-----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, E3uFPzEfaHWNSchfSB6YHRj/C0eUGaKccQBqU7ca1wCxrcEIG6Ld5OMqr+w3iwzS DmJAqIxj2Md9OMapRmSyuQ== 0001021408-02-004494.txt : 20020415 0001021408-02-004494.hdr.sgml : 20020415 ACCESSION NUMBER: 0001021408-02-004494 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX PROPERTY TRUST INC CENTRAL INDEX KEY: 0000920522 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 770369576 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13106 FILM NUMBER: 02594922 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-K 1 d10k.txt FORM 10-K FOR PERIOD ENDED 12/31/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-13106 ----------------- ESSEX PROPERTY TRUST, INC. (Exact name of registrant as specified in its charter) Maryland 77-0369576 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
925 East Meadow Drive, Palo Alto, California 94303 (Address of principal executive offices) (Zip code) (650) 494-3700 (Registrant's telephone number, including area code) ----------------- Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.0001 par value New York Stock Exchange Rights to purchase Series A Junior Participating New York Stock Exchange Preferred Stock, par value $.0001
Securities registered pursuant to Section 12(g) of the Act: None ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [_] As of March 25, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $542,153,852. The aggregate market value was computed with reference to the closing price on the New York Stock Exchange on such date. This calculation does not reflect a determination that persons are affiliates for any other purpose. As of March 25, 2002, 19,575,172 shares of Common Stock ($.0001 par value) were outstanding. LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part IV, Item 14, on page number 34. DOCUMENTS INCORPORATED BY REFERENCE: The following document is incorporated by reference in Part III of the Annual Report on Form 10-K: Proxy statement for the annual meeting of stockholders of Essex Property Trust, Inc. to be held May 14, 2002. ================================================================================ TABLE OF CONTENTS FORM 10-K
Page No. -------- PART I Item 1 Business............................................................................. 1 Item 2 Properties........................................................................... 22 Item 3 Legal Proceedings.................................................................... 27 Item 4 Submission of Matters to a Vote of Security Holders.................................. 27 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters................. 28 Item 6 Selected Financial Data.............................................................. 31 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 32 Item 7A Quantitative and Qualitative Disclosures About Market Risk........................... 44 Item 8 Financial Statements and Supplementary Data.......................................... 44 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 44 PART III Item 10 Directors and Executive Officers of the Registrant................................... 45 Item 11 Executive Compensation............................................................... 45 Item 12 Security Ownership of Certain Beneficial Owners and Management....................... 45 Item 13 Certain Relationships and Related Transactions....................................... 45 PART IV Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K..................... 46 Signatures................................................................................... S-1
PART I Forward Looking Statements Certain statements in this Report on Form 10-K which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company's expectation as to the timing of completion of current development projects, expectation as to the total projected costs and rental rates 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 capital expenditures, future acquisitions and developments, the anticipated performance of the Essex Apartment Value Fund, L.P., the anticipated performance of existing properties, projected stabilization dates for development properties, 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 the total projected costs of current development projects will exceed expectations, that such development projects will not be completed, that acquisitions will fail to meet expectations, 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, that the Essex Apartment Value Fund will fail to perform as anticipated, as well as those risks, special considerations, and other factors discussed under the caption "Other Matters/Risk Factors" in Item 1 of this Report on Form 10-K for the year ended December 31, 2001, 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. Item 1. Business Description of Business Essex Property Trust, Inc. ("the Company" or "Essex") is a self-administered and self-managed equity real estate investment trust ("REIT") engaged in the ownership, acquisition, development and management of multifamily apartment communities. The Company's multifamily portfolio consists of ownership interests in 92 properties (comprising 20,762 apartment units), 11,295 units are located in Southern California (Los Angeles, Ventura, Orange and San Diego counties), 4,023 units of which are located in Northern California (the San Francisco Bay Area) and 5,444 of which are located in the Pacific Northwest (4,073 units in the Seattle metropolitan area and 1,371 units in the Portland, Oregon metropolitan area). The Company also owns an office building that has approximately 17,400 square feet located in Northern California (Palo Alto) which houses the Company's headquarters and an office building in Southern California (Woodland Hills) that has approximately 38,940 square feet, of which the Company currently occupies approximately 6,800 square feet. The Woodland Hills office building has ten third party tenants occupying approximately 28,700 feet (the "Commercial Properties," and together with the Company's multifamily residential properties, the "Properties"). The Company along with its affiliated entities and joint ventures also have entered into commitments for the development of 1,274 units in five multifamily communities; two in Northern California and three in Southern California. The Company was incorporated in the state of Maryland in March 1994. On June 13, 1994, the Company commenced operations with the completion of an initial public offering ("the Offering") in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds of the Offering of $112.1 million were used to acquire an approximate 77.2% general partnership interest in Essex Portfolio, L.P. (the "Operating Partnership"). 1 The Company conducts substantially all of its activities through the Operating Partnership. The Company currently owns an approximate 89.0% general partnership interest and members of the Company's Board of Directors, senior management and certain outside investors own approximately 11.0% limited partnership interests in the Operating Partnership. As the sole general partner of the Operating Partnership, the Company has control over the management of the Operating Partnership and over each of the Properties. Business Objectives The Company's primary business objective is to maximize funds from operations and total returns to stockholders through active property and portfolio management including redevelopment of properties. The Company's strategies include: . Active Property Marketing and Management. Maximize, on a per share basis, cash available for distribution and the capital appreciation of its property portfolio through active property marketing and management and, if applicable, redevelopment. . Selected Expansion of Property Portfolio. Increase, on a per share basis, cash available for distribution through the acquisition and development of multifamily residential properties in selected major metropolitan areas located in the west coast region of the United States. . Optimal Portfolio Asset Allocations. Produce predictable financial performance through a portfolio asset allocation program that seeks to increase or decrease the investments in each market based on changes in regional economic and local market conditions. . Management of Capital and Financial Risk. Optimize the Company's capital and financial risk positions by maintaining a conservative leverage ratio and minimizing the Company's cost of capital. Business Principles The Company was founded on, has followed, and intends to continue to follow the business principles set forth below: Property Management. Through its long-standing philosophy of active property management and a customer satisfaction approach, coupled with a discipline of internal cost control, the Company seeks to retain tenants, maximize cash flow, enhance property values and compete effectively for new tenants in the marketplace. The Company's Senior Vice President of Operations and the regional portfolio managers are accountable for overall property operations and performance. They supervise on-site managers, provide training for the on-site staff, monitor fiscal performance against budgeted expectations, monitor property performance against competing properties in the area, prepare operating and capital budgets for executive approval, and implement new strategies focused on enhancing tenant satisfaction, increasing revenue, controlling expenses, and creating a more efficient operating environment. Business Planning and Control. Real estate investment decisions are accompanied by a multiple year plan, to which executives and other managers responsible for obtaining future financial performance must agree. Performance versus plan serves as a significant factor in determining compensation. Property Type Focus. The Company focuses on acquisition and development of multifamily residential communities, containing between 75 and 750 units. These types of properties offer attractive opportunities because such properties (i) are often mispriced by real estate sellers and buyers who lack the Company's ability to obtain and use real-time market information, (ii) provide opportunities for value enhancement since many of these properties have been owned by parties that are either inadequately capitalized or lack the professional property management expertise of the Company. 2 Geographic Focus. The Company focuses its property investments in markets that meet the following criteria: . Major Metropolitan Areas. The Company focuses on metropolitan areas having a regional population in excess of one million people. Real estate markets in these areas are typically characterized by a relatively greater number of buyers and sellers and are, therefore, more liquid. Liquidity is an important element for implementing the Company's strategy of varying its portfolio in response to changing market conditions. . Supply Constraints. The Company believes that properties located in real estate markets with limited development opportunities are well suited to produce increased rental income. When evaluating supply constraints, the Company reviews: (i) availability of developable land sites on which competing properties could be readily constructed; (ii) political barriers to growth resulting from a restrictive local political environment regarding development and redevelopment (such an environment, in addition to the restrictions on development itself, is often associated with a lengthy development process and expensive development fees); and (iii) physical barriers to growth, resulting from natural limitations to development, such as mountains or waterways. . Rental Demand Created by High Cost of Housing. The Company concentrates on markets in which the cost of renting compares favorably to the cost of owning a home. In such markets, rent levels tend to be higher and operating expenses and capital expenditures, as a percentage of rent, are lower in comparison with markets that have a lower cost of owning a home. . Job Proximity. The Company believes that most renters select housing based on its proximity to their jobs and related commuting factors. The Company obtains local area information relating to its residential properties and uses this information when making multifamily residential property acquisition decisions. The Company also reviews the location of major employers relative to its portfolio and potential acquisition properties. Following the above criteria, the Company is currently pursuing investment opportunities in selected markets of Northern and Southern California and the Pacific Northwest. Active Portfolio Management Through Regional Economic Research and Local Market Knowledge. The Company was founded on the belief that the key elements of successful real estate investment and portfolio growth include extensive regional economic research and local market knowledge. The Company utilizes its economic research and local market knowledge to make appropriate portfolio allocation decisions that it believes result in better overall operating performance and lower portfolio risk. The Company maintains and evaluates: . Regional Economic Data. The Company evaluates and reviews regional economic factors for the markets in which it owns properties and where it considers expanding its operations. The Company's research focuses on regional and sub-market supply and demand, economic diversity, job growth, market depth and the comparison of rents to down payments and occupancy costs associated with single-family housing. . Local Market Conditions. Local market knowledge includes (i) local factors that influence whether a sub-market is desirable to tenants; (ii) the extent to which the area surrounding a property is improving or deteriorating; and (iii) local investment market dynamics, including the relationship between the value of a property and its yield, the prospects for capital appreciation and market depth. Recognizing that all real estate markets are cyclical, the Company regularly evaluates the results of regional economic and local market research and adjusts portfolio allocations accordingly. The Company actively manages the allocation of assets within its portfolio. The Company seeks to increase its portfolio allocation in markets projected to have economic growth and to decrease such allocations in markets projected to have declining economic conditions. Likewise, the Company also seeks to increase its portfolio allocation in markets that have attractive property valuations and to decrease such allocations in markets that have inflated valuations 3 and low relative yields. Although the Company is generally a long-term investor, it does not establish defined or preferred holding periods for its Properties. Current Business Activities The Company conducts substantially all of its activities through the Operating Partnership, of which it owns an approximate 89.0% general partnership interest. The approximate 11.0% limited partnership interests in the Operating Partnership are owned by directors, officers and employees of the Company and certain third-party investors. As the sole general partner of the Operating Partnership, the Company has operating control over the management of the Operating Partnership and each of the Properties. From time to time, the Company may invest in properties through the acquisition of an interest in another entity, based upon the criteria described above. The Company does not plan to invest in the securities of other entities not engaged in real estate related activities. The Company has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes, commencing with the year ended December 31, 1994. 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"), in order to maintain compliance with REIT tax rules. The Company owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of the Company own 100% of EMC's 1,000 shares of common stock. On July 11, 2001, Essex Apartment Value Fund, L.P. (the "Fund"), an investment fund organized by the Company, had its initial closing with three institutional investors. The Fund will acquire, develop, and manage multifamily properties located in California, Oregon, and Washington. The Fund's objective is to add value through rental growth and appreciation, using the Company's development, redevelopment and asset management capabilities. The total equity committed to the Fund by investors, including the Operating Partnership, at the initial closing was $105 million. Subsequent to the initial closing the Fund, several additional equity commitments were received. As of the final closing in February 2002, equity commitments totaled approximately $250 million. An affiliate of the Company, Essex VFGP, L.P. ("VFGP"), is the Fund's 1% general partner and is a 20.4% percent limited partner. The Operating Partnership owns a 99% limited partner interest in VFGP. The Fund is expected to utilize leverage of approximately 65% of the value of the underlying real estate portfolio. The Company, through VFGP, has a 21.4% interest in the Fund on economic terms identical to the other investors with respect to capital invested. Since August 2000, the Company has acquired several properties in anticipation of the Fund's formation. These properties include six apartment properties having 1,377 apartment units and two development land parcels on which approximately 368 units are planned for construction. These properties have an aggregate purchase price of approximately $123 million. In addition, six of the properties are encumbered by non-recourse mortgages in the aggregate amount of approximately $81.9 million. On August 13, 2001, the Fund acquired one asset directly, Marbrisas Apartments, a 500-unit apartment community located in Chula Vista, California for a contract price of $62.0 million. In connection with this transaction the Fund assumed an approximately $39.9 million secured loan. 4 The current portfolio of stabilized properties of the Fund is set forth below:
Fixed Loan Loan Interest Maturity Property Name Location Units Amount Rate Date - ------------- -------- ----- --------------- -------- -------- ($ in millions) Rosebeach Apartments La Mirada, CA 174 $ 8.5 7.09% Feb-11 Foxborough Homes Orange, CA 90 5.0 7.84% Jul-09 Vista del Rey Tustin, CA 116 8.0 6.95% Feb-11 The Crest at Phillips Ranch Pomona, CA 501 36.1 7.99% Jul-05 Andover Park Apartments Beaverton, OR 240 12.5 6.66% Oct-11 Hunt Club Lake Oswego, OR 256 11.8 7.05% Feb-11 Marbrisas Chula Vista, CA 500 39.9 7.99% Jul-05 ----- ------ Total 1,877 $121.8 ===== ======
In December 2001, the Fund obtained an unsecured line of credit for an aggregate amount of $50 million. The line matures in June 2002 but may be extended at the Fund's option to September 2002. The line bears interest at LIBOR plus 0.875%. As of December 31, 2001, the line had an outstanding balance of $46.2 million. In addition to distributions with respect to its pro-rata share of the Fund's Limited Partnership Interest invested capital, VFGP (1) will receive special priority distributions from the Fund in the annual amount of 1% of the Fund's unreformed third party capital, payable quarterly for managing the Fund's operations, and (2) may receive over the life of the Fund incentive distributions up to 20% of the cumulative net profits on the Fund's investments, if the Fund exceeds certain financial return benchmarks, including a minimum 10% compounded annual return on the Limited Partner's total capital contributions. VFGP will also be paid fees consistent with industry standards for its property management, development and redevelopment services with respect to the Fund's investments. VFGP will not receive transaction fees, such as acquisition, disposition, and financing or similar fees, in connection with the operation of the Fund. Subject to specific exceptions, the Fund will generally be the Company's exclusive investment vehicle for new investments until the earlier of (i) the date at least 90% of the Fund's aggregate capital commitments have been invested or committed or reserved for investments or (ii) December 31, 2003. The exceptions are: (1) properties acquired to complete transactions intended to qualify for non-recognition under Section 1031 of the Internal Revenue Code, (2) transactions involving properties with 75 units or less, (3) transactions which require equity securities of the Company, including convertible or exchangeable securities, with a value of at least $750,000, (4) follow-on investments and re-building of properties which have been destroyed or damaged, (5) land leases with remaining terms of less than 35 years; and (6) other transactions which are prohibited from being consummated on behalf of the Fund due to express restrictions or diversification limitations. The Company is not prohibited from utilizing its development and redevelopment capabilities to improve properties that it currently owns or acquires pursuant to the preceding exceptions. The Company's executives, Keith Guericke, Michael Schall, John Eudy, Craig Zimmerman and John Burkart, serve as the Fund's investment committee and are required to devote such time as is reasonably necessary to achieve the objectives of the Fund. Investors have the right to suspend their capital commitments to the Fund if two or more of these executives are no longer actively involved in the management of the Fund. John Burkart serves as the portfolio manager and is committed to devote substantially all of his time to the Fund during the investment period. The Fund also has a five-person advisory committee representing the investors. Acquisitions During 2001, the Company acquired ownership interests in eight multifamily properties consisting of 1,684 units with an aggregate purchase price of approximately $171.4 million. These investments were primarily 5 funded by the contribution of equity from joint venture partners, cash generated from operations, proceeds from the dispositions of properties, proceeds from new and assumed loans and the Company's line of credit. Of the eight properties of which the Company acquired ownership interest in 2001, seven properties (1,444 units) are located in Southern California and one (240 units) is located in the Pacific Northwest. Multifamily property ownership interests acquired in 2001 are as follows:
Purchase Price or Agreed Upon Property Name Location Units Value ------------- -------- ----- --------------- ($ in millions) Southern California Marbrisas Apartments(1) Chula Vista, CA 500 $ 62.0 Capri at Sunny Hills(2)(3) Fullerton, CA 100 16.7 Hearthstone(2) Santa Ana, CA 140 14.1 Montejo(2) Garden Grove, CA 124 9.6 Treehouse(2) Santa Ana, CA 164 13.1 Valley Park(2) Fountain Valley, CA 160 16.8 Villa Angelina(2) Placentia, CA 256 22.5 Pacific Northwest Andover Park(1) Beaverton, OR 240 16.6 ----- ------ Total 1,684 $171.4 ===== ======
- -------- (1) The Company has a 21.4% interest in the Fund, which owns this property. (2) The Company holds a 1% special limited partner interest in the partnerships, which own these multifamily properties. These investments were made under arrangements whereby EMC became the 1% sole general partner interest and the other limited partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain conditions, the Company may, however, elect to deliver an equivalent number of shares of the Company's Common Stock in satisfaction of the applicable partnership's cash redemption obligation. (3) Acquired in an IRC Section 1031 exchange in which the Company disposed of three retail properties located near Portland, OR. Other Acquisition Related Activities On March 1, 2001 the Company purchased Clarewood Office Building, an approximately 38,940 square foot office building in Woodland Hills, California for a contract price of $4.5 million. The Company currently occupies approximately 6,800 square feet. The Company's employees that occupy this space are involved in the following functions: property operations, development, redevelopment and accounting. The building has ten third party tenants occupying approximately 28,700 feet. The largest single tenant occupies approximately 10,900 square feet. On March 22, 2001, in connection with the acquisition of The Carlyle Apartments in April 2000, Essex issued 158,202 Operating Partnership units convertible into Common Stock at the option of the holder. This was the final payment and was based on an amount that provides Essex with a targeted yield on the property. Total consideration paid for the property was $26.5 million. On June 1, 2001 the Company completed the partner buyout of Mt. Sutro Terrace Apartments, a 99-unit apartment community located in San Francisco, California. The buyout was at the Company's option under a capped pricing formula which terms were agreed to at the time of the Company's initial investment in September 1999. In connection with the partner buyout the Company issued 50,725 Operating Partnership units, which are convertible into Common Stock at the option of the holder. 6 On June 29, 2001, the Company purchased Moanalua Hillside Apartments through one of its taxable REIT subsidiaries. Moanalua Hillside Apartments is a 700-unit apartment community located in Honolulu, Hawaii, which was acquired for a contract price of $42.2 million. The Company is actively involved in reselling this property to unrelated third parties at a price in excess of the Company's purchase price. However, there can be no assurance that the sale of the property will close as expected. The Company's net investment is reflected in the Company's financial statements as notes receivable from investees and related parties and investments. Dispositions On September 21,2001, two partnerships in which EMC is a 1% general partner and the Operating Partnership holds a 1% special limited partnership interest, sold to an unrelated third party the following three retail centers: Canby Square, Garrison Square and Powell Villa. These properties are located in the Portland, Oregon metropolitan area and were sold for a contract price of $14.5 million. The Company recognized a previously deferred gain of $3.8 million, net of disposition related costs, in connection with this transaction. In a tax deferred exchange transaction, these two partnerships acquired on September 28, 2001, Capri at Sunny Hills, a 100-unit apartment community located in Fullerton, California for a contract price of $16.7 million. Development Development communities are defined by the Company as new apartment properties that are being constructed or are newly constructed and in a phase of lease-up and have not yet reached stabilized operations. As of December 31, 2001, the Company had five development communities, with an aggregate of 1,274 multifamily units. During 2001, the Company announced one new development community and also reached stabilized operations at one apartment property containing 404 units. In connection with the properties currently under development, the Company has directly, or in some cases through its joint venture entities, entered into contractual construction related commitments with unrelated third parties. As of December 31, 2001, the Company and its partners are committed to fund approximately $113.4 million. The following table sets forth information regarding the development communities at December 31, 2001.
Estimated Project Incurred Project Cost as of Cost as of Projected Development Communities Location Units 12/31/01(1) 12/31/01(1) Stabilization - ----------------------- -------- ----- ----------------- ---------------- ------------- ($ in millions) ($ in millions) Direct Development The San Marcos(2) Richmond, CA 312 $ 43.8 $ 31.5 Mar. 2003 (formerly Vista Del Mar) The Essex on Lake Merritt(2) Oakland, CA 270 69.0 51.0 May 2003 Parker Ranch(3) Simi Valley, CA 324 43.0 10.8 Dec. 2004 Joint Venture Chesapeake(4) San Diego, CA 230 43.0 9.0 Aug. 2004 Kelvin Avenue(4) Irvine, CA 138 22.4 5.5 Dec. 2003 ----- ------ ------ Total Development Communities 1,274 $221.2 $107.8 ===== ====== ======
- -------- (1) Estimated project cost as of December 31, 2001 includes total estimated and incurred costs for the development projects. (2) The Company is the sole owner of these development projects. (3) The Company has 50% interest in this development project. (4) The Company has a 21.4% interest in the Fund, which owns this property. The Company is entitled to receive development fee income on the joint venture development communities. 7 The Company intends to continue to pursue the development of multifamily communities to the extent that the market conditions and the specific project terms are considered favorable. During the year, the Company reached stabilized operations at one property, Tierra Vista, a 404-unit apartment community located in Oxnard, California. Redevelopment Redevelopment communities are defined by the Company as existing properties owned or recently acquired which have been targeted for additional investment by the Company with the expectation of increased financial returns. Redevelopment communities typically have apartment units that are under construction and as a result, may have less than stabilized operations. As of December 31, 2001, the Company had the following three-redevelopment communities.
Estimated Renovation Incurred Cost as of Total Cost as Projected Redevelopment Communities(1) Location Units 12/31/01(2) of 12/31/01 Completion - ---------------------------- --------------- ----- --------------- --------------- ---------- ($ in millions) ($ in millions) Plumtree Santa Clara, CA 140 $3.2 $0.1 Sep. 2002 Monterey Villas (The Village) Oxnard, CA 122 3.2 2.4 Jan. 2002 The Lofts at Pinehurst (Villa Scandia) Ventura, CA 118 3.3 0.2 Aug. 2002 --- ---- ---- Total Redevelopment Communities 380 $9.7 $2.7 === ==== ====
- -------- (1) The Company owns 100% of each redevelopment community. (2) Represents the projected cost of renovation of the apartment community excluding the original cost of land and buildings. During 2001 the Company completed six redevelopment projects, which comprised 1,806 units and had total project costs in excess of $30 million. Equity Transactions On June 28, 2001, the Operating Partnership issued 200,000 Series Z Incentive Units of limited partner interest (the "Series Z Incentive Units") to eleven senior executives of the Company in exchange for a capital commitment of $1.00 per Series Z Incentive Unit, for an aggregate offering price of $200,000. Upon certain triggering events, the Series Z Incentive Units will automatically convert into common Operating Partnership units based on a conversion ratio that may increase over time upon satisfaction of specific conditions. The conversion ratio, initially set at zero, will increase on January 1 of each year for each participating executive who remains employed by the Company if the Company has met a specified "funds from operations" per share target for the prior year, up to a maximum conversion ratio of 1.0. In certain change of control situations, the participating executives will also be given the option to convert their units at the then-effective conversion ratio. In addition, the Operating Partnership has the option to redeem Series Z Incentive Units held by any executive whose employment has been terminated for any reason and the obligation to redeem any such units following the death of the holder. In such event, the Operating Partnership will redeem the units for, at its option, either common Operating Partnership units or shares of the Company's common stock based on the then-effective conversion ratio. During the year, the Company's Board of Directors authorized the Operating Partnership to purchase from time to time shares of the Company's Common Stock, in an amount up to $50 million, at a price not to exceed $48.00 per share in the open market or through negotiated or block transactions. The timing of the repurchase will depend on the market price and other market conditions and factors. Essex will use working capital or proceeds from the sale of properties to provide funds for this program. The purpose of the program is to acquire 8 stock related to real estate transactions involving the issuance of partnership units in the Operating Partnership and similar interests. Such repurchased shares may be reissued in connection with the conversion of such partnership units, the exercise of stock options or other business transactions. This Program supersedes its common stock repurchase plan as announced on March 25, 1999. In October 2001, the Operating Partnership acquired 100,700 shares of the Company's outstanding Common Stock. The weighted average exercise price paid for the shares was $47.88. The amount paid for the shares are reflected as a reduction of the common stock and additional-paid-in-capital in the Company's consolidated balance sheets for the year ended December 31, 2001. In September 1999, the Company formed a program in which directors and management of the Company can participate indirectly in an investment in the Company's common stock. Pursuant to the program, in 1999, the participants entered into a swap agreement with a securities broker whereby the securities broker acquired, in open market transactions, 223,475 shares of the Company's common stock. The agreement by its terms expires in September 2004 at which time the settlement amount is determined by comparing the original purchase price of the stock plus interest at a rate of LIBOR plus 1.5% to the termination date market value of the shares and all dividends received during the investment period. From August 2001 through January 2002, the directors and management effected an early termination of the agreement with respect to 120,718 shares of the total 223,475 shares, realizing a gain of approximately $15 per share. Participants are obligated for any termination or settlement shortfall. The Company is a guarantor of participant obligations under the program. Offices and Employees The Company is headquartered in Palo Alto, California, and has regional offices in Seattle, Washington, Portland, Oregon, Woodland Hills, California and Tustin, California. As of December 31, 2001, the Company had approximately 754 employees. Environmental Matters Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on, in or migrating from such property. Such laws often impose liability without regard as to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances or wastes also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility to which such substances or wastes were sent, whether or not such facility is owned or operated by such person. In addition, certain environmental laws impose liability for release of asbestos-containing materials ("ACMs"), into the air, and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company could be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and costs related to injuries of persons and property. Recently there has been an increasing number of lawsuits against owners and managers of multifamily properties other than Essex alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. Insurance carriers have reacted to these liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates. We have adopted programs designed to minimize the existence of mold in any of our properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on residents or the property. 9 All of the Properties have been subjected to preliminary environmental assessments, including a review of historical and public data ("Phase I assessments"), by independent environmental consultants. Phase I assessments generally consist of an investigation of environmental conditions at the Property, including a preliminary investigation of the site, an identification of publicly known conditions occurring at properties in the vicinity of the site, an investigation as to the presence of polychlorinated biphenyl's ("PCBs"), ACMs and above-ground and underground storage tanks presently or formerly at the sites, and preparation and issuance of written reports. As a result of information collected in the Phase I assessments, certain of the Properties were subjected to additional environmental investigations, including, in a few cases, soil sampling or ground water analysis to further evaluate the environmental conditions of those Properties. The environmental studies revealed the presence of groundwater contamination on certain of the Properties. Certain of these Properties had contamination which was reported to have migrated on-site from adjacent industrial manufacturing operations, and one Property was previously occupied by an industrial user that was identified as the source of contamination. The environmental studies noted that certain of the Properties are located adjacent to and possibly downgradient from sites with known groundwater contamination, the lateral limits of which may extend onto such Properties. The environmental studies also noted that contamination existed at certain Properties because of the former presence of underground fuel storage tanks that have been removed. There are asbestos-containing material in a number of the properties, primarily in the form of ceiling texture, floor tiles and adhesives, which are generally in good condition. At properties where radon, hydrogen sulfide or methane has been identified as a potential concern, the Company has implemented remediating measures and/or additional testing. Based on its current knowledge, the Company does not believe that future liabilities associated with asbestos, radon, hydrogen sulfide or methane will be material. Based on the information contained in the environmental studies, the Company believes that the costs, if any, it might bear as a result of environmental contamination or other conditions at these Properties would not have a material adverse effect on the Company's financial condition, result of operations, or liquidity. Certain Properties that have been sold by the Company were identified as having potential groundwater contamination. While the Company does not anticipate any losses or costs related to groundwater contamination on Properties that have been sold, it is possible that such losses or costs may materialize in the future. Except with respect to one Property, the Company has no indemnification agreements from third parties for potential environmental clean-up costs at its Properties. The Company has no way of determining at this time the magnitude of any potential liability to which it may be subject arising out of unknown environmental conditions or violations with respect to the properties formerly owned by the Company. No assurance can be given that existing environmental studies with respect to any of the Properties reveal all environmental liabilities, that any prior owner or operator of a Property did not create any material environmental condition not known to the Company, or that a material environmental condition does not otherwise exist as to any one or more of the Properties. The Company has limited insurance coverage for the types of environmental liabilities described above. Insurance The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties. There are, however, certain types of extraordinary losses for which the Company does not have insurance. All of the Properties are located in areas that are subject to earthquake activity. The Company has obtained earthquake insurance for all the Properties. Most of the Properties are included in an earthquake insurance program that is subject to an aggregate limit of $40.0 million payable upon a covered loss in excess of a $7.5 million self-insured retention amount and a 5% deductible. In the future, the Company may selectively exclude properties from being covered by earthquake insurance based on management's evaluation of the following factors: (i) the availability of coverage on terms acceptable to the Company, (ii) the location of the property and the amount of seismic activity affecting that region, and, (iii) the age of the property and building codes in effect at the time of construction. Despite earthquake coverage on all of the Company's Properties, 10 should a property sustain damage as a result of an earthquake, the Company may incur losses due to deductibles, co-payments and losses in excess of applicable insurance, if any. Although the Company carries certain insurance for non-earthquake damages to its properties and liability insurance, the Company may still incur losses due to uninsured risks, deductibles, co-payments or losses in excess of applicable insurance coverage. Competition The Company's Properties compete for tenants with similar properties primarily on the basis of location, rent charged, services provided, and the design and condition of the improvements. Competition for tenants from competing properties affects the amount of rent charged as well as rental growth rates, vacancy rates, deposit amounts, and the services and features provided at each property. While economic conditions are generally stable in the Company's target markets, a prolonged economic downturn could have a material adverse effect on the Company's financial position, results of operations or liquidity. The Company also experiences competition when attempting to acquire properties that meet its investment criteria. Such competing buyers include domestic and foreign financial institutions, other REIT's, life insurance companies, pension funds, trust funds, partnerships and individual investors. Working Capital The Company expects to meet its short-term liquidity requirements by using its working capital, cash generated from operations, and its amounts available on its 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 qualification requirements. The Company has credit facilities in the committed amount of approximately $150,000,000. At December 31, 2001 the Company had an outstanding balance of $74,459,000 under these facilities. Other Matters/Risk Factors Our operations involve various risks that could have adverse consequences to us. These risks include, among others, the following: Debt Financing At December 31, 2001, the Company had approximately $638,660,000 of indebtedness (including $133,279,000 of variable rate indebtedness, of which $58,820,000 is capped at interest rates ranging from 7.1% to 7.3%). Essex is subject to the risks normally associated with debt financing, including the following: . cash flow may not be sufficient to meet required payments of principal and interest; . inability to refinance existing indebtedness on encumbered Properties; and . the terms of any refinancing may not be as favorable as the terms of existing indebtedness. Uncertainty of Ability to Refinance Balloon Payments At December 31, 2001, the Company had an aggregate of approximately $638,660,000 of mortgage debt and line of credit borrowings, some of which are subject to balloon payments of principal. The Company does not expect to have sufficient cash flows from operations to make all of such balloon payments when due under these mortgages and the line of credit borrowings. At December 31, 2001, these mortgages and lines of credit 11 borrowings had the following scheduled maturity dates: 2002--$86.8 million (includes lines of credit balance of $74.4 million as of December 31, 2001); 2003--$21.9 million; 2004--$4.0 million; 2005--$36.0 million; 2006--$15.1 million; 2007 and thereafter--$474.8 million. The Company may not be able to refinance such mortgage indebtedness. The Properties subject to these mortgages could be foreclosed upon or otherwise transferred to the mortgagee. This could mean a loss to the Company of income and asset value. Alternatively, the Company may be required to refinance the debt at higher interest rates. If the Company is unable to make such payments when due, a mortgage lender could foreclose on the property securing the mortgage, which could have a material adverse effect on the financial condition and results of operations of the Company. Risk of Rising Interest Payments At December 31, 2001, the Company had approximately $58,820,000 of long-term variable rate indebtedness bearing interest at a floating rate tied to the rate of short-term tax exempt securities (which matures at various dates from 2020 through 2026), and $74,459,000 of variable rate indebtedness under its lines of credit bearing interest at rates ranging from 1.15%--1.175% over LIBOR. The long-term variable rate indebtedness of approximately $58,820,000 is subject to an interest rate protection agreement, which may reduce the risks associated with fluctuations in interest rates. The remaining $74,459,000 of long-term variable rate indebtedness is not subject to any interest rate protection agreement, and consequently, an increase in interest rates may have an adverse effect on net income and results of operations of the Company. Current interest rates are at historic lows and potentially could increase rapidly to levels more in line with recent historic levels. The immediate effect of significant and rapid interest rate increases would result in higher interest expense in the Company's variable rate indebtedness. The effect of prolonged interest rate increases could negatively impact the Company's ability to make acquisitions and develop properties at economic returns on investment and the Company's ability to refinance existing borrowings at acceptable rates. Risk of Losses on Interest Rate Hedging Arrangements The Company has, from time to time, entered into agreements to reduce the risks associated with increases in interest rates, and may continue to do so. Although these agreements may partially protect against rising interest rates, these agreements also may reduce the benefits to the Company when interest rates decline. There can be no assurance that any such hedging arrangements can be refinanced or that the Company will be able to enter into other hedging arrangements to replace existing ones if interest rates decline. Furthermore, interest rate movements during the term of interest rate hedging arrangements may result in a gain or loss on the Company's investment in the hedging arrangement. In addition, if a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, the Company may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the hedging arrangement may subject the Company to increased credit risks. In order to minimize counterparty credit risk, the Company's policy is to enter into hedging arrangements only with large financial institutions. Acquisition Activities: Risks That Acquisitions Will Fail To Meet Expectations The Company intends to continue to acquire multifamily residential properties. There are risks that acquired properties will fail to perform as expected. Estimates of future income, expenses and the costs of improvements necessary to allow the Company to market an acquired property as originally intended may prove to be inaccurate. In addition, the Company expects to finance future acquisitions, in whole or in part, under various forms of secured or unsecured financing or through the issuance of partnership units by the Operating Partnership or additional equity by the Company. The use of equity financing, rather than debt, for future developments or acquisitions could dilute the interest of the Company's existing stockholders. If new acquisitions are financed under existing lines of credit, there is a risk that, unless substitute financing is obtained, further availability under the lines of credit for new development may not be available or may be available only on disadvantageous terms. 12 Also, the Company may not be able to refinance its existing lines of credit upon maturity, or the terms of such refinancing may not be as favorable as the terms of the existing indebtedness. Further, acquisitions of properties are subject to the general risks associated with real estate investments. See "Adverse Effect to Property Income and Value Due to General Real Estate Investment Risks." Risks That Development Activities Will Be Delayed, Not Completed, and/ or Fail to Achieve Expected Results The Company pursues multifamily residential property development projects from time to time. Development projects generally require various governmental and other approvals, the receipt of which cannot be assured. The Company's development activities generally entail certain risks, including the following: . funds may be expended and management's time devoted to projects that may not be completed; . construction costs of a project may exceed original estimates possibly making the project economically unfeasible; . development projects may be delayed due to, among other things, adverse weather conditions; . occupancy rates and rents at a completed project may be less than anticipated; and . expenses at a completed development may be higher than anticipated. These risks may reduce the funds available for distribution to the Company's stockholders. Further, the development of properties is also subject to the general risks associated with real estate investments. See "Adverse Effect to Property Income and Value Due to General Real Estate Investment Risks." The Geographic Concentration Of The Properties And Fluctuations In Local Market May Adversely Impact Income Significant amounts of rental revenues for the year ended December 31, 2001, were derived from Properties concentrated 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). Of our 92 ownership interests in multifamily residential properties, 65 are located in California. As a result of this geographic concentration, if a local property market performs poorly, the income from the Properties in that market could decrease. As a result of such a decrease in income, the Company may be unable to pay expected dividends to the Company's stockholders. The performance of the economy in each of these areas affects occupancy, market rental rates and expenses and, consequently impacts the income generated from the Properties and their underlying values. The financial results of major local employers may also impact the cash flow and value of certain of the Properties. Economic downturns in the local markets in which the Company owns properties could have a negative impact on the financial condition and results from operations of the Company. Both the national economy and the economies of the western states in which the Company owns, manages and develops properties have been and continue to be in a recession. The early indicators of how this affects the real estate industry in general, and the Company in particular, are slightly reduced occupancy rates, flattening and reductions in market rental rates. The Company's property type and diverse geographic locations provide some degree of risk moderation but are not immune to a prolonged down cycle in the real estate markets in which the Company operates. Although the Company believes it is well positioned to meet the challenges ahead, it is possible that further reductions in occupancy and market rental rates will result in reduction of rental revenues, operating income, cash flows, and market value of the Company's shares. Prolonged recession could also affect the Company's ability to obtain financing at acceptable rates of interest and to access funds from the disposition of properties at acceptable disposition prices. 13 Competition In The Multifamily Residential Market May Adversely Affect Operations And The Rental Demand For The Company's Properties There are numerous housing alternatives that compete with the multifamily Properties in attracting residents. These include other multifamily rental apartments and single-family homes that are available for rent in the markets in which the Properties are located. The Properties also compete for residents with new and existing homes and condominiums that are for sale. If the demand for the Company's Properties is reduced or if competitors develop and/or acquire competing properties on a more cost-effective basis, rental rates may drop, which may have a material adverse affect on the financial condition and results of operations of the Company. The Company also faces competition from other real estate investment trusts, businesses and other entities in the acquisition, development and operation of properties. Some of the competitors are larger and have greater financial resources than the Company. This competition may result in increased costs of properties the Company acquires and/or develops. Debt Financing On Properties May Result In Insufficient Cash Flow Where possible, the Company intends to continue to use leverage to increase the rate of return on its investments and to provide for additional investments that the Company could not otherwise make. There is a risk that the cash flow from the Properties will be insufficient to meet both debt payment obligations and the distribution requirements of the real estate investment trust provisions of the Internal Revenue Code of 1986, as amended. The Company may obtain additional debt financing in the future, through mortgages on some or all of the Properties. These mortgages may be recourse, non-recourse, or cross-collateralized. As of December 31, 2001, the Company had 43 properties encumbered by debt. Of the 43 properties, 24 are secured by deeds of trust relating solely to those properties, and with respect to the remaining 19 properties, five cross-collateralized mortgages are secured by eight properties, three properties, three properties, three properties and two properties, respectively. The holders of this indebtedness will have a claim against these Properties and to the extent indebtedness is cross collateralized, lenders may seek to foreclose upon properties, which are not the primary collateral for their loan. This may, in turn, accelerate other indebtedness secured by Properties. Foreclosure of Properties would cause a loss to the Company of income and asset value. Increase In Dividend Requirements As A Result Of Preferred Stock May Lead To A Possible Inability To Sustain Dividends In 1998 and 1999, the Operating Partnership issued $210 million in aggregate of Series B Cumulative Redeemable Preferred Units (the "Series B Preferred Units"), Series C Cumulative Redeemable Preferred Units, (the "Series C Preferred Units"), Series D Cumulative Redeemable Preferred Units (the "Series D Preferred Units") and Series E Cumulative Redeemable Preferred Units (the "Series E Preferred Units"). The Series B Preferred Units, the Series C Preferred Units, the Series D Preferred Units and the Series E Preferred Units are collectively referred to herein as the "Preferred Units". The terms of the preferred stock into which each series of Preferred Units are exchangeable provide for certain cumulative preferential cash distributions per each share of preferred stock. These terms also provide that while such preferred stock is outstanding, no distributions may be authorized, declared or paid on the Common Stock unless all distributions accumulated on all shares of such preferred stock have been paid in full. The distributions payable on such preferred stock may impair the Company's ability to pay dividends on its Common Stock. If the Company wishes to issue any Common Stock in the future (including, upon exercise of stock options), the funds required to continue to pay cash dividends at current levels will be increased. The Company's ability to pay dividends will depend largely upon the performance of the Properties and other properties that may be acquired in the future. 14 The Company's ability to pay dividends on the Company's stock is further limited by the Maryland General Corporation Law. Under the Maryland General Corporation Law, the Company may not make a distribution on stock if, after giving effect to such distribution, either: . the Company would not be able to pay its indebtedness as it becomes due in the usual course of business; or . the Company's total assets would be less than its total liabilities. If the Company cannot pay dividends on its stock, its status as a real estate investment trust may be jeopardized. Existing Registration Rights And Preemptive Rights May Have An Adverse Effect On The Market Price Of The Shares Registration rights are held by the senior members of the Company's management and certain outside investors (collectively, the "Operating Partnership Holders") who as of December 31, 2001 owned approximately 11.0% limited partnership interests in the Operating Partnership. These rights include certain "demand" and "piggyback" registration rights with respect to shares of Common Stock issuable in connection with the exchange of their limited partnership interests in the Operating Partnership. The aggregate 11.0% limited partnership interests held by the "Operating Partnership Holders" in the Operating Partnership is exchangeable for an aggregate of 2,286,082 shares of Common Stock. In addition, the Operating Partnership has invested in certain real estate partnerships. Certain partners in such limited partnerships have the right to have their limited partnership interests in such partnerships redeemed for cash or, at the Company's option, for 1,511,533 shares of Common Stock. These partners also have certain "demand" and "piggyback" registration rights with respect to the shares of Common Stock that may be issued in exchange for such limited partnership interests. All of the registration rights discussed above could materially adversely affect the market price for the shares of Common Stock. Our Chairman is Involved in Other Real Estate Activities and Investments, Which May Lead to Conflicts of Interest Our Chairman, George Marcus, owns interests in various other real estate-related business and investments. He is the Chairman of The Marcus & Millichap Company ("M&M"), which is the holding company for real estate brokerage and services companies. M&M has an interest in Pacific Properties, a company that invests in West Coast multifamily residential properties. The Company has sold an office building which it previously occupied to The Marcus & Millichap Company. Mr. Marcus has entered into an agreement with the Company whereby the Company has the right of first refusal to acquire multifamily properties under contract by Marcus & Millichap and its affiliates in situations where both the Company and Marcus & Millichap have offered to purchase the property. Notwithstanding this agreement, Mr. Marcus and affiliated entities may potentially compete with the Company in acquiring multifamily properties, which competition may be detrimental to the Company. In addition, due to such potential competition for real estate investments, Mr. Marcus and affiliated entities may have a conflict of interest with the Company, which may be detrimental to the interests of the Company's shareholders. The Influence of Executive Officers, Directors and Significant Stockholders May Be Detrimental To Holders of Common Stock As of December 31, 2001, George M. Marcus, the Chairman of the Company's Board of Directors, wholly or partially owned 1,972,929 shares of Common Stock (including shares issuable upon exchange of limited partnership interests in the Operating Partnership and certain other partnerships and assuming exercise of all vested options). This represents approximately 9.5% of the outstanding shares of Common Stock. Mr. Marcus 15 currently does not have majority control over the Company. However, he currently has, and likely will continue to have, significant influence with respect to the election of directors and approval or disapproval of significant corporate actions. Consequently, his influence could result in decisions that do not reflect the interests of all stockholders of the Company. Under the partnership agreement of the Operating Partnership, the consent of the holders of limited partnership interests is generally required for any amendment of the agreement and for certain extraordinary actions. Through their ownership of limited partnership interests and their positions in the Company, the Company's directors and executive officers, including Messrs Marcus and Millichap, have substantial influence on the Company. Consequently, their influence could result in decisions that do not reflect the interests of all stockholders of the Company. The Voting Rights Of Preferred Stock May Allow Holders Of Preferred Stock To Impede Actions That Otherwise Benefit Holders Of Common Stock In general, the holders of the preferred stock into which the Company's Preferred Units are exchangeable do not have any voting rights. However, if full distributions are not made on any outstanding preferred stock for six quarterly distributions periods, the holders of preferred stock who have not received distributions, voting together as a single class, will have the right to elect two additional directors to serve on the Company's Board of Directors. These voting rights continue until all distributions in arrears and distributions for the current quarterly period on the preferred stock have been paid in full. At that time, the holders of the preferred stock are divested of these voting rights, and the term and office of the directors so elected immediately terminates. In addition, while any shares of preferred stock (into which the preferred units are exchangeable) are outstanding, the Company (1) may not authorize or create any class of series of stock that ranks senior to this preferred stock with respect to the payment of dividends, rights upon liquidation, dissolution or winding-up of the Company, or (2) amend, alter or repeal the provisions of the Company's Charter or Bylaws, that would materially and adversely af fect these rights without the consent of the holders of two-thirds of the outstanding shares of each series of preferred stock (as applicable), each voting separately as a single class. Also, while any shares of preferred stock are outstanding, the Company may not (1) merge or consolidate with another entity, or (2) transfer substantially all of its assets to any corporation or other entity, without the affirmative vote of the holders of at least two-thirds of each series of preferred stock, each voting separately as a class, unless the transaction meets certain criteria. These voting rights of the preferred stock may allow holders of preferred stock to impede or veto actions by the Company that would otherwise benefit the holders of the Company's Common Stock. Exemption Of George Marcus From The Maryland Business Combination Law May Allow Certain Transactions Between The Company And George Marcus To Proceed Without Compliance With Such Law The Maryland General Corporation Law establishes special requirements for "business combinations" between a Maryland corporation and "interested stockholders" unless exemptions are applicable. An interested stockholder is any person who beneficially owns ten percent or more of the voting power of the then-outstanding voting stock. Among other things, the law prohibits for a period of five years a merger and other similar transactions between the Company and an interested stockholder unless the Board of Directors approved the transaction prior to the party becoming an interested stockholder. The five-year period runs from the most recent date on which the interested stockholder became an interested stockholder. The law also requires a supermajority stockholder vote for such transactions after the end of the five-year period. This means that the transaction must be approved by at least: . 80% of the votes entitled to be cast by holders of outstanding voting shares; and . 66% of the votes entitled to be cast by holders of outstanding voting shares other than shares held by the interested stockholder with whom the business combination is to be effected. 16 However, as permitted by the statute, the Board of Directors irrevocably has elected to exempt any business combination by the Company, George M. Marcus, William A. Millichap, who are the chairman and a director of the Company, respectively, and The Marcus & Millichap Company ("M&M") or any entity owned or controlled by Messrs Marcus and Millichap and M&M. Consequently, the five-year prohibition and the super-majority vote requirement described above will not apply to any business combination between the Company and Mr. Marcus, Mr. Millichap, or M&M. As a result, the Company may in the future enter into business combinations with Messrs Marcus and Millichap and M&M, without compliance with the super-majority vote requirements and other provisions of the Maryland General Corporation Law. Anti-Takeover Provisions Contained In The Operating Partnership Agreement, Charter, Bylaws, And Certain Provisions Of Maryland Law Could Delay, Defer Or Prevent A Change In Control Of the Company While the Company is the sole general partner of the Operating Partnership, and generally has full and exclusive responsibility and discretion in the management and control of the Operating Partnership, certain provisions of the Operating Partnership's Partnership Agreement place limitations on the Company's ability to act with respect to the Operating Partnership. Such limitations could delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for the stock or otherwise be in the best interest of the stockholders or that could otherwise adversely affect the interest of the stockholders. The Partnership Agreement provides that if the limited partners own at least 5% of the outstanding units of limited partnership interest in the Operating Partnership, the Company cannot, without first obtaining the consent of a majority-in-interest of the limited partners in the Operating Partnership, transfer all or any portion of the Company's general partner interest in the Operating Partnership to another entity. Such limitations on the Company's ability to act may result in the Company being precluded from taking action that the Board of Directors believes is in the best interests of the Company's stockholders. In addition, as of December 31, 2001, two individuals together held more than 50% of the outstanding units of limited partnership interest in the Operating Partnership, allowing such actions to be blocked by a small number of limited partners. The Company's charter authorizes the issuance of additional shares of Common Stock or preferred stock and the setting of the preferences, rights and other terms of such preferred stock without the approval of the holders of the Common Stock. Although the Company has no intention to issue any additional shares of preferred stock at the present time, the Company may establish one or more series of preferred stock that could delay, defer or prevent a transaction or a change in control of the Company. Such a transaction might involve a premium price for the Company's stock or otherwise be in the best interests of the holders of Common Stock. Also, such a class of preferred stock could have dividend, voting or other rights that could adversely affect the interest of holders of Common Stock. The Company's charter, as well as its stockholder rights plan, also contains other provisions that may delay, defer or prevent a transaction or a change in control of the Company that might be in the best interest of the Company's stockholders. The Company's stockholder rights plan is designed, among other things, to prevent a person or group from gaining control of the Company without offering a fair price to all of the Company's stockholders. Also, the Bylaws may be amended by the Board of Directors to include provisions that would have a similar effect, although the Company presently has no such intention. The Charter contains ownership provisions limiting the transferability and ownership of shares of capital stock, which may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company. For example, subject to receiving an exemption from the Board of Directors, potential acquirers may not purchase more than 6% percent in value of the stock (other than qualified pension trusts which can acquire 9.9%). This may discourage tender offers that may be attractive to the holders of Common Stock and limit the opportunity for stockholders to receive a premium for their shares of Common Stock. In addition, the Maryland General Corporations Law restricts the voting rights of shares deemed to be "control shares." Under the Maryland General Corporations Law, "control shares" are those which, when aggregated with any other shares held by the acquirer, entitle the acquirer to exercise voting power within 17 specified ranges. Although the Bylaws exempt the Company from the control share provisions of the Maryland General Corporations Law, the provisions of the Bylaws may be amended or eliminated by the Board of Directors at any time in the future. Moreover, any such amendment or elimination of such provision of the Bylaws may result in the application of the control share provisions of the Maryland General Corporations Law not only to control shares which may be acquired in the future, but also to control shares previously acquired. If the provisions of the Bylaws are amended or eliminated, the control share provisions of the Maryland General Corporations Law could delay, defer or prevent a transaction or change in control of the Company that might involve a premium price for the stock or otherwise be in the best interests of its stockholders. The Company's Guarantee of the Director and Executive Stock Purchase Program May Lead to Liability For the Company In September 1999, the Company formed a program in which directors and management of the Company can participate indirectly in an investment in the Company's Common Stock. The participants have entered into a swap agreement with a securities broker whereby the securities broker has acquired, in open marked transactions, 223,475 shares of the Company's Common Stock. The agreement terminates in five years, or earlier under certain circumstances, at which time the settlement amount is determined by comparing the original purchase price of the stock plus interest at a rate of LIBOR plus 1.5% to the termination date market value of the shares and all dividends received during the investment period. In certain circumstances the participants may be required to provide collateral to the securities broker. The Company has guaranteed performance of the participants with respect to any obligations relating to the swap agreement. Due to this guarantee, if the swap agreement, upon its termination, results in a net loss to participants, the Company could be liable for paying the loss. Further, if collateral is required to be advanced to the securities broker, the Company could be obligated to make such advance, which in turn could be costly to the Company. From August 2001 through January 2002, the directors and management effected an early termination of the agreement with respect to 120,718 shares of the total 223,475 shares, realizing a gain of approximately $15 per share. Bond Compliance Requirements May Limit Income From Certain Properties At December 31, 2001, the Company had approximately $58.8 million of tax-exempt financing relating to the Inglenook Court Apartments, Wandering Creek Apartments, Treetops Apartments, Huntington Breakers Apartments and Camarillo Oaks Apartments. This tax-exempt financing subjects these Properties to certain deed restrictions and restrictive covenants. The Company expects to engage in tax-exempt financings in the future. In addition, the Internal Revenue Code of 1986, as amended, (the "Code") and its related regulations impose various restrictions, conditions and requirements excluding interest on qualified bond obligations from gross income for federal income tax purposes. The Code also requires that at least 20% of apartment units be made available to residents with gross incomes that do not exceed 50% of the median income for the applicable family size as determined by the Housing and Urban Development Department of the federal government. In addition to federal requirements, certain state and local authorities may impose additional rental restrictions. These restrictions may limit income from the tax-exempt financed properties if the Company is required to lower rental rates to attract residents who satisfy the median income test. If the Company does not reserve the required number of apartment homes for residents satisfying these income requirements, the tax-exempt status of the bonds may be terminated, the obligations under the bond documents may be accelerated and the Company may be subject to additional contractual liability. Adverse Effect To Property Income And Value Due To General Real Estate Investment Risks Real property investments are subject to a variety of risks. The yields available from equity investments in real estate depend on the amount of income generated and expenses incurred. If the Properties do not generate sufficient income to meet operating expenses, including debt service and capital expenditures, cash flow and ability to make distributions to stockholders will be adversely affected. The performance of the economy in each of the areas in which the Properties are located affects occupancy, market rental rates and expenses. 18 Consequently, the income from the Properties and their underlying values may be impacted. The financial results of major local employers may have an impact on the cash flow and value of certain of the Properties as well. Income from the Properties may be further adversely affected by, among other things, the following factors: . the general economic climate; . local economic conditions in which the Properties are located, such as oversupply of space or a reduction in demand for rental space; . the attractiveness of the Properties to tenants; . competition from other available space; . the Company's ability to provide for adequate maintenance and insurance; and . increased operating expenses. Also, as leases on the Properties expire, tenants may enter into new leases on terms that are less favorable to the Company. Income and real estate values may also be adversely affected by such factors as applicable laws (e.g., the Americans With Disabilities Act of 1990 and tax laws), interest rate levels and the availability and terms of financing. In addition, real estate investments are relatively liquid and, therefore, the Company's ability to vary its portfolio promptly in response to changes in economic or other conditions may be adversely affected. The Company's Joint Ventures And Joint Ownership Of Properties And Partial Interests In Corporations And Limited Partnerships Could Limit the Company's Ability To Control Such Properties And Partial Interests Instead of purchasing properties directly, the Company has invested and may continue to invest as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, it is possible that the co-venturer in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with the Company's business interests or goals, or be in a position to take action contrary to the Company's instructions or requests, or to Company policies or objectives. Consequently, a co-venturer's actions might subject property owned by the joint venture to additional risk. Although the Company seeks to maintain sufficient control of any joint venture to achieve its objectives, the Company may be unable to take action without the Company's joint venture partners' approval, or joint venture partners could take actions binding on the joint venture without consent. Additionally, should a joint venture partner become bankrupt, the Company could become liable for such partner's share of joint venture liabilities. From time to time, the Company, through the Operating Partnership, invests in corporations, limited partnerships, limited liability companies or other entities that have been formed for the purpose of acquiring, developing or managing real property. In certain circumstances, the Operating Partnership's interest in a particular entity may be less than a majority of the outstanding voting interests of that entity. Therefore, the Operating Partnership's ability to control the daily operations of such an entity may be limited. Furthermore, the Operating Partnership may not have the power to remove a majority of the board of directors (in the case of a corporation) or the general partner or partners (in the case of a limited partnership) of such an entity in the event that its operations conflict with the Operating Partnership's objectives. In addition, the Operating Partnership may not be able to dispose of its interests in such an entity. In the event that such an entity becomes insolvent, the Operating Partnership may lose up to its entire investment in and any advances to the entity. In addition, the Company has and in the future may enter into transactions that could require it to pay the tax liabilities of partners, which contribute assets into joint ventures or the Company Operating Partnership for negotiated periods of the years in the event that certain taxable events, which are within the Company's control, occur. Although the Company plans to hold the contributed assets or defer recognition per Internal Revenue Code Section 1031, this is no assurance that it will be able to do so and if such tax liabilities were incurred they would have a material impact on the Company's financial position. 19 Dedicated Investment Activities and Other Factors Specifically Related to the Fund The Company has recently organized an investment fund, the Essex Apartment Value Fund, L.P. (the "Fund"), which will be, subject to specific exceptions, the Company's exclusive investment vehicle for new investment until at least 90% of the Fund's committed capital has been invested or committed for investments, or if earlier, December 31, 2003. The Company is committed to invest 21.4% of the aggregate capital committed to the Fund. This Fund involves risks to Essex such as the following: Essex's partners in the Fund might become bankrupt (in which event Essex might become generally liable for the liabilities of the Fund) or have economic or business interests or goals that are inconsistent with the Company's business interests or goals, or fail to approve decisions regarding the Fund that are in the best interest of the Company. Essex will, however, generally seek to maintain sufficient control over the Fund to permit it to achieve its business objectives. Investments In Mortgages And Other Real Estate Securities The Company may invest in securities related to real estate, which could adversely affect its ability to make distributions to stockholders. The Company may purchase securities issued by entities, which own real estate and may also invest in mortgages. These mortgages may be first, second or third mortgages that may or may not be insured or otherwise guaranteed. The Company anticipates that such investment in mortgage receivables will not in the aggregate be significant. In general, investments in mortgages include the following risks: . that the value of mortgaged property may be less than the amounts owed; . that interest rates payable on the mortgages may be lower than the Company's cost of funds; and . in the case of junior mortgages, that foreclosure of a senior mortgage would eliminate the junior mortgage. If any of the above were to occur, cash flows from operations and the Company's ability to make expected dividends to stockholders could be adversely affected. Possible Environmental Liabilities Investments in real property create a potential for environmental liabilities on the part of the owner of such real property. The Company carries certain insurance coverage for this type of environmental risk. The Company has conducted environmental studies which revealed the presence of groundwater contamination at certain properties; such contamination at certain of these properties was reported to have migrated on-site from adjacent industrial manufacturing operations. The former industrial users of the properties were identified as the source of contamination. The environmental studies noted that certain properties are located adjacent to any possible down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such properties. The environmental studies also noted that at certain of these properties, contamination existed because of the presence of underground fuel storage tanks, which have been removed. In general, in connection with the ownership, operation, financing, management and development of real properties, the Company may be potentially liable for removal or clean-up costs, as well as certain other costs and environmental liabilities. The Company may also be subject to governmental fines and costs related to injuries to persons and property. Recently there has been an increasing number of lawsuits against owners and managers of multifamily properties other than Essex alleging personal injury and property damage caused by the presence of mold in residential real estate. Mold related claims are often excluded from standard insurance policies. Should an uninsured mold related claim arise against Essex, we could be required to use our own funds to resolve the claim and to make any needed cleanups to the involved property. California has enacted legislation commonly referred to as "Proposition 65" requiring that "clear and reasonable" warnings be given to consumers who are exposed to chemicals known to the State to cause cancer or reproductive toxicity, including tobacco smoke. Although Essex has sought to comply with Proposition 65 20 requirements, there can be no assurance that Essex will not be adversely affected by litigation relating to Proposition 65. Essex cannot be assured that existing environmental assessments of its properties reveal all environmental liabilities, that any prior owner of any of our properties did not create a material environmental condition not known to Essex, or that a material environmental condition does not otherwise exist as to any one or more of its properties. General Uninsured Losses The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the Properties. There are, however, certain types of extraordinary losses for which the Company does not have insurance. Certain of the Properties are located in areas that are subject to earthquake activity. The Company has obtained certain limited earthquake insurance coverage. The Company may sustain losses due to insurance deductibles, co-payments on insured losses or uninsured losses, or losses in excess of applicable coverage. Changes In Real Estate Tax And Other Laws Generally the Company does not directly pass through costs resulting from changes in real estate tax laws to residential property tenants. The Company also does not generally pass through increases in income, service or other taxes, to tenants under leases. These costs may adversely affect funds from operations and the ability to make distributions to stockholders. Similarly, compliance with changes in (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions or (ii) rent control or rent stabilization laws or other laws regulating housing may result in significant unanticipated expenditures, which would adversely affect funds from operations and the ability to make distributions to stockholders. Changes In Financing Policy; No Limitation On Debt The Company has adopted a policy of maintaining a debt-to-total-market-capitalization ratio of less than 50%. The calculation of debt-to-total-market-capitalization is as follows: total property indebtedness = debt-to-total-market-capitalization - ---------------------------------------------------------------- total property indebtedness + total equity market capitalization
As used in the above formula, total market capitalization is equal to the aggregate market value of the outstanding shares of Common Stock (based on the greater of current market price or the gross proceeds per share from public offerings of the outstanding shares plus any undistributed net cash flow), assuming the conversion of all limited partnership interests in the Operating Partnership into shares of Common Stock and the gross proceeds of the preferred units of the Operating Partnership. Based on this calculation (including the current market price and excluding undistributed net cash flow), the Company's debt-to-total-market-capitalization ratio was approximately 33.8% as of December 31, 2001. The Company's organizational documents and the organizational documents of the Operating Partnership do not limit the amount or percentage of indebtedness that may be incurred. Accordingly, the Board of Directors could change current policies and the policies of the Operating Partnership regarding indebtedness. If these policies were changed, the Company and the Operating Partnership could incur more debt, resulting in an increased risk of default on the Company's obligations and the obligations of the Operating Partnership, and an increase in debt service requirements that could adversely affect the financial condition and results of operations of the Company. Such increased debt could exceed the underlying value of the Properties. 21 Failure To Qualify As A Real Estate Investment Trust The Company has operated as a qualified real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 1994. Although the Company believes that it has operated in a manner which satisfies the real estate investment trust qualification requirements, no assurance can be given that the Company will continue to do so. A real estate investment trust is generally not taxed on its net income distributed to its stockholders. It is required to distribute at least 90% of its taxable income to maintain qualification as a real estate investment trust. Qualification as a real estate investment trust involves the satisfaction of numerous requirements (some on an annual or quarterly basis) established under the highly technical and complex Internal Revenue Code of 1986, as amended, provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within the Company's control. If the Company fails to qualify as a real estate investment trust in any taxable year, it would generally be subject to federal and state income tax (including any applicable alternative minimum tax) at corporate rates on its taxable income for such year. Moreover, unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a real estate investment trust for the four taxable years following the year of disqualification. This treatment would reduce net earnings available for investment or distribution to stockholders because of the additional tax liability for the years involved. In addition, distributions would no longer be required to be made. Other Matters Certain Policies of the Company The Company intends to continue to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. The Company has in the past five years and may in the future (i) issue securities senior to its Common Stock, (ii) fund acquisition activities with borrowings under its line of credit and (iii) offer shares of Common Stock and/or units of limited partnership interest in the Operating Partnership as partial consideration for property acquisitions. The Company from time to time acquires partnership interests in partnerships and joint ventures, either directly or indirectly through subsidiaries of the Company, when such entities' underlying assets are real estate. In general, the Company does not (i) underwrite securities of other issuers or (ii) actively trade in loans or other investments. The Company primarily invests in multifamily properties in 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 Company currently intends to continue to invest in multifamily properties in such regions, but may change such policy without a vote of the stockholders. The policies discussed above may be reviewed and modified from time to time by the Board of Directors without the vote of the stockholders. Item 2. Properties The Company's property portfolio (including partial ownership interests) consists of 94 Properties: 92 multifamily residential Properties containing 20,762 apartment units, one office building in Northern California, which houses the Company's headquarters, with approximately 17,400 square feet and an approximately 38,940 square foot office building in Southern California. 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 Company's multifamily Properties accounted for in excess of 95% of the Company's revenues for the year ended December 31, 2001. The 92 multifamily residential Properties had an average occupancy rate (based on 22 "Financial Occupancy", which refers to the percentage resulting from dividing actual rents by total possible rents as determined by valuing occupied units at contractual rates and vacant units at market rents) during the year ended December 31, 2001 of approximately 95%. As of December 31, 2001, the headquarters building was 100% occupied by the Company and the Southern California office building was 91% occupied. With respect to stabilized multifamily properties with sufficient operating history, occupancy figures are based on Financial Occupancy. With respect to office buildings or multifamily properties which have not yet stabilized or have insufficient operating history, occupancy figures are based on "Physical Occupancy" which refers to the percentage resulting from dividing leased and occupied square footage by rentable square footage. For the year ended December 31, 2001, none of the Company's Properties had book values equal to 10% or more of total assets of the Company or gross revenues equal to 10% or more of aggregate gross revenues of the Company. Multifamily Residential Properties The Company's multifamily Properties are generally suburban garden apartments and townhomes comprising multiple clusters of two and three story buildings situated on three to fifteen acres of land. The multifamily properties have on average 226 units, with a mix of studio, one, two and some three-bedroom units. A wide variety of amenities are available at each apartment community, including, covered parking, wood-burning fireplaces, swimming pools, clubhouses with complete fitness facilities, volleyball and playground areas and tennis courts. Most of the multifamily Properties are designed for and marketed to people in white-collar or technical professions. The Company selects, trains and supervises a full team of on-site service and maintenance personnel. The Company believes that its customer service approach enhances its ability to retain tenants and that its multifamily Properties were built well and have been maintained well since acquisition. Office Buildings The Company's corporate headquarters are located in a two-story office building with approximately 17,400 square feet located at 925 East Meadow Drive, Palo Alto, California. The Company acquired this property in 1997. The Company also has an office building in Southern California (Woodland Hills), an approximately 38,940 square feet of which the Company currently occupies approximately 6,800 square feet. The building has ten third party tenants occupying approximately 28,700 feet. The largest single tenant occupies approximately 10,900 square feet. The Company acquired this property in 2001. 23 The following tables describe the Company's Properties as of December 31, 2001. The first table describes the Company's multifamily residential properties and the second table describes the Company's office buildings.
Rentable Square Year Year Multifamily Residential Properties(1) Location Units Footage Built Acquired Occupancy(2) - ------------------------------------- -------- ----- --------- ----- -------- ------------ Northern California Brookside Oaks (3)................... Cupertino, CA 170 119,980 1973 2000 96% The Point at Cupertino (Westwood)(4). Cupertino, CA 116 135,288 1963(5) 1998 95%(6) Stevenson Place...................... Fremont, CA 200 146,296 1971(7) 1982 92% Treetops (8)......................... Fremont, CA 172 131,270 1978 1996 95% Wimbledon Woods...................... Hayward, CA 560 462,400 1975 1998 92% Summerhill Commons................... Newark, CA 184 139,012 1987 1987 92% Marina Cove (9)...................... Santa Clara, CA 292 250,294 1974 1994 98% Plumtree............................. Santa Clara, CA 140 113,260 1975(10) 1994 92%(6) Mt. Sutro Terrace (8)................ San Francisco, CA 99 64,095 1973 1999 97% The Carlye (8)....................... San Jose, CA 132 129,216 2000 2000 95% Waterford Place...................... San Jose, CA 238 219,642 2000 2000 92% Bel Air (8).......................... San Ramon, CA 462 391,136 1988(11) 1995 96% Eastridge............................ San Ramon, CA 188 174,104 1988 1996 97% Foothill Gardens..................... San Ramon, CA 132 155,100 1985 1997 96% Twin Creeks.......................... San Ramon, CA 44 51,700 1985 1997 96% Bristol Commons (8).................. Sunnyvale, CA 188 142,668 1989 1995 97% Oak Pointe........................... Sunnyvale, CA 390 294,180 1973 1988 96% Summerhill Park...................... Sunnyvale, CA 100 78,584 1988 1988 97% Windsor Ridge........................ Sunnyvale, CA 216 161,892 1989 1989 96% ----- --------- --- 4,023 3,360,117 95% Pacific Northwest Seattle, Washington Metropolitan Area Emerald Ridge........................ Bellevue, WA 180 144,036 1987 1994 92% Foothill Commons (8)................. Bellevue, WA 360 288,317 1978 1990 94% The Palisades (8).................... Bellevue, WA 192 159,792 1977 1990 96% Sammamish View....................... Bellevue, WA 153 133,590 1986 1994 97% Woodland Commons (8)................. Bellevue, WA 236 172,316 1978 1990 92% Inglenook Court...................... Bothell, WA 224 183,624 1985 1994 95% Salmon Run at Perry Creek............ Bothell, WA 132 117,125 2000 2000 94% Stonehedge Village (8)............... Bothell, WA 196 214,872 1986 1997 94% Park Hill at Issaquah (12)........... Issaquah, WA 245 277,778 1999 1999 89% Wandering Creek...................... Kent, WA 156 124,366 1986 1995 97% Bridle Trails (8).................... Kirkland, WA 92 73,448 1986 1997 97% Evergreen Heights.................... Kirkland, WA 200 188,340 1990 1997 95% Laurels at Mill Creek................ Mill Creek, WA 164 134,360 1981 1996 95% Anchor Village (3)................... Mukilteo, WA 301 245,928 1981 1997 94% Castle Creek......................... Newcastle, WA 216 191,935 1997 1997 96% Brighton Ridge....................... Renton, WA 264 201,300 1986 1996 95% Fountain Court (8)................... Seattle, WA 320 207,037 2000 2000 90% Linden Square........................ Seattle, WA 183 142,271 1994 2000 94% Maple Leaf (8)....................... Seattle, WA 48 35,584 1986 1997 98% Spring Lake (8)...................... Seattle, WA 69 42,325 1986 1997 99% Wharfside Pointe..................... Seattle, WA 142 119,290 1990 1994 92% Meadows at Cascade Park.............. Vancouver, WA 198 199,377 1989 1997 94% Village at Cascade Park.............. Vancouver, WA 192 178,144 1989 1997 93% Portland, Oregon Metropolitan Area Andover Park (13).................... Beaverton, OR 240 227,804 1992 2001 91% Jackson School Village (8)........... Hillsboro, OR 200 196,896 1996 1996 92% Landmark............................. Hillsboro, OR 285 282,934 1990 1996 94% Hunt Club (13)....................... Lake Oswego, OR 256 198,056 1985 2000 92% ----- --------- --- 5,444 4,680,845 94%
24
Rentable Square Year Year Multifamily Residential Properties(1) Location Units Footage Built Acquired Occupancy(2) - ------------------------------------- -------- ------ ---------- ----- -------- ------------ Southern California Barkley Apartments(14)(15)............ Anaheim, CA 161 139,835 1984 2000 97% Vista Pointe(16)...................... Anaheim, CA 286 242,410 1968 1985 97% Camarillo Oaks(8)..................... Camarillo, CA 564 459,072 1985 1996 94% Marbrisas Apartments(13).............. Chula Vista, CA 500 540,116 1991 2001 94% Casa Mango(4)......................... Del Mar, CA 96 88,112 1981 1997 98% Valley Park(3)........................ Fountain Valley, CA 160 169,788 1969 2001 93% Capri at Sunny Hills(3)............... Fullerton, CA 100 128,100 1961 2001 97% Wilshire Promenade.................... Fullerton, CA 128 108,470 1992 1997 95% Montejo(3)............................ Garden Grove, CA 124 103,280 1974 2001 93% Hampton Court (Columbus)(8)........... Glendale, CA 83 71,573 1974(17) 1999 93% Hampton Place (Loraine)(8)............ Glendale, CA 132 141,591 1970(18) 1999 92% Huntington Breakers(8)................ Huntington Beach, CA 342 241,763 1984 1997 92% Hillsborough Park..................... La Habra, CA 235 215,510 1999 1999 96% Rosebeach(13)......................... La Mirada, CA 174 172,202 1970 2000 98% Trabuco Villas........................ Lake Forest, CA 132 131,032 1985 1997 96% Pathways.............................. Long Beach, CA 296 197,720 1975 1991 99% Bunker Hill(8)........................ Los Angeles, CA 456 346,672 1968 1998 95% City Heights(16)...................... Los Angeles, CA 687 424,170 1968 2000 93% Cochran Apartments.................... Los Angeles, CA 58 51,468 1989 1998 97% Kings Road............................ Los Angeles, CA 196 132,112 1979 1997 97% Park Place............................ Los Angeles, CA 60 48,000 1988 1997 97% Windsor Court......................... Los Angeles, CA 58 46,600 1988 1997 97% Mirabella............................. Marina Del Rey, CA 188 176,860 2000 2000 95% Hillcrest Park (Mirabella)............ Newbury Park, CA 608 521,968 1973(19) 1998 92% Coronado at Newport North(20)......... Newport Beach, CA 732 459,677 1968(21) 1999 92%(6) Coronado at Newport South(20)......... Newport Beach, CA 715 498,716 1968 1999 96% Fairways(8)(22)....................... Newport Beach, CA 74 107,160 1972 1999 94% Foxborough (Woodland Apartments)(13).. Orange, CA 90 108,000 1969(23) 2000 86%(6) Mariners Place........................ Oxnard, CA 105 77,254 1987 2000 98% Tierra Vista(4)....................... Oxnard, CA 404 387,144 2001 2001 96%(24) Monterey Villas (Village Apartments).. Oxnard, CA 122 122,120 1974(25) 1997 83%(6) Monterra del Mar (Windsor Terrace).... Pasadena, CA 123 74,475 1972(26) 1999 94% Monterra del Rey (Glenbrook).......... Pasadena, CA 84 73,101 1972(27) 1999 86%(6) Monterra del Sol (Euclid)............. Pasadena, CA 85 69,295 1972(28) 1999 93% Villa Angelina(3)..................... Placentia, CA 256 217,600 1970 2001 94% Crest, The(13)........................ Pomona, CA 501 498,036 1986 2000 91% Highridge(3).......................... Rancho Palos, CA 255 290,250 1972 1997 94% Bluffs II, The(29).................... San Diego, CA 224 126,744 1974 1997 97% Riverfront(4)......................... San Diego, CA 229 231,006 1990 1997 98% Hearthstone(3)........................ Santa Ana, CA 140 154,820 1970 2001 93% Tree House(3)......................... Santa Ana, CA 164 135,762 1970 2001 95% Meadowood(8).......................... Simi Valley, CA 320 264,568 1986 1996 94% Tara Village.......................... Tarzana, CA 168 173,600 1972 1997 97% El Encanto(13)........................ Tustin, CA 116 92,760 1969(30) 2000 94% The Lofts at Pinehurst (Villa Scandia) Ventura, CA 118 71,160 1971 1997 98% Avondale at Warner Center............. Woodland Hills, CA 446 331,072 1970 1999 94% ------ ---------- --- 11,295 9,462,744 94% ====== ========== --- Total/Weighted Average 20,762 17,503,706 95% ====== ========== ===
25
Number Rentable of Square Year Year Office Buildings (1) Location Tenants Footage Built Acquired Occupancy (2) - -------------------- -------- ------- -------- ----- -------- ------------- 925 East Meadow Drive........ Palo Alto, CA 1 17,404 1988 1997 100% 22110-22120 Clarendon Street. Woodland Hills, CA 11 38,940 1982 2001 91% -- ------ ---- Total Office Buildings 12 56,344 94% == ====== ====
- -------- (1) Unless otherwise specified, the Company has a 100% ownership interest in each Property. (2) For multifamily residential Properties, occupancy rates are based on Financial Occupancy for the year ended December 31, 2001; for the Office Buildings, occupancy rates are based on Physical Occupancy as of December 31, 2001. (3) The Company holds a 1% special limited partner interest in the partnerships, which own these multifamily properties. These investments were made under arrangements whereby EMC became the 1% sole general partner interest and the other limited partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain conditions, the Company may, however, elect to deliver an equivalent number of shares of the Company's Common Stock in satisfaction of the applicable partnership's cash redemption obligation. (4) The Company has a 20.0% ownership this property. (5) The Company completed a $2.7 million redevelopment on this property in 2001. (6) Financial Occupancy includes the impact of units that were not occupied due to redevelopment activity at this property. (7) The Company completed an approximately $4.5 million redevelopment on this property in 1998. (8) This Property is owned by a single asset limited partnership in which the Company has a minimum 99.0% limited partnership interest. (9) A portion of this Property on which 84 units are presently located is subject to a ground lease, which, unless extended, will expire in 2028. (10) The Company is in the process of performing a $3.2 million redevelopment on this property. (11) The Company completed construction of 114 units of the property's 462 total units in 2000. (12) The Company has as approximate 45% limited partnership interest in this property. (13) The Company has a 21.4% interest in this property owned by the Fund. (14) The Company has a 30% special limited partnership interest in this property, which own these multifamily properties. These investments were made under arrangements whereby EMC became the general partner and the existing partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain conditions, the Company may, however, elect to deliver an equivalent number of shares of the Company's Common Stock in satisfaction of the applicable partnership's cash redemption obligation. (15) The property is subject to a ground lease, which, unless extended, will expire in 2082. (16) The Company owns the land of this property and has entered into a leasehold interest for which it receives a monthly payment for the 34-year term of the lease. The Company may be required to sell its interest in the property anytime following the seventh anniversary of the date that the leasehold was created. (17) The Company completed an approximate $1.6 million redevelopment on this property in 2000. (18) The Company completed an approximate $2.3 million redevelopment on this property in 2000. (19) The Company completed an $11.0 million redevelopment on this property in 2001. (20) The Company has an approximate 49.9% ownership interest in this property. (21) The Company completed a $13.6 million redevelopment on this property in 2001. (22) This property is subject to a ground lease, which, unless extended, will expire in 2027. (23) The Company completed a $1.7 million redevelopment on this property in 2001. (24) Financial occupancy on development properties that have reached stabilization is computed from the date of stabilization through December 31, 2001. (25) The Company is in the process of performing a $3.2 million redevelopment on this property. (26) The Company completed a $1.9 million redevelopment on this property in 2000. (27) The Company completed a $1.9 million redevelopment on this property in 2001. (28) The Company is in the process of performing a $1.7 million redevelopment on this property. (29) The Company has an 85.0% limited partnership interest in this property. (30) The Company is in the process of performing a $3.3 million redevelopment on this property. 26 Item 3. Legal Proceedings Neither the Company nor any of the Properties is presently subject to any material litigation nor, to the Company's knowledge, is there any material litigation threatened against the Company or the Properties. The Properties are subject to certain routine litigation and administrative proceedings arising in the ordinary course of business, which, taken together, are not expected to have a material adverse impact on the Company's financial position, results of operations or liquidity. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 2001, no matters were submitted to a vote of security holders. 27 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The shares of the Company's common stock are traded on the New York Stock Exchange ("NYSE") under the symbol ESS. Market Information The Company's common stock has been traded on the NYSE since June 13, 1994. The high, low and closing price per share of common stock reported on the NYSE for the quarters indicated are as follows:
Quarter Ended High Low Close ------------- ------ ------ ------ December 31, 2001................................ $51.05 $45.50 $49.41 September 30, 2001............................... $54.67 $47.00 $49.10 June 30, 2001.................................... $50.97 $42.28 $49.55 March 31, 2001................................... $55.94 $46.96 $48.05 December 31, 2000................................ $57.75 $50.50 $54.75 September 30, 2000............................... $56.50 $42.00 $55.38 June 30, 2000.................................... $44.00 $36.00 $42.02 March 31, 2000................................... $36.31 $32.56 $36.00
The closing price as of March 25, 2002 was $53.65. Holders The approximate number of holders of record of the shares of the Company's common stock was 175 as of March 25, 2002. This number does not include stockholders whose shares are held in trust by other entities. The actual number of stockholders is greater than this number of holders of record. Return of Capital Under provisions of the Internal Revenue Code of 1986, as amended, the portion of cash dividend that exceeds earnings and profits is a return of capital. The return of capital is generated due to the deduction of non-cash expenses, primarily depreciation, in the determination of earnings and profits. The status of the cash dividends distributed for the years ended December 31, 2001, 2000 and 1999 for tax purposes is as follows:
2001 2000 1999 ------ ------ ------ Taxable portion............................. 100.00% 100.00% 100.00% Return of capital........................... -- -- -- ------ ------ ------ 100.00% 100.00% 100.00% ====== ====== ======
28 Dividends and Distributions Since its initial public offering on June 13, 1994, the Company has paid regular quarterly dividends to its stockholders. From inception, the Company has paid the following dividends per share of common stock:
Quarter Ended 1994 1995 1996 1997 1998 1999 2000 2001 ------------- ------- ------- ------- ------- ------- ------ ------ ------ 3/31.... N/A $0.4175 $0.4250 $0.4350 $0.4500 $.5000 $.5500 $.7000 6/30.... $0.0800 $0.4175 $0.4250 $0.4350 $0.5000 $.5500 $.6100 $.7000 9/30.... $0.4175 $0.4250 $0.4350 $0.4500 $0.5000 $.5500 $.6100 $.7000 12/31.... $0.4175 $0.4250 $0.4350 $0.4500 $0.5000 $.5500 $.6100 $.7000
Future distributions by the Company will be at the discretion of the Board of Directors and will depend on the actual funds from operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. There are currently no contractual restrictions on the Company's present or future ability to pay dividends. Dividend Reinvestment and Share Purchase Plan The Company has adopted a dividend reinvestment and share purchase plan designed to provide holders of Common Stock with a convenient and economical means to reinvest all or a portion of their cash dividends in shares of Common Stock and to acquire additional shares of Common Stock through voluntary purchases. Computershare, LLC, which serves as the Company's transfer agent, administers the dividend reinvestment and share purchase plan. For a copy of the plan, contact Computershare, LLC at (310) 360-5354. Stockholder Rights Plan In 1998, the Company adopted a stockholder rights plan that is designed to enhance the ability of all of the Company's stockholders to realize the long-term value of their investment. The rights plan is designed, among other things, to prevent a person or group from gaining control of the Company without offering a fair price to all of the Company's stockholders. On October 13, 1998, the Board declared a one for one preferred share purchase right (a "Right") for each outstanding share of Common Stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.0001 per share, of the Company, at a price of $99.13 per one-hundredth of a share, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of November 11, 1998, as amended between the Company and Computershare, LLC as Rights Agent. Unregistered Sales of Securities On March 22, 2001, in connection with the acquisition of The Carlyle Apartments in April 2000, Essex issued 158,202 Operating Partnership units convertible into Common Stock at the option of the holder. This was the final payment and was based on an amount that provides Essex with a targeted yield on the property. Total consideration paid for the property was $26.5 million. 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 1, 2001, in connection with the completion of its acquisition of the Mt. Sutro Terrace Apartments, the Company issued 50,725 Operating Partnership Units, which are convertible into common stock of the Company at the option of the holder. This private placement of operating partnership units was completed pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. 29 On November 1, 2001, the Company acquired ownership interests in partnerships which own the following five multifamily properties: Villa Angelina, Valley Park Apartments, Hearthstone Apartments, Treehouse Apartments, and Montejo Apartments. Each property is owned by a separate limited partnership in which the Company has a 1% special limited partnership interest and the 1% sole general partnership interest. The other limited partners were granted the right to require the applicable partnership to redeem their interest for cash. Subject to certain condition, the Company may elect to deliver an aggregate of 461,163 shares of the Company's common stock in lieu of the combined partnerships' redemption obligation. This private placement of limited partnerships interests was completed pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended. Transfer Agent Effective as of February 28, 2002, the Company's shareholder accounts are serviced by a new transfer agent, Computershare, LLC. 30 Item 6. Selected Financial Data The following tables set forth summary financial and operating information for the Company from January 1, 1997 through December 31, 2001.
As of December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- -------- -------- (Dollars in thousands, except per share amounts) OPERATING DATA: Revenues Rental.............................................. $ 177,954 $ 162,959 $ 137,262 $119,397 $ 79,936 Other property income............................... 5,528 4,812 3,165 2,645 1,464 Interest and other income........................... 22,152 10,969 5,618 3,217 3,169 ---------- ---------- ---------- -------- -------- Total revenues.................................. 205,634 178,740 146,045 125,259 84,569 ---------- ---------- ---------- -------- -------- EXPENSES Property operating expenses......................... 52,923 46,690 41,706 37,933 25,826 Depreciation and amortization....................... 36,295 30,765 26,150 21,948 13,992 Amortization of deferred financing costs............ 657 639 566 718 509 General and administrative.......................... 7,498 6,062 4,263 3,765 2,413 Other expenses...................................... -- -- -- 930 138 Interest............................................ 39,105 30,384 21,268 19,374 12,659 ---------- ---------- ---------- -------- -------- Total expenses.................................. 136,478 114,540 93,953 84,668 55,537 ---------- ---------- ---------- -------- -------- Income before gain on sales, minority interests and extraordinary item................................ 69,156 64,200 52,092 40,591 29,032 Gain on sales of real estate........................ 3,788 4,022 9,524 9 5,114 Minority interests.................................. (24,399) (23,750) (17,838) (9,554) (4,469) Extraordinary item--loss on early extinguishment of debt.............................................. -- (119) (214) (4,718) (361) ---------- ---------- ---------- -------- -------- Net income............................................. $ 48,545 $ 44,353 $ 43,564 $ 26,328 $ 29,316 ========== ========== ========== ======== ======== Net income per share--diluted.......................... $ 2.59 $ 2.37 $ 2.36 $ 1.36 $ 1.92 ========== ========== ========== ======== ======== Weighted average common stock outstanding--diluted (in thousands).................................... 18,768 18,658 18,491 16,809 15,285 Cash dividend per common share......................... $ 2.80 $ 2.38 $ 2.15 $ 1.95 $ 1.77 As of December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- -------- -------- BALANCE SHEET DATA: Investment in real estate (before accumulated depreciation)..................................... $1,175,200 $1,156,408 $ 929,076 $889,964 $730,987 Net investment in real estate....................... 1,018,931 1,036,909 832,471 812,175 702,716 Real estate under development....................... 93,256 38,231 120,414 53,213 20,234 Total assets........................................ 1,329,458 1,281,849 1,062,313 931,796 738,835 Total property indebtedness......................... 638,660 595,535 384,108 361,515 276,597 Stockholders' equity................................ 386,599 391,675 387,693 389,800 398,915 As of December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- -------- -------- OTHER DATA: Interest coverage ratio(1)............................. 3.7x 4.2x 4.7x 4.3x 4.4x Gross operating margin(2).............................. 71% 72% 70% 68% 68% Average same property monthly rental rate per apartment unit(3)(4)........................................... $ 1,153 $ 1,039 $ 950 $ 944 $ 852 Average same property monthly operating expenses per apartment unit(3)(5)................................. $ 293 $ 271 $ 259 $ 256 $ 257 Total multifamily units (at end of period)............. 20,762 18,673 15,106 12,267 10,700 Multifamily residential property occupancy rate(6)..... 95% 97% 96% 96% 96% Total properties (at end of period).................... 94 87 72 63 59
31 - -------- (1) Interest coverage ratio represents earnings before minority interest, expense, taxes, depreciation and amortization ("EBITDA") divided by interest expense. (2) Gross operating margin represents rental revenues and other property income less property operating expenses, exclusive of depreciation and amortization divided by rental revenues and other property income. (3) Same property apartment units are those units in properties that the Company has consolidated for the entire two years ended as of the end of the period set forth. The number of same property apartment units in such properties may vary at each year end. Percentage changes in averages per unit do not correspond to total same property revenues and expense percent changes which are discussed in Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations. (4) Average same property monthly rental rate per apartment unit represents total scheduled rent for the same property apartment units for the period (actual rental rates on occupied apartment units plus market rental rates on vacant apartment units) divided by the number of such apartment units and further divided by the number of months in the period. (5) Average same property monthly expenses per apartment unit represents total monthly operating expenses, exclusive of depreciation and amortization, for the same property apartment units for the period divided by the total number of such apartment units and further divided by the number of months in the period. (6) Occupancy rates are based on Financial Occupancy which refers to the percentage resulting from dividing actual rents by total possible rents as determined by valuing occupied units at contractual rates and vacant units at market rates. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is based on the consolidated financial statements of Essex Property Trust, Inc. ("Essex" or the "Company") as of and for the years ended December 31, 2001, 2000 and 1999. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. Substantially all the assets of the Company are held by, and substantially all operations are conducted through, Essex Portfolio, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership and, as of December 31, 2001, 2000, and 1999 owned an approximate 89.0%, 89.6% and 89.7% 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 this Annual Report 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, expectation as to the total projected costs 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, 2002, future acquisitions and developments, the anticipated performance of the Essex Apartment Value Fund, L.P., the anticipated performance of existing properties, 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 the total projected costs of current development projects will exceed expectations, that such development projects will not be completed, that acquisitions will fail to meet expectations, 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 32 capital expenditures will exceed the Company's current expectations, that the Essex Apartment Value Fund will fail to perform as anticipated, as well as those risks, special considerations, and other factors discussed under the caption "Other Matters/Risk Factors" in Item 1 of this Annual Report on Form 10-K for the year ended December 31, 2001, 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. Critical Accounting Policies and Estimates In response to the SEC's Release Number 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company identifies the following critical accounting areas that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The related accounting policies are included here and in the notes to the consolidated financial statements. The preparation of consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties and its investments in and advances to joint ventures and affiliates. The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Rental properties are recorded at cost less accumulated depreciation. Depreciation on rental properties has been provided over estimated useful lives ranging from 3 to 30 years using the straight-line method. Development costs include acquisition, direct and indirect construction costs, interest and real estate taxes incurred during the construction period, and certain operating expenses prior to property stabilization. Maintenance and repair expenses that do not add to the value or prolong the useful life of the property are expensed as incurred. Asset replacements and improvements are capitalized and depreciated over their estimated useful lives. The Company assesses the carrying value of its real estate investments by monitoring performance compared to budget for operating properties and joint ventures, and by monitoring contract performance for properties under development. Local market knowledge and data is used to assess carrying values of properties and the market value of acquisition opportunities. Whenever events or changes in circumstances indicate that the carrying amount of a property held for investment may not be fully recoverable, the carrying amount is evaluated. If the sum of the property's expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property, then the Company will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. Adverse changes in market conditions or poor operating results of real estate investments could result in impairment charges. When the Company determines that a property is held for sale, it discontinues the periodic depreciation of that property. Assets held for sale are reported at the lower of the carrying amount or estimated fair value less costs to sell. With respect to investments in and advances to joint ventures and affiliates, the Company looks to the underlying properties to assess performance and the recoverability of carrying amounts for those investments in a manner similar to direct investments in real estate properties. An impairment charge or investment valuation charge is recorded if the carrying value of the investment exceeds its fair value. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions. 33 General Background The Company's property revenues are generated primarily from multifamily property operations, which accounted for greater than 95% of its property revenues for the years ended December 31, 2001, 2000, and 1999. The Company's properties ("the Properties") are located in Northern California (the San Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and San Diego counties) and the Pacific Northwest (The Seattle, Washington and Portland, Oregon metropolitan areas). The average occupancy level of the Company's portfolio has exceeded 95% for the last five years. Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund managed by the Company and will be, subject to specific exceptions, the Company's exclusive investment vehicle for new investments until the Fund's committed capital has been invested or committed for investments, or if earlier, December 31, 2003. The Fund has total capital commitments of $250 million and is expected to utilize leverage of approximately 65% of the value of the underlying real estate portfolio. The Company is committed to invest 21.4% of the aggregate capital committed to the Fund. In addition, Essex will be compensated by the Fund for its asset management, property management, development and redevelopment services and may receive incentive distributions if the Fund exceeds certain financial return benchmarks. 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. 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"), in order to maintain compliance with REIT tax rules. The Company owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of the Company own 100% of EMC's 1,000 shares of Common Stock. Since the Company's initial public offering (the "IPO") in June 1994, the Company has acquired ownership interests in 76 multifamily residential properties, its headquarters building and its Southern California office building, of which 14 are located in Northern California, 42 are located in Southern California, 15 are located in the Seattle Metropolitan Area and 5 are located in the Portland Metropolitan Area. In total, these acquisitions consist of 16,451 units with total capitalized acquisition costs of approximately $1,254.3 million. Additionally, since its IPO, the Company has developed and has ownership interests in 9 multifamily development properties that have reached stabilized operations. These development properties consist of 1,944 units with total capitalized development costs of $236.8 million. As part of its active portfolio management strategy, the Company has disposed of, since its IPO, eight multifamily residential properties (six in Northern California, one in Southern California and one in the Pacific Northwest) consisting of a total of 1,021 units, six retail shopping centers in the Portland, Oregon metropolitan area and its former headquarters building located in Northern California at an aggregate gross sales price of approximately $118.7 million resulting in a net realized gain of approximately $25.8 million. The Company is developing five multifamily residential communities, with an aggregate of 1,274 multifamily units. 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 and the total projected estimated cost for these projects is approximately $221.2 million. As of December 31, 2001, the Company's remaining commitment to fund these projects is approximately $113.4 million. Results of Operations Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000 Average financial occupancy rates of the Company's multifamily "Same Store Properties" (properties consolidated by the Company for each of the years ended December 31, 2001 and 2000) decreased to 95.1% for the year ended December 31, 2001 from 96.8% for the year ended December 31, 2000. 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 contract rates and vacant units at market rents. 34 The regional breakdown of financial occupancy for the Same Store Properties for the years ended December 31, 2001 and 2000 are as follows:
December 31, December 31, 2001 2000 ------------ ------------ Northern California......................... 95.4% 98.0% Southern California......................... 95.1% 96.2% Pacific Northwest........................... 94.5% 95.9%
Total Revenues increased by $26,894,000 or 15.0% to $205,634,000 in 2001 from $178,740,000 in 2000. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the Same Store Properties.
Years Ended December 31, Number of ----------------- Dollar Percentage Properties 2001 2000 Change Change ---------- -------- -------- ------- ---------- (dollars in thousands) Revenues Property revenues Same Store Properties Northern California........................... 14 $ 56,646 $ 52,814 $ 3,832 7.3% Southern California........................... 15 43,338 41,095 2,243 5.5 Pacific Northwest............................. 19 35,743 35,122 621 1.8 -- -------- -------- ------- ----- Total property revenues Same Store Properties.................... 48 135,727 129,031 6,696 5.2 == Property revenues properties acquired/disposed of subsequent to January 1, 2000(1)................ 47,755 38,740 9,015 23.3 -------- -------- ------- ----- Total property revenues.................... 183,482 167,771 15,711 9.4 -------- -------- ------- ----- Interest and other income............................ 22,152 10,969 11,183 102.0 -------- -------- ------- ----- Total revenues............................. $205,634 $178,740 $26,894 15.0% ======== ======== ======= =====
- -------- (1) Also includes two office buildings, redevelopment communities and development communities. As set forth in the above table, $9,015,000 of the $26,894,000 net increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 2000, the two office buildings, redevelopment communities and development communities. During this period, the Company acquired interests in 20 properties and achieved stabilized operations at six development communities, (the "Acquisition Properties"), and disposed of three retail shopping centers and one commercial property (the "Disposition Properties"). Of the increase in total revenues, $6,696,000 is attributable to increases in property revenues from the Same Store Properties. Property revenues from the Same Store Properties increased by approximately 5.2% to $135,727,000 in 2001 from $129,031,000 in 2000. A significant portion of this increase was attributable to the 14 multifamily Same Store Properties located in Northern California; the property revenues of these properties increased by $3,832,000 or 7.3% to $56,646,000 in 2001 from $52,814,000 in 2000. This $3,832,000 increase is primarily attributable to rental rate increases, which were offset by a decrease in average financial occupancy to 95.4% in 2001 from 98.0% in 2000. The 15 multifamily Same Store Properties located in Southern California accounted for the next largest contribution to the Same Store Properties revenues increased. The property revenues of these properties increased by $2,243,000 or 5.5 % to $43,338,000 in 2001 from $41,095,000 in 2000. This $2,243,000 increase is primarily attributable to rental rate increases, which were offset by a decrease in average financial occupancy to 95.1% in 2001 from 96.2% in 2000. The 19 multifamily Same Store Properties located in the Pacific Northwest accounted for the next largest contribution to the Same Store Properties revenues 35 increase. The property revenues of these properties increased by $621,000 or 1.8% to $35,743,000 in 2001 from $35,122,000 in 2000. This $621,000 increase is attributable to rental rate increases, which were offset by a decrease in financial occupancy to 94.5% in 2001 from 95.9% in 2000. The increase in total revenue also reflected an increase of $11,183,000 attributable to interest and other income, which primarily relates to income and fees earned on the Company's investments in joint ventures and interest income earned on outstanding notes receivable and cash balances. Total expenses increased by $21,938,000 or approximately 19.2% to $136,478,000 in 2001 from $114,540,000 in 2000. The most significant factor contributing to this increase was the growth in the Company's multifamily portfolio from 83 properties (18,673 units) at January 1, 2001 to 92 properties (20,762 units) at December 31, 2001. Interest expense increased by $8,721,000 or 28.7% to $39,105,000 in 2001 from $30,384,000 in 2000. Such interest expense increase was primarily due to the net addition of mortgage debt in connection with property acquisitions and investments, which was offset by an increase in the capitalization of interest charges on the Company's development and redevelopment communities of $1,011,000 or approximately 34.8% to $3,917,000 from $2,906,000 in 2000. Property operating expenses, exclusive of depreciation and amortization, increased by $6,233,000 or 13.3% to $52,923,000 in 2001 from $46,690,000 in 2000. Of such increase, $4,624,000 is attributable to properties acquired or disposed of subsequent to January 1, 2000, and the balance is attributable to an increase in operating expenses for the Same Store Properties. Property operating expenses, exclusive of depreciation and amortization, as a percentage of property revenues were 28.8% for 2001 and 27.8% for 2000. Depreciation and amortization increased by $5,530,000 or approximately 18.0% to $36,295,000 in 2001 from $30,765,000 in 2000, primarily due to the acquisition of assets. General and administrative expenses represent the costs of the Company's various acquisition and administrative departments as well as corporate and partnership administration and non-operating expenses. Such expenses increased by $1,436,000 in 2001 from the amount incurred in 2000. This increase is largely due to additional staffing requirements resulting from the growth of the Company. General and administrative expenses as a percentage of total revenues were 3.6 % for 2001 and 3.4% for 2000. Minority interests increased by $649,000 or 2.7% to $24,399,000 in 2001 from $23,750,000 in 2000. This is primarily due to the increase in net income of the Company. Net income increased by $4,192,000 to $48,545,000 in 2001 from $44,353,000 in 2000. Net income for 2001 included a gain on sales of real estate of $3,788,000 as compared with $4,022,000 in 2000. Net operating income of the Acquisition Properties and the increase in net operating income from the Same Store Properties represent the largest contributions to the increase in net income. Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999 Average financial occupancy rates of the Company's multifamily "2000/1999 Same Store Properties" (properties consolidated by the Company for each of the years ended December 31, 2000 and 1999) increased to 96.8% for the year ended December 31, 2000 from 96.0% for the year ended December 31, 1999. Financial occupancy is defined as the percentage resulting from dividing actual rental income by total possible rental income. Total possible rental income is determined by valuing occupied units at contract rates and vacant units at market rents. The regional breakdown of financial occupancy for the 2000/1999 Same Store Properties for the years ended December 31, 2000 and 1999 are as follows:
December 31, December 31, 2000 1999 ------------ ------------ Northern California......................... 98.2% 96.6% Southern California......................... 96.3% 96.8% Pacific Northwest........................... 95.9% 94.7%
36 Total Revenues increased by $32,695,000 or 22.4% to $178,740,000 in 2000 from $146,045,000 in 1999. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the 2000/1999 Same Store Properties.
Years Ended December 31, Number of ----------------- Dollar Percentage Properties 2000 1999 Change Change ---------- -------- -------- ------- ---------- (dollars in thousands) Revenues Property revenues Same Store Properties Northern California........................... 12 $ 45,408 $ 39,705 $ 5,703 14.3% Southern California........................... 13 38,306 35,821 2,485 6.9 Pacific Northwest............................. 19 35,122 33,315 1,807 5.4 -- -------- -------- ------- ---- Total property revenues Same Store Properties.................... 44 118,836 108,841 9,995 9.2 == Property revenues properties acquired/disposed of subsequent to January 1, 1999(1)................ 48,935 31,586 17,349 54.9 -------- -------- ------- ---- Total property revenues.................... 167,771 140,427 27,344 19.5 -------- -------- ------- ---- Interest and other income............................ 10,969 5,618 5,351 95.3 -------- -------- ------- ---- Total revenues............................. $178,740 $146,045 $32,695 22.4% ======== ======== ======= ====
- -------- (1) Also includes one commercial property, redevelopment communities and development communities. As set forth in the above table, $17,349,000 of the $32,695,000 net increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 1999, the commercial property, redevelopment communities and development communities. During this period, the Company acquired interests in 12 properties, (the "2000/1999 Acquisition Properties"), and disposed of one multifamily property and six retail shopping centers, (the "2000/1999 Disposition Properties"). Of the increase in total revenues, $9,995,000 is attributable to increases in property revenues from the 2000/1999 Same Store Properties. Property revenues from the 2000/1999 Same Store Properties increased by approximately 9.2% to $118,836,000 in 2000 from $108,841,000 in 1999. The majority of this increase was attributable to the 12 multifamily 2000/1999 Same Store Properties located in Northern California, the property revenues of which increased by $5,703,000 or 14.3% to $45,408,000 in 2000 from $39,705,000 in 1999. This $5,703,000 increase is primarily attributable to rental rate increases, and an increase in average financial occupancy to 98.2% in 2000 from 96.6% in 1999. The 13 multifamily 2000/1999 Same Store Properties located in Southern California accounted for the next largest contribution to this Same Store Property revenues increase. The property revenues of these properties increased by $2,485,000 or 6.9% to $38,306,000 in 2000 from $35,821,000 in 1999. This $2,485,000 increase is primarily attributable to rental rate increases, which were offset in part by a decrease in average financial occupancy to 96.3% in 2000 from 96.8% in 1999. The 19 multifamily 2000/1999 Same Store Properties located in the Pacific Northwest accounted for the next largest contribution to this 2000/1999 Same Store Property revenues increase. The property revenues of these properties increased by $1,807,000 or 5.4% to $35,122,000 in 2000 from $33,315,000 in 1999. This $1,807,000 increase is attributable to rental rate increases, and an increase in financial occupancy to 95.9% in 2000 from 94.7% in 1999. The increase in total revenue also reflected an increase of $5,351,000 attributable to interest and other income, which primarily relates to income and fees earned on the Company's investments in joint ventures and interest income earned on outstanding notes receivable and cash balances. 37 Total expenses increased by $20,587,000 or 21.9% to $114,540,000 in 2000 from $93,953,000 in 1999. The most significant factor contributing to this increase was the growth in the Company's multifamily portfolio from 68 properties (15,106 units) at January 1, 2000 to 83 properties (18,673 units) at December 31, 2000. Interest expense increased by $9,116,000 or 42.9% to $30,384,000 in 2000 from $21,268,000 in 1999. Such interest expense increase was primarily due to the net addition of mortgage debt in connection with property and investment acquisitions and a decrease in the capitalization of interest charges on the Company's development and redevelopment communities of $2,266,000 or approximately 43.8% to $2,906,000 from $5,172,000 in 1999. Property operating expenses, exclusive of depreciation and amortization, increased by $4,984,000 or 12.0% to $46,690,000 in 2000 from $41,706,000 in 1999. Of such increase, $5,066,000 is attributable to properties acquired or disposed of subsequent to January 1, 1999, which was offset by a decrease in operating expenses for the 2000/1999 Same Store Properties. Property operating expenses, exclusive of depreciation and amortization, as a percentage of property revenues were 27.8% for 2000 and 29.7% for 1999. Depreciation and amortization increased by $4,615,000 or approximately 17.6% to $30,765,000 in 2000 from $26,150,000 in 1999 primarily due to the acquisitions of assets. General and administrative expenses represent the costs of the Company's various acquisition and administrative departments as well as corporate and partnership administration and non-operating expenses. Such expenses increased by $1,799,000 in 2000 from the 1999 amount. This increase is largely due to additional staffing requirements resulting from the growth of the Company. General and administrative expenses as a percentage of total revenues were 3.4% for 2000 and 2.9% for 1999. Minority interests increased by $5,912,000 or 33.1% to $23,750,000 in 2000 from $17,838,000 in 1999. This is primarily due to an issuance of perpetual preferred units in 1999. Net income increased by $789,000 to $44,353,000 in 2000 from $43,564,000 in 1999. Net income for 2000 also included a gain on sales of real estate of $4,022,000 as compared with $9,524,000 in 1999. The net effect of this item was offset by the net operating income of the 2000/1999 Acquisition Properties and an increase in net operating income from the 2000/1999 Same Store Properties. Liquidity and Capital Resources Including Non-consolidated Investments At December 31, 2001, the Company had $6,440,000 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 current net cash flows will be adequate to meet operating requirements and to provide for payment of dividends by the Company in accordance with REIT qualification requirements. The Company expects to meet its long-term liquidity requirements relating to property acquisitions and development (beyond the next 12 months) by using a combination of some or all of the following sources: working capital, amounts available on lines of credit, net proceeds from public and private debt and equity issuances, and proceeds from the disposition of properties that may be sold from time to time. There can, however, be no assurance that the Company will have access to the debt and equity markets in a timely fashion to meet 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 two outstanding unsecured lines of credit for an aggregate amount of $150,000,000. The first line, in the amount of $120,000,000, matures in May 2002, with an option to extend it for one year thereafter. Outstanding balances under this line of credit bear interest at a rate, which uses a tiered rate structure tied to the Company's corporate ratings, if any, and leverage rating, which has been priced at LIBOR plus 1.15% during 2001 and 2000. At December 31, 2001 the Company had $44,459,000 outstanding on this line of credit. A second line of credit in the amount of $30,000,000 matures in August 2002, with an option to extend for one year thereafter. Outstanding balances, if any, on this second line bear interest based on a tiered rate structure currently at LIBOR plus 1.175%. At December 31, 2001 the Company had $30,000,000 outstanding on this line of credit. At December 31, 2001, these lines of credit bore interest rates of approximately 3.0%. 38 In addition, the Fund, the investment fund managed by the Company, has an unsecured line of credit for an aggregate amount of $50 million. This line matures in June 2002, but may be extended at the Fund's option to September 2002. The line bears interest at LIBOR plus 0.875%. As of December 31 2001, the line had an outstanding balance of $46.2 million. In addition to the Company's unsecured lines of credit, the Company had $564,201,000 of secured indebtedness at December 31, 2001. Such indebtedness consisted of $505,381,000 in fixed rate debt with interest rates varying from 6.6% to 8.8% and maturity dates ranging from 2002 to 2026. The indebtedness also includes $58,820,000 of tax-exempt variable rate demand bonds with interest rates paid during 2001 ranging from approximately 4.0% to 5.5% and maturity dates ranging from 2020 to 2026. The tax-exempt variable rate demand bonds are capped at interest rates ranging from 7.1% to 7.3%. The Company's unrestricted cash balance decreased $160,000 from $6,600,000 as of December 31, 2000 to $6,440,000 as of December 31, 2001. The Company generated $98,871,000 in cash from operating activities, used $63,808,000 of cash in investing activities and used $35,223,000 of cash from financing activities. Of the $63,808,000 net cash used in investing activities, $22,168,000 was used to purchase and upgrade rental properties, $52,969,000 was used to fund real estate under development and $44,267,000 was issued as notes receivable from investees and other related party notes and other receivables; these expenditures were offset by $58,141,000 in repayment of notes from investees, other related parties and other receivables and $5,018,000 of proceeds received from the disposition of rental properties. The $35,223,000 net cash used in financing activities was primarily a result of $252,153,000 of proceeds from mortgages and other notes payable as offset by $215,172,000 of repayments of mortgages and other notes payable and lines of credit, and $49,987,000 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. For the year ended December 31, 2001, non-revenue generating capital expenditures totaled approximately $342 per weighted average occupancy unit. The Company expects to incur approximately $350 per weighted average occupancy unit in non-revenue generating capital expenditures for the year ended December 31, 2002. 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 2002 and/or the funding thereof will not be significantly different than the Company's current expectations. The Company is currently developing five multifamily residential projects, with an aggregate of 1,274 multifamily units. Such projects involve certain risks inherent in real estate development. See "Other Matters/ Risk Factors--Risk that Development Activities Will be Delayed or Not Completed" in Item 1 of this Annual Report on Form 10-K for the year ended December 31, 2001. 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 and the total projected estimated cost for these projects is approximately $221,200,000. As of December 31, 2001, the Company's remaining commitment to these development projects is approximately $113,400,000. The Company expects to fund such commitments by using a combination of some or all of the following sources: 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, if any. 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 line of credit. 39 Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund managed by the Company and will be, subject to specific exceptions, the Company's exclusive investment vehicle for new investments until the Fund's committed capital has been invested or committed for investments, or if earlier, December 31, 2003. The Fund has total capital commitments of $250 million and is expected to utilize leverage of approximately 65% of the value of the underlying real estate portfolio. The Company is committed to invest 21.4% of the aggregate capital committed to the Fund. In addition, Essex will be compensated by the Fund for its asset management, property management, development and redevelopment services and may receive incentive distributions if the Fund exceeds certain financial return benchmarks. The Fund will provide funds related to certain new acquisitions and development transactions. During the year, the Company's Board of Directors has authorized the Operating Partnership to purchase from time to time shares of the Company's Common Stock, in an amount up to $50 million, at a price not to exceed $48.00 per share in the open market or through negotiated or block transactions. The timing of any repurchase will depend on the market price and other market conditions and factors. Essex will use working capital or proceeds from the sale of properties to provide funds for this program. The purpose of the program is to acquire stock related to real estate transactions involving the issuance of partnership units in the Operating Partnership and similar interests. Such repurchased shares may be reissued in connection with the conversion of such partnership units, the exercise of stock options or other business transactions. This Program supersedes its common stock repurchase plan as announced on March 25, 1999. In October 2001, the Operating Partnership acquired 100,700 shares of the Company's outstanding Common Stock. The weighted average exercise price paid for the shares was $47.88. The amount paid for the shares are reflected as a reduction of the common stock and additional-paid-in-capital in the Company's consolidated balance sheets for the year ended December 31, 2001. The Company invests in joint ventures, which generally involve single multifamily property acquisitions. The Company accounts for these investments under the equity or consolidation methods of accounting based on the control it exercises through its ownership interests in these affiliates. Under the equity method of accounting, the investment is carried at cost of acquisition, plus the Company's share in undistributed earnings or losses since acquisition. The individual assets, liabilities, revenues and expenses of the joint venture are not recorded in the Company's consolidated financial statements. At December 31, 2001 and 2000, the Company did not have any other relationship with unconsolidated entities or financial partnership, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose. As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships. Included in the Company's investments accounted for under the equity method investments are limited partnership interests in 17 partnerships (Down REIT entities), which collectively own ten multifamily properties, comprised of 1,831 units. These investments were made under arrangements whereby Essex Management Corporation (EMC) became the general partner, the Operating Partnership became a special minority interest limited partner, and the other limited partners were granted rights of redemption for their interests. Such partners can request to be redeemed and the Company can elect to redeem their rights for cash or by issuing shares of its common stock on a one share per unit basis. Conversion values will be based on the market value of the Company's common stock at the time of redemption multiplied by the number of units stipulated under the above arrangements. The other limited partners receive distributions based on the Company's current dividend rate times the number of redemption shares. At December 31, 2001, the maximum number of shares that could be required to meet redemption of these Down REIT entities is 1,511,533. The net income reported by the Company under the equity method of accounting by these down REIT entities is the net income of these down REIT entities as reduced by the distributions to the other limited partners. 40 Total investments accounted for under the equity method of accounting are summarized as follows:
Investments--December 31, 2001 Company's Total Debt - ------------------------------ Carrying Total ------------------------------------------- Down Value of Company's Book Estimated Interest Maturity REIT Down Equity Value Value(1) Amount Type Rate Date Units REIT Unit Value (In thousands) --------- --------- -------- ---------- -------------- -------- ------ --------- --------- Down REIT's Highridge, Rancho Palos Verde, CA.. $ 12,075 Fixed 7.63% Jun-07 Anchor Village, Mukilteo, WA....... 10,750 Var.-bonds 5.50% Dec-27 Barkley Apartments, Anahiem, CA.... 5,406 Fixed 6.63% Feb-09 Brookside Oaks, Sunnyvale, CA...... 15,186 Fixed 7.90% Oct-10 Capri at Sunny Hills, Fullerton, CA............................... 8,000 Var. Bank ref.+0.8% Oct-02 Hearthstone, Santa Ana, CA......... 10,168 Fixed 6.86%-7.25% Jun-08 Montejo, Garden Grove, CA.......... 6,255 Fixed 6.98% Feb-11 Treehouse, Santa Ana,CA............ 8,422 Fixed 6.98% Feb-11 Valley Park, Fountain Valley, CA... 10,669 Fixed 6.98% Feb-11 Villa Angelina, Placentia, CA...... 14,428 Fixed 6.98% Feb-11 (2) (3) -------- $16,610 $192,425 101,360 1,511 $74,659 $16,406 ======== ====== ======= Value of Essex Equity Ownership ------ --------- Joint Ventures Essex Apartment Value Fund, L.P. Andover Park, Beaverton, OR...... 12,505 Fixed 6.60% Oct-11 Marbrisas, Chula Vista, CA....... 39,889 Fixed 7.99% Jul-05 Vista Del Rey (El Encanto), Tustin, CA...................... 8,048 Fixed 6.95% Feb-11 Rosebeach, La Mirada, CA......... 8,490 Fixed 7.09% Feb-11 Hunt Club, Lake Oswego, CA....... 11,770 Fixed 7.05% Feb-11 The Crest, Pomona, CA............ 36,056 Fixed 7.99% Jul-05 Foxborough (Woodland), Orange, CA.............................. 4,956 Fixed 7.84% Jul-09 Line of credit.................. 46,200 Var. LIBOR+.875% Jun-02 -------- 17,119 $207,127 167,914 39,213 31.8% 12,466 ======== AEW Casa Mango, San Diego, CA.......... 7,155 Fixed 7.35% Feb-09 Riverfront, San Diego, CA.......... 19,434 Fixed 7.35% Feb-09 The Pointe at Cupertino, Cupertino, CA.................... 0 Tierra Vista, Oxnard, CA........... 39,750 Var. LIBOR+1.795% Feb-03 -------- 10,729 $125,266 66,339 58,927 20.0% 11,785 ======== Newport Beach Coronado at Newport--North, CA..... 34,137 Var. LIBOR+225 Nov-02 Coronado at Newport--South, CA(4).. 37,556 Var. LIBOR+225 Nov-02 -------- 31,214 $139,682 71,693 67,989 49.9% 33,927 ======== Other Joint Ventures Park Hill Apartments, Issaquah, WA. 5,754 $ 34,888 22,500 Fixed 6.90% Aug-29 12,388 45.0% 5,575 ======== Other............................... 14,034 14,034 ------- -------- -------- ------- $95,460 $699,388 $429,806 $94,189 ======= ======== ======== =======
- -------- (1) Value derived based on estimated 2002 net operating income at capitalization rates ranging from 7.75% to 8.00% on stabilized multifamily properties. Other properties, either in development, redevelopment or acquired less than 12 months ago are valued at cost. The Company's carrying value includes advances and other transaction costs which will be repaid or recovered from refinancings, operations or dispositions. (2) Based on assumed conversion of Down REIT limited partner units into Company's shares at share price $49.41 at December 31, 2001. (3) Estimate value attributed to Company's interest after limited partners interest and debt. (4) Rehab not yet started. 41 Potential Factors Affecting Future Operating Results Many factors affect the Company's actual financial performance and may cause the Company's future results to be different from past performance or trends. These factors include: Economic Environment Both the national economy and the economies of the western states in which the Company owns, manages and develops properties have been and continue to be in a recession. This has resulted in reduced occupancy rates, and flattening and reductions in market rental rates. The Company's property type and diverse geographic locations provide some degree of risk moderation but are not immune to a prolonged down cycle in the real estate markets in which the Company operates. Although the Company believes it is well positioned to meet the challenges ahead, it is possible that further reductions in occupancy and market rental rates will result in reduction of rental revenues, operating income, cash flows, and market value of the Company's shares. Prolonged recession could also affect the Company's ability to obtain financing at acceptable rates of interest and to access funds from the disposition of properties at acceptable disposition prices. Interest Rate Fluctuations The Company monitors changes in interest rates and believes that it is well positioned from both a liquidity and interest rate risk perspective. However, current interest rates are at historic lows and potentially could increase rapidly to levels more in line with recent historic levels. The immediate effect of significant and rapid interest rate increases would result in higher interest expense on the Company's variable interest rate debt (see Item 7A and Note 7 and 8 to consolidated financial statements). The effect of prolonged interest rate increases could negatively impact the Company's ability to make acquisitions and develop properties at economic returns on investment and the Company's ability to refinance existing borrowings at acceptable rates. Inflations Inflationary increases would likely have a negative effect on property operating results and such increases may be at a greater rate of increases than property rental rates in a period of recession. The Company believes it effectively manages its property and other expenses but understands that a return to higher annual rates of inflation would result in increases to operating expense. 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, gains/ losses on sales of real estate and extraordinary items. 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 performance of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. Funds from Operations does not represent net income or cash flows from operations as defined by generally accepted accounting principles (GAAP) and is not intended to indicate whether cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the REIT's operating performance or to cash flows as a measure of liquidity. Funds from Operations does not measure whether cash flow is sufficient to fund all cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations also does not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Company's 42 calculation of Funds from Operations. The following table sets forth the Company's calculation of Funds from Operations for 2001, 2000 and 1999.
For the year For the quarter ended ended -------------------------------------------------- 12/31/01 12/31/01 9/30/01 6/30/01 3/31/01 ------------ ----------- ----------- ----------- ----------- Income before gain on sale of real estate, minority interests and extraordinary item.... $ 69,156,000 $17,148,000 $17,551,000 $17,537,000 $16,920,000 Adjustments: Depreciation and amortization.............. 36,295,000 9,345,000 9,197,000 8,927,000 8,826,000 Adjustments for unconsolidated joint ventures.................................. 5,341,000 1,694,000 1,209,000 1,201,000 1,237,000 Minority interests(1)......................... (18,515,000) (4,700,000) (4,608,000) (4,602,000) (4,605,000) ------------ ----------- ----------- ----------- ----------- Funds from Operations......................... $ 92,277,000 $23,487,000 $23,349,000 $23,063,000 $22,378,000 ============ =========== =========== =========== =========== Weighted average number of shares outstanding diluted(1)....................... 21,004,707 21,026,883 21,093,631 21,034,366 20,922,186 ============ =========== =========== =========== =========== For the year For the quarter ended ended -------------------------------------------------- 12/31/00 12/31/00 9/30/00 6/30/00 3/31/00 ------------ ----------- ----------- ----------- ----------- Income before gain on sale of real estate, minority interests and extraordinary item.... $ 64,200,000 $17,114,000 $15,946,000 $16,218,000 $14,922,000 Adjustments: Depreciation and amortization.............. 30,765,000 8,459,000 8,689,000 6,950,000 6,667,000 Adjustments for unconsolidated joint ventures.................................. 4,541,000 1,246,000 1,232,000 1,054,000 1,009,000 Minority interests(1)......................... (18,731,000) (4,625,000) (4,602,000) (4,778,000) (4,726,000) ------------ ----------- ----------- ----------- ----------- Funds from operations......................... $ 80,775,000 $22,194,000 $21,265,000 $19,444,000 $17,872,000 ============ =========== =========== =========== =========== Weighted average number of shares outstanding diluted(1)....................... 20,732,148 20,951,690 20,891,729 20,708,639 20,578,898 ============ =========== =========== =========== =========== For the year For the quarter ended ended -------------------------------------------------- 12/31/99 12/31/99 9/30/99 6/30/99 3/31/99 ------------ ----------- ----------- ----------- ----------- Income before gain on sale of real estate, minority interests and extraordinary item.... $ 52,092,000 $14,641,000 $13,426,000 $12,335,000 $11,690,000 Adjustments: Depreciation and amortization.............. 26,150,000 6,774,000 7,084,000 6,247,000 6,045,000 Adjustments for unconsolidated joint ventures.................................. 1,790,000 691,000 366,000 366,000 367,000 Minority interests(1)......................... (13,061,000) (4,685,000) (3,616,000) (2,397,000) (2,363,000) ------------ ----------- ----------- ----------- ----------- Funds from Operations......................... $ 66,971,000 $17,421,000 $17,260,000 $16,551,000 $15,739,000 ============ =========== =========== =========== =========== Weighted average number of shares outstanding diluted(1)....................... 20,513,398 20,554,096 20,573,866 20,476,092 20,496,718 ============ =========== =========== =========== ===========
- -------- (1) Assumes conversion of all outstanding operating partnership interests in the Operating Partnership and Convertible Preferred Stock, Series 1996A into shares of the Company's Common Stock. Minority interests have been adjusted to reflect such conversion. 43 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes. The Company's interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes. The Company believes that the principal amounts of the Company's mortgage notes payable and line of credit approximate fair value as of December 31, 2001 as interest rates are consistent with yields currently available to the Company for similar instruments.
For the Year Ended December 31 ------------------------------------------------------------ 2002 2003 2004 2005 2006 Thereafter Total (In thousands) ------- ------ ----- ------ ------ ---------- -------- Fixed rate debt.............. $12,422 21,853 4,021 36,077 15,121 415,887 $505,381 Average interest rate........ 7.3% 6.9% 6.9% 7.1% 7.0% 7.0% Variable rate LIBOR debt..... $74,459 -- -- -- -- 58,820(1) $133,279 Average interest rate........ 3.5% -- -- -- -- 5.1%
- -------- (1) Capped at interest rates ranging from 7.1% to 7.3% Item 8. Financial Statements and Supplemental Data The response to this item is submitted as a separate section of this Form 10-K. See Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 44 PART III Item 10. Directors and Executive Officers of the Registrant The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 14, 2002. Item 11. Executive Compensation The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 14, 2002. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 14, 2002. Item 13. Certain Relationships and Related Transactions The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 14, 2002. 45 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K (A) Financial Statements and Report of KPMG LLP, independent auditors
Page ---- (1) Consolidated Financial Statements Independent Auditors' Report........................................... F-1 Balance Sheets: As of December 31, 2001 and December 31, 2000........................ F-2 Statements of Operations: For the years ended December 31, 2001, 2000 and 1999................. F-3 Statements of Stockholders' Equity: For the years ended December 31, 2001, 2000 and 1999................. F-4 Statements of Cash Flows: For the years ended December 31, 2001, 2000 and 1999................. F-5 Notes to Consolidated Financial Statements............................. F-6 (2) Financial Statement Schedule: Real Estate and Accumulated Depreciation Essex Property Trust, Inc. for the year ended December 31, 2001...... F-26
(B) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 2001. (C) Exhibits 46 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES Consolidated Financial Statements and Financial Statement Schedule December 31, 2001 and 2000 (With Independent Auditors' Report Thereon) Independent Auditors' Report The Board of Directors Essex Property Trust, Inc.: We have audited the accompanying consolidated balance sheets of Essex Property Trust, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement schedule of Real Estate and Accumulated Depreciation as of December 31, 2001. These consolidated financial statements and the financial statement schedule are the responsibility of the management of Essex Property Trust, Inc. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Essex Property Trust, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP San Francisco, California February 5, 2002, except as to the second paragraph of Note (3)(b) for which the date is February 15, 2002 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000 (Dollars in thousands, except per share amounts)
2001 2000 - - ---------- ---------- ASSETS ------ Real estate: Rental properties: Land and land improvements........................... $ 291,913 $ 289,796 Buildings and improvements........................... 883,287 866,612 ---------- ---------- 1,175,200 1,156,408 Less accumulated depreciation............................ (156,269) (119,499) 1,018,931 1,036,909 Investments.............................................. 95,460 65,703 Real estate under development............................ 93,256 38,231 ---------- ---------- 1,207,647 1,140,843 Cash and cash equivalents--unrestricted..................... 6,440 6,600 Cash and cash equivalents--restricted cash.................. 17,163 18,965 Notes receivable from investees and other related parties... 56,014 77,081 Notes and other receivables................................. 29,771 24,062 Prepaid expenses and other assets........................... 6,699 7,654 Deferred charges, net....................................... 5,724 6,644 ---------- ---------- Total assets...................................... $1,329,458 $1,281,849 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Mortgage notes payable...................................... $ 564,201 $ 502,066 Lines of credit............................................. 74,459 93,469 Accounts payable and accrued liabilities.................... 29,577 30,430 Dividends payable........................................... 16,559 14,538 Other liabilities........................................... 6,583 6,539 Deferred gain............................................... -- 5,002 ---------- ---------- Total liabilities................................. 691,379 652,044 Minority interests.......................................... 251,480 238,130 Stockholders' equity: Common stock; $0.0001 par value, 656,682,178 and 656,682,178 shares authorized; 18,428,295 and 18,417,013 shares issued and outstanding............... 2 2 Cumulative redeemable preferred stock; $0.0001 par value, no shares issued and outstanding................ -- -- 7.875% Series B, 2,000,000 shares authorized......... -- -- 9.125% Series C, 500,000 shares authorized........... -- -- 9.30% Series D, 2,000,000 shares authorized.......... -- -- 9.25% Series E, 2,200,000 shares authorized.......... -- -- Excess stock; $0.0001 par value; 330,000,000 shares authorized; no shares issued or outstanding............ -- -- Additional paid-in capital............................... 426,517 428,433 Distributions in excess of accumulated earnings.......... (39,920) (36,760) ---------- ---------- Total stockholders' equity........................ 386,599 391,675 ---------- ---------- Commitments and contingencies Total liabilities and stockholders' equity........ $1,329,458 $1,281,849 ========== ==========
See accompanying notes to consolidated financial statements. F-2 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands, except per share amounts)
2001 2000 1999 ----------- ----------- ----------- Revenues: Rental....................................... $ 177,954 $ 162,959 $ 137,262 Other property............................... 5,528 4,812 3,165 ----------- ----------- ----------- Total property revenues................... 183,482 167,771 140,427 Interest and other........................... 22,152 10,969 5,618 ----------- ----------- ----------- Total revenues............................ 205,634 178,740 146,045 ----------- ----------- ----------- Expenses: Property operating expenses: Maintenance and repairs.................... 12,578 10,074 9,222 Real estate taxes.......................... 12,283 11,338 10,271 Utilities.................................. 8,787 8,387 8,532 Administrative............................. 15,254 13,695 10,582 Advertising................................ 2,870 2,211 2,187 Insurance.................................. 1,151 985 912 Depreciation and amortization.............. 36,295 30,765 26,150 ----------- ----------- ----------- Total property operating expenses......... 89,218 77,455 67,856 Interest..................................... 39,105 30,384 21,268 Amortization of deferred financing costs..... 657 639 566 General and administrative................... 7,498 6,062 4,263 ----------- ----------- ----------- Total expenses............................ 136,478 114,540 93,953 ----------- ----------- ----------- Income before gain on the sales of real estate, minority interests and extraordinary item...................... 69,156 64,200 52,092 Gain on the sales of real estate................ 3,788 4,022 9,524 ----------- ----------- ----------- Income before minority interests and extraordinary item...................... 72,944 68,222 61,616 Minority interests.............................. (24,399) (23,750) (17,838) ----------- ----------- ----------- Income before extraordinary item.......... 48,545 44,472 43,778 Extraordinary loss on early extinguishment of debt........................................ -- (119) (214) ----------- ----------- ----------- Net income................................ 48,545 44,353 43,564 Preferred stock dividends....................... -- (246) (1,333) ----------- ----------- ----------- Net income available to common stockholders............................ $ 48,545 $ 44,107 $ 42,231 =========== =========== =========== Per share data: Basic: Income before extraordinary item available to common stockholders.......... $ 2.63 $ 2.43 $ 2.42 Extraordinary item--debt extinguishment.... -- (0.01) (0.01) ----------- ----------- ----------- Net income................................ $ 2.63 $ 2.42 $ 2.41 =========== =========== =========== Weighted average number of shares outstanding during the year................ 18,451,935 18,233,752 17,521,185 =========== =========== =========== Diluted: Income before extraordinary item available to common stockholders.......... $ 2.59 $ 2.38 $ 2.37 Extraordinary item--debt extinguishment.... -- (0.01) (0.01) =========== =========== =========== Net income................................ $ 2.59 $ 2.37 $ 2.36 =========== =========== =========== Weighted average number of shares outstanding during the year............... 18,768,216 18,657,636 18,491,242 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 2001, 2000 and 1999 (Dollars and shares in thousands)
Convertible Distributions preferred stock Common stock Additional in excess of -------------- -------------- paid-in accumulated Shares Amount Shares Amount capital earnings Total ------ ------ ------ ------ ---------- ------------- -------- Balances, 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.................... -- -- (262) -- (7,119) -- (7,119) Net proceeds from options exercised...................... -- -- 53 -- 930 -- 930 Net income....................... -- -- -- -- -- 43,564 43,564 Dividends declared............... -- -- -- -- -- (39,482) (39,482) ------ ---- ------ --- -------- -------- -------- Balances, December 31, 1999...... 185 1 18,050 2 425,089 (37,399) 387,693 Shares issued from conversion of convertible preferred stock.... (185) (1) 211 -- -- -- (1) Net proceeds from options exercised...................... -- -- 156 -- 3,344 -- 3,344 Net income....................... -- -- -- -- -- 44,353 44,353 Dividends declared............... -- -- -- -- -- (43,714) (43,714) ------ ---- ------ --- -------- -------- -------- Balances, December 31, 2000...... -- -- 18,417 2 428,433 (36,760) 391,675 Shares purchased by Operating Partnership.................... -- -- (101) -- (4,822) -- (4,822) Net proceeds from options exercised...................... -- -- 112 -- 2,906 -- 2,906 Net income....................... -- -- -- -- -- 48,545 48,545 Dividends declared............... -- -- -- -- -- (51,705) (51,705) ------ ---- ------ --- -------- -------- -------- Balances, December 31, 2001...... -- $ -- 18,428 $ 2 $426,517 $(39,920) $386,599 ====== ==== ====== === ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands)
2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net income............................................. $ 48,545 $ 44,353 $ 43,564 Minority interests..................................... 24,399 23,750 17,838 Adjustments to reconcile net income to net cash provided by operating activities: Gain on the sales of real estate..................... (3,788) (4,022) (9,524) Equity in income of limited partnerships............. (3,854) (1,333) (1,389) Loss on early extinguishment of debt................. -- 119 214 Depreciation and amortization........................ 36,295 30,765 26,150 Amortization of deferred financing costs............. 657 639 566 Changes in operating assets and liabilities: Other receivables................................. -- (944) 621 Prepaid expenses and other assets................. 955 (4,159) (393) Accounts payable and accrued liabilities.......... (4,382) 2,051 5,626 Other liabilities................................. 44 945 293 --------- --------- --------- Net cash provided by operating activities................................... 98,871 92,164 83,566 --------- --------- --------- Cash flows from investing activities: Additions to rental properties......................... (22,168) (73,929) (88,305) Dispositions of rental properties...................... -- 31,302 63,421 Contribution of real estate to corporate investee.............................................. 21,005 -- -- Decrease/(increase) in restricted cash................. 1,802 (1,749) (1,684) Additions to notes receivable from investees, other related parties and other receivables........... (42,766) (87,517) (6,084) Repayments of notes from investees, other related parties and................................... other receivables...................................... 56,640 3,514 16,504 Net contribution to investments in corporations and limited partnerships................. (25,352) (9,609) (30,025) Additions to real estate under development............. (52,969) (43,612) (74,608) --------- --------- --------- Net cash used in investing activities.......... (63,808) (181,600) (120,781) --------- --------- --------- Cash flows from financing activities: Proceeds from mortgage and other notes payable and lines of credit................................... 252,153 351,194 241,150 Repayment of mortgage and other notes payable and lines of credit................................... (215,172) (203,004) (229,771) Additions to deferred charges.......................... (43) (1,680) (1,253) Net proceeds from preferred unit sales................. -- -- 102,340 Payment of offering related costs...................... -- -- (93) Net proceeds from stock options exercised and shares issued and through dividend reinvestment plan..................................... 2,906 3,344 930 Shares purchased by Operating Partnership.............. (4,822) -- (7,119) Redemption of Operating Partnership units.............. (2,650) (555) (2,100) Contribution from minority interest partners........... 6,660 -- -- Distributions to minority interest partners............ (24,268) (23,187) (18,435) Dividends paid......................................... (49,987) (42,424) (38,634) --------- --------- --------- Net cash used in financing activities.......... (35,223) 83,688 47,015 --------- --------- --------- Net (decrease) increase in cash and cash equivalents.............................................. (160) (5,748) 9,800 Cash and cash equivalents at beginning of year............ 6,600 12,348 2,548 --------- --------- --------- Cash and cash equivalents at end of year.................. $ 6,440 $ 6,600 $ 12,348 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest, net of $3,917, $2,906 and $5,172 capitalized in 2001, 2000 and 1999, respectively.................................... $ 34,895 $ 25,528 $ 15,860 ========= ========= ========= Supplemental disclosure of noncash investing and financing activities: Real estate under development transferred to rental properties..................................... $ -- $ 120,183 $ 21,700 ========= ========= ========= Mortgage notes payable assumed in connection with the purchase of real estate...................... $ 6,144 $ 63,209 $ 15,800 ========= ========= ========= Issuance of Operating Partnership units in connection with the purchase of real estate........... $ 10,381 $ 2,365 $ 7,469 ========= ========= ========= Consolidation of previously unconsolidated investment............................................ $ 8,087 $ 2,771 $ 32,452 ========= ========= ========= Exchange of real estate under development for notes receivable...................................... $ -- $ 5,613 $ -- ========= ========= ========= Exchange of notes receivable for investment............ $ 8,347 $ 9,540 $ -- ========= ========= ========= Exchange of investment for note receivable from investee......................................... $ 1,929 $ -- $ -- ========= ========= ========= Contribution of real estate in exchange for notes receivable and investments...................... $ 22,463 $ -- $ -- ========= ========= =========
See accompanying notes to consolidated financial statements. F-5 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) (1) Organization and Basis of Presentation The accompanying consolidated financial statements present the accounts of Essex Property Trust, Inc. (the Company), which include the accounts of the Company and Essex Portfolio, L.P. (the Operating Partnership, which holds the operating assets of the Company). The Company was incorporated in the state of Maryland in March 1994. On June 13, 1994, the Company commenced operations with the completion of an initial public offering (the Offering) in which it issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds of the Offering of $112,070 were used to acquire a 77.2% general partnership interest in the Operating Partnership. The Company has an 89.0% general partner interest and the limited partners own a 11.0% interest in the Operating Partnership as of December 31, 2001. The limited partners may convert their 2,286,082 units of interests into an equivalent number of shares of common stock or cash (based upon the trading price of the common stock at the conversion date). The Company has reserved shares of common stock for such conversions. These conversion rights may be exercised by the limited partners at any time through 2024. The Company operates and has ownership interests in 92 multifamily properties (containing 20,762 units) and two office buildings (with approximately 56,300 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 (Seattle, Washington, and Portland, Oregon metropolitan areas). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. (2) Summary of Significant Accounting Policies (a) Critical Accounting Policies and Estimates In response to the SEC's Release Number 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company identifies the following critical accounting areas that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The related accounting policies are included in this and other notes to the consolidated financial statements and, as appropriate, in Management's Discussion and Analysis of Financial Condition and Results of Operations. The preparation of consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate properties and its investments in and advances to joint ventures and affiliates. The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions. F-6 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) (b) Real Estate Rental Properties Rental properties are recorded at cost less accumulated depreciation. Depreciation on rental properties has been provided over estimated useful lives ranging from 3 to 30 years using the straight-line method. Development costs include acquisition, direct and indirect construction costs, interest and real estate taxes incurred during the construction period, and certain operating expenses prior to property stabilization. Maintenance and repair expenses that do not add to the value or prolong the useful life of the property are expensed as incurred. Asset replacements and improvements are capitalized and depreciated over their estimated useful lives. Certain rental properties are pledged as collateral for the related mortgage notes payable. Whenever events or changes in circumstances indicate that the carrying amount of a property held for investment may not be fully recoverable, the carrying amount will be evaluated. If the sum of the property's expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property, then the Company will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. When the Company determines that a property is held for sale, it discontinues the periodic depreciation of that property. Assets held for sale are reported at the lower of the carrying amount or estimated fair value less costs to sell. (c) Investments and Joint Ventures The Company consolidates or accounts for its investments in joint ventures and affiliates under the equity method of accounting based on the percentage of ownership and control it exercises through its ownership interests in those entities. Under the equity method of accounting, the investment is carried at cost of acquisition, plus the Company's equity in undistributed earnings or losses since acquisition. (d) Revenues and Gains on Sale of Real Estate Rental revenue is reported on the accrual basis of accounting. Rental revenues of the Company include revenues received from its wholly and majority-owned apartment properties, which are rented under short-term leases (generally, lease terms of 6 to 12 months). The Company recognizes gains on sales of real estate when a contract is in place, a closing has taken place, the buyer's investment is adequate to demonstrate a commitment to pay for the property and the Company does not have a substantial continuing involvement in the property. (e) Income Taxes Generally in any year in which the Company qualifies as a real estate investment trust (REIT) under the Internal Revenue Code (the Code), it is not subject to federal income tax on that portion of its income that it distributes to stockholders. No provision for federal income taxes has been made in the accompanying consolidated financial statements for each of the three years in the period ended December 31, 2001, as the F-7 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) Company believes it qualifies under the code as a REIT and has made distributions during the periods in excess of its taxable income. Cash dividends distributed for the years ended December 31, 2001, 2000, and 1999 are classified for tax purposes as follows:
2001 2000 1999 ---- ---- ---- Taxable portion....................................... 100% 100% 100% Return of capital..................................... -- -- -- --- --- --- 100% 100% 100% === === ===
(f) Interest Rate Protection, Swap, and Forward Contracts The Company has from time to time used interest rate protection, swap and forward contracts to manage its interest rate exposure on current or identified future debt transactions. Prior to January 1, 2001, amounts paid in connection with such contracts were capitalized and amortized over the term of the contract or related debt. If the original contract was terminated, the gain or loss on termination was deferred and amortized over the remaining term of the contract. If the related debt was repaid, the unamortized portion of the deferred amount was charged to income or the contract was marked to market, as appropriate. The Company adopted SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001. Under the SFAS 133 derivative instruments are required to be included in the balance sheet at fair value. The changes in the fair value of the derivatives are accounted for depending on the use of the derivative and whether it has been designated and qualifies as a part of a hedging relationship. If the hedged exposure is a cash flow exposure, changes in fair value of the effective portion of the gain or loss on the derivative instrument are reported initially as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. Changes in the ineffective portion of the gain or loss are reported in earnings immediately. (g) Deferred Charges Deferred charges are principally comprised of loan fees and related costs which are amortized over the terms of the related borrowing in a manner which approximates the effective interest method. (h) Interest The Company capitalized $3,917, $2,906, and $5,172 of interest related to the development of real estate during 2001, 2000, and 1999, respectively. (i) Stock-based Compensation Stock-based compensation is accounted for under Accounting Principles Board Opinion 25 and related Interpretations with disclosures specified in Financial Accounting Standards Board Statement No. 123. F-8 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) (j) Cash Equivalents and Restricted Cash Highly liquid investments with maturities of three months or less when purchased are classified as cash equivalents. Restricted cash relates to reserve requirements in connection with the Company's tax exempt variable rate bond financings and a guarantee the Company has made on a first mortgage loan held by one of its joint venture partnerships. (k) Accounting Pronouncements In July 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and also specifies the criteria that intangible assets acquired in a business combination must meet in order to be recognized and reported apart from goodwill. Statement 142 eliminates the requirement to amortize goodwill and intangible assets with indefinite useful lives, but instead requires testing of these assets for impairment at least annually. Statement 142 also requires that intangible with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. The Company does not expect the adoption of Statements 141 and 142 to have a material effect on the financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121 " Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. The Company will adopt SFAS No. 144 effective January 1, 2002. The Company believes that the adoption of SFAS No. 144 will not have a material impact on the Company's financial statements. (3) Real Estate (a) Rental Properties Rental properties consist of multifamily properties with a net book value of $1,009,556 and office buildings with a net book value of $9,375. As of December 31, 2001, Moanalua Hillside Apartments, a property purchased by the Company's taxable REIT subsidiary, Essex Fidelity I Corp (EFC) (an entity accounted for as an investment on the equity method of accounting) is considered held for sale. The property was purchased in June 2001 for a contract price of $42,200. The property is located in Honolulu, Hawaii, which is not within the Company's geographic focus and the Company is actively involved in reselling this property to various unrelated third parties. In the opinion of management, the amount realized will be equal or greater than the carrying value. In accordance with the FAS 121, no depreciation has been recorded on this property during the year ended December 31, 2001. The properties are located in California, Washington, and Oregon. The operations of the properties could be adversely affected by a recession, general economic downturn or a natural disaster in the areas where the properties are located. For the years ended December 31, 2001, 2000, and 1999, gain on the sales of real estate was $3,788, $4,022, and $9,524, respectively. The Company utilized Internal Revenue Code section 1031 to defer the majority of the taxable gains resulting from these sales. F-9 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) For the years ended December 31, 2001, 2000, and 1999, depreciation expense on real estate was $36,295, $30,765, and $26,150, respectively. (b) Investments The Company has investments in a number of affiliates, which are accounted for under the equity method. The affiliates own and operate multifamily rental properties. Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund managed by the Company and will be, subject to specific exceptions, the Company's exclusive investment vehicle for new investments until the Fund's committed capital has been invested or committed for investments, or if earlier, December 31, 2003. As of the year end, the Fund has total capital commitments of $157 million. On February 15, 2002 the Fund completed its equity raising effort with a total of $250 million in capital commitments. The Fund is expected to utilize leverage of approximately 65% of the value of the underlying real estate portfolio. The Company is committed to invest 21.4% of the aggregate capital committed to the Fund. In addition, Essex will be compensated by the Fund for its asset management, property management, development and redevelopment services and may receive incentive distributions if the Fund exceeds certain financial return benchmarks. The current portfolio of stabilized properties of the Fund is set forth below:
Loan Amount Fixed Loan ($ in Interest Maturity Property Name Location Units millions) Rate Date ------------- --------------- ----- --------- -------- -------- Rosebeach Apartments....... LaMirada, CA 174 $ 8.5 7.09% Feb-11 Foxborough Homes........... Orange, CA 90 5.0 7.84% Jul-09 Vista del Rey.............. Tustin, CA 116 8.0 6.95% Feb-11 The Crest at Phillips Ranch Pomona, CA 501 36.1 7.99% Jul-05 Andover Park Apartments.... Beaverton, OR 240 12.5 6.66% Oct-11 Hunt Club.................. Lake Oswego, OR 256 11.8 7.05% Feb-11 Marbrisas.................. Chula Vista, CA 500 39.9 7.99% Jul-05 ----- ------ Total............... 1,877 $121.8 ===== ======
In December 2001, the Fund obtained an unsecured line of credit for an aggregate amount of $50 million. The line matures in June 2002 but may be extended at the Fund's option to September 2002. The line bears interest at LIBOR plus 0.875%. As of December 31, 2001, the line had an outstanding balance of $46.2 million. In addition to distributions with respect to its pro-rata share of the Fund's Limited Partnership Interest invested capital, VFGP (1) will receive special priority distributions from the Fund in the annual amount of 1% of the Fund's unreformed third party capital, payable quarterly for managing the Fund's operations, and (2) may receive over the life of the Fund incentive distributions up to 20% of the cumulative net profits on the Fund's investments, if the Fund exceeds certain financial return benchmarks, including a minimum 10% compounded annual return on the Limited Partner's total capital contributions. VFGP will also be paid fees consistent with industry standards for its property management, development and redevelopment services with respect to the Fund's investments. VFGP will not receive transaction fees, such as acquisition, disposition, and financing or similar fees, in connection with the operation of the Fund. F-10 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) Subject to specific exceptions, the Fund will generally be the Company's exclusive investment vehicle for new investments until the earlier of (i) the date at least 90% of the Fund's aggregate capital commitments have been invested or committed or reserved for investments or (ii) December 31, 2003. The exceptions are: (1) properties acquired to complete transactions intended to qualify for non-recognition under Section 1031 of the Internal Revenue Code, (2) transactions involving properties with 75 units or less, (3) transactions which require equity securities of the Company, including convertible or exchangeable securities, with a value of at least $750,000, (4) follow-on investments and re-building of properties which have been destroyed or damaged, (5) land leases with remaining terms of less than 35 years; and (6) other transactions which are prohibited from being consummated on behalf of the Fund due to express restrictions or diversification limitations. The Company is not prohibited from utilizing it's development and redevelopment capabilities to improve properties that it currently owns or acquires pursuant to the preceding exceptions. In October 1999, the Company entered into two separate joint venture arrangements and through two separate private REITs, Newport Beach North, Inc. and Newport Beach South, Inc., received an approximate 49.9% equity interest in each. Generally, profit and loss are allocated to the partners in accordance with their ownership interests. In addition to its equity earnings, the Company is entitled to management and redevelopment fees from the joint ventures and incentive payments based on the financial success of the joint ventures. In December 1999, the Company entered into a joint venture arrangement (AEW joint venture) and received an approximate 20% equity interest in the joint venture. The Company contributed its investment in Riverfront Apartments, Casa Mango Apartments, and Westwood Apartments into the joint venture. The Company also contributed land and development rights for a development community, Tierra Vista, located in Oxnard, California. Tierra Vista completed construction and reached stabilized operations in 2001. Generally, profit and loss are allocated to the partners in accordance with their ownership interests. In addition to its equity earnings, the Company is entitled to management, redevelopment and development fees from the joint venture and incentive payments based on the financial success of the joint venture. The Company holds limited partnership interests in 17 partnerships which collectively own ten multifamily properties, comprised of 1,831 units (Down REIT entities). These investments were made under arrangements whereby Essex Management Corporation (EMC) became the general partner, the Operating Partnership became a special limited partner, and the other limited partners were granted rights of redemption for their interests. Such partners can request to be redeemed and the Company can elect to redeem their rights for cash or by issuing shares of its common stock on a one unit per share basis. Redemption values will be based on the market value of the Company's common stock at the time of redemption multiplied by the number of units stipulated under the above arrangements. The Company has investments in two taxable REIT subsidiaries, EMC and EFC. The Company has a 99% economic interest in these entities through its ownership of nonvoting preferred stock. Executives of the Company have a 1% economic interest through ownership of 100% of the common stock and for the years ended December 31, 2001, 2000 and 1999 have not received any form of compensation from this ownership interest. These entities were formed for the purpose of acquiring, developing and managing real property and are accounted for on the equity method of accounting. As of December 31, 2001, EFC owns one multifamily property, one property under development and an investment in Internet Realty Partners. The investments were made using proceeds from loans made by the Company. At December 31, 2001, EFC's total assets and equity were $61,049 and $8,926, respectively. F-11 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts)
2001 2000 ------- ------- Investments in joint ventures: Direct and indirect LLC member interests of approximately 49.9% in Newport Beach North, LLC and Newport Beach South, LLC........................................................ $31,214 $31,201 Limited partnership interest of 30.8% and general partner interest of 1% in Essex Apartment Value Fund, L.P.(1)...... 17,119 -- Limited partnership interest of 20% in AEW joint ventures.... 10,729 10,585 Class A Member interest of 45% in Park Hill LLC.............. 5,754 5,753 Limited partnership interests of 49% in Parker Ranch......... -- 6,000 Preferred limited partnership interests in Mountain Vista Apartments................................................. 4,004 9,540 Limited partnership interest of 46% in Mt. Sutro Terrace Associates, L.P............................................ -- 2,048 Limited partnership interests of 1% to 30% in Down REIT entities................................................... 16,610 (1,926) ------- ------- 85,430 63,201 Total equity method investments.......................... Other investments............................................ 10,030 2,502 ------- ------- Total investments........................................ $95,460 $65,703 ======= =======
- -------- (1) Subsequent to the year end, the Fund completed its equity raising effort, which will reduce its limited partnership interest to 20.4%. The combined summarized financial information of investments, which are accounted for under the equity method, are as follows:
December 31, ----------------- 2001 2000 -------- -------- Balance sheets: Real estate and real estate under development.... $682,310 $376,261 Other assets..................................... 51,182 37,373 -------- -------- Total assets................................. $733,492 $413,634 ======== ======== Mortgage notes payable........................... $421,556 $179,994 Other liabilities................................ 113,357 29,926 Partners' equity................................. 198,579 203,714 -------- -------- Total liabilities and partners' equity....... $733,492 $413,634 ======== ======== Company's share of equity........................... $ 95,460 $ 65,703 ======== ========
F-12 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts)
Years ended December 31, --------------- 2001 2000 ------- ------- Statements of operations: Total revenue.................................... $70,414 $39,097 Total expenses................................... 60,289 34,502 ------- ------- Total net income............................. $10,125 $ 4,595 ======= ======= Company's share of net income....................... $ 3,854 $ 1,333 ======= =======
(c) Real Estate Under Development The Company is developing five multifamily residential communities, with an aggregate of 1,274 multifamily units. 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 and the total estimated cost for this projects are approximately $221.2 million. As of December 31, 2001, the remaining development commitment including those held in joint ventures is approximately $113.4 million. (4) Notes Receivable from Investees and Other Related Parties Notes receivable from joint venture investees and other related party receivables consist of the following as of December 31, 2001 and 2000:
2001 2000 ------- ------- Notes receivable from joint venture investees: Note receivable EFC, secured by Moanalua Hillside Apartment bearing interest at 7% due by December 2002................. $34,000 $ -- Notes receivable from VFGP L.P.s, secured, bearing interest at 9%--Prime + 3%, due 2001-2010............................ -- 47,840 Note receivable from Highridge Apartments, secured, bearing interest at 9%, due March 2008.............................. -- 1,047 Note receivable from Highridge Apartments, secured, bearing interest at 10%, due on demand.............................. 2,950 2,950 Notes receivable from EFC, secured, bearing interest at LIBOR + 2.5%, due 2004............................................ 13,305 5,613 Notes receivable from EFC, unsecured, bearing interest at 7.5%, due 2011.............................................. 1,150 -- Receivable from Down REIT entities, noninterest bearing, due on demand................................................... -- 8,281 Receivable from Newport Beach North LLC and Newport Beach South LLC, due on demand.................................... 974 1,753 Receivable from City Heights LP, noninterest bearing, due on demand...................................................... -- 865 Other related party receivables: Loans to officers, bearing interest at 8%, due April 2006..... 633 633 Other related party receivables, substantially all due on demand...................................................... 3,002 8,099 ------- ------- $56,014 $77,081 ======= =======
F-13 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) The Company's officers and directors do not have a substantial economic interest in these joint venture investees. Other related party receivables consist primarily of accrued interest income on related party notes receivable from investees and other related parties and loans to officers, advances and accrued management fees from joint venture partnerships, and unreimbursed expenses due from EMC. (5) Notes and Other Receivables Notes and other receivables consist of the following as of December 31, 2001 and 2000:
2001 2000 ------- ------- Note receivable from Derian Ave, LLC, secured, bearing interest at 9.3%, due on demand........................................ $15,000 $15,000 Note receivable from DOIT City Heights Los Angeles L.P., secured, interest payable monthly at 9%, principal due December 2007................................................. 2,434 2,415 Note receivable from Derian Ave, LLC, secured, bearing interest at 15.0%, due on demand....................................... 1,372 208 Other receivables............................................... 10,965 6,439 ------- ------- $29,771 $24,062 ======= =======
(6) Related Party Transactions The Company provides some of its fee-based asset management and disposition services as well as third-party property management and leasing services through EMC. The Company owns 100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of the Company own 100% of EMC's 1,000 shares of common stock. All general and administrative expenses of the Company and EMC are initially borne by the Company, with a portion subsequently allocated to EMC based on a business unit allocation methodology, formalized and approved by management and the Board of Directors. Expenses allocated to EMC for the years ended December 31, 2001, 2000, and 1999 totaled $2,635, $1,247, and $545, respectively, and are reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of operations. The Company's Chairman, George Marcus, is also the Chairman of the Marcus & Millichap Company (M&M), which is a real estate brokerage firm. During the years ended December 31, 2001, 2000, and 1999, the Company paid brokerage commissions totaling $0, $289, and $105 to M&M on the purchase and sales of real estate. The commissions are either capitalized as a cost of acquisition or are reflected as a reduction of the gain on sales of real estate in the accompanying consolidated statements of operations. EMC is entitled to receive a percentage of M&M brokerage commissions on certain transactions in which the Company is a party. Interest and other income include interest income of $1,236, $1,863, and $705 for the years ended December 31, 2001, 2000, and 1999, respectively, which was earned principally on the notes receivable from related party partnerships in which the Company owns an ownership interest (Joint Ventures). Interest and other income also include management fee income and investment income earned by the Company from its Joint Ventures in which it has an ownership interest of $11,567, $1,955, and $561 for the years ended December 31, 2001, 2000, and 1999, respectively. F-14 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) (7) Mortgage Notes Payable Mortgage notes payable consist of the following as of December 31, 2001 and 2000:
2001 2000 -------- -------- Mortgage notes payable to a pension fund, secured by deeds of trust, bearing interest at rates ranging from 6.62% to 8.18%, interest only payments due monthly for periods ranging from October 2001 through November 2004, principal and interest payments due monthly thereafter, and maturity dates ranging from October 2008 through October 2010. Under certain conditions a portion of these loans can be converted to an unsecured note payable....................................... $240,000 $240,000 Mortgage notes payable, secured by deeds of trust, bearing interest at rates ranging from 6.760% to 8.055%, principal and interest payments due monthly, and maturity dates ranging from February 2003 through July 2011......................... 198,140 116,551 Multifamily housing mortgage revenue bonds secured by deeds of trust on rental properties and guaranteed by collateral pledge agreements, payable monthly at a variable rate as defined in the Loan Agreement (approximately 3.0% for December 2001 and 2000), plus credit enhancement and underwriting fees ranging from approximately 1.2 to 1.9%. The bonds are convertible to a fixed rate at the Company's option. Among the terms imposed on the properties, which are security for the bonds, is that 20% of the units are subject to tenant income qualification criteria. Principal balances are due in full at various maturity dates from July 2020 through October 2026. These bonds are subject to interest rate protection agreements through August 2003, limiting the interest rate with respect to such bonds to a maximum interest rate of 7.1% to 7.3%................................ 58,820 58,820 Mortgage notes payable, secured by deeds of trust, bearing interest at rates ranging from 7.00% to 8.78%, principal and interest payments due monthly, and maturity dates ranging from December 2002 through April 2005. Under certain conditions these loans can be converted to unsecured notes payable...................................................... 42,723 43,436 Multifamily housing mortgage revenue bonds secured by deed of trust on a rental property and guaranteed by a collateral pledge agreement, bearing interest at 6.455%, principal and interest payments due monthly, final principal payment of $14,800 due January 2026. Among the terms imposed on the property, which is security for the bonds, is that 20% of the units are subject to tenant income qualification criteria. The interest rate will be repriced in February 2008 at the then current tax-exempt bond rate............................ 16,493 16,770 Multifamily housing mortgage revenue bonds secured by deed of trust on rental property, bearing interest at 7.69%, principal and interest installments due monthly through June 2018. Among the terms imposed on the property, which is security for the bonds, is that 20% of the units are subject to tenant income qualifications criteria..................... 8,025 8,265 Construction note payable, secured by deed of trust, bearing interest at a variable rate of LIBOR + 1.75% (approximately 8.5% for December 2000), interest payments due monthly and maturing in May 2001......................................... -- 18,224 -------- -------- $564,201 $502,066 ======== ========
F-15 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) The aggregate scheduled maturities of mortgage notes payable are as follows: 2002....................................................... $ 12,422 2003....................................................... 21,853 2004....................................................... 4,021 2005....................................................... 36,077 2006....................................................... 15,121 Thereafter................................................. 474,707 -------- $564,201 ========
In October 1997, the Company entered into four forward treasury contracts for an aggregate notional amount of $60,000, locking the 10-year treasury rate at between 6.15% and 6.26%. These contracts were entered into to limit the interest rate exposure on identified future debt financing requirements relating to real estate under development and the refinancing of a $18,101 fixed rate loan. These contracts were settled by June 2000. During 2000, the four contracts were sold, resulting in a net realized gain of $1,384, which is being amortized over the related debt. During the years ended December 31, 2001, 2000, and 1999, the Company refinanced various mortgages and incurred a loss on the early extinguishment of debt of $0, $119, and $214 related to the write-off of the unamortized mortgage loan fees and prepayment penalties. During transactions through 1999, the Company purchased interest rate cap contracts in order to reduce the risks associated with increases in interest rates on its tax exempt variable rate demand bonds. The Company has the right to receive cash if interest rates increase above a specified level. The purpose of the caps is to hedge the exposure to variability in expected future interest cash flows above a fixed interest rate, and, accordingly, they are accounted for as cash flow hedges under SFAS 133. The Company determines the fair value of the caps and assesses the ineffectiveness of the hedge based on changes in the time value of the caps. As of January 1, 2001, there were no changes in the intrinsic value of the caps since the date the caps were purchased, and the changes in fair value of the caps is attributable entirely to changes in time value. The amortized cost of the cap contracts exceeded their fair value by approximately $450, which resulted in a transition adjustment (charge to earnings) of that amount in the quarter ended March 31, 2001. (8) Lines of Credit The Company has two outstanding unsecured lines of credit for an aggregate amount $150,000. The first line, in the amount of $120,000, matures in May 2002, with an option to extend it for one year thereafter. Outstanding balances under this line of credit bear interest at a rate which uses a tiered rate structure tied to the Company corporate ratings, if any, and leverage rating, which has been priced at LIBOR + 1.15% during 2001 and 2000. As of December 31, 2001 and 2000, the interest rate was approximately 3.0% and 7.9%, respectively. As of December 31, 2001 and 2000, the Company had $44,459 and $86,469 outstanding on this line of credit, respectively. A second line of credit in the amount of $30,000 matures in September 2002, with an option to extend for one year thereafter. Outstanding balances, if any, on this second line bear interest based on a tiered-rate structure currently at LIBOR plus 1.175%. As of December 31, 2001 and 2000, the Company had $30,000 and $7,000 outstanding on this line of credit, respectively. The Company had no outstanding letters of credit as of December 31, 2001. As of December 31, 2001, the 30-day LIBOR rate was approximately 1.9%. F-16 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) The credit agreements contain debt covenants related to limitations on indebtedness and liabilities, maintenance of minimum levels of consolidated earnings before depreciation, interest and amortization and maintenance of minimum tangible net worth. (9) Equity Transactions As of December 31, 2001 the Operating Partnership has the following cumulative redeemable preferred units outstanding.
Liquidation Description Issue Date Units Preference -------------------- ------------------------- --------- ----------- 7.875% Series B February 1998 1,200,000 $60,000 7.875% Series B April 1998 400,000 $20,000 9.125% Series C November 1998 500,000 $25,000 9.3% Series D July 1999 2,000,000 $50,000 9.25% Series E September 1999 2,200,000 $55,000
Dividends on the units are payable quarterly. The holders of the units do not have any voting rights. Holders of the units have the right to exchange their units on or after the tenth anniversary of the Issue Date for shares of the Company's cumulative redeemable preferred stock at identical economic terms. The Company has the right to redeem the units on the fifth anniversary after the issue date. These preferred units are included in minority interests in the accompanying consolidated balance sheet. On June 28, 2001, the Operating Partnership issued 200,000 Series Z Incentive Units of limited partner interest (the "Series Z Incentive Units") to eleven senior executives of the Company in exchange for a capital commitment of $1.00 per Series Z Incentive Unit, for an aggregate offering price of $200. Upon certain triggering events, the Series Z Incentive Units will automatically convert into common Operating Partnership units based on a conversion ratio that may increase over time upon satisfaction of specific conditions. The conversion ratio, initially set at zero, will increase by 10% (20% in 2002) on January 1 of each year for each participating executive who remains employed by the Company if the Company has met a specified "funds from operations" per share target for the prior year, up to a maximum conversion ratio of 1.0. In certain change of control situations, the participating executives will also be given the option to convert their units at the then-effective conversion ratio. In addition, the Operating Partnership has the option to redeem Series Z Incentive Units held by any executive whose employment has been terminated for any reason and the obligation to redeem any such units following the death of the holder. In such event, the Operating Partnership will redeem the units for, at its option, either common Operating Partnership units or shares of the Company's common stock based on the then-effective conversion ratio. During the year, the Company's Board of Directors has authorized the Operating Partnership to purchase from time to time shares of the Company's Common Stock, in an amount up to $50 million, at a price not to exceed $48.00 per share in the open market or through negotiated or block transactions. The timing of the repurchase will depend on the market price and other market conditions and factors. Essex will use working capital or proceeds from the sale of properties to provide funds for this program. The purpose of the program is to acquire stock related to real estate transactions involving the issuance of partnership units in the Operating Partnership and similar interests. Such repurchased shares may be reissued in connection with the conversion of such partnership units, the exercise of stock options or other business transactions. This Program supersedes its common stock repurchase plan as announced on March 25, 1999. In October 2001, the Operating Partnership F-17 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) acquired 100,700 shares of the Company's outstanding Common Stock. The weighted average exercise price paid for the shares was $47.88. The amount paid for the shares has been reflected as a reduction of the common stock and additional paid-in-capital in the Company's consolidated balance sheets for the year ended December 31, 2001. Pursuant to existing shelf registration statements, the Company has the capacity to issue up to $342,000 of equity securities and the Operating Partnership has the capacity to issue up to $250,000 of debt securities. (10) Per Share Data Basic income per share before extraordinary items and diluted income per share before extraordinary items are calculated as follows for the years ended December 31:
2001 2000 1999 ------------------------- -------------------------- -------------------------- Weighted- Per Weighted- Per Weighted- Per average share average share average share Income shares amount Income shares amount Income shares amount ------- --------- ------ ------- --------- ------ ------- --------- ------ Income before extraordinary item.... $48,545 $44,472 $43,778 Less: dividends on preferred stock.. -- (246) (1,333) ------- ------- ------- Basic: Income available to common stockholders..................... 48,545 18,452 $2.63 44,226 18,234 $2.43 42,445 17,521 $2.42 ===== ===== ===== Effect of Dilutive Securities: Convertible limited partnership units................ -- -- (1) -- -- (1) -- -- (1) Convertible preferred stock........ -- -- 246 108 1,333 786 Stock options(2)................... -- 316 -- 315 -- 184 ------- ------ ------- ------ ------- ------ Diluted: Income available to common stockholders plus assumed conversions...................... $48,545 18,768 $2.59 $44,472 18,657 $2.38 $43,778 18,491 $2.37 ======= ====== ===== ======= ====== ===== ======= ====== =====
- -------- (1) Securities not included because they were anti-dilutive (2) The following stock options are not included in the diluted earnings per share calculation because the strike price of the option was greater than the average market price of the common shares for the year and, therefore, the effect would be anti-dilutive:
2001 2000 1999 -------------- -------------- -------------- Number of options............ 145 12 295 Range of exercise prices..... $49.250-54.250 $45.063-54.250 $31.875-34.750
(11) Stock Option Plans The Essex Property Trust, Inc. 1994 Stock Incentive Plan provides incentives to attract and retain officers, directors and key employees. The Stock Incentive Plan provides for the grants of options to purchase a specified number of shares of common stock or grants of restricted shares of common stock. Under the Stock Incentive Plan, the total number of shares available for grant is approximately 1,375,400. The Board of Directors (the Board) may adjust the aggregate number and type of shares reserved for issuance. Participants in the Stock F-18 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) Incentive Plans are selected by the Stock Incentive Plan Committee of the Board, which is comprised of independent directors. The Compensation Committee is authorized to establish the exercise price; however, the exercise price cannot be less than 100% of the fair market value of the common stock on the grant date. The Company's options have a life of ten years. Option grants fully vest between one year and five years after the grant date. In connection with the Company's 1994 initial public offering, the Company provided a one-time grant of options to M&M to purchase 220,000 shares of common stock at the initial public offering price of $19.50 per share pursuant to an agreement whereby Marcus & Millichap Real Estate Investment Brokerage Company, a subsidiary of M&M, will provide real estate transaction, trend and other information to the Company for a period of ten years. The Company has also reserved 406,500 shares of common stock in connection with the Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan. There was no activity in this plan during 2001, 2000, and 1999. The Company applies APB Opinion 25 and related interpretations in accounting for its stock-based compensation plans. Under this opinion, no compensation cost has been recognized for its plans. Had compensation cost for the Company's plans been determined based on the fair value at the grant dates consistent with the method of FASB Statement 123, the Company's net income for the years ended December 31, 2001, 2000, and 1999 would have been reduced to the pro forma amounts indicated below:
2001 2000 1999 ------- ------- ------- Net income: As reported................................... $48,545 $44,353 $43,564 Pro forma..................................... 47,965 43,857 43,489
For the years ended December 31, 2001, 2000, and 1999, the effect of determining compensation cost consistent with FASB Statement 123 on basic and diluted earnings per share was not material. The fair value of options granted was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants: risk-free interest rates ranging from 3.54% to 4.96% in 2001, from 5.67% to 6.72% in 2000, and from 5.14% to 6.39% in 1999; expected lives of 6 years for 2001, 6 years for 2000 and 7 years for 1999; volatility of 18.93% for 2001, 19.26% for 2000 and 21.41% for 1999; and dividend yield of 5.7% for 2001, 4.3% for 2000 and 6.6% for 1999. F-19 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) A summary of the status of the Company's option plans as of December 31, 2001, 2000, and 1999 and changes during the years ended on those dates is presented below:
2001 2000 1999 ------------------- ------------------- ------------------ Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price -------- --------- -------- --------- ------- --------- Outstanding at beginning of year....... 885,958 $28.48 954,449 $26.24 909,764 $24.40 Granted................................ 162,500 49.88 125,000 40.93 161,550 29.18 Exercised.............................. (111,982) 27.57 (151,591) 22.50 (45,535) 17.38 Forfeited and canceled................. (17,800) 43.42 (41,900) 36.01 (71,330) 25.40 -------- -------- ------- Outstanding at end of year............. 918,676 32.14 885,958 28.48 954,449 26.24 ======== ======== ======= Options exercisable at year end........ 565,672 26.51 560,681 25.06 579,112 23.31 Weighted-average fair value of options granted during the year.............. $5.82 $7.57 $3.45
The following table summarizes information about stock options outstanding as of December 31, 2001:
Options outstanding Options exercisable - ---------------------------------- ---------------------- Number Weighted- Number outstanding average Weighted- exercisable Weighted- as of remaining average as of average Range of December 31, contractual exercise December 31, exercise exercise prices 2001 life price 2001 price --------------- ------------ ----------- --------- ------------ --------- $16.28-21.70 275,016 2.5 years $19.48 275,016 $19.48 21.70-27.13 44,900 7.2 years 26.10 8,900 26.00 27.13-32.55 142,280 6.5 years 30.27 98,030 30.06 32.55-37.98 209,280 5.9 years 34.23 152,126 34.23 37.98-43.40 76,700 8.4 years 39.57 28,700 38.66 43.40-48.83 29,500 9.3 years 46.66 1,000 45.06 48.83-54.25 141,000 9.1 years 50.48 1,900 51.86 ------- ------- 918,676 565,672 ======= =======
Through December 31, 2001, the Company has granted 42,586 stock units under the Company's Phantom Stock Unit Agreement to two of the Company's executives. The units vest in installments in accordance with the vesting schedule set forth in the Phantom Stock Unit Agreement such that the units will be fully vested five years from the date of issuance. At that time, the Company expects to issue to the executives the number of shares of common stock equal to the number of units vested, or at the Company's option, an equivalent amount in cash. Dividends are paid by the Company on the vested and unvested portion of shares. For the years ended December 31, 2001, 2000, and 1999, compensation cost was $327, $262, and $184, respectively, related to this plan. F-20 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) (12) Shareholder Rights Plan On November 12, 1998, the Company's Board of Directors adopted a Stockholder Rights Plan. A dividend of one right (a Right) per share of common stock was distributed to stockholders of record on November 21, 1998. Each Right, expiring November 11, 2008, represents a right to buy from the Company 1/100th of a share of Series A junior participating preferred stock at a price of $99.13 per Right. Generally the Rights will not be exercisable unless a person or group acquires 15% or more, or announces an offer that could result in acquiring 15% or more, of the Company's common stock unless such person is or becomes the beneficial owner of 15% or more of the Company's outstanding common stock and had a contractual right or the approval of the Company's Board of Directors, provided that such percentage shall not be greater than 19.9%. Following an acquisition of 15% or more of the Company's common stock, each Right holder, except the 15% or more shareholder, has the right to receive, upon exercise, shares of common stock valued at twice the then applicable exercise price of the Right, unless the 15% or more shareholder has offered to acquire all of the outstanding shares of the Company under terms that a majority of the independent directors of the Company have determined to be fair and in the best interest of the Company and its shareholders. Similarly, unless certain conditions are met, if the Company engages in a merger or other business combination following a stock acquisition where it does not survive or survives with a change or exchange of its common stock or if 50% or more of its assets, earning power or cash flow is sold or transferred, the Rights will become exercisable for shares of the acquiror's stock having a value of twice the exercise price. Generally, Rights may be redeemed for $0.01 each (in cash, common stock or other consideration the Company deems appropriate) until the tenth day following a public announcement that a 15% or greater position has been acquired of the Company's stock. (13) Segment Information In accordance with FASB No. 131, Disclosures about Segments of an Enterprise and Related 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. Nonsegment revenues and net operating income included in the following schedule consist of revenue generated from the two commercial properties. Also excluded from segment revenues are interest and other corporate income. Other nonsegment assets include investments, real estate under development, cash, notes receivables, other assets and deferred charges. The accounting policies of the segments are the same as those described in note 2. The Company evaluates performance based upon net operating income from the combined properties in each segment. F-21 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the years ended and as of December 31, 2001, 2000, and 1999:
Year ended December 31, ---------------------------------- 2001 2000 1999 ---------- ---------- ---------- Revenues: Northern California.............................................. $ 65,812 $ 57,998 $ 48,740 Southern California.............................................. 72,561 68,246 58,371 Pacific Northwest................................................ 45,109 41,527 33,316 ---------- ---------- ---------- Total segment revenues....................................... 183,482 167,771 140,427 Interest and other income........................................... 22,152 10,969 5,618 ---------- ---------- ---------- Total revenues............................................... $ 205,634 $ 178,740 $ 146,045 ========== ========== ========== Net operating income: Northern California.............................................. $ 49,956 $ 44,960 $ 35,962 Southern California.............................................. 49,713 47,168 40,122 Pacific Northwest................................................ 30,890 28,953 22,284 ---------- ---------- ---------- Total segment net operating income........................... 130,559 121,081 98,368 Nonsegment net operating income..................................... -- -- 353 Interest and other income........................................... 22,152 10,969 5,618 Depreciation and amortization....................................... (36,295) (30,765) (26,150) Interest............................................................ (39,105) (30,384) (21,268) Amortization of deferred financing costs............................ (657) (639) (566) General and administrative.......................................... (7,498) (6,062) (4,263) ---------- ---------- ---------- Income before gain on the sales of real estate, minority interests, and extraordinary item.......................... $ 69,156 $ 64,200 $ 52,092 ========== ========== ========== Assets: Northern California.............................................. $ 302,408 $ 289,839 $ 222,086 Southern California.............................................. 456,639 478,835 415,374 Pacific Northwest................................................ 259,884 268,235 195,011 ---------- ---------- ---------- Net real estate assets....................................... 1,018,931 1,036,909 832,471 Nonsegment assets................................................... 310,527 244,940 229,842 ---------- ---------- ---------- Total assets................................................. $1,329,458 $1,281,849 $1,062,313 ========== ========== ==========
F-22 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) (14) Quarterly Results of Operations (Unaudited) The following is a summary of quarterly results of operations for 2001 and 2000:
Quarter ended Quarter ended Quarter ended Quarter ended December 31 September 30 June 30 March 31 ------------- ------------- ------------- ------------- 2001: Total revenues before gain on the sales of real estate....................................... $52,716 $51,763 $51,045 $50,110 ======= ======= ======= ======= Gain on the sales of real estate............... $ -- $ 3,788 $ -- $ -- ======= ======= ======= ======= Extraordinary item...................... $ -- $ -- $ -- $ -- ======= ======= ======= ======= Net income.............................. $11,070 $14,899 $11,527 $11,049 ======= ======= ======= ======= Per share data: Net income: Basic....................................... $ 0.60 $ 0.81 $ 0.62 $ 0.60 ======= ======= ======= ======= Diluted..................................... $ 0.59 $ 0.79 $ 0.61 $ 0.59 ======= ======= ======= ======= Market price:................................. High........................................ $ 51.05 $ 54.67 $ 50.97 $ 55.94 ======= ======= ======= ======= Low......................................... $ 45.50 $ 47.00 $ 42.28 $ 46.96 ======= ======= ======= ======= Close....................................... $ 49.41 $ 49.10 $ 49.55 $ 48.05 ======= ======= ======= ======= Dividends declared............................ $ 0.70 $ 0.70 $ 0.70 $ 0.70 ======= ======= ======= ======= 2000: Total revenues before gain on the sales of real estate....................................... $49,434 $47,358 $42,412 $39,536 ======= ======= ======= ======= Gain on the sales of real estate............... $ -- $ -- $ -- $ 4,022 ======= ======= ======= ======= Extraordinary item...................... $ (119) $ -- $ -- $ -- ======= ======= ======= ======= Net income.............................. $11,081 $10,249 $10,273 $12,750 ======= ======= ======= ======= Per share data: Net income:................................... Basic....................................... $ 0.60 $ 0.56 $ 0.56 $ 0.70 ======= ======= ======= ======= Diluted..................................... $ 0.59 $ 0.54 $ 0.55 $ 0.69 ======= ======= ======= ======= Market price:................................. High........................................ $ 57.75 $ 56.50 $ 44.00 $ 36.31 ======= ======= ======= ======= Low......................................... $ 50.50 $ 42.00 $ 36.00 $ 32.56 ======= ======= ======= ======= Close....................................... $ 54.75 $ 55.38 $ 42.02 $ 36.00 ======= ======= ======= ======= Dividends declared............................ $ 0.61 $ 0.61 $ 0.61 $ 0.55 ======= ======= ======= =======
F-23 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) (15) 401(k) Plan The Company has a 401(k) pension plan (the Plan) for all full-time employees who have completed six months of service. Employees may contribute up to 23% of their compensation, limited by the maximum allowed under Section 401(k) of the Internal Revenue Code. The Company matches the employee contributions for nonhighly compensated personnel, up to 50% of their contribution to a maximum of $.5 (per individual) per year. Company contributions to the Plan were approximately $116, $98, and $58 for the years ended December 31, 2001, 2000, and 1999. (16) Fair Value of Financial Instruments Management believes that the carrying amounts of mortgage notes payable, lines of credit, notes and other related party receivables approximate fair value as of December 31, 2001 and 2000, because interest rates, yields and other terms for these instruments are consistent with yields currently available to the Company for similar instruments. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable, other liabilities and dividends payable approximate fair value as of December 31, 2001 and 2000 due to the short-term maturity of these instruments. (17) Commitments and Contingencies The Company had no outstanding letters of credit relating to financing and development transactions as of December 31, 2001. In conjunction with an acquisition of a property by the Company in 2000, the Company has committed to provide a loan of up to $4,400 subject to conditions. The commitment expires no later than February 2003. Investments in real property create a potential for environmental liabilities on the part of the owner of such real property. The Company carries limited insurance coverage for this type of environmental risk. The Company has conducted environmental studies, which revealed the presence of groundwater contamination at certain properties; such contamination at certain of these properties was reported to have migrated on-site from adjacent industrial manufacturing operations. The former industrial users of the properties were identified as the source of contamination. The environmental studies noted that certain properties are located adjacent to and possibly down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such properties. The environmental studies also noted that at certain of these properties, contamination existed because of the presence of underground fuel storage tanks, which have been removed. Based on the information contained in the environmental studies, the Company believes that the costs, if any, it might bear as a result of environmental contamination or other conditions at these properties would not have a material adverse effect on the Company's financial position, results of operations, or liquidity. The Company is involved in various lawsuits arising out of the ordinary course of business and certain other legal matters. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. In September 1999, the Company formed a program in which directors and management of the Company can participate indirectly in an investment in the Company's common stock. The participants have entered into a swap agreement with a securities broker whereby the securities broker has acquired, in open market transactions, F-24 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (Dollars in thousands, except for per share amounts) 223,475 shares of the Company's common stock. The agreement terminates in five years at which time the settlement amount is determined by comparing the original purchase price of the stock plus interest at a rate of LIBOR plus 1.5% to the termination date market value of the shares and all dividends received during the investment period. In certain circumstances, the participants may be required to provide collateral to the securities broker. The Company has guaranteed performance of the participants with respect to any obligations relating to the swap agreement. If the program was terminated effective December 31, 2001, there would have been no collateral requirement and no obligation under the participant performance guarantee. Through January 2002, the directors and management effected an early termination of the agreement with respect to 120,718 shares of the total 223,475 shares, realizing a gain of approximately $15 per share. F-25 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES Real Estate and Accumulated Depreciation December 31, 2001 (Dollars in thousands)
Initial cost Costs ---------------------- capitalized Buildings and subsequent to Property Units Location Encumbrance Land improvements acquisition - --------------------------------- ----- -------------------- ----------- -------- ------------- ------------- Encumbered multifamily properties Summerhill Park 100 Sunnyvale, CA $ $ 2,654 $ 4,918 $ 642 Oak Pointe 390 Sunnyvale, CA 4,842 19,776 5,443 Summerhill Commons 184 Newark, CA 1,608 7,582 1,040 Pathways 296 Long Beach, CA 4,083 16,757 8,137 Stevenson Place (The Apple) 200 Fremont, CA 996 5,582 6,143 Foothill Commons 360 Bellevue, WA 2,435 9,821 3,032 Woodland Commons 236 Bellevue, WA 2,040 8,727 1,764 Palisades 192 Bellevue, WA 1,560 6,242 1,825 -------- -------- -------- ------- 100,000 20,218 79,405 28,026 -------- -------- -------- ------- Wharfside Pointe 142 Seattle, WA 2,245 7,020 1,010 Emerald Ridge 180 Bellevue, WA 3,449 7,801 956 Sammamish View 153 Bellevue, WA 3,324 7,501 791 -------- -------- -------- ------- 18,487 9,018 22,322 2,757 -------- -------- -------- ------- Brighton Ridge 264 Renton, WA 2,623 10,800 1,098 Landmark 285 Hillsboro, OR 3,655 14,200 1,061 Eastridge 188 San Ramon, CA 6,068 13,628 419 -------- -------- -------- ------- 26,781 12,346 38,628 2,578 -------- -------- -------- ------- Fountain Court 320 Bellevue, WA 6,702 27,306 352 Hillcrest Park (Mirabella) 608 Newbury Park, CA 15,318 40,601 6,974 Hillsborough Park 235 La Habra, CA 6,291 15,455 85 -------- -------- -------- ------- 80,000 28,311 83,362 7,411 -------- -------- -------- ------- The Shores 462 San Ramon, CA 12,105 18,252 15,036 Waterford 238 San Jose, CA 11,808 24,500 1,275 -------- -------- -------- ------- 60,000 23,913 42,752 16,311 -------- -------- -------- ------- Bridle Trails 92 Kirkland, WA 4,098 1,500 5,930 235 Bunker Hill Towers 456 Los Angeles, CA 17,700 11,498 27,871 606 Camarillo Oaks 564 Camarillo, CA 27,445 10,953 25,254 3,919 Evergreen Heights 200 Kirkland, WA 8,506 3,566 13,395 672 Hampton Park (Columbus) 83 Glendale, CA 4,450 2,407 5,672 1,340 Hampton Place (Lorraine) 132 Glendale, CA 8,245 4,288 11,081 1,177 Huntington Breakers 342 Huntington Beach, CA 22,930 9,306 22,720 1,458 Inglenook Court 224 Bothell, WA 8,300 3,467 7,881 1,609 Jackson School Village 200 Hillsboro, OR 9,111 2,588 10,452 432 Maple Leaf 48 Seattle, WA 2,002 805 3,283 95 Mariners Palce 105 Oxnard, CA 4,241 1,555 6,103 282 Meadowood 320 Simi Valley, CA 16,493 7,852 18,592 1,220 Monterra del Rey (Glenbrook) 84 Pasadena, CA 4,375 2,312 4,923 2,071 Monterra del Sol (Euclid) 85 Pasadena, CA 2,817 2,202 4,794 1,900 Mt. Sutro 99 San Francisco, CA 6,119 2,334 8,507 484 Spring Lake 69 Seattle, WA 2,193 838 3,399 110 Stonehedge Village 196 Bothell, WA 8,859 3,167 12,603 690 The Bluffs 224 San Diego, CA 13,268 3,405 7,743 336 The Carlyle 132 San Jose, CA 16,541 3,954 15,277 8,526 Treetops 172 Fremont, CA 9,800 3,520 8,182 1,141 Wandering Creek 156 Kent, WA 5,300 1,285 4,980 1,143 Wilshire Promenade 128 Fullerton, CA 7,435 3,118 7,385 685 Wimbledon Woods 560 Hayward, CA 55,650 9,883 37,670 1,929 Windsor Ridge 216 Sunnyvale, CA 13,055 4,017 10,315 835 -------- -------- -------- ------- 278,933 193,626 550,481 89,978 -------- -------- -------- -------
Gross amount carried at close of period --------------------------------------- Land and Buildings and Accumulated Date of Date Depreciable Property improvements improvements Total(1) depreciation construction acquired (years) - --------------------------------- ------------ ------------- -------- ------------ ------------ -------- ----------- Encumbered multifamily properties Summerhill Park $ 2,655 $ 5,559 $ 8,214 $ 2,302 1988 9/88 3-40 Oak Pointe 4,845 25,216 30,061 13,089 1973 12/88 3-30 Summerhill Commons 1,523 8,707 10,230 3,643 1987 7/87 3-40 Pathways 6,236 22,741 28,977 7,235 1975 2/91 3-30 Stevenson Place (The Apple) 1,000 11,721 12,721 5,281 1971 4/82 3-30 Foothill Commons 2,438 12,850 15,288 6,581 1978 3/90 3-30 Woodland Commons 2,042 10,489 12,531 5,075 1978 3/90 3-30 Palisades 1,562 8,065 9,627 4,422 1969/1977 (2) 5/90 3-30 -------- -------- -------- -------- 22,301 105,348 127,649 47,628 -------- -------- -------- -------- Wharfside Pointe 2,253 8,022 10,275 2,509 1990 6/94 3-30 Emerald Ridge 3,447 8,759 12,206 2,677 1987 11/94 3-30 Sammamish View 3,329 8,287 11,616 2,382 1986 11/94 3-30 -------- -------- -------- -------- 9,029 25,068 34,097 7,568 -------- -------- -------- -------- Brighton Ridge 2,654 11,867 14,521 1,876 1986 12/96 3-30 Landmark 3,697 15,219 18,916 2,892 1990 08/96 3-30 Eastridge 6,089 14,026 20,115 2,585 1988 08/96 3-30 -------- -------- -------- -------- 12,440 41,112 53,552 7,353 -------- -------- -------- -------- Fountain Court 6,977 27,383 34,360 1,631 2000 3/00 3-30 Hillcrest Park (Mirabella) 15,750 47,143 62,893 5,913 1973 3/98 3-30 Hillsborough Park 6,270 15,561 21,831 1,687 1999 09/99 3-30 -------- -------- -------- -------- 28,997 90,087 119,084 9,231 -------- -------- -------- -------- The Shores 12,577 32,816 45,393 4,095 1988 01/97 3-30 Waterford 12,309 25,274 37,583 1,225 2000 6/00 3-30 -------- -------- -------- -------- 24,886 58,090 82,976 5,320 -------- -------- -------- -------- Bridle Trails 1,530 6,135 7,665 924 1986 10/97 3-30 Bunker Hill Towers 11,635 28,340 39,975 3,813 1968 3/98 3-30 Camarillo Oaks 11,068 29,058 40,126 4,827 1985 07/96 3-30 Evergreen Heights 3,647 13,986 17,633 2,256 1990 06/97 3-30 Hampton Park (Columbus) 2,420 6,999 9,419 600 1974 06/99 3-30 Hampton Place (Lorraine) 4,302 12,244 16,546 1,060 1970 06/99 3-30 Huntington Breakers 9,312 24,172 33,484 3,579 1984 10/97 3-30 Inglenook Court 3,474 9,483 12,957 3,758 1985 10/94 3-30 Jackson School Village 2,697 10,775 13,472 453 1996 9/00 3-30 Maple Leaf 827 3,356 4,183 496 1986 10/97 3-30 Mariners Palce 1,560 6,380 7,940 333 1987 5/00 3-30 Meadowood 7,897 19,767 27,664 3,719 1986 11/96 3-30 Monterra del Rey (Glenbrook) 2,430 6,876 9,306 573 1972 04/99 3-30 Monterra del Sol (Euclid) 2,382 6,514 8,896 546 1972 04/99 3-30 Mt. Sutro 2,750 8,575 11,325 667 1973 06/01 3-30 Spring Lake 859 3,488 4,347 506 1986 10/97 3-30 Stonehedge Village 3,198 13,262 16,460 1,267 1986 10/97 3-30 The Bluffs 3,439 8,045 11,484 1,264 1974 06/97 3-30 The Carlyle 5,784 21,973 27,757 823 2000 4/00 3-30 Treetops 3,578 9,265 12,843 2,066 1978 01/96 3-30 Wandering Creek 1,296 6,112 7,408 1,635 1986 11/95 3-30 Wilshire Promenade 3,140 8,048 11,188 1,500 1992 01/97 3-30 Wimbledon Woods 10,348 39,134 49,482 5,122 1975 3/98 3-30 Windsor Ridge 4,019 11,148 15,167 4,061 1989 03/89 3-40 -------- -------- -------- -------- 201,245 632,840 834,085 122,948 -------- -------- -------- --------
F-26 ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES Real Estate and Accumulated Depreciation December 31, 2001 (Dollars in thousands)
Initial cost Costs ---------------------- capitalized Buildings and subsequent to Property Units Location Encumbrance Land improvements acquisition - ----------------------------------------- ------ ------------------ ----------- -------- ------------- ------------- Unencumbered multifamily properties Avondale at Warner Center 446 Woodland Hills, CA 10,536 24,522 2,278 Bristol Commons 188 Sunnyvale, CA 5,278 11,853 1,117 Castle Creek 216 Newcastle, WA 4,149 16,028 875 City Heights (3) -- Los Angeles, CA 9,655 -- 111 Fairway (4) 74 Newport Beach, CA -- 7,850 741 Foothill/Twincreeks 176 San Ramon, CA 5,875 13,992 1,117 Kings Road 196 Los Angeles, CA 4,023 9,527 521 Linden Square 183 Seattle, WA 4,374 11,588 226 Marina Cove (5) 292 Santa Clara, CA 5,320 16,431 2,128 Meadows @ Cascade 198 Vancouver, WA 2,261 9,070 1,026 Mirabella 188 Marina Del Rey, CA 6,180 26,673 157 Park Place/Windsor Court/Cochran 176 Los Angeles, CA 4,965 11,806 419 Plumtree 140 Santa Clara, CA 3,090 7,421 881 Salmon Run 132 Bothell, WA 3,717 11,483 187 Tara Village 168 Tarzana, CA 3,178 7,535 811 The Laurels 164 Mill Creek, WA 1,559 6,430 483 The Village 122 Oxnard, CA 2,349 5,579 2,715 Trabucco Villas 132 Lake Forest, CA 3,638 8,640 644 Villa Scandia 118 Ventura, CA 1,570 3,912 296 Village @ Cascade 192 Vancouver, WA 2,103 8,753 256 Monterra del Mar (Windsor Terrace) 123 Pasadena, CA 2,188 5,263 3,678 Vista Point (3)(6) -- Anaheim, CA -- -- 6 ------ -------- -------- -------- -------- 13,544 564,201 279,634 774,837 110,645 ------ -------- -------- -------- -------- Commercial properties 3925 East Meadow (7) Palo Alto, CA -- 1,401 3,172 932 22120 Clarendon (8) Woodland Hills, CA -- 903 3,600 76 -------- -------- -------- -------- Total multifamily and commercial properties $564,201 $281,938 $781,609 $111,653 ======== ======== ======== ========
Gross amount carried at close of period --------------------------------------- Depreciable Land and Buildings and Accumulated Date of Date lives Property improvements improvements Total(1) depreciation construction acquired (years) - ----------------------------------------- ------------ ------------- ---------- ------------ ------------ -------- ----------- Unencumbered multifamily properties Avondale at Warner Center 10,568 26,768 37,336 2,186 1989 01/97 3-30 Bristol Commons 5,284 12,964 18,248 2,157 1989 01/97 3-30 Castle Creek 4,830 16,222 21,052 1,816 1997 12/97 3-30 City Heights (3) 9,766 -- 9,766 -- 1968 12/00 -- Fairway (4) 9 8,582 8,591 775 1972 06/99 3-30 Foothill/Twincreeks 5,952 15,032 20,984 2,516 1985 02/97 3-30 Kings Road 4,030 10,041 14,071 1,617 1979 06/97 3-30 Linden Square 4,199 11,989 16,188 605 1994 6/00 3-30 Marina Cove (5) 5,322 18,557 23,879 5,745 1974 6/94 3-30 Meadows @ Cascade 2,334 10,023 12,357 1,508 1988 11/97 3-30 Mirabella 6,189 26,821 33,010 1,452 2000 5/00 3-30 Park Place/Windsor Court/Cochran 5,014 12,176 17,190 1,451 1988 08/97 3-30 Plumtree 3,091 8,301 11,392 2,507 1975 2/94 3-30 Salmon Run 3,784 11,603 15,387 448 2000 10/00 3-30 Tara Village 3,211 8,313 11,524 1,479 1972 01/97 3-30 The Laurels 1,595 6,877 8,472 1,163 1981 12/96 3-30 The Village 2,413 8,230 10,643 1,001 1974 07/97 3-30 Trabucco Villas 3,842 9,080 12,922 1,291 1985 10/97 3-30 Villa Scandia 1,612 4,166 5,778 740 1971 06/97 3-30 Village @ Cascade 2,151 8,961 11,112 1,267 1995 12/97 3-30 Monterra del Mar (Windsor Terrace) 2,730 8,399 11,129 909 1972 09/97 3-30 Vista Point (3)(6) 6 6 -- 1968 07/85 -- -------- -------- ---------- -------- 289,171 875,945 1,165,116 155,581 -------- -------- ---------- -------- Commercial properties 3925 East Meadow (7) 1,771 3,734 5,505 588 1,984 11/97 3-30 22120 Clarendon (8) 971 3,608 4,579 100 1,982 03/01 3-30 -------- -------- ---------- -------- Total multifamily and commercial properties $291,913 $883,287 $1,175,200 $156,269 ======== ======== ========== ========
- -------- (1) The aggregate cost for federal income tax purposes is $896,529,421. (2) Phase I was built in 1969 and Phase II was built in 1977. (3) The Company has a leasehold interest in this land and receives a land lease payment over a 34-year-term. (4) The land is leased pursuant to a ground lease expiring 2027. (5) A portion of land is leased pursuant to a ground lease expiring in 2028. (6) The Company's interest in the land is subordinate to a loan issued to the purchaser of the buildings and improvements, and therefore the carrying amount was written off in connection with the sale. (7) Total rentable square footage of 17,404. (8) Total rentable square footage of 38,940. A summary of activity for real estate and accumulated depreciation is as follows:
2001 2000 1999 2001 2000 ---------- ---------- --------- -------- -------- Real estate: Accumulated depreciation: Balance at beginning of year.. $1,156,408 $ 929,076 $ 889,964 Balance at beginning of year........ $119,499 $ 96,605 Improvements.................. 25,839 18,348 5,554 Dispositions........................ -- (7,871) Acquisition of real estate.... 15,904 238,938 193,634 Depreciation expense--Acquisitions.. 758 2,626 Disposition of real estate.... (22,951) (29,954) (160,076) Depreciation expense................ 36,012 28,139 ---------- ---------- --------- -------- -------- Balance at end of year........ $1,175,200 $1,156,408 $ 929,076 Balance at end of year................ $156,269 $119,499 ========== ========== ========= ======== ========
1999 ------- Real estate: Accumulated depreciation: Balance at beginning of year.. Balance at beginning of year........ $77,789 Improvements.................. Dispositions........................ (7,334) Acquisition of real estate.... Depreciation expense--Acquisitions.. 1,377 Disposition of real estate.... Depreciation expense................ 24,773 ------- Balance at end of year........ Balance at end of year................ $96,605 =======
F-27 SIGNATURE Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 2002 Essex Property Trust, Inc. By: /s/ MICHAEL J. SCHALL ----------------------------- Michael J. Schall Senior Executive Vice President Chief Financial Officer and Director SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the date indicated. Name Title Date ---- ----- ---- /s/ GEORGE M. MARCUS Chairman of the Board March 29, 2002 - ----------------------------- George M. Marcus /s/ KEITH R. GUERICKE President and Chief Executive March 29, 2002 - ----------------------------- Officer and Vice Keith R. Guericke Chairman (Principal Executive Officer) /s/ MICHAEL J. SCHALL Senior Executive Vice March 29, 2002 - ----------------------------- President and Chief Michael J. Schall Financial Officer and Director (Principal Financial Officer) /s/ MARK J. MIKL Vice President and Controller March 29, 2002 - ----------------------------- (Principal Accounting Mark J. Mikl Officer) /s/ WILLIAM A. MILLICHAP Director March 29, 2002 - ----------------------------- William A. Millichap /s/ GARY P. MARTIN Director March 29, 2002 - ----------------------------- Gary P. Martin /s/ ROBERT E. LARSON Director March 29, 2002 - ----------------------------- Robert E. Larson /s/ THOMAS E. RANDLETT Director March 29, 2002 - ----------------------------- Thomas E. Randlett /s/ DAVID W. BRADY Director March 29, 2002 - ----------------------------- David W. Brady /s/ ISSIE N. RABINOVITCH Director March 29, 2002 - ----------------------------- Issie N. Rabinovitch /s/ WILLARD H. SMITH, JR. Director March 29, 2002 - ----------------------------- Willard H. Smith, Jr. S-1 EXHIBIT INDEX
Exhibit No. Document Note - ------- -------- ---- 3.1 Articles of Amendment and Restatement of Essex dated June 22, 1995, attached as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference. -- 3.2 Articles Supplementary of Essex Property Trust, Inc. for the 8.75% Convertible Preferred Stock, Series 1996A, attached as Exhibit 3.1 to the Company's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 3.3 First Amendment to Articles of Amendment and Restatement of Essex Property Trust, Inc., attached as Exhibit 3.1 to the Company's 10-Q for the quarter ended September 30, 1996, and incorporated herein by reference. -- 3.4 Certificate of Correction to Exhibit 3.2 dated December 20, 1996 (1) 3.5 Amended and Restated Bylaws of Essex Property Trust, Inc., attached as Exhibit 3.2 to the Company's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 3.6 Certificate of Amendment of the Bylaws of Essex Property Trust, Inc., dated December 17, 1996. (1) 3.7 Articles Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 7.875% Series B Cumulative Redeemable Preferred Stock, filed with the State of Maryland on February 10, 1998, attached as Exhibit 3.1 to the Company's Current Report on Form 8-K, filed March 3, 1998, and incorporated herein by reference. -- 3.8 Articles Supplementary reclassifying 500,000 shares of Common Stock as 500,000 shares of 9 1/8% Series C Cumulative Redeemable Preferred Stock, filed with the State of Maryland on November 25, 1998. (2) 3.9 Certificate of Correction to Exhibit 3.2 dated February 12, 1999. (2) 3.10 Articles Supplementary reclassifying 6,617,822 shares of Common Stock as 6,617,822 shares of Series A Junior Participating Preferred Stock, filed with the State of Maryland on November 13, 1998, attached as Exhibit 4.0 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. -- 3.11 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, attached as Exhibit 3.1 to the Company's 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference. -- 3.12 Articles Supplementary reclassifying 2,200,000 shares of Common Stock as 2,200,000 shares of 9.25% Series E Cumulative Redeemable Preferred Stock, filed with the State of Maryland on September 9, 1999, attached as Exhibit 3.1 to the Company's 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference. -- 3.13 Certificate of Correction to Articles Supplementary reclassifying 2,000,000 shares of Common Stock as 2,000,000 shares of 9.30% Series D Cumulative Redeemable Preferred Stock, attached as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference. -- 3.14 Certificate of Amendment of the Bylaws of Essex Property Trust, Inc. dated February 14, 2000, attached as Exhibit 3.2 to the Company's Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by reference. -- 4.1 Rights Agreement, dated as of November 11, 1998, between Essex Property Trust, Inc., and BankBoston, N.A., as Rights Agent, including all exhibits thereto, attached as Exhibit 1 to the Company's Registration Statement filed on Form 8-A dated November 12, 1998, and incorporated herein by reference. --
Exhibit No. Document Note - ------- -------- ---- 4.2 Amendment to Rights Agreement, dated as of December 13, 2000, attached as Exhibit 4.1 to the Company's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference. -- 4.3 Amendment to Rights Agreement, dated as of February 28, 2002 -- 10.1 Essex Property Trust, Inc. 1994 Stock Incentive Plan, (amended and restated), attached as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference.* -- 10.2 First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference. -- 10.3 First Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated February 6, 1998, attached as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed March 3, 1998, and incorporated herein by reference. -- 10.4 Second Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated April 20, 1998, attached as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed April 23, 1998, and incorporated herein by reference. -- 10.5 Third Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated November 24, 1998. (2) 10.6 Fourth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated July 28, 1999, attached as Exhibit 10.1 to the Company's 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference. -- 10.7 Fifth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., dated September 3, 1999, attached as Exhibit 10.1 to the Company's 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference. -- 10.8 Form of Essex Property Trust, Inc. 1994 Non-Employee and Director Stock Incentive Plan, attached as Exhibit 10.3 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference.* -- 10.9 Form of Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan, attached as Exhibit 10.4 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference.* -- 10.10 Form of Non-Competition Agreement between Essex and each of Keith R. Guericke and George M. Marcus, attached as Exhibit 10.5 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.11 Termination of Non-Compete Agreement between Essex Property Trust, Inc. and George M. Marcus attached as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. -- 10.12 Contribution Agreement by and among Essex, the Operating Partnership and the Limited Partners in the Operating Partnership, attached as Exhibit 10.6 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.13 Form of Indemnification Agreement between Essex and its directors and officers, attached as Exhibit 10.7 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. --
Exhibit No. Document Note - ------- -------- ---- 10.14 First Amendment to Investor Rights Agreement dated July 1, 1996 by and between George M. Marcus and The Marcus & Millichap Company, attached as Exhibit 10.3 to the Company's Current Report on Form 8-K, filed August 13, 1996, and incorporated herein by reference. -- 10.15 Agreement by and among M&M, M&M REIBC and the Operating Partnership and Essex regarding Stock Options attached as Exhibit 10.14 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.16 Co-Brokerage Agreement by and among Essex, the Operating Partnership, M&M REIBC and Essex Management Corporation attached as Exhibit 10.15 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.17 General Partnership Agreement of Essex Washington Interest Partners attached as Exhibit 10.16 to the Company's Registration Statement on Form S-11 (Registration No.33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.18 Form of Management Agreement between the Operating Partnership and Essex Management Corporation regarding the retail Properties attached as Exhibit 10.18 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.19 Form of Investor Rights Agreement between Essex and the Limited Partner of the Operating Partnership attached as Exhibit 10.26 to the Company's Registration Statement on Form S-11 (Registration No. 33-76578), which became effective on June 6, 1994, and incorporated herein by reference. -- 10.20 Phantom Stock Unit Agreement for Mr. Guericke, attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. (Same form was used for subsequent phantom stock agreements.)* -- 10.21 Phantom Stock Unit Agreement for Mr. Schall, attached as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. (Same form was used for subsequent phantom stock agreements.)* -- 10.22 Replacement Promissory Note (April 15, 1996) and Pledge Agreement for Mr. Guericke, attached as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.* -- 10.23 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Guericke, attached as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. (Same form of Promissory Note and Pledge Agreement used for subsequent loans.)* -- 10.24 Replacement Promissory Note (April 30, 1996) and Pledge Agreement for Mr. Schall, attached as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference.* -- 10.25 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Schall, attached as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. (Same form of Promissory Note and Pledge Agreement used for subsequent loans.)* -- 10.26 First Amended and Restated Agreement of Limited Partnership of Western Highridge I Investors, effective as of May 13, 1997, attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. --
Exhibit No. Document Note - ------- -------- ---- 10.27 Registration Rights Agreement, effective as of May 13, 1997, by and between the Company and the limited partners of Western-Highridge I Investors, Irvington Square Associates, Western-Palo Alto II Investors, Western Riviera Investors, and Western-San Jose III Investors, attached as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. -- 10.28 $100,000,000 Promissory Note between Essex Portfolio, L.P., and Essex Morgan Funding Corporation, attached as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference. -- 10.29 Form of Revolving Loan Agreement among Essex Portfolio L.P., Bank of America and other banks as specified therein, attached as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference. -- 10.30 Sixth Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P. dated as of June 28, 2001, attached as Exhibit 10.1 to the Company's 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference.* -- 10.31 Executive Severance Plan.* -- 12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. -- 21.1 List of Subsidiaries of Essex Property Trust, Inc. -- 23.1 Consent of Independent Public Accountants. --
- -------- * Management contract or compensatory plan or arrangement. (1) Incorporated by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (2) Incorporated by reference to the identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. EX-4.3 3 dex43.txt AMENDMENT TO RIGHTS AGREEMENT Exhibit 4.3 ESSEX PROPERTY TRUST, INC. AMENDMENT TO RIGHTS AGREEMENT ----------------------------- Amendment No. 1 (the "Amendment"), dated as of February 28, 2002 among Essex Property Trust, Inc. (the "Company"), BankBoston, N.A. ("BankBoston") and Computershare Investor Services, LLC ("Computershare"), to the Rights Agreement (the "Rights Agreement") dated as of November 11, 1998 between the Company and BankBoston. W I T N E S S E T H WHEREAS, the Company and BankBoston previously entered into the Rights Agreement, pursuant to which the BankBoston was appointed to serve as the Rights Agent under the Rights Agreement; and WHEREAS, the Company desires to appoint Computershare as successor Rights Agent under the Rights Agreement, effective as of February 28, 2002, and as of such date, BankBoston will be relieved of its duties as Rights Agent under the Rights Agreement; and WHEREAS, in connection with the resignation of BankBoston as Rights Agent and the appointment of Computershare as successor Rights Agent, the Company, BankBoston and Computershare desire to amend the Rights Agreement in certain respects. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Resignation of Rights Agent. BankBoston hereby resigns as Rights Agent under the Rights Agreement, effective as of February 28, 2002, and the Company hereby accepts such resignation. Section 2. Appointment of the Successor Rights Agent. The Company hereby appoints Computershare as successor Rights Agent under the Rights Agreement, effective as of February 28, 2002, and Computershare hereby accepts such appointment. Section 3. Amendment of Rights Agreement. Effective as of the date of appointment of Computershare as successor Rights Agent, the Rights Agreement shall be amended as follows: (a) Section 21 of the Rights Agreement is hereby amended by deleting the sentence that begins on page 44 with "Any successor Rights Agent. . . ." and ends on page 45 with ". . . an affiliate of a legal business entity described above in clause (a) of this sentence." and submitting in lieu thereof the following sentence: "Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (a) a corporation, limited liability company or trust company (or similar form of entity under the laws of any state of the United States or a foreign jurisdiction) authorized to conduct business under the laws of the United States or any state of the United States, which is authorized under such laws to exercise corporate trust, fiduciary or stockholder services powers and is subject to supervision or examination by a federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $10,000,000 or (b) an Affiliate controlled by an entity described in clause (a) of this sentence." (b) Section 26 of the Rights Agreement is hereby amended by deleting the address for notice or demand to be given to the Rights Agent therein and substituting in lieu thereof the following: "Computershare Investor Services, LLC Two North LaSalle Street Chicago, Illinois 60602 Attention: Keith Bradley with a copy to: Computershare Investor Services, LLC Two North LaSalle Street Chicago, Illinois 60602 Attention: Steven Rothbloom" (c) All references in the Rights Agreement to "BankBoston, N.A." as Rights Agent shall for all purposes be deemed to refer to "Computershare Investor Services, LLC." Section 4. Continued Effectiveness. Except as amended hereby, the Rights Agreement shall remain in full force and effect. Section 5. Execution in Counterparts. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute one and the same instrument. Section 6. Except as otherwise expressly provided herein, or unless the context otherwise requires, all terms used herein have the meanings assigned to them in the Rights Agreement. [Signature Page Follows] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year above written. Essex Property Trust, Inc. By ----------------------------------- Its ---------------------------------- BankBoston, N.A. By ----------------------------------- Its ---------------------------------- COMPUTERSHARE INVESTOR SERVICES, LLC By ----------------------------------- Its ---------------------------------- EX-10.31 4 dex1031.txt EXECUTIVE SEVERANCE PLAN Exhibit 10.31 ESSEX PROPERTY TRUST, INC. Executive Severance Plan ------------------------ 1. Purpose. Essex Property Trust, Inc. (the "Company") considers it ------- essential to the best interests of its stockholders to foster the continuous employment of key management personnel. The Board of Directors of the Company (the "Board") recognizes, however, that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in Section 2 hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Therefore, the Board has determined that the Essex Property Trust, Inc. Executive Severance Plan (the "Plan") should be adopted to reinforce and encourage the continued attention and dedication of the President, Chief Financial Officer, any Executive Vice President, any Senior Vice President and any Vice President with ten (10) or more years of service with the Company (each, a "Covered Employee"; collectively, the "Covered Employees"), to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control. Nothing in this Plan shall be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Covered Employee and the Company or any of its subsidiaries or affiliates (together with the Company, the "Employers"), the Covered Employee shall not have any right to be retained in the employ of the Employers. 2. Change in Control. For purposes of this Plan, a "Change in Control" ----------------- shall mean the occurrence of any one of the following events: (a) Any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act") other than any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of any of the Employers), together with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 30 percent or more of the combined voting power of the Company's then outstanding securities having the right to vote in an election of the Company's Board of Directors ("Voting Securities") (other than as a result of an acquisition of securities directly from the Company); or (b) persons who, as of July 1, 2000, constitute the Company's Board of Directors (the "Incumbent Directors") cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board (rounded up to the next whole number), provided that any person becoming a director of the Company subsequent to such date shall be considered an Incumbent Director if such person's election was approved by or such person was nominated for election by a vote of a majority of the Incumbent Directors; provided, however, that any person whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of members of the Board of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a "person" other than the Board of Directors, including by reason of agreement intended to avoid or settle any such actual or threatened contest or solicitation, shall not be considered an Incumbent Director; or (c) the consummation of any consolidation or merger of the Company where the stockholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, "beneficially own" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate 50 percent or more of the voting shares of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any). Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred for purposes of the foregoing clause (a) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Voting Securities outstanding, increases the proportionate number of shares of Voting Securities beneficially owned by any person (as defined in the foregoing clause (a)) to 30 percent or more of the combined voting power of all then outstanding Voting Securities; provided, however, that if such person shall thereafter become the beneficial owner of any additional shares of Voting Securities (other than pursuant to a stock split, stock dividend, or similar transaction or as a result of an acquisition of securities directly from the Company) and immediately thereafter beneficially owns 30 percent or more of the combined voting power of all then outstanding Voting Securities, then a "Change in Control" shall be deemed to have occurred for purposes of the foregoing clause (a). 3. Effect of a Change in Control. Upon a Change in Control, all loans to ----------------------------- Covered Employees in connection with transactions in shares of common stock of the Company, or securities convertible into common stock, shall be forgiven. All stock options granted to Covered Employees to purchase shares of common stock of the Company shall become fully exercisable and shall remain outstanding for the remainder of their original terms, regardless of any subsequent termination of employment of the Covered Employees. Notwithstanding the foregoing, in the event of any corporate merger that constitutes a Change in Control, if the stock options are terminated without being assumed by the successor to the Company, the Covered Employees shall receive payment equal to the value of the cancelled stock options no later than 10 days after the Change in Control. The value of such stock options (based on acceptable option valuation methodology) shall be determined by a financial advisor selected by the Company and approved by a majority of the Covered Employees whose approval shall not be unreasonably withheld. 4. Terminating Event. A "Terminating Event" shall mean the termination of ----------------- employment of a Covered Employee in connection with any of the events provided in this Section 4 occurring within 12 months following a Change in Control: (a) termination by the Employers of the employment of the Covered Employee with the Employers for any reason other than for Cause or the death or disability (as determined under the Employers' then existing long-term disability coverage) of such Covered Employee. "Cause" shall mean, and shall be limited to, the occurrence of any one or more of the following events: (i) a willful act of dishonesty by the Covered Employee with respect to any matter involving any of the Employers; or (ii) conviction of the Covered Employee of a crime involving moral turpitude; or (iii) the deliberate or willful failure by the Covered Employee (other than by reason of the Covered Employee's physical or mental illness, incapacity or disability) to substantially perform the Covered Employee's duties with the Employers and the continuation of such failure for a period of 30 days after delivery by the Employers to the Covered Employee of written notice specifying the scope and nature of such failure and their intention to terminate the Covered Employee for Cause. A Terminating Event shall not be deemed to have occurred pursuant to this Section 4(a) solely as a result of the Covered Employee being an employee of any direct or indirect successor to the business or assets of either of the Employers, rather than continuing as an employee of the Employers following a Change in Control. For purposes of clauses (i) and (iii) of this Section 4(a), no act, or failure to act, on the Covered Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Covered Employee without reasonable belief that the Covered Employee's act, or failure to act, was in the best interest of the Employers; or (b) termination by the Covered Employee of the Covered Employee's employment with the Employers for Good Reason. "Good Reason" shall mean the occurrence of any of the following events: (i) a substantial adverse change in the nature or scope of the Covered Employee's responsibilities, authorities, title, powers, functions, or duties from the responsibilities, authorities, powers, functions, or duties exercised by the Covered Employee immediately prior to the Change in Control; or (ii) a reduction in the Covered Employee's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all or substantially all management employees; or (iii) the relocation of the Employers' offices at which the Covered Employee is principally employed immediately prior to the date of a Change in Control to a location more than 30 miles from such offices, or the requirement by the Employers for the Covered Employee to be based anywhere other than the Employers' offices at such location, except for required travel on the Employers' business to an extent substantially consistent with the Covered Employee's business travel obligations immediately prior to the Change in Control; or (iv) the failure by the Employers to pay to the Covered Employee any portion of his compensation or to pay to the Covered Employee any portion of an installment of deferred compensation under any deferred compensation program of the Employers within 15 days of the date such compensation is due without prior written consent of the Covered Employee; or (v) the failure by the Employers to obtain an effective agreement from any successor to assume and agree to perform this Agreement. 5. Special Termination Benefits. In the event a Terminating Event occurs ---------------------------- within 12 months after a Change in Control with respect to a Covered Employee, (a) the Employers shall pay to the Covered Employee an amount equal to the sum of the following: (i) two (2) times the amount of the current annual base salary of the Covered Employee, determined prior to any reductions for pre-tax contributions to a cash or deferred arrangement or a cafeteria plan; and (ii) two (2) times the amount of the Covered Employee's targeted annual bonus. Said amount shall be paid in one lump sum payment no later than 31 days following the Date of Termination (as such term is defined in Section 8(b)); and (b) the Employers shall continue to provide health, dental and life insurance to the Covered Employee, on the same terms and conditions as though the Covered Employee had remained an active employee, for 24 months after the Terminating Event; and (c) the Employers shall pay to the Covered Employee all reasonable legal and mediation fees and expenses incurred by the Covered Employee in obtaining or enforcing any right or benefit provided by this Plan, except in cases involving frivolous or bad faith litigation initiated by the Covered Employee. Notwithstanding the foregoing, the special termination benefits required by Section 4(a) shall be offset by any severance amount paid or payable to the Covered Employee by the Employers under the terms of any employment agreement or other plan. 6. Additional Benefits. ------------------- (a) Anything in this Plan to the contrary notwithstanding, in the event it shall be determined that any compensation payment or distribution by the Employers to or for the benefit of the Covered Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise (the "Severance Payments"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Covered Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Covered Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") such that the net amount retained by the Covered Employee, after deduction of any Excise Tax on the Severance Payments, any Federal, state, and local income tax, employment tax and Excise Tax upon the payment provided by this subsection, and any interest and/or penalties assessed with respect to such Excise Tax and not after the deduction of any other taxes or amounts, shall be equal to the Severance Payments. (The Gross-Up Payment is not intended to compensate the Covered Employee for any income taxes payable with respect to the Severance Payments.) (b) Subject to the provisions of Section 6(c), all determinations required to be made under this Section 6, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by KPMG or any other nationally recognized accounting firm selected by the Employers (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Employers and the Covered Employee within 15 business days of the Date of Termination, if applicable, or at such earlier time as is reasonably requested by the Employers or the Covered Employee. For purposes of determining the amount of the Gross-Up Payment, the Covered Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation applicable to individuals for the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rates of individual taxation in the state and locality of the Covered Employee's residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The initial Gross-Up Payment, if any, as determined pursuant to this Section 6(b), shall be paid to the Covered Employee within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Covered Employee, the Employers shall furnish the Covered Employee with an opinion of counsel that failure to report the Excise Tax on the Covered Employee's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Employers and the Covered Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Employers should have been made (an "Underpayment"). In the event that the Employers exhaust their remedies pursuant to Section 6(c) and the Covered Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred, consistent with the calculations required to be made hereunder, and any such Underpayment, and any interest and penalties imposed on the Underpayment and required to be paid by the Covered Employee in connection with the proceedings described in Section 6(c), shall be promptly paid by the Employers to or for the benefit of the Covered Employee. (c) The Covered Employee shall notify the Employers in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employers of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Covered Employee knows of such claim and shall apprise the Employers of the nature of such claim and the date on which such claim is requested to be paid. The Covered Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Employers (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employers notify the Covered Employee in writing prior to the expiration of such period that they desire to contest such claim, provided that the Employers have set aside adequate reserves to cover the Underpayment and any interest and penalties thereon that may accrue, the Covered Employee shall: (i) give the Employers any information reasonably requested by the Employers relating to such claim, (ii) take such action in connection with contesting such claim as the Employers shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Employers, (iii) cooperate with the Employers in good faith in order effectively to contest such claim, and (iv) permit the Employers to participate in any proceedings relating to such claim; provided, however, that the Employers shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Covered Employee harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6(c), the Employers shall control all proceedings taken in connection with such contest and, at their sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at their sole option, either direct the Covered Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Covered Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employers shall determine; provided, however, that if the Employers direct the Covered Employee to pay such claim and sue for a refund, the Employers shall advance the amount of such payment to the Covered Employee on an interest-free basis and shall indemnify and hold the Covered Employee harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Covered Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Employers' control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Covered Employee shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Covered Employee of an amount advanced by the Employers pursuant to Section 6(c), the Covered Employee becomes entitled to receive any refund with respect to such claim, the Covered Employee shall (subject to the Employers' complying with the requirements of Section 6(c)) promptly pay to the Employers the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Covered Employee of an amount advanced by the Employers pursuant to Section 6(c), a determination is made that the Covered Employee shall not be entitled to any refund with respect to such claim and the Employers do not notify the Covered Employee in writing of their intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. Withholding. All payments made by the Employers under this Plan shall ----------- be net of any tax or other amounts required to be withheld by the Employers under applicable law. 8. Notice and Date of Termination; Disputes; Etc. --------------------------------------------- (a) Notice of Termination. Within 12 months after a Change in --------------------- Control, any purported termination of a Covered Employee's employment (other than by reason of death) shall be communicated by written Notice of Termination from the Employers to the Covered Employee or vice versa in accordance with this Section 8. For purposes of this Plan, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Plan relied upon and the Date of Termination. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the entire membership of the Board at a meeting of the Board (after reasonable notice to the Covered Employee and an opportunity for the Covered Employee, accompanied by the Covered Employee's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the termination met the criteria for Cause set forth in Section 4(a) hereof. (b) Date of Termination. "Date of Termination," with respect to any ------------------- purported termination of a Covered Employee's employment within 12 months after a Change in Control, shall mean the date specified in the Notice of Termination. In the case of a termination by the Employers other than a termination for Cause (which may be effective immediately), the Date of Termination shall not be less than 30 days after the Notice of Termination is given. In the case of a termination by a Covered Employee, the Date of Termination shall not be less than 15 days from the date such Notice of Termination is given. Notwithstanding Section 4(a) of this Plan, in the event that a Covered Employee gives a Notice of Termination to the Employers, the Employers may unilaterally accelerate the Date of Termination and such acceleration shall not result in a second Terminating Event for purposes of Section 4(a) of this Plan. (c) No Mitigation. The Covered Employee is not required to seek ------------- other employment or to attempt in any way to reduce any amounts payable to the Covered Employee by the Employers under this Plan. Further, the amount of any payment provided for in this Plan shall not be reduced by any compensation earned by the Covered Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Covered Employee to the Employers, or otherwise. (d) Mediation of Disputes. The parties shall endeavor in good faith --------------------- to settle within 90 days any controversy or claim arising out of or relating to this Plan or the breach thereof through mediation with JAMS, Endispute or similar organizations. If the controversy or claim is not resolved within 90 days, the parties shall be free to pursue other legal remedies in law or equity. 9. Benefits and Burdens. This Plan shall inure to the benefit of and be -------------------- binding upon the Employers and the Covered Employees, their respective successors, executors, administrators, heirs and permitted assigns. In the event of a Covered Employee's death after a Terminating Event but prior to the completion by the Employers of all payments due him under this Plan, the Employers shall continue such payments to the Covered Employee's beneficiary designated in writing to the Employers prior to his death (or to his estate, if the Covered Employee fails to make such designation). 10. Enforceability. If any portion or provision of this Plan shall to any -------------- extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Plan, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Plan shall be valid and enforceable to the fullest extent permitted by law. 11. Waiver. No waiver of any provision hereof shall be effective unless ------ made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Plan, or the waiver by any party of any breach of this Plan, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 12. Notices. Any notices, requests, demands, and other communications ------- provided for by this Plan shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to a Covered Employee at the last address the Covered Employee has filed in writing with the Employers, or to the Employers at their main office, attention of the Board of Directors. 13. Effect on Other Plans. Nothing in this Plan shall be construed to limit --------------------- the rights of the Covered Employees under the Employers' benefit plans, programs or policies. 14. Amendment or Termination of Plan. The Company may amend or terminate -------------------------------- this Plan at any time or from time to time; provided, however, that no such amendment shall, without the consent of the Covered Employees, in any material adverse way affect the rights of the Covered Employees, and no termination shall be made without the written consent of the Covered Employees. 15. Governing Law. This Plan shall be construed under and be governed in ------------- all respects by the laws of the State of California. 16. Obligations of Successors. In addition to any obligations imposed by ------------------------- law upon any successor to the Employers, the Employers will use their best efforts to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Employers to expressly assume and agree to perform this Plan in the same manner and to the same extent that the Employers would be required to perform if no such succession had taken place. Adopted: As of May 15, 2001 EX-12.1 5 dex121.txt SCHEDULE OF COMPUTATION OF RATIO Exhibit 12.1
ESSEX PROPERTY TRUST, INC. Schedule of computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (Dollars in thousands, except ratios) Years ended December 31 ------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- Earnings: Income before minority interests and extraordinary item $ 72,944 $ 68,222 $ 61,616 $ 40,600 $ 34,146 $ 14,970 Interest expense 39,105 30,384 21,268 19,374 12,659 11,442 Amortization of deferred financing costs 657 639 566 718 509 639 ---------- ---------- ---------- ---------- ---------- ---------- Total earnings $112,706 $ 99,245 $ 83,450 $ 60,692 $ 47,314 $ 27,051 ========== ========== ========== ========== ========== ========== Fixed charges: Interest expense $ 39,105 $ 30,384 $ 21,268 $ 19,374 $ 12,659 $ 11,442 Amortization of deferred financing costs 657 639 566 718 509 639 Capitalized interest 3,917 2,906 5,172 3,494 1,276 115 Convertible preferred stock dividends - 246 1,333 3,500 2,681 635 Perpetual preferred unit distributions 18,319 18,319 12,238 5,595 - - ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges and preferred stock dividends $ 61,998 $ 52,494 $ 40,577 $ 32,681 $ 17,125 $ 12,831 ========== ========== ========== ========== ========== ========== Ratio of earnings to fixed charges (excluding preferred stock dividends) 2.58 X 2.93 X 3.09 X 2.57 X 3.28 X 2.22 X ========== ========== ========== ========== ========== ========== Ratio of earnings to combined fixed charges and preferred dividends 1.82 X 1.89 X 2.06 X 1.86 X 2.76 X 2.11 X ========== ========== ========== ========== ========== ==========
EX-21.1 6 dex211.txt LIST OF SUBSIDIARIES OF ESSEX PROPERTY TRUST, INC.
Exhibit 21.1 List of Subsidiaries 1. Essex Portfolio, L.P., a California limited partnership 2. Essex Management Corporation, a California corporation 3. Essex-Palisades Facilitator, a California limited partnership 4. Essex Sunpointe Limited, a California limited partnership 5. Essex Washington Interest Partners, a California general partnership 6. Essex San Ramon Partners L.P., a California limited partnership 7. Essex Bristol Partners, L.P., a California limited partnership 8. Essex Fidelity I Corporation, a California corporation 9. Essex Camarillo Corporation, a California corporation 10. Essex Camarillo L.P., a California limited partnership 11. Essex Meadowood Corporation, a California corporation 12. Essex Meadowood, L.P., a California limited partnership 13. Essex Bunker Hill Corporation, a California corporation 14. Essex Bunker Hill, L.P., a California limited partnership 15. Essex Treetops Corporation, a California corporation 16. Essex Treetops, L.P., a California limited partnership 17. Essex Bluffs, L.P., a California limited partnership 18. Essex Huntington Breakers, L.P., a California limited partnership 19. Essex Stonehedge Village, L.P., a California limited partnership 20. Essex Bridle Trails, L.P., a California limited partnership 21. Essex Spring Lake, L.P., a California limited partnership 22. Essex Maple Leaf, L.P., a California limited partnership 23. Fountain Court Apartment Associates, L.P., a Washington limited partnership 24. Essex Fountain Court, LLC, a Washington limited liability company 25. Essex Inglenook Court, LLC, a Delaware limited liability company 26. Essex Wandering Creek, LLC, a Delaware limited liability company 27. Essex Fairways, LLC, A California limited liability company 28. Essex Columbus, LLC, a Delaware limited liability company 29. Essex Loraine, LLC, a Delaware limited liability company 30. Essex Glenbrook, LLC, a Delaware limited liability company 31. Essex Euclid, LLC, a Delaware limited liability company 32. Essex Loraine, Inc., a California corporation 33. Essex Columbus, Inc., a California corporation 34. Richmond Essex L.P., a California limited partnership 35. Essex Chesapeake L.P., a California limited partnership 36. Essex Los Angeles L.P., a California limited partnership 37. Essex Woodland Apartments L.P., a California limited partnership 38. Essex The Crest L.P., a California limited partnership 39. Richmond Essex, Inc., a California corporation 40. Essex VFGP L.P., a California limited partnership 41. Essex VFGP Corporation, a Delaware corporation 42. Essex Anaheim, LLC, a Delaware limited liability company 43. Jackson School Village, L.P. a California limited partnership 44. Mount Sutro Terrace Associates, L.P., a California limited partnership 45. Essex El Encanto Apartments, L.P., a California limited partnership 46. Essex Hunt Club Apartment, L.P., a California limited partnership 47. Essex Rosebeach Apartments, L.P., a California limited partnership 48. Essex Andover Park Apartments, L.P., a California limited partnership 49. Essex Marbrisas Apartments, L.P., a California limited partnership 50. Essex Carlyle, L.P., a California limited partnership 51. Essex Apartment Value Fund L.P., a Delaware limited partnership 52. Essex Realty Partners, G.P. a California general partnership 53. ESG Property I LLC, a Delaware limited liability company 54. Lineberry Sammamish, LLC, a Washington limited liability company 55. Essex Carlyle, LLC, a Delaware limited liability company 56. Essex Wimbledon Woods Apartments, LLC, a Delaware limited liability company 57. Western Blossom Hill Investors, a California limited partnership 58. Western Los Gatos I Investors, a California limited partnership 59. Western Highridge Investors, a California limited partnership 60. Western San Jose III Investors, a California limited partnership 61. Western Riviera Investors, a California limited partnership 62. Western Palo Alto II Investors, a California limited partnership
63. Irvington Square Associates, a California limited partnership 64. Western Seven Trees Investors, a California limited partnership 65. Western Las Hadas Investors, a California limited partnership 66. San Pablo Medical Investors, LTD, a California limited partnership 67. Gilroy Associates, a California limited partnership 68. The Oakbrook Company, a Ohio limited partnership 69. Pine Grove Apartment Fund, LTD, a California limited partnership 70. Valley Park Apartments, LTD, a California limited partnership 71. Fairhaven Apartment Fund, LTD, a California limited partnership 72. K-H Properties, a California limited partnership 73. Villa Angelina Apartment Fund, LTD, a California limited partnership
EX-23.1 7 dex231.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 Consent of Independent Public Accountants The Board of Directors Essex Property Trust, Inc.; We consent to incorporation by reference in the registration statements on Form S-3 (No. 333-68503, No. 333-44467, No. 333-21989, and No. 333-36029), and the registration statements on Form S-8 (No. 33-84830 and No. 333-55646) of Essex Property Trust, Inc. our report dated February 5, 2002, except as to the second paragraph of Note (3)(b), for which the date is February 15, 2002, relating to the consolidated balance sheets of Essex Property Trust, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows of Essex Property Trust, Inc. and subsidiaries for each of the years in the three-year period ended December 31, 2001 and the related financial statement schedule, which report appears in the December 31, 2001 annual report on Form 10-K of Essex Property Trust, Inc. KPMG LLP San Francisco, California March 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----