FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 333-44467-01
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as specified in its Charter)
California 77-0369575
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
925 E. Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices)
(Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months for such shorter period that the Registrant
was required to file such report, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
<PAGE>
INDEX
Exhibit
- -------
Number Description Page Number
- ------ ----------- -----------
Part I: Financial Information
- ------- ---------------------
Item 1: Financial Statements (Unaudited) 3
Consolidated Balance Sheets
as of March 31, 1998 and December 31, 1997 4
Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997 5
Consolidated Statements of Partners' Capital
for the three months ended March 31, 1998
and the year ended December 31, 1997 6
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997 7
Notes to Condensed Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II: Other Information
- ------- -----------------
Item 2: Changes in Securities and Use of Proceeds 18
Item 6: Exhibits and Reports on Form 8-K 19
Signatures 20
Page 2 of 20
<PAGE>
Part I Financial Information
- ------ ---------------------
Item 1: Financial Statements (Unaudited)
--------------------------------
Essex Portfolio, L.P., a California limited partnership, (the
"Operating Partnership") effectively holds the assets and liabilities
and conducts the operating activities of Essex Property Trust, Inc.,
("Essex") or "The Company." Essex Property Trust, Inc., a real estate
investment trust incorporated in the State of Maryland, is the sole
general partner of the Operating Partnership.
The information furnished in the accompanying consolidated balance
sheets, statements of operations, partners' capital and cash flows of
the Operating Partnership reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the
aforementioned financial statements for the interim periods.
The accompanying unaudited financial statements should be read in
conjunction with the notes to such financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Page 3 of 20
<PAGE>
<TABLE>
ESSEX PORTFOLIO, L.P.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
March 31, December 31,
Assets 1998 1997
------ ---------- ---------
<S> ......................................................... <C> <C>
Real estate:
Rental properties:
Land and land improvements ........................ $ 206,030 $ 182,416
Buildings and improvements ........................ 619,010 548,571
--------- ---------
825,040 730,987
Less accumulated depreciation ..................... (61,236) (58,040)
--------- ---------
763,804 672,947
Investments ............................................ 2,134 2,347
Real estate under development .......................... 29,534 27,422
--------- ---------
795,472 702,716
Cash and cash equivalents-unrestricted ...................... 5,574 4,282
Restricted cash ............................................. 14,274 6,093
Notes and other related party receivables ................... 10,267 9,264
Notes and other receivables ................................. 8,923 8,602
Prepaid expenses and other assets ........................... 6,685 3,838
Deferred charges, net ....................................... 4,320 4,040
--------- ---------
$ 845,515 $ 738,835
========= =========
Liabilities and Partners' Capital
Mortgage notes payable ...................................... $ 281,547 $ 248,997
Lines of credit ............................................. 28,775 27,600
Accounts payable and accrued liabilities .................... 30,046 21,337
Distributions payable ....................................... 9,919 9,189
Deferred gain ............................................... 5,002 --
Other liabilities ........................................... 4,649 4,208
--------- ---------
Total liabilities ....................... 359,938 311,331
Minority interests .......................................... 3,058 3,102
Partners' capital:
General Partner:
Common equity ..................................... 361,191 361,410
Preferred equity .................................. 37,505 37,505
--------- ---------
398,696 398,915
Limited Partners:
Common equity ..................................... 25,548 25,487
Preferred equity .................................. 58,275 --
--------- ---------
Total partners' capital ................. 482,519 424,402
--------- ---------
Total liabilities and partners' capital $ 845,515 $ 738,835
========= =========
See accompanying notes to the consolidated unaudited financial statements.
</TABLE>
Page 4 of 20
<PAGE>
<TABLE>
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit amounts)
Three months ended
-----------------------------
March 31, March 31,
1998 1997
------------- -------------
<S> ............................................ <C> <C>
Revenues:
Rental .................................... $ 26,530 $ 17,356
Interest and other income ................. 1,306 1,195
------------ ------------
27,836 18,551
------------ ------------
Expenses:
Property operating expenses:
Maintenance and repairs ................ 2,268 1,494
Real estate taxes ...................... 2,187 1,422
Utilities .............................. 1,717 1,138
Administrative ......................... 1,903 1,152
Advertising ............................ 378 270
Insurance .............................. 300 238
Depreciation and amortization .......... 4,669 3,088
------------ ------------
13,422 8,802
------------ ------------
Interest .................................. 3,797 3,363
Amortization of deferred financing costs .. 144 127
General and administrative ................ 818 516
------------ ------------
Total expenses ......................... 18,181 12,808
------------ ------------
Income before minority interests ....... 9,655 5,743
Minority interests ........................ (109) (95)
------------ ------------
Net income ......................... 9,546 5,648
Distributions on preferred units .......... (1,597) (438)
------------ ------------
Net income available to common units ... $ 7,949 $ 5,210
============ ============
Per Operating Partnership Unit data:
Basic:
Net income ............................. $ 0.43 $ 0.39
============ ============
Weighted average number of partnership
units outstanding during the period 18,491,659 13,449,606
============ ============
Diluted:
Net income ............................. $ 0.42 $ 0.38
============ ============
Weighted average number of partnership
units outstanding during the period 18,722,273 13,639,952
============ ============
Distributions per Operating Partnership Unit: .. $ 0.450 $ 0.435
============ ============
See accompanying notes to the consolidated unaudited financial
statements.
</TABLE>
Page 5 of 20
<PAGE>
<TABLE>
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
For the three months ended March 31, 1998 and the
year ended December 31, 1997
(Unaudited)
(Dollars and units in thousands)
General Partner Limited Partners
----------------------------------------- ------------------------------------------
Preferred Preferred
Common Equity Equity Common Equity Equity
------------------------ -------- ---------------------- ----------
Units Amount Amount Units Amount Amount Total
------- --------- --------- ------- --------- -------- -------
<S> ............................. <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 .. 11,592 $ 205,302 $ 17,505 1,855 $ 24,239 $ -- $ 247,046
Contribution-net proceeds
from preferred stock ...... -- -- 20,000 -- -- -- 20,000
Contribution-net proceeds
from common stock ......... 4,995 154,012 -- -- -- -- 154,012
Contribution-net proceeds
from options exercised .... 28 686 -- -- -- -- 686
Contributions-net proceeds
from partners ............. -- -- -- 18 543 -- 543
Net income ..................... -- 26,636 2,681 -- 4,005 -- 33,322
Partners' distributions ........ -- (25,226) (2,681) -- (3,300) -- (31,207)
----- --------- --------- ----- --------- --------- --------
Balances at December 31, 1997 16,615 361,410 37,505 1,873 25,487 -- 424,402
Contribution-net proceeds
from perpetual preferred
units ..................... -- -- -- -- -- 58,275 58,275
Contribution-net proceeds
from options exercised .... 12 208 -- -- -- -- 208
Contribution-net proceeds
from dividend reinvest-
ment plan ................ 2 -- -- -- -- -- --
Net income .................... -- 7,045 875 -- 904 722 9,546
Partners' distributions ....... -- (7,472) (875) -- (843) (722) (9,912)
------ --------- --------- ------ --------- ---------- ---------
Balances at March 31, 1998..... 16,629 $ 361,191 $ 37,505 1,873 $ 25,548 $ 58,275 $ 482,519
======= ========= ========= ====== ========= ========== =========
See accompanying notes to the consolidated unaudited financial statements
</TABLE>
Page 6 of 20
<PAGE>
<TABLE>
ESSEX PORTFOLIO, L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three months ended
----------------------------------------
March 31, March 31,
1998 1997
----------- -----------
<S> ................................................................... <C> <C>
Net cash provided by operating activities ............................. $ 13,683 $ 12,674
-------- --------
Cash flows from investing activities:
Additions to rental properties ................................... (99,578) (51,032)
Additions to restricted cash ..................................... (8,181) --
Dispositions of rental properties ................................ 15,842 --
Additions to notes receivable .................................... (140) (785)
Additions to real estate under development ....................... (2,112) --
Investments in corporations and limited partnerships ............. 161 (64)
-------- --------
Net cash used in investing activities ....................... (94,008) (51,881)
-------- --------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit ......................................... 74,275 34,420
Repayment of mortgage and other notes payable
and lines of credit ......................................... (40,550) (665)
Additions to deferred charges .................................... (424) (267)
Additions to related party notes
and other receivables ....................................... (3,836) (22,805)
Repayment of related party notes
and other receivables ....................................... 2,833 1,361
Decrease in offering related accounts payable .................... 25 (630)
Net proceeds from perpetual preferred units sale ................. 58,275 --
Contributions from stock options exercised - general partner ..... 208 99
Distributions to limited partners and minority interest .......... (843) (807)
Distributions to general partners ................................ (8,346) (5,482)
-------- --------
Net cash provided by financing activities ................... 81,617 5,224
-------- --------
Net (decrease) increase in cash and cash equivalents .................. 1,292 (33,983)
Cash and cash equivalents at beginning of period ...................... 4,282 46,899
-------- --------
Cash and cash equivalents at end of period ............................ $ 5,574 $ 12,916
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amount capitalized ........... $ 3,410 $ 3,126
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Mortgage notes payable assumed in connection
with purchase of real estate ...................... $ -- $ 30,818
======== ========
Distributions payable .................................. $ 9,919 $ 6,289
======== ========
See accompanying notes to consolidated unaudited financial
statements.
</TABLE>
Page 7 of 20
<PAGE>
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(1) Organization and Basis of Presentation
--------------------------------------
Essex Portfolio, L.P. (the "Operating Partnership") was formed in March
1994 and commenced operations on June 13, 1994, when Essex Property
Trust, Inc. (the "Company"), the general partner of the Operating
Partnership (the "General Partner"), completed its initial public
offering (the "Offering") in which it issued 6,275,000 shares of common
stock at $19.50 per share. The net proceeds from the Offering of $112,071
were used by the General Partner to acquire a 77.2% interest in the
Operating Partnership. The Company has elected to be treated as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986
(the "Code"), as amended.
The unaudited consolidated financial statements of the Operating
Partnership are prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations, and
cash flows for the periods presented have been included and are normal
and recurring in nature.
The Company is the sole general partner in the Operating Partnership,
owning an 89.9%, 89.9% and 88.0% general partnership interest as of March
31, 1998, December 31, 1997 and March 31, 1997 respectively.
All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
(2) Significant Transactions
------------------------
(A) Equity Transactions
-----------------------
On February 6, 1998 the Operating Partnership completed the sale of
1,200,000 units of its 7.875% Series B Cumulative Redeemable Preferred
Units ("Perpetual Preferred Units") to an institutional investor in a
private placement, at a price of $50.00 per unit. The net proceeds from
this offering were $58,275.
(B) Acquisitions
----------------
(i) On February 25, 1998, the Operating Partnership acquired Mirabella
Apartments, a 608 unit apartment community in Newbury Park, California,
for a contract price of $50,500. In connection with this acquisition the
Operating Partnership obtained a $25,000 variable rate, secured loan
which carries interest at 1.5% over LIBOR and is due in February 2000.
The community features a swimming pool, spa, exercise room, volleyball
court and golf putting green.
(ii) On March 3, 1998, the Operating Partnership acquired Wimbledon Woods
Apartments, a 560 unit apartment community in Hayward, California, for a
contract price of $44,000. The community features tennis courts, spas,
swimming pools and a weight room.
These first quarter 1998 acquisitions were funded with proceeds from the
Operating Partnership's February 1998 Perpetual Preferred Units offering,
a loan secured by the Mirabella Apartment property as indicated above,
the Operating Partnership's lines of credit, and proceeds from the
disposition of the Operating Partnership's three retail shopping centers.
Page 8 of 20
<PAGE>
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Unaudited)
(Dollars in thousands, except for per share and per unit amounts)
(C) Dispositions
--- ------------
On February 25, 1998, the Operating Partnership sold its remaining three
retail shopping centers, Canby Square, Garrison Square and Powell Villa
located in the Portland, Oregon metropolitan area for a net sales price
of $15,842. The properties were sold to partnerships in which the
Operating Partnership holds a 1% limited partnership interest and Essex
Management Corporation ("EMC") holds a 1% 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 conditions, the Operating Partnership may elect to deliver an
equivalent number of shares of the Company's Common Stock in satisfaction
of the applicable partnership's cash redemption obligation. Due to the
structure of the transaction, a conservative application of generally
accepted accounting principles was utilized and the net gain of $5,002
was deferred.
(D) Debt Related Transactions
--- -------------------------
On March 12, 1998, the Operating Partnership obtained a 6.885% ten
year fixed rate loan in the amount of $8,500. This loan is secured by
The Bluffs Apartments.
(E) Subsequent Events
--- -----------------
On April 20, 1998 the Operating Partnership completed the sale of 400,000
units of its Perpetual Preferred Units to the same institutional investor
who had purchased 1,200,000 Perpetual Preferred Units in February 1998,
at a price of $50.00 per unit. The net proceeds from this offering were
$19,500.
(3) Related Party Transactions
--------------------------
All general and administrative expenses of the Company, the Operating
Partnership and Essex Management Corporation ("EMC"), are initially borne
by the Operating Partnership, with a portion subsequently allocated to
EMC. Expenses allocated to EMC for the three months ended March 31, 1998
totaled $76 and are reflected as a reduction in general and
administrative expenses in the accompanying consolidated statements of
operations.
Rental income in the accompanying consolidated statements of operations
includes related party rents earned from space leased to The Marcus &
Millichap Company ("M&M"), including operating expense reimbursement, of
$201 and $171 for the three months ended March 31, 1998 and 1997,
respectively.
Other income for the three months ended March 31, 1998 includes interest
income of $205 earned principally under notes receivable from the
partnerships which collectively own Highridge Apartments, a 255 unit
multifamily property located in Rancho Palos Verde, California
("Highridge"), the partnerships which collectively own an approximate
30.7% minority interest in Pathways Apartments, a 296 unit multifamily
property located in Long Beach, California ("Pathways") and from the
investment of short term excess cash. For the three months ended March
31, 1998, the Operating Partnership earned $101 and $95 of dividend
income from Essex Sacramento Corporation and Essex Fidelity I
Corporation, respectively. In addition, the Operating Partnership earned
management fee income of $105 for the three months ended March 31, 1998,
from Anchor Village, Highridge, Pathways, and the partnerships which
collectively own the three retail shopping centers located in the
Portland, Oregon metropolitan area.
Page 9 of 20
<PAGE>
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Unaudited)
(Dollars in thousands, except for per share amounts)
Prior to the Operating Partnership's February 1998 disposition of its
remaining three retail shopping centers, EMC charged the Operating
Partnership for property management services for these centers. The fee
paid by the Operating Partnership for such services for the three months
ended March 31, 1998 was $7, and is included in administrative expense in
the accompanying consolidated statements of operations.
<TABLE>
Notes and other related party receivables as of March 31, 1998 and
December 31, 1997 consist of the following:
March 31, December 31,
1998 1997
---- ----
<S> ......................................................... <C> <C>
Notes and other related party receivables:
Note receivable from Highridge Apartments
secured, bearing interest at 9%, due March, 2008 .. $ 2,750 $ 2,750
Notes receivable from Fidelity I, secured,
bearing interest at 12%, due December 1998 ........ 1,580 1,580
Note receivable from Fidelity I and JSV, secured,
bearing interest at 9.5%-10%, due 2015 ........... 1,026 726
Notes receivable from Highridge Apartments,
non-interest bearing, due on demand .............. 2,566 1,699
Loans to officers, bearing interest at 8%, due April
2006 375 375
Other related party receivables, substantially
due on demand .................................... 1,970 2,134
------- -------
$10,267 $ 9,264
======= =======
</TABLE>
Other related party receivables consist primarily of accrued interest
income on related party notes receivables, loans to officers, advances and
accrued management fees from joint venture partnerships and unreimbursed
expenses due from EMC.
(4) New Accounting Pronouncements:
------------------------------
In June 1997, the FASB issued Financial Accounting Standard No. 130
(SFAS130), Reporting Comprehensive Income. SFAS 130 is effective with the
year-end 1998 financial statements; however, the total comprehensive
income is required in the financial statements for interim periods
beginning in 1998. In June 1997, the FASB issued Financial Accounting
Standard No. 131, Disclosure About Segments of An Enterprise and Related
Information. SFAS 131 is effective with the year-end 1998 financial
statements. In February 1998, the FASB issued Financial Accounting
Standards No. 132, Employees' Disclosures about Pensions and Other
Postretirement Benefits. SFAS 132 is effective with the year-end 1998
Financial Statements. Management believes that the adoption of these
statements will not have a material impact on the Operating Partnership's
financial statements.
(5) Net Income Per Unit:
--------------------
Net income per unit in the accompanying consolidated statements of
operations is calculated for March 31, 1998 and 1997, respectively, by
dividing net income applicable to the Operating
Page 10 of 20
<PAGE>
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Unaudited)
(Dollars in thousands, except for per share amounts)
Partnership units of $7,949 and $5,210 by the weighted average number of
units outstanding during the period. Net income applicable to the
Operating Partnership Units are calculated by deducting preferred
distributions of $1,597 and $438 for March 31, 1998 and 1997,
respectively, from net income.
Page 11 of 20
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operation
--------------------
The following discussion is based primarily on the condensed consolidated
financial statements of the Operating Partnership for the three months ended
March 31, 1998 and 1997.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect a fair statement of the results and all such adjustments are of a normal
recurring nature.
The Operating Partnership holds, directly or indirectly, all of the Company's
interests in the Company's properties and all of the Company's operations
relating to the Company's properties are conducted through the Operating
Partnership. The Company is the sole general partner of the Operating
Partnership and, as of March 31, 1998 and 1997, owned an 89.9% and 88.0% general
partnership interest in the Operating Partnership, respectively.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in the quarterly report on
Form 10-Q which are not historical facts may be considered forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including statements regarding the Operating Partnership's expectations, hopes,
intentions, beliefs and strategies regarding the future. Forward looking
statements include statements regarding potential acquisitions, the anticipated
performance of future acquisitions, recently completed acquisitions and existing
properties, and statements regarding the Operating Partnership's financing
activities. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors including, but not limited to, those risks,
special considerations, and other factors discussed under the caption "Other
Matters" in Item 1 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, and those other risk factors and special considerations
set forth from time to time in the Operating Partnership's other filings with
the Securities and Exchange Commission (the "SEC") which may cause the actual
results, performance or achievements of the Operating Partnership to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.
General Background
The Operating Partnership's revenues are generated primarily from multifamily
residential, retail and commercial property operations, which accounted for 97%
and 95% of its revenues for the three months ended March 31, 1998 and 1997,
respectively. The Operating Partnership's properties (the "Properties") are
located in California, Washington and Oregon. Occupancy levels of the
multifamily residential Properties in these markets have generally remained high
(averaging over 95% for the last five years).
Since the Operating Partnership began operations in June 1994, the Operating
Partnership has acquired ownership interests in forty-six multifamily
residential properties, of which twenty-nine are located in California, sixteen
are located in Washington and one is located in Oregon. In aggregate, these
acquisitions consist of a total of 8,867 units and had a total capitalized cost
of approximately $653.1 million. As part of its active portfolio management
strategy, the Operating Partnership has sold, since it began operations, five
multifamily residential properties in Northern California consisting of a total
of 579 units and six retail shopping centers in the Portland, Oregon
metropolitan area at an aggregate gross sales price of approximately $59.0
million resulting in net aggregate gain recognition of approximately $13.6
million.
Page 12 of 20
<PAGE>
Average financial occupancy rates ( 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) of the Operating
Partnership's multifamily properties on a same-property basis decreased to 95.7%
for the three months ended March 31, 1998 from 96.4%, for the three months ended
March 31, 1997. The regional breakdown of such financial occupancy for the three
months ended March 31, 1998 and 1997 is as follows:
March 31, March 31,
1998 1997
---- ----
Northern California 97.1% 97.2%
Pacific Northwest 94.0% 96.7%
Southern California 95.0% 93.8%
The commercial properties were 98% occupied (based on square footage) as of
March 31, 1998.
Results of Operations
Comparison of the Three Months Ended March 31, 1998 to the Three Months Ended
March 31, 1997.
Total Revenues increased by $9,285,000 or 50.1% to $27,836,000 in the first
quarter of 1998 from $18,551,000 in the first quarter of 1997. The following
table sets forth a breakdown of these revenue amounts, including the revenues
attributable to properties that the Operating Partnership owned for both of the
quarters ended March 31, 1998 and 1997 ("Quarterly Same Store Properties").
<TABLE>
Three Months Ended
March 31, Dollar Percentage
1998 1997 Change Change
---- ---- ------ ------
(dollars in thousands)
Number of
Rental income Properties
----------
<S> ............................. <C> <C> <C> <C> <C>
Quarterly Same Store Properties
Northern California ......... 11 $ 8,021 $ 7,184 $ 837 11.7%
Pacific Northwest ........... 12 5,328 5,142 186 3.6
Southern California ......... 3 2,048 1,917 131 6.8
Commercial .................. 1 466 402 64 15.9
----- ------- ------- ------- ---------
Total Quarterly Same
Store Properties ............ 27 15,863 14,645 1,218 8.3%
Properties acquired/
disposed of subsequent
to January 1, 1996 ..... 10,667 2,711 7,956 293.5%
Total rental income ........... 26,530 17,356 9,174 52.9
Other income .................. 1,306 1,195 111 9.3
------- ------- ------- ----------
Total revenues ................ $27,836 $18,551 $ 9,285 50.1%
======= ======= ======= ==========
</TABLE>
As set forth in the above table, $7,956,000 of the $9,285,000 increase in total
revenues is attributable to properties acquired or disposed of subsequent to
January 1, 1997. During this period, the Operating Partnership acquired
interests in thirty-two multifamily properties (the "Acquisition Properties"),
and disposed of one multifamily property and six retail shopping centers (the
"Disposition Properties").
Page 13 of 20
<PAGE>
Of the increase in total revenues, $1,218,000 is attributable to increases in
rental income from the Quarterly Same Store Properties. Rental income from the
Quarterly Same Store Properties increased by approximately 8.3% to $15,863,000
in the first quarter of 1998 from $14,645,000 in the first quarter of 1997. The
majority of this increase was attributable to the eleven multifamily Quarterly
Same Store Properties located in Northern California, the rental income of which
increased by $837,000 or 11.7% to $8,021,000 in the first quarter of 1998 from
$7,184,000 in the first quarter of 1997. This $837,000 increase is primarily
attributable to rental rate increases as reduced by the effect of the decrease
in financial occupancy to 97.1% in the first quarter of 1998 from 97.2% in the
first quarter of 1997. The twelve multifamily residential properties located in
the Pacific Northwest accounted for the next largest regional component of the
Quarterly Same Store Properties rental income increase. The rental income of
these properties increased by $186,000 or 3.6% to $5,328,000 in the first
quarter of 1998 from $5,142,000 in the first quarter of 1997. The $186,000
increase is primarily attributable to rental rate increases as reduced by the
effect of the decrease in financial occupancy to 94.0% in the first quarter of
1998, from 96.7% in the first quarter of 1997. The three properties in Southern
California also contributed towards this Quarterly Same Store Properties rental
income increase. The rental income of these properties increased by $131,000 or
6.8% to $2,048,000 in the first quarter of 1998 from $1,917,000 in the first
quarter of 1997. The $131,000 increase is attributable to rental rate increases
and the increase in financial occupancy to 95.0% in the first quarter of 1998
from 93.8% in the first quarter of 1997.
The increase in total revenue also reflected an increase of $111,000
attributable to other income, the most significant component of which was
dividend income from two related corporations in which the Operating Partnership
has a preferred stock investment.
Total Expenses increased by $5,373,000 or approximately 41.9% to $18,181,000 in
the first quarter of 1998 from $12,808,000 in the first quarter of 1997.
Interest expense increased by $434,000 or 12.9% to $3,797,000 in the first
quarter of 1998 from $3,363,000 in the first quarter of 1997. Such increase was
primarily due to the net addition of outstanding mortgage debt in connection
with property and investment acquisitions. Property operating expenses,
exclusive of depreciation and amortization, increased by $3,039,000 or 53.2% to
$8,753,000 in the first quarter of 1998 from $5,714,000 in the first quarter of
1997. Of such increase, $2,902,000 was attributable to the Acquisition
Properties and the Disposition Properties. General and administrative expenses
represents the costs of the Operating Partnership's various acquisition and
administrative departments as well as partnership administration and
non-operating expenses. Such expenses increased by $302,000 in the first quarter
of 1998 from the amount for the first quarter of 1997. This increase is largely
due to additional staffing requirements resulting from the growth of the
Operating Partnership.
Net income increased by $3,898,000 to $9,546,000 in the first quarter of 1998
from $5,648,000 in the first quarter of 1997. A significant component of the
increase in net income was primarily a result of the net contribution of the
Acquisition Properties and the increase in net operating income from the
Quarterly Same Store Properties.
Liquidity and Capital Resources
At March 31, 1998, the Operating Partnership had $5,574,000 of unrestricted cash
and cash equivalents. The Operating Partnership expects to meet its short-term
liquidity requirements by using its working capital, the net proceeds from the
sale of Perpetual Preferred Units (as defined below), and amounts available
under lines of credit. The Operating Partnership believes that its future net
cash flows will be adequate to meet operating requirements and to provide for
payment of dividends by the Company in accordance with REIT requirements. The
Operating Partnership has credit facilities in the committed amount of
approximately $87,000,000. At March 31, 1998 the Operating Partnership had
$28,775,000 outstanding on its lines of credit, with interest rates during the
first quarter of 1998 ranging from 7.2% to 7.5%. Subsequent to the quarter ended
March 31, 1998, the Operating Partnership repaid a portion of its outstanding
lines of credit balance with the proceeds from the sale of additional Perpetual
Preferred Units. The Operating Partnership expects to meet its long-term
liquidity requirements relating to property acquisition and development (beyond
the next 12 months) by using working capital, amounts available on
Page 14 of 20
<PAGE>
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 Operating Partnership will
have access to the debt and equity markets in a timely fashion to meet long-term
liquidity requirements or that future working capital, and borrowings under the
lines of credit will be available, or if available, will be sufficient to meet
the Operating Partnership's requirements or that the Operating Partnership will
be able to dispose of properties in a timely manner and under terms and
conditions that the Operating Partnership deems acceptable.
The Operating Partnership's unrestricted cash balance increased by $1,292,000
from $4,282,000 as of December 31, 1997 to $5,574,000 as of March 31, 1998. This
increase was primarily a result of $13,683,000 of cash provided by operating
activities, and $81,617,000 of cash provided by financing activities, which were
reduced by $94,008,000 of cash used in investing activities. Of the $94,008,000
net cash used in investing activities, $99,578,000 was used to purchase and
upgrade rental properties, $2,112,000 was used to fund real estate under
development, and $8,181,000 was used to fund an increase in the Operating
Partnership's restricted cash; these expenditures were primarily offset by
$15,842,000 of proceeds received from the disposition of three retail
properties. The $81,617,000 net cash provided by financing activities was
primarily a result of $74,275,000 of proceeds from mortgage and other notes
payable and lines of credit and $58,275,000 net proceeds from the Perpetual
Preferred Units sale as offset by $40,550,000 of repayments of mortgages and
other notes payable and lines of credit, and $9,189,000 of
dividends/distributions paid.
As of March 31, 1998, the total amount of the Operating Partnership's
outstanding debt was $310,322,000. Such indebtedness consisted of $197,727,000
in fixed rate debt, $53,775,000 of variable rate debt and $58,820,000 of debt
represented by tax exempt variable rate demand bonds, of which $29,220,000 is
capped at a maximum interest rate of 7.2%.
As of March 31, 1998, 34 of the Operating Partnership's majority owned
Properties were encumbered by debt. The agreements underlying these encumbrances
contain customary restrictive covenants which the Operating Partnership believes
do not have a material adverse effect on the Operating Partnership's operations.
As of March 31, 1998, the Operating Partnership was in compliance with such
covenants. Also, of the Operating Partnership's 34 Properties encumbered by
debt, 17 were secured by deeds of trust relating solely to those Properties.
With respect to the remaining 17 Properties, three cross collaterized mortgages
were secured by 8 Properties, 3 Properties and 3 Properties, respectively, and a
separate line of credit was secured by 3 Properties.
The Operating Partnership expects to incur approximately $300 per weighted
average occupancy unit in non-revenue generating capital expenditures for the
year ended December 31, 1998. 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 Operating Partnership 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 1998
and/or funded thereof will not be significantly different than the Operating
Partnership's current expectations.
The Operating Partnership is developing six multifamily residential projects,
which are anticipated to have an aggregate of approximately 1,330 multifamily
units. The Operating Partnership expects that such projects will be completed
during the next two years (1998 and 1999). Such projects involve certain risks
inherent in real estate development. See "Other Matters - Development
Activities; Risks That Developments Will Be Delayed or Not Completed" in Item 1
of the Company's Annual Report on Form 10-K for the year ended December 31,
1997. In connection with these development projects, the Operating Partnership
has directly, or in some cases through its joint venture partners, entered into
contractual construction related commitments with unrelated third parties for
approximately $77,000,000. The Operating Partnership expects to fund such
commitments with some combination of its working capital amounts available on
its lines of credit, net proceeds from public and private equity and debt
issuances, and proceeds from the disposition of properties, which may be sold
from time to time.
Page 15 of 20
<PAGE>
The Operating Partnership pays quarterly distributions from cash available for
distribution. Until it is distributed, cash available for distribution is
invested by the Operating Partnership primarily in short-term investment grade
securities or is used by the Operating Partnership to reduce balances
outstanding under its lines of credit.
On March 31, 1997, the Company completed the sale of 2,000,000 shares of its
Common Stock to Cohen & Steers at a price of $29.125 per share.
On June 20, 1997, the Company completed the sale of an additional $20,000,000 of
its convertible preferred stock to Tiger/Westbrook.
On September 10, 1997, the Company completed a public offering of 1,495,000
shares of its Common Stock at a net price of $31.00 per share.
On December 8, 1997, the Company completed a public offering of 1,500,000 shares
of Common Stock at a net price of $35.50 per share.
On February 6, 1998, the Operating Partnership completed the sale of 1,200,000
units of its 7.875% Series B Cumulative Redeemable Preferred Units ("Perpetual
Preferred Units") to an institutional investor at a price of $50.00 per unit.
On April 20, 1998, The Operating Partnership completed the sale of 400,000 units
of its Perpetual Preferred Units at a $50.00 per unit price to the same
institutional investor who purchased the 1,200,000 units in February 1998.
The proceeds from these offerings were used primarily to reduce balances under
the Operating Partnership's lines of credit and to fund acquisitions and
development of multifamily properties.
In the first quarter of 1998, the Operating Partnership and Essex filed a
registration statement (the "1998 Shelf Registration Statement") with the
Securities and Exchange Commission (the "SEC") to register $300,000,000 of
equity securities of Essex and $250,000,000 of debt securities of the Operating
Partnership. Prior to the filing of the 1998 Shelf Registration Statement, Essex
had approximately $42,000,000 of capacity remaining on a previously filed
registration statement which registered shares of common stock, preferred stock,
depository shares and warrants to purchase common and preferred stock.
The Operating Partnership is currently evaluating appropriate courses of action
regarding "year 2000" compliance. The Operating Partnership has contacted its
current software vendor and had determined that an upgraded package will be
available for implementation. Total costs are not expected to have a material
impact on operations.
Funds from Operations
Industry analysts generally consider funds from operations ("Funds From
Operations"), an appropriate measure of performance of an equity REIT. The
Company, the sole general partner in the Operating Partnership, has elected to
be treated as a REIT under the Code. Generally, Funds From Operations adjusts
the net income of equity REITs for non-cash charges such as depreciation and
amortization of rental properties and non-recurring gains or losses. Management
generally considers Funds from Operations to be a useful financial performance
measurement of an equity REIT because, together with net income and cash flows,
Funds from Operations provides investors with an additional basis to evaluate
the ability of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds From Operations does not represent net income
or cash flows from operations as defined by GAAP and 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
Page 16 of 20
<PAGE>
cash needs including principal amortization, capital improvements and
distributions to shareholders. Funds From Operations also does not represent
cash flows generated from operating, investing or financing activities as
defined under GAAP. Further, Funds from Operations as disclosed by other REITs
may not be comparable to the Company's calculation of Funds From Operations.
The following table sets forth the Operating Partnership's calculation of Funds
From Operations for the quarters ended March 31, 1998 and 1997.
Three months ended
------------------
March 31, 1998 March 31, 1997
-------------- --------------
Income before minority interests ..... $ 9,655,000 $ 5,743,000
Adjustments:
Depreciation & amortization . 4,669,000 3,088,000
Adjustment for unconsolidated
joint venture ............. s 296,000 --
Minority interests .......... (907,000) (138,000)
------------ ------------
Funds from Operations ....... $ 13,713,000 $ 8,693,000
============ ============
Weighted average number of
Company shares outstanding
diluted (1) .................... 20,550,845 14,554,238
============ ============
(1) Includes all outstanding shares of the Company's common stock and assumes
conversion of all outstanding operating partnership interests in the
Operating Partnership and Convertible Preferred Stock into shares of the
Company's Common Stock. Also includes Common Stock equivalents. Minority
interest have been adjusted to reflect such conversion.
The National Association of Real Estate Investment Trust ("NAREIT"), a leading
industry trade group, has approved a revised definition of Funds from
Operations, which provides, in part, that the amortization of deferred financing
costs is no longer to be added back to net income in the calculation of Funds
from Operations. Consistent with the NAREIT recommendation, Essex has adopted
this new definition beginning in 1996.
Page 17 of 20
<PAGE>
Part II Other Information
- ------- -----------------
Item 2: Changes in Securities and Use of Proceeds
-----------------------------------------
(c) Recent Sales of Unregistered Securities
On February 6, 1998, the Operating Partnership completed the
private placement of 1,200,000 7.875% Series B Cumulative
Redeemable Preferred Units (the "Perpetual Preferred Units"),
representing a limited partnership interest in the Operating
Partnership, to an institutional investor in return for a
contribution to the Operating Partnership of $60,000,000. The
Perpetual Preferred Units will become exchangeable, on a one for
one basis, in whole or in part at any time on or after the tenth
anniversary of the date of this private placement (or earlier
under certain circumstances) for shares of the Company's 7.875%
Series B Cumulative Redeemable Preferred Stock, par value $.0001
per share (the "Series B Preferred Stock"). Pursuant to the terms
of a registration rights agreement, entered into in connection
with this private placement, the holders of Series B Preferred
Stock will have certain rights to cause the Company to register
such shares of Series B Preferred Stock. On February 10, 1998, the
Company filed Articles Supplementary reclassifying 2,000,000
shares of its Common Stock par value $.0001 per share, as
2,000,000 shares of Series B Preferred Stock and setting forth the
rights, preferences and privileges of the Series B Preferred
Stock.
On April 20, 1998, the Operating Partnership completed the private
placement of an additional 400,000 Perpetual Preferred Units with
the same institutional investor in return of an additional
contribution to the Operating Partnership of $20,000,000. The sale
of the additional 400,000 Perpetual Preferred Units was on
substantially the same terms as the sale by the Operating
Partnership of 1,200,000 Series B Preferred Units in February
1998.
The net proceeds from the above private placements were used or
are planned to be used primarily to fund acquisition and
development activities and for general purposes.
Each of the above private placements was completed pursuant to the
exemption from registration contained in Section 4(2) the
Securities Act of 1933, as amended.
Page 18 of 20
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits Page
-- -------- ----
3.1 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
(incorporated by reference to the identically
numbered exhibit to the Company's Current Report
on Form 8-K, filed March 3, 1998). --
10.1 First Amendment to the First Amended and
Restated Agreement of Limited Partnership
of Essex Portfolio, L.P., dated February 6,
1998 (incorporated by reference to the
identically numbered exhibit to the
Company's Current Report on Form 8-K,
filed March 3, 1998). --
10.2 Second Amendment to the First Amended
and Restated Agreement of Limited Partnership
of Essex Portfolio, L.P., dated April 20, 1998
(incorporated by reference to Exhibit No.
10.1 to the Company's Current Report on Form 8-K,
filed April 23, 1998). --
11.1 Statement regarding Computation of Earnings per Unit 20
12.1 Schedule of Computation of Ratio of Earnings to
Fixed Charges and Preferred Unit Distribution 21
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only) --
B. Reports on Form 8-K
----------------------
On March 3, 1998, Essex filed a current report on Form 8-K, regarding its
private placement of 1,200,000 units of its 7.875% Series B Cumulative
Redeemable Preferred Units to an institutional investor.
On March 30, 1998, Essex filed a current report on Form 8-K, regarding its
purchase of Casa Mango, Village at Cascade Park and Mirabella Apartments.
On April 23, 1998, Essex filed a current report on Form 8-K, regarding its
private placement of 400,000 units of its 7.875% Series B Cumulative
Redeemable Preferred Units to the same institutional investor who
previously purchased 1,200,000 of such units.
On May 14, 1998, Essex filed a current report on Form 8-K, regarding its
purchase of Wimbledon Woods and Bunker Hill Towers.
Page 19 of 20
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESSEX PORTFOLIO, L.P.,
a California Limited Partnership
By: Essex Property Trust, Inc.
Its: General Partner
/s/ Mark J. Mikl
----------------
By: Mark J. Mikl
Its: Controller
(Authorized Officer and
Principal Accounting Officer)
June 26, 1998
-------------
Date
Page 20 of 20
<PAGE>
<TABLE>
Exhibit 11.1
ESSEX PORTFOLIO, L.P.
Statement of Computation of Earnings per Unit
(Dollars in thousands except per unit amounts)
Quarter ended March 31,
1998 1997
<S> .......................................................................... <C> <C>
Basic:
Net income ............................................................. $ 9,546 $ 5,648
Less:
Distributions on Preferred Interest for 8.75% Series 1996A
Convertible Preferred Stock .................................... 875 438
Distributions on 7.875% Series B Cumulative Redeemable Preferred
Units .......................................................... 722 0
=========== ===========
Net income applicable to general and limited partners ................... $ 7,949 $ 5,210
=========== ===========
Weighted average number of units outstanding
during the period .............................................. 18,491,659 13,449,606
=========== ===========
Net income per partnership unit ......................................... $ 0.43 $ 0.39
=========== ===========
Diluted:
Adjusted units - basic, from above ...................................... 18,491,659 13,449,606
Weighted average units issuable upon conversion of the
8.75% Series 1996A Convertible Preferred Stock
of 1,828,572 and 914,286 in 1998 and 1997, respectively,
excluded as anti-dilutive
Additional weighted average units of dilutive stock options
using the average stock price under the treasury stock method .. 230,614 190,346
----------- -----------
Weighted average number of units outstanding
during the period .............................................. 18,722,273 13,639,952
=========== ===========
Net income per partnership unit ......................................... $ 0.42 $ 0.38
=========== ===========
</TABLE>
<PAGE>
<TABLE>
Exhibit 12.1
ESSEX PORTFOLIO, L.P.
Schedule of computation of Ratio of Earnings to Fixed Charges and Preferred Distributions
(in thousands, except ratios)
Three months Year ended Year ended Year ended
ended
March 31, December 31, December 31, December 31,
1998 1997 1996 1995
----------- ------------ ------------ ------------
<S> ...................................... <C> <C> <C> <C>
Earnings:
Income before minority interests ....... $ 9,655 $ 34,146 $ 14,970 $ 14,244
Interest expense 3,797 12,659 11,442 10,928
Amortization of deferred financing costs 144 509 639 1,355
------- ------- ---------- -------
Total earnings ......................... 13,596 47,314 27,051 26,527
------- ------- ---------- -------
Fixed charges:
Interest expense ....................... $ 3,797 $ 12,659 $ 11,442 $ 10,928
Convertible preferred interest.......... 875 2,681 635 --
distributions
Perpetual preferred unit distributions 722 -- -- --
Amortization of deferred financing costs 144 509 639 1,355
Capitalized interest 875 1,276 115 92
------- ------- ---------- -------
Total fixed charges and preferred
distributions ........................ $ 6,413 $ 17,125 $ 12,831 $ 12,375
Ratio of earnings to fixed charges
(excluding preferred distributions) .... 2.82 X 3.28 X 2.22 X 2.14 X
======= ======= ========== =======
Ratio of earnings to combined fixed
charges and preferred distributions .... 2.12 X 2.76 X 2.11 X 2.14 X
======= ======= ========== =======
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001053059
<NAME> Essex Portfolio, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,848
<SECURITIES> 0
<RECEIVABLES> 19,190
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,723
<PP&E> 854,574
<DEPRECIATION> 61,236
<TOTAL-ASSETS> 845,515
<CURRENT-LIABILITIES> 44,614
<BONDS> 310,322
0
95,780
<COMMON> 386,739
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 845,515
<SALES> 0
<TOTAL-REVENUES> 27,836
<CGS> 0
<TOTAL-COSTS> 13,422
<OTHER-EXPENSES> 927
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,941
<INCOME-PRETAX> 7,949
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,949
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
