees Frangadakis Family Revocable Trust 14. Harvey Friedman 4,042 15. Harvey and Margaret Green 16,735 16. Keith R. and Thelma Guericke 48,116 17. George P. Katsoulis 5,000 18. Gerald E. and Annette Kelly 5,643 19. Nancy Kukkola 11,637 20. George M. Marcus 1,136,227 21. Meistrich Family Trust UTA 12/6/90 4,042 22. Charles E. Martin 1,785 23. William A. and Sherrie Millichap 73,099 24. J. Peter and Cherie Otten 9,447 25. Milton Pagonis 10,267 26. Gary Pagonis Family Trust 10,267 27. G. Michael Roark 54,740 28. Michael and Ann Schall 26,388 29. J. Lawrence Schnadig 1,729 30. J.A. Shafran 2,889 31. Swanson Survivors Trust 7,687 32. Marcus & Millichap 2,564 33. The Way 1994 Living Trust Dtd. 2,226 11/2/94 34. Gay A. Yamagiwa 10,720 35. Craig K. Zimmerman 15,849 7.875% SERIES B PREFERRED UNITS ------------------------------- Limited Partner: - ---------------- Belair Real Estate Corporation 1,600,000 2 9 1/8% SERIES C PREFERRED UNITS ------------------------------- Limited Partner: - ---------------- Belcrest Realty Corporation 420,000 Belair Real Estate Corporation 80,000 ________ TOTAL PARTNERSHIP UNITS: 2,100,000
3 EXHIBIT M ADDRESSES OF PARTNERS PARTNERSHIP UNIT HOLDERS ------------------------ Essex Portfolio Management Company Essex Property Corporation 777 California Avenue 777 California Avenue Palo Alto, CA 94304 Palo Alto, CA 94304 GMMS Partners M & M Projects, Inc. 777 California Avenue 777 California Avenue Palo Alto, CA 94304 Palo Alto, CA 94304 SummerHill Homes Paula Amanda 777 California Avenue 1001 Bridgeway #460 Palo Alto, CA 94304 Sausalito, CA 94965 Robert and Margaret Arnold Randall I. Barkan 460 Marlowe 777 California Avenue Palo Alto, CA 94301 Palo Alto, CA 94304 Belair Capital Fund LLC David Bernstein, Trustee c/o Eaton Vance Management David Bernstein Revocable Trust 24 Federal Street 8773 Midnight Pass Road #406 Boston, Massachusetts 02110 Sarasota, FL 34242 Attention: Mr. Alan Dynner Fax: 617-338-8054 Kenneth and Angeliki Frangadakis John D. and Robbin Eudy 10383 Torre Avenue 777 California Avenue Cupertino, CA 95014 Palo Alto, CA 94304 Kenneth and Angeliki Frangadakis, George and Katherine Frangadakis, Trustees Trustees Frangadakis Family Revocable Trust Frangadakis Family Revocable Trust 10383 Torre Avenue 7408 Fallenleaf Lane Cupertino, CA 95014 Cupertino, CA 95014 Keith R. and Thelma Guericke Harvey Friedman 14341 Lutheria Way 720 Rochedale Way Saratoga, CA 95070 Los Angeles, CA 90049 Gerald E. and Annette Kelly Harvey and Margaret Green 1517 Kalmia Street 12243 Huston Street San Mateo, CA 94402 N. Hollywood, CA 91607 4 Charles E. Martin George P. Katsoulis 1001 Bridgeway #134 3300 Webster Street #612 Sausalito, CA 94965 Oakland, CA 94609 J. Peter and Cherie Otten Nancy Kukkola 250 El Bonito Way 123 Greenmeadow Way Millbrae, CA 94030 Palo Alto, CA 94306 Gary and Elisa Pagonis, Trustees George M. Marcus Gary Pagonis Family Trust 777 California Avenue 10383 Torre Avenue, Suite 1 Palo Alto, CA 94304 Cupertino, CA 95014 Michael and Ann Schall Herbert Meistrich 1544 Sioux Court 1320 W. Muirlands Drive Fremont, CA 94539 La Jolla, CA 92037 William A. and Sherrie Millichap G. Michael Roark 2626 Hanover P.O. Box 2767 Palo Alto, CA 94304 Sausalito, CA 94966 Milton Pagonis Roger and Anita Swanson, Trustees 10383 Torre Avenue, Suite 1 Swanson Survivors Trust Cupertino, CA 95014 889 Norfolk Pine Avenue Sunnyvale, CA 94087 J.A. Shafran J. Lawrence Schnadig 30360 Morning View Drive 833 MOraga Drive #6 Malibu, CA 90265 Los Angeles, CA 90049 Linwood C. Thompson J.A. Shafran Marcus & Millichap 30360 Morning View Drive 8750 W. Bryn Mawr #750 Malibu, CA 90265 Chicago, IL 60631 Gay A. Yamagiwa Stephen and Patricia Way, Trustees 341 Seville The Way 1994 Living Trust Dtd. San Mateo, CA 94402 11/2/94 338 Georgetown Avenue San Mateo, CA 94402 5 Belcrest Realty Corporation Craig K. Zimmerman c/o Eaton Vance Management 409 Georgetown Avenue 24 Federal Street San Mateo, CA 94402 Boston, MA 02110 Attn: Mr. Alan Dynner Belair Real Estate Corporation c/o Eaton Vance Management 24 Federal Street Boston, MA 02110 Attn: Mr. Alan Dynner 6 EXHIBIT E ALLOCATIONS 1. Allocation of Net Income and Net Loss. ------------------------------------- (a) Net Income. Except as otherwise provided herein, Net Income for ---------- any fiscal year or other applicable period shall be allocated in the following order and priority: (1) First, to the Partners, until the cumulative Net Income allocated pursuant to this subparagraph (a)(1) for the current and all prior periods equals the cumulative Net Loss allocated pursuant to subparagraph (b)(2) hereof for all prior periods, among the Partners in the reverse order that such Net Loss was allocated to the Partners pursuant to subparagraph (b)(2) hereof (and, in the event of a shift of a Partner's interest in the Partnership, to the Partners in a manner that most equitably reflects the successors in interest to the Partners). (2) Thereafter, the balance of the Net Income, if any, shall be allocated to the Partners in accordance with their respective Percentage Interests. (b) Net Loss. Except as otherwise provided herein, Net Loss of the -------- Partnership for each fiscal year or other applicable period shall be allocated as follows: (1) To the Partners in accordance with their respective Percentage Interests. (2) Notwithstanding subparagraph (b)(1) hereof, to the extent any Net Loss allocated to a Partner under subparagraph (b)(1) hereof or this subparagraph (b)(2) would cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted Capital Account Deficit as of the end of the fiscal year to which such Net Loss relates, such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance with their relative Percentage Interests. (c) Notwithstanding Sections 1(a) and (b) above, on any date on which any Series A Preferred Stock, any Series B Preferred Stock, any Series C Preferred Stock or any Series B Preferred Unit or any Series C Preferred Unit (or other Preferred Stock or other preferred units) is outstanding, Net Income and Net Loss shall be allocated as follows: (1) Net Income for any fiscal year or other applicable period shall be allocated in the following order and priority: (i) First, to the Partners, until the cumulative Net Income allocated pursuant to this subparagraph (c)(1)(i) for the current and all prior periods equals the cumulative Net Loss allocated pursuant to subparagraphs (c)(2)(iii) and (iv) 1 hereof for all prior periods, among the Partners in the reverse order that such Net Loss was allocated (and, in the event of a shift of a Partner's interest in the Partnership, to the Partners in a manner that most equitably reflects the successors in interest to such Partners); (ii) Second, to the General Partner, until the cumulative Net Income allocated pursuant to this subparagraph (c)(1)(ii) for the current and all prior periods equals the cumulative Net Loss allocated pursuant to subparagraph (c)(2)(ii) hereof for all prior periods; (iii) Third, on a pari passu basis, to (A) the General ---- ----- Partner until the cumulative amount of Net Income allocated pursuant to this subparagraph (c)(1)(iii) equals the total amount of dividends paid on the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock (and other Preferred Stock) as of or prior to the date of such allocation plus the total amount of accrued but unpaid dividends on the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock (and other Preferred Stock) as of such date; (B) to the holders of Series B Preferred Units until the cumulative amount of Net Income allocated pursuant to this subparagraph (c)(i)(iii) equals the total amount of Priority Return paid on the Series B Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series B Preferred Units; and (C) to the holders of Series C Preferred Units until the cumulative amount of Net Income allocated pursuant to this subparagraph (c)(i)(iii) equals the total amount of Priority Return paid on the Series C Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series C Preferred Units; (iv) Thereafter, the balance of the Net Income, if any, shall be allocated to the Partners in accordance with their respective Percentage Interests. (2) Net Loss of the Partnership for each fiscal year or other applicable period shall be allocated as follows: (i) First, to the Partners in accordance with their respective Percentage Interests until the Capital Account balances of the Limited Partners (not including the holders of the Series B Preferred Units and the Series C Preferred Units) are reduced to zero (for purpose of this calculation, such Partners' share of Partnership Minimum Gain shall be added back to their Capital Accounts); (ii) Second, on a pari passu basis, to (A) the General ---- ----- Partner until its Capital Account balance has been reduced to zero (for purpose of this calculation, such Partner's share of Partnership Minimum Gain shall be added back to its Capital Account); (B) to the holders of Series B Preferred Units until their Capital Account balances have been reduced to zero (for purpose of this calculation, such Partners' share of Partnership Minimum Gain shall be added back to their Capital Accounts); and (C) to the holders of Series C Preferred Units until their Capital Account Balances have been reduced to zero (for purposes of this calculation, such Partners' share of Partnership Minimum Gain shall be added back to their Capital Accounts); 2 (iii) Thereafter, to the Partners in accordance with their then Percentage Interests; (iv) Notwithstanding subparagraph (c)(2)(iii) hereof, to the extent any Net Loss allocated to a Partner under subparagraph (c)(2) would cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted Capital Account Deficit as of the end of the fiscal year to which such Net Loss relates, such Net Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance with their relative Percentage Interests. (d) Book-Up and Capital Account Adjustments. On any day on which --------------------------------------- Series A Preferred Stock (or other Preferred Stock) is redeemed or converted into Common Stock, the Partnership shall adjust the Gross Asset Values of all Partnership assets to equal their respective gross fair market values and shall allocate the amount of such adjustment as Net Income or Net Loss pursuant to Section 1(c) hereof, provided, however, that if no Series A Preferred Stock (or other Preferred Stock) is outstanding after such redemption or conversion, such Net Income or Net Loss shall be allocated in such a manner that after such allocation the Capital Accounts of the Partners are in proportion to their Percentage Interests. (e) Adjustment of Percentage Interests Upon Conversion of Convertible ----------------------------------------------------------------- Preferred Stock to Common Stock. Upon the conversion of any Series A Preferred - ------------------------------- Stock to Common Stock of the General Partner , the Percentage Interests of the Partners shall be adjusted in accordance with the provisions of Article 4 of the Partnership Agreement as if, on the date of such conversion, the General Partner had made an additional Capital Contribution to the Partnership in an amount equal to the number of shares of Common Stock issued as a result of such conversion multiplied by the fair market value of such shares on the date of conversion, and provided that in calculating such adjustments, the General Partner shall be deemed not to have incurred any expenses in connection with raising the funds used to make such additional Capital Contribution. 2. Special Allocations. ------------------- Notwithstanding any provisions of paragraph 1 of this Exhibit E, the following special allocations shall be made in the following order: (a) Minimum Gain Chargeback (Nonrecourse Liabilities). If there is a ------------------------------------------------- net decrease in Partnership Minimum Gain for any Partnership fiscal year (except as a result of conversion or refinancing of Partnership indebtedness, certain capital contributions or revaluation of the Partnership property as further outlined in Regulation Sections 1.704-2(d)(4), (f)(2) or (f)(3)), each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in Partnership Minimum Gain. The items to be so allocated shall be determined in accordance with Regulation Section 1.704-2(f). This paragraph (a) is intended to comply with the minimum gain chargeback requirement in said section of the Regulations and shall be interpreted consistently 3 therewith. Allocations pursuant to this paragraph (a) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. (b) Minimum Gain Attributable to Partner Nonrecourse Debt. If there ----------------------------------------------------- is a net decrease in Minimum Gain Attributable to Partner Nonrecourse Debt during any fiscal year (other than due to the conversion, refinancing or other change in the debt instrument causing it to become partially or wholly nonrecourse, certain capital contributions, or certain revaluations of Partnership property as further outlined in Regulation Section 1.704-2(i)(4)), each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Minimum Gain Attributable to Partner Nonrecourse Debt. The items to be so allocated shall be determined in accordance with Regulation Section 1.704-2(i)(4) and (j)(2). This paragraph (b) is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this paragraph (b) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. (c) Qualified Income Offset. In the event a Limited Partner ----------------------- unexpectedly receives any adjustments, allocations or distributions described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6), and such Limited Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly as possible. This paragraph (c) is intended to constitute a "qualified income offset" under Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted - consistently therewith. (d) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal ---------------------- year or other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests. (e) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions ------------------------------ for any fiscal year or other applicable period shall be specially allocated to the Partner that bears the economic risk of loss for the debt (i.e., the Partner Nonrecourse Debt) in respect of which such Partner Nonrecourse Deductions are attributable (as determined under Regulation Section 1.704-2(b)(4) and (i)(1)). (f) Curative Allocations. It is the intent of the Partnership that, -------------------- to the extent possible, the Capital Account balances of the Partners be in proportion to the Partners' Percentage Interests. Thus, items of "book" income, gain, loss, and deduction shall be allocated among the Partners so that, to the extent possible, the resulting Partners' Capital Account balances bear this relationship. This subparagraph (f) is intended to minimize to the extent possible and to the extent necessary any economic distortions which may result from application of the Regulatory Allocations and shall be interpreted in a manner consistent therewith. For purposes hereof, "Regulatory Allocations" shall mean the 4 allocations provided under paragraph 1(b)(2) and this paragraph 2 (save subparagraphs (d) and (f) hereof). 3. Tax Allocations. --------------- (a) Generally. Subject to paragraphs (b) and (c) hereof, items of --------- income, gain, loss, deduction and credit to be allocated for income tax purposes (collectively, "Tax Items") shall be allocated among the Partners on the same basis as their respective book items. (b) Sections 1245/1250 Recapture. If any portion of gain from the ---------------------------- sale of property is treated as gain which is ordinary income by virtue of the application of Code Section 1245 or 1250 ("Affected Gain"), then (A) such Affected Gain shall be allocated among the Partners in the same proportion that the depreciation and amortization deductions giving rise to the Affected Gain were allocated and (B) other Tax Items of gain of the same character that would have been recognized, but for the application of Code Sections 1245 and/or 1250, shall be allocated away from those Partners who are allocated Affected Gain pursuant to Clause (A) so that, to the extent possible, the other Partners are allocated the same amount, and type, of capital gain that would have been allocated to them had Code Sections 1245 and/or 1250 not applied; provided, however, that the net amount of Tax Items allocated to each Partner shall be the same as if this paragraph 3(a) did not exist. For purposes hereof, in order to determine the proportionate allocations of depreciation and amortization deductions for each fiscal year or other applicable period, such deductions shall be deemed allocated on the same basis as Net Income and Net Loss for such respective period. (c) Allocations Respecting Section 704(c) and Revaluations. If any ------------------------------------------------------ Partnership property is subject to Code Section 704(c) or is reflected in the Capital Accounts of the Partners and on the books of the Partnership at a book value that differs from the adjusted tax basis of such property, then the tax items with respect to such property shall, in accordance with the requirements of Regulations Section 1.704-1(b)(4)(i), be shared among the Partners in a manner that takes account of the variation between the adjusted tax basis of the applicable property and its book value in the same manner as variations between the adjusted tax basis and fair market value of property contributed to the Partnership are taken into account in determining the Partners' share of tax items under Code Section 704(c). The General Partner is authorized to choose any reasonable method permitted by the Regulations pursuant to Code Section 704(c), including the "remedial allocation" method, the "curative allocation" method and the traditional method; provided that the General Partner agrees to use reasonable efforts to minimize the amount of taxable income in excess of book income allocated to the holders of the Series B Preferred Units and the Series C Preferred Units. (d) Code Section 752 Specification. Pursuant to Regulations Section ------------------------------ 1.752-3, the Partners' interest in Partnership profits for purposes of determining the Partners' shares of excess nonrecourse liabilities shall be their Percentage Interests. 5 EXHIBIT O DESCRIPTION OF PREFERENCES, OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DISTRIBUTIONS, QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE SERIES C PREFERRED UNITS 1. Definitions. In addition to those terms defined in the Agreement, the following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in the Agreement and this Exhibit O: "Business Day" shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York, New York are not required to be open. "Distribution Payment Date" shall have the meaning set forth in Section 2(c) hereof. "Parity Units" means (i) the Series A Preferred Interest, (ii) the Series B Preferred Interest, (iii) the Series C Preferred Interest, and (iv) any class or series of Partnership Interests of the Partnership now or hereafter authorized, issued or outstanding expressly designated by the Partnership to rank on a parity with Series C Preferred Units with respect to distributions or rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Partnership, or both, as the context may require. "Priority Return" means, an amount equal to 91/8% per annum, determined on the basis of a 360 day year of twelve 30 day months (or actual days for any month which is shorter than a full monthly period), cumulative to the extent not distributed for any given distribution period pursuant to Section 6.2(a) of the Partnership Agreement, of the stated value of $50 per Series C Preferred Unit, commencing on the date of issuance of the Series C Preferred Units. "Series C Preferred Stock" means the 91/8% Series C Cumulative Redeemable Preferred Stock (liquidation preference $50.00 per share), $.0001 par value, issued by the General Partner. "Series C Preferred Unit" means a Partnership Unit issued by the Partnership to certain Persons. The Series C Partnership Units shall constitute a series of Partnership Units. The Series C Preferred Units shall have the preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption as are set forth in this Exhibit O. "set apart for payment" shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent. 1 2. Terms of Series C Preferred Units. A. Number. The number of authorized Series C Preferred Units shall be ------ 500,000. B. Ranking. The Series C Preferred Units will, with respect to distributions ------- and rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Partnership, rank senior to all classes or series of Partnership Interests (as defined in the Partnership Agreement) of the Partnership now or hereafter authorized, issued or outstanding, other than (i) the Series A Preferred Interest, the Series B Preferred Interest and the Series C Preferred Interest, with which it shall rank on a parity, and (ii) any class or series of Partnership Interests or Partnership Units expressly designated as ranking on a parity with or senior to the Series A Preferred Units, Series B Preferred Units and Series C Preferred Units as to distributions and rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Partnership. C. Distributions. ------------- (i) Subject to the rights of the holders of the Parity Units as to the payments of distributions, holders of Series C Preferred Units will be entitled to receive, when, as and if declared by the Partnership, acting through the Company as the sole general partner of the Partnership, cumulative preferential cash distributions at the rate per annum of 9 1/8% of the original Capital Contribution per Series C Preferred Unit. Distributions shall be cumulative, shall accrue from the original date of issuance (the "Issue Date") and shall be payable (A) quarterly in arrears (such quarterly periods, for purposes of payment and accrual shall be the quarterly periods ending on the dates specified in this sentence and not calendar quarters), on the 15th day of February, May, August and November of each year and (B) in the event of (i) an exchange of Series C Preferred Units into shares of Series C Preferred Stock, or (ii) upon a redemption of Series C Preferred Units, on the exchange date or redemption date (each a "Distribution Payment Date"), commencing on February 15, 1999. The amount of distributions payable for any period will be computed on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full quarterly period for which distributions are computed, the amount of the distribution payable will be computed on the basis of the actual number of days elapsed in such a 30-day month. If any date on which distributions are to be made on the Series C Preferred Units is not a Business Day, then payment of the distribution to be made on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. Distributions on the Series C Preferred Units will be made to the holders of record of the Series C Preferred Units on the relevant record dates, which, unless otherwise provided by the Company with respect to any distribution, will be 15 Business Days prior to the relevant Distribution Payment Date. (ii) No distributions on the Series C Preferred Units shall be declared or paid or set apart for payment by the Partnership at such time as the terms and provisions of any agreement of the Partnership, including any agreement relating to its indebtedness, prohibits such declaration, payment or 2 setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, of if such declaration, payment or setting apart for payment shall be restricted or prohibited by law. (iii) Notwithstanding the foregoing, distributions on the Series C Preferred Units will accrue whether or not the terms and provisions set forth in Section 2.C.(ii) hereof at any time prohibit the current payment of distributions, whether or not the Corporation has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accrued but unpaid distributions on the Series C Preferred Units will accumulate as of the Distribution Payment Date on which they first become payable. Accumulated and unpaid distributions will not bear interest. (iv) So long as any Series C Preferred Unit is outstanding, no distribution of cash or other property shall be authorized, declared, paid or set apart for payment on or with respect to any class or series of Partnership Interests ranking junior to the Series C Preferred Units as provided in this Section 2 (such Partnership Interests, collectively, "Junior Units"), nor shall any cash or other property be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series C Preferred Units, any Parity Units with respect to distributions or any Junior Units, unless, in each case, all distributions accumulated on all Series C Preferred Units and all classes and series of outstanding Parity Units as to payment of distributions have been paid in full. The foregoing sentence will not prohibit (i) distributions payable solely in Junior Units, (ii) the conversion of Junior Units or Parity Units into common stock or preferred stock of the Company in accordance with the exchange rights of such Junior Units or Parity Units, or (iii) the redemption, purchase or other acquisition of Junior Units made for purposes of and in compliance with requirements of an employee incentive or benefit plan of the Corporation or any subsidiary of the Partnership or the Corporation. (v) So long as distributions have not been paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series C Preferred Units, all distributions authorized and declared on the Series C Preferred Units and all classes or series of outstanding Parity Units with respect to distributions shall be authorized and declared so that the amount of distributions authorized and declared per share of Series C Preferred Units and such other classes or series of Parity Units shall in all cases bear to each other the same ratio that accrued distributions per share on the Series C Preferred Units and such other classes or series of Parity Units (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such class or series of Parity Units do not have cumulative distribution rights) bear to each other. (vi) Holders of Series C Preferred Units shall not be entitled to any distributions, whether payable in cash, other property or otherwise, in excess of the full cumulative distributions described herein. D. Allocation of Net Income. ------------------------ With respect to the Series C Preferred Units, the net income of the Partnership will be allocated as provided in Exhibit E to the Partnership Agreement. 3 E. Liquidation. ----------- Subject to the rights of holders of any series of Parity Units with respect to rights upon any voluntary or involuntary liquidation dissolution or winding-up of the Partnership, upon any voluntary or involuntary liquidation, dissolution or winding up of the Partnership, the holders of the Series C Preferred Units will be entitled to receive out of the assets of the Partnership legally available for distribution or the proceeds thereof, after payment or provision for debts and other liabilities of the Partnership, an amount equal to their respective Capital Account balances. Written notice of any such voluntary or involuntary liquidation, dissolution or winding-up of the Partnership, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by (i) fax and (ii) by first class mail, postage pre-paid, not less than 30 and not more than 60 days prior to the payment date stated therein, to each record holder of the Series C Preferred Units at the respective addresses of such holders as the same shall appear on the transfer records of the Partnership. The consolidation or merger of the Partnership with or into any corporation, trust or other entity (or of any corporation, trust or other entity with or into the Partnership) shall not be deemed to constitute a liquidation, dissolution, winding-up or termination of the Partnership. F. Optional Redemption. ------------------- (i) The Series C Preferred Units may not be redeemed prior to November 24, 2003. On or after such date, subject to the terms and conditions of any Parity Preferred Stock or any Parity Units, the Partnership shall have the right to redeem the Series C Preferred Units, in whole or in part, from time to time, upon not less than 30 nor more than 60 days' notice, at a redemption price, payable in cash, equal to the Capital Account balance of such holders of Series C Preferred Units (the "Redemption Price"); provided; however that such redemption shall not be permitted if such Redemption Price shall be less than the original Capital Contribution of such Partner and the cumulative Priority Return to the redemption date to the extent not previously distributed. (ii) Except in connection with a liquidation, dissolution, winding-up or termination of the Partnership as described under "Liquidation" above, the Redemption Price of the Series C Preferred Units (other than the portion thereof consisting of accumulated but unpaid distributions) will be payable solely out of the sale proceeds of capital stock of the Company, which will be contributed by the Company to the Partnership as an additional capital contribution, or out of the sale proceeds of limited partner interests of the Partnership and from no other source. Unless previously redeemed, the Series C Preferred Units will be redeemed for cash upon termination of the Partnership. Unless sooner dissolved, the Partnership will terminate on December 31, 2054. The Series C Preferred Units will not be subject to any sinking fund. (iii) If the Partnership gives a notice of redemption in respect of Series C Preferred Units (which notice will be irrevocable) then, by 12:00 noon, New York City time, on the redemption date, the Partnership will deposit irrevocably in trust for the benefit of the Series C Preferred Units being redeemed funds sufficient to pay the applicable Redemption Price and will give irrevocable instructions and authority to pay such Redemption Price to the holders of the Series C Preferred Units. On and after the date of redemption, distributions will cease to accumulate on the Series C Preferred Units or portions thereof called for redemption, unless the 4 Partnership defaults in the payment thereof. If any date fixed for redemption of Series C Preferred Units is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of the Series C Preferred Units is improperly withheld or refused and not paid by the Partnership, distributions on such Series C Preferred Units will continue to accumulate from the original redemption date to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the applicable Redemption Price. If fewer than all the Series C Preferred Units are to be redeemed, the Series C Preferred Units to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional units). (iv) The Partnership may not redeem fewer than all the outstanding Series C Preferred Units unless all accumulated and unpaid distributions have been paid on all Series C Preferred Units for all quarterly distribution periods terminating on or prior to the date of redemption. (v) Notice of redemption will be (i) faxed, and (ii) mailed by the Partnership, postage prepaid, not less than 30 nor more than 60 days prior to the redemption date, addressed to the respective holders of record of the Series C Preferred Units to be redeemed at their respective addresses as they appear on the transfer records of the Partnership. No failure to give or defect in such notice shall affect the validity of the proceedings for the redemption of any Series C Preferred Units except as to the holders to whom notice was defective or not given. Each notice shall state: (i) the redemption date, (ii) the Redemption Price, (iii) the number of Series C Preferred Units to be redeemed; (iv) the place or places where the Series C Preferred Units are to be surrendered for payment of the Redemption Price; (v) that distributions on the Series C Preferred Units to be redeemed will cease to accumulate on such redemption date and (vi) that payment of the Redemption Price will be made upon presentation and surrender of such Series C Preferred Units. If fewer than all of the Series C Preferred Units held by any holder are to be redeemed, the notice mailed to such holder shall also specify then number of Series C Preferred Units to be redeemed from such holder. G. Exchange Rights. --------------- (i) Unless called for redemption as described above under "Optional Redemption," Series C Preferred Units will be exchangeable in whole or in part at anytime on or after the tenth anniversary of the Issue Date, at the option of the holders thereof, for authorized but previously unissued shares of the Company's Series C Preferred Stock at an exchange price of $50.00 per share of Series C Preferred Stock (equivalent to an exchange rate of one share of Series C Preferred Stock for each Series C Preferred Unit), subject to adjustment as described below (the "Exchange Price"), provided that the Series C Preferred Units will become immediately exchangeable at any time in whole or in part at the option of the holders for Series C Preferred Units (y) if at any time full distributions shall not have made on any outstanding Series C Preferred Units with respect to any six (6) prior quarterly distribution periods, whether or not consecutive, such that distributions for such six (6) distribution periods have not been fully 5 paid and are outstanding in whole or in part at the same time or (z) upon receipt by holders of Series C Preferred Units of (A) notice from the General Partner that the General Partner or a subsidiary of the General Partner has taken the position that the Partnership is, or upon the occurrence of a defined event in the immediate future will be a "publicly traded partnership" (a "PTP") within the meaning of Section 7704 of the Internal Revenue Code of 1986, as amended, and (B) an opinion rendered by independent counsel to the General Partner familiar with such matter (or, in the event of a conflict, other reputable independent counsel designated by such General Partner counsel), addressed to a holder or holders of Series C Preferred Units, that the Partnership is, or likely is, or upon the occurrence of a defined event in the immediate future will be or likely will be, a PTP. Series C Preferred Units may be exchanged for Series C Preferred Stock in whole or in part at the option of any holder prior to the tenth anniversary of the Issue Date and after the third anniversary thereof if such holder delivers to the Partnership and the Company either (i) a private letter ruling addressed to a holder of Series C Preferred Units or (ii) an opinion of independent counsel reasonably acceptable to the Company based on the enactment of temporary or final Treasury Regulations or the publication of a Revenue Ruling, in either case to the effect that an exchange of the Series C Preferred Units at such earlier time would not cause the Series C Preferred Units to be considered "stock and securities" within the meaning of section 351(e) of the Code for purposes of determining whether the holder of such Series C Preferred Units is an "investment company" under section 721(b) of the Code if an exchange is permitted at such earlier date. The Series C Preferred Units will become exchangeable in whole or in part at the option of the holders of the Series C Preferred Units if (i) the Partnership is advised by independent counsel that, based on the assets and income of the Partnership for a taxable year after 1998, the Partnership would not satisfy the income and assets tests of Section 856 of the Code for such taxable year if the Partnership were a real estate investment trust within the meaning of the Code; or (ii) any holder of the Series C Preferred Units shall deliver to the Partnership and the Company an opinion of independent counsel reasonably acceptable to the Company to the effect that, based on the assets and income of the Partnership for a taxable year after 1998, the Partnership would not satisfy the income and assets tests of Section 856 of the Code for such taxable year if the Partnership were a real estate investment trust within the meaning of the Code and that such failure would create a meaningful risk that a holder of the Series C Preferred Units would fail to maintain its qualification as a real estate investment trust. (ii) Notwithstanding anything to the contrary set forth in 2.G.(i), if an Exchange Notice (as defined herein) has been delivered to the General Partner, then the General Partner may, at its option, elect to redeem or cause the Partnership to redeem all or a portion of the outstanding Series C Preferred Units for cash in an amount equal to the original Capital Contribution per Series C Preferred Unit and all accrued and unpaid distributions thereon to the date of redemption. The General Partner may exercise its option to redeem the Series C Preferred Units for cash pursuant to this 2.G.(ii) by giving each holder of record of Series C Preferred Units notice of its election to redeem for cash, within fifteen (15) Business Days after receipt of the Exchange Notice, by (i) fax, and (ii) registered mail, postage paid, at the address of each holder as it may appear on the records of the Partnership stating (i) the redemption date, which shall be no later than sixty (60) days following the receipt of the Exchange Notice, (ii) the Redemption Price, (iii) the place or places where the Series C Preferred Units are to be surrendered for payment of the Redemption Price, (iv) that distributions on the Series C Preferred 6 Units will cease to accrue on such redemption date; (v) that payment of the Redemption Price will be made upon presentation and surrender of the Series C Preferred Units and (vi) the aggregate number of Series C Preferred Units to be redeemed, and if fewer than all of the outstanding Series C Preferred Units are to be redeemed, the number of Series C Preferred Units to be redeemed held by such holder, which number shall equal such holder's prorata share (based on the percentage of the aggregate number of outstanding Series C Preferred Units the total number of Series C Preferred Units held by such holder represents) of the aggregate number of Series C Preferred Units being redeemed. The redemption of Series C Preferred Units described in this Section 2.G.(iii) shall be subject to the provisions of Section 2.F.(ii) and (iii); provided, however, that the term "Redemption Price" in such Sections shall be read to mean the original Capital Contribution per Series C Preferred Unit being redeemed plus all accrued and unpaid distributions to the redemption date. (iii) In the event an exchange of all or a portion of the Series C Preferred Units pursuant to Section 2.G.(i) would violate the Ownership Limit of the General Partner set forth in Article EIGHTH of the Charter, the General Partner will give written notice thereof to each holder of record of Series C Preferred Units exercising such exchange right, within fifteen (15) Business Days following receipt of the Exchange Notice, by (i) fax, and (ii) mail, postage prepaid, at the address of each such holder set forth in the records of the Partnership. In such event, each holder of Series C Preferred Units exercising its exchange right, shall be entitled to exchange a number of Series C Preferred Units which would comply with the Ownership Limit of the General Partner set forth in Article EIGHTH of the Charter and any Series C Preferred Units not so exchanged (the "Excess Units") shall be redeemed by the Partnership for cash in an amount equal to the original Capital Contribution per Excess Unit, plus any accrued and unpaid distributions thereon to the date of redemption. The written notice of the General Partner shall state (i) the number of Excess Units held by such holder, (ii) the Redemption Price of the Excess Units, (iii) the date on which such Excess Units shall be redeemed, which date shall be no later than ninety (90) days following the receipt of the Exchange Notice, except as provided below, (iv) the place or places where such Excess Units are to be surrendered for payment of the Redemption Price, (iv) that distributions on the Excess Units will cease to accrue on such redemption date, and (v) that payment of the Redemption Price will be made upon presentation and surrender of such Excess Units. The redemption of Series C Preferred Units described in this Section 2.G.(iii) shall be subject to the provisions of Section 2.F.(ii) and (iii); provided, however, that the term "Redemption Price" in such Sections shall be read to mean the original Capital Contribution per Series C Preferred Unit being redeemed plus all accrued and unpaid distributions to the redemption date. The Partnership may at its option delay the payment of cash to effect redemption of Series C Preferred Units pursuant to this Section 2.G.(iii) for up to two hundred seventy (270) days following the end of the 90 day period set forth in clause (iii) above of this Section 2.G.(iii), provided that during such two hundred seventy (270) day period, the Corporation shall pay, in addition to the Redemption Price of the Excess Units and any accrued and unpaid distribution with respect to the Excess Units, to the holder of such Excess Units an amount equal to 1 1/4% per annum of the original Capital Contribution per such Excess Unit from the end of such 90 day period through the date of redemption. (iv) Any exchange shall be exercised pursuant to a notice of exchange (the "Exchange Notice") delivered to the General Partner by the holder who is exercising such 7 exchange right, by (i) fax, and (ii) by mail, postage prepaid. The exchange of Series C Preferred Units, or a specified portion thereof, may be effected after the fifteenth (15th) Business Day following receipt by the General Partner of the Exchange Notice by delivering certificates, if any, representing such Series C Preferred Units to be exchanged together with written notice of exchange and a proper assignment of such Series C Preferred Units to the office of the Company maintained for such purpose. Currently, such office is Essex Property Trust, Inc., 925 E. Meadow Drive, Palo Alto, California 94303. (v) Each exchange will be deemed to have been effected immediately prior to the close of business on the date on which such Series C Preferred Units to be exchanged (together with all required documentation) shall have been surrendered and notice shall have been received by the Company as aforesaid and the exchange shall be at the Exchange Price in effect at such time and on such date. The right to exchange Series C Preferred Units called for redemption will terminate upon receipt by the holder of such Series C Preferred Units of a notice of redemption from the Partnership that pertains to such Series C Preferred Units. (vi) In the event of an exchange of Series C Preferred Units into shares of Series C Preferred Stock, an amount equal to the accrued and unpaid distributions to the date of exchange on any Series C Preferred Units tendered for exchange shall accrue on the shares of the Series C Preferred Stock into which such Series C Preferred Units are exchanged and the Series C Preferred Units so exchanged shall no longer be outstanding. (vii) Fractional shares of Series C Preferred Stock are not to be issued upon exchange but, in lieu thereof, the Company will pay a cash adjustment based upon the fair market value of the Series C Preferred Stock on the day prior to the exchange date as determined in good faith by the Board of Directors of the Company. H. Exchange Price Adjustments. -------------------------- (i) The Exchange Price is subject to adjustment upon certain events, including (i) subdivisions, combinations and reclassification of the Series C Preferred Stock, and (ii) distributions to all holders of Series C Preferred Stock of evidences of indebtedness of the Company or assets (including securities, but excluding dividends and distributions paid in cash out of equity applicable to the Series C Preferred Stock). In addition to the foregoing adjustments, the Company will be permitted to make such reduction in the Exchange Price as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights will not be taxable to the holders of the Common Stock. (ii) In case the Company shall be a party to any transaction (including, without limitation, a merger, consolidation, statutory share exchange, tender offer for all or substantially all of the Company's capital stock or sale of all or substantially all of the Company's assets), in each case as a result of which the Series C Preferred Stock will be converted into the right to receive shares of capital stock, other securities or other property (including cash or any combination thereof), each Series C Preferred Unit, will thereafter be exchangeable into the kind and amount of shares of capital stock and other securities and property receivable (including cash or any combination thereof) upon the consummation of such transaction by a holder of that number of shares of Series C Preferred Stock or fraction thereof into which one Series C 8 Preferred Unit was exchangeable immediately prior to such transaction. The Company may not become a party to any such transaction unless the terms thereof are consistent with the foregoing. (iii) No adjustment of the Exchange Price is required to be made in any case until cumulative adjustments amount to 1% or more of the Exchange Price. Any adjustments not so required to be made will be carried forward and taken into subsequent adjustments. I. Voting Rights. -------------- (i) Holders of the Series C Preferred Units will not have any voting rights or rights to consent to any matters, except as set forth below. (ii) So long as any Series C Preferred Units remains outstanding, the Partnership shall not, without the affirmative vote of the holders of at least two-thirds (2/3) of the Series C Preferred Units outstanding at the time (i) authorize or create, or increase the authorized or issued amount of, any class or series of Partnership Interests ranking prior to the Series C Preferred Units with respect to payment of distributions or rights upon liquidation, dissolution or winding-up or reclassify any Partnership Interests of the Partnership into any such Partnership Interest, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such Partnership Interest, (ii) amend, alter or repeal the provisions of the Partnership Agreement, whether by merger, consolidation or otherwise, that would materially and adversely affect the powers, special rights, preferences, privileges or voting power of the Series C Preferred Units or the holders thereof; provided that any increase in the amount of Partnership Interests or the creation or issuance of any other class or series of Partnership Interests ranking junior to or on a parity with the Series C Preferred Units with respect to payment of distributions and the distribution of assets upon liquidation, dissolution or winding-up shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers, or (iii) consolidate, amalgamate, merge into or with, or convey, transfer or lease its assets substantially as an entirety to, any corporation or other entity, unless (a) the Partnership is the surviving entity and the Series C Preferred Units remain outstanding with the terms thereof unchanged, (b) the resulting, surviving or transferee entity is a partnership, limited liability company or other pass- through entity organized under the laws of any state and substitutes the Series C Preferred Units for other interests in such entity having substantially the same terms and rights as the Series C Preferred Units, including with respect to distributions, voting rights and rights upon liquidation, dissolution or winding-up, or (c) such merger, consolidation, amalgamation or asset transfer does not adversely affect the powers, special rights, preferences and privileges of the holders of the Series C Preferred Units in any material respect. However, the Partnership may create additional classes and series of Parity Units and Junior Units, increase the authorized number of Parity Units and Junior Units and issue additional classes and series of Parity Units and Junior Units without the consent of any holders of Series C Preferred Units. J. Restrictions on Ownership and Transfer. -------------------------------------- Each holder of the Series C Preferred Units shall be permitted to transfer its units if such transfer is in accordance with the provisions and restrictions on Transfers of Limited Partnership Interests set forth in Sections 9.2 and 9.3(b) of the Partnership Agreement; provided, however, that upon any Transfer by a holder of Series C Preferred Units to any Controlled Entity, 9 such transferee shall, subject to compliance with Section 9.3 and clauses (A), (B) and (D) of Section 9.2 of the Partnership Agreement, be admitted as a Substituted Limited Partner. 10 EX-10.9 5 TERMINATION OF NON-COMPETE AGREEMENT EXHIBIT 10.9 TERMINATION OF NON-COMPETE AGREEMENT THIS TERMINATION OF NON-COMPETE AGREEMENT (this "Agreement") is hereby made and entered into as of this day ____ day of February, 1999, by and between George M. Marcus, for both himself and his Affiliated Companies (as defined below) (collectively, "Marcus"), and Essex Property Trust, Inc., a Maryland corporation, and its Affiliated Companies (collectively, "Essex"). RECITALS WHEREAS, Marcus previously entered into a certain Non-Compete Agreement dated June 13, 1994, for the benefit of Essex (the "Non-Compete Agreement"). WHEREAS, Marcus and Essex, subject to the terms and conditions provided for herein, wish to terminate the Non-Compete Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. The Recitals set forth above are true and correct. 2. Subject to the terms and conditions provided for in this Agreement, the Non-Compete Agreement is hereby terminated in its entirety. 3. Marcus hereby agrees, on behalf of both himself and all of his Affiliated Companies, that if Marcus and/or any of his Affiliated Companies enters into, whether directly or indirectly, a contract or agreement ("Subject Contract") providing for the acquisition or development of any residential rental properties containing, in the aggregate, more than one hundred (100) residential rental units, then within ten (10) business days thereafter Marcus shall give (or shall cause the respective Affiliated Company to give) written notice to Essex of such Subject Contract and the essential terms thereof ("Notice of Contract"). If Essex, within forty eight (48) hours following receipt of the Notice of Contract, delivers to Marcus (i) reasonable evidence that prior to the date of the Subject Contract Essex had submitted to the other party to the Subject Contract a bona fide good faith written offer respecting the property that is the subject of the Subject Contract, and (ii) written notice of the election by Essex to take an assignment of the Subject Contract, then, within ten (10) business days following receipt by Marcus of the items described in clauses (i) and (ii) of this sentence, Marcus shall assign (or shall cause the respective Affiliated Company to assign) to Essex or its designee, the Subject Contract. Such assignment shall be without compensation of any kind or nature being paid to either Marcus, any such Affiliated Company or to any other person or entity for or in connection with such assignment. Each Notice of Contract shall be in writing, and delivered to Essex at 925 East Meadow Drive, Palo Alto, California 94303-4233, Attention: Keith R. Guericke, via telecopy at (650) 858-0139, with a copy to be sent via regular mail. Each notice to Marcus shall be in writing, and delivered to Marcus at 777 California Avenue, Palo Alto, California 94304, via telecopy at (650) 424-9136, with a copy sent via regular mail. The term "Affiliated Company" is hereby defined to mean (i) any person or entity as to which Essex (and/or Essex Portfolio, L.P., a California limited partnership ("EPLP") or Marcus, as the case may be, owns, whether directly or indirectly, a twenty percent (20%) or greater interest in, (ii) any person or entity which owns, whether directly or indirectly, a twenty percent (20%) or greater interest in Essex (and/or EPLP) or Marcus, as the case may be, (iii) any person or entity which as the ability to control the decision making process of Essex (and/or EPLP) or Marcus, as the case may be, (iv) any person or entity over which Essex (and/or EPLP) or Marcus, as the case may be, has the ability to control the decision making process of, or (v) for Essex, EPLP. 4. This Agreement shall be governed by and construed under the laws of the State of California. 5. This Agreement may be executed in two of more counterparts, each such counterpart being deemed to be an original, but all of which counterparts taken together being deemed to be one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. ESSEX: ESSEX PROPERTY TRUST, INC. a Maryland corporation By: /s/ Keith R. Guericke -------------------------- Its: President -------------------------- MARCUS: ------------------------------- George M. Marcus EX-12.1 6 SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS
Exhibit 12.1 ESSEX PROPERTY TRUST, INC. Schedule of computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (Dollars in thousands, except ratios) Years ended December 31 ------------------------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ----------------- Earnings: Income before minority interests and extraordinary item $ 40,600 $ 34,146 $ 14,970 Interest expense 19,374 12,659 11,442 Amortization of deferred financing costs 718 509 639 ---------------- ---------------- ----------------- Total earnings $ 60,692 $ 47,314 $ 27,051 ================ ================= ================= Fixed charges: Interest expense $ 19,374 $ 12,659 $ 11,442 Convertible preferred stock dividends 3,500 2,681 635 Perpetual preferred unit distributions 5,595 - - Amortization of deferred financing costs 718 509 639 Capitalized interest 3,494 1,276 281 ---------------- ---------------- ----------------- Total fixed charges and preferred stock dividends $ 32,681 $ 17,125 $ 12,997 ================ ================= ================= Ratio of earnings to fixed charges (excluding preferred stock dividends) 2.57X 3.28X 2.19X ================ ================= ================= Ratio of earnings to combined fixed charges and preferred dividends 1.86X 2.76X 2.08X ================ ================= =================
EX-21.1 7 LIST OF SUBSIDIARIES OF ESSEX PROPERTY TRUST EXHIBIT 21.1 LIST OF SUBSIDIARIES 1. Essex Portfolio, L.P., a California limited partnership 2. Essex Management Corporation, a California corporation 3. Essex-Palisades Facilitator, a California limited partnership 4. Essex Sunpointe Limited, a California limited partnership 5. Essex Washington Interest Partners, a California general partnership 6. Essex San Ramon Partners L.P., a California limited partnership 7. Essex Bristol Partners, L.P., a California limited partnership 8. Essex Fidelity I Corporation, a California corporation 9. Essex Camarillo Corporation, a California corporation 10. Essex Camarillo L.P., a California limited partnership 11. Essex Meadowood Corporation, a California corporation 12. Essex Bunker Hill Corporation, a California corporation 13. Essex Meadowood, L.P., a California limited partnership 14. Essex Treetops Corporation, a California corporation 15. Essex Treetops, L.P., a California limited partnership 16. Essex Bluffs, L.P., a California limited partnership 17. Essex Huntington Breakers, L.P., a California limited partnership 18. Essex Stonehedge, L.P., a California limited partnership 19. Essex Bridle Trails, L.P., a California limited partnership 20. Essex Spring Lake, L.P., a California limited partnership 21. Essex Maple Leaf, L.P., a California limited partnership 22. Essex Riverfront, L.P., a California limited partnership 23. Essex Casa Mango, L.P., a California limited partnership 24. Essex Bunker Hill, L.P., a California limited partnership 25. Essex Westwood, L.P. a California limited partnership
EX-23.1 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Essex Property Trust, Inc.; We consent to incorporation by reference in the registration statement (No. 333-68503) on Form S-3, the registration statement (No. 333-44467) on Form S- 3, the registration statement (No. 333-21989) on Form S-3, and the registration statement (No. 33-84830) on Form S-8 of Essex Property Trust, Inc. of our report dated January 30, 1999, relating to the consolidated balance sheets of Essex Property Trust, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows of Essex Property Trust, Inc. and subsidiaries for each of the years in the three-year period ended December 31, 1998. and the related financial statement schedule, which report appears in the December 31, 1998 annual report on Form 10-K of Essex Property Trust, Inc. KPMG LLP San Francisco, California March 31, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ESSEX PROPERTY TRUST, INC. REPORT FOR THE YEAR ENDED DECEMBER 31, 1998. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 18,080 0 29,259 0 0 42,217 943,177 77,789 931,796 45,047 361,515 0 1 2 389,797 931,796 0 125,268 0 59,881 13,319 930 20,092 31,046 0 31,046 0 (4,718) 0 26,328 1.37 1.36
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