-----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, GRdJRGjcj1BiuaD8jJKwJiSO/wvdTrwFpUtvnGME5Q8kATytdNYGRMrgnMyuGsOt /SkA5GMKFG/2fqRpf6ZPbQ== 0001012870-99-002780.txt : 19990816 0001012870-99-002780.hdr.sgml : 19990816 ACCESSION NUMBER: 0001012870-99-002780 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX PROPERTY TRUST INC CENTRAL INDEX KEY: 0000920522 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 770369576 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13106 FILM NUMBER: 99686836 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-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No. 1-13106 ESSEX PROPERTY TRUST, INC. (Exact name of Registrant as specified in its Charter) Maryland 77-0369576 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 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) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months for such shorter period that the Registrant was required to file such report, and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: 18,029,851 shares of Common Stock as of August 11, 1999 TABLE OF CONTENTS FORM 10-Q Part I Page No. -------- Item 1 Financial Statements (Unaudited) 3 Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 4 Consolidated Statements of Operations for the three months ended June 30, 1999 and 1998 5 Consolidated Statements of Operations for the six months ended June 30, 1999 and 1998 6 Consolidated Statements of Stockholders' Equity for the six months ended June 30, 1999 and the year ended December 31, 1998 7 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 8 Notes to Consolidated Financial Statements 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3 Quantitative and Qualitative Disclosure About Market Risk 21 Part II Item 2 Changes in Securities and Use of Proceeds 23 Item 6 Exhibits and Reports on Form 8-K 23 Signatures 24 2 Part I Financial Information - ------ --------------------- Item 1: Financial Statements (Unaudited) -------------------------------- "Essex" or the "Company" means Essex Property Trust, Inc., a real estate investment trust incorporated in the State of Maryland, or where the context otherwise requires, Essex Portfolio, L.P., a limited partnership in which Essex Property Trust, Inc. is the sole general partner. The information furnished in the accompanying consolidated unaudited balance sheets, statements of operations, stockholders' equity and cash flows of the Company reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned financial statements for the interim periods. The accompanying unaudited financial statements should be read in conjunction with the notes to such financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 3 ESSEX PROPERTY TRUST, INC. Consolidated Balance Sheets (Unaudited) (Dollars in thousands, except per share amounts)
June 30, December 31, Assets 1999 1998 ------ ------------- -------------- Real estate: Rental properties: Land and land improvements $ 233,060 $ 219,115 Buildings and improvements 716,517 670,849 ------------- ------------- 949,577 889,964 Less accumulated depreciation (90,030) (77,789) ------------- ------------- 859,547 812,175 Investments 11,895 10,590 Real estate under development 93,335 53,213 ------------- ------------- 964,777 875,978 Cash and cash equivalents - unrestricted 1,795 2,548 Restricted cash 16,601 15,532 Notes and other related party receivables 14,811 10,450 Notes and other receivables 10,414 18,809 Prepaid expenses and other assets 2,726 3,444 Deferred charges, net 5,701 5,035 ------------- ------------- $ 1,016,825 $ 931,796 ============= ============= Liabilities and Stockholders' Equity ------------------------------------ Mortgage notes payable $ 380,035 $ 325,822 Lines of credit 60,450 35,693 Accounts payable and accrued liabilities 36,181 28,601 Dividends payable 12,346 11,145 Deferred gain 5,002 5,002 Other liabilities 5,773 5,301 ------------- ------------- Total liabilities 499,787 411,564 Minority interests 136,069 130,432 Stockholders' equity: 8.75% Convertible Preferred Stock, Series 1996A: $.0001 par value, 184,687 and 1,600,000 authorized, 184,687 1 1 and 1,600,000 issued and outstanding Common stock, $.0001 par value, 660,697,491 and 659,282,178 authorized, 18,022,802 and 16,640,616 issued and outstanding 2 2 7.875% Series B cumulative redeemable preferred stock: $.0001 par value, 2,000,000 shares authorized and no shares issued and outstanding - - 9.125% Series C cumulative redeemable preferred stock: $.0001 par value, 500,000 shares authorized and no shares issued and outstanding - - Excess stock, $.0001 par value 330,000,000 shares authorized and no shares issued and outstanding - - Additional paid-in capital 424,649 431,278 Accumulated deficit (43,683) (41,481) ------------- ------------- Total stockholders' equity 380,969 389,800 ------------- ------------- $ 1,016,825 $ 931,796 ============= =============
See accompanying notes to the consolidated unaudited financial statements. 4 ESSEX PROPERTY TRUST, INC. Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts)
Three months ended ------------------------------------------------- June 30, June 30, 1999 1998 ---------------------- --------------------- Revenues: Rental $ 33,074 $ 30,273 Other property 789 668 ---------------------- --------------------- Total property 33,863 30,941 Interest and other 1,035 743 ---------------------- --------------------- Total revenues 34,898 31,684 ---------------------- --------------------- Expenses: Property operating expenses Maintenance and repairs 2,292 2,460 Real estate taxes 2,443 2,231 Utilities 2,013 1,891 Administrative 2,356 2,230 Advertising 492 470 Insurance 221 335 Depreciation and amortization 6,247 5,632 ---------------------- --------------------- 16,064 15,249 ---------------------- --------------------- Interest 5,250 5,217 Amortization of deferred financing costs 138 197 General and administrative 1,111 1,016 ---------------------- --------------------- Total expenses 22,563 21,679 ---------------------- --------------------- Income before minority interests and 12,335 10,005 extraordinary item Minority interests (3,369) (2,457) ---------------------- --------------------- Income before extraordinary item 8,966 7,548 Extraordinary item: Loss on early extinguishment of debt (90) - ---------------------- --------------------- Net income 8,876 7,548 Preferred stock dividends (236) (875) ---------------------- --------------------- Net income available to common stockholders $ 8,640 $ 6,673 ====================== ===================== Per share data: Basic: Income before extraordinary item $ 0.51 $ 0.40 Extraordinary item - debt extinguishment (0.01) - ---------------------- --------------------- Net income $ 0.50 $ 0.40 ====================== ===================== Weighted average number of shares outstanding during the period 17,238,910 16,632,561 ====================== ===================== Diluted: Income before extraordinary item $ 0.49 $ 0.40 Extraordinary item - debt extinguishment - - ---------------------- --------------------- Net income $ 0.49 $ 0.40 ====================== ===================== Weighted average number of shares outstanding during the period 18,447,710 16,847,830 ====================== ===================== Dividend per share $ 0.55 $ 0.50 ====================== =====================
See accompanying notes to the consolidated unaudited financial statements. 5 ESSEX PROPERTY TRUST, INC. Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts)
Six months ended ------------------------------------------------ June 30, June 30, 1999 1998 ---------------------- -------------------- Revenues: Rental $ 64,976 $ 56,803 Other property 1,485 1,189 ---------------------- -------------------- Total property 66,461 57,992 Interest and other 2,328 1,528 ---------------------- -------------------- Total revenues 68,789 59,520 ---------------------- -------------------- Expenses: Property operating expenses Maintenance and repairs 4,386 4,728 Real estate taxes 4,960 4,418 Utilities 4,008 3,608 Administrative 5,099 4,133 Advertising 1,001 848 Insurance 443 635 Depreciation and amortization 12,292 10,301 ---------------------- -------------------- 32,189 28,671 ---------------------- -------------------- Interest 10,184 9,014 Amortization of deferred financing costs 268 341 General and administrative 2,122 1,834 ---------------------- -------------------- Total expenses 44,763 39,860 ---------------------- -------------------- Income before minority interests and 24,026 19,660 extraordinary item Minority interests (6,607) (4,187) ---------------------- -------------------- Income before extraordinary item 17,419 15,473 Extraordinary item: Loss on early extinguishment of debt (90) - ---------------------- -------------------- Net income 17,329 15,473 Preferred stock dividends (1,067) (1,750) ---------------------- -------------------- Net income available to common stockholders $ 16,262 $ 13,723 ====================== ==================== Per share data: Basic: Income before extraordinary item $ 0.96 $ 0.83 Extraordinary item - debt extinguishment (0.01) - ---------------------- -------------------- Net income $ 0.95 $ 0.83 ====================== ==================== Weighted average number of shares outstanding during the period 16,988,665 16,625,413 ====================== ==================== Diluted: Income before extraordinary item $ 0.94 $ 0.81 Extraordinary item - debt extinguishment - - ---------------------- -------------------- Net income $ 0.94 $ 0.81 ====================== ==================== Weighted average number of shares outstanding during the period 18,527,629 16,852,987 ====================== ==================== Dividend per share $ 1.05 $ 0.95 ====================== ====================
See accompanying notes to the consolidated unaudited financial statements. 6 ESSEX PROPERTY TRUST, INC. Consolidated Statements of Stockholders' Equity For the six months ended June 30, 1999 and the year ended December 31, 1998 (Unaudited) (Dollars and shares in thousands)
Preferred stock Common stock Additional ------------------- ------------------- paid-in Accumulated Shares Amount Shares Amount capital deficit Total --------- --------- -------- ---------- ------------- ----------- ------------ 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 Shares issued from conversion of Convertible Preferred Stock (1,415) - 1,618 - - - - Shares purchased by Operating Partnership - - (257) - (6,991) - (6,991) Net proceeds from options exercised - - 20 - 362 - 362 Net income - - - - - 17,329 17,329 Dividends declared - - - - - (19,531) (19,531) --------------------------------------- ------------- ----------- ------------ Balances at June 30, 1999 185 $ 1 18,022$ 2 $ 424,649 $ (43,683) $ 380,969 ======================================= ============= =========== ============
See accompanying notes to the consolidated unaudited financial statements 7 ESSEX PROPERTY TRUST, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
Six months ended ------------------------------------------------ June 30, June 30, 1999 1998 ---------------------- -------------------- Net cash provided by operating activities: $ 37,825 $ 28,223 ---------------------- -------------------- Cash flows from investing activities: Additions to real estate (29,557) (126,632) Increase in restricted cash (1,069) (8,886) Dispositions of real estate - 15,842 Additions to related party notes and other receivables (4,361) (2,696) Repayment of related party notes and other receivables 8,493 1,147 Additions to real estate under development (41,370) (10,987) Distributions from investments in corporations and limited partnerships 762 461 ---------------------- -------------------- Net cash used in investing activities (67,102) (131,751) ---------------------- -------------------- Cash flows from financing activities: Proceeds from mortgage and other notes payable and lines of credit 117,650 150,347 Repayment of mortgage and other notes payable and lines of credit (54,480) (102,848) Additions to deferred charges (934) (1,882) Payment of offering related costs (314) (110) Net proceeds from preferred units sales - 77,775 Net proceeds from stock options exercised and shares issued through dividend reinvestment plan 362 339 Shares purchased by Operating Partnership (6,991) - Distributions to minority interest/partners (6,776) (2,806) Redemption of operating partnership units (1,438) - Dividends paid (18,555) (16,596) ---------------------- -------------------- Net cash provided by financing activities 28,524 104,219 ---------------------- -------------------- Net decrease (increase) in cash and cash equivalents (753) 691 Cash and cash equivalents at beginning of period 2,548 4,282 ---------------------- -------------------- Cash and cash equivalents at end of period $ 1,795 $ 4,973 ====================== ==================== Supplemental disclosure of cash flow information: Cash paid for interest, net of $2,682 and $1,775 capitalized $ 7,193 $ 8,236 ====================== ==================== Supplemental disclosure of non-cash investing and Financing activities: Mortgage notes payable assumed in connection with purchase of real estate $ 15,800 $ 18,443 ====================== ==================== Contribution of Operating Partnership Units in connection with the purchase of real estate $ 7,469 $ - ====================== ==================== Dividends payable $ 12,346 $ 11,799 ====================== ====================
See accompanying notes to consolidated unaudited financial statements. 8 Notes to Consolidated Financial Statements June 30, 1999 and 1998 (Unaudited) (Dollars in thousands, except for per share and per unit amounts) (1) Organization and Basis of Presentation -------------------------------------- The unaudited consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 1998. The unaudited consolidated financial statements for the three and six months ended June 30, 1999 and 1998 include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating assets of the Company). The Company is the sole general partner in the Operating Partnership, owning an 89.6%, 89.9% and 89.9% general partnership interest as of June 30, 1999, December 31, 1998 and June 30, 1998, respectively. Currently, the Company operates and has ownership interests in 64 multifamily properties (containing 12,974 units) and five commercial properties (with approximately 290,000 square feet) (collectively, the "Properties"). The Properties are located in Northern California (the San Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and San Diego counties), and the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. (2) Significant Transactions ------------------------ (A) Acquisition Activities --------------------------- On April 30, 1999, the Company purchased Glenbrook and Euclid Apartments, together a 169-unit apartment community located in Pasadena, California for an aggregate contract price of $13,600. These communities feature secure parking garages, controlled security access, and pool areas. In connection with this transaction, the Company obtained a $4,400, 7.0% fixed rate, secured loan which matures in April 2009. Also, the Company assumed a $2,900, 7.6% fixed rate, secured loan which matures in July 2007. A portion of the amount paid for the properties was funded through the issuance of units of limited partnership interest ("Units") in the Operating Partnership. Any time after one year from the date of issuance of the Units, the holders of the Units can require the Operating Partnership to redeem the Units for either cash, or at the Company's option an aggregate of 273,912 shares of the Company's common stock. This private placement of Units was completed pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. On June 4, 1999, the Company purchased a leasehold interest in Fairways Apartments, with a remaining term of 28 years. Fairways Apartments is a 74- unit apartment community, located in Newport Beach, California and was purchased for a contract price of $7,500. This community features vaulted ceilings, two-car garages, spa and pool areas. On June 11, 1999, the Company purchased Columbus and Loraine Apartments, together a 215-unit apartment community located in Glendale, California for an aggregate contract price of $21,100. In connection with this transaction, the Company assumed a $4,500, 7.3% fixed rate, secured loan which matures in December 2007. Also, the Company assumed a $8,400, 7.8% fixed rate, secured loan which matures in August 2007. These communities feature fitness centers, pool and spa areas and fireplaces. These second quarter 1999 acquisitions were funded with the proceeds from the mortgage loans, assumed loans and Operating Partnership interests as indicated above, and the Company's line of credit. 9 (B) Development Activities --------------------------- The Company is developing seven multifamily residential projects, which are anticipated to contain an aggregate of 1,333 multifamily units. As of June 30, 1999, construction is complete on 100% of the units on two of these development projects. The remaining five projects are anticipated to be substantially completed by the year ended December 31, 1999. 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 June 30, 1999, the Company is committed to fund approximately $71,000, representing the estimated cost to complete these projects. One project which was previously reported as a development project achieved stabilized occupancy in the third quarter of 1999. The 245-unit apartment community, Park Hill @ Issaquah, located in Issaquah, Washington, is owned by a joint venture in which the Company owns a 45% interest and will receive a 12% preferred return on the equity it has invested. In addition, the Company has an option to purchase the property five years subsequent to completion. The community is located amid wooded hillsides and has convenient freeway access. The community also features spacious units, direct access garages, and other amenities including a video theatre, pool and spa, and exercise room. The Company's interest in the joint venture is reported as a component of investments in the accompanying consolidated balance sheets as of June 30, 1999. (C) Equity Transactions ------------------------ In the first six months of 1999, WBP I Holding Corp. (formerly known as Tiger/Westbrook Real Estate Fund, L.P.), and WBP II Holding Corp. (formerly known as Tiger/Westbrook Real Estate Co-Investment Partnership, L.P.) (collectively, Tiger/Westbrook) converted 1,415,313 shares of its ownership in the Company's 8.75% Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock") into 1,617,501 shares of Common Stock. As of June 30, 1999, Tiger Westbrook owned 184,687 shares of Convertible Preferred Stock. In March 1999, the Company's Board of Directors authorized the Operating Partnership to purchase up to 500,000 shares of the Company's Common Stock, or approximately 3% of the issued and outstanding Common Stock of the Company, at a total price per share not to exceed $29.00 in the open market or through negotiated or block transactions. In April 1999, the Operating Partnership purchased 257,000 shares of the Company's outstanding Common Stock. The weighted average price paid for the shares was $27.14. The amount paid for the shares is reflected as a reduction of the issued and outstanding common stock and additional-paid-in-capital in the accompanying consolidated balance sheets as of June 30, 1999. (D) Debt Related Transactions ------------------------------ On June 18, 1999, the Company replaced its credit enhancement agreement on $16,000 of its variable rate secured multifamily housing mortgage revenue bonds. In connection with this transaction, the Company obtained an $7,500, 7.7% fixed rate, secured loan which matures in June 2009. The Company wrote- off $90 of costs related to the previous credit enhancement agreement which is presented as a loss on early extinguishment of debt in the accompanying consolidated statements of operations. The effective variable interest rate of the $16,000 bonds was reduced from 6.9% to 4.8%. (E) Other- Earthquake Insurance -------------------------------- On June 13, 1999, the Company renewed its earthquake insurance policy. The insurance coverage is unchanged from the prior year and provides for an aggregate limit of $40,000, payable upon a covered loss in excess of a $7,500 self-insured retention amount. The insurance also provides for a per building deductible of 5% in California and 2% in Oregon and Washington. 10 Notes to Consolidated Financial Statements June 30, 1999 and 1998 (Unaudited) (Dollars in thousands, except for per share and per unit amounts) (F) Subsequent Event --------------------- On July 28, 1999, the Operating Partnership completed the sale of 2,000,000 units of its 9.30% Series D Cumulative Redeemable Preferred Units to two related institutional investors in a private placement, at a price of $25.00 per unit. The net proceeds from this sale were approximately $49,000. (3) Related Party Transactions -------------------------- All general and administrative expenses of the Company and Essex Management Corporation, an unconsolidated preferred stock subsidiary of the Company ("EMC") are initially borne by the Company, with a portion subsequently allocated to EMC. Expenses allocated to EMC for the three months ended June 30, 1999 and 1998 totaled $110 and $61, respectively, and $212 and $137 for the six months ended June 30, 1999 and 1998, respectively. The expenses 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 $247 and $229 for the three months ended June 30, 1999 and 1998, respectively, and $412 and $430 for the six months ending June 30, 1999 and 1998, respectively. Other income includes interest income of $86 and $330 for the three months ended June 30, 1999 and 1998, respectively, and $172 and $535 for the six months ended June 30, 1999 and 1998, respectively. This interest income was earned principally on the notes receivable from related party partnerships in which the Company owns an ownership interest ("Joint Ventures"). Other income also includes management fee income and investment income earned by the Company from its Joint Ventures of $150 and $100 for the three months ended June 30, 1999 and 1998, respectively and $310 and $205 for the six months ended June 30, 1999 and 1998, respectively. Also included in other income is income earned from operations of the Company's Joint Venture development projects of $234 and $419 for the three and six months ended June 30, 1999, respectively. No income was earned from operations of the Company's Joint Venture development projects in 1998.
Notes and other related party receivables as of June 30, 1999 and December 31, 1998 consist of the following: June 30, December 31, -------- ------------ Notes receivable from Joint Ventures: 1999 1998 ---- ---- Note receivable from Highridge Apartments secured, bearing interest at 9.4%, due March 2008 $ 1,047 $ 1,047 Note receivable from Fidelity I, secured, bearing interest at 8%, due on demand 4,843 1,358 Note receivable from Fidelity I and JSV, secured, bearing interest at 9.5-10%, due 2015 800 800 Note receivable from Highridge, non-interest bearing, due on demand 3,199 2,928 Note receivable from Portland Shopping Centers, non-interest bearing, due on demand 1,209 1,209 Note receivable from Anchor Village, non-interest bearing, due on demand 1,147 933 Other related party receivables: Loans to officers, bearing interest at 8%, due April 2006 500 500 Other related party receivables, substantially due on demand 2,066 1,675 ------- ------- $14,811 $10,450 ======= =======
11 Notes to Consolidated Financial Statements June 30, 1999 and 1998 (Unaudited) (Dollars in thousands, except for per share and per unit amounts) Other related party receivables consist primarily of accrued interest income on related party notes receivables and loans to officers, advances and accrued management fees from joint venture investees and unreimbursed expenses due from EMC. (4) Forward Treasury Contracts: --------------------------- The Company has four forward treasury contracts for an aggregate notional amount of $60,000, locking the 10 year treasury rate at between 6.15% - 6.26%. These contracts are to limit the interest rate exposure on identified future debt financing requirements relating to the multifamily development projects and a maturity of an $18,520 fixed rate loan. These contracts will be settled no later than June 2000. If the contracts were settled as of June 30, 1999, the Company would be obligated to pay approximately $899. (5) 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 2001, the effective date of SFAS 133, as amended. Had SFAS 133 been implemented in 1999, a charge to earnings of $899 relating to treasury contracts that do not qualify as anticipatory hedges under SFAS 133 would have been recorded for the six months ended June 30, 1999. Such charge would be considered a non-recurring item and therefore would not effect the Company's calculation of funds from operations. (6) Segment Information: -------------------- 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 property revenues and net operating income included in the following schedule consists of revenue generated from the Company's commercial properties. 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 revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the periods presented. Three months ended June 30, 1999 June 30, 1998 ------------------------------------------------------------------------- Revenues Northern California $11,617 $10,509 Southern California 13,301 11,717 Pacific Northwest 8,373 8,096 ------- ------- Total segment revenues 33,291 30,322 Non-segment property revenues 572 618 Interest and other income 1,035 744 ------- ------- Total revenues $34,898 $31,684 ======= ======= Net operating income: Northern California $ 8,957 $ 7,898 Southern California 9,130 7,626 Pacific Northwest 5,695 5,357 ------- ------- Total segment net operating income 23,782 20,881 Non-segment net operating income 264 442 Interest and other income 1,035 744 Depreciation and amortization (6,247) (5,632) Interest (5,250) (5,217) Amortization of deferred financing costs (138) (197) General and administrative (1,111) (1,016) ------- ------- Income before minority interests and extraordinary item $12,335 $10,005 ======= ======= 12 Notes to Consolidated Financial Statements June 30, 1999 and 1998 (Unaudited) (Dollars in thousands, except for per share and per unit amounts) (6) Segment Information (continued): --------------------------------
Six months ended June 30, 1999 June 30, 1998 ------------------------------------------------------------------------------- Revenues Northern California $ 22,905 $ 19,751 Southern California 25,810 20,860 Pacific Northwest 16,489 15,863 ---------- -------- Total segment revenues 65,204 56,474 Non-segment property revenues 1,257 1,518 Interest and other income 2,328 1,528 ---------- -------- Total revenues $ 68,789 $ 59,520 ========== ======== Net operating income: Northern California $ 17,520 $ 14,726 Southern California 17,462 13,541 Pacific Northwest 11,070 10,282 ---------- -------- Total segment net operating income 46,052 38,549 Non-segment net operating income 512 1,073 Interest and other income 2,328 1,528 Depreciation and amortization (12,292) (10,301) Interest (10,184) (9,014) Amortization of deferred financing costs (268) (341) General and administrative (2,122) (1,834) ---------- -------- Income before minority interests and extraordinary item $ 24,026 $ 19,660 ========== ======== June 30, 1999 December 31, 1998 ------------------------------------------------------------------------------ Assets: Northern California $ 239,452 $241,676 Southern California 405,763 355,077 Pacific Northwest 196,679 198,761 ---------- -------- Total segment net real estate assets 841,894 795,514 Non-segment net real estate assets 17,653 16,661 ---------- -------- Net real estate assets 859,547 812,175 Non-segment assets 157,278 119,621 ---------- -------- Total assets $1,016,825 $931,796 ========== ========
13 Item 2: Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------- Results of Operations --------------------- The following discussion is based primarily on the consolidated unaudited financial statements of Essex Property Trust, Inc. ("Essex" or the "Company") for the three months ended June 30, 1999 and 1998 and for the six months ended June 30, 1999 and 1998. This information should be read in conjunction with the accompanying consolidated unaudited financial statements and notes thereto. These financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results and all such adjustments are of a normal recurring nature. Substantially all of the assets of the Company are held by, and substantially all operations were conducted through, Essex Portfolio, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership and, as of June 30, 1999, December 31, 1998 and June 30, 1998, owned an 89.6%, 89.9% and 89.9% 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. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in the quarterly report on Form 10-Q which are not historical facts may be considered forward looking statements within the meaning of 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 non-revenue generating capital expenditures for the year ended December 31, 1999, potential acquisitions and developments, the anticipated performance of existing properties, future acquisitions and developments and statements regarding 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 insufficient to provide for dividend payments in accordance with REIT requirements, that the actual non-revenue generating capital expenditures 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 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and those other risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (the "SEC") 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. General Background The Company's property revenues are generated primarily from multifamily property operations, which accounted for 98% of its property revenues for the three months ended June 30, 1999 and 1998 and 98% and 97% of its property revenues for the six months ended June 30, 1999 and 1998, respectively. The Company's multifamily properties (the "Properties") are located in Northern California (the San Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and San Diego counties) and the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas). The average occupancy levels of the Company's portfolio has exceeded 95% for the last five years. 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 non-voting Preferred Stock. Executives of the Company own 100% of EMC's 1,000 shares of Common Stock. 14 Since the Company's initial public offering (the "IPO") in June 1994, the Company has acquired ownership interests in 54 multifamily residential properties and its headquarters building. Of the multifamily properties acquired since the IPO, 10 are located in Northern California, 26 are located in Southern California, 17 are located in the Seattle, Washington metropolitan area and one is located in the Portland, Oregon metropolitan area. In total, these acquisitions consist of 10,206 multifamily units with total capitalized acquisition costs of approximately $765.3 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 disposed of six retail shopping centers in the Portland, Oregon metropolitan area at an aggregate gross sales price of approximately $71.1 million resulting in a total net realized gain of approximately $13.6 million and a deferred gain of $5.0 million. The Company has committed approximately $162.0 million relating to seven development projects which are expected to contain an aggregate of 1,333 multifamily units. At June 30, 1999, the Company's remaining commitment to fund the estimated total cost of such projects is approximately $71.0 million. Results of Operations Comparison of the Three Months Ended June 30, 1999 to the Three Months Ended - ---------------------------------------------------------------------------- June 30, 1998. - -------------- Average financial occupancy rates of the Company's multifamily Quarterly Same Store Properties (properties owned by the Company for the three months ended June 30, 1999 and 1998) increased to 96.6% for the three months ended June 30, 1999 from 95.7%, for the three months ended June 30, 1998. "Financial Occupancy" is defined as the percentage resulting from dividing actual rental income by total possible rental income. Total possible rental income is determined by valuing occupied units at contractual rents and vacant units at market rents. The regional breakdown of financial occupancy for the multifamily Quarterly Same Store Properties for the three months ended June 30, 1999 and 1998 are as follows: June 30, June 30, 1999 1998 --------- --------- Northern California 97.5% 97.3% Southern California 96.5% 95.5% Pacific Northwest 95.6% 93.8% The Company's commercial properties were 100% occupied (based on square footage) as of June 30, 1999. 15 Total Revenues increased by $3,214,000 or 10.1% to $34,898,000 in the second quarter of 1999 from $31,684,000 in the second quarter of 1998. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the Quarterly Same Store Properties.
Three Months Ended June 30, Number of -------- Dollar Percentage Properties 1999 1998 Change Change ---------- ---- ---- ------ ------ Revenues Property revenues Quarterly Same Store Properties Northern California 13 $10,973 $10,509 $ 464 4.4% Southern California 16 10,513 9,729 784 8.1 Pacific Northwest 18 7,768 7,330 438 6.0 Commercial 2 687 689 (2) (0.3) -- ------- ------- ------ ---- Total property revenues Quarterly Same Store Properties 49 29,941 28,257 1,684 6.0 == Property revenues properties acquired/disposed of subsequent to March 31, 1998 3,922 2,683 1,239 46.2 ------- ------- ------ ---- Total property revenues 33,863 30,940 2,923 9.4 ------- ------- ------ ---- Interest and other income 1,035 744 291 39.1 ------- ------- ------ ---- Total revenues $34,898 $31,684 $3,214 10.1% ======= ======= ====== ====
As set forth in the above table, $1,239,000 of the $3,214,000 increase in total revenues is attributable to properties acquired or disposed of subsequent to March 31, 1998. During this period, the Company acquired interests in eight multifamily properties (the "Acquisition Properties"), and disposed of one multifamily property (the "Disposition Property"). Of the increase in total revenues, $1,684,000 is attributable to increases in property revenues from the Quarterly Same Store Properties. Property revenues from the Quarterly Same Store Properties increased by approximately 6.0% to $29,941,000 in the second quarter of 1999 from $28,257,000 in the second quarter of 1998. The majority of this increase was attributable to the 16 multifamily Quarterly Same Store Properties located in Southern California. The property revenues of the Quarterly Same Store Properties in Southern California increased by $784,000 or 8.1% to $10,513,000 in the second quarter of 1999 from $9,729,000 in the second quarter of 1998. This $784,000 increase is primarily attributable to rental rate increases and the increase in financial occupancy to 96.5% in the second quarter of 1999 from 95.5% in the second quarter of 1998. The 13 Quarterly Same Store Properties located in Northern California accounted for the next largest regional component of the Quarterly Same Store Properties property revenues increase. The property revenues of these properties increased by $464,000 or 4.4% to $10,973,000 in second quarter of 1999 from $10,509,000 in the second quarter of 1998. The $464,000 increase is attributable to rental rate increases and the increase in financial occupancy to 97.5% in the second quarter of 1999 from 97.3% in the second quarter of 1998. The 18 multifamily residential properties located in the Pacific Northwest also contributed to the Quarterly Same Store Properties property revenues increase. The property revenues of these properties increased by $438,000 or 6.0% to $7,768,000 in the second quarter of 1999 from $7,330,000 in the second quarter of 1998. The $438,000 increase is primarily attributable to rental rate increases and an increase in financial occupancy to 95.6% in the second quarter of 1999 from 93.8% in the second quarter of 1998. The increase in total revenue also reflected an increase of $291,000 attributable to other income, which primarily relates to interest income on outstanding notes receivables and income earned on the Company's investments in joint venture development projects. Total Expenses increased by $884,000 or approximately 4.1% to $22,563,000 in the second quarter of 1999 from $21,679,000 in the second quarter of 1998. Interest expense increased by $33,000 or 0.6% to $5,250,000 in the second quarter from $5,217,000 in the second quarter of 1998. Such increase was primarily due to the net addition of outstanding mortgage debt in connection with property and investment acquisitions which was offset by lower average interest rates incurred on outstanding debt balances. Property operating expenses, exclusive of depreciation and amortization, increased by $200,000 or 2.1% to $9,817,000 in the second quarter of 1999 from $9,617,000 in the second quarter of 1998. Of such increase, $390,000 was attributable to the Acquisition Properties and the Disposition Property. General 16 and administrative expenses represents the costs of the Company's various acquisition and administrative departments as well as partnership administration and non-operating expenses. Such expenses increased by $95,000 in the second quarter of 1999 from the amount for the second quarter of 1998. This increase is largely due to additional staffing requirements resulting from the growth of the Company. Net income increased by $1,328,000 to $8,876,000 in the second quarter of 1999 from $7,548,000 in the second quarter of 1998. A significant component of the increase in net income was primarily a result of the net contribution of the Acquisition Properties and the increase in net operating income from the Quarterly Same Store Properties. Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June - ----------------------------------------------------------------------------- 30, 1998. - --------- Average financial occupancy rates of the Company's multifamily Same Store Properties (properties owned by the Company for the six months ended June 30, 1999 and 1998) increased to 96.5% for the six months ended June 30, 1999 from 95.7% for the six months ended June 30, 1998. The regional breakdown of financial occupancy for the multifamily Same Store Properties for the six months ended June 30, 1999 and 1998 are as follows: June 30, June 30, 1999 1998 ---- ---- Northern California 97.4% 97.1% Southern California 97.0% 95.8% Pacific Northwest 95.0% 93.9% The Company's commercial properties were 100% occupied (based on square footage) as of June 30, 1999. Total Revenues increased by $9,269,000 or 15.6% to $68,789,000 for the first six months of 1999 from $59,520,000 for the first six months of 1998. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the Same Store Properties.
Six Months Ended June 30, Number of -------- Dollar Percentage Properties 1999 1998 Change Change ---------- ---- ---- ------ ------ Revenues Property revenues Same Store Properties Northern California 12 $18,470 $17,702 $ 768 4.3% Southern California 14 16,898 15,590 1,308 8.4 Pacific Northwest 18 15,329 14,504 825 5.7 Commercial 2 1,485 1,199 286 23.9 -- ------- ------- ------ ---- Total property revenues Same Store Properties 46 52,182 48,995 3,187 6.5% == Property revenues properties acquired/disposed of subsequent to December 31, 1997 14,279 8,997 5,282 58.7 ------- ------- ------ ---- Total property revenues 66,461 57,992 8,469 14.6 ------- ------- ------ ---- Interest and other income 2,328 1,528 800 52.4 ------- ------- ------ ---- Total revenues $68,789 $59,520 $9,269 15.6% ======= ======= ====== ====
As set forth in the above table, $5,282,000 of the $9,269,000 increase in total revenues is attributable to properties acquired or disposed of subsequent to December 31, 1997. During this period, the Company acquired interests in ten multifamily properties (the "Post-1997 Acquisition Properties"), and disposed of one multifamily property and three retail shopping centers (the "Post-1997 Disposition Properties"). Of the increase in total revenues, $3,187,000 is attributable to increases in property revenues from the Same Store Properties. Property revenues from the Same Store Properties increased by approximately 6.5% to $52,182,000 in the first six months of 1999 from $48,995,000 in the first six months of 1998. The 17 majority of this increase was attributable to the 14 Same Store Properties located in Southern California. The property revenues of these properties increased by $1,308,000 or 8.4% to $16,898,000 in first six months of 1999 from $15,590,000 in the first six months of 1998. The $1,308,000 increase is attributable to rental rate increases and the increase in financial occupancy to 97.0% in the first six months of 1999 from 95.8% in the first six months of 1998. The 18 multifamily Same Store Properties located in the Pacific Northwest accounted for the next largest regional component of the Same Store Properties property revenues increase. The property revenues of these properties increased by $825,000 or 5.7% to $15,329,000 in the first six months of 1999 from $14,504,000 in the first six months of 1998. The $825,000 increase is primarily attributable to rental rate increases and an increase in financial occupancy to 95.0% in the first six months of 1999 from 93.9% in first six months of 1998. The 12 multifamily residential properties located in Northern California also contributed to the Same Store Properties property revenues increase. The property revenues of the Same Store Properties in Northern California increased by $768,000 or 4.3% to $18,470,000 in the first six months of 1999 from $17,702,000 in the first six months of 1998. This $768,000 increase is primarily attributable to rental rate increases and the effect of the increase in financial occupancy to 97.4% in the first six months of 1999 from 97.1% in the first six months of 1998. The increase in total revenue also reflected an increase of $800,000 attributable to other income, which primarily relates to interest income on outstanding notes receivables and income earned on the Company's investments in joint venture development projects. Total Expenses increased by $4,903,000 or approximately 12.3% to $44,763,000 in the first six months of 1999 from $39,860,000 in the first six months of 1998. Interest expense increased by $1,170,000 or 13.0% to $10,184,000 in the first six months from $9,014,000 in the first six months of 1998. Such 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 $1,527,000 or 8.3% to $19,897,000 in the first six months of 1999 from $18,370,000 in the first six months of 1998. Of such increase, $1,829,000 was attributable to the Post-1997 Acquisition Properties and the Post-1997 Disposition Properties. General and administrative expenses represents the costs of the Company's various acquisition and administrative departments as well as partnership administration and non-operating expenses. Such expenses increased by $288,000 in the first six months of 1999 from the amount for the first six months of 1998. This increase is largely due to additional staffing requirements resulting from the growth of the Company. Net income increased by $1,856,000 to $17,329,000 in the first six months of 1999 from $15,473,000 in the first six months of 1998. A significant component of the increase in net income was primarily a result of the net contribution of the Acquisition Properties and the increase in net operating income from the Same Store Properties. Liquidity and Capital Resources At June 30, 1999, the Company had $1,795,000 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. The Company expects to meet its long-term funding requirements relating to property acquisition and development (beyond the next 12 months) by using working capital, amounts available from 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 such future funding requirements or that future working capital, and borrowings under the lines of credit will be available, or if available, will be sufficient to meet the 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 has a $100,000,000 unsecured line of credit. Outstanding balances under the line of credit bear interest at the bank's reference rate or at the Company's option, 1.15% over the LIBOR rate. The line of credit matures in June 2000. At June 30, 1999 the Company had $60,450,000 outstanding on its line of credit, with interest rates during the second quarter of 1999 ranging from 6.0% to 6.2%. 18 In addition to the unsecured line of credit, the Company had $380,035,000 of secured indebtedness at June 30, 1999. Such indebtedness consisted of $321,215,000 in fixed rate debt with interest rates varying from 6.5% to 8.8% and maturity dates ranging from 2000 to 2026. The indebtedness also includes $58,820,000 of debt represented by tax exempt variable rate demand bonds with interest rates paid during the first six months of 1999 of 5.5% and maturity dates ranging from 2020 to 2026. A portion of the tax exempt variable rate demand bonds, $29,220,000, is capped at a maximum interest rate of 7.3%. The Company's unrestricted cash balance decreased by $753,000 from $2,548,000 as of December 31, 1998 to $1,795,000 as of June 30, 1999. This decrease was primarily a result of $67,102,000 of net cash used in investing activities, which was offset by $37,825,000 of net cash provided by operating activities and $28,524,000 of net cash provided by financing activities. Of the $67,102,000 net cash used in investing activities, $41,370,000 was used to fund real estate under development and $29,557,000 was used to purchase and upgrade rental properties. The $28,524,000 net cash provided by financing activities was primarily a result of $117,650,000 of proceeds from mortgage and other notes payable and lines of credit as offset by $54,480,000 of repayments of mortgages and other notes payable and lines of credit and $25,331,000 of dividends/distributions paid. Non-revenue generating capital expenditures are improvements and upgrades that extend the useful life of the property and are not related to preparing a multifamily property unit to be rented to a tenant. 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 revenue, 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 seven multifamily residential projects, which are anticipated to contain an aggregate of 1,333 multifamily units. Construction is complete on two of the projects, and leasing activities have begun at five of the projects. The Company expects that construction on the remaining five projects will be substantially completed by December 31, 1999, with leasing activities completed by the second quarter of 2000. Such projects involve certain risks inherent in real estate development. See "Other Matters/Risk Factors - Risks That Development Activities Will Be Delayed or Not Completed" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. In connection with these development projects, the Company has directly, or in some cases through its joint venture partners, entered into contractual construction related commitments with unrelated third parties for approximately $162,000,000. As of June 30, 1999, the Company's remaining commitment to fund the estimated cost to complete is approximately $71,000,000. 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. One project which was previously reported as a development project has achieved stabilized occupancy subsequent to the second quarter of 1999. This project, Park Hill @ Issaquah, is owned by a joint venture in which the Company owns a 45% interest. On July 28, 1999, The Operating Partnership completed the sale of 2,000,000 units of its 9.30% Series D Cumulative Redeemable Preferred Units to two related institutional investors at a price of $25.00 per unit. The net proceeds from this sale were approximately $49,000,000. The net proceeds were used primarily to reduce outstanding balances under the Company's line of credit. Pursuant to existing shelf registration statements, 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. 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. 19 Year 2000 Compliance The Company's State of Readiness. Employing a team made up of internal personnel, the Company has identified IT systems that are not Year 2000 compliant and has substantially modified or replaced such systems as necessary. However, because the full ramifications of the Year 2000 issue will not be fully realized until after the Year 2000 date change, the Company can provide no assurances that its internal systems will not be adversely affected by the Year 2000 date change. 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. 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 June 30, 1999, 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. Risks of the Company's Year 2000 issues. The Company believes that it is taking appropriate steps to assess and address its Year 2000 issues and currently does not expect that its business will be adversely affected by the Year 2000 issue in any material respect. Nevertheless, achieving Year 2000 readiness is dependent on many factors, some of which are not completely within the Company's control. Should either the Company's internal systems and devices or the internal systems and devices of one or more critical vendors fail to achieve Year 2000 readiness, the Company's business and its results of operations could be adversely affected. 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 considers Funds from Operations to be a useful financial performance measurement of an equity REIT because, together with net income and cash flows, Funds from Operations provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. Funds From Operations does not represent net income or cash flows from operations as defined by 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 presentation of Funds From Operations. The 20 following table sets forth Essex's calculation of Funds from Operations for the three and six months ended June 30, 1999 and 1998.
Three months ended Six months ended ------------------- ---------------- June 30 June 30 June 30 June 30 --------------------- --------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Income before minority interests and extraordinary item $12,335,000 $10,005,000 $24,026,000 $19,660,000 Adjustments: Depreciation & amortization 6,247,000 5,632,000 12,292,000 10,301,000 Adjustment for unconsolidated joint ventures 366,000 366,000 732,000 662,000 Minority interests (1) (2,397,000) (1,692,000) (4,760,000) (2,599,000) ----------- ----------- ----------- ----------- Funds from Operations $16,551,000 $14,311,000 $32,290,000 $28,024,000 =========== =========== =========== =========== Weighted average number shares outstanding diluted (1) 20,476,092 20,549,875 20,478,496 20,555,032 =========== =========== =========== ===========
(1) Assumes conversion of all outstanding operating partnership interests in the Operating Partnership and Convertible Preferred Stock, Series 1996 A, into shares of the Company's Common Stock. Minority interests have been adjusted to reflect such conversion. Item 3. 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. The Company believes that the principal amounts of the Company's mortgage notes payable and line of credit approximate fair value as of June 30, 1999 as interest rates are consistent with yields currently available to the Company for similar instruments.
For Year Ended: 1999 2000 2001 2002 2003 Thereafter Total Fixed rate debt (In thousands) $ 1,354 21,034 3,114 25,206 30,870 239,637 $321,215 Average interest rate 7.06% 7.06% 6.56% 6.56% 5.71% 5.71% Variable rate LIBOR debt (In thousands) $ - 60,450 - - - 58,820(1) $119,270 Average interest rate - 6.20% - - - 5.50%
(1) $29,220,000 is capped at 7.3% The Company 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 which will be settled in 2000. The fair value of these contracts as of June 30, 1999 is approximately $899,000. The fair value represents the estimated payments that would be made to terminate the agreement at June 30, 1999. 21 The four forward treasury contracts represent the exposures that exist as of June 30, 1999. As firm commitments do not exist as of June 30, 1999, the information presented herein 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 may arise during the period, the Company's hedging strategies at that time, and interest rates. 22 Part II Other Information - ------- ----------------- Item 2: Changes in Securities and Use of Proceeds ----------------------------------------- (c) Recent Sales of Unregistered Securities On July 28, 1999, Essex Portfolio, L.P., a California limited partnership (the "Operating Partnership") as to which the Company is the sole general partner, completed the private placement of 2,000,000 9.30% Series D Cumulative Redeemable Preferred Units (the "Perpetual Preferred Units"), representing a limited partnership interest of the Operating Partnership, to two related institutional investors in return for contributions to the Operating Partnership totaling $50 million. The Perpetual Preferred Units will become exchangeable, on a one for one basis, in whole or in part at any time on or after the tenth anniversary of the date of this private placement (or earlier under certain circumstances) for shares of the Company's 9.30% Series D Cumulative Redeemable Preferred Stock, par value $.0001 per share (the "Series D Preferred Stock"). Pursuant to the terms of a registration rights agreement, entered into in connection with this private placement, the holders of Series D Preferred Stock will have certain rights to cause the Company to register such shares of Series D Preferred Stock. On July 30, 1999, the Company filed Articles Supplementary reclassifying 2,000,000 shares of its Common Stock, par value $.0001 per share, as 2,000,000 shares of Series D Preferred Stock and setting forth the rights, preference and privileges of the Series D Preferred Stock. The net proceeds from the above private placement were used to reduce outstanding balances on the Company's line of credit. The above private Placement was completed pursuant to the exemption from registration contained in Section 4(2) the Securities Act of 1933, as amended. Item 6: Exhibits and Reports on Form 8-K A. Exhibits -------- 3.1 Articles Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 9.30% Series D Cumulative Redeemable Preferred Stock, filed with the State of Maryland on July 30, 1999. 10.1 Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated July 28, 1999. 27.1 Article 5 Financial Data Schedule (EDGAR Filing Only) B. Reports on Form 8-K ------------------- None 23 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESSEX PROPERTY TRUST, INC. /s/ Mark J. Mikl -------------------------------------------- Mark J. Mikl, Controller (Authorized Officer and Principal Accounting Officer) August 12, 1999 ------------------- Date 24 EX-3.1 2 ARTICLES SUPPLEMENTARY Exhibit 3.1 ESSEX PROPERTY TRUST, INC. ------------------------- ARTICLES SUPPLEMENTARY Reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 9.30% SERIES D 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 (the "Board"), at a teleconference meeting held on July 27, 1999, duly adopted a resolution reclassifying 2,000,000 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 9.30% Series D 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 (h) of Article FIFTH of the Charter SECOND: The reclassification increases the number of shares ------ classified as 9.30% Series D Cumulative Redeemable Preferred Stock from no shares immediately prior to the reclassification to 2,000,000 shares immediately after the reclassification. The reclassification decreases the number of shares classified as Common Stock (par value $.0001 per share) from 659,282,178 shares immediately prior to the reclassification to 657,282,178 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 9.30% Series D Cumulative Redeemable Preferred Stock of the Corporation: 9.30% Series D Cumulative Redeemable Preferred Stock ---------------------------------------------------- Section 1. Designation and Amount. ---------------------- Of the 659,282,178 authorized shares of Common Stock, 2,000,000 shares are reclassified and designated "9.30% Series D Cumulative Redeemable Preferred Stock (par value $.0001 per share)" (the "Series D Preferred Stock"). Section 2. Rank. The Series D 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 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"), the 7.875% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock") and the 9 1/8% Series C Cumulative Redeemable Preferred Stock (the "Series C 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 D 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 D Preferred Stock, the term "Parity Preferred Stock" shall be used to refer to the Series A Preferred Stock, the Series B Preferred Stock, the Series C 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 D 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 D 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 9.30% of the $25.00 liquidation preference per share of Series D 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 based on the ratio of the actual number of days elapsed in such a period to ninety (90) days. If any date on which distributions are to be made on the Series D 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 D Preferred Stock will be made to the holders of record of the Series D Preferred Stock on the relevant record dates, which, unless otherwise provided by the Corporation (as a date not more than thirty (30) days prior to the Preferred Stock Distribution Date) 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 D Preferred Stock shall also continue to accrue all accrued and unpaid distributions to the exchange date on any Series D Preferred Unit (as defined in the Fourth Amendment to First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated as of July 28, 1999 (the "Fourth Amendment")) validly exchanged into such share of Series D Preferred Stock in accordance with the provisions of such Fourth Amendment. 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 D ---------------------------- 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 D 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 D 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 D 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 D Preferred Stock as provided in this Section 3 (such Common Stock or other junior stock, including, without limitation, the Series A Junior Participating Preferred 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 D Preferred Stock, any Parity Preferred Stock with respect to distributions or any 3 Junior Stock, unless, in each case, all distributions accumulated on all Series D 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 D 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 D Preferred Stock, all distributions authorized and declared on the Series D 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 D Preferred Stock and such other classes or series of Parity Preferred Stock shall in all cases bear to each other the same ratio that accrued distributions per share on the Series D 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 D 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 D 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 D 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 $25 per share of Series D 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 D 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 D Preferred Stock and such Parity Preferred Stock shall be made so that the payments on the Series 4 D 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 D 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 D 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 D Preferred Stock will have no right or claim to any of the remaining assets of the Corporation. (d) Consolidation, Merger or Certain Other Transactions. Without --------------------------------------------------- limiting Section 6(c) hereof, 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 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 D Preferred Stock may ---------------------------- not be redeemed prior to July 28, 2004. 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 D 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 $25 per share of Series D Preferred Stock plus accumulated and unpaid distributions to the date of redemption. If fewer than all of the outstanding shares of Series D Preferred Stock are to be redeemed, the shares of Series D 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 D Preferred Stock will also be subject to the provisions of Article EIGHTH of the Charter pursuant to which Series D 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. 5 (b) Limitation on Redemption. ------------------------ (i) The redemption price of the Series D 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 D Preferred Stock unless all accumulated and unpaid distributions have been paid on all Series D 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 D 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 D 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 D 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 D Preferred Stock at the close of business on such Distribution Record Date shall be entitled to the distributions payable on such shares on the 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 D 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 D 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 D 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 D Preferred Stock to be redeemed, (iv) the place or places where such shares of Series D Preferred Stock are to be surrendered for payment of the redemption price, (v) that distributions on the Series D Preferred Stock to be redeemed will cease to accumulate on such redemption 6 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 D Preferred Stock. If fewer than all of the shares of Series D 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 D Preferred Stock held by such holder to be redeemed. (ii) If the Corporation gives a notice of redemption in respect of Series D 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 D 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 D Preferred Stock upon surrender of the Series D 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 D Preferred Stock or portions thereof called for redemption, unless the Corporation defaults in the payment thereof. If any date fixed for redemption of Series D 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 D Preferred Stock is improperly withheld or refused and not paid by the Corporation, distributions on such Series D 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. (e) Status of Redeemed Stock. Any Series D 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 D 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 D 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 7 part at the same time, the holders of such Series D 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 D 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 D 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, the Series D 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 D Preferred Stock shall have been paid in full or irrevocably set aside for payment in full, the holders of the Series D 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 D 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 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 D 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 D --------------------- 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 D Preferred Stock outstanding at the time (i) authorize or create, or 8 increase the authorized or issued amount of, any class or series of shares ranking prior to the Series D Preferred Stock with respect to payment of distributions or 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 D 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 D Preferred Stock 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 provided that, with respect to Parity Preferred Stock issued to any "affiliate" of the Corporation (as such term is defined in Rule 144 of the General Rules and Regulations Under the Securities Act of 1933), such Parity Preferred Stock is issued with the consent of the majority of the independent directors of the Board (i.e., directors who are not (i) officers or employees of the Corporation or its affiliates or (ii) related to any such officer or employee. While any shares of the Series D 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 D 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 D 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 D Preferred Stock other preferred stock having substantially the same terms and same rights as the Series D 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 D 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 D Preferred Stock, provided that, with respect to Parity Preferred Stock issued to any "affiliate" of the Corporation (as such term is defined in Rule 144 of the General Rules and Regulations Under the Securities Act of 1933), such Parity Preferred Stock is issued with the consent of the majority of the independent directors of the Board (i.e., directors who are not (i) officers or employees of the Corporation or its affiliates or (ii) related to any such officer or employee. Section 7. Transfer Restrictions. The Series D Preferred Stock shall --------------------- be subject to the provisions of Article EIGHTH of the Charter. 9 Section 8. No Conversion Rights. The holders of the Series D -------------------- 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, Section 9. No Sinking Fund. No sinking fund shall be established for --------------- the retirement or redemption of Series D Preferred Stock. FOURTH: The Series D 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. 10 IN WITNESS WHEREOF, these Articles Supplementary are executed on behalf of the Corporation by its President and attested by its Assistant Secretary this 28/th/ day of July, 1999. 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 11 EX-10.1 3 FOURTH AMENDMENT TO FIRST AMENDED AND RESTATED AGR Exhibit 10.1 FOURTH AMENDMENT TO FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ESSEX PORTFOLIO, L.P. Dated as of July 28, 1999 This Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., as amended (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 $50,000,000.00, in cash, to the Partnership in exchange for which Contributors are entitled to receive an aggregate of 2,000,000 9.30% Series D Cumulative Redeemable Preferred Units (the "Series D 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 D Preferred Units, (ii) the admission of the Contributors as Additional Limited Partners and holders of a certain number of Series D 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. 1 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. 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 D 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, Series C Preferred Units or Series D 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, Series C Preferred Units, Series D Preferred Interest and Series D 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 D Preferred Interest" after the "definition of "Series C Preferred Interest" and before the definition of "Series A Preferred Stock." "Series D Preferred Interest" shall mean the interest in the Partnership received by the General Partner in connection with the issuance of shares of Series D Preferred Stock, as and when issued, which Series D Preferred Interest includes and shall include 2 the right to receive preferential distributions and certain other rights as set forth in this Agreement. 6. Series D Preferred Stock. Section 1.1 of the Partnership ------------------------ Agreement is hereby amended to include the following definitions of "Series D Preferred Stock" and "Series D Preferred Units" which are hereby inserted after the definition of "Series C Preferred Units" and before the definition of "Stock Incentive Plans": "Series D Preferred Stock" shall mean the preferred stock of the General Partner described in Article THIRD of the Articles Supplementary, reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 9.30% Series D Cumulative Redeemable Preferred Stock to be filed with the Department on or about July 28, 1999. "Series D Preferred Units" shall mean the 9.30% Series D 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 P hereto. 7. Issuance of Additional Partnership Interests; Contributions of -------------------------------------------------------------- Proceeds of Issuance of Shares. - ------------------------------ (a) Section 4.3(c) of the Partnership Agreement is hereby deleted and the following is hereby substituted in lieu thereof: "(c) After the date hereof, the General Partner shall not issue any additional shares of Common Stock or Preferred Stock (other than shares of Common Stock or Preferred Stock issued pursuant to Article XI hereof or any exchange right or redemption right applicable to any Preferred Interest), rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock or Preferred Stock (collectively, "New Securities") other than to all holders of the shares of Common Stock (or, to the extent such New Securities relate to Preferred Stock, to all holders of the shares of Preferred Stock) unless (i) the General Partner shall cause the Partnership to issue to the General Partner Partnership Interest or rights, options warrants or other rights, all such that the economic interests are substantially similar to those of the New Securities, and (ii) the General Partner contributes the proceeds, if any (subject to actual or deemed reimbursement of any expenses, including underwriting discount commission or fees by the Partnership to the General Partner pursuant to Section 7.1 hereof) from the issuance of such New Securities and from the exercise of rights contained in such New Securities to the Partnership. Without limiting the foregoing, the General Partner is expressly authorized to issue New Securities for less than fair market value (so long as the General Partner concludes in good faith that such issuance is 3 in the best interests of the Partnership) and to cause the Partnership to issue to the General Partner corresponding Partnership Interests." (b) Section 4.5 of the Partnership Agreement is hereby deleted and the following is hereby substituted in lieu thereof: "4.5 Contribution of Proceeds of Issuance of Shares of Common Stock and Preferred Stock. In connection with the issuance of shares of Common Stock or Preferred Stock pursuant to Section 4.3 hereof, the General Partner shall make a Capital Contribution to the Partnership of the proceeds raised in connection with such issuance, provided that if the proceeds actually received by the General Partner are less than the gross proceeds of such issuance as a result of any underwriter's discount, commission or fee or other expenses paid or incurred in connection with such issuance, then the General Partner shall be deemed to have made a Capital Contribution to the Partnership in the amount of the gross proceeds of such issuance and the Partnership shall be deemed simultaneously to have reimbursed the General Partner pursuant to Section 7.1 hereof for the amount of such underwriter's discount, commission or fee or other expenses. A redemption of a Partnership Unit, whether by the Partnership or the General Partner, shall not constitute an issuance of shares of Common Stock or Preferred Stock for purposes of this Section 4.5." 8. 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 Series D Preferred Stock and per unit of Series B Preferred Units, Series C Preferred Units and Series D 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) (w) to the General Partner, on account of the Series A Preferred Interest, Series B Preferred Interest, Series C Preferred Interest and Series D Preferred Interest until the total amount of distributions made pursuant to this Section 6.2(a)(i)(w) 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, the Series C Preferred Stock and the Series D Preferred Stock as of the date of such distribution; (x) 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)(x) equals the total amount 4 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; (y) 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)(y) 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; and (z) to the Limited Partners holding Series D Preferred Units, on account of the Series D Preferred Units until the 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 D Preferred Units, in accordance with Exhibit P 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, the Series C Preferred Stock or the Series D Preferred Stock (or any other Preferred Stock) or that funds distributed to the General Partner 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." 9. 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 D Partnership Units, Series A Preferred Interest, Series B Preferred Interest, Series C Preferred Interest Partnership and Series D Preferred Interest assets other than cash." 10. 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. 11. Exhibit N. Exhibit N is hereby amended by (i) inserting the --------- --------- language set forth in the provisos at the end of Section 2.I(ii)(ii) and at the end of Section 2.I(ii) of Exhibit P in the corresponding positions at the end of --------- Section 2.I(ii)(ii) and 2.I(ii) of Exhibit N; (ii) by deleting clause (y) of --------- Section 2.G.(i) and inserting the following in lieu thereof: "(y) if at any time full distributions shall not have been timely made on any outstanding Series B Preferred Units with respect to any six (6) prior quarterly distribution periods, whether or not consecutive, provided, however, that a distribution in respect of Series B Preferred Units shall be considered 5 timely made if made within two (2) Business Days after the applicable Distribution Payment Date if at the time of such payment there shall not be any prior quarterly distribution periods in respect of which full distributions were not timely made and (iii) deleting the last sentence at the end of Section 2.G(i) and inserting the following sentence in lieu thereof: "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 is advised by independent counsel that, based on the assets and income of the Partnership for a taxable year after 1999, 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 B Preferred Units shall deliver to the Partnership and the General Partner an opinion of independent counsel reasonably acceptable to the General Partner to the effect that, based on the assets and income of the Partnership for a taxable year after 1999, 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 B Preferred Units would fail to maintain qualification as a real estate investment trust within the meaning of the Code." 12. Exhibit O. Exhibit O is hereby amended by (i) inserting the --------- --------- language set forth in the provisos at the end of Section 2.I(ii)(ii) and at the end of Section 2.I(ii) of Exhibit P in the corresponding positions at the end of --------- Section 2.I(ii)(ii) and 2.I(ii) of Exhibit O; (ii) by deleting clause (y) of --------- Section 2.G.(i) and inserting the following in lieu thereof: "(y) if at any time full distributions shall not have been timely made on any outstanding Series C Preferred Units with respect to any six (6) prior quarterly distribution periods, whether or not consecutive, provided, however, that a distribution in respect of Series C Preferred Units shall be considered timely made if made within two (2) Business Days after the applicable Distribution Payment Date if at the time of such payment there shall not be any prior quarterly distribution periods in respect of which full distributions were not timely made and (iii) deleting the last sentence at the end of Section 2(G(i) and inserting the following sentence in lieu thereof: "The Series C Preferred Units will become exchangeable at any time in whole or in part at the option of the holders of the Series C Preferred Units if, at any time (i) the Partnership is advised by independent counsel that, based on the assets and income of the Partnership for a taxable year after 1999, 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 General Partner an opinion of independent counsel reasonably acceptable to the General Partner to the effect that, based on the assets and income of the Partnership for a taxable year after 1999, the Partnership would not 6 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 qualification as a real estate investment trust within the meaning of the Code." 13. Exhibit P. The Partnership Agreement is hereby amended by adding --------- a new exhibit, Exhibit P, a copy of which is attached hereto. Exhibit P is --------- --------- hereby inserted into the Partnership Agreement following Exhibit O. --------- 14. 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. 15. 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. 7 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 CONTRIBUTORS: BELCREST REALTY CORPORATION, a Delaware corporation By:_______________________________________________ Name:_____________________________________________ Title:____________________________________________ BELAIR REAL ESTATE CORPORATION a Delaware Corporation By:_______________________________________________ Name:_____________________________________________ Title:____________________________________________ EXHIBIT A PARTNERSHIP UNITS (As of July 28, 1999) 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, Trustees 4,697 Frangadakis Family Revocable Trust 13. Kenneth and Angeliki Frangadakis, Trustees 24,334 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 1 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. Linwood C. Thompson 1,278 33. The Way 1994 Living Trust Dtd. 11/2/94 2,226 34. Gay A. Yamagiwa 10,720 35. Craig K. Zimmerman 15,849 36. 280 Euclid Properties, Ltd. 135,260 37. El Molino Properties, Ltd. 138,652 7.875% SERIES B PREFERRED UNITS* -------------------------------- Limited Partner: - --------------- Belair Real Estate Corporation 977,000 Belcrest Realty Corporation 623,000 9 1/8% SERIES C PREFERRED UNITS ------------------------------- Limited Partner: - --------------- Belcrest Realty Corporation 420,000 Belair Real Estate Corporation 80,000 ------- 9.30 % SERIES D PREFERRED UNITS ------------------------------- Limited Partner: - --------------- Belcrest Realty Corporation 1,000,000 Belair Real Estate Corporation 1,000,000 TOTAL PARTNERSHIP UNITS: 22,862,023 2 Units ----- - ------------------ 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, any Series D Preferred Stock or any Series B Preferred Unit, any Series C Preferred Unit or any Series D Preferred Unit (or other Preferred Stock or other Preferred Units) is outstanding, Net Income and Net Loss shall be allocated as follows: 1 (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) 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 the Series C Preferred Stock and the Series D 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, the Series C Preferred Stock and the Series D 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; (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; and (D) to the holders of Series D 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 D 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 D 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 2 holders of the Series B Preferred Units, the Series C Preferred Units and the Series D 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); (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); and (D) to the holders of Series D 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); (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 3 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 1.7042(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 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 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 deter-mined 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-l(b)(2)(ii)(d) and shall be interpreted consistently therewith. 4 (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 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 5 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, the Series C Preferred Units and the Series D 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. 6 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, Trustees George and Katherine Frangadakis, 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 - -------------------------------------------------------------------------------------------------
7
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. 11/2/94 San Mateo, CA 94402 338 Georgetown Avenue San Mateo, CA 94402 Belcrest Realty Corporation Craig K. Zimmerman c/o Eaton Vance Management 409 Georgetown Avenue The Eaton Vance Building San Mateo, CA 94402 255 State Street Boston, MA 02109 Attn: Mr. Alan Dynner - --------------------------------------------------------------------------------------------
8 Belair Real Estate Corporation c/o Eaton Vance Management The Eaton Vance Building 255 State Street Boston, MA 02109 Attn: Mr. Alan Dynner El Molino Properties, Ltd. c/o Richard J. Lauter & Company 11801 Washington Boulevard Los Angeles, CA 90066 280 Euclid Properties, Ltd. c/o Richard J. Lauter & Company 11801 Washington Boulevard Los Angeles, CA 90066 9 EXHIBIT P DESCRIPTION OF PREFERENCES, OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DISTRIBUTIONS, QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE SERIES D 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 P: "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, (iv) the Series D Preferred Interest and (v) 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 D 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 9.30% per annum, determined 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 distribution payable will be computed based on the ratio of the actual number of days elapsed in such quarterly period to ninety (90) days), 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 $25 per Series D Preferred Unit, commencing on the date of issuance of the Series D Preferred Units. "Series D Preferred Stock" means the 9.30% Series D Cumulative Redeemable Preferred Stock (liquidation preference $25.00 per share), $.0001 par value, issued by the General Partner. "Series D Preferred Unit" means a Partnership Unit issued by the Partnership to certain Persons. The Series D Partnership Units shall constitute a series of Partnership Units. The Series D Preferred Units shall have the preferences, conversion and other rights, voting 1 powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption as are set forth in this Exhibit P. "set apart for payment" shall mean irrevocably placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent. 2. Terms of Series D Preferred Units. A. Number. The number of authorized Series D Preferred Units shall be ------ 2,000,000. B. Ranking. The Series D 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, the Series C Preferred Interest and the Series D 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, Series C Preferred Units and Series D 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 D 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 9.30% of the original Capital Contribution per Series D 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 D Preferred Units into shares of Series D Preferred Stock, or (ii) upon a redemption of Series D Preferred Units, on the exchange date or redemption date (each a "Distribution Payment Date"), commencing on August 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 based on the ratio of the actual number of days elapsed in such quarterly period to ninety (90) days. If any date on which distributions are to be made on the Series D 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 2 immediately preceding Business Day, in each case with the same force and effect as if made on such date. Distributions on the Series D Preferred Units will be made to the holders of record of the Series D 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 D 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 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 D 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 Company 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 D 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 D 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 D 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 D Preferred Units, any Parity Units with respect to distributions or any Junior Units, unless, in each case, all distributions accumulated on all Series D 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 Company or any subsidiary of the Partnership or the Company. (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 D Preferred Units, all distributions authorized and declared on the Series D Preferred Units and all classes or series of outstanding Parity Units shall be authorized and declared so that the amount of distributions authorized and declared per share of Series D 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 D Preferred Units and such other classes or series of Parity Units (which shall not include 3 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 D 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 D Preferred Units, the net income of the Partnership will be allocated as provided in Exhibit E to the Partnership Agreement. 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 D 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 D Preferred Units at the respective addresses of such holders as the same shall appear on the transfer records of the Partnership. Without limiting Section 2.I hereof, 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 D Preferred Units may not be redeemed prior to July 28, 2004. 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 D 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 D 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. 4 (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 D 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 D 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 D Preferred Units will not be subject to any sinking fund. (iii) If the Partnership gives a notice of redemption in respect of Series D 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 D 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 D Preferred Units. On and after the date of redemption, distributions will cease to accumulate on the Series D Preferred Units or portions thereof called for redemption, unless the Partnership defaults in the payment thereof. If any date fixed for redemption of Series D 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 D Preferred Units is improperly withheld or refused and not paid by the Partnership, distributions on such Series D 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 D Preferred Units are to be redeemed, the Series D 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 D Preferred Units unless all accumulated and unpaid distributions have been paid on all Series D 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 D 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 D 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 5 Series D Preferred Units to be redeemed; (iv) the place or places where the Series D Preferred Units are to be surrendered for payment of the Redemption Price; (v) that distributions on the Series D 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 D Preferred Units. If fewer than all of the Series D Preferred Units held by any holder are to be redeemed, the notice mailed to such holder shall also specify then number of Series D Preferred Units to be redeemed from such holder. G. Exchange Rights. --------------- (i) Unless called for redemption as described above under "Optional Redemption," Series D 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 D Preferred Stock at an exchange price of $25.00 per share of Series D Preferred Stock (equivalent to an exchange rate of one share of Series D Preferred Stock for each Series D Preferred Unit), subject to adjustment as described below (the "Exchange Price"), provided that the Series D Preferred Units will become immediately exchangeable at any time in whole or in part at the option of the holders for Series D Preferred Units (y) if at any time full distributions shall not have been timely made on any outstanding Series D Preferred Units with respect to any six (6) prior quarterly distribution periods, whether or not consecutive, provided, however, that a distribution in respect of Series D Preferred Units shall be considered timely made if made within two (2) Business Days after the applicable Distribution Payment Date if at the time of such payment there shall not be any prior quarterly distribution periods in respect of which full distributions were not timely made or (z) upon receipt by holders of Series D 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 D 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 D Preferred Units may be exchanged for Series D 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 D 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 D Preferred Units at such earlier time would not cause the Series D 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 D Preferred Units is an "investment company" under section 721(b) of the Code if an exchange is permitted at such earlier date. The Series D 6 Preferred Units will become exchangeable in whole or in part at the option of the holders of the Series D Preferred Units if, at any time (i) the Partnership is advised by independent counsel that, based on the assets and income of the Partnership for a taxable year after 1999, 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 D 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 1999, 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 D Preferred Units would fail to maintain its qualification as a real estate investment trust within the meaning of the Code. (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 D Preferred Units for cash in an amount equal to the original Capital Contribution per Series D 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 D Preferred Units for cash pursuant to this 2.G(ii) by giving each holder of record of Series D 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 D Preferred Units are to be surrendered for payment of the Redemption Price, (iv) that distributions on the Series D Preferred 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 D Preferred Units and (vi) the aggregate number of Series D Preferred Units to be redeemed, and if fewer than all of the outstanding Series D Preferred Units are to be redeemed, the number of Series D Preferred Units to be redeemed held by such holder, which number shall equal such holder's pro rata share (based on the percentage of the aggregate number of outstanding Series D Preferred Units the total number of Series D Preferred Units held by such holder represents) of the aggregate number of Series D Preferred Units being redeemed. The redemption of Series D 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 D 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 D 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 D Preferred Units exercising such exchange right, within fifteen (15) 7 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 D Preferred Units exercising its exchange right, shall be entitled to exchange a number of Series D Preferred Units which would comply with the Ownership Limit of the General Partner set forth in Article EIGHTH of the Charter and any Series D 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 D 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 D 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 D 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 General Partner 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 exchange right, by (i) fax, and (ii) by mail, postage prepaid. The exchange of Series D 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 D Preferred Units to be exchanged together with written notice of exchange and a proper assignment of such Series D 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 D 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 D Preferred Units called for 8 redemption will terminate upon receipt by the holder of such Series D Preferred Units of a notice of redemption from the Partnership that pertains to such Series D Preferred Units. (vi) In the event of an exchange of Series D Preferred Units into shares of Series D Preferred Stock, an amount equal to the accrued and unpaid distributions to the date of exchange on any Series D Preferred Units tendered for exchange shall accrue on the shares of the Series D Preferred Stock into which such Series D Preferred Units are exchanged and the Series D Preferred Units so exchanged shall no longer be outstanding. (vii) Fractional shares of Series D 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 D 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 D Preferred Stock, and (ii) distributions to all holders of Series D 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 D 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 D 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 D 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 D Preferred Stock or fraction thereof into which one Series D 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. 9 I. Voting Rights. ------------- (i) Holders of the Series D 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 D 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 D 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 D 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 D 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 D 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; provided that, with respect to Parity Preferred Units issued to any "affiliate" of the Partnership (as such term is defined in Rule 144 of the General Rules and Regulations under the Securities Act of 1933), such Parity Preferred Units are issued with the consent of the majority of the independent directors of the General Partner's board of directors (i.e., directors who are not (i) officers or employees of the General Partner or its affiliates or (ii) related to any such officers or employees), or (iii) consolidate, amalgamate, merge into or with, or convey, transfer or lease its assets substantially as an entirety to, any General Partner or other entity, unless (a) the Partnership is the surviving entity and the Series D 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 D Preferred Units for other interests in such entity having substantially the same terms and rights as the Series D 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 D 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 D Preferred Units; provided that, with respect to Parity Preferred Units issued to any "affiliate" of the Partnership (as such term is defined in Rule 144 of the General Rules and Regulations under the Securities Act of 1933), such Parity Preferred Units are issued with the consent of the majority of the independent directors of the General Partner's board of directors 10 (i.e., directors who are not (i) officers or employees of the General Partner or its affiliates or (ii) related to any such officers or employees). J. Restrictions on Ownership and Transfer. -------------------------------------- Each holder of the Series D Preferred Units shall be permitted to transfer its Partnership 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 D Preferred Units to any Controlled Entity, 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. 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:__________________________________________ 11 BELAIR REAL ESTATE CORPORATION a Delaware Corporation By:_____________________________________________ Name:___________________________________________ Title:__________________________________________ 12 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Essex Property Trust, Inc. report for the six months ended June 30, 1999 1,000 6-MOS DEC-31-1999 JUN-30-1999 18,396 0 25,225 0 0 46,347 1,042,912 90,030 1,016,825 54,300 440,485 2 0 1 380,966 1,016,825 0 68,789 0 32,189 2,390 0 10,184 17,419 0 17,419 0 90 0 17,329 0.95 0.94
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