<PAGE>
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FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------------- -----------------
COMMISSION FILE NO. 1-13106
ESSEX PROPERTY TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 77-0369576
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
777 CALIFORNIA AVENUE, PALO ALTO, CALIFORNIA 94304
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(415) 494-3700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORT, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
6,275,000 SHARES OF COMMON STOCK,
$.0001 PAR VALUE AS OF JUNE 30, 1996
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Page 1 of 18
<PAGE>
INDEX
Exhibit
Number Description Page Number
- ------- ----------- -----------
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheet of Essex Property
Trust, Inc. as of June 30, 1996 and December 31, 1995 4
Condensed Consolidated Statement of Operations of Essex
Property Trust, Inc. for the three months ended
June 30, 1996 and 1995 5
Condensed Consolidated Statement of Operations of Essex
Property Trust, Inc. for the six months ended June 30, 1996
and 1995 6
Condensed Consolidated Statement of Cash Flows of Essex
Property Trust, Inc. for the six months ended June 30, 1996
and 1995 7
Notes to Condensed Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II: OTHER INFORMATION
Item 2: Changes in Securities 15
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 19
Page 2 of 18
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PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
"Essex" means Essex Property Trust, Inc., a real estate investment
trust incorporated in the State of Maryland, or where the context
otherwise requires, Essex Portfolio, L.P., a partnership in which
Essex Property Trust, Inc. is the sole general partner.
The information furnished in the accompanying condensed consolidated
balance sheet, condensed consolidated statement of operations and
condensed consolidated statement of cash flows of Essex reflect all
adjustments which are, in the opinion of management, necessary for a
fair presentation of the aforementioned financial statements for the
interim periods.
The accompanying unaudited financial statements should be read in
conjunction with the notes to such financial statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Page 3 of 18
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ESSEX PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
June 30, December 31,
1996 1995
---------- ----------
ASSETS
Real estate:
Rental properties:
Land and land improvements $ 62,525 $ 61,738
Buildings and improvements 223,188 222,620
---------- ----------
285,713 284,358
Less accumulated depreciation (43,041) (40,281)
---------- ----------
242,672 244,077
Investments 8,589 8,656
---------- ----------
251,261 252,733
Cash and cash equivalents 5,710 3,983
Notes and other related party receivables 4,351 4,780
Notes and other receivables 5,068 5,130
Prepaid expenses and other assets 4,224 1,944
Deferred charges, net 2,875 5,090
---------- ----------
$ 273,489 $ 273,660
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable 141,792 136,061
Lines of credit 12,843 18,463
Accounts payable and accrued liabilities 5,574 2,964
Dividends payable 3,455 3,455
Other liabilities 1,668 1,565
---------- ----------
Total liabilities 165,332 162,508
Minority interest 25,660 26,423
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 (29,574) (27,342)
---------- ----------
Total stockholders' equity 82,497 84,729
---------- ----------
$ 273,489 $ 273,660
---------- ----------
---------- ----------
See accompanying notes to the unaudited financial statements.
Page 4 of 18
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ESSEX PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands, except shares per share amounts)
Three months ended
------------------
June 30, June 30,
1996 1995
---------- ----------
Revenues:
Rental $ 11,053 $ 10,418
Interest and other income 701 493
---------- ----------
11,754 10,911
---------- ----------
Expenses:
Property operating expenses:
Maintenance and repairs 1,070 933
Real estate taxes 883 853
Utilities 728 746
Administrative 628 654
Advertising 139 79
Insurance 145 135
Depreciation and amortization 2,047 1,991
---------- ----------
5,640 5,391
---------- ----------
Interest 3,009 2,753
Amortization of deferred financing costs 181 349
General and administrative 466 358
Loss from hedge termination 18 13
---------- ----------
Total expenses 9,314 8,864
---------- ----------
Net income before gain on sales of real estate,
minority interests and extraordinary item 2,440 2,047
Gain on sales of real estate 2,409 789
---------- ----------
Net income before minority interest and
extraordinary item 4,849 2,836
Minority interest (1,025) (676)
---------- ----------
Income before extraordinary item 3,824 2,160
Extraordinary item:
Loss on early extinguishment of debt (665) (154)
---------- ----------
Net income $ 3,159 $ 2,006
---------- ----------
---------- ----------
Per share data:
Net income per share from operations before
extraordinary item $ .61 .34
Extraordinary item -- debt extinguishment (.10) ( .02)
---------- ----------
Net income per share $ .51 $ .32
---------- ----------
---------- ----------
Weighted average number of shares outstanding
during the period 6,275,000 6,275,000
---------- ----------
---------- ----------
See accompanying notes to the unaudited financial statements.
Page 5 of 18
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ESSEX PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands, except shares per share amounts)
Six months ended
----------------
June 30, June 30,
1996 1995
---------- ----------
Revenues:
Rental $ 22,004 $ 20,725
Interest and other income 1,304 1,109
---------- ----------
23,308 21,834
---------- ----------
Expenses:
Property operating expenses:
Maintenance and repairs 2,105 1,918
Real estate taxes 1,769 1,702
Utilities 1,485 1,514
Administrative 1,254 1,329
Advertising 290 149
Insurance 292 271
Depreciation and amortization 4,237 3,971
---------- ----------
11,432 10,854
---------- ----------
Interest 5,910 5,473
Amortization of deferred financing costs 426 712
General and administrative 863 723
Loss from hedge termination 39 13
---------- ----------
Total expenses 18,670 17,775
---------- ----------
Net income before gain on sales of real estate,
minority interests and extraordinary item 4,638 4,059
Gain on sales of real estate 2,409 789
---------- ----------
Net income before minority interest and
extraordinary item 7,047 4,848
Minority interest (1,100) (1,201)
---------- ----------
Income before extraordinary item 5,947 3,647
Extraordinary item:
Loss on early extinguishment of debt (2,845) (154)
---------- ----------
Net income $ 3,102 $ 3,493
---------- ----------
---------- ----------
Per share data:
Net income per share from operations before
extraordinary item $ .95 .58
Extraordinary item - debt extinguishment (.45) ( .02)
---------- ----------
Net income per share $ .50 $ .56
---------- ----------
---------- ----------
Weighted average number of shares outstanding
during the period 6,275,000 6,275,000
---------- ----------
---------- ----------
See accompanying notes to the unaudited financial statements.
Page 6 of 18
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ESSEX PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Six months ended
June 30, 1996 June 30, 1995
------------- -------------
Net cash provided by operating activities $ 8,073 $ 8,663
Cash flows from investing activities:
Additions to real estate investments (13,417) (1,381)
Dispositions of real estate investments 13,506 4,569
Investments in corporations and joint ventures 390 (3,099)
---------- ----------
Net cash provided by investing activities 479 89
Cash flows from financing activities:
Proceeds from mortgages, other notes payable
and lines of credit 47,083 16,400
Repayment of mortgages, other notes
payables and lines of credit (46,972) ( 19,381)
Additions to deferred charges (590) (542)
Additions to notes and other related party
receivables/payables 2,679 -
Repayment of notes and other related party
receivables/payables (2,117) (309)
Distribution to partners/dividends to shareholders (6,908) (6,788)
---------- ----------
Net cash used in financing activities (6,825) (10,620)
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,727 (1,868)
Cash and cash equivalents at beginning of period 3,983 2,411
---------- ----------
Cash and cash equivalents at end of period $ 5,710 $ 543
---------- ----------
---------- ----------
Supplemental disclosure of cash flow
information
Cash paid for interest $ 5,951 $ 5,550
---------- ----------
---------- ----------
Supplemental disclosure of non-cash investing
and financing activity
Dividends declared and payable $ 3,455 $ 3,394
---------- ----------
---------- ----------
See accompanying notes to the unaudited financial statements.
Page 7 of 18
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Essex Property
Trust, Inc. (the "Company") are prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q. In the opinion of management, all
adjustments necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented have been
included and are normal and recurring in nature. These unaudited condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.
The consolidated financial statements for the three months and six months
ended June 30, 1996 and 1995 include the accounts of the Company and Essex
Portfolio, L.P. (the "Operating Partnership", which holds the operating
assets of the Company). The Company is the sole general partner in and
owns 77.2% of the Operating Partnership. The limited partners own an
aggregate 22.8% interest in the Operating Partnership.
All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.
(2) SIGNIFICANT TRANSACTIONS
The following significant transactions occurred during the quarter ended
June 30, 1996:
(A) Dispositions
(i) On April 30, 1996, Essex sold Viareggio Apartments, a 116 unit
apartment community located in San Jose, California. The gross
sales price was $10,610, resulting in a net gain of
approximately $2,195. Essex used the proceeds to reduce
indebtedness and to facilitate the acquisition of Camarillo
Oaks Apartments in the third quarter of 1996.
(ii) On June 21, 1996, Essex sold Westbridge Apartments, a 92 unit
apartment community located in Yuba City, California. The
gross sales price was $3,700, resulting in a net gain of
approximately $214. Essex used the proceeds to reduce
indebtedness.
(iii) Essex entered into contract to sell its six neighborhood
shopping centers for a contract price of $22,500. The sale is
subject to a number of contingencies and there is no assurance
that such sale will be completed.
(B) Debt related transactions
(i) On June 30, 1996, Essex repaid a $7,917 LIBOR based variable
rate loan. Essex wrote off approximately $665 in deferred
financing costs and costs associated with a related interest
rate swap agreement.
(C) Recent Developments
(i) On June 20, 1996, the Company entered into a definitive
agreement to sell up to $40,000 of the Company's 8.75%
Convertible Preferred Stock, Series 1996A (the "Convertible
Preferred Stock") at $25.00 per share to Tiger/Westbrook Real
Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment
Partnership, L.P. (collectively, "Tiger/Westbrook"). In the
first phase
Page 8 of 18
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
of this transaction, Tiger/Westbrook on July 1, 1996 purchased
340,000 shares of Convertible Preferred Stock for an aggregate
purchase price of $8,500 and loaned the Company an additional
$11,500, which loan will be exchanged for shares of Convertible
Preferred Stock upon stockholder approval of the transaction.
Upon such stockholder approval and as a part of the second
phase of this transaction, Tiger/Westbrook is obligated to
purchase up to an additional $20,000 of Convertible Preferred
Stock as requested by Essex on or prior to June 20, 1997.
Holders of shares of Convertible Preferred Stock are entitled
to receive annual cumulative cash dividends, payable quarterly,
in an amount equal to the greater of (i) $2.1875 per share
(8.75% of the $25.00 per share price) or (ii) the dividends
(subject to adjustment) paid with respect to Essex's common
stock (the "Common Stock") plus, in both cases, any accumulated
but unpaid dividends on the Convertible Preferred Stock. After
June 20, 1997, 25% of the 1.6 million authorized shares of
Convertible Preferred Stock is convertible into Common Stock at
the option of the holder, and thereafter, at the beginning of
each next three-month period, an additional 25% of the
Convertible Preferred Stock is convertible. The conversion
price per share of Convertible Preferred Stock is $21.875,
subject to adjustment under certain circumstances.
(ii) In late July 1996, the Company commenced an underwritten
follow-on public offering of shares of its common stock. All of
the shares in the offering are being sold by the Company and
will be issued pursuant to a shelf registration statement that
was previously filed by the Company with the Securities and
Exchange Commission. On August 8, 1996, the follow-on offering
was priced at $22.75 per share of Common Stock with the number
of shares in the offering set at 2,200,000 shares (not
including 330,000 shares that may be sold pursuant to the
exercise of the underwriters over allotment option), and is
anticipated to close on August 14, 1996.
(3) RELATED PARTY TRANSACTIONS
Since June 13, 1994, all general and administrative expenses of the Company
and Essex Management Corporation ("EMC") have been initially borne by the
Company, with a portion subsequently allocated to EMC. Expenses allocated
to EMC for the three and six months ended June 30, 1996 totaled $431 and
$856, respectively, and are reflected as a reduction in general and
administrative expenses in the accompanying consolidated statements of
operations.
Included in rental income in the accompanying consolidated statements of
operations is related party rents earned from space leased to The Marcus &
Millichap Company ("M&M"), including operating expense reimbursements, of
$170 and $340 for the three and six months ended June 30, 1996,
respectively and $170 and $335 for the three and six months ended June 30,
1995, respectively.
Included in other income for the three and six months ended June 30, 1996
is interest income of $273 and $517, respectively, which were earned
principally under notes receivable from Essex Fidelity I Corporation, Essex
Sacramento Corporation, Essex Marina Cove, L.P., and Pathways. In
addition, management fees and equity income of $233 and $370 were earned
for the three and six month periods ended June 30, 1996, respectively, from
Essex Bristol Partners, L.P., Essex San Ramon Partners, L.P. and Essex
Marina Cove, L.P.
Since June 13, 1994, EMC has provided property management services to the
Company's neighborhood shopping centers. The fee paid by the Company for
the three and six months ended June 30, 1996 was $29, and $57,
respectively, and is included in administrative expense in the accompanying
consolidated statements of operations.
Page 9 of 18
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Notes and other related party receivables as of June 30, 1996 and December
31, 1995 consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
Notes receivable from Essex Sacramento Corporation,
bearing interest at 9% due on demand $ 1,866 $ 3,540
Note receivable from Essex Fidelity I Corporation
interest at 9% due on demand 226 ---
Notes receivable from Essex Marina Cove, L.P.
bearing interest at 12% due on demand 850 ----
Notes receivable from Essex Fidelity I Corporation and
Jackson School Village, L.P. bearing
interest at 9.5% - 10%, due 2015 500 500
Other related party receivables 909 740
-------- --------
$ 4,351 $ 4,780
-------- --------
-------- --------
</TABLE>
Other related party receivables consist primarily of unreimbursed expenses
due from EMC, accrued interest income on related party notes receivables
and acquisition cost-related reimbursements due from Essex San Ramon
Partners, L.P.
As of June 30, 1996 and December 31, 1995, the Company has payables to
related parties totaling $33 and $217, respectively, representing temporary
borrowings and unreimbursed expenses.
During the three and six months ended June 30, 1996, the Company paid
brokerage commissions totaling $312 and $562, respectively to M&M in
connection with the purchase and disposition of real estate. The
commissions are reflected as an increased cost on the purchase of real
estate or a reduction in the gain on sale in the accompanying condensed
consolidated balance sheet.
Page 10 of 18
<PAGE>
ITEM 2: 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") as of June
30, 1996 and 1995 and for the three months and six months ended June 30, 1996
and 1995.
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 conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). Essex is the sole general partner of the Operating Partnership
and, as of June 30, 1996 and 1995, owned a 77.2% general partnership interest in
the Operating Partnership. The Company qualifies as a real estate investment
trust (a "REIT") for Federal income tax purposes.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," 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 further results,
performance or achievements expressed or implied by such forward-looking
statements.
GENERAL BACKGROUND
Essex's revenues are generated primarily from multifamily residential, retail
and commercial property operations, which accounted for 94% and 95% of its
revenues for the six months ended June 30, 1996 and 1995, respectively. Essex's
properties (the "Properties") are located in California, Oregon and Washington.
Occupancy levels of Essex's multifamily residential Properties in these markets
have generally remained high (averaging over 95% for the last five years).
Essex has qualified 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 overall 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 there will be fewer
opportunities to acquire portfolios of non-performing assets in the future.
Average financial occupancy rates of the Company's multifamily properties on a
same-property basis for the three months ended June 30, 1996 and 1995 were as
follows:
June 30, June 30,
1996 1995
-------- --------
Northern California 98.6% 98.2%
Seattle Metropolitan 95.9% 94.2%
Southern California 96.6% 95.4%
Page 11 of 18
<PAGE>
The Company's retail and commercial properties were 93% occupied (based on
square footage) as of June 30, 1996.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1996 TO THE THREE MONTHS ENDED
JUNE 30, 1995
TOTAL REVENUES increased by $843,000 or 7.7% to $11,754,000 in the second
quarter of 1996 from $10,911,000 in the second quarter of 1995. Rental revenues
increased by $635,000 or 6.1% to $11,053,000 in the second quarter of 1996 from
$10,418,000 in the second quarter of 1995. Approximately $62,000 of the
increase in rental revenues was attributable to the Properties acquired or
disposed of in 1995 and with the remainder of the increase relating to rental
rate and occupancy level increases at properties owned by the Company during the
periods being compared. Rental revenues from the San Francisco Bay Area and
Seattle multifamily residential Properties increased by $532,000 to $8,647,000
in the second quarter of 1996 from $8,115,000 in the second quarter of 1995.
Rental revenue increased by $47,000 during the second quarter of 1996 from the
amount in the second quarter of 1995 for the two Properties located in Southern
California. Commercial property rental revenue increased $56,000 for the second
quarter of 1996 from the amount for the second quarter of 1995 as a result of
increased occupancy.
TOTAL EXPENSES increased by $450,000 or approximately 5.1% to $9,314,000 in the
second quarter of 1996 from $8,864,000 in the second quarter of 1995. Interest
expense increased by $256,000 or 9.3% to $3,009,000 in the second quarter of
1996 from $2,753,000 in the second quarter of 1995. Such interest expense
increase was primarily due to the net addition of outstanding mortgage debt in
connection with property and investment acquisitions. Property operating
expenses, which include maintenance and repairs, real estate taxes, advertising,
utilities, and on-site administrative expenses, increased by $193,000 or 5.7% to
$3,593,000 in the second quarter of 1996 from $3,400,000 in the second quarter
of 1995. Of such increase, $18,000 was attributable to Properties acquired or
disposed of in 1995 and 1996. 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 $108,000 in the second quarter of 1996 from the second quarter of 1995.
NET INCOME AFTER MINORITY INTEREST increased by $1,153,000 to $3,159,000 in the
second quarter of 1996 from $2,006,000 in the second quarter of 1995. The
increase in net income was largely the result of an increased revenue on gain on
the sales of real estate of $2,409,000, partially offset by an extraordinary
charge of $665,000 related to the early extinguishment of debt.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 TO THE SIX MONTHS ENDED
JUNE 30, 1995
TOTAL REVENUES increased by $1,474,000 or 6.8% to $23,308,000 in the first six
months of 1996 from $21,834,000 in the first six months of 1995. Rental
revenues increased by $1,279,000 or 6.2% to $22,004,000 in the first six months
of 1996 from $20,725,000 in the first six months of 1995. Approximately
$128,000 of the increase in rental revenues was attributable to the Properties
acquired or disposed of in 1995 and 1996 with the remainder of the increase
primarily relating to rental rate and occupancy level increases at properties
owned by the Company during the periods being compared. Rental revenues from
the San Francisco Bay Area and Seattle multifamily residential Properties
increased by $1,004,000 to $17,211,000 in the first six months of 1996 from
$16,207,000 in the first six months of 1995. Rental revenue increased by
$84,000 during the first six months of 1996 from the amount in the first six
months of 1995 for the two Properties located in Southern California. Commercial
property rental revenue increased $191,000 for the first six months of 1996 from
the amount for the second quarter of 1995 as a result of increased occupancy.
TOTAL EXPENSES increased by $895,000 or approximately 5.0% to $18,670,000 in the
first six months of 1996 from $17,775,000 in the first six months of 1995.
Interest expense increased by $437,000 or 8.0% to $5,910,000 in the first six
months of 1996 from $5,473,000 in the first six months of 1995. Such interest
expense increase was primarily due to the net addition of outstanding mortgage
debt in connection with property and investment acquisitions. Property
operating expenses, which include maintenance and repairs, real estate taxes,
advertising, utilities, and on-site administrative expenses, increased by
$312,000 or 4.5%
Page 12 of 18
<PAGE>
to $7,195,000 in the first six months of 1996 from $6,883,000 in the first six
months of 1995. Of such increase, $29,000 was attributable to Properties
acquired or disposed in 1995 and 1996. 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 $140,000 in the first six months of 1996 from the
first six months of 1995.
NET INCOME AFTER MINORITY INTEREST decreased by $391,000 to $3,102,000 in the
first six months of 1996 from $3,493,000 in the first six months of 1995. The
decrease in net income was largely the result of an extraordinary charge of
$2,845,000 related to the early extinguishment of debt, partially offset by gain
on the sales of real estate of $2,409,000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, Essex had $5,710,000 in cash and cash equivalents. The
Company expects to meet its short-term liquidity requirements by using this
working capital, the proceeds from its sale of Convertible Preferred Stock (as
defined below) and any portion of net cash flow from operations not currently
distributed. The Company believes that its future net cash flows will be
adequate to meet operating requirements and to provide for payment of dividends
by the Company in accordance with REIT requirements. Essex has credit
facilities in the committed amount of approximately $17,600,000. The Company is
currently negotiating to increase the committed amount of one of its lines of
credit, which, upon such increase would result in the Company having an
aggregate committed amount under all lines of credit of $39,000,000. At June
30, 1996 Essex had $12,843,000 outstanding on its lines of credit, with interest
rates generally ranging from 7.4% to 7.5%.
Essex's cash balance increased $1,727,000 from $3,983,000 as of December 31,
1995 to $5,710,000 as of June 30, 1996. This increase in cash was the result of
$8,073,000 net cash provided by operating activities, increased by $479,000 net
cash provided by investing activities and reduced by $6,825,000 in net cash used
by financing activities. The significant components which contributed to the
$479,000 net cash provided by investing activities was $13,506,000 provided by
the disposition of real estate as offset by $13,417,000 used to purchase and
upgrade rental properties. The significant components which contributed to the
$6,825,000 net cash used by financing activities were $47,083,000 of proceeds
from mortgages, other notes payable and lines of credit as offset by $46,972,000
of repayments of mortgages, other notes payable and lines of credit and
$6,908,000 of dividends/distribution paid.
As of June 30, 1996, the combined outstanding indebtedness under mortgages and
lines of credit consisted of $128,531,000 in fixed rate debt, (such component
includes variable rate indebtedness subject to interest rate swap agreements),
$12,505,000 in debt based on the Federal Home Loan Bank's 11th District Cost of
Funds index ("the 11th District Debt"), $13,600,000 of debt represented by tax
exempt variable rate demand bonds. 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 May 1995, Essex entered 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 $22,838,000
as of June 30, 1996.
Essex expects to incur approximately $1,450,000 or $300 per weighted average
occupancy unit in non-revenue generating capital expenditures for the year ended
December 31, 1996. 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 that cash from operations and/or the
lines of credit will fund such expenditures.
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.
On July 1, 1996, the Company sold 340,000 shares of its 8.75% Convertible
Preferred Stock, Series 1996A (the "Convertible Preferred Stock") for $8,500,000
and borrowed $11,500,000 from Tiger/Westbrook. Upon
Page 13 of 18
<PAGE>
stockholder approval of the transaction, the $11,500,000 loan will be
automatically exchanged for an additional 460,000 shares of Convertible
Preferred Stock. In the event that stockholder approval of the transaction is
not obtained and the Internal Revenue Service does not approve the transaction
on or before December 16, 1996, the $11,500,000 loan will be payable no later
than April 30, 1997. Upon stockholder approval of the transaction, the Company
may require Tiger/Westbrook to purchase up to an additional $20,000,000 of
Convertible Preferred Stock any time prior to June 20, 1997.
The Company expects to utilize the proceeds of the follow-on public offering of
shares of common stock funds available from the sale of Convertible Preferred
Stock to Tiger/Westbrook, availability under its lines of credit, and cash
balances to fund its current and future property acquisition and development
activities. Essex expects to meet certain long-term liquidity requirements such
as scheduled debt maturities 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).
On March 7, 1996, the Company filed a shelf registration statement for up to
$100,000,000 of Common Stock, preferred stock, depository shares and warrants to
purchase common and preferred stock. The shelf registration statement was
declared effective by the Securities and Exchange Commission on June 6, 1996. In
late July 1996, the Company commenced an underwritten follow-on public offering
of shares of its common stock. On August 8, 1996, the follow-on offering was
priced at $22.75 per share of Common Stock with the number of shares in the
offering set at 2,200,000 shares (not including 330,000 shares that may be sold
pursuant to the exercise of the underwriters over allotment option), and is
anticipated to close on August 14, 1996.
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, together with net income and cash flows, Funds from
Operations provides investors with an additional basis to evaluate the ability
of a REIT to incur and service debt and to fund acquisitions and other capital
expenditures. Funds from Operations does not represent net income or cash flows
from operations as defined by GAAP and 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 Operating Partnership's
operating performance or to cash flows as a measure of liquidity. Funds from
Operations does not measure whether cash flow is sufficient to fund all cash
needs including principal amortization, capital improvements and distributions
to shareholders. Funds from Operations also does not represent cash flows
generated from operating, investing or financing activities as defined under
GAAP. Further, Funds from Operations as disclosed by other REITs may not be
comparable to the Company's calculation of Funds from Operations. The following
table sets forth Essex's calculation of actual Funds from Operations for the
quarter ended June 30, 1996 and 1995.
Three months ended
---------------------------------
June 30, 1996 June 30, 1995
------------- -------------
Income before minority interest
and extraordinary item $ 4,849,000 $ 2,836,000
Adjustments:
Depreciation & Amortization 2,047,000 2,000,000
Adjustment for Unconsolidated
Joint Venture 130,000 0
Non-recurring Items, including
gain on sales of real estate
and loss from hedge termination (2,391,000) (776,000)
Minority Interest - Pathways (132,000) (129,000)
----------- -----------
Funds from Operations $ 4,503,000 $ 3,931,000
----------- -----------
----------- -----------
Number of Shares (1) 8,130,000 8,130,000
Page 14 of 18
<PAGE>
(1) Assumes conversion of all outstanding operating partnership interests in
the Operating Partnership into shares of Essex's common stock.
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 added back to net income to calculate Funds from Operations. Essex
has adopted the revised NAREIT definition of Funds from Operations as of
January 1, 1996 and has restated prior year amounts for consistency.
PART II OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
On June 20, 1996, the Company entered into a definitive agreement to
sell up to $40.0 million of the Company's 8.75% Convertible Preferred
Stock, Series 1996A (the "Convertible Preferred Stock") at $25.00 per
share to Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook
Real Estate Co-Investment Partnership, L.P. (collectively,
"Tiger/Westbrook"). In the first phase of this transaction,
Tiger/Westbrook on July 1, 1996 purchased 340,000 shares of
Convertible Preferred Stock for an aggregate purchase price of $8.5
million and loaned the Company an additional $11.5 million, which loan
will be exchanged for shares of Convertible Preferred Stock upon
stockholder approval of the transaction. Upon such stockholder
approval and as part of the second phase of this transaction,
Tiger/Westbrook is obligated to purchase up to an additional $20.0
million of Convertible Preferred Stock as requested by Essex on or
prior to June 20, 1997.
Dividends may be authorized, declared and paid on shares of Common
Stock in any fiscal quarter only if full cumulative dividends have
been paid on, or authorized and set apart on all shares of Convertible
Preferred Stock for all prior dividends through and including the end
of such quarter. Holders of shares of Convertible Preferred stock are
entitled to receive annual cumulative cash dividends, payable
quarterly, in an amount equal to the greater or (i) $2.1875 per share
8.75% of the $25.00 per share price) or (ii) the dividends (subject to
adjustment) paid with respect to the Common Stock plus, in both cases,
any accumulated but unpaid dividends on the Convertible Preferred
Stock. After June 20, 1997, 25% of the 1.6 million authorized shares
of Convertible Preferred Stock is convertible into Common Stock at the
option of the holder, and thereafter, at the beginning of each next
three-month period, an additional 25% of the authorized shares of
Convertible Preferred Stock is convertible. The conversion price per
share of Convertible Preferred Stock is $21.875, subject to adjustment
under certain circumstances.
The Convertible Preferred Stock ranks senior to the Common Stock with
respect to the payments of dividends and amounts upon liquidation,
dissolution or winding up of the Company. Except as indicated below
with respect to the election of directors of the Company, certain
amendments to the Company's articles of incorporation, as amended and
supplemented (the "Charter") and certain other specified matters, the
holders of shares of Convertible Preferred Stock have no voting
rights. The holders of the Convertible Preferred Stock as a class
ordinarily have the right to elect one director. In the event of a
breach of certain protective provisions (a "Charter Breach") set forth
in the Articles Supplementary pertaining to the Convertible Preferred
Stock (the "Articles Supplementary"), the holders of the Convertible
Preferred Stock will be entitled to elect an aggregate of four
directors and in the event of Dividend Default as defined in the
Articles Supplementary, the holders of Convertible Preferred Stock
will be entitled to elect an aggregate of five directors.
The approval of holders of two-thirds of the outstanding shares of
Convertible Preferred Stock is required to (i) increase the number of
authorized shares of Convertible Preferred Stock, (ii) create or issue
any class of stock ranking prior to or on a parity with the
Convertible Preferred Stock, (iii) amend or alter the Company's
Charter or Bylaws in a manner that would adversely
Page 15 of 18
<PAGE>
affect the holders of Convertible Preferred Stock, (iv) effect a
voluntary liquidation, dissolution or winding up of the Company, the
sale of substantially all of the assets of the Company, the merger or
consolidation of the Company and (v) for certain other specified
matters. In addition, the approval of holders of a majority of the
outstanding shares of Convertible Preferred Stock is required for the
Company (i) to sell certain specified amounts of its assets, (ii) to
make certain specified major changes in its business and (iii) to
effect any change in control of the Company of the Operating
Partnership. Pursuant to the terms of the stock purchase agreement
pertaining to the Convertible Preferred Stock, Tiger/Westbrook has the
preemptive right to purchase a pro rata share, based on its holding of
Convertible Preferred Stock on a converted basis, of any future
issuance by the Company of any stock. In addition, the holders of
Convertible Preferred Stock have certain registration rights pursuant
to which they may cause the Company to register Convertible Preferred
Stock and/or Common Stock issuable upon the conversion of Convertible
Preferred Stock. The Company intends to seek stockholder approval for
the sale of up to $40.0 million of Convertible Preferred Stock to
Tiger/Westbrook in September, 1996.
The foregoing summary of the sale and terms of the Convertible
Preferred Stock does not purport to be complete and is subject to and
qualified in its entirety by the Articles Supplementary and the other
exhibits that were filed with the Company's Current Report on Form 8-
K, filed on July 16, 1996, which are incorporated herein by reference.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
--------
1.1 Purchase Agreement dated as of August 8, 1996,
among Essex Property Trust, Inc., Merrill Lynch
& Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Raymond James & Associates,
Inc., and Sutro & Co. Incorporated, as representatives
of several underwriters. (1)
1.2 Pricing Agreement dated as of August 8, 1996, among
Essex Property Trust, Inc., Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation,
Raymond James & Associates, Inc., and Sutro & Co.
Incorporated, as representatives of several
underwriters. (1)
3.1 Articles Supplementary of Essex Property Trust, Inc.
for the 8.75% Convertible Preferred Stock,
Series 1996A (2)
3.2 Amended and Restated Bylaws of Essex Property
Trust, Inc. (2)
10.1 Stock Purchase Agreement dated as of June 20, 1996
by and between Essex Property Trust, Inc. and
Tiger/Westbrook Real Estate Fund L.P. and Tiger/
Westbrook Real Estate Co-Investment Partnership, L.P. (2)
10.2 Amendment No. 1 to Stock Purchase Agreement dated
as of July 1, 1996 by and between Essex Property
Trust, Inc. and Tiger/Westbrook Real Estate Fund, L.P.
and Tiger/Westbrook Real Estate Co-Investment
Partnership, L.P. (2)
10.3 First Amendment to Investor Rights Agreement dated
July 1, 1996 by and between George M Marcus and The
Marcus & Millichap Company (2)
10.4 Loan Facility Agreement dated as of June 20, 1996
among Essex Property Trust, Inc. and T/W Essex
Funding, L.L.C. (2)
10.5 Amendment No. 1 to Loan Facility Agreement dated
as of July 1, 1996 by and between Essex Property
Trust, Inc. and T/W Essex Funding, L.L.C. (2)
Page 16 of 18
<PAGE>
10.6 Guarantee dated as of June 20, 1996 of Essex
Portfolio, L.P. to T/W Essex Funding, L.L.C. (2)
10.7 Reaffirmation of Guarantee dated as of
July 1, 1996 by Essex Portfolio, L.P. (2)
10.8 Registration Rights Agreement, dated as of
June 20, 1996 (2)
10.9 Letter Agreement, dated July 1, 1996, among Essex
Property Trust, Inc., Essex Portfolio, L.P.,
Tiger/Westbrook Real Estate Fund, L.P. and Tiger/
Westbrook Real Estate Co-Investment Partnership, L.P. (2)
12.1 Schedule of Confirmation Ratio of Earnings to
Fixed Charges Page 18
27.1 Article 5 Financial Data Schedule (EDGAR Filing Only) ---
99.1 Press Release, dated July 1, 1996 (2)
99.2 Press Release, dated June 27, 1996 (2)
_____________________
(1) Incorporated by reference to the identically numbered
exhibit is the Company's Current Report on Form 8-K, filed
August 13, 1996.
(2) Incorporated by reference to the identically numbered
exhibit is the Company's Current Report on Form 8-K, filed
July 16, 1996.
B. REPORTS ON FORM 8-K
On July 16, 1996, Essex filed a current report on Form 8-K, which
described its sale of 8.75% Convertible Preferred Stock, Series 1996A
and which included as exhibits certain agreements and other documents
relating to such sale.
On August 13, 1996, Essex filed a current report on Form 8-K, which
included as exhibits the Purchase Agreement and Pricing Agreement
pertaining to Essex's pending follow-on offering of Common Stock.
Page 17 of 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESSEX PROPERTY TRUST, INC.
/s/ Mark J. Mikl
------------------------------
Mark J. Mikl, Controller
(Principal Accounting Officer)
8/13/96
------------------------------
Date
Page 18 of 18
<PAGE>
Exhibit 12.1
ESSEX PROPERTY TRUST, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratios)
<TABLE>
<CAPTION>
ESSEX PROPERTY TRUST, INC.
---------------------------------------------
PERIOD OF
6 MONTHS ENDED YEAR ENDED JUNE 13, 1994
JUNE 30, DECEMBER 31, TO DECEMBER 31,
1996 1995 1994
-------------- ------------ ---------------
<S> <C> <C> <C>
EARNINGS:
Income before extraordinary item
and minority interest $ 4,638 $ 8,231 $ 4,397
Interest expense 5,910 10,928 4,304
Amortization of deferred financing costs 426 1,355 773
Capitalized interest 56 92 -
------------ ----------- ------------
TOTAL EARNINGS $ 11,030 $ 20,606 $ 9,474
FIXED CHARGES:
Interest expense $ 5,910 $ 10,928 $ 4,304
Amortization of deferred financing costs 426 1,355 773
Capitalized interest 56 92 -
------------ ----------- ------------
TOTAL FIXED CHARGES $ 6,392 $ 12,375 $ 5,077
------------ ----------- ------------
RATIO OF EARNINGS TO FIXED CHARGES 1.73 1.67 1.87
------------ ----------- ------------
------------ ----------- ------------
FIXED CHARGES IN EXCESS ON EARNINGS - - -
------------ ----------- ------------
------------ ----------- ------------
<CAPTION>
ESSEX PARTNERS PROPERTIES
------------------------------------------------------------
PERIOD OF
JANUARY 1, 1994 YEAR ENDED YEAR ENDED YEAR ENDED
TO JUNE 12, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
EARNINGS:
Income before extraordinary item
and minority interest $ 332 $ 387 (2,344) (3,582)
Interest expense 5,924 11,902 13,224 14,762
Amortization of deferred financing costs 96 219 218 216
Capitalized interest - - - -
--------------- ------------ ------------ ------------
TOTAL EARNINGS $ 6,352 $ 12,508 $ 11,098 $ 11,396
FIXED CHARGES:
Interest expense $ 5,924 $ 11,902 $ 13,224 $ 14,762
Amortization of deferred financing costs 96 219 218 216
Capitalized interest - - - -
--------------- ------------ ------------ ------------
TOTAL FIXED CHARGES $ 6,020 $ 12,121 $ 13,442 $ 14,978
--------------- ------------ ------------ ------------
RATIO OF EARNINGS TO FIXED CHARGES 1.06 1.03 0.83 0.76
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------
FIXED CHARGES IN EXCESS ON EARNINGS - - 2,344 3,582
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Essex
Property Trust, Inc. quarterly report for the period ended June 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 5,710
<SECURITIES> 0
<RECEIVABLES> 9,419
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,353
<PP&E> 285,713
<DEPRECIATION> (43,041)
<TOTAL-ASSETS> 273,489
<CURRENT-LIABILITIES> 10,697
<BONDS> 154,635
0
0
<COMMON> 1
<OTHER-SE> 82,497
<TOTAL-LIABILITY-AND-EQUITY> 273,489
<SALES> 0
<TOTAL-REVENUES> 11,754
<CGS> 0
<TOTAL-COSTS> 5,640
<OTHER-EXPENSES> 1,509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,190
<INCOME-PRETAX> 3,824
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,824
<DISCONTINUED> 0
<EXTRAORDINARY> 1,744
<CHANGES> 0
<NET-INCOME> 3,159
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
