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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 2)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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 of (I.R.S. Employer incorporation or
organization) Identification No.)
777 California Avenue, Palo Alto, California 94304
(Address of principal executive offices) (Zip code)
(415) 494-3700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
common stock, $.0001 par value New York Stock Exchange
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 the
Form 10-K. [X]
As of February 29, 1996, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $121,435,000. The aggregate market value was
computed with reference to the closing price on the New York Stock Exchange on
such date. This calculation does not reflect a determination that persons are
affiliates for any other purpose.
As of February 29, 1996, 6,275,000 shares of Common Stock ($.0001 par value)
were outstanding.
LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part IV, Item 14,
on page number 18.
DOCUMENTS INCORPORATED BY REFERENCE:
The following document is incorporated by reference in Part III of the Annual
Report on Form 10K/A: Proxy statement for the annual meeting of stockholders of
Essex Property Trust, Inc. to be held on May 21, 1996.
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EXPLANATORY NOTE
The undersigned Registrant hereby amends, as and to the extent set forth below,
the following items, financial statements, exhibits or other portions of its
Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended
December 31, 1995 filed pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934:
PART I
+ Item 1 - Business
+ Item 2 - Properties
+ Item 3 - Legal Proceedings
+ Item 4 - Submission of Matters to a Vote of Security Holders
PART II
+ Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters
* Item 6 - Selected Financial Data
* Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
+ Item 8 - Financial Statements and Supplementary Data
+ Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
+ Item 10 - Directors and Executive Officers of the Registrant
+ Item 11 - Executive Compensation
+ Item 12 - Security Ownership of Certain Beneficial Owners and
Management
+ Item 13 - Certain Relationships and Related Transactions
PART IV
* Item 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
*The items amend information previously filed by the Company as part of the
Company's Annual Report on Form 10-K/A (Amendment No. 1) filed with the
Securities and Exchange Commission on May 2, 1996.
+These items have not been amended hereby and are included herein for
convenience of reference only.
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TABLE OF CONTENTS
FORM 10-K/A
(AMENDMENT NO. 2)
<TABLE>
<CAPTION>
PART I Page No.
<S> <C> <C>
Item 1 Business......................................................................... 4
Item 2 Properties....................................................................... 10
Item 3 Legal Proceedings................................................................ 12
Item 4 Submission of Matters to a Vote of Security Holders.............................. 12
PART II
Item 5 Market for Registrant's Common Stock
and Related Stockholder Matters................................................... 13
Item 6 Selected Financial Data........................................................... 13
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 16
Item 8 Financial Statements and Supplementary Data....................................... 21
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................ 21
PART III
Item 10 Directors and Executive Officers of the Registrant................................ 22
Item 11 Executive Compensation............................................................ 22
Item 12 Security Ownership of Certain Beneficial
Owners and Management............................................................. 22
Item 13 Certain Relationships and Related Transactions.................................... 22
PART IV
Item 14 Exhibits, Financial Statements Schedules and
Reports on Form 8-K............................................................... 22
</TABLE>
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PART I
ITEM 1. BUSINESS
General Development and Description of Business
Essex Property Trust, Inc. ("Essex", or the "Company") is a self-administered
and self-managed real estate investment trust ("REIT") in the business of
acquiring, refurbishing, marketing, leasing, managing and developing multifamily
residential and retail properties. As of December 31, 1995 Essex's property
portfolio consisted of ownership interests in the following 30 properties
("Properties"): (i) 23 multifamily residential properties containing 4,868
apartment units, (ii) six neighborhood shopping centers containing approximately
351,000 rentable square feet of space and (iii) an office building housing
Essex's headquarters (the "Headquarters Building"), with approximately 45,000
rentable square feet of space (each individually a "Property" and, collectively,
the "Properties"). Essex's properties are concentrated in Northern California
and the Seattle, Washington greater metropolitan area, from which 78% of its
rental revenue was derived in 1995. Other markets in which the Company owns
property include areas surrounding Portland, Oregon and Southern California.
Essex was incorporated in the state of Maryland in March 1994. On June 13, 1994,
Essex 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").
All references to Essex in this report refer to Essex Property Trust, Inc. and
those entities owned or controlled by Essex Property Trust, Inc. Unless
otherwise specified, information about Essex and the properties refers to the
operations of Essex after the completion of the Offering and the operations of
Essex Property Corporation ("EPC") prior to the completion of the Offering.
Essex was formed to continue and expand the real estate investment and
management operations conducted by EPC since 1971. Since its inception, Essex
has successfully acquired, developed, managed and/or disposed of a combination
of approximately 145 property and portfolio assets in seven major metropolitan
markets in the western United States at an aggregate investment in excess of
$700 million. Such properties have included various types of commercial
property, with a focus on multifamily residential property. Essex's multifamily
residential property investments have involved an aggregate of more than 13,600
apartment units.
Business Objectives
Essex's four core business objectives are:
- - Active Property Marketing and Management. Maximize, on a per share basis,
cash flow available for distribution and the capital appreciation of its
property portfolio through active property marketing and management.
- - Selected Expansion of Property Portfolio. Increase, on a per share basis,
cash flow available for distribution through the acquisition and
development of multifamily residential properties in selected major
metropolitan areas located in the western United States.
- - Optimal Portfolio Asset Allocations. Produce predictable financial
performance through a portfolio asset allocation program that seeks to
increase or decrease the equity invested in each market based on changes in
regional economic and local market conditions.
- - Management of Capital and Financial Risk. Optimize Essex's capital and
financial risk positions by maintaining a conservative leverage ratio,
evaluating financing alternatives on an on-going basis and minimizing
Essex's cost of capital.
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Business Principles
Essex was founded on, has followed, and will 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, Essex seeks to retain tenants, maximize cash flow,
enhance property values and compete effectively for new tenants in the
marketplace. Essex's regional property managers are accountable for overall
property operations and performance. They supervise on-site managers, monitor
fiscal performance against budgeted expectations, monitor Property performance
against the performance of competing properties in the area, prepare operating
and capital budgets for executive approval, and implement new strategies focused
on enhancing tenant satisfaction, increasing revenue, controlling expenses, and
creating a more efficient operating environment. Essex has established in-house
training programs for its on-site staff.
Business Planning and Control. Real estate investment decisions are accompanied
by a multiple year plan, to which an executive and other managers responsible
for obtaining future financial performance must agree in writing. Performance
versus plan serves as a significant factor in determining compensation.
Property Type Focus. Essex focuses on acquisition of multifamily residential
communities, containing between 75 and 400 units. Essex believes that these
types of properties offer attractive opportunities because such properties (i)
are often mispriced by real estate sellers and buyers who lack Essex'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
either are inadequately capitalized or lack the professional property management
expertise of Essex, and (iii) can be readily exchanged or sold during periods of
changing market conditions due to the relatively large pool of prospective and
qualified buyers for such properties.
Geographic Focus. Essex focuses its property investments in markets that meet
the following criteria:
- - Major Metropolitan Areas. Essex focuses on metropolitan areas having a
regional population in excess of 1 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 Essex's strategy of varying its
portfolio in response to changing market conditions.
- - Supply Constraints. Essex believes that properties located in real estate
markets with limited development or redevelopment opportunities are
well-suited to produce increased rental income. In evaluating supply
constraints, Essex 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. Essex concentrates on
markets in which the cost of renting is significantly lower than the cost
of owning a home. In such markets, rent levels are higher and operating
expenses, as a percentage of rent, are lower in comparison with markets
that have a lower cost of housing.
- - Job Proximity. Essex believes that most renters select housing based on its
proximity to their jobs and on related commuting factors and desire to
remain within a specified travel distance from their jobs. Essex obtains
commuting information relating to its residential properties and uses this
information when making multifamily residential property acquisition
decisions. Essex also reviews the location of major employers relative to
its portfolio and potential acquisition properties.
Following the above criteria, Essex is currently pursuing investment
opportunities in selected markets of Northern and Southern California, the
Seattle Metropolitan Area and Portland Metropolitan Area.
Active Portfolio Management Through Regional Economic Research and Local Market
Knowledge. Essex 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. Essex 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. Essex maintains and evaluates:
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- Regional Economic Data. Essex evaluates and reviews regional
economic factors for the markets in which it owns properties and where
it considers expanding its operations. Essex's research focuses on
regional and sub-market supply and demand, economic diversity, job
growth, market depth and, for residential properties, the comparison
of rental price to single-family housing prices.
- Local Market Conditions. Local market knowledge includes (i)
local factors that influence whether a sub-market is desirable to
tenants, (ii) the extent to which the area surrounding a property is
improving or deteriorating, and (iii) local investment market
dynamics, including the relationship between the value of a property
and its yield, the prospects for capital appreciation and market
depth.
Recognizing that all real estate markets are cyclical, Essex regularly evaluates
the results of regional economic and local market research and adjusts asset
acquisitions and portfolio allocations accordingly. Essex actively manages the
allocation of assets within its portfolio. Essex 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, Essex also seeks to increase its portfolio allocation in markets that
have attractive property valuations and to decrease such allocations in markets
that have inflated valuations and low relative yields. Although Essex is
generally a long-term investor, it does not establish defined or preferred
holding periods for its Properties.
Current Business Activities
Essex conducts substantially all of its activities through the Operating
Partnership, of which Essex owns an approximate 77.2% general partnership
interest. An approximate 22.8% Operating Partnership interest is owned by the
Directors, officers and employees of Essex and certain third-party investors. As
the sole general partner of the Operating Partnership, Essex has operating
control over the management of the Operating Partnership and each of the
Properties. Three of the multifamily residential Properties located in the State
of Washington are owned by partnerships in which the Operating Partnership owns
a 99% general partnership interest and Essex Washington Interests Partners
("EWIP") owns the remaining 1% Partnership interest. The Operating Partnership
owns a 99% general partnership interest in EWIP and Essex owns the remaining 1%
general partnership interest. EWIP was organized in March 1994 as a California
general partnership.
Essex qualifies as a real estate investment trust ("REIT") for federal income
tax purposes, commencing with the year ending December 31, 1994. In order to
maintain compliance with REIT tax rules, Essex provides fee-based asset
management and disposition services as well as third-party property management
and leasing services through Essex Management Corporation ("EMC"). Essex owns
100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of Essex
own 100% of EMC's 1,000 shares of common stock. Essex has been actively engaged
in the business of acquiring and managing portfolios of non-performing assets
along with institutional investors. Asset management services resulting from
these portfolios are provided by EMC, typically for the term that is required to
acquire, reposition and dispose of the portfolio. Asset management agreements
usually provide for a base management fee calculated as a percentage of the
gross asset value of the portfolio under management, and an incentive fee based
upon the over all financial performance of the portfolio. Accordingly, the fees
earned as a result of these contracts fluctuate as assets are acquired and
disposed. However, Essex believes, that few opportunities to acquire portfolios
of non-performing assets will be available in the near future.
During 1995, Essex acquired ownership interests in three multifamily properties
consisting of 692 units for an aggregate contracted purchase price of
approximately $48 million. The acquisitions were financed by new mortgage loans
and borrowings under lines of credit. One of the acquisitions (156 units) was
located in the greater Seattle metropolitan area and two were located in
Northern California (536 units).
For the two acquisitions in Northern California, Essex acquired limited
partnership interests in Essex Bristol Partners, L.P. ("Bristol") and Essex San
Ramon Partners, L.P. ("San Ramon"). In the Bristol transaction, Essex obtained
for $2,145,000 a 99% interest in Bristol and Bristol simultaneously acquired
Bristol Commons Apartments, a 188 unit apartment community in Sunnyvale,
California for $16,850,000. Essex's partner is Acacia Capital Corporation, which
provided subordinated debt and equity financing to the partnership in the amount
of $2,648,000. Permanent debt financing consisted of a 7 year mortgage in the
amount of $12,298,000, with a fixed interest rate of 7.54%. Essex will receive
approximately 60% of the cash flow generated by the venture. Built in 1989,
Bristol Commons is a luxury apartment property with a full amenity package,
including pool, spa, exercise room, business center, marble woodburning
fireplaces, and landscaped grounds. In the San Ramon transaction, Essex obtained
for $3,647,000, a 99% partnership interest in San Ramon and San Ramon
simultaneously acquired The Shores Apartments, a 348 unit apartment community in
San Ramon, California for $25,450,000. Essex's partner is Acacia Capital
Corporation, which provided subordinated debt and equity to the partnership in
the amount of $3,816,000. Permanent debt financing consisted of a 5 year
mortgage in the amount of $18,520,000, with a fixed interest rate of 7.5%. Essex
will receive approximately 60% of the cash flow generated by the venture. Built
in 1988,
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The Shores Apartments is a luxury apartment property with a full amenity
package, including two pools, lighted tennis courts, a volleyball court, four
spas, two saunas and a fitness center. Essex will manage the two properties on
behalf of the partnerships.
In 1995, Essex purchased undeveloped land in Hillsboro, Oregon for $950,000.
This land and cash of approximately $550,000 was contributed in exchange for a
49.9% partnership interest, to Jackson School Village limited partnership. The
partnership will develop on the site a 200 unit garden-style apartment
community. Essex's partner in this partnership, Great Northwest Management
Company, is to provide development and property management services to the
partnership and has secured and guaranteed construction financing. The
partnership was formed in July 1995 and construction began shortly thereafter.
During 1995, Essex disposed of two multifamily properties consisting of 234
units for an aggregate gross sales price of approximately $13 million. These
funds were used repay indebtedness under existing mortgages and lines of credit
and acquire additional properties. Both these properties were located in
Northern California.
Offices and Employees
Essex is headquartered in Palo Alto, California, and has regional offices in
Seattle, Washington, and Portland, Oregon. As of December 31, 1995, Essex had
approximately 210 employees.
Competition
Essex'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 improving in Essex's target markets, a
prolonged economic downturn could have a material adverse effect on Essex's
operations and financial condition.
Essex 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
Essex's practice is to maintain cash reserves for normal repairs, replacements,
improvements, working capital and other contingencies. Essex believes it
currently maintains sufficient cash balances to fund working capital needs.
Essex currently has access to two lines of credit in the committed amount of
approximately $23 million with unused portions as of December 31, 1995
sufficient to cover any known cash requirements in excess of cash balances.
Other Matters
Essex's operating results may be affected by the following factors:
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, Essex's cash flow and ability
to make distributions to its stockholders will be adversely affected. The
performance of the economy in each of the areas which the Properties are located
affects occupancy, market rental rates and expenses and, consequently, has an
impact on the income from the Properties and their underlying values. The
financial results of major local employers may have an impact on the cash flow
and value of certain of the Properties.
Income from the Properties may be further adversely affected by 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 ability of the Company to provide for adequate maintenance and
insurance and increased operating expenses. There is also the risk that as
leases on the Properties expire, tenants will 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., ADA and tax
laws), interest rate levels and the availability of financing. In addition, real
estate investments are relatively illiquid and, therefore, will tend to limit
the ability of the Company to vary its portfolio promptly in response to changes
in economic or other conditions.
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Geographic Concentration; Dependence on California, Washington and Oregon
Economics. Approximately 51%, 31%, 11% and 7% of Essex's rental revenues for the
year ended December 31, 1995 were derived from Properties located in the
Northern California Area, the Seattle Metropolitan Area, southern California and
the Portland Metropolitan Area (and Eugene, Oregon), respectively. The
performance of the economy in each of these areas affects occupancy, market
rental rates and expenses and, consequently, has an impact on the income from
the Properties and their underlying values. The financial results of major local
employers may have an impact on the cash flow and value of certain of the
Properties.
Risks of Acquisition and Development Activities. Essex intends to actively
continue to acquire multifamily residential properties. Acquisitions of such
properties entail risks that investments will fail to perform in accordance with
expectations. Estimates of the costs of improvements to bring an acquired
property up to standards established for the market position intended for that
property may prove inaccurate. In addition, there are general real estate
investment risks associated with any new real estate investment.
Essex has one multifamily residential property development project in progress
as of December 31, 1995 and may pursue other projects. Any future projects
generally require various governmental and other approvals, the receipt of which
cannot be assured. The Company's development activities will entail certain
risks, including the expenditure of funds on and devotion of management's time
to projects which may not come to fruition; the risk that construction costs of
a project may exceed original estimates, possibly making the project not
economical; the risk that occupancy rates and rents at a completed project will
be less than anticipated; and the risk that expenses at a completed development
will be higher than anticipated. These risks may result in a development project
adversely affecting Essex's results of operations.
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 from
such property. Certain of such laws impose such liability without regard 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 and regardless of whether such person selected
the disposal or treatment facility. 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, potentially liable for removal or remediation costs, as well as
certain other costs, including governmental fines and damages for injuries to
persons and property. In addition, certain environmental laws impose liability
for release of asbestos-containing materials ("ACMs"), and third parties may
seek recovery from owners or operators of real properties for personal injury
associated with ACMs.
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 concurring properties in the vicinity of the site,
an investigation as to the presence of polychlorinated biphenyls ("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
three of the Properties. Two of such properties had contamination which was
reported to have migrated on-site from adjacent industrial manufacturing
operations, and the third property was occupied previously by an industrial user
that was identified as the source of contamination. The environmental studies
noted that five of the Properties are located adjacent to and possibly down
gradient from sites with known groundwater contamination, the lateral limits of
which may extend onto such Properties. The environmental studies also noted that
at two 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 ten Properties would not have a material adverse effect on the Company's
financial condition or result of operations.
With one exception, the Company has no indemnification agreements from third
parties for potential environmental clean-up costs at one of their properties.
No assurance can be given that existing environmental studies with respect to
any of the
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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.
Uninsured Losses. All of the Properties are located in areas that are subject to
earthquake activity, including 15 Properties in California, 10 Properties in
Washington and 5 Properties in Oregon. Essex has obtained earthquake insurance
for all the Properties. The existing earthquake insurance covers losses, subject
to an aggregate limitation of $4.0 million, losses of up to $2.5 million for
each multifamily residential Property subject to a 10% deductible. Properties
may selectively be excluded from being covered by earthquake insurance based on
management's evaluation of the following factors: (i) the availability of
coverage on terms acceptable to Essex, (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. Accordingly,
despite earthquake coverage on all of its Properties, should a property sustain
damage as a result of an earthquake, Essex may incur losses due to deductibles,
co-payments or losses in excess of applicable insurance, if any.
Although the Company carries certain insurance for non-earthquake damages to its
properties and liability insurance, Essex may still incur losses due to
deductibles, co-payments or losses in excess of applicable insurance.
Financing Policy. Essex has adopted a policy of maintaining a
Debt-to-Total-Market-Capitalization ratio of less than 50%. Debt-to-Total-Market
capitalization is the ratio of the total property indebtedness to the sum of (i)
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 its shares plus any undistributed net cash flow), assuming the
conversion of all limited partnership interests in the Operating Partnership
into shares of stock and (ii) the total property indebtedness. Based on this
calculation, Essex's Debt-to-Total-Market-Capitalization ratio was 49.4% as of
December 31, 1995.
The organizational documents of Essex and the Operating Partnership do not limit
the amount or percentage of indebtedness that they may incur. Essex may from
time to time modify its debt policy in light of then current economic
conditions, relative costs of debt and equity securities, fluctuations in the
fair market price of the Common Stock, growth and acquisition opportunities and
other factors. Accordingly, Essex may increase its Debt-to-Total-Market-
Capitalization ratio beyond the limits described above. If the Board of
Directors determines that additional funding is required, Essex or the Operating
Partnership may raise such funds through additional equity offerings, debt
financing or retention of cash flow (subject to provisions in the Code
concerning taxability of undistributed real estate investment trust income), or
a combination of these methods.
Debt Financing; Uncertainty of Ability to Refinance Balloon Payments. The
Company is subject to the risks normally associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest, that the Company will not be able
to refinance existing indebtedness on the encumbered Properties or that the
terms of such refinancing will not be as favorable as the terms of existing
indebtedness. As of December 31, 1995, the Company had outstanding approximately
$155 million of indebtedness that is secured by the Properties.
The Company is not expected to have sufficient cash flow from operations to make
all of the balloon payments of principal when due under its mortgage
indebtedness and lines of credit, which are an aggregate of approximately $155
million. Such mortgage indebtedness and lines of credit have the following
scheduled maturity dates: 1996-$20.9 million; 1997-$3.2 million; 1998-$3.2
million; 1999-$18.6 million; 2000-$5.2 million; 2001 and thereafter-$105.4
million. As a result, the Company will be subject to risks that it will not be
able to refinance such mortgage indebtedness and the mortgaged properties could
be foreclosed upon by or otherwise transferred to the mortgagee with a
consequent loss of income and asset value to the Company, or, that the
indebtedness, if any, refinanced will have higher interest rates. An inability
to make such payments when due could cause the mortgage lender to foreclose on
the Properties securing the mortgage, which would have a material adverse effect
on the Company.
Debt Financing; Risk of Rising Interest Rates. As of December 31, 1995, the
Company had approximately $78.3 million of variable rate mortgage indebtedness,
which bears interest at a floating rate tied to either (i) the London InterBank
Offered Rates ("LIBOR"), (ii) the rate of short-term tax exempt securities or
(iii) the 11th District Cost of Funds. Although approximately $18.6 million of
such variable rate indebtedness is subject to an interest rate swap agreement
which may reduce the risks associated with fluctuations in interest rates, an
increase in interest rates will have an adverse effect on the Company's net
income and Funds from Operations.
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ITEM 2. PROPERTIES
Portfolio Overview
Essex's property portfolio (including partial ownership interests) consists of
the following 30 Properties: (i) 23 multifamily residential Properties
containing 4,868 apartment units, (ii) six neighborhood shopping centers
containing approximately 351,000 rentable square feet of space and (iii) an
office building housing Essex's headquarters, with approximately 45,000 rentable
square feet of space. The Properties are located in California, Washington, and
Oregon. Essex's multifamily residential Properties accounted for approximately
89% of Essex's rental revenues for the year ended December 31, 1995. The 23
multifamily residential Properties had an average occupancy rate (based on
financial occupancy) during the year ended December 31, 1995 of approximately
97%. As of December 31, 1995, the six retail Properties had an occupancy rate
(based on leased and occupied square footage) of approximately 93%, and the
Headquarters Building had an occupancy rate (based on leased and occupied square
footage) of 100%.
For the year ended December 31, 1995, none of the Company's properties had book
values equal to 10% or more of total assets or gross revenues equal to 10% or
more of aggregate gross revenues.
The Location and Type of the Company's Properties
<TABLE>
<CAPTION>
NUMBER OF OCCUPANCY RENTAL PERCENTAGE OF
PROPERTY TYPE PROPERTIES LOCATION SIZE RATE REVENUE PORTFOLIO(1)
- -------------- ---------- -------- ---- ---- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Multifamily Residential Properties
11 San Francisco South Bay 2,311 units 98% $18,922 45%
9 Seattle, Washington 1,883 units 96% 12,980 31%
1 Sacramento Metropolitan Area 92 units 95% 592 1%
2 Southern California 582 units 95% 4,597 11%
--- ----------- ---
Subtotal 23 4,868 units 89%
Commercial Properties
Neighborhood Shopping Center 5 Portland Metropolitan Area 302,706 sq. ft. 93% 2,527 6%
1 Eugene, Oregon 49,420 sq. ft. 98% 454 1%
---
Subtotal 6
Headquarters Building 1 San Francisco South Bay 44,827 sq. Ft. 100% 1,649 4%
--- ------- ---
TOTAL 30 $41,640 100%
== ======= ===
</TABLE>
(1) Based upon rental revenues for the year ended December 31, 1995.
Multifamily Residential Properties
Essex has ownership interests in 23 multifamily residential apartment
communities containing 4,868 units. The majority of these Properties are
suburban garden apartments and townhomes comprising multiple clusters of two-
and three-story buildings situated on three to 15 acres of land. The multifamily
Properties have on average 211 units, with a mix of studio, one-, two- and some
three-bedroom units. A wide variety of amenities is available at each apartment
community, including swimming pools, clubhouses, covered parking, and cable
television. Many Properties offer additional amenities, such as fitness centers,
volleyball and playground areas, tennis courts and wood-burning fireplaces.
Most of Essex's apartment communities are designed for and marketed to working
people in white-collar or technical professions. Essex selects, trains and
supervises a full team of on-site service and maintenance personnel. Essex
believes that its customer-service approach enhances its ability to retain
tenants and that its multifamily residential Properties were well-built and have
been well-maintained.
At December 31, 1995 one of Essex's rental properties in Northern California
with a carrying amount of $7,321,000 was held for sale.
Neighborhood Shopping Centers and Headquarters Building
Five of Essex's six neighborhood shopping centers are in the Portland
Metropolitan Area and the remaining property is located in Eugene, Oregon. These
neighborhood shopping centers contain an aggregate of approximately 351,000
rentable square feet of space and, as of December 31, 1995, had an occupancy
rate (based on leased and occupied square footage) of approximately 93%. These
Properties are located in several sub-markets in Portland and Eugene. The
tenants include a mix of national, regional and local retailers. Essex acquired
the neighborhood shopping centers as a portfolio in 1990 and since
10
<PAGE> 11
that time has implemented an expansion, renovation and re-leasing program. Essex
is evaluating the potential disposition of one or more of these retail
properties.
Essex also owns a prepaid ground leasehold interest in the office building that
houses its corporate headquarters. Essex acquired this Property in 1986 and
redeveloped it in 1988. The Headquarters Building has approximately 45,000
rentable square feet of space and is a multi-tenant, one-story office building,
located in the Stanford Research Park in Palo Alto, California. Essex occupies
approximately 6,000 square feet of the Headquarters Building, The Marcus &
Millichap Company occupies approximately 16,000 square feet and the remaining
two tenants occupy approximately 23,000 square feet. The land on which the
Headquarters Building is located is owned by Stanford University, and Essex owns
a ground leasehold interest in the building and underlying land. The ground
lease for the Headquarters Building is prepaid until its expiration in 2054,
and, unless the lease is extended, the land, together with all improvements
thereon, will revert to Stanford University in 2054.
The following table describes Essex's Properties.
<TABLE>
<CAPTION>
PROPERTY NUMBER OF TOTAL RENTABLE YEAR YEAR OWNERSHIP
NAME/LOCATION UNITS/TENANTS SQUARE FOOTAGE COMPLETED ACQUIRED INTEREST(1)
------------- ------------- --------------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
MULTIFAMILY RESIDENTIAL
PROPERTIES
The Apple 200 Units 146,296 1971 1982 100%
Fremont, CA
Countrywood 137 93,495 1970 1988 100%
Fremont, CA
Marina Cove 292 250,294 1974 1994 100%
Santa Clara, CA
Oak Pointe 390 294,180 1973 1988 100%
Sunnyvale, CA
Pathways 296 197,720 1975 1991 69.3%
Long Beach, CA
Plumtree 140 113,260 1975 1994 100%
Santa Clara, CA
Summerhill Commons 184 139,012 1987 1987 100%
Newark, CA
Summerhill Park 100 78,584 1988 1988 100%
Sunnyvale, CA
Viareggio 116 89,615 1988 1988 100%
San Jose, CA
Villa Rio Vista 286 242,410 1968 1985 100%
Anaheim, CA
Windsor Ridge 216 161,892 1989 1989 100%
Sunnyvale, CA
Foothill Commons 360 288,317 1978 1990 100%
Bellevue, WA
Westbridge 92 104,560 1983 1994 100%
Yuba City, CA
Palisades 192 159,792 1969 1990 100%
Bellevue, WA
Wharfside Pointe 142 119,290 1990 1994 100%
Seattle, WA
Woodland Commons 236 172,316 1978 1990 100%
Bellevue, WA
Santa Fe Ridge 240 262,340 1993 1994 100%
Silverdale, WA
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
PROPERTY NUMBER OF TOTAL RENTABLE YEAR YEAR OWNERSHIP
NAME/LOCATION UNITS/TENANTS SQUARE FOOTAGE COMPLETED ACQUIRED INTEREST(1)
------------- ------------- --------------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Inglenook Court 224 183,624 1985 1994 100%
Bothell. WA
Emerald Ridge 180 144,036 1987 1994 100%
Bellevue, WA
Sammamish View 153 133,590 1986 1994 100%
Bellevue, WA
Wandering Creek 156 124,516 1986 1995 100%
Kent, WA
PARTIALLY OWNED PROPERTIES
The Shores 348 275,888 1988 1995 45%(3)
San Ramon, CA
Bristol Commons 188 142,668 1989 1995 45%(3)
Sunnyvale, CA
------------ ---------
Subtotal 4868 Units 3,917,695
------------ ---------
NEIGHBORHOOD SHOPPING CENTERS
Canby Square 10 Tenants 102,565 1976 1990 100%
Canby, OR
Cedar Mill Place 12 28,392 1975 1990 100%
Portland, OR
Powell Villa Center 10 63,645 1959 1990 100%
Portland, OR
Riviera Plaza 13 48,420 1961 1990 100%
Eugene, OR
Wichita Towne Center 5 38,324 1978 1990 100%
Milwaukie, OR
Garrison Square 14 69,780 1962 1990 100%
Vancouver, WA
------------ ---------
Subtotal 64 tenants 351,126
------------ ---------
OFFICE PROPERTY
Headquarters Building 3 tenants 44,827 1988(2) 1986 100%
Palo Alto, CA
30 TOTAL PROPERTIES: 4,313,648
=========
</TABLE>
(1) For information relating to the encumbrances of the
individual Properties, see pages F-25 and F-26 of
the Notes to Consolidated Financial Statements.
(2) Represents the completion date for a major
renovation.
(3) Actual cash flow received may be more or less than
these percentages.
ITEM 3. LEGAL PROCEEDINGS
Neither Essex nor any of the Properties is presently subject to any material
litigation nor, to Essex's knowledge, is there any material litigation
threatened against Essex 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 Essex.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
quarter ended December 31, 1995.
12
<PAGE> 13
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 for the quarters from the
Company's inception are as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low Close
------------- ---- --- -----
<S> <C> <C> <C>
December 31, 1995 $19.500 $17.250 $19.250
September 30, 1995 $18.250 $16.750 $17.500
June 30, 1995 $18.125 $15.750 $18.125
March 31, 1995 $16.875 $15.3875 $15.875
December 31, 1994 $18.000 $14.625 $15.125
September 30, 1994 $19.000 $17.125 $18.000
June 30, 1994 $19.625 $17.250 $17.675
</TABLE>
The closing price as of March 28, 1996 was $20.000.
Holders
The approximate number of holders of record of the shares of the Company's
common stock was 83 as of February 29, 1996. 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 noncash expenses,
primarily depreciation, in the determination of earnings and profits. The status
of the cash dividends distributed for the years ended December 31, 1995 and 1994
for tax purposes is as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Taxable portion 69.00% 68.00%
Return of capital 31.00% 32.00%
------ ------
100.00% 100.00%
====== ======
</TABLE>
Dividends and Distributions
Since its initial public offering, the Company has paid regular quarterly
dividends to its stockholders. From inception, the Company paid the following
dividends: July 15, 1994, $.08; October 17, 1994, $.4175; January 15, 1995,
$.4175; April 17, 1995, $.4175; July 17, 1995, $.4175; October 16, 1995, $.425;
and January 16, 1996, $.425. 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 restrictions on the
Company's present or future ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected summary financial and operating
information (i) for Essex from June 13, 1994 (completion of Essex's initial
public offering (the "Offering")) through December 31, 1995, (ii) on a pro forma
basis for Essex for the year ended December 31, 1994 and (iii) on a historical
combined basis for the 20 Properties in which the original limited partners in
the Operating Partnership previously held ownership interests, combined with the
financial and operating information of EPC. For the years ended December 31,
1993 and for earlier periods, the historical combined
13
<PAGE> 14
financial information does not include financial information relating to the
properties acquired subsequent to June 13, 1994. The unaudited pro forma
financial and operating information for the year ended December 31, 1994 is
based on the ownership and operation of the 23 Properties owned of the time of
the Offering (including the properties acquired as of the Offering) combined
with the financial and operating information of EPC and is presented as if the
following had occurred on January 1, 1994: (i) the Offering was completed, (ii)
Essex qualified as a REIT, (iii) Essex used the net proceeds from the Offering
and concurrent debt placement to fund a series of asset acquisitions and
mortgage repayments as outlined in the prospectus for the Offering, and (iv)
Essex Management Corporation was formed and certain property and asset
management contracts were assigned to it.
The pro forma financial and operating information should not be considered
indicative of actual results that would have been achieved had the transactions
occurred on the dates or for the periods indicated and do not purport to
indicate results of operations as of any future date or for any future period.
The following table should be read in conjunction with Management's Discussion
and Analysis of Financial Conditions and Results of Operations and with all of
he financial statements and notes thereto included in this report.
14
<PAGE> 15
ESSEX PROPERTY TRUST, INC. CONSOLIDATED ("ESSEX") AND
ESSEX PARTNERS PROPERTIES COMBINED ("EPP")
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Essex Essex For the years ended December 31,
---------------------------------------------------------------------
Historical
---------------------------------------------------------------------
Year Ended June 13, 1994- Pro Forma Jan. 1, 1994-
Dec. 31, 1995 Dec. 31, 1994 1994(5) June 12, 1994 (EPP) 1993 (EPP) 1992 (EPP) 1991 (EPP
------------- -------------- --------- ------------------- ---------- ---------- ---------
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $43,940 $20,413 $35,993 $14,811 $30,429 $28,088 $27,829
Net Income (loss) before
minority interest and
provision for income
taxes $14,090 $4,397 $8,235 $332 $387 ($2,344) ($3,582)
Net Income (loss) after
minority interest $10,604 $3,266 $6,380 $152 ($33) ($2,313) ($3,533)
Net Income per share after
minority interest (1) $1.69 $0.52 $1.02
Common Stock
outstanding
(in thousands) 6,275 6,275 6,275
<CAPTION>
Historical, as of December 31
---------------------------------------------------------------
Essex Essex
1995 1994 1993 (EPP) 1992 (EPP) 1991 (EPP)
---- ---- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate
(before accumulated
depreciation) $284,358 $282,344 $186,447 $183,898 $182,037
Net investment in real
estate 244,077 248,232 158,873 161,808 165,197
Total Assets 273,660 269,065 171,287 172,450 172,644
Total property indebtedness (net or
depreciation) 154,524 150,019 151,301 153,287 154,360
Stockholders' equity 84,729 84,699 7,772 8,844 10,889
<CAPTION>
Essex Essex For the years ended December 31,
---------------------------------------------------------------------
Historical
---------------------------------------------------------------------
Year Ended June 13, 1994- Pro Forma Jan. 1, 1994-
Dec. 31, 1995 Dec. 31, 1994 1994(5) June 12, 1994 (EPP) 1993 (EPP) 1992 (EPP) 1991 (EPP
------------- -------------- --------- ------------------- ---------- ---------- ---------
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Funds from Operations (2) $17,475 $8,947 $16,232
Funds from Operations
applicable to Essex's
stockholders (77.2%) $13,491 $6,906 $12,528
Net cash provided by
operating activities $16,595 $12,100 $4,989 $5,046 $1,226 $126
Net cash used in investing
activities $(4,962) $(94,751) $(1,796) $(2,549) $(1,861) $(5,889)
Net cash (used in)
provided by financing
activities $(10,061) $82,213 $(5,375) $(441) $1,295 $2,726
Net increase (decrease) in
cash and cash
equivalents $1,572 $(438) $(2,182) $2,056 $660 $(3,037)
Total multifamily
residential units (at
end of period) 4,868 4,410 4,410 2,957 2,817 2,817 2,817
Total rentable square feet
of retail properties
and Headquarters
Building (3) 395,953 395,953 395,953 395,953 395,953 377,702 377,702
Total properties (at end
of period) 30 29 29 21 20 20 20
Multifamily residential
property occupancy
rate (4) 97% 96% 96% 95% 95% 95% 95%
Retail properties and
Headquarters Building
occupancy rate (4) 94% 86% 86% 88% 92% 88% 87%
</TABLE>
15
<PAGE> 16
- --------------
(1) Per share amounts are presented only for the year ended December 31, 1995,
the period from June 13, 1994 to December 31, 1994 and the pro forma 1994
period and are based upon respective amounts divided by 6,275,000 shares.
(2) Industry analysts generally consider Funds from Operations to be an
appropriate measure of the performance of an equity REIT. Funds from
Operations represents net income (loss) (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and
joint ventures, if any. Adjustments for unconsolidated partnerships and
joint ventures, if any, will be calculated to reflect Funds from Operations
on the same basis. Management generally considers Funds from Operations to
be a useful financial performance measurement of an equity REIT because it
provides investors with an additional basis to evaluate the performance of
a REIT. Funds from Operations does not represent net income or cash flows
from operations as defined by generally accepted accounting principles
("GAAP") and does not necessarily indicate that cash flows will be
sufficient to fund cash needs. It should not be considered as an
alternative to net income as an indicator of the Company'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 Operating
Partnership's calculation of Funds from Operations. The Company intends to
adopt the revised NAREIT definition of Funds from Operations in 1996 and
will report future earnings in accordance with the revised definition . The
revised definition does not include, among other items, the amortization of
deferred financing costs as an adjustment to net income. Based on the
revised NAREIT definition of Funds from Operations, the Company's Funds
from Operations for 1995 would have been $16,120,000. For information
regarding Funds from Operations for other periods based on the revised
NAREIT definition, see "Item 7. Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Funds from Operations."
(3) Square footage amounts are approximate.
(4) For multifamily residential Properties, occupancy rates for each year are
based on average annual financial occupancy. For retail Properties and the
Headquarters Building, occupancy rates are based on leased and occupied
square footage as of December 31 of each year.
(5) The unaudited pro forma financial and operating information for the year
ended December 31, 1994 is based on the ownership and operation of the 23
Properties owned at the time of the Offering (including the properties
acquired as of the Offering) combined with the financial and operating
information of EPC and is presented as if the following had occurred on
January 1, 1994: (i) the Offering was completed, (ii) Essex qualified as a
REIT, (iii) Essex used the net proceeds from the Offering and concurrent
debt placement to fund a series of asset acquisitions and mortgage
repayments as outlined in the prospectus for the Offering and (iv) Essex
Management Corporation was formed and certain property and asset management
contracts were assigned to it. Pro Forma net cash flows for operating,
investing and financing activities have been omitted because of the
subjectivity involved in the assumptions required for related balance sheet
structure and because of the presence of disclosure of actual cash flow
information for 1994 and 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is based primarily on the consolidated financial
statements of Essex Property Trust, Inc. ("Essex" or the "Company") for the year
ended December 31, 1995 and for the period from June 13, 1994 (commencement of
operations) through December 31, 1994, and the combined financial statements of
Essex Partners Properties ("EPP") for the period from January 1, 1994 through
June 12, 1994 and for the year ended December 31, 1993. The combined financial
statements of EPP combine the balance sheet data and results of operations of
Essex Property Corporation ("EPC") and of various limited partnerships. EPP is
considered the predecessor entity to Essex and the combined financial statements
are presented for comparative purposes. The following discussion also compares
Essex's activities for the year ended December 31, 1995, with the activities for
the year ended December 31, 1994 which include a summation of Essex's and EPP's
results of operations. The discussion also compares the activities for the year
ended December 31, 1994 with EPP's results of operations for the year ended
December 31, 1993.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect a fair statement of the results and all such adjustments are of a normal
recurring nature.
Substantially all the assets of Essex are held by, and substantially all
operations are conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). Essex is the sole general partner and as of December 31, 1995 and
1994, owned a 77.2% general partnership interest in the Operating Partnership.
The Company qualifies as a REIT for Federal income tax purposes.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," section constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Essex to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
16
<PAGE> 17
GENERAL BACKGROUND
Essex's revenues are generated primarily from multifamily residential and
commercial property operations, which accounted for 95%, 91% and 87% of its
revenues for the years ended December 31, 1995, December 31, 1994 and December
31, 1993, respectively. Essex's properties are located in California, Oregon and
Washington. Occupancy levels for Essex's multifamily residential properties in
these markets have generally remained high (averaging approximately 95% over the
last five years).
Essex qualifies as a real estate investment trust ("REIT") for federal income
tax purposes, commencing with the year ending December 31, 1994. In order to
maintain compliance with REIT tax rules, Essex provides fee-based asset
management and disposition services as well as third-party property management
and leasing services through Essex Management Corporation ("EMC"). Essex owns
100% of EMC's 19,000 shares of nonvoting preferred stock. Executives of Essex
own 100% of EMC's 1,000 shares of common stock. Essex has been actively engaged
in the business of acquiring and managing portfolios of non-performing assets
along with institutional investors. Asset management services resulting from
these portfolios are provided by EMC, typically for the term that is required to
acquire, reposition and dispose of the portfolio. Asset management agreements
usually provide for a base management fee calculated as a percentage of the
gross asset value of the portfolio under management, and an incentive fee based
upon the over all financial performance of the portfolio. Accordingly, the fees
earned as a result of these contracts fluctuate as assets are acquired and
disposed. In general, Essex believes, however, that few opportunities to acquire
portfolios of non-performing assets will be available in the near future.
Essex utilized the net proceeds of its initial public offering (the "IPO") to
acquire two multifamily properties for an aggregate of $31,180,000 and to reduce
its outstanding mortgage debt by $60,205,000. A third property, Plumtree
Apartments, had been acquired by EPC in February 1994 and was transferred to the
Operating Partnership upon the completion of the IPO. Subsequent to the
Offering, seven multifamily properties were acquired for an aggregate of
approximately $58,325,000. One of these seven properties has been subsequently
sold. As a result, revenues and operating expenses have generally increased.
Average financial occupancy rates for the year ended December 31, 1995 for
multifamily properties were as follows:
Northern California 98%
Seattle, Washington 96%
Southern California 95%
The commercial properties were 94% occupied (based on square footage) as of
December 31, 1995.
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Total Revenues increased by $8,716,000 or 24.8% to $43,940,000 in 1995 from
$35,224,000 in 1994. Rental revenue increased by $9,399,000 or 29.2% to
$41,640,000 in 1995 from $32,241,000 in 1994. Rental revenue from the Northern
California and Seattle multifamily residential Properties increased by
$8,918,000 or 37.8% to $32,494,000 in 1995 from $23,576,000 in 1994.
Approximately $8,269,000 of the increase in rental revenue was attributable to
the properties which were acquired by Essex concurrent with and after the IPO in
1994 and 1995. Rental revenue increased by $206,000 or 4.7% during 1995 for the
two Properties located in Southern California. Commercial property rental
revenue increased by $149,000 or 3.3% during 1995.
On May 31, 1995 and November 8, 1995 the Company sold Loma Verde and Pacifica
Park, respectively. The net all cash sales price of the two properties was
$12,147,000. The net book value of these assets were $6,134,000 resulting in a
gain on sales of real estate of $6,013,000.
Total Expenses increased by $5,214,000 or approximately 17.1% to $35,709,000 in
1995 from $30,495,000 in 1994. Interest expense increased by $700,000 or 6.8% to
$10,928,000 in 1995 from $10,228,000 in 1994. Such interest expense increase was
primarily due to the acquisition of additional multifamily Properties.
Property operating expenses, which include maintenance and repairs, real estate
taxes, advertising, utilities, and on-site administrative expenses, increased by
$2,885,000 or 26.9% to $13,604,000 in 1995 from $10,719,000 in 1994. Of such
increase, $2,793,000 is attributable to properties acquired concurrent with and
after the IPO in 1994 and 1995.
17
<PAGE> 18
Property and asset management expenses relate to (i) the cost of managing
properties in which certain directors and officers of the Company and their
affiliates hold a minimal economic interest and (ii) the cost of managing
portfolios of real estate and non-performing mortgages. No such expenses were
incurred in the periods following the completion of the IPO. Property and asset
management expenses of $974,000 were incurred prior to the completion of the
IPO. Such expenses are no longer incurred due to the establishment of EMC in
connection with the IPO (the financial results of which are not consolidated
with Essex's financial statements), which has borne all property and asset
management costs since June 13, 1994.
General and administrative expenses represents the cost of Essex's various
acquisition and administrative departments, as well as, partnership,
administration and non-operating expenses. Such expenses increased by $764,000
due primarily to reduced allocations of Essex's expenses to EMC of approximately
$500,000 and the accrual of incentive compensation related to achieving certain
performance benchmarks. Other expenses represent an allocation to Essex of costs
incurred prior to the completion of the IPO by The Marcus & Millichap Company
for executive management, incentive compensation, audit and tax services and
other matters; such expenses have not been borne by Essex since the completion
of the IPO.
Net income after minority interest increased by $7,186,000 to $10,604,000 in
1995 from $3,418,000 in 1994. The increase in net income after minority interest
was primarily due to $6,013,000 gains from the sale of two Properties and
operations from Properties acquired concurrent with and after the IPO in 1994
and 1995.
Comparison of Year Ended December 31, 1994 to Year Ended December 31, 1993
Total Revenues increased by $4,795,000 or 15.8% to $35,224,000 in 1994 from
$30,429,000 in 1993. Rental revenue increased by $5,732,000 or 21.6% to
$32,241,000 in 1994 from $26,509,000 in 1993. Approximately $5,003,000 of the
increase in rental revenue was attributable to the properties acquired in 1994.
Rental revenue from the San Francisco South Bay and Seattle multifamily
residential Properties increased by $398,000 to $18,681,000 in 1994 from
$18,283,000 in 1993. Rental revenue decreased by $130,000 during 1994 for the
two Properties located in southern California. Commercial property rental
revenue increased $461,000 generally as a result of increased leasing activity.
Property and asset management revenues decreased by $1,483,000 or 45.2% to
$1,794,000 in 1994 from $3,277,000 in 1993 due to the transfer of such
activities to EMC upon completion of the IPO. Since the completion of the IPO,
property and asset management services are being provided by EMC, whose results
are not consolidated with the results of Essex. EMC receives an allocation of
Essex's expenses, based on the time and overhead related to those activities.
Total Expenses increased by $453,000 or approximately 1.5% to $30,495,000 in
1994 from $30,042,000 in 1993. Interest expense decreased by $1,647,000 or 14.1%
to $10,228,000 in 1994 from $11,902,000 in 1993. Such interest expense decrease
was primarily due to the net reduction of outstanding mortgage debt that was
paid with the proceeds of the IPO and the two mortgage loans closed in
connection with the IPO. In addition, Essex obtained six mortgage loans after
the IPO related to acquisitions activity.
Property operating expenses, which include maintenance and repairs, real estate
taxes, advertising, utilities and on-site administrative expenses, increased by
$1,371,000 or 14.7% to $10,719,000 in 1994 from $9,348,000 in 1993. The
component of the increase related to properties acquired at or following the
completion of the IPO was $1,700,000 which are partially offset by a reduction
in management costs of $545,000.
Property and asset management expenses relate to (i) the cost of managing
properties in which certain directors and officers of the company and their
affiliates hold a minimal economic interest and (ii) the cost of managing
portfolios of real estate and non-performing mortgages. Such expenses decreased
by $422,000 in 1994 or 30.2% to $974,000 in 1994 from $1,396,000 in 1993. Such
decreases were primarily a result of the establishment of EMC in connection with
the IPO (the financial results of which are not consolidated with Essex's
financial statements), which has borne all property and asset management costs
since June 13, 1994.
General and administrative expenses represent the costs of Essex's various
acquisition and administrative departments as well as partnership administration
and non-operating expenses. Such expenses increased by $75,000 in 1994 compared
to 1993. Other expenses represent an allocation to Essex costs incurred prior to
the completion of the IPO by The Marcus & Millichap Company for executive
management, incentive compensation, audit and tax services and other matters;
since expenses have not been borne by Essex since the completion of the IPO.
18
<PAGE> 19
Net income after minority increased by $3,451,000 to $3,418,000 in 1994 from
$(33,000) in 1993. The increase in net income was largely the result of
increases in rental revenue and decreased interest costs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, Essex had $3,983,000 in cash and cash equivalents, which
management believes should be sufficient to meet its immediate operating cash
requirements. Essex has credit facilities in the committed amount of
approximately $23,000,000. At December 31, 1995 Essex had $18,463,000
outstanding on its lines of credit, with interest rates generally ranging from
7.6% to 8.2%.
Essex's cash balance increased $1,572,000 from $2,411,000 as of December 31,
1994 to $3,983,000 as of December 31, 1995. This increase in cash was the result
of $16,595,000 of cash provided by operating activities, reduced by $4,962,000
of cash used in investing activities and $10,061,000 of cash used in financing
activities. The $4,962,000 of net cash used by investing activities was the
result of $9,516,000 used to purchase a rental property and $7,426,000 used to
invest in corporations and joint ventures, which were offset by $12,147,000 of
proceeds of the sales of two rental properties. The $10,061,000 of net cash used
by financing activities was the result of $13,636,000 of dividends/distribution
paid, partially offset by $4,505,000 of net proceeds in excess of repayments of
mortgage and other notes payable and lines of credit.
As of December 31, 1995, the combined outstanding indebtedness under mortgages
and lines of credit consisted of $94,850,000 in fixed rate debt, (such component
includes variable rate indebtedness subject to interest rate swap agreements),
$27,611,000 in debt based on the Federal Home Loan Bank's 11th District Cost of
Funds index ("the 11th District Debt"), $17,432,000 of variable rate debt based
on The London Interbank Offered Rates ("LIBOR"), $13,600,000 of debt represented
by tax exempt variable rate demand bonds and $1,031,000 in debt based on the
prime lending rate. Essex's 11th District Debt is subject to maximum annual
payment adjustments of 7.5% and a maximum interest rate during the term of the
loans of 13%.
In June 1994, Essex entered into a five-year interest rate protection agreement
covering mortgage notes payable with aggregate balances of $24,133,000 as of
December 31, 1994. The agreements protected Essex from increases in the
thirty-day LIBOR rate in excess of a 6.3125% cap rate on these mortgage notes.
In May 1995, Essex sold this agreement and used the net proceeds to enter into
an interest rate swap agreement extending through June 1999. The interest rate
swap agreement fixes the thirty-day LIBOR rate at 5.79% for mortgage notes
payable with aggregate balances of $18,580,000 as of December 31, 1995.
In connection with the IPO, Essex obtained a commitment from Northwestern Mutual
Life ("NML") to provide up to $50 million in additional mortgage financing,
subject to several requirements of NML including providing additional collateral
satisfactory to NML. During 1995, in connection with the refinance of three
properties, Essex committed to utilize $20.2 million of this financing in a 7
year fixed rate loan with an interest rate of 7.5%. The refinance transaction
closed subsequent to December 31, 1995. Essex believes it will incur
approximately $175,000 in non-cash costs associated with the early retirement of
this debt.
For the year ended December 31, 1995, non-revenue generating capital
expenditures totaled approximately $1,424,000 or an annualized $329 per weighted
average occupancy unit. These expenditure rates are higher than such capital
expenditures per weighted average occupancy unit of $203 for the year ended
December 31, 1994 due to the implementation of upgrade programs that may result
in increased rental revenues. These expenditures do not include the improvements
required in connection with Northwestern Mutual mortgage loans and renovation
expenditures required pursuant to the requirements related to the tax-exempt
variable rate demand bonds. Essex expects to incur in the range of approximately
$1,450,000 or $300 per weighted average occupancy unit in non-revenue generating
capital expenditures for the year ended December 31, 1996. Essex expects that
cash from operations and/or the lines of credit will fund such expenditures.
However, there can be no assurance that the actual expenditures incurred during
1996 and/or the funding thereof will not be materially different that of the
Company's current expectations.
Essex pays quarterly dividends from cash available for distribution. Until it is
distributed, cash available for distribution is invested by the Company
primarily in short-term investment grade securities or is used by the Company to
reduce balances outstanding under its lines of credit.
Essex expects to meet its short-term liquidity requirements by using its initial
working capital and any portion of net cash flow from operations not currently
distributed. Essex 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.
19
<PAGE> 20
Essex expects to meet certain long-term liquidity requirements such as scheduled
debt maturities (including balloon debt payments due in 1996 of approximately
$20.9 million) and repayment of short-term financing of acquisition and
development activities through the issuance of long-term secured and unsecured
debt and offerings by Essex of additional equity securities (or limited
partnership interests in the Operating Partnership).
Subsequent to December 31, 1995, Essex filed a shelf registration statement for
up to $100 million of common stock, preferred stock, depository shares and
warrants to purchase common and preferred stock. The shelf registration
statement was filed on March 7, 1996 and, as of March 29, 1996, had not been
declared effective by the Securities and Exchange Commission.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations an appropriate
measure of performance of an equity REIT. Generally, Funds from Operations
adjusts the net income of equity REITs for non-cash charges such as depreciation
and amortization and non-recurring gains or losses. Management generally
considers Funds from Operations to be a useful financial performance measurement
of an equity REIT because Funds from Operations provides investors with an
additional basis to evaluate the performance of a REIT. Funds from Operations
does not represent net income or cash flows from operations as defined by
generally GAAP and does not necessarily indicate that cash flows will be
sufficient to fund cash needs. It should not be considered as an alternative to
net income as an indicator of the Company'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 stockholders. 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 Operating Partnership's
calculation of Funds from Operations.
The National Association of Real Estate Investment Trusts ("NAREIT"), a leading
industry trade group, has approved a revised definition of Funds from
Operations, which provides that the amortization of deferred financing costs is
no longer to be added back to net income to calculate Funds for Operations.
NAREIT has suggested that REITs adopt this new definition beginning in 1996. The
following table sets forth Essex's calculation of actual Funds from Operations
for 1995 and 1994 and pro forma Funds for Operations for 1994.
<TABLE>
<CAPTION>
For the Proforma
year For the quarter ended For the 6/13/94
ended ----------------------------------------------------- year ended through
12/31/95 12/31/95 9/30/95 6/30/95 3/31/95 12/31/94 12/31/94
----------- ----------- ------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before minority interest $14,090,000 $7,254,000 $2,142,000 $2,682,000 $2,012,000 $8,235,000 $4,397,000
Adjustments:
Depreciation and amortization 8,007,000 1,999,000 2,037,000 2,000,000 1,973,000 7,059,000 4,030,000
Adjustments for
unconsolidated joint ventures 121,000 68,000 51,000 0 0 0 0
Non-recurring items(1)
Gains of the sales of real (6,013,000) (5,224,000) 0 (789,000) 0 0 0
estate
Other non-recurring items 442,000 249,000 26,000 167,000 0 0 0
Minority interest - Pathways (527,000) (155,000) (123,000) (129,000) (120,000) (457,000) (260,000)
----------- ---------- ---------- ---------- ---------- ---------- ----------
Funds from operations -
NAREIT "revised definition" 16,120,000 4,191,000 4,133,000 3,931,000 3,865,000 14,837,000 8,167,000
Amortization of deferred
financing cost 1,355,000 332,000 311,000 349,000 363,000 1,395,000 773,000
----------- ---------- ---------- ---------- ---------- ----------- ----------
Funds from operations -
NAREIT "prior definition" $17,475,000 $4,523,000 $4,444,000 $4,280,000 $4,228,000 $16,232,000 $8,940,000
=========== ========== ========== ========== ========== =========== ==========
Number of Shares (2) 8,130,000 8,130,000 8,130,000 8,130,000 8,130,000 8,130,000 8,130,000
<CAPTION>
For the quarter ended 6/13/94
------------------------- through
12/31/94 9/30/94 6/30/94
----------- ----------- ---------
<S> <C> <C> <C>
Income before minority interest $1,810,000 $2,180,000 $407,000
Adjustments:
Depreciation and amortization 2,056,000 1,649,000 325,000
Adjustments for
unconsolidated joint ventures 0 0 0
Non-recurring items(1)
Gains of the sales of real 0 0 0
estate
Other non-recurring items 0 0 0
Minority interest - Pathways (121,000) (117,000) (22,000)
---------- ---------- --------
Funds from operations -
NAREIT "revised definition" 3,745,000 3,712,000 710,000
Amortization of deferred
financing cost 357,000 346,000 70,000
---------- ---------- --------
Funds from operations -
NAREIT "prior definition" $4,102,000 $4,058,000 $780,000
========== ========== ========
Number of Shares (2) 8,130,000 8,130,000 8,130,000
</TABLE>
(1) Other non-recurring items consist of $288,000 of loss from hedge
termination and $154,000 of loss on the early extinguishment of debt. These
non-recurring items are excluded from the Funds from Operations calculation
since they are non-operational in nature, infrequent in occurrence and
inclusion would distort the comparative measurement of the Company's
performance over time.
(2) Assumes conversion of all outstanding operating partnership interests in
the Operating Partnership into shares of Essex's common stock.
20
<PAGE> 21
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has issued Financial Accounting
Standards (FAS) 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and FAS 123, "Accounting for Stock-Based
Compensation."
Essex has adopted FAS 121 effective January 1, 1996, and believes that adoption
will not have a material impact on Essex's 1996 financial statements. Essex will
adopt the disclosure requirements of FAS 123 in 1996, but continue to account
for its stock option plan under Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees," as permitted under FAS 123.
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.
21
<PAGE> 22
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 21, 1996.
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 21, 1996.
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 21, 1996.
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 21, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Consolidated Financial Statements and Report of KPMG Peat Marwick LLP, independent auditors Page
----
<S> <C>
Independent Auditor's Report F-1
Financial Statements:
Balance Sheets:
Essex Property Trust, Inc. Consolidated as of December 31, 1995 and December 31, 1994 F-2
Statements of Operations:
Essex Property Trust Inc., Consolidated the year ended
December 31, 1995, and for the period from June 13, 1994 to
December 31, 1994; Essex Partners
Properties Combined for periods prior to June 13, 1994 F-3
Statements of Stockholder's Equity:
Essex Property Trust Inc. Consolidated Statements of Stockholder's Equity for the
year ended December 31, 1995, and for the period from June 13, 1994 to December 31, 1994;
Essex Partners Properties combined for periods prior to June 13, 1994 F-4
Statements of Cash Flows:
Essex Property Trust, Inc. Consolidated Statement of Cash Flow for the year ended
December 31, 1995 and for the period June 13, 1994 to December 31, 1994;
Essex Partners Properties Combined for period prior to June 13, 1994 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
(b) Reports on Form 8-K - None
(c) Exhibits
22
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit # Document Page
- --------- -------- ----
<S> <C> <C>
3.1 Articles of Incorporation of Essex Property Trust, Inc. (1)
3.2 Bylaws of Essex Property Trust, Inc. (1)
3.3 Articles of Amendment of Essex, dated April 19, 1994. (1)
3.4 Articles of Amendment and Restatement of Essex, dated June 1, 1994. (1)
3.5 Articles of Amendment and Restatement of Essex dated June 22, 1995, attached
as Exhibit 3.1 to Essex's 10Q as of June 30, 1995. (5)
10.1 Agreement of Limited Partnership for the Operating Partnership. (1)
10.2 Form of Essex Property Trust, Inc. 1994 Employee Stock Incentive Plan (1)
10.3 Form of Essex Property Trust, Inc. 1994 Non-Employee and Director Stock
Incentive Plan. (1)
10.4 Form of the Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan (1)
10.5 Form of Non-Competition Agreement between Essex and each of Keith R. Guericke
and George M. Marcus. (1)
10.6 Contribution Agreement by and among Essex, the Operating Partnership and
the Limited Partners in the Operating Partnership. (1)
10.7 Form of Indemnification Agreement between Essex and its directors and officers. (1)
10.8 Commitment Letter between Northwestern Mutual Life Insurance Company and
the Operating Partnership. (1)
10.9 Summary of terms letter dated April 27, 1994 for three credit facilities from Bank
of America to the Operating Partnership and Essex. (1)
10.10 Real Estate Purchase and Sale Agreement dated as of November 5, 1993 by and
between Seattle-First National Bank and EPC, as amended. (1)
10.11 Counter offer to Real Estate Purchase Agreement dated as of October 15, 1993 by and
between Plumtree Apartments, Ltd. and EPC, as amended. (1)
10.12 Form of Purchase Agreement between EPC and the Former Partners. (1)
10.13 Leasehold agreement between Houghton Mifflin Company and Stanford University
dated as of February 1, 1955, as amended. (1)
10.14 Agreement by and among M&M, M&M REIBC and the Operating Partnership
and Essex regarding Stock Options. (1)
10.15 Co-Brokerage Agreement by and among Essex, the Operating Partnership, M&M
REIBC and Essex Management Corporation. (1)
10.16 General Partnership Agreement of Essex Washington Interest Partners. (1)
10.17 Form of Office Lease between the Operating Partnership and the Marcus and
Millichap Company. (1)
10.18 Form of Management Agreement between the Operating Partnership and Essex
Management Corporation regarding the retail Properties. (1)
10.19 Form of Amended and Restated Agreement among Tenants-in-Common regarding
Pathways Property. (1)
10.20 Form of Promissory Note made by Gilroy Associates and San Pablo Medical
Investors in favor of the Operating Partnership. (1)
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C>
10.21 Loan Agreement between Chaparral-Anaheim Investors--1985 and Security Pacific
National Bank, as amended. (1)
10.22 Promissory Note made by Summerhill Wolfe Associates in favor of Citibank. (1)
10.23 Real Estate Purchase Agreement and Counter offer dated as of February 18, 1994
by and between Marina Cove Apartments and EPC. (1)
10.24 Commitment letter dated May 12, 1994 between First Interstate Bank and the
Operating Partnership. (1)
10.25 Revised Exhibit A to Forms of Holdback Funding Agreements between
Northwestern Mutual Life Insurance Company and the Operating Partnership
and partnerships (in which the Operating Partnership is the general partner) that
own certain of the Washington Properties. (1)
10.26 Form of Investor Rights Agreement between Essex and the Limited Partners of
the Operating Partnership. (1)
10.27 Assumption and Modification Agreement dated May 12, 1994 by and among Citibank,
Summerhill Wolfe Associates and the Operating Partnership (1)
10.28 Revolving credit agreement between Essex and First Interstate Bank,
attached as Exhibit 10.1 to Essex's 10Q as of June 30, 1994. (2)
10.29 Standing loan agreement between Essex and Bank of America for
$15,250,000, attached as Exhibit 10.2 to Essex's 10Q as of June 30, 1994. (2)
10.30 Standing loan agreement between Essex and Bank of America for
$8,925,000, attached as Exhibit 10.3 to Essex's 10Q as of June 30, 1994. (2)
10.31 Form of Promissory Note to be made by San Pablo Medical Investors, Ltd.
and Gilroy Associates in favor of the Operating Partnership and forms of
documents relating thereto. (1)
10.32 Promissory notes for $3,400,000, $10,000,000 and $42,000,000 evidencing
amounts payable to Northwestern mutual Life Insurance Company, attached
as Exhibit 10.5 to Essex's 10Q as of June 30, 1994. (2)
10.35 Real Estate purchase agreement for Santa Fe Ridge Apartments. (4)
10.36 $12.58 million Promissory Note to World Savings and Loan Association. (4)
10.37 $6.3 million Promissory Note to World Savings and Loan Association. (4)
10.38 $6.7 million Promissory Note to World Savings and Loan Association. (4)
10.39 $13.61 million Promissory Note secured by deeds of trust to Bank of America. (4)
10.40 Revolving credit agreement between Essex and Bank of America, attached as
Exhibit 10.4 to Essex's 10Q as of June 30, 1994. (2)
10.41 Interest rate protection agreement dated June 10, 1994, attached as Exhibit 10.6
to Essex's 10Q as of June 30, 1994. (2)
10.42 Purchase agreement for Inglenook Court Apartments, Emerald Ridge Apartments
and Sammanish View Apartments, attached as an Exhibit to Form 8K dated
November 21, 1994. (3)
12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges (6)
21.1 List of Subsidiaries of Essex Property Trust, Inc. (1)
</TABLE>
24
<PAGE> 25
(1) Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-11 (Registration No.
33-76578), which became effective on June 6, 1994.
(2) Incorporated by reference to the Company's report on Form 10Q for
the quarter ended June 30, 1994.
(3) Incorporated by reference to the Company's report on Form 8K filed
as of November 21, 1994.
(4) Incorporated by reference to the identically number exhibit to the
Company's report on Form 10K for the year ended December 31, 1994.
(5) Incorporated by reference to the Company's report on Form 10Q for
the quarter ended June 30, 1995.
(6) Incorporated by reference to Exhibit 12.1 to the Company's
Registration Statement on Form S-3 (File No. 333-2054).
25
<PAGE> 26
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to its
Annual Report or Form 10-K filed on Form 10-K/A to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: June 3, 1996 ESSEX PROPERTY TRUST, INC.
By: /s/ Michael J. Schall
------------------------------------
Michael J. Schall
Executive Vice President and Chief
Financial Officer
26
<PAGE> 27
Independent Auditors' Report
The Board of Directors
Essex Property Trust, Inc.:
We have audited the accompanying consolidated balance sheets of Essex Property
Trust, Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows of Essex Property
Trust, Inc. for the year ended December 31, 1995, and the period June 13, 1994
through December 31, 1994 and of Essex Partners Properties (the Predecessor) for
the period January 1, 1994 through June 12, 1994 and the year ended December 31,
1993. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule of Real Estate and
Accumulated Depreciation of Essex Property Trust, Inc. as of December 31, 1995.
These consolidated financial statements and financial statement schedule are the
responsibility of the management of Essex Property Trust, Inc. and the
Predecessor. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Essex Property
Trust, Inc. as of December 31, 1995 and 1994, and the results of their
operations and cash flows of Essex Property Trust, Inc. and the Predecessor for
the years ending December 31, 1995 and 1993 and for the periods June 13, 1994
through December 31, 1994 and January 1, 1994 through June 12, 1994 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
San Francisco, California KPMG PEAT MARWICK LLP
February 7, 1996
F-1
<PAGE> 28
ESSEX PROPERTY TRUST, INC.
Consolidated Balance Sheets
December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Real estate:
Rental properties:
Land and land improvements $ 61,738 $ 62,092
Buildings and improvements 222,620 220,252
-------- --------
284,358 282,344
Less accumulated depreciation (40,281) (34,112)
-------- --------
244,077 248,232
Investments 8,656 1,138
-------- --------
252,733 249,370
Cash and cash equivalents 3,983 2,411
Notes and other related party receivables 4,780 4,441
Notes and other receivables 5,130 5,254
Prepaid expenses and other assets 1,944 1,157
Deferred charges, net 5,090 6,432
-------- --------
$273,660 $269,065
======== ========
Liabilities and Stockholders' Equity
Mortgage notes payable 136,061 135,019
Lines of credit 18,463 15,000
Accounts payable and accrued liabilities 2,964 3,037
Dividends payable 3,455 3,394
Other liabilities 1,565 1,368
-------- --------
Total liabilities 162,508 157,818
Minority interest 26,423 26,548
Stockholders' equity:
Common stock, $.0001 par value, 670,000,000 shares
authorized, 6,275,000 shares issued and outstanding 1 1
Additional paid-in capital 112,070 112,070
Accumulated deficit (27,342) (27,372)
-------- --------
Total stockholders' equity 84,729 84,699
-------- --------
$273,660 $269,065
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 29
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Essex Property Trust, Inc. Essex Partners Properties
-------------------------- -------------------------
June 13, January 1,
Year ended to to Year ended
December 31, December 31, June 12, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental $41,640 $19,499 $12,742 $26,509
Property and asset management -- -- 1,794 3,277
Interest and other income 2,300 914 275 643
------- ------- ------- -------
43,940 20,413 14,811 30,429
------- ------- ------- -------
Expenses:
Property operating expenses:
Maintenance and repairs 3,811 1,725 1,108 2,364
Real estate taxes 3,371 1,601 1,120 2,330
Utilities 2,974 1,396 834 1,853
Administrative 2,592 1,297 922 2,158
Advertising 299 149 142 327
Insurance 557 284 141 316
Depreciation and amortization 8,007 4,030 2,598 5,537
------- ------- ------- -------
21,611 10,482 6,865 14,885
------- ------- ------- -------
Interest 10,928 4,304 5,924 11,902
Amortization of deferred financing costs 1,355 773 96 219
General and administrative 1,527 457 306 688
Loss from hedge termination 288 -- -- --
Property and asset management -- -- 974 1,396
Other -- -- 314 952
------- ------- ------- -------
Total expenses 35,709 16,016 14,479 30,042
------- ------- ------- -------
Income before gain on sale of real estate, provision for income
taxes, minority interests and extraordinary item 8,231 4,397 332 387
Gain on sales of real estate 6,013 -- -- --
Provision for income taxes -- -- (267) (581)
Minority interest (3,486) (1,131) 87 161
------- ------- ------- -------
Income before extraordinary item 10,758 3,266 152 (33)
Extraordinary item:
Loss on early extinguishment of debt (154) -- -- --
------- ------- ------- -------
Net income (loss) $10,604 $ 3,266 $ 152 $ (33)
======= ======= ======= =======
Per share data:
Net income per share from operations before extraordinary item $ 1.71 .52
Extraordinary item - debt extinguishment .02 --
------- -------
Net income per share $ 1.69 $ .52
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 30
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Retained
Common stock Additional earnings/
----------------- paid-in (Accumulated
Shares Amount capital deficit) Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 -- $ -- $ -- $ 8,844 $ 8,844
Contributions -- -- -- 100 100
Distributions -- -- -- (1,139) (1,139)
Net loss -- -- -- (33) (33)
----- ---- ------- -------- --------
Balance at December 31, 1993 -- -- -- 7,772 7,772
Distributions -- -- -- (1,273) (1,273)
Net income through June 12, 1994 -- -- -- 152 152
----- ---- ------- -------- --------
Balance at June 12, 1994 -- -- -- 6,651 6,651
Net proceeds from the initial public offering 6,275 1 112,070 -- 112,071
Effect of the initial public offering -- -- -- (5,658) (5,658)
Recognition of minority interest -- -- -- (25,889) (25,889)
----- ---- ------- -------- --------
Balances after the reorganization and offering 6,275 1 112,070 (24,896) 87,175
Net income -- -- -- 3,266 3,266
Dividends declared -- -- -- (5,742) (5,742)
----- ---- ------- -------- --------
Balances at December 31, 1994 6,275 1 112,070 (27,372) 84,699
Net income -- -- -- 10,604 10,604
Dividends declared -- -- -- (10,574) (10,574)
----- ---- ------- -------- --------
Balances at December 31, 1995 6,275 $ 1 $112,070 $(27,342) $ 84,729
===== ==== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 31
ESSEX PROPERTY TRUST, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Essex Property Trust, Inc Essex Partners Properties
--------------------------- -------------------------
Year ended June 13, to January 1, Year ended
December 31, December 31, to June 12, December 31,
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 10,604 $ 3,266 $ 152 $ (33)
Minority interest 3,003 892 (87) (161)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sales of real estate (6,013) -- -- --
Equity income of limited partnerships (92) -- -- --
Loss on early extinguishment of debt 154 -- -- --
Loss from hedge termination 62 -- -- --
Depreciation and amortization 8,007 4,030 2,598 5,537
Amortization of deferred financing costs 1,355 773 96 219
Changes in operating assets and liabilities:
Other receivables (48) (71) 1,848 (490)
Prepaid expenses and other assets (561) 3,626 (1,396) 549
Accounts payable and accrued liabilities (73) 685 691 345
Other liabilities 197 (1,101) 1,087 (920)
-------- --------- ------- -------
Net cash provided by operating activities 16,595 12,100 4,989 5,046
-------- --------- ------- -------
Cash flows from investing activities:
Additions to rental properties (9,516) (84,940) (1,796) (2,549)
Issuance of notes receivable (500) (8,673) -- --
Repayments of notes receivable 333 -- -- --
Investments in corporations and joint ventures (7,426) (1,138) -- --
Dispositions of real estate 12,147 -- -- --
-------- --------- ------- -------
Net cash used in investing activities (4,962) (94,751) (1,796) (2,549)
-------- --------- ------- -------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable
and lines of credit 21,700 128,904 -- 2,700
Repayment of mortgage and other notes payable
and lines of credit (17,195) (138,434) (2,113) (3,486)
Additions to deferred charges (930) (7,085) -- (47)
Additions to payable to related parties -- 190 919 1,431
Repayment of payable to related parties -- (4,668) 2,908 --
Net proceeds from stock offering -- 112,071 -- --
Net payments made in connection with the reorganization -- (4,721) -- --
Contributions from partners -- -- -- 100
Distributions to minority interest/partners (3,123) -- (1,273) (1,139)
Dividends paid (10,513) (4,044) -- --
-------- --------- ------- -------
Net cash (used in) provided by financing activities (10,061) 82,213 (5,375) (441)
-------- --------- ------- -------
Net increase (decrease) in cash and cash equivalents $ 1,572 $ (438) $(2,182) $ 2,056
Cash and cash equivalents at beginning of period 2,411 2,849 5,031 2,975
-------- --------- ------- -------
Cash and cash equivalents at end of period $ 3,983 $ 2,411 $ 2,849 $ 5,031
======== ========= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,927 $ 3,562 $ 6,584 $11,806
======== ========= ======= =======
Supplemental disclosure of non-cash investing and
financing activities:
Mortgage note payable assumed in connection
with purchase of real estate $ -- $ -- $ 9,161 $ --
======== ========= ======= =======
Dividends payable $ 3,455 $ 3,394 $ -- $ --
======== ========= ======= =======
</TABLE>
See note 1 for additional supplemental disclosure of non-cash activities.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 32
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(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 $112.1 million were used to acquire an
approximate 77.2% general partnership interest in the Operating
Partnership.
The limited partners own an aggregate 22.8% interest in the Operating
Partnership. The limited partners may convert their interests into
shares of common stock or cash based upon the trading price of the
common stock at the conversion date. The Company has reserved
1,855,000 shares of common stock for such conversions. These
conversion rights may be exercised by the limited partners at any
time through 2024.
Concurrent with the Offering, two mortgage loans were closed,
generating net proceeds of $66.2 million. The Operating Partnership
used the net proceeds from the Offering and the two mortgage loans as
follows: (i) $146,600 to repay indebtedness, (ii) $31,200 to acquire
two multi-family properties, and (iii) $500 to pay expenses related
to the Offering.
The net effect of certain transactions resulting from the
reorganization and Offering was charged directly to stockholders'
equity. Such transactions, which include payments for limited
partnership interests in predecessor partnerships contributed to the
Operating Partnership, repayment of an affiliate line of credit
securing two contributed properties, issuance of a note receivable to
the minority interest partners in Pathways and the adjustments for
EPC assets and liabilities which were not transferred to the
Operating Partnership, are reflected in the accompanying consolidated
statements of stockholders' equity for the year ended December 31,
1994. The charge of $5,658 to stockholders' equity is comprised of
the following:
(Continued)
F-6
<PAGE> 33
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
<TABLE>
<S> <C>
Net effect of Offering
Distributions to partners
Repayment of an affiliate line of credit securing two
contributed properties $ 6,750
Limited partner buyouts and related costs 2,321
-------
9,071
Issuance of note receivable to the minority interest
partners in Pathways (4,800)
EPC net assets which were not transferred to the
Operating Partnership
Assets (primarily accounts receivable unrelated to
property operations and non-controlling interest
in partnerships) 5,687
Liabilities of EPC not repaid or assumed by the
Operating Partnership (4,300)
-------
1,387
-------
$ 5,658
=======
</TABLE>
Of these amounts, $937 represents the net effect of non-cash transactions in
1994.
The consolidated financial statements include the combined financial statements
of Essex Partners Properties (the Predecessor), the predecessor to the Company,
for the period January 1 to June 12, 1994 and the year ended December 31, 1993.
The combined financial statements of the Predecessor include Essex Property
Corporation and the combined accounts of 17 limited partnerships in which a
majority economic ownership was controlled by EPC or its affiliates.
All significant intercompany balances and transactions have been eliminated in
the consolidated financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(Continued)
F-7
<PAGE> 34
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(2) Summary of Significant Accounting Policies
Real Estate
Rental Properties:
Rental properties are recorded at cost less accumulated depreciation.
Depreciation on rental properties has been provided over the estimated
useful lives of 3 to 40 years using the straight-line method. The carrying
costs of rental properties are adjusted, if necessary based on changes and
circumstances, to reflect a permanent impairment in the value of the assets
or in the case of properties to be disposed of, the excess of the carrying
value over net realizable value. No reductions for impairment in value of
rental properties are recorded as of December 31, 1995 and 1994.
The Company will adopt Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, effective January 1, 1996. In the normal course of
business, when it determines that a property should be disposed of, the
Company will discontinue the periodic depreciation of that property in
accordance with this Statement. In addition, whenever events or changes in
circumstances indicate that the carrying amount of a property 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.
Management of the Company believes that the implementation of this Statement
will not have a material effect on the consolidated financial statements of
the Company.
Maintenance and repair expenses are charged to operations as incurred. Asset
replacements and improvements are capitalized and depreciated over their
estimated useful lives.
Rental properties are pledged as collateral for the related mortgage notes
payable.
Investments:
The Company accounts for its investments in joint ventures and corporations
using either the equity method or the cost method of accounting.
(Continued)
F-8
<PAGE> 35
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(2) Summary of Significant Accounting Policies, Continued
Cash Equivalents
Highly liquid investments with a maturity of three months or less when
purchased are classified as cash equivalents.
Revenues
For residential properties, rental revenue is reported on the accrual basis
of accounting. For the retail and corporate properties, rental income is
accrued on the straight-line basis over the terms of the leases. Deferred
rent receivable relating to such leases has been included in prepaid
expenses and other assets in the accompanying consolidated balance sheets.
Property management fees of the Predecessor were based on a percentage of
rental receipts of properties managed and recognized as the related rental
receipts were collected. Asset management fees were based on a percentage of
assets managed and recognized monthly as earned.
Deferred Charges
Deferred charges are principally comprised of mortgage loan fees and costs
which are amortized over the terms of the related mortgage notes in a manner
which approximates the effective interest method; an interest rate
protection agreement which is amortized over the five-year term of the
agreement; and prepaid interest on one mortgage note payable which is
amortized over the four-year prepayment term in a manner which approximates
the effective interest method.
Interest Rate Protection and Swap Arrangements
The Company will from time to time use interest rate protection and swap
agreements to reduce its interest rate exposure on specific variable rate
loans. The cost of such arrangements is capitalized and amortized over the
term of the agreement. If the agreement is terminated the gain or loss on
termination is deferred and amortized over the remaining term of the
agreement or reflected in income on repayment of the related debt.
Income Taxes
The Company is taxed as a real estate investment trust (REIT) under Sections
856 to 860 of the Internal Revenue Code of 1986, as amended (the Code). A
REIT is generally not subject to federal income tax on that portion of its
income that qualifies as REIT taxable income provided
(Continued)
F-9
<PAGE> 36
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
that it distributes at least 95 percent of its taxable income to its
shareholders and complies with certain other requirements. Accordingly, no
provision for federal income taxes has been made in the accompanying
consolidated financial statements for the year ended December 31, 1995 and the
period June 13 to December 31, 1994, as the Company believes it is in compliance
with the Code.
(Continued)
F-10
<PAGE> 37
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(2) Summary of Significant Accounting Policies, Continued
Prior to June 13, 1994, income taxes were not provided for on the taxable
income of the combined partnerships because the taxable income or loss was
included in the income tax returns of the individual partners. Income taxes
were provided for EPC, which was included in the consolidated tax return
filed by its parent company, The Marcus & Millichap Company (M&M). Income
tax expense of $267 and $581 for 1994 and 1993, respectively, was allocated
to EPC by M&M based upon the effective rates applicable to M&M.
Per Share Data
Net income per share is computed based upon 6,275,000 weighted average
shares outstanding.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
with the current year presentation.
(3) Real Estate
Rental Properties:
Rental properties consists of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Land and Buildings
land - and - Accumulated
improvements improvements Total depreciation
------------ ------------ ----- ------------
<S> <C> <C> <C> <C>
December 31, 1995:
Apartment properties $ 57,672 $193,871 $251,543 $ 34,943
Retail and corporate 4,066 28,749 32,815 5,338
-------- -------- -------- --------
$ 61,738 $222,620 $284,358 $ 40,281
======== ======== ======== =======
December 31, 1994:
Apartment properties $ 58,028 $192,291 $250,319 $ 29,704
Retail and corporate 4,064 27,961 32,025 4,408
-------- -------- -------- --------
$ 62,092 $220,252 $282,344 $ 34,112
======== ======== ======== ========
</TABLE>
(Continued)
F-11
<PAGE> 38
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(3) Real Estate, Continued
The properties are located in California, Oregon and Washington. As a result
of this geographic concentration, 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.
At December 31, 1995, one of the Company's rental properties in Northern
California with a carrying amount of $7,326 is held for sale.
During the year ended December 31, 1995, the Company sold to third parties
two properties for cash of $12,147. The net book value of these assets were
$6,134 resulting in a gain on sales of real estate of $6,013.
For the years ended December 31, 1995, 1994 and 1993, depreciation expense
on real estate was $7,978, $6,562 and $5,484, respectively, and amortization
of capitalized leasing commissions was $29, $66 and $53, respectively.
Investments:
In connection with the reorganization, the Operating Partnership obtained
all of the 19,000 shares of the non-voting preferred stock of Essex
Management Corporation (EMC). Management of the Company owns 100 percent of
the common stock of EMC. EMC was formed to provide property and asset
management services to various partnerships not controlled by the Company,
along with the neighborhood shopping centers owned by the Company. The
Company accounts for its investment in EMC on the equity method of
accounting.
In August 1994, the Operating Partnership obtained all of the 31,800 and
62,500 shares of non-voting preferred stock of Essex Fidelity I Corporation
(Fidelity I) and Essex Sacramento, Inc. (Sacramento), respectively.
Management of the Company owns 100 percent of the common stock of Fidelity I
and Sacramento. Fidelity I holds a 20 percent equity interest in Blythe,
Limited Partnership, which was formed to acquire, manage and dispose of a
portfolio of mortgages and real estate purchased from a federal savings
bank. Sacramento holds a 20 percent equity interest in Golden Bear Homes I -
IV, Limited Partnerships, which were formed to acquire, manage and dispose
of residential real properties purchased from a third party asset management
company.
During 1995, Fidelity I and Sacramento contributed their respective
interests in Blythe, Limited Partnership and Golden Bear Homes I - IV,
Limited Partnerships to a new general partnership, Essex Fidelity Sacramento
Partners (EFSP). Profits and losses of EFSP are allocated 32 percent to
Fidelity I and 68 percent to Sacramento, subject to certain limitations
defined in the partnership agreement. This revised structure facilitates the
sharing of common resources between these
(Continued)
F-12
<PAGE> 39
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
investments. The Company accounts for its investments in Fidelity and
Sacramento on the cost method of accounting.
During 1995, the Operating Partnership acquired limited partnership
interests in Essex Bristol Partners (Bristol), Essex San Ramon Partners (San
Ramon) and Jackson School Village, L.P. (JSV). Bristol and San Ramon were
formed to acquire, own and operate residential rental properties located in
Sunnyvale, California and San Ramon, California, respectively. The Company
provides management services to Bristol and San Ramon. JSV was formed to
develop and operate a 200-unit garden style apartment community in
Hillsboro, Oregon. The general partner in JSV provides development services
to the partnership. The Company accounts for its investments in Bristol, San
Ramon and JSV on the equity method of accounting.
(Continued)
F-13
<PAGE> 40
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(3) Real Estate, Continued
The shares of non-voting preferred stock in EMC, Fidelity I and Sacramento
are entitled to a preferential dividend of $0.80 per share per annum.
Through these preferred stock investments, the Operating Partnership will be
eligible to receive a preferential liquidation value of $10.00 per share
plus all cumulative and unpaid dividends.
Equity basis income and loss and distributions received from investments
accounted for on the cost method of accounting are included in interest and
other income.
Investments consists of the following as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Investments in joint ventures:
Limited partnership interest of 45% in Essex Bristol
Partners $2,101 $ --
Limited partnership interest of 48% in Essex
San Ramon Partners 3,703 --
Limited partnership interest of 49.9% in Jackson
School Village, L.P. 1,670 --
------ ------
7,474 --
Investments in corporations:
Essex Management Corporation - 19,000 shares of
preferred stock 190 190
Essex Fidelity I Corporation - 31,800 shares of
preferred stock 331 321
Essex Sacramento Corporation - 62,500 shares of
preferred stock 627 627
------ ------
1,148 1,138
Other investments 34 --
------ ------
$8,656 $1,138
====== ======
</TABLE>
(Continued)
F-14
<PAGE> 41
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(4) Receivables
Receivables consists of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Notes and other related party receivables:
Notes receivable from Fidelity I and Sacramento, bearing
interest at 9%, due on demand $3,540 $3,873
Notes receivable from Fidelity I and JSV, bearing interest
at 9.5-10%, due 2015 500 --
Other related party receivables 740 568
------ ------
$4,780 $4,441
====== ======
</TABLE>
Other related party receivables at December 31, 1995 of $740 consist
primarily of unreimbursed expenses due from EMC and acquisition cost-related
reimbursements due from Essex San Ramon Partners. Related party receivables
at December 31, 1994 of $568 are comprised of unreimbursed expenses due from
EMC and accrued interest income due from Fidelity I and Sacramento.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Notes and other receivables:
Note receivable from the co-tenants in the Pathways
property, interest payable monthly at 9%, principal due
June 2001 $4,800 4,800
Other receivables 330 454
------ ------
$5,130 $5,254
====== ======
</TABLE>
(5) Related Party Transactions
Effective June 13, 1994, 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. Management believes the business unit allocation methodology so
applied is reasonable. Expenses allocated to EMC for the years ended
December 31, 1995 and 1994 totaled $2,116 and $1,139, respectively, and are
reflected as a reduction in general and administrative expenses in the
accompanying consolidated statements of operations.
(Continued)
F-15
<PAGE> 42
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(5) Related Party Transactions, Continued
Effective June 13, 1994, EMC provides property management services to the
Company's neighborhood shopping centers. The fees paid by the Company for
the year ended December 31, 1995 and 1994 were $108 and $72, respectively,
and are included in administrative expense in the accompanying consolidated
statements of operations.
Prior to June 13, 1994, EPC provided property management, asset management
and gardening services to related partnerships which are not included in the
accompanying consolidated financial statements. Fees received for these
services totaled $1,794 and $2,415 for the period ended June 12, 1994 and
the year ended December 31, 1993, respectively, and are included in property
and asset management fees in the accompanying consolidated statements of
operations.
Other expenses in the accompanying consolidated statements of operations of
$314 and $952 for the period ended June 12, 1994 and the year ended December
31, 1993, respectively, represents the Predecessor's share of overhead costs
incurred by M&M and allocated among its subsidiaries.
Included in rental income in the accompanying consolidated statements of
operations is related party rents earned from space leased to M&M, including
operating expense reimbursements, of $675, $660 and $594 for the years ended
December 31, 1995, 1994 and 1993, respectively.
During the year ended December 31, 1995, the Company paid brokerage
commissions totaling $405 to M&M on the sale of real estate. The commissions
are reflected as a reduction of the gain on sales of real estate in the
accompanying consolidated statements of operations.
Included in other income for the year ended December 31, 1995 is $183,
representing dividends from Essex Sacramento, equity income from EMC and
management fees and equity income from Essex Bristol Partners and Essex San
Ramon Partners. Interest income includes $358 and $118 earned principally
under the notes receivable from Essex Fidelity I and Essex Sacramento for
the years ended December 31, 1995 and 1994, respectively.
Included in accounts payable and accrued liabilities as of December 31, 1995
and 1994 are payables to related parties totaling $217 and $377,
respectively, representing temporary borrowings and unreimbursed expenses.
These payables are non-interest bearing and are due on demand.
(Continued)
F-16
<PAGE> 43
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(6) Mortgage Notes Payable
Mortgage notes payable consist of the following at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Mortgage notes payable to commercial bank, secured by deeds of trust,
bearing interest at the lower of .9% over the LIBOR rate or the bank's
prime rate, principal and interest payments due monthly, remaining
principal due June 1999 $ 18,580 $ 24,133
Mortgage notes payable to savings institutions, secured by deeds of
trust, bearing interest at 2.25% to 2.75% over the Federal Reserve
11th District cost of funds rate, payable in monthly principal and
interest installments through 2024 27,611 30,367
Mortgage notes payable to mutual life insurance company, secured by
deeds of trust, bearing interest at 7.45%, interest only payments due
through June 1996, monthly principal and interest installments due
thereafter, final principal payment of $46,064 due June 2001 56,000 54,684
Mortgage note payable to commercial bank, secured by deed of trust,
bearing interest at 6.25% until April 1998, 9.31% thereafter, payable
in monthly principal and interest installments, remaining principal
due February 2002 12,170 12,225
Mortgage notes payable to a life insurance company, secured by deeds of
trust, bearing interest at 8.93%, interest only payments due through
March 1997, monthly principal and interest installments due
thereafter, final principal payment of $6,853 due April 2005 8,100 --
Multifamily housing demand mortgage revenue bonds secured by deeds of
trust on rental properties and guaranteed by letters of credit,
payable monthly at a variable rate as defined in the Loan Agreement
(approximately 3.25% for December 1995), plus credit enhancement and
underwriting fees of approximately 1.9%. The bonds are convertible to
a fixed rate. Among the terms imposed on the properties which are
secured by these bonds is that twenty percent of the units are subject
to tenant income qualification criteria. Principal balances are due in
full at the maturity dates of May and November 2025 13,600 --
Mortgage note payable to commercial bank, secured by deeds of trust,
bearing interest at 2% over the LIBOR rate or 1% over the bank's prime
rate, payable in monthly principal and interest installments through
October 1999 -- 13,610
-------- --------
$136,061 $135,019
======== ========
</TABLE>
(Continued)
F-17
<PAGE> 44
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(6) Mortgage Notes Payable, Continued
The aggregate scheduled maturities of mortgage notes payable are as follows:
<TABLE>
Year ending December 31,
------------------------
<S> <C>
1996 $ 2,421
1997 3,215
1998 3,157
1999 18,608
2000 3,237
Thereafter 105,423
--------
$136,061
========
</TABLE>
As of December 31, 1995, the thirty-day LIBOR rate was 5.75%, the prime rate
was 8.5% and the Federal Reserve 11th District cost of funds rate was 5.12%.
In June 1994, the Company entered into a five-year interest rate protection
agreement covering mortgage notes payable with aggregate balances of $24,133
as of December 31, 1994. The agreement protected the Company from increases
in the thirty-day LIBOR rate in excess of the 6.3125% cap rate. In May 1995,
the Company sold this agreement and used the net proceeds to enter into an
interest rate swap agreement extending through June 1999. The interest rate
swap agreement fixes the thirty-day LIBOR rate at 5.79% for mortgage notes
payable with aggregate balances of $18,580 as of December 31, 1995.
In June 1994, the Company paid $1,180 to enter into a five-year interest
rate protection agreement covering mortgage notes payable with aggregate
balances of $24,133 as of December 31, 1994. The agreement protected the
Company from increases in the thirty-day LIBOR rate in excess of the 6.3125%
cap rate. In May 1995, the Company sold this agreement for $542 and incurred
a loss on termination of the agreement of $419 which was deferred and is
being amortized over the remaining term of the agreement. During the time
the agreement was in effect, LIBOR did not exceed 6.3125%.
The Company used the proceeds of $542 from the sale of the five-year
interest rate protection agreement to enter into an interest rate swap
agreement extending through June 1999. The interest rate swap agreement
fixes the thirty-day LIBOR rate at 5.79% for mortgage notes payable with
aggregate balances of $18,580 as of December 31, 1995. As of December 31,
1995, the Company incurred net interest expense of $1,621 relating to the
mortgage notes payable covered
(Continued)
F-18
<PAGE> 45
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
by the interest rate swap agreement. The interest expense is net of $19
received by the Company as a result of the agreement.
In December 1995, the Company paid $531 to enter into a seven-year interest
rate protection agreement in anticipation of acquisition of related debt.
Because the related debt was not acquired as had been anticipated, the
interest rate protection agreement was terminated, and the Company
recognized a loss of $226 as of December 31, 1995.
During 1995, the Company charged $288 to income representing $62 of
amortization of deferred costs relating to the termination of the five-year
interest rate protection agreement and $266 of termination costs relating to
the unmatched position taken on the seven-year interest rate protection
agreement.
During the year ended December 31, 1995, the Company refinanced two
mortgages and incurred a loss on the early extinguishment of debt of $154
related to the write off of the unamortized loan fees.
(7) Lines of Credit
As of December 31, 1995 and 1994, the Company has the following lines of
credit with commercial banks:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Secured $11,600 line of credit, interest payable monthly at the lower of
1% over the banks' prime rate or 2% over the LIBOR rate, expiring June
30, 1996. The outstanding principal as of June 30, 1996 will be due in
equal monthly installments of principal with interest through June
1999 $ 7,883 $ 5,100
Secured $12,000 line of credit, interest payable monthly at the lower of
1.85% over the LIBOR rate or .50% over the bank's prime rate, expiring
December 13, 1996 10,580 9,900
------- -------
$18,463 15,000
======= =======
</TABLE>
(Continued)
F-19
<PAGE> 46
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(8) Leasing Activity
The rental operations of the Company include apartment properties, which are
rented under short term leases (generally, lease terms of three to twelve
months), and retail properties and the headquarters building, which are
rented under cancelable and noncancelable operating leases, certain of which
contain renewal options. Future minimum rental activity for the apartment
properties is not included in the following schedule due to the short-term
nature of the leases.
Future minimum rentals due under noncancelable operating leases with tenants
of the retail properties and the headquarters building are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1996 $3,441
1997 3,146
1998 2,665
1999 2,119
2000 1,691
Thereafter 6,209
-------
$19,271
=======
</TABLE>
Included in this schedule is $526 due annually from M&M through May 1999.
In addition to minimum rental payments, retail and headquarters building
tenants pay reimbursements for their pro rata share of specified operating
expenses. Such amounts totaled $1,018, $1,074 and $804 for the years ended
December 31, 1995, 1994 and 1993, respectively, and are included as rental
income and operating expenses in the accompanying consolidated statements of
operations. Certain of these leases also provide for the payment of
additional rent based on a percentage of the tenants' revenues.
(9) Fair Value of Financial Instruments
There is no quoted market value available for any of the Company's financial
instruments. Management believes that the carrying amounts of its financial
instruments, which include investments in preferred stock, notes receivable
and mortgage and other notes payable approximate fair value as of December
31, 1995 because interest rates and yields from these instruments are
consistent with yield or such instruments currently available to the Company
for similar instruments.
(Continued)
F-20
<PAGE> 47
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(10) Stock Option Plans
The Company has adopted the Essex Property Trust, Inc. 1994 Employee Stock
Incentive Plan and 1994 Non-Employee and Director Stock Incentive Plan
(together, the Stock Incentive Plans) to provide incentives to attract and
retain officers, directors and key employees. The Stock Incentive Plans
provide 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 Plans, the total number of shares available for grant is
approximately 495,400. The Board of Directors (the Board) may adjust the
aggregate number and kind of shares reserved for issuance. Participants in
the Stock Incentive Plans are selected by the Compensation Committee of the
Board, which is comprised of independent directors. The Compensation
Committee is authorized to establish the exercise price; however, the
exercise price cannot be less than 100 percent of the fair market value of
the common stock on the grant date.
A summary of employee and non-employee and director stock options
outstanding as of December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Number of
options
Number vested as of Number of options
of Date Exercise December 31, scheduled to vest in
options granted price 1995 1996 1997-2000
------- ------- ----- ------------ ---- ---------
<S> <C> <C> <C> <C> <C>
198,350 June 6, 1994 $19.50 53,150 36,300 108,900
20,000 June 24, 1994 $18.38 6,667 6,667 6,666
65,500 March 14, 1995 $15.50 -- 13,100 52,400
35,150 December 13, 1995 $19.00 -- 16,750 18,400
</TABLE>
No options were exercised in 1995 and 1994.
In connection with the Offering, the Company provided a one-time grant of
options to M&M to purchase 220,000 shares of common stock through June 1999
at the initial public offering price of $19.50 per share pursuant to an
agreement whereby Marcus & Millichap Real Estate Investment Brokerage
Company, a subsidiary of M&M, will provide real estate transaction, trend
and other information to the Company for a period of ten years.
The Company has also reserved 406,500 shares of common stock in connection
with the Essex Property Trust, Inc. 1994 Employee Stock Purchase Plan. There
was no activity in this plan during 1995 and 1994.
(Continued)
F-21
<PAGE> 48
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
The Financial Accounting Standards Board has issued Financial Accounting
Standard 123 (FAS 123). The Company will adopt the disclosure requirements
of FAS 123 in 1996, but continue to account for its stock option plan under
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," as permitted under FAS 123.
(Continued)
F-22
<PAGE> 49
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(11) Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for 1995 and
1994:
<TABLE>
<CAPTION>
Quarter Quarter Quarter Quarter
ended ended ended ended
1995 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues before gain on
sale of real estate $10,923 $10,913 $10,983 $11,121
Gain on sale of real estate -- 789 -- 5,224
------- ------- ------- -------
Total revenues $10,923 $11,702 $10,983 $16,345
======= ======= ======= =======
Extraordinary item $ -- $ (154) $ -- $ --
======= ======= ======= =======
Net income $ 1,487 $ 2,006 $ 1,589 $ 5,522
======= ======= ======= =======
Per share data:
Net income $ .24 $ .32 $ .25 $ .88
======= ======= ======= =======
Market price:
High $16.875 $18.125 $ 18.25 $ 19.50
======= ======= ======= =======
Low $15.375 $ 15.75 $ 16.75 $ 17.25
======= ======= ======= =======
Close $15.875 $18.125 $ 17.50 $ 19.25
======= ======= ======= =======
Dividends declared $ .4175 $ .4175 $ .425 $ .425
======= ======= ======= =======
1994
----
Total revenues $ 8,442 $ 8,027 $ 8,753 $10,002
======= ======= ======= =======
Net income $ 313 $ 162 $ 1,639 $ 1,304
======= ======= ======= =======
Per share data:
Net income $ -- $ .05 $ .26 $ .21
======= ======= ======= =======
Market price:
High $ -- $19.625 $ 19.00 $ 18.00
======= ======= ======= =======
Low $ -- $ 17.25 $17.125 $14.625
======= ======= ======= =======
Close $ -- $17.675 $ 18.00 $15.125
======= ======= ======= =======
Dividends declared $ -- $ .08 $ .4175 $ .4175
======= ======= ======= =======
</TABLE>
(Continued)
F-23
<PAGE> 50
ESSEX PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(12)Commitments and Contingencies
A commercial bank has issued on behalf of the Company letters of credit
relating to Company financing transactions of $606 and $564, expiring in
February 1996 and June 2002, respectively.
The Company has provided a guarantee of the mortgage note payable of Essex
Bristol Partners to a commercial bank. This note has a balance of $12,298 as
of December 31, 1995 and is due in May 2002.
The Company identifies and evaluates prospective investments on a continuous
basis. In connection therewith, the Company initiates letters of interest
and extends offers on a regular basis. At December 31, 1995, the Company was
committed to fund the acquisition of an apartment property in Fremont,
California. This acquisition was completed on January 31, 1996 through the
payment of cash of approximately $3,225 and assumption of a mortgage loan in
the amount of $7,266.
Investments in real property create a potential for environmental
liabilities on the part of the owner of such real property. The Company
carries no express insurance coverage for this type of environmental risk.
The Company has conducted environmental studies which revealed the presence
of groundwater contamination at three properties; such contamination at two
of the 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 five 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 two 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 eight properties would not have a
material adverse effect on the Company's financial condition or results of
operations.
F-24
<PAGE> 51
SCHEDULE III
Page 1 of 2
ESSEX PROPERTY TRUST, INC.
Real Estate and Accumulated Depreciation
December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Initial cost Costs
------------------------- capitalized
Buildings and subsequent
Property Location Encumbrance Land improvements to acquisition
-------- -------- ----------- ---- ------------ --------------
<S> <C> <C> <C> <C> <C>
Apartments:
The Apple Fremont, CA $ $ 996 $ 5,582 $ 992
Countrywood Fremont, CA 1,374 5,638 473
Wharfside Pointe Seattle, WA 2,245 7,020 78
Plumtree Santa Clara, CA 3,090 7,421 71
------- ------- ------- -------
26,463(5) 7,705 25,661 1,614
------- ------- ------- -------
Summerhill Park Sunnyvale, CA 2,654 4,918 229
Oak Pointe Sunnyvale, CA 4,842 19,776 3,208
Viareggio San Jose, CA 1,917 6,505 202
Summerhill Commons Newark, CA 1,608 7,582 229
Pathways Long Beach, CA 4,083 16,757 233
Villa Rio Vista Anaheim, CA 3,013 12,661 931
Foothill Commons Bellevue, WA 2,435 9,821 1,058
Woodland Commons Bellevue, WA 2,040 8,727 445
Palisades Bellevue, WA 1,560 6,242 671
------- ------- ------- -------
56,000 24,152 92,989 7,206
------- ------- ------- -------
Marina Cove(3) Santa Clara, CA 12,541 5,320 16,431 236
------- ------- ------- -------
Santa Fe Ridge Silverdale, WA 8,100 4,137 7,925 35
------- ------- ------- -------
Inglenook Court Bothell, WA 8,300 3,467 7,881 450
------- ------- ------- -------
Emerald Ridge Bellevue, WA 3,449 7,801 60
Sammamish View Bellevue, WA 3,324 7,501 34
------- ------- ------- -------
12,975 6,773 15,302 94
------- ------- ------- -------
Westbridge Yuba City, CA 2,095 917 2,455 33
------- ------- ------- -------
Windsor Ridge Sunnyvale, CA 12,170 4,017 10,315 160
------- ------ ------- -------
Wandering Creek Kent, WA 5,300 1,285 4,980 6
------- ------ ------- -------
Headquarters Building:
777 California(4) Palo Alto, CA -- -- 6,700 8,508
------- ------ ------- -------
</TABLE>
<TABLE>
<CAPTION>
Gross amount
carried at close of period
----------------------------------- Depreciable
Land and Building and Accumulated Date of Date lives
Property Location improvements improvements Total(1) depreciation construction acquired (years)
-------- -------- ------------ ------------ ----- ------------ ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apartments:
The Apple Fremont, CA $ 996 $ 6,574 $ 7,570 $ 3,534 1971 4/82 5-30
Countrywood Fremont, CA 1,374 6,111 7,485 1,795 1970 2/88 5-30
Wharfside Pointe Seattle, WA 2,252 7,091 9,343 368 1990 6/94 5-30
Plumtree Santa Clara, CA 3,090 7,492 10,582 433 1975 2/94 5-30
------- -------- -------- -------
7,712 27,268 34,980 6,130
------- -------- -------- -------
Summerhill Park Sunnyvale, CA 2,654 5,147 7,801 1,056 1988 9/88 5-40
Oak Pointe Sunnyvale, CA 4,842 22,984 27,826 6,036 1973 12/88 5-30
Viareggio San Jose, CA 1,917 6,707 8,624 1,298 1988 9/88 5-40
Summerhill Commons Newark, CA 1,517 7,902 9,419 1,734 1987 7/87 5-40
Pathways Long Beach, CA 4,083 16,990 21,073 2,905 1975 2/91 5-30
Villa Rio Vista Anaheim, CA 2,984 13,621 16,605 5,229 1968 7/85 5-30
Foothill Commons Bellevue, WA 2,435 10,879 13,314 2,640 1978 3/90 5-30
Woodland Commons Bellevue, WA 2,040 9,172 11,212 2,196 1978 3/90 5-30
Palisades Bellevue, WA 1,560 6,913 8,473 1,683 1969/1977(2) 5/90 5-30
------- -------- -------- -------
24,032 100,315 124,347 24,777
------- -------- -------- -------
Marina Cove(3) Santa Clara, CA 5,320 16,667 21,987 872 1974 6/94 5-30
------- -------- -------- -------
Santa Fe Ridge Silverdale, WA 4,141 7,956 12,097 320 1993 10/94 5-30
------- -------- -------- -------
Inglenook Court Bothell, WA 3,472 8,326 11,798 345 1985 10/94 5-30
------- -------- -------- -------
Emerald Ridge Bellevue, WA 3,445 7,865 11,310 297 1987 11/94 5-30
Sammamish View Bellevue, WA 3,328 7,531 10,859 281 1986 11/94 5-30
------- -------- -------- -------
6,773 15,396 22,169 578
------- -------- -------- -------
Westbridge Yuba City, CA 922 2,483 3,405 113 1983 8/94 5-30
------- -------- -------- -------
Windsor Ridge Sunnyvale, CA 4,017 10,475 14,492 1,787 1989 3/89 5-40
------- -------- -------- -------
Wandering Creek Kent, WA 1,285 4,986 6,271 21 1986 11/95 5-30
------- -------- -------- -------
Headquarters Building:
777 California(4) Palo Alto, CA -- 15,208 15,208 2,779 1987 7/86 5-30
------- -------- -------- -------
</TABLE>
F-25
<PAGE> 52
SCHEDULE III
Page 2 of 2
ESSEX PROPERTY TRUST, INC.
Real Estate and Accumulated Depreciation, Continued
December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Initial cost Costs
---------------------- capitalized
Buildings and subsequent
Property Location Encumbrance Land improvements to acquisition
-------- -------- ----------- ---- ------------- --------------
<S> <C> <C> <C> <C> <C>
Retail:
Canby Square Canby, OR $ $ 801 $ 1,729 $ 546
Cedar Mill Place Portland, OR 535 1,100 288
Powell Villa Center Portland, OR 740 1,693 1,523
Riviera Plaza Eugene, OR 766 1,880 477
Wichita Towne Center Milwaukee, OR 218 854 184
Garrison Square Vancouver, WA 1,004 2,170 1,096
-------- ------- -------- --------
10,580(6) 4,064 9,426 4,114
-------- ------- -------- --------
$154,524 $61,837 $200,065 $22,456
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Gross amount
arried at close of period
------------------------------------- Depreciable
Land and Building and Accumulated Date of Date lives
Property Location improvements improvements Total(1) depreciation construction acquired (years)
-------- -------- ------------ ------------ ----- ------------ ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail:
Canby Square Canby, OR $ 801 $ 2,275 $ 3,076 $ 430 1976 1/90 7-30
Cedar Mill Place Portland, OR 535 1,388 1,923 416 1975 1/90 7-30
Powell Villa Center Portland, OR 740 3,216 3,956 428 1959 1/90 7-30
Riviera Plaza Eugene, OR 766 2,357 3,123 429 1961 1/90 7-30
Wichita Towne Center Milwaukee, OR 218 1,038 1,256 428 1978 1/90 7-30
Garrison Square Vancouver, WA 1,004 3,266 4,270 428 1962 1/90 7-30
-------- ------- -------- -------
4,064 13,540 17,604 2,559
------- ------- -------- -------
$61,738 $222,620 $284,358 $40,281
======= ======== ======== =======
</TABLE>
(1) The aggregate cost for federal income tax purposes is $259,260.
(2) Phase I was built in 1969 and Phase II was built in 1977.
(3) A portion of land is leased pursuant to a ground lease expiring in 2028.
(4) Land is leased pursuant to a ground lease expiring in 2054.
(5) This encumbrance represents the outstanding balance of $7,883 as of December
31, 1995 on a $11,600 line of credit. (6)This encumbrance represents the
outstanding balance of $10,580 as of December 31, 1995 on a $12,000 line of
credit.
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Real estate:
Balance at beginning of year $282,344 $186,447
Improvements 3,193 2,614
Acquisition of real estate 6,265 93,283
Disposition of real estate (7,444) --
-------- --------
Balance at end of year $284,358 $282,344
======== ========
Accumulated depreciation:
Balance at beginning of year 34,112 27,574
Dispositions (1,809) 6,538
Depreciation expense 7,978 --
-------- --------
Balance at end of year $ 40,281 $ 34,112
======== ========
</TABLE>
F-26
