<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 Identification No.)
incorporation or organization)
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:
Title of each class Name of each exchange 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 March 25, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $348,946,000. The aggregate market value
was computed with reference to the closing price on the New York Stock Exchange
on such date. This calculation does not reflect a determination that persons
are affiliates for any other purpose.
As of March 20, 1997, 11,596,616 shares of Common Stock ($.0001 par value) were
outstanding.
LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part IV, Item 14,
on page number 24.
DOCUMENTS INCORPORATED BY REFERENCE:
The following document is incorporated by reference in Part III of the Annual
Report on Form 10K: Proxy statement for the annual meeting of stockholders of
Essex Property Trust, Inc. to be held May 29, 1997.
1
<PAGE>
TABLE OF CONTENTS
FORM 10-K
<TABLE>
<CAPTION>
PART I Page No.
<S> <C> <C>
Item 1 Business............................................................................ 3
Item 2 Properties.......................................................................... 10
Item 3 Legal Proceedings................................................................... 13
Item 4 Submission of Matters to a Vote of Security Holders................................. 13
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters............... 13
Item 6 Selected Financial Data............................................................ 14
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 16
Item 8 Financial Statements and Supplementary Data......................................... 22
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22
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................................................................. 23
Item 16 Signatures.......................................................................... 55
</TABLE>
2
<PAGE>
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, 1996 Essex's property
portfolio consisted of ownership interests in the following 36 properties (each
individually a "Property" and, collectively, the "Properties"): (i) 29
multifamily residential properties containing 6,624 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. Essex's properties are concentrated in Northern California and the
Seattle, Washington greater metropolitan areas, from which 78% of its rental
revenue was derived in 1996. Other markets in which the Company owns property
include Southern California and areas surrounding Portland, Oregon.
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").
The Company conducts substantially all of its activities through the Operating
Partnership. The Company currently owns an approximate 86.2% general
partnership interest and senior members of the Company's management and certain
outside investors own an approximate 13.8% limited partnership interest in the
Operating Partnership. As the sole general partner of the Operating
Partnership, the Company has control over the management of the Operating
Partnership and over each of the Properties.
All references to Essex in this report refer to Essex Property Trust, Inc. and
those entities owned or controlled by Essex Property Trust, Inc., including the
Operating Partnership. 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 160 property and portfolio assets in seven major metropolitan
markets in the western United States at an aggregate investment in excess of
$900 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 15,575
apartment units.
Business Objectives
- -------------------
The Company's primary business objective is to maximize Funds from Operations
and total returns to stockholders through continued active leasing, property
management and active portfolio management. The Company's strategies include:
. Active Property Marketing and Management. Maximize on a per share
basis, cash available for distribution and the capital appreciation of
its property portfolio through active property marketing and
management.
. Selected Expansion of Property Portfolio. Increase, on a per share
basis, cash available for distribution through the acquisition and
development of multifamily residential properties in selected major
metropolitan areas located throughout the west coast of the United
States.
. Optimal Portfolio Asset Allocations. Produce predictable financial
performance through a portfolio asset allocation program that seeks to
increase or decrease the investments in each market based on changes
in regional economic and local market conditions.
3
<PAGE>
. 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.
Business Principles
- -------------------
Essex was founded on, has followed, and intends to continue to follow the
business principles set forth below:
Property Management. Through its long-standing philosophy of active property
management and a customer satisfaction approach, coupled with a discipline of
internal cost control, Essex seeks to retain tenants, maximize cash flow,
enhance property values and compete effectively for new tenants in the
marketplace. Essex's regional portfolio 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 executives 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. The Company focuses on acquisition of multifamily
residential communities, containing between 75 and 400 units. The Company
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. The Company 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 one million people. Real estate
markets in these areas are typically characterized by a relatively
greater number of buyers and sellers and are, therefore, more liquid.
Liquidity is an important element for implementing the Company's
strategy of varying its portfolio in response to changing market
conditions.
. Supply Constraints. 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 community 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, the Company is currently pursuing investment
opportunities in selected markets of Northern and Southern California, the
Seattle Metropolitan Area and the Portland Metropolitan Area.
4
<PAGE>
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:
. 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 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 86.2% general partnership
interest. An approximate 13.8% limited partnership interest in the Operating
Partnership 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 has elected to be treated 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.
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"). Under the terms of the agreement,
Tiger/Westbrook has purchased 800,000 shares of Convertible Preferred Stock for
an aggregate purchase price of $20.0 million. Tiger/Westbrook is obligated to
purchase up to an additional $20.0 million of Convertible Preferred Stock 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
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 are convertible into Common
Stock at the option of the
5
<PAGE>
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. The stockholders of the Company
approved the sale of the Convertible Preferred Stock at a special meeting of
the stockholders held on September 27, 1996.
On August 14, 1996, the Company sold 2.2 million shares of Common Stock in a
public offering for $22.75 per share. In addition, on August 20, 1996, the
underwriters for this offering exercised their over-allotment option and
purchased an additional 330,000 shares at $22.75 per share. The Company
contributed the net proceeds from this offering to the Operating Partnership and
increased its ownership interest in the Operating Partnership from an
approximate 77.2% general partnership interest to an approximate 82.6% general
partnership interest.
On December 24, 1996, the Company sold 2.45 million shares of Common Stock in a
public offering for $27.75 per share. In addition, on December 24, 1996, the
underwriters for this offering exercised their over-allotment option and
purchased an additional 333,000 shares at $27.75 per share. The Company
contributed the net proceeds from this offering to the Operating Partnership and
increased its ownership interest in the Operating Partnership from an
approximate 82.6% to an approximate 86.2% general partnership interest.
The Operating Partnership utilized the proceeds of these 1996 equity
transactions to fund the acquisition and development of multifamily properties,
to reduce outstanding indebtedness, and for general corporate purposes.
During 1996, Essex acquired ownership interests in seven multifamily properties
consisting of 1,764 units for an aggregate contract purchase price of
approximately $114.5 million. In addition, Essex completed construction of
Jackson School Village, a 200 unit apartment property. These investments were
primarily funded by the equity transactions completed in 1996. Two of these
properties (428 units) are located in the greater Seattle metropolitan area,
two (360 units) are located in Northern California, two (691 units) are located
in Southern California and two (485 units) are located in Oregon.
The properties acquired or developed in 1996 are as follows:
Name Location Units Purchase Price
- ------------------------- ---------------- ----- ----------------
Brighton Ridge Renton, WA 264 $ 12.8 million
Camarillo Oaks Camarillo, CA 371 20.8 million
East Ridge Apartments San Ramon, CA 188 19.2 million
Landmark Apartments Hillsboro, OR 285 17.7 million
Laurels at Mill Creek Mill Creek, WA 164 7.6 million
Jackson School Village Hillsboro, OR 200 11.9 million (1)
Meadowood Apartments Simi Valley, CA 320 25.7 million
Treetops Apartments Fremont, CA 172 10.7 million
----- ---------------
1,964 $126.4 million
(1) Represents total estimated cost of development
In 1996, Essex, through a joint venture limited partnership, completed the
development of Jackson School village, a 200-unit apartment complex located in
Hillsboro, Oregon. Projected total capitalized cost of the property is $11.9
million. Leasing of the property commenced in August 1996. Although the
property has not yet achieved stabilized occupancy levels, the property was
approximately 39% occupied as of December 31, 1996.
Essex has entered into a contract to purchase a 15.2-acre parcel of land in
Milpitas, California, known as McCarthy Ranch, for approximately $10.9 million.
The purchase contract requires Essex to acquire the site within 90 days after
the completion of the entitlement phase of this project, which is anticipated to
occur in the spring of 1997. Upon closing of the purchase, Essex expects to
contribute the site to a joint venture partnership. Essex , through the joint
venture partnership, intends to construct 374 apartment units on the property at
a currently estimated total capitalized cost of $47.5 million.
As part of the acquisition of The Shores Property, Essex acquired an adjacent
10-acre parcel of land which is zoned for additional apartment development.
Essex intends to develop on this parcel approximately 100 additional apartment
units as an expansion to The Shores Property. It is anticipated that the
development of additional units at The Shores will produce an attractive
incremental return from the Property as a result of (i) an increase in the
number of units available for rent with no additional land cost and (ii) the
utilization of the existing leasing office, staff and amenities for the new
units. Essex expects to begin construction of the additional units in 1997.
Essex has entered into a letter of intent to purchase a 15-acre parcel of land
in Orange County, California for approximately $5.1 million and expects to
complete the land purchase by July 1997.
6
<PAGE>
Essex intends to construct an approximate 345 unit apartment complex in two
phases for an estimated total capitalized cost of approximately $32 million.
Construction is anticipated to begin in summer of 1997.
Essex is under contract to purchase a 2.6-acre parcel of land in Walnut Creek,
California for approximately $2.5 million and expects to complete the land
purchase by August, 1997. Essex intends to construct an approximate 100 unit
apartment complex at an estimated total capitalized cost of approximately $10.5
million. Construction is anticipated to begin in late 1997.
Essex, through a joint venture limited liability company (the "LLC"), is
currently under contract to purchase a 15-acre parcel of land in Issaquah,
Washington for approximately $4.2 million and expects to complete the land
purchase by July 1997. The LLC intends to construct an approximate 240 unit
apartment complex at an estimated total capitalized cost of approximately $23.5
million. Construction is anticipated to begin in late 1997.
The purchase of the land parcels in Milpitas, Orange County, Walnut Creek and
Issaquah are each subject to various conditions and there can be no assurance
that any such purchases will be consummated or that the development of any of
the parcels will occur.
In 1996, Essex sold two Northern California Properties for an aggregate net all
cash sales price of $13,350,000. The proceeds were used to fund acquisitions of
mulitfamily properties and to reduce outstanding debt.
Offices and Employees
- ---------------------
Essex is headquartered in Palo Alto, California, and has regional offices in
Seattle, Washington, Portland, Oregon and Tustin, California. As of December
31, 1996, Essex had approximately 274 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 stable 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 balances 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 a line of credit in the committed amount of approximately
$38.8 million with unused portions as of December 31, 1996 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
operations of major local employers may have an impact on the cash flow and
value of certain 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
7
<PAGE>
the Properties to tenants, competition from other available space, the ability
of Essex 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
Essex. Income and real estate values may also be adversely affected by such
factors as applicable laws (e.g., ADA, tax laws and rent control ordinances),
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 Essex to vary its portfolio promptly in response to changes in
economic or other conditions.
Geographic Concentration; Dependence on California, Washington and Oregon
Economics. Approximately 48%, 30%, 14% and 8% of Essex's rental revenues for
the year ended December 31, 1996 were derived from Properties located in the
Northern California Area, the Seattle Metropolitan Area, Southern California
Area 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 operations 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 and develop multifamily residential properties.
Acquisitions and development of such properties entail risks that investments
will fail to perform in accordance with expectations. Estimates of the costs of
construction or 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 had six multifamily residential property development projects in various
phases of development and may pursue other projects. Any future projects
generally will require various governmental and other approvals, the receipt of
which cannot be assured. The Company's development activities 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, Essex 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 occurring at properties in the vicinity of the
site, an investigation as to the presence of polychlorinated biphenyl's
("PCBs"), ACMs and above-ground and underground storage tanks presently or
formerly at the sites, and preparation and issuance of written reports. As a
result of information collected in the Phase I assessments, certain of the
Properties were subjected to additional environmental investigations, including,
in a few cases, soil sampling or ground water analysis to further evaluate the
environmental conditions of those Properties.
The environmental studies revealed the presence of groundwater contamination on
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
8
<PAGE>
storage tanks which have been removed. Based on the information contained in
the environmental studies, Essex 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 Essex's financial
condition or result of operations.
Except with respect to one Property, Essex has no indemnification agreements
from third parties for potential environmental clean-up costs at its Properties.
No assurance can be given that existing environmental studies with respect to
any of the Properties reveal all environmental liabilities, that any prior owner
or operator of a Property did not create any material environmental condition
not known to the Company, or that a material environmental condition does not
otherwise exist as to any one or more of the Properties.
Uninsured Losses. All of the Properties are located in areas that are subject
to earthquake activity, including 17 Properties in California, 12 Properties in
Washington and 7 Properties in Oregon. Essex has obtained earthquake insurance
for all the Properties. This earthquake insurance is subject to an aggregate
limit of $4.0 million, a limit to $2.5 million for each multifamily residential
Property and a 10% deductible. Essex may selectively exclude properties from
being covered by earthquake insurance based on management's evaluation of the
following factors: (i) the availability of coverage on terms acceptable to
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. In addition, 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 Essex 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 (which includes
outstanding balances on Essex's lines of credit) 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 and Convertible
Preferred Stock into shares of common stock and (ii) the total property
indebtedness. Based on this calculation, Essex's Debt-to-Total-Market-
Capitalization ratio was 26.6% as of December 31, 1996.
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 the 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. Essex 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, 1996, Essex had outstanding approximately $153.2 million of indebtedness
that is secured by the Properties.
Essex is not expected to have sufficient Funds 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 $153.2 million. Such
mortgage indebtedness and lines of credit have the following scheduled
maturity dates: 1997-$3.0 million; 1998-$3.2 million; 1999-$3.5 million; 2000-
$3.7 million; 2001-$41.7 million; 2002 and thereafter-$98.1 million. As a
result, Essex 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 Essex, 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 Essex.
Debt Financing; Risk of Rising Interest Rates. As of December 31, 1996, Essex
had approximately $42.8 million of variable rate mortgage indebtedness, which
bears interest at a floating rate tied to the rate of short-term tax exempt
securities. In
9
<PAGE>
addition, Essex's line of credit bears interest at a floating rate tied to the
London InterBank Offered Rates ("LIBOR"). An increase in interest rates will
have an adverse effect on Essex's net income and Funds from Operations.
ITEM 2. PROPERTIES
Portfolio Overview
- ------------------
Essex's property portfolio (including partial ownership interests) consists of
the following 36 Properties: (i) 29 multifamily residential Properties
containing 6,624 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, 1996. The 29
multifamily residential Properties had an average occupancy rate (based on
financial occupancy, which refers to the percentage resulting from dividing
actual rents by total possible rents as determined by valuing occupied units at
contractual rates and vacant units at market rents) during the year ended
December 31, 1996 of approximately 97%. As of December 31, 1996, the six retail
Properties had an occupancy rate (based on leased and occupied square footage)
of approximately 98%, and the Headquarters Building had an occupancy rate (based
on leased and occupied square footage) of 100%.
For the year ended December 31, 1996, 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
- ------------- ---------- -------- ---- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Multifamily Residential Properties
12 San Francisco South Bay 2,555 units 98% $20,993 44%
11 Seattle, Washington 2,311 units 96% 14,510 30%
2 Portland, Oregon area 485 units 84% 703 1%
4 Southern California 1,273 units 96% 6,753 14%
-- ----------- ---
Subtotal 29 6,624 units 89%
Neighborhood Shopping Centers
5 Portland Metropolitan
Area 302,706 sq. ft. 97% 2,416 5%
1 Eugene, Oregon 48,420 sq. ft. 100% 786 2%
--
Subtotal 6
Headquarters Building 1 San Francisco South Bay 44,827 sq. ft. 100% 1,619 4%
-- ------- ---
TOTAL 36 $47,780 100%
== ======= ===
</TABLE>
(1) Based upon rental revenues for the year ended December 31, 1996.
Multifamily Residential Properties
- ----------------------------------
Essex has ownership interests in 29 multifamily residential apartment
communities containing 6,624 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 fifteen acres of land. The
multifamily Properties have on average 228 units, with a mix of studio, one-,
two- and some three-bedroom units. A wide variety of amenities are available at
each apartment community, including 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 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.
Neighborhood Shopping Centers and Headquarters Building
- -------------------------------------------------------
Five of Essex's six neighborhood shopping centers are in the Portland
Metropolitan Area and one is located in Eugene, Oregon. These neighborhood
shopping centers contain an aggregate of approximately 351,000 rentable square
feet of space
10
<PAGE>
and, as of December 31, 1996, had an occupancy rate (based on leased and
occupied square footage) of approximately 98%. 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 that time has implemented an expansion,
renovation and re-leasing program. Essex considers these properties to
be held for sale.
Essex also owns a prepaid ground leasehold interest in the office building that
houses its corporate headquarters (the "Headquarters Building"). 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.
11
<PAGE>
The following tables describe Essex's Properties as of December 31, 1996. The
first table describes Essex's
Multifamily Properties and the second table describes Essex's Commercial
Properties.
<TABLE>
<CAPTION>
NUMBER TOTAL RENTABLE YEAR YEAR
PROPERTY NAME(1) LOCATION OF UNITS SQUARE FOOTAGE COMPLETED ACQUIRED OCCUPANCY(2)
<S> <C> <C> <C> <C> <C> <C>
The Apple Fremont, CA 200 146,296 1971 1982 99%
Bristol Commons(3) Sunnyvale, CA 188 142,668 1989 1995 99
Camarillo Oaks Camarillo, CA 371 303,840 1985 1996 94
Countrywood Fremont, CA 137 93,495 1970 1988 99
Eastridge San Ramon, CA 188 174,104 1988 1996 97
Marina Cove(4) Santa Clara, CA 292 250,294 1974 1994 99
Meadowood Simi Valley, CA 320 264,568 1986 1996 91
Oak Pointe Sunnyvale, CA 390 294,180 1973 1988 99
Pathways(5) Long Beach, CA 296 197,720 1975 1991 96
Plumtree Santa Clara, CA 140 113,260 1975 1994 98
The Shores(3) San Ramon, CA 348 275,888 1988 1995 96
Summerhill Commons Newark, CA 184 139,012 1987 1987 98
Summerhill Park Sunnyvale, CA 100 78,584 1988 1988 98
Treetops Fremont, CA 172 131,270 1978 1996 98
Villa Rio Vista Anaheim, CA 286 242,410 1968 1985 97
Windsor Ridge Sunnyvale, CA 216 161,892 1989 1989 99
Brighton Ridge(6) Renton, WA 264 201,300 1986 1996 98
Emerald Ridge Bellevue, WA 180 144,036 1989 1994 97
Foothill Commons Bellevue, WA 360 288,317 1978 1990 96
Inglenook Court Bothell, WA 224 183,624 1985 1994 97
Laurels at Mill Creek(6) Mill Creek, WA 164 134,360 1981 1996 95
Palisades Bellevue, WA 192 159,792 1969 1990 97
Sammamish View Bellevue, WA 153 133,590 1986 1994 98
Santa Fe Ridge Silverdale, WA 240 262,340 1993 1994 92
Wandering Creek Kent, WA 156 124,366 1986 1995 92
Wharfside Pointe Seattle, WA 142 119,290 1990 1994 95
Woodland Commons Bellevue, WA 236 172,316 1978 1990 95
Jackson School Village(7) Hillsboro, OR 200 196,896 1996 1996 (8)
Landmark Hillsboro, OR 285 283,934 1990 1996 84
------- ------- ---- ---- ------
Total/Weighted Average 6,624 5,412,792 97%(9)
</TABLE>
<TABLE>
<CAPTION>
NEIGHBORHOOD NUMBER
SHOPPING OF TOTAL RENTABLE YEAR YEAR
CENTERS LOCATION TENANTS SQUARE FOOTAGE COMPLETED ACQUIRED OCCUPANCY(2)
<S> <C> <C> <C> <C> <C> <C>
Canby Square Canby, OR 17 102,565 1976 1990 97%
Cedar Mill Place Portland, OR 11 28,392 1975 1990 94
Powell Villa Center Portland, OR 11 63,645 1959 1990 100
Riviera Plaza Eugene, OR 11 48,420 1961 1990 93
Wichita Towne Center Milwaukee, OR 6 38,324 1978 1990 100
Garrison Square Vancouver, WA 13 69,780 1962 1990 100
-- ------- ---
Subtotal 69 351,126 98%
OFFICE PROPERTY
Headquarters building(10) Palo Alto, CA 4 44,827 1988(11) 1986 100
-- ------- ---
Total/Weighted Average 73 395,593 98%
== ======= ===
</TABLE>
(1) Unless otherwise specified, the Company has a 100% ownership interest in
each respective Property.
(2) For multifamily residential Properties, occupancy rates are based on
Financial Occupancy for the year ended December 31, 1996; for the
Commercial Properties, occupancy rates are based on leased and occupied
square footage as of December 31, 1996.
(3) The Company has an approximate 45% economic ownership interest in this
Property.
(4) A portion of this Property on which 84 units are presently located is
subject to a ground lease, which, unless extended, will expire in 2028.
(5) The Company has a 69% ownership interest in this Property.
(6) Purchased in late December 1996, occupancy based on physical occupancy as
of December 31, 1996.
(7) The Company has a 49.9% interest in this Property.
(8) This Property was developed in 1996 and has not yet achieved a stabilized
occupancy level. As of December 31, 1996 this Property had an occupancy
rate of 39%.
(9) Excludes the Jackson School Village Property.
(10) The Company owns a ground leasehold interest in the building and the land
on which the headquarters building is located. The ground lease is prepaid
until its expiration in 2054, and, unless the lease is extended, the land,
together with all improvements thereon, will revert to the owner in 2054.
(11) Represents the completion date for a major renovation.
12
<PAGE>
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
At a Special Meeting of Stockholders, held on December 17, 1996, the
stockholders did not approve the following proposal: a proposal to make certain
amendments to the Company's Articles of Incorporation (the "Charter") to provide
for changes in the composition of the Board of Directors in the event of the
breach of certain protective provisions in the Charter relating to the Company's
8.75% Convertible Preferred Stock, Series 1996A (the "Convertible Preferred
Stock"). This proposal was listed as proposal number three in the Company's
proxy statement, dated September 5, 1996. There were 5,299,241 votes for this
proposal and 386,845 votes against or withheld. This proposal required the
affirmative vote of the holders of two-thirds, or approximately 5,870,000
shares, of the 8,805,000 shares of Common Stock that were then issued and
outstanding. Consequently, the affirmative votes for the proposal were not
sufficient to approve it. The voting on this proposal was first held on
September 27, 1996 and the voting was adjourned to December 17, 1996, in order
to obtain additional votes from the stockholders in connection with this
proposal.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of the Company's common stock are traded on the New York Stock
Exchange ("NYSE") under the symbol ESS.
Market Information
- ------------------
The Company's common stock has been traded on the NYSE since June 13, 1994. The
high, low and closing price per share of common stock reported on the NYSE for
the quarters indicated from the Company's inception are as follows:
Quarter Ended High Low Close
- ---------------------- ------- ------- -------
December 31, 1996 $29.375 $24.625 $29.375
September 30, 1996 $24.875 $21.375 $24.875
June 30, 1996 $22.500 $19.375 $21.500
March 31, 1996 $21.250 $18.750 $20.750
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 $15.375 $15.875
The closing price as of March 20, 1997 was $30.375.
Holders
- -------
The approximate number of holders of record of the shares of the Company's
common stock was 117 as of March 25, 1997. 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
13
<PAGE>
depreciation, in the determination of earnings and profits. The status of the
cash dividends distributed for the years ended December 31, 1996, 1995 and 1994
for tax purposes is as follows:
1996 1995 1994
------- ------- ------
Taxable portion 58.00% 69.00% 68.00%
Return of capital 42.00% 31.00% 32.00%
------ ------ -----
100.00% 100.00% 100.00%
====== ====== ======
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;
January 16, 1996, $.425, April 12, 1996, $.425; July 15, 1996, $.425; October
15, 1996, $.435; and January 15, 1997, $.435. Future distributions by the
Company will be at the discretion of the Board of Directors and will depend on
the actual funds from operations of the company, its financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Internal Revenue Code, applicable legal restrictions and such
other factors as the Board of Directors deems relevant. There are currently no
contractual restrictions on the Company's present or future ability to pay
dividends.
ITEM 6. SUMMARY FINANCIAL AND OPERATING DATA
The following tables set forth summary financial and operating information (i)
for the Company from June 13, 1994 (completion of the Company's IPO) through
December 31, 1996, (ii) on a pro forma basis for the Company for the year ended
December 31, 1994 and (iii) on a historical combined basis for the year ended
December 31, 1993 and for the period from January 1, 1994 through June 12, 1994
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 Essex Property Corporation (''EPC''). 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 IPO (including the properties acquired as of the IPO) combined with the
financial and operating information of EPC and is presented as if the following
had occurred on January 1, 1994: (i) the IPO was completed, (ii) the Company
qualified as a REIT, (iii) the Company used the net proceeds from the IPO and
the debt incurred in connection with the IPO to fund a series of asset
acquisitions and mortgage repayments in connection with the IPO, and (iv) Essex
Management Corporation (''EMC'') was formed and certain property and asset
management contracts were assigned to EMC (such pro forma adjustments, the ''IPO
Pro Forma Adjustments'').
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 Condition and Results of Operations and with all of
the financial statements and notes thereto.
14
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Year Year June 13, Pro forma Jan. 1, Year
ended ended 1994- Year ended 1994- ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, June 12, Dec. 31,
1996 1995 1994 1994(1) 1994 1993
---------- -------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES
Rental.......................... $47,780 $41,640 $19,499 $34,154 $12,742 $26,509
Property and asset management... - - - 257 1,794 3,277
Other........................... 2,913 2,300 914 1,582 275 643
------- -------- ------- ------- ------- -------
Total revenues............. 50,693 43,940 20,413 35,993 14,811 30,429
EXPENSES
Property operating expenses..... 15,505 13,604 6,452 11,414 4,267 9,348
Depreciation and amortization... 8,855 8,007 4,030 7,047 2,598 5,537
Amortization of deferred
financing costs............... 639 1,355 773 1,407 96 219
General and administrative...... 1,717 1,527 457 804 306 688
Property and asset management... - - - - 974 1,396
Other expenses.................. 42 288 - - 314 952
Interest........................ 11,442 10,928 4,304 7,086 5,924 11,902
------- -------- ------- ------- ------- -------
Total expenses............... 38,200 35,709 16,016 27,758 14,479 30,042
------- -------- ------- ------- ------- -------
Income before gain on sales, minority
interest, provision for income
taxes and extraordinary item....... 12,493 8,231 4,397 8,235 332 387
Gain on sales................... 2,477 6,013
Minority interest............... (2,648) (3,486) (1,131) (1,938) 87 161
Provision for income taxes...... - - - - (267) (581)
Extraordinary item-loss on early
extinguishment of debt........ (3,441) (154) - - - -
------- -------- ------- ------- ------- -------
Income (loss) after minority
interest........................... $8,881 $10,604 $3,266 $6,297 $152 $ (33)
======= ======= ======= ======= ======= =======
Net income (loss) per share after
minority interest(2)............... $1.12 $1.69 $0.52 $ 1.00 - -
======= ======= ======= ======= ======= =======
Weighted average common stock
outstanding (in thousands)......... 7,348 6,275 6,275 6,275 - -
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------
1996 1995 1994 1993
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate (before accumulated depreciation)......... $393,809 $284,358 $282,344 $186,447
Net investment in real estate....................................... 346,178 244,077 248,232 158,873
Total assets........................................................ 417,174 273,660 269,065 171,287
Total property indebtedness......................................... 153,205 154,524 150,019 152,501
Stockholders' equity................................................ 222,807 84,729 84,699 7,772
</TABLE>
<TABLE>
<CAPTION>
Year Year June 13, Pro forma
ended ended 1994- Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1994 1994(1)
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS(3)
Net income before gain on sales, minority interest,
provision for income taxes and extraordinary item........................... $12,493 $8,231 $4,397 $8,235
Adjustments
Depreciation and amortization............................................ 8,855 8,007 4,030 7,059
Adjustments for unconsolidated joint ventures............................ 508 121 - -
Non-recurring items...................................................... 42 288 - -
Minority interest........................................................ (560) (527) (260) (457)
------- ------- ------ -------
Funds from Operations(3)...................................................... $21,338 $16,120 $8,167 $14,837
======= ======= ====== =======
Weighted average number of shares outstanding
(fully diluted)(4).......................................................... 9,562 8,130 8,130 8,130
Funds from Operations applicable to Essex's stockholders...................... $17,006 $12,445 $6,305 $11,454
FFO Pay-Out Ratio............................................................. 77% 85% 91% 92%
Debt service coverage ratio(5)................................................ 2.9x 2.6x 3.1x 3.4x
Gross operating margin(6)..................................................... 68% 67% 67% 67%
Average same-property monthly rental rate per apartment unit (7)(8)........... $798 $749 $715 0.00
Average same-property monthly operating expenses per apartment unit (7)(9).... $248 $241 $234 0.00
Total multi-family units (at end of period)................................... 6,624 4,868 4,410 4,410
Multi-family residential property occupancy rate(10).......................... 97% 97% 96% 96%
Total properties (at end of period)........................................... 36 30 29 29
</TABLE>
15
<PAGE>
(1) 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 Company's initial public offering (the
"IPO") (including the properties acquired as of the IPO) combined with the
financial and operating information of EPC and is presented as if the
following had occurred on January 1, 1994: (i) the IPO was completed, (ii)
Essex qualified as a REIT, (iii) Essex used the net proceeds from the IPO
and debt incurred in connection with the IPO to fund a series of asset
acquisitions and mortgage repayments in connection with the IPO and (iv)
EMC 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.
(2) Per share amounts are presented only for the periods subsequent to June 13,
1994 and the pro forma 1994 period and are based upon respective amounts
divided by the weighted average outstanding shares on the applicable dates.
(3) Industry analysts generally consider Funds from Operations to be an
appropriate measure of the performance of an equity REIT. Funds from
Operations, as currently defined by the National Association of Real Estate
Investment Trusts (''NAREIT'') represents net income (loss) (computed in
accordance with generally accepted accounting principles (''GAAP''),
excluding gains (or losses) from debt restructuring, sales of property,
plus depreciation, 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 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 Company's calculation
of Funds from Operations.
(4) Assumes the conversion of all outstanding shares of Convertible Preferred
Stock, if any, and all outstanding limited partnership interests in the
Operating Partnership, into shares of Common Stock, as of the applicable
date.
(5) Debt service coverage ratio represents EBITDA divided by interest expense.
(6) Gross operating margin represents rental income less property operating
expenses divided by rental income.
(7) Same-property apartment units are those units which the Company has owned
since the IPO.
(8) Average same-property monthly rental rate per apartment unit represents
total scheduled rent for the period (actual rental rates on occupied
apartment units plus market rental rates on vacant apartment units) divided
by the number of apartment units and further divided by the number of
months in the period.
(9) Average same-property monthly expenses per apartment unit represents total
monthly operating expenses for the period divided by the total number of
apartment units and further divided by the number of months in the period.
(10) Occupancy rates are based on Financial Occupancy during the period
presented. Occupancy rates exclude Jackson School Village (which was
developed in 1996 and has not yet achieved stabilized occupancy).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is based on the consolidated financial statements of
Essex Property Trust, Inc. ("Essex or the "Company") as of and for the years
ended December 31, 1996 and 1995 and for the period from June 13, 1994 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.
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 compares Essex's results of operations for the year ended
December 31, 1996, with its results for the year ended December 31, 1995. The
discussion also compares Essex's results for the year ended December 31, 1995,
with the combined activities of Essex and EPP for the year ended December 31,
1994.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
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, 1996
owned an approximate 86.2% general partnership interest in the Operating
Partnership and as of December 31,1995 and 1994, owned an approximate 77.2%
general partnership interest in the Operating Partnership. The Company has
elected to be treated as a REIT for Federal income tax purposes.
16
<PAGE>
Certain statements in the Report on Form 10-K and in this Management's
Discussion and Analysis of Financial Condition and Results of Operations,
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. Some of the factors that could cause
actual results to differ materially are set forth in Item 1 Business-Other
Matters.
GENERAL BACKGROUND
Revenues are generated primarily from multifamily residential and commercial
property operations, which accounted for 96%, 95%, and 91% of its revenues for
the years ended December 31, 1996, 1995, and 1994, respectively. Essex's
properties are located in California, Washington and Oregon. Occupancy levels
for Essex's multifamily residential properties in these markets have generally
remained high (averaging approximately 95% over the last five years).
Essex elects to be treated 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 fewer
opportunities to acquire portfolios of non-performing assets will be available
in the near future.
Average financial occupancy rates for the year ended December 31, 1996 for
multifamily properties were as follows:
Northern California 98%
Seattle, Washington 96%
Southern California 96%
Portland, Oregon 84%
The commercial properties were 98% occupied (based on square footage) as of
December 31, 1996.
For the year ended December 31, 1996, multifamily property revenue on a same
property basis grew at 6.7% over the 1995 comparable period. The following is a
regional breakdown of same property revenue growth for Essex's multifamily
properties:
Northern California 9.3%
Seattle Metropolitan Area 4.4%
Southern California 3.8%
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
- --------------------------------------------------------------------------
Total Revenues increased by $6,753,000 or 15.4% to $50,693,000 in 1996 from
$43,940,000 in 1995. Rental revenue increased by $6,140,000 or 14.7% to
$47,780,000 in 1996 from $41,640,000 in 1995. Approximately $3,564,000 of the
increase in rental revenue was attributable to the properties which were
acquired by Essex in 1995 and 1996. Rental revenue from the Northern California
and Seattle multifamily residential Properties increased by $3,010,000 or 9.3%
to $35,504,000 in 1996 from $32,494,000 in 1995. Rental revenue increased by
$2,156,000 or 46.9% during 1996 for the Properties located in Southern
California. Approximately $1,973,000 of this increase was attributable to two
properties acquired in this region during 1996. Portland, Oregon 1996
acquisitions contributed $703,000 to rental operations. Commercial property
rental revenue increased by $271,000 or 5.9% during 1996.
17
<PAGE>
On April 30, 1996 and June 21, 1996 the Company sold the Viareggio and
Westbridge properties, respectively. The net all cash sales price of the two
properties was $13,350,000. The net book value of these assets were $10,873,000
resulting in a gain on sales of real estate of $2,477,000.
Total Expenses increased by $2,491,000 or approximately 7.0% to $38,200,000 in
1996 from $35,709,000 in 1995. Interest expense increased by $514,000 or 4.7%
to $11,442,000 in 1996 from $10,928,000 in 1995. Such interest expense increase
was primarily due to the acquisition of additional multifamily Properties.
Property operating expenses, exclusive of depreciation and amortization
increased by $1,901,000 or 14.0% to $15,505,000 in 1996 from $13,604,000 in
1995. Of such increase, $1,293,000 is attributable to Properties acquired
subsequent to December 31, 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 $190,000 primarily due to an increase in staffing during the year.
Net income decreased by $1,723,000 to $8,881,000 in 1996 from $10,604,000 in
1995. The decrease in net income was primarily due to an extraordinary charge
of $3,441,000 related to the early extinguishment of debt, net reduction in
gains on sale of real estate of $3,536,000 from $6,013,000 in 1995 to $2,477,000
in 1996, partially offset by income before gain on sales of real estate,
provision for income taxes, minority interest and extraordinary items increase
of $4,262,000 to $12,493,000 in 1996 from $8,231,000 in 1995.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
- --------------------------------------------------------------------------
Total Revenues increased by $8,716,000 or 24.7% 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. Approximately $8,269,000 of the
increase in rental revenue was attributable to the properties which were
acquired by Essex's concurrent with and after the IPO in 1994 and 1995. 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. 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 the Loma Verde and
Pacifica Park properties, 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, exclusive of depreciation and amortization,
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. 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. 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 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 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 sales of two properties and operations from Properties
acquired concurrent with and after the IPO in 1994 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Essex had $46,899,000 in cash and cash equivalents, of
which a substantial portion is identified for future property acquisitions.
Management believes that the uncommitted cash and available lines of credit
should be
18
<PAGE>
sufficient to meet its immediate operating cash requirements. Essex has credit
facilities in the committed amount of approximately $38,800,000. At December 31,
1996 Essex had no outstanding balance on its line of credit. The interest rate
on the line of credit is 1.85% over the LIBOR rate. The line of credit expires
on May 15, 1997.
Essex's cash balance increased $42,916,000 from $3,983,000 as of December 31,
1995 to $46,899,000 as of December 31, 1996. This increase in cash was the
result of $20,135,000 of cash provided by operating activities, and $107,777,000
of cash provided by financing activities reduced by $84,996,000 of cash used in
investing activities. The $84,996,000 of net cash used by investing activities
was the result of $101,429,000 used to purchase rental properties, which were
offset by $13,350,000 of proceeds of the sales of two properties. The
significant components which contributed to the $107,777,000 net cash provided
by financing activities were $143,969,000 net proceeds from stock offerings,
$91,253,000 of proceeds from mortgages, other notes payable and lines of credit
partially offset by $110,305,000 of repayments of mortgages, other notes payable
and lines of credit and $15,198,000 of dividends/distributions paid.
As of December 31, 1996, the combined outstanding indebtedness under mortgages
and lines of credit consisted of $110,385,000 in fixed rate debt, and
$42,820,000 of debt represented by tax exempt variable rate demand bonds, of
which $29,220,000 of the tax exempt variable rate demand bonds are subject to
interest rate protection agreements limiting the maximum interest rate to 7.2%.
For the year ended December 31, 1996, non-revenue generating capital
expenditures totaled approximately $1,420,000 or an annualized $300 per weighted
average occupancy unit These expenditures do not include the improvements 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 $300 per
weighted average occupancy unit in non-revenue generating capital expenditures
for the year ended December 31, 1997. 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 1997 and/or the
funding thereof will not be significantly different than 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 from working capital
and cash flow from operations. 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.
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).
Subsequent to December 31, 1996, Essex filed a shelf registration statement for
$175 million, (the "December Shelf Registration Statement"). Prior to this
filing, Essex had approximately $25 million capacity remaining on a previously
filed registration statement which registered shares of common stock, preferred
stock, depository shares and warrants to purchase common and preferred stock.
The December Shelf Registration Statement was declared effective by the
Securities and Exchange Commission on February 26, 1997.
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
performance of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds from Operations does not represent net income
or cash flows from operations as defined by generally accepted accounting
principles (GAAP) and 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
19
<PAGE>
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 1996, 1995 and the period June 13 through
December, 1994 and Pro forma Funds from Operations for 1994.
The National Association of Real Estate Investment Trusts ("NAREIT"), a leading
industry 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 1996,
1995 and 1994 and pro forma Funds for Operations for 1994 under the revised
definition.
20
<PAGE>
<TABLE>
<CAPTION>
For the quarter ended
Year Ended --------------------------------------------------
12/31/96 12/31/96 9/30/96 6/30/96 3/31/96
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income before minority interest $11,529,000 $ 4,423,000 $2,904,000 $ 4,184,000 $ 18,000
Adjustments:
Depreciation and amortization 8,855,000 2,342,000 2,276,000 2,047,000 2,190,000
Adjustments for unconsolidated
joint ventures 508,000 129,000 130,000 130,000 119,000
Non-recurring items (1)
Gains of the sales of real estate -2,477,000 3,000 -71,000 -2,409,000 0
Other non-recurring items 3,483,000 124,000 475,000 683,000 2,201,000
Minority interest - Pathways -560,000 -144,000 -144,000 -132,000 -140,000
---------- ----------- ---------- ----------- ----------
Funds from operations
NAREIT "revised definition" $21,338,000 $ 6,877,000 $5,570,000 $ 4,503,000 $4,388,000
Weighted average number
of Shares - fully diluted (2) 9,562,236 11,974,675 9,878,075 8,130,000 8,130,000
</TABLE>
<TABLE>
<CAPTION>
For the quarter ended
Year Ended --------------------------------------------------
12/31/95 12/31/95 9/30/95 6/30/95 3/31/95
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income before minority interest $14,090,000 $ 7,254,000 $2,142,000 $ 2,682,000 $2,012,000
Adjustments:
Depreciation and amortization 8,007,000 1,999,000 2,037,000 2,000,000 1,973,000
Adjustments for unconsolidated
joint ventures 121,000 68,000 51,000 0 0
Non-recurring items(1)
Gains of the sales of real estate -6,013,000 -5,224,000 0 -789,000 0
Other non-recurring items 442,000 249,000 26,000 167,000 0
Minority interest - Pathways -527,000 -155,000 -123,000 -129,000 -120,000
----------- ----------- ---------- ----------- ----------
Funds from operations -
NAREIT "revised definition" $16,120,000 $ 4,191,000 $4,133,000 $ 3,931,000 $3,865,000
=========== =========== ========== =========== ==========
Number of Shares (2) 8,130,000 8,130,000 8,130,000 8,130,000 8,130,000
</TABLE>
<TABLE>
<CAPTION>
Proforma
For the 6/13/94 For the quarter ended 6/13/94
Year Ended Through ------------------------ Through
12/31/94 12/31/94 12/31/94 9/30/94 6/30/94
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income before minority interest $8,235,000 $ 4,397,000 $1,810,000 $ 2,180,000 $ 407,000
Adjustments:
Depreciation and amortization 7,059,000 4,030,000 2,056,000 1,649,000 325,000
Minority interest - Pathways -457,000 -260,000 -121,000 -117,000 -22,000
----------- ----------- ---------- ----------- ----------
Funds from operations -
NAREIT "revised definition" $14,837,000 $ 8,167,000 $3,745,000 $ 3,712,000 $ 710,000
=========== =========== ========== =========== ==========
Number of Shares (2) 8,130,000 8,130,000 8,130,000 8,130,000 8,130,000
</TABLE>
(1) Other non-recurring items for the years ended December 31, 1996 and 1995
consist of $42,000 and $288,000 of loss from hedge termination and
$3,441,000 and $154,000 of loss on the early extinguishment of debt,
respectively. 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 and Convertible Preferred Stock into shares of Essex's
common stock. Also includes common stock equivalents.
21
<PAGE>
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.
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 29, 1997.
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 29, 1997.
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 29, 1997.
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 29, 1997.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Report of KPMG Peat Marwick LLP, independent
auditors Page
----
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-1
Financial Statements:
Consolidated Balance Sheets:
Essex Property Trust, Inc. as of December 31, 1996 and December 31, 1995 F-2
Statements of Operations:
Essex Property Trust Inc., consolidated for the years ended December 31, 1996 and 1995,
and for the period from June 13, 1994 through December 31, 1994; Essex Partners
Properties combined for period January 1 through June 13, 1994 F-3
Statements of Stockholders' Equity:
Essex Property Trust Inc. consolidated for the years ended December 31, 1996
and 1995, and for the period from June 13, 1994 through December 31, 1994; Essex
Partners Properties combined for the period of January 1 through June 13, 1994 F-4
Statements of Cash Flows:
Essex Property Trust, Inc. consolidated for the years ended December 31, 1996 and 1995
and for the period June 13, 1994 through December 31, 1994; Essex Partners Properties
Combined for the period of January 1 through June 13, 1994 F-5
Notes to Consolidated Financial Statements F-6
(b) Pro Forma Condensed Consolidated Statement of Operations - Unaudited
Between January 31, 1996 and November 7, 1996, Essex consummated five property
acquisitions and two property dispositions with independent third parties in
"arms-lengths" transactions.
The following unaudited pro forma condensed consolidated statement of operations
for the year ended December 31, 1996 is presented as if the property
transactions stated above occurred on January 1, 1996.
Pro Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1996. S-1
Notes to Pro Forma Condensed Consolidated Statement of Operations S-2
</TABLE>
(c) Reports on Form 8-K
On December 19, 1996, the Company filed a current report on Form 8-K, with
respect to its acquisition of the Meadowood property, which included historical
and pro forma financial statements.
On October 17, 1996, the Company filed a current report on Form 8-K/A (an
amendment to a 8-K report filed on September 11, 1996), regarding 1996 property
acquisitions and dispositions and which included combined historical summary of
gross income and direct operating expenses for the year ended December 31, 1995
for such 1996 property acquisitions.
(d) Exhibits
23
<PAGE>
<TABLE>
<CAPTION>
Exhibit # Document Page
- --------- -------- ----
<S> <C> <C>
3.1 Articles of Amendment and Restatement of Essex dated June 22, 1995. (5)
3.2 Articles Supplementary of Essex Property Trust, Inc. for the 8.75% Convertible Preferred Stock, Series 1996A,
attached as Exhibit 3.1 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated
herein by reference. --
3.3 First Amendment to Articles of Amendment and Restatement of Essex Property Trust, Inc., attached as Exhibit
3.1 to Essex's 10Q as of September 30, 1996, and hereby incorporated herein by reference. --
3.4 Certificate of Correction dated December 20, 1996. 56
3.5 Amended and Restated Bylaws of Essex Property Trust, Inc., attached as Exhibit 3.2 to Essex's Current Report
on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference. --
3.6 Certificate of Amendment of the Bylaws of Essex Property Trust, Inc., dated December 17, 1996. 62
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 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.,
attached as Exhibit 10.1 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby
incorporated herein by reference. --
10.11 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., attached as Exhibit 10.2 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby
incorporated herein by reference. --
10.12 First Amendment to Investor Rights Agreement dated July 1, 1996 by and between George M. Marcus and The
Marcus & Millichap Company, attached as Exhibit 10.3 to Essex's Current Report on Form 8-K, filed August 13,
1996, and hereby incorporated herein by reference. --
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)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit # Document Page
- --------- -------- ----
<S> <C> <C>
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)
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 Loan Facility Agreement dated as of June 20, 1996 among Essex Property Trust, Inc. and T/W Essex Funding, L.L.C.,
attached as Exhibit 10.4 to Essex's Current Report on Form 80K, filed August 13, 1996, and hereby incorporated
herein by reference. --
10.24 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., attached as Exhibit 10.5 to Essex's Current Report on Form 8-K, filed August 13, 1996,
and hereby incorporated herein by reference. --
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)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit # Document Page
- --------- -------- ----
<S> <C> <C>
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 Sammamish View Apartments,
attached as an Exhibit to Form 8K dated November 21, 1994. (3)
10.43 Guarantee dated as of June 20, 1996 of Essex Portfolio, L.P. to T/W Essex Funding, L.L.C. attached as Exhibit
10.6 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by
reference. --
10.44 Reaffirmation of Guarantee dated as of July 1, 1996 by Essex Portfolio, L.P., attached as Exhibit 10.7 to Essex's
Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference. --
10.45 Registration Rights Agreement, dated as of June 20, 1996, attached as Exhibit 10.8 to Essex's Current Report on
Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference. --
10.46 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., attached as Exhibit
10.9 to Essex's Current Report on Form 8-K, filed August 13, 1996, and hereby incorporated herein by reference. --
10.47 Letter Agreement with Tiger/Westbrook entities re: Limitations on Ownership of Stock of the Company, attached
as Exhibit 10.1 to Essex's 10Q as of September 30, 1996, and hereby incorporated herein by reference. --
10.48 Promissory Note dated February 13, 1996, executed by the Operating Partnership to the order of The Northwestern
Mutual Life Insurance Company, in the principal amount of $20,200,000, attached as Exhibit 10.43 to Essex's
10Q as of March 31, 1996, and hereby incorporated herein by reference. --
10.49 Commercial Promissory Note Secured by Deed of Trust dated January 29, 1996, executed by the Operating Partnership
to the order of Union Bank, in the principal amount of $14,475,000, attached as Exhibit 10.44 to Essex's 10Q as of
March 31, 1996, and hereby incorporated herein by reference. --
11.1 Statements regarding Computation of Earnings Per Share. 63
12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. 64
21.1 List of Subsidiaries of Essex Property Trust, Inc. 65
23.1 Consent of Independent Public Accountants. 66
27.1 Article 5 Financial Data Schedule (Edgar Filing Only) --
</TABLE>
(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.
26
<PAGE>
(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 Exhibit 3.1 to the Company's report on Form
10Q for the quarter
ended June 30, 1995.
* Management contract or compensatory plan or agreement.
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Essex Property Trust, Inc.:
We have audited the accompanying consolidated balance sheets of Essex Property
Trust, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1996 and 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. In connection with our audits of
the consolidated financial statements, we have also audited the financial
statement schedule of Real Estate and Accumulated Depreciation as of December
31, 1996. 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. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows of Essex Property Trust, Inc. for the
years ended December 31, 1996 and 1995 and for the period June 13, 1994 through
December 31, 1994 and of the Predecessor for the period 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.
KPMG PEAT MARWICK LLP
San Francisco, California
January 31, 1997
F-1
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets 1996 1995
------ -------- --------
<S> <C> <C>
Real estate:
Rental properties:
Land and land improvements $ 90,557 $ 61,738
Buildings and improvements 303,252 222,620
-------- --------
393,809 284,358
Less accumulated depreciation (47,631) (40,281)
-------- --------
346,178 244,077
Investments 8,537 8,656
-------- --------
354,715 252,733
Cash and cash equivalents 46,899 3,983
Notes and other related party receivables 2,362 4,780
Notes and other receivables 5,293 5,130
Prepaid expenses and other assets 3,745 1,944
Deferred charges, net 4,160 5,090
-------- --------
$417,174 $273,660
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Mortgage notes payable $153,205 $136,061
Lines of credit -- 18,463
Accounts payable and accrued liabilities 7,346 2,964
Dividends payable 6,286 3,455
Other liabilities 2,249 1,565
-------- --------
Total liabilities 169,086 162,508
Minority interest 25,281 26,423
Stockholders' equity:
8.75% Convertible preferred stock, series 1996A: $.0001 par
value, 1,600,000 and none authorized; 800,000 and none
issued and outstanding, in 1996 and 1995 respectively 1 --
Common stock, $.0001 par value, 668,400,000 and
670,000,000 shares authorized; 11,591,650 and 6,275,000
shares issued and outstanding, in 1996 and 1995
respectively 1 1
Excess stock, $.0001 par value, 330,000,000 shares authorized;
no shares issued or outstanding -- --
Additional paid-in capital 256,106 112,070
Accumulated deficit (33,301) (27,342)
-------- --------
Total stockholders' equity 222,807 84,729
-------- --------
$417,174 $273,660
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Essex
Partners
Essex Property Trust, Inc Properties
------------------------------------------------- -------------------
Year ended Year ended June 13, through January 1, through
December 31, December 31, December 31, June 12,
1996 1995 1994 1994
------------- ------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Rental $47,780 $41,640 $19,499 $12,742
Property and asset management -- -- -- 1,794
Interest and other income 2,913 2,300 914 275
------- ------- ------- -------
50,693 43,940 20,413 14,811
------- ------- ------- -------
Expenses:
Property operating expenses:
Maintenance and repairs 4,341 3,811 1,725 1,108
Real estate taxes 3,790 3,371 1,601 1,120
Utilities 3,175 2,974 1,396 834
Administrative 2,911 2,592 1,297 922
Advertising 653 299 149 142
Insurance 635 557 284 141
Depreciation and amortization 8,855 8,007 4,030 2,598
------- ------- ------- -------
24,360 21,611 10,482 6,865
------- ------- ------- -------
Interest 11,442 10,928 4,304 5,924
Amortization of deferred financing costs 639 1,355 773 96
General and administrative 1,717 1,527 457 306
Loss from hedge termination 42 288 -- --
Property and asset management -- -- -- 974
Other -- -- -- 314
------- ------- ------- -------
Total expenses 38,200 35,709 16,016 14,479
------- ------- ------- -------
Income before gain on sales of
real estate, provision for income
taxes, minority interest and
extraordinary items 12,493 8,231 4,397 332
Gain on sales of real estate 2,477 6,013 -- --
Provision for income taxes -- -- -- (267)
Minority interest (2,648) (3,486) (1,131) 87
------- ------- ------- -------
Income before extraordinary items 12,322 10,758 3,266 152
Extraordinary loss on early extinguishments of debt (3,441) (154) -- --
------- ------- ------- -------
Net income $ 8,881 $10,604 $ 3,266 $ 152
======= ======= ======= =======
Per share data:
Net income per share from operations
before extraordinary item $1.50 $1.71 $.52
Extraordinary loss on extinguishments
of debt (.38) .02 --
------- ------- -------
Net income per share $1.12 $1.69 $.52
======= ======= =======
Weighted average shares used in
net income per share calculation 7,348 6,275 6,275
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Retained
Preferred stock Common stock Additional earnings/
--------------- ----------------- paid-in (accumulated
Shares Amount Shares Amount capital deficit) Total
------ ------ ------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
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
Net proceeds from preferred stock offering 800 $ 1 -- - 17,504 -- 17,505
Net proceeds from common stock offerings -- - 5,313 - 126,464 -- 126,464
Net proceeds from options exercised -- - 4 - 68 -- 68
Net income -- - -- - -- 8,881 8,881
Dividends declared -- - -- - -- (14,840) (14,840)
--- --- ------ --- -------- -------- --------
Balances at December 31, 1996 800 $ 1 11,592 $ 1 $256,106 $(33,301) $222,807
=== === ====== === ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Essex Partners
Essex Property Trust, Inc. Properties
------------------------------------------ ---------------
Year ended Year ended June 13, to January 1, to
December 31, December 31, December 31, June 12,
1996 1995 1994 1994
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,881 $ 10,604 $ 3,266 $ 152
Minority interest 2,047 3,003 892 (87)
Adjustments to reconcile net income
to net cash provided
by operating activities:
Gain on sales of real estate (2,477) (6,013) -- --
Equity income of limited
partnerships (546) (92) -- --
Loss on early extinguishment of debt 3,441 154 -- --
Loss from hedge termination 42 62 -- --
Depreciation and amortization 8,855 8,007 4,030 2,598
Amortization of deferred financing
costs 639 1,355 773 96
Changes in operating assets and
liabilities:
Other receivables (163) (48) (71) 1,848
Prepaid expenses and other assets (2,110) (561) 3,626 (1,396)
Accounts payable and accrued
liabilities 842 (73) 685 691
Other liabilities 684 197 (1,101) 1,087
--------- ------- --------- -------
Net cash provided by operating
activities 20,135 16,595 12,100 4,989
-------- -------- --------- -------
Cash flows from investing activities:
Additions to rental properties (101,429) (9,516) (84,940) (1,796)
Issuance of notes receivable (3,909) (500) (8,673) --
Repayments of notes receivable 6,327 333 -- --
Investments in corporations and joint
ventures 665 (7,426) (1,138) --
Dispositions of real estate 13,350 12,147 -- --
--------- ------- --------- -------
Net cash used in investing
activities (84,996) (4,962) (94,751) (1,796)
--------- ------- --------- -------
Cash flows from financing activities:
Proceeds from mortgage and other
notes payable and
lines of credit 91,253 21,700 128,904 --
Repayment of mortgage and other notes
payable and lines
of credit (110,305) (17,195) (138,434) (2,113)
Additions to deferred charges (2,530) (930) (7,085) --
Additions to payable to related
parties -- -- 190 919
Repayment of payable to related
parties -- -- (4,668) (2,908)
Net proceeds from common stock
offerings 143,969 -- 112,071 --
Increase in offering related accounts
payable 1,140 -- -- --
Net proceeds from stock options
exercised 68 -- -- --
Net payments made in connection with
the reorganization -- -- (4,721) --
Net payments made in connection with
costs related to the
early extinguishment of debt (620) -- -- --
Distributions to minority
interest/partners (3,189) (3,123) -- (1,273)
Dividends paid (12,009) (10,513) (4,044) --
-------- -------- --------- --------
Net cash provided by (used in)
financing
activities 107,777 (10,061) 82,213 (5,375)
-------- -------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 42,916 1,572 (438) (2,182)
Cash and cash equivalents at beginning
of period 3,983 2,411 2,849 5,031
--------- ------- --------- --------
Cash and cash equivalents at end of
period $ 46,899 $ 3,983 $ 2,411 $ 2,849
========= ======= ========= ========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 11,575 $10,927 $ 3,562 $ 6,584
========= ======= ========= ========
Supplemental disclosure of non-cash
investing and
financing activities:
Mortgage note payable assumed in
connection with
purchase of real estate $ 17,733 -- $ -- $ 9,161
========= ======= ======== ========
Dividends payable $ 6,286 $ 3,455 $ 3,394 $ --
========= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(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 $112,100 were used to acquire a 77.2%
general partnership interest in the Operating Partnership.
The limited partners own an aggregate 13.8% interest in the Operating
Partnership at December 31, 1996. 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 $66,200. 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 Apartments
(Pathways) and the adjustments for Essex Property Corporation (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:
F-6
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
Net effect of Offering:
<TABLE>
<CAPTION>
<S> <C>
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 through June 12, 1994. 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
periods. Actual results could differ from those estimates.
F-7
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
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.
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.
The Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of (SFAS 121), effective January 1, 1996. In the normal
course of business, when the Company determines that a property is
considered to be held for sale, it will discontinue the periodic
depreciation of that property in accordance with the provisions of SFAS 121.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. In addition, whenever events or changes in
circumstances indicate that the carrying amount of a property to be held 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. No impairment has been
recorded through December 31, 1996. Adoption of this Statement did not have
a material impact on the Company's financial position, results of
operations, or liquidity.
Real Estate Investments
The Company accounts for its investments in joint ventures and corporations
in a manner which approximates the equity method of accounting.
Cash Equivalents
Highly liquid investments with a maturity of three months or less when
purchased are classified as cash equivalents. Cash and cash equivalents
include $4,194 of restricted cash related to reserve requirements in
conjunction with the Company's tax exempt variable rate bond financings.
F-8
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
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. Accrued
rent receivable relating to such leases has been included in 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.
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
In any year in which the Company qualifies as a real estate investment trust
(REIT) under Sections 856 to 860 of the Internal Revenue Code of 1986, as
amended (the Code), in general it is not subject to federal income tax on
that portion of its income that it distributes to stockholders. Accordingly,
no provision for federal income taxes has been made in the accompanying
consolidated financial statements for the years ended December 31, 1996 and
1995, and the period June 13 through December 31, 1994, as the Company
believes it qualifies under the code as a REIT and has made distributions
during the periods in excess of taxable income.
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 for 1994 was allocated to EPC by M&M based upon the
effective rates applicable to M&M.
F-9
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
Federal taxable income of the Company prior to the dividend paid deductions
for the years ended December 31, 1996 and 1995, and for the period June 13,
1994 to December 31, 1994, was: $7,600, $7,295 and $3,897, respectively. The
difference between net income for financial reporting purposes and taxable
income results primarily from different methods of depreciation and gains on
property dispositions.
The status of the cash dividends distributed for the years ended December
31, 1996, 1995 and 1994 for tax purposes is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Taxable portion 58% 69% 68%
Return of capital 42 31 32
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
Advertising
Property specific advertising costs incurred during the initial lease-up
period are capitalized. All other advertising costs are expensed as
incurred.
Per Share Data
Primary net income per share is computed by dividing net income after
deduction of preferred stock dividends of $635 by the weighted average
number of common shares and dilutive common stock equivalents outstanding
for the period. The weighted average number of shares used to compute
primary earnings per share were 7,347,527, 6,275,000 and 6,275,000 in 1996,
1995 and the period from June 13, 1994 through December 31, 1994,
respectively. Fully diluted net income per share was not reported because it
was anti-dilutive.
Stock Based Compensation
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock plans.
(3) EQUITY TRANSACTIONS
During 1996, the Company sold additional shares of Common Stock in two
separate common stock offerings on August 14, 1996 and December 24, 1996. In
connection with these offerings, the Company sold 2,530,000 and 2,783,000
shares at $22.75 and $27.75 per share, respectively. The total proceeds
received for these two transactions was $53,996 and $72,468, respectively.
F-10
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
On June 20, 1996, the Company entered into an agreement to sell up to
$40,000 of the 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 accordance with the agreement, on
July 1, 1996, Tiger/Westbrook purchased 340,000 shares of Convertible
Preferred Stock for an aggregate purchase price of $8,500 and loaned the
Company an additional $11,500. This loan was exchanged for 460,000 shares of
Convertible Preferred Stock at $25.00 per share on September 27, 1996 upon
receiving stockholder approval. Tiger/Westbrook is obligated to purchase up
to an additional $20,000 of Convertible Preferred Stock as requested by the
Company on or prior to June 20, 1997. The outstanding Convertible Preferred
Stock is entitled to receive annual cumulative cash dividends paid quarterly
in an amount equal to the greater of (i) 8.75% of the 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. Subsequent to 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 of the next three-month periods, an additional 25% of the
Convertible Preferred Stock is convertible. The conversion price per share
is $21.875, subject to certain adjustments as defined in the agreement.
(4) REAL ESTATE
Rental Properties
Rental properties consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Land and Buildings
land im- and im- Accumulated
provements provements Total depreciation
---------- ---------- -------- ------------
<S> <C> <C> <C> <C>
December 31, 1996:
Apartment properties $86,491 $274,241 $360,732 $41,627
Retail and corporate 4,066 29,011 33,077 6,004
------- -------- -------- -------
$90,557 $303,252 $393,809 $47,631
======= ======== ======== =======
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
======= ======== ======== =======
</TABLE>
The properties are located in California, Washington and Oregon. The
operations of the Properties could be adversely affected by a recession,
general economic downturn or a natural disaster in the areas where the
properties are located.
F-11
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
At December 31, 1996, the Company's six retail properties in Portland Oregon
with a carrying amount of $14,866 are held for sale. These properties
consist of approximately 350,000 square feet of retail space which
contributed $3,240 to revenues in 1996.
During the year ended December 31, 1996, the Company sold to third parties
two properties for $14,310, resulting in a gain of $2,477. During the year
ended December 31, 1995, the Company sold to third parties two properties
for $12,147, resulting in a gain of $6,013.
For the years ended December 31, 1996, 1995, and 1994, depreciation expense
on real estate was $8,820, $7,978 and $6,562, respectively, and amortization
of capitalized leasing commissions was $35, $29, and $66, 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 investments. The Company accounts
for its investments in Fidelity and Sacramento on the equity method of
accounting.
F-12
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
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 JSR on the equity method of accounting.
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.
Investments consists of the following as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Investments in joint ventures:
Limited partnership economic interest of 45% in
Essex Bristol Partners $1,921 $2,101
Limited partnership economic interest of 45% in
Essex San Ramon Partners $3,436 3,703
Limited partnership interest of 49.9% in
Jackson School Village, L.P. 2,032 1,670
------ ------
7,389 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 331 331
Essex Sacramento Corporation -- 62,500 shares of preferred stock 627 627
------ ------
1,148 1,148
Other investments -- 34
------ ------
$8,537 $8,656
====== ======
</TABLE>
F-13
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(5) RECEIVABLES
Receivables consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Notes and other related party receivables:
Note receivable from Fidelity I and Sacramento,
secured, bearing interest at 9%, due on demand $ 718 $3,540
Notes receivable from Fidelity I and JSV, secured,
bearing interest at 9.5 - 10%, due 2015 726 500
Other related party receivables, substantially due on
demand 740
------ ------
$2,362 $4,780
====== ======
</TABLE>
Other related party receivables at December 31, 1996 consist primarily of
unreimbursed expenses due from EMC, acquisition cost-related reimbursements
due from Essex San Ramon Partners and receivables from two Company
executives. Other related party receivables at December 31, 1995 are
comprised of unreimbursed expenses due from EMC and accrued interest income
due from Fidelity I and Sacramento.
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Notes and other receivables:
Note receivable from the co-tenants in the Pathways
property, secured, interest payable monthly at
9%, principle due June 2001 $4,728 $4,800
Other receivables 565 330
------ ------
$5,293 $5,130
====== ======
</TABLE>
(6) 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, 1996, 1995 and the 1994 period totaled $1,752, $2,116 and
$1,139, respectively, and are reflected as a reduction in general and
administrative expenses in the accompanying consolidated statements of
operations.
F-14
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
Effective June 13, 1994, EMC provides property management services to the
Company's neighborhood shopping centers. The fees paid by the Company for
the years ended December 31, 1996, 1995 and 1994, were $113, $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 for the period ended June 12, 1994, 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 for the period ended June 12, 1994 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 are rents earned from space leased to M&M, including operating
expense reimbursements, of $681, $675 and $660 for the years ended December
31, 1996, 1995 and 1994, respectively.
During the years ended December 31, 1996 and 1995, the Company paid
brokerage commissions totaling $312 and $405 to M&M on the sales 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 years ended December 31, 1996 and 1995 are
$820 and $183, respectively, representing dividends from EMC and Essex
Sacramento and management fees and equity income from Essex Bristol Partners
and Essex San Ramon Partners. Interest income includes $214, $358 and $118
earned principally under the notes receivable from Essex Fidelity I and
Essex Sacramento for the years ended December 31, 1996, 1995 and 1994,
respectively.
Included in accounts payable and accrued liabilities as of December 31, 1996
and 1995 are payables to related parties totaling $-0- and $217,
respectively, representing temporary borrowings and unreimbursed expenses.
These payables are non-interest bearing and are due on demand.
F-15
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(7) MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<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, repaid during 1996 $ -- $ 18,580
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, repaid during 1996 -- 27,611
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 $40,371 due June 2001 50,240 56,000
Mortgage note payable to mutual life insurance company, secured by deed of trust, bearing
interest at 7.5%, principal and interest payments due monthly, remaining principal due March
2003 19,991 --
Mortgage note payable to commercial bank, secured by deed of trust, bearing interest at 6.25%
until April 1998, 9.31% thereafter, repaid during 1996 -- 12,170
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 8,100
Mortgage note payable to commercial bank, secured by deed of trust, bearing interest at 7.09%,
principal and interest payments due monthly, remaining principal due March 2006 14,321 --
Multifamily housing demand mortgage revenue bonds secured by deeds of trust on rental
properties and guaranteed by collateral pledge agreements, payable monthly at a variable rate
as defined in the Loan Agreement (approximately 3.6% for December 1996), 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 various maturity dates from May 2025 through October 2026. Bonds
in the aggregate of $29,220 are subject to interest rate protection agreements through August
2003, limiting the interest rate with respect to such bonds to a maximum interest rate of
7.2%. 42,820 13,600
Multifamily housing demand mortgage revenue bonds secured by deeds of trust on a rental
property and guaranteed by a collateral pledge agreement, bearing interest at 6.455%,
principal and interest payments due monthly, remaining principal due January 2026. The
interest rate will be repriced in February 2008 at the then-current tax-exempt bond rate 17,733 --
------- --------
$153,205 $136,061
======== ========
</TABLE>
F-16
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
The aggregate scheduled maturities of mortgage notes payable are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------
<S> <C>
1997 $ 2,958
1998 3,222
1999 3,471
2000 3,738
2001 41,748
Thereafter 98,068
--------
$153,205
========
</TABLE>
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 terminated 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 by the interest rate swap agreement. The
interest expense is net of $19 received by the Company as a result of the
agreement. In August 1996, the Company sold this agreement for $280.
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 1996 and 1995, the Company charged $42 and $288 to income
representing $42 and $62 of amortization of deferred costs relating to the
termination of the five-year interest rate protection agreement and $-0- and
$226 of termination costs relating to the unmatched position taken on the
seven-year interest rate protection agreement.
During the year ended December 31, 1996 and 1995, the Company refinanced
various mortgages and incurred a loss on the early extinguishment of debt
of $3,441 and $154 related to the write off of the unamortized loan fees
and prepayment penalties.
F-17
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(8) LINES OF CREDIT
As of December 31, 1996 and 1995, the Company has the following lines of
credit with commercial banks:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Secured $38,800 line of credit, interest payable monthly at the lower of
1% over the banks' prime rate or 1.85% over the LIBOR rate, expiring
May 15, 1997. - $ 7,883
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
---- -------
$ - $18,463
==== =======
</TABLE>
As of December 31, 1996, the thirty-day LIBOR rate was 5.5%, and the prime
rate was 8.25%.
(9) 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>
1997 $3,407
1998 2,955
1999 2,411
2000 1,917
2001 1,500
Thereafter 4,508
------
$16,698
=======
</TABLE>
Included in this schedule is $533 due annually from M&M through May 1999.
F-18
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
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 $964, $1,018 and $1,074 for the years ended
December 31, 1996, 1995 and 1994, 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.
(10) 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 cash and cash equivalents, notes
receivable and mortgage and other notes payable, approximates fair value as
of December 31, 1996 and 1995, because interest rates and yields from these
instruments are consistent with yields currently available to the Company
for similar instruments.
(11) 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 Stock Incentive Plan
Committee of the Board, which is comprised of independent directors. The
Stock Incentive Plan 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.
The Company's options have a life of ten years. Option grants less than
1,000 shares per participant fully vest one year after the grant date, and
option grants greater than 1,000 shares per participant vest 20% per year
one year after the grant date.
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 1996, 1995 and
1994.
F-19
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
plans. Had compensation cost for the Company's plans been determined based
on the fair value at the grant dates for awards under the plans consistent
with the method of FASB Statement 123, the Company's net income and net
income per share for the years ended December 31, 1996 and 1995 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C> <C>
Net income As reported $ 8,881 $10,604
Pro forma 8,820 10,566
Primary net income per share As reported $ 1.12 $ 1.69
Pro forma 1.11 1.68
</TABLE>
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: risk-free interest rates
ranging from 5.52% to 6.92% expected lives of 4 years; expected volatility
of 15.13%; and dividend yield of 6%.
A summary of the status of the Company's option plans as of December 31,
1996, 1995 and 1994 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ------------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 538,950 $ 18.93 444,950 $ 19.44 -- $ --
Granted 14,000 24.55 100,400 16.72 445,650 19.44
Exercised (6,750) 19.07 -- -- -- --
Forfeited (16,750) 18.89 (6,400) 19.21 (700) 19.50
Outstanding at end of year 529,450 19.08 538,950 18.93 444,950 19.44
Options exercisable at
year end 202,975 19.13 104,010 19.39 -- --
Weighted-average fair value of
options granted during the year -- $ 2.40 -- $ 1.67 -- --
</TABLE>
F-20
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
The following table summarized information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------
Weighted
Number average Weighted Number Weighted
Range of Outstanding at remaining average exercisable at average
exercise December 31, contractual exercise December 31, exercise
prices 1996 life price 1996 price
- ----------------------- -------------- ------------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 15.50 to 19.50 515,450 7.6 years $18.93 202,975 $19.13
19.51 to 27.88 14,000 9.6 years 24.55 -- --
------- ----------- ------ ------- ------
15.50 to 27.88 529,450 7.7 years 19.08 202,975 19.13
</TABLE>
(12) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
The following is a summary of quarterly results of operations for 1996 and 1995:
Quarter Quarter Quarter Quarter
ended ended ended ended
1996 March 31 June 30 September 30 December 31
---- -------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues before gain on sale of real estate $11,554 $11,754 $12,823 $14,562
Gain (loss) on sale of real estate -- 2,409 71 (3)
------- ------- ------ -------
Total revenues $11,554 $14,163 $12,894 $14,559
======= ======= ======= =======
Extraordinary item $(2,180) $ (665) $ (472) $ (124)
======= ======= ======= =======
Net income (loss) $ (57) $ 3,159 $ 2,232 $ 3,547
======= ======= ======= =======
Per share data:
Net income $ (.01) $ .51 $ .27 $ .34
======= ======= ======= =======
Market price: High $ 21.25 $ 22.50 $24.875 $29.375
======= ======= ======= =======
Low $ 18.75 $19.375 $21.375 $24.625
======= ======= ======= =======
Close $ 20.75 $ 21.50 $24.875 $29.375
======= ======= ======= =======
Dividends declared $ .425 $ .425 $ .435 $ .435
======= ======= ======= =======
1995
----
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
======= ======= ======= =======
</TABLE>
F-21
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
(13) COMMITMENTS AND CONTINGENCIES
A commercial bank has issued on behalf of the Company a letter of credit
relating to Company financing transactions of $564 which expires in June
2002.
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, 1996 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
intent and extends offers on a regular basis. At December 31, 1996, the
Company was committed to fund the acquisition of two apartment properties
for $20,585.
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.
At December 31, 1996, the Company was committed to purchase the ownership
interests of its joint venture partner in Bristol and San Ramon for $7.9
million. This transaction was completed in January, 1997.
The Company is involved in various lawsuits arising out of the ordinary
course of business and certain other legal matters. In the opinion of
management, the resolution of these matters will not have a material
adverse effect on the Company's financial condition.
F-22
<PAGE>
Schedule I
----------
Page 1 of 2
<TABLE>
<CAPTION>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
December 31, 1996
(Dollars in thousands)
Initial cost
----------------------------------
Buildings and
Property Units Location Encumbrance Land improvements
-------- ----- -------- ----------- ---- ------------
<S> <C> <C> <C> <C> <C>
Apartments:
The Apple(5) 200 Fremont, CA $ $ 996 $ 5,582
Countrywood(5) 137 Fremont, CA 1,374 5,638
Plumtree(5) 140 Santa Clara, CA 3,090 7,421
---------- ---------- ---------
--- 5,460 18,641
---------- ---------- ---------
Summerhill Park 100 Sunnyvale, CA 2,654 4,918
Oak Pointe 390 Sunnyvale, CA 4,842 19,776
Summerhill Commons 184 Newark, CA 1,608 7,582
Pathways 296 Long Beach, CA 4,083 16,757
Villa Rio Vista 286 Anaheim, CA 3,013 12,661
Foothill Commons 360 Bellevue, WA 2,435 9,821
Woodland Commons 236 Bellevue, WA 2,040 8,727
Palisades 192 Bellevue, WA 1,560 6,242
---------- ----------- ---------
50,240 22,235 86,484
---------- ----------- ---------
Marina Cove(3) 292 Santa Clara, CA --- 5,320 16,431
---------- ----------- ---------
Santa Fe Ridge 240 Silverdale, WA 8,100 4,137 7,925
---------- ----------- ---------
Inglenook Court 224 Bothell, WA 8,300 3,467 7,881
---------- ----------- ---------
Wharfside Pointe 142 Seattle, WA 2,245 7,020
Emerald Ridge 180 Bellevue, WA 3,449 7,801
Sammamish View 153 Bellevue, WA 3,324 7,501
---------- ----------- ---------
19,991 9,018 22,322
---------- ----------- ---------
The Laurels 164 Mill Creek, WA --- 1,559 6,430
---------- ----------- ---------
Brighton Ridge 264 Renton, WA --- 2,623 10,800
---------- ----------- ---------
Windsor Ridge 216 Sunnyvale, CA 14,321 4,017 10,315
---------- ----------- ---------
Wandering Creek 156 Kent, WA 5,300 1,285 4,980
---------- ----------- ---------
Camarillo Oaks 371 Camarillo, CA 19,420 6,310 14,525
---------- ----------- ---------
Treetops 172 Fremont, CA 9,800 3,520 8,182
---------- ---------- ---------
Eastridge Apartements 188 San Ramon, CA --- 6,068 13,628
---------- ---------- ---------
Landmark Apartments 285 Hillsboro, OR --- 3,655 14,200
---------- ---------- ---------
Meadowood 320 Simi Valley, CA 17,733 7,852 18,592
------- ---------- ---------- ---------
5,888
=======
</TABLE>
<TABLE>
<CAPTION>
Gross amount
Cost carried at close of period
capitalized -----------------------------------------------
subsequent Land and Building and
Property Units Location to aquisition improvements improvements Total(1)
-------- ----- -------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Apartments:
The Apple(5) 200 Fremont, CA $ 1,080 $ 996 $ 6,662 $ 7,658
Countrywood(5) 137 Fremont, CA 572 1,374 6,210 7,584
Plumtree(5) 140 Santa Clara, CA 108 3,090 7,529 10,619
---------- ---------- --------- ---------
1,760 5,460 20,401 25,861
---------- ---------- --------- ---------
Summerhill Park 100 Sunnyvale, CA 257 2,654 5,175 7,829
Oak Pointe 390 Sunnyvale, CA 3,442 4,842 23,218 28,060
Summerhill Commons 184 Newark, CA 285 1,517 7,958 9,475
Pathways 296 Long Beach, CA 307 4,083 17,064 21,147
Villa Rio Vista 286 Anaheim, CA 1,082 2,984 13,772 16,756
Foothill Commons 360 Bellevue, WA 1,218 2,435 11,039 13,474
Woodland Commons 236 Bellevue, WA 557 2,040 9,284 11,324
Palisades 192 Bellevue, WA 821 1,560 7,063 8,623
---------- ----------- --------- ---------
7,969 22,115 94,573 116,688
---------- ----------- --------- ---------
Marina Cove(3) 292 Santa Clara, CA 360 5,320 16,791 22,111
---------- ----------- --------- ---------
Santa Fe Ridge 240 Silverdale, WA 94 4,142 8,014 12,156
---------- ----------- --------- ---------
Inglenook Court 224 Bothell, WA 842 3,472 8,718 12,190
---------- ----------- --------- ---------
Wharfside Pointe 142 Seattle, WA 263 2,251 7,277 9,528
Emerald Ridge 180 Bellevue, WA 141 3,445 7,946 11,391
Sammamish View 153 Bellevue, WA 95 3,327 7,593 10,920
---------- ----------- --------- ---------
499 9,023 22,816 31,839
---------- ----------- --------- ---------
The Laurels 164 Mill Creek, WA 6 1,565 6,430 7,995
---------- ----------- --------- ---------
Brighton Ridge 264 Renton, WA 5 2,628 10,800 13,428
---------- ----------- --------- ---------
Windsor Ridge 216 Sunnyvale, CA 221 4,018 10,535 14,553
---------- ----------- --------- ---------
Wandering Creek 156 Kent, WA 376 1,294 5,347 6,641
---------- ----------- --------- ---------
Camarillo Oaks 371 Camarillo, CA 467 6,223 15,079 21,302
---------- ----------- --------- ---------
Treetops 172 Fremont, CA 142 3,574 8,270 11,844
---------- ---------- --------- ---------
Eastridge Apartements 188 San Ramon, CA 35 6,087 13,644 19,731
---------- ---------- --------- ---------
Landmark Apartments 285 Hillsboro, OR 59 3,689 14,225 17,914
---------- ---------- --------- ---------
Meadowood 320 Simi Valley, CA 35 7,881 18,598 26,479
------- ---------- ---------- --------- ---------
5,888
=======
</TABLE>
<TABLE>
<CAPTION>
Depreciation
Accumulated Date of Date lives
Property Units Location depreciation construction acquired (years)
-------- ----- -------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Apartments:
The Apple(5) 200 Fremont, CA $ 3,799 1971 4/82 5-30
Countrywood(5) 137 Fremont, CA 2,029 1970 2/88 5-30
Plumtree(5) 140 Santa Clara, CA 705 1975 2/94 5-30
----------
6,533
----------
Summerhill Park 100 Sunnyvale, CA 1,229 1988 9/88 5-40
Oak Pointe 390 Sunnyvale, CA 7,014 1973 12/88 5-30
Summerhill Commons 184 Newark, CA 1,975 1987 7/87 5-40
Pathways 296 Long Beach, CA 3,531 1975 2/91 5-30
Villa Rio Vista 286 Anaheim, CA 5,787 1968 7/85 5-30
Foothill Commons 360 Bellevue, WA 3,128 1978 3/90 5-30
Woodland Commons 236 Bellevue, WA 2,565 1978 3/90 5-30
Palisades 192 Bellevue, WA 2,050 1969/1977(2) 5/90 5-30
----------
27,279
----------
Marina Cove(3) 292 Santa Clara, CA 1,493 1974 6/94 5-30
----------
Santa Fe Ridge 240 Silverdale, WA 602 1993 10/94 5-30
----------
Inglenook Court 224 Bothell, WA 780 1985 10/94 5-30
----------
Wharfside Pointe 142 Seattle, WA 627 1990 6/94 5-30
Emerald Ridge 180 Bellevue, WA 585 1987 11/94 5-30
Sammamish View 153 Bellevue, WA 544 1986 11/94 5-30
----------
1,756
----------
The Laurels 164 Mill Creek, WA -- 1981 12/96 5-30
----------
Brighton Ridge 264 Renton, WA -- 1986 12/96 5-30
----------
Windsor Ridge 216 Sunnyvale, CA 2,086 1989 3/89 5-40
----------
Wandering Creek 156 Kent, WA 193 1986 11/95 5-30
----------
Camarillo Oaks 371 Camarillo, CA 262 1985 7/96 5-30
----------
Treetops 172 Fremont, CA 283 1978 1/96 5-30
----------
Eastridge Apartements 188 San Ramon, CA 152 1988 8/96 5-30
----------
Landmark Apartments 285 Hillsboro, OR 158 1990 8/96 5-30
----------
Meadowood 320 Simi Valley, CA 50 1986 11/96 5-30
------- ----------
5,888
=======
</TABLE>
F-23
<PAGE>
Schedule I
Page 2 of 2
<TABLE>
<CAPTION>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation, Continued
December 31, 1996
(Dollars in thousands)
Initial cost Costs
----------------------- capitalized
Total rentable Buildings and subsequent
Property square footage Location Encumbrance Land improvements to acquisition
- ------------ -------------- --------- ------------ -------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Headquarters Building:
777 California(4)(5) 44,827 Palo Alto, CA -- -- 6,700 8,657
--------- --------- --------- ---------
Retail:
Canby Square(5) 102,565 Canby, OR $ $ 801 $ 2,507 $ 1,783
Cedar Mill Place(5) 28,392 Portland, OR 535 1,149 156
Powell Villa Center(5) 63,645 Portland, OR 740 1,393 1,185
Rivera Plaza(5) 48,420 Eugene, OR 766 1,069 208
Wichita Towne Center(5) 38,324 Milwaukee, OR 218 1,632 149
Garrison Square(5) 69,780 Vancouver, WA 1,004 1,676 749
--------- --------- --------- --------- ---------
351,126 -- 4,064 9,426 4,230
--------- --------- --------- --------- ---------
395,953 $ 153,205 $ 90,590 $ 277,462 $ 25,757
========= ========= ========= ========= =========
<CAPTION>
Gross amount
carried at close of period
---------------------------------------
Total rentable Land and Building and Accumulated
Property square footage Location improvement improvements Total(1) depreciation
- ------------ -------------- --------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Headquarters Building:
777 California(4)(5) 44,827 Palo Alto, CA -- 15,357 15,357 3,150
--------- --------- --------- ---------
Retail:
Canby Square(5) 102,565 Canby, OR $ 802 $ 4,289 $ 5,091 $ 478
Cedar Mill Place(5) 28,392 Portland, OR 536 1,304 1,840 472
Powell Villa Center(5) 63,645 Portland, OR 739 2,579 3,318 472
Rivera Plaza(5) 48,420 Eugene, OR 767 1,276 2,043 475
Wichita Towne Center(5) 38,324 Milwaukee, OR 218 1,781 1,999 471
Garrison Square(5) 69,780 Vancouver, WA 1,004 2,425 3,429 486
--------- --------- --------- --------- ---------
351,126 4,066 13,654 17,720 2,854
--------- --------- --------- --------- ---------
395,953 $ 90,557 $ 303,252 $ 393,809 $ 47,631
========= ========= ========= ========= =========
<CAPTION>
Date Depreciable
Total rentable Accumulated Date lives
Property square footage Location construction acquired (years)
- ------------ -------------- --------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Headquarters Building:
777 California(4)(5) 44,827 Palo Alto, CA 1987 7/86 5-30
Retail:
Canby Square(5) 102,565 Canby, OR 1976 1/90 7-30
Cedar Mill Place(5) 28,392 Portland, OR 1975 1/90 7-30
Powell Villa Center(5) 63,645 Portland, OR 1959 1/90 7-30
Rivera Plaza(5) 48,420 Eugene, OR 1961 1/90 7-30
Wichita Towne Center(5) 38,324 Milwaukee, OR 1978 1/90 7-30
Garrison Square(5) 69,780 Vancouver, WA 1962 1/90 7-30
---------
351,126
---------
395,953
=========
</TABLE>
(1) The aggregate cost for federal income tax purposes is $303,034.
(2) Phase I was built in 1969 and Phase II was built in 1997.
(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) These properties secure the Company's $38,000 line of credit.
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Real estate:
Balance at beginning of year $ 284,358 $ 282,344 $ 186,447
Improvements 3,406 3,193 2,614
Acquisition of real estate 118,107 6,265 93,283
Disposition of real estate (12,062) (7,444) --
--------- --------- ---------
Balance at end of year $ 393,809 $ 284,358 $ 282,344
========= ========= =========
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Accumulated depreciation:
Balance at beginning of year 40,281 $ 34,112 $ 27,574
Disposition (1,470) (1,809) --
Depreciation expense - Acquisition 905 -- --
Depreciation expense 7,915 7,978 6,538
--------- --------- ---------
Balance at end of year $ 47,631 $ 40,281 $ 34,112
========= ========= =========
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
ESSEX PROPERTY TRUST, INC.
Pro Forma Condensed Consolidated Statement of Operations
For the year ended December 31, 1996
(Unaudited)
(Dollars in thousands, except shares and per share amounts)
Pro Forma Adjustments (2)
---------------------------
Acquisition Disposition
Historical Properities Properities Pro Forma
------------ ---------------------------- ------------
<S> <C> <C> <C> <C>
Revenues
Rental ............................................ $ 47,780 $ 7,623 $ 701 $ 54,702
Interest and other income ......................... 2,913 162 8 3,067
----------- ----------- ----------- -----------
50,693 7,785 709 57,769
Expenses
Property operating expenses
Maintenance and repairs ......................... 4,341 696 55 4,982
Real estate taxes ............................... 3,790 695 69 4,416
Utilities ....................................... 3,175 470 26 3,619
Administrative .................................. 2,911 402 48 3,265
Advertising ..................................... 653 110 6 757
Insurance ....................................... 635 108 11 732
Depreciation and amortization ................... 8,855 1,489 106 10,238
----------- ----------- ----------- -----------
24,360 3,970 321 28,009
Interest .......................................... 11,442 1,314 180 12,576
Amortization of deferred financing costs .......... 639 24 8 655
General and administrative ........................ 1,717 0 0 1,717
Loss from hedge termination ....................... 42 0 0 42
----------- ----------- ----------- -----------
Total expenses .................................. 38,200 5,308 509 42,999
----------- ----------- ----------- -----------
Income before gain on sales of real estate,
minority interest and extraordinary item .......... 12,493 2,477 200 14,770
Gain on sales of real estate ........................ 2,477 0 0 2,477
----------- ----------- ----------- -----------
Income before minority interest and
extraordinary item ................................ 14,970 2,477 200 17,247
Minority interest ................................... (2,648) (430) (35) (3,043)
----------- ----------- ----------- -----------
Income before extraordinary item .................... 12,322 2,047 165 14,204
Extraordinary item .................................. (3,441) 0 0 (3,441)
=========== =========== =========== ===========
Net income ......................................... $ 8,881 $ 2,047 $ 165 $ 10,763
=========== =========== =========== ===========
Per share data
Net income per share from operations
before extraordinary item ....................... $ 1.50 $ 1.54
Extraordinary item-debt extinguishment ............ (0.38) (0.32)
=========== ===========
Net income per share .............................. $ 1.12 $ 1.22
=========== ===========
Weighted average number of shares
outstanding during the period ..................... 7,347,527 8,805,500
=========== ===========
Supplemental information-Funds from operations
Income before minority interest and
extraordinary item .............................. $ 14,970 $ 2,477 $ 200 17,247
Adjustments
Depreciation and amortization ................... 8,855 1,489 106 10,238
Adjustment for unconsolidated
joint ventures ................................ 508 0 0 508
Non-recurring items, including gain on
sales of real estate and loss from
hedge termination ............................. (2,435) 0 0 (2,435)
Minority interest - Pathways .................... (560) 0 (560)
=========== =========== =========== ===========
Funds from operations ........................... $ 21,338 $ 3,966 $ 306 $ 24,998
=========== =========== =========== ===========
</TABLE>
See accompanying notes to Pro Forma financial statements
Page S-1
<PAGE>
ESSEX PROPERTY TRUST, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(Dollars in thousands, except shares and per share amounts)
(1) - OVERVIEW
- --------------
Between January 31, 1996 and November 7, 1996, Essex consummated five property
acquisitions and two property dispositions with independent third parties in
"arms-lengths" transactions. Below is a summary of property acquisitions and
disposition whose effects are incorporated into the unaudited pro forma
condensed consolidated statement of operations as of January 1, 1996.
1996 ACQUISITIONS
- -----------------
On January 31, 1996, Essex acquired Treetops Apartments which was built in 1978
and contains 172 apartment units with 131,200 square feet and is located in
Fremont, California. The contract price was $10,725,000. Essex funded this
acquisition by assuming an existing 8.5% fixed interest rate mortgage in the
amount of $7,266,000 and the remainder was funded by Essex's lines of credit.
On August 14, 1996, Essex repaid the mortgage on the property with the proceeds
from a common stock offering. On August 22, 1996, Essex completed a $9,800,000
tax exempt bond financing on the property.
On August 23, 1996, Essex completed its acquisition of Camarillo Oaks Apartments
for a contract price of $20,750,000. Camarillo Oaks is a 371-unit apartment
property consisting of approximately 303,800 square feet located in Camarillo,
California. Essex utilized proceeds from its August 14, 1996 offering of common
stock and from the sale of a property to fund the acquisition. On October 24,
1996, Essex completed a $19,420,000 tax exempt bond financing on the property.
On August 30, 1996, Essex acquired Eastridge Apartments which was built in 1988
and contains 188 apartment units with 174,100 square feet located San Ramon,
California. The contract price was approximately $19,200,000. The price
includes the cost relating to the retirement of a land lease which occurred on
September 27, 1996. Essex utilized proceeds from its August 14, 1996 offering
of common stock to fund the acquisition.
On August 30 1996, Essex acquired Landmark Apartments which was built in 1990
and contains 285 apartment units with 282,900 square feet located in Hillsboro,
Oregon. The contract price was $17,700,000. The seller was Metric Realty, an
Illinois general partnership. Essex utilized proceeds from its August 14, 1996
offering of common stock to fund the acquisition.
On November 7, 1996. Essex acquired Meadowood Apartments, which was built in
1986 and contains 320 apartment units with 264,500 square feet located in Simi
Valley, California. The contract price was $25,650,000. Essex assumed
$17,732,750 in fixed tax exempt bonds at a 6.455% interest rate. The bonds are
fixed at this rate through February, 2008 at which time they will be repriced at
the then going bond market rate. The bonds mature in January, 2026. The
balance of the purchase price was funded by $19,420,000 of 30 year variable
rate tax exempt bonds issued by the City of Camarillo in connection with
Camarillo Oaks Apartments. The excess of the Camarillo bond proceeds not used
to fund this acquisition went to fully payoff $7,500,000 outstanding on the
Company's lines of credit.
S-2
<PAGE>
ESSEX PROPERTY TRUST, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(Dollars in thousands, except shares and per share amounts)
1996 DISPOSITIONS
- -----------------
On April 30, 1996, Essex sold Viareggio Apartments, a 116-unit, 89,615 square
foot apartment community located in San Jose, California. The gross sales price
was $10,610,000, resulting in a net gain of approximately $2,263,000. Essex
used the proceeds to reduce indebtedness and to facilitate the acquisition of
Camarillo Oaks.
On June 21, 1996, Essex sold Westbridge Apartments, a 92-unit, 104,560 square
foot apartment community in Yuba City, California. The gross sales price was
$3,700,000, resulting in a net gain of approximately $214,000. Essex used the
proceeds to reduce outstanding indebtedness.
(2) - PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS
- ---------------------------------------------------------------------------
The Pro Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1996 includes the following pro forma adjustments:
For Treetops Apartments, acquired on January 31, 1996, pro forma adjustment was
made by taking its eleven months actual operating income through December 31,
1996 and annualizing such result.
For Viareggio Apartments and Westbridge Apartments, the Pro Forma Condensed
Consolidated Statements of Operations reflects the elimination of the actual
results of operations.
For the properties, Camarillo Oaks Apartments, Eastridge Apartments, Landmark
Apartments and Meadowood Apartments, based on their short period actual
operating results, their twelve month internal operating budgets were utilized.
S-3
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Essex Property Trust, Inc.
(Registrant)
/s/ Michael J. Schall
Date: March 31, 1997 By:___________________________________
_______________________________
Michael J. Schall
Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
SIGNATURES
----------
Dated March 31, 1997 /s/ George M. Marcus
____________________ ___________________________________
George M. Marcus
Chairman of the Board
Dated March 31, 1997 /s/ Keith R. Guericke
____________________ ___________________________________
Keith R. Guericke
President and Chief Executive
Officer, Director
Dated March 31, 1997 /s/ Michael J. Schall
____________________ ___________________________________
Michael J. Schall
Chief Financial Officer and
Director
Dated March 31, 1997 /s/ Mark J. Mikl
____________________ ___________________________________
Mark J. Mikl
Controller
(Principal Accounting Officer)
Dated March 31, 1997 /s/ William A. Millichap
____________________ ___________________________________
William A. Millichap
Director
Dated March 31, 1997 /s/ Gary P. Martin
____________________ __________________________________
Gary P. Martin
Director
Dated March 31, 1997 /s/ Robert E. Larson
____________________ ________________________________
Robert E. Larson
Director
Dated March 31, 1997 /s/ Thomas E. Randlett
____________________ ___________________________________
Thomas E. Randlett
Director
55
<PAGE>
EXHIBIT 3.4
STATE OF MARYLAND
497962
STATE DEPARTMENT OF ASSESTMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: DECEMBER 31, 1996
THIS IS TO ADVISE YOU THAT THE CERTIFICATE OF CORRECTION FOR ESSEX
PROPERTY TRUST, INC. WAS RECEIVED AND APPROVED FOR RECORD ON DECEMBER 31,
1996 AT 1:00PM.
FEE PAID: 71.00
[SEAL - OF SCVTO BONE VOLVNTATIS TVAE CORONASTI NOS 1632]
AT5-031 IRENE B WOZNY
CHARTER SPECIALIST
56
<PAGE>
ESSEX PROPERTY TRUST, INC.
CERTIFICATE OF CORRECTION
THIS IS TO CERTIFY THAT:
Essex Property Trust, Inc., a Maryland corporation (the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
that:
FIRST: The title of the document being corrected is Articles
Supplementary.
SECOND: The document being corrected was filed on July 1, 1996.
THIRD: The provisions of the Articles Supplementary which are to be
corrected are as follows:
1. The first line of the second paragraph of
Section 5, subsection (g), currently reads as follows:
"(i) Before taking any action which would
cause and adjustment";
2. The first line of the third paragraph of
Section 5, subsection (g), currently reads as follows:
"(ii) The Corporation will seek to list
the shares of Common Stock";
3. The title of Section 12, Status, currently
reads as follows:
"Section 12. Status.";
4. The title of Section 13, Redemption after
Notice of Mandatory Conversion, currently reads as follows:
"Section 13. Redemption after Notice of Mandatory
Conversion.";
57
<PAGE>
5. The table in Section 13 currently reads as follows:
Redemption
Redemption Date Percentage
------------------------------ ----------
Section 7. June 20, 2001 to June 19, 2002 105
Section 8. June 20, 2002 to June 19, 2003 104
Section 9. June 20, 2003 to June 19, 2004 103
Section 10. June 20, 2004 to June 19, 2005 102
Section 11. June 20, 2005 to June 19, 2006 101
Section 12. June 20, 2006 and thereafter 100
6. The first line of the second paragraph of Section 13
currently reads as follows:
"(a) In order to exercise a right to require the Corporation
to redeem a holder's";
7. The first line of the third paragraph of Section 13
currently reads as follows:
"(b) (i) If a request for redemption accompanied by the
certificates";
8. The first line of the fourth paragraph of Section 13
currently reads as follows:
"(i) The dividend with respect to a share of Series
1996A Stock which";
9. The first line of the fifth paragraph of Section 13
currently reads as follows:
"(c) At such time as there ceases to be in excess of 40,000
shares of Series".
FOURTH: The corrected provisions of the Articles Supplementary are as
follows:
1. The first line of the second paragraph of Section 5,
subsection (g), shall read as follows:
"(ii) Before taking any action which would cause an
adjustment";
1. The first line of the second paragraph of Section 5,
subsection (g), shall read as follows:
"(ii) Before taking any action which would cause an
adjustment";
58
<PAGE>
2. The first line of the third paragraph of Section 5,
subsection (g), shall read as follows:
"(iii) The Corporation will seek to list the shares
of Common Stock";
3. The title of Section 12, Status, shall read as follows;
"Section 6. Status.";
4. The title of Section 13, Redemption after Notice of
Mandatory Conversion, shall read as follows;
"Section 7. Redemption after Notice of Mandatory
Conversion.";
5. The table in Section 13 shall read as follows:
Redemption
Redemption Date Percentage
------------------------------- --------------
June 20, 2001 to June 19, 2002 105
June 20, 2002 to June 19, 2003 104
June 20, 2003 to June 19, 2004 103
June 20, 2004 to June 19, 2005 102
June 20, 2005 to June 19, 2006 101
June 20, 2006 and thereafter 100
6. The first line of the second paragraph of Section 13
shall read as follows:
"(b) In order to exercise a right to require the Corporation
to redeem a holder's";
7. The first line of the third paragraph of Section 13 shall
read as follows:
"(c) (i) If a request for redemption accompanied by the
certificates";
59
<PAGE>
8. The first line of the fourth paragraph of Section 13
shall read as follows:
"(ii) The dividend with respect to a share of
Series 1996A Stock which";
9. The first line of the fifth paragraph of Section 13 shall
read as follows:
"(d) At such time as there ceases to be in excess of 40,000
shares of Series".
[CONTINUED ON PAGE 5]
60
<PAGE>
The undersigned President acknowledges this Certificate of Correction to be
the corporate act of the Corporation and as to all matters or facts required to
be verified under oath, the undersigned President acknowledges that to the best
of his knowledge, information and belief, these matters and facts are true in
all material respects and that this statement is made under the penalties for
perjury.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Correction to be signed in its name and on its behalf by its President and
attested to by its Secretary on this 20th day of December, 1996
ATTEST: ESSEX PROPERTY TRUST, INC.
/s/ Michael Schall By: /s/ Keith Guericke
- -------------------------- _________________________(SEAL)
Michael Schall Keith Guericke
Secretary President
61
<PAGE>
Exhibit 3.6
CERTIFICATE OF AMENDMENT
OF
THE BYLAWS OF
ESSEX PROPERTY TRUST, INC.
a Maryland corporation
The undersigned, Michael J. Schall, hereby certifies that:
1. He is the duly elected Secretary of Essex Property Trust, Inc., a
Maryland corporation (the "Company").
2. Effective as of December 17, 1996, Section 2.2 of Article II of
the Company's Bylaws was amended in its entirety to read as follows:
"SECTION 2.2 Number of Directors. The Corporation shall have at
-------------------
least the minimum number of directors required by the Maryland General
Corporation Law. The Corporation shall have a Board of Directors consisting of
twelve directors. Eleven of the twelve directors, hereinafter referred to as
the "Common Directors," shall be elected by the holders of common stock and the
holders of all classes or series of stock who vote together with the holders of
common stock and the remaining director, hereinafter referred to as the "Series
1996A Director" shall be elected by the holders of the 8.75% Convertible
Preferred Stock, Series 1996A (the "Series 1996A Stock"), voting separately as a
class. The number of directors may be increased upon certain events as provided
in Article First, Section 3 of the Articles Supplementary classifying 1,600,000
shares of Common Stock as shares of 8.75% Convertible Preferred Stock, Series
1996A (or Article FIFTH, subsection (e) of any restatement of the Charter) (the
"Articles Supplementary (Series 1996A Stock)"). All directors shall be
classified with respect to their respective terms of office as provided in
Section 2.3 and each director shall serve until the expiration of his or her
term and until his or her successor is elected and qualifies."
IN WITNESS HEREOF, the undersigned has set his hand hereto this 17/th/
day of December, 1996.
/s/ Michael J. Schall
____________________________
Michael J. Schall
Secretary
62
<PAGE>
Exhibit 11.1
ESSEX PROPERTY TRUST, INC.
Statement of Computation of Earnings per Share
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Year ended December 31, June 13, 1994 -
----------------------------- December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary:
Net income $ 8,881 $ 10,604 $ 3,266
Less:
Dividends on 8.75% Convertible Preferred Stock, Series 1996A 635 0 0
---------- ---------- ----------
Net income applicable to common stockholders $ 8,246 $ 10,604 $ 3,266
========== ========== ==========
Weighted average shares outstanding 7,283,124 6,275,000 6,275,000
Weighted average shares of dilutive stock options using
average stock price under the treasury stock method 64,403 0 0
---------- ---------- ----------
Weighted average shares used in net income per share
calculation 7,347,527 6,275,000 6,275,000
Net income per share $ 1.12 $ 1.69 $ 0.52
========== ========== =========
Fully - diluted:
Adjusted shares - primary, from above 7,347,527 - -
Weighted average shares issuable upon conversion of the
8.75% Convertible Preferred Stock, Series 1996A 330,741 - -
Additional weighted average shares of dilutive stock options
using end of period stock price under the treasury stock
method 28,967 - -
---------- ---------- ----------
Weighted average number of common shares - assuming full
dilution 7,707,235 N/A N/A
========== ========== ==========
Earnings per common share - assuming full dilution $1.12(1) N/A(2) N/A(2)
=========== ========== ==========
</TABLE>
(1) For 1996, the 8.75% Convertible Preferred Stock, Series 1996A were
antidilutive and accordingly, the results of the primary earnings per
share is reported for earnings per common share - assuming full
dilution.
(2) Not applicable before 1996. The 8.75% Convertible Preferred Stock,
Series 1996A was issued in July, 1996.
63
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
ESSEX PROPERTY TRUST, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(in thousands, except ratios)
Essex Partners
Essex Property Trust, Inc. Properties
------------------------------------------- ---------------
Period of Period of
Year ended Year ended June 13, 1994 January 1, 1994
December 31, December 31, to December 31, to June 30
1996 1995 1994 1994
------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
Earnings:
Income before provision for income taxes,
extraordinary items and minority interest $14,970 $14,244 $4,397 $ 332
Interest expense 11,442 10,928 4,304 5,924
Amortization of deferred financing costs 639 1,355 773 96
Capitalized interest 115 92 0.00 0.00
------- ------- ------ ------
Total earnings $27,166 $26,619 $9,474 $6,352
------- ------- ------ ------
Fixed charges:
Interest expense $11,442 $10,928 $4,304 $5,924
Convertible preferred stock dividends 635 0.00 0.00 0.00
Amortization of deferred financing costs 639 1,355 773 96
Capitalized interest 115 92 0.00 0.00
------- ------- ------ ------
Total fixed charges and preferred
stock dividends $12,831 $12,375 $5,077 $6,020
------- ------- ------ ------
Ratio of earnings to fixed charges
(excluding preferred stock dividends) 2.23 2.15 1.87 1.06
======= ====== ===== =====
Ratio of earnings to combined fixed
charges and preferred dividends 2.12 2.15 1.87 1.06
======= ====== ===== =====
Fixed charges in excess on earnings - - - -
======= ====== ===== =====
</TABLE>
64
<PAGE>
SCHEDULE 21.1
List of Subsidiaries
1. Essex Portfolio, L.P., a California limited partnership
2. Essex Management Corporation, a California corporation
3. Essex-Palisades Facilitator, a California limited partnership
4. Essex Sunpointe Limited, a California limited partnership
5. Essex Washington Interest Partners, a California general partnership
6. Essex San Ramon Partners L.P., a California limited partnership
7. Essex Bristol Partners, L.P., a California limited partnership
8. Essex Marina Cove, L.P., a California limited partnership
9. Essex Sacramento Corporation, a California corporation
10. Essex Fidelity I Corporation, a California corporation
11. Essex Camarillio Corporation, a California corporation
12. Essex Camarillo L.P., a California limited partnership
13. Essex Meadowood Corporation, a California corporation
14. Essex Meadwood, L.P., a California limited partnership
15. Essex Treetops Corporation, a California corporation
16. Essex Treetops, L.P., a California limited partnership
65
<PAGE>
Exhibit 23.1
Consent of Independent Certified Public Accountants
The Board of Directors
Essex Property Trust, Inc.;
We consent to incorporation by reference in the registration statement and
related prospectus dated March 31, 1997 on Form S-3 of Essex Property Trust,
Inc. of our report dated January 31, 1997, relating to the consolidated balance
sheets of Essex Property Trust, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows of Essex Property Trust, Inc. and subsidiaries for the
years ended December 31, 1996 and 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 related financial statement
schedule, which report appears in the December 31, 1996, annual report on Form
10-K of Essex Property Trust, Inc.
We also consent to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG PEAT MARWICK LLP
San Francisco, California
March 31, 1997
66
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Essex
Property Trust, Inc. year ended report for the year ended December 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 46,899
<SECURITIES> 0
<RECEIVABLES> 7,655
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 58,299
<PP&E> 393,809
<DEPRECIATION> 47,631
<TOTAL-ASSETS> 417,174
<CURRENT-LIABILITIES> 15,881
<BONDS> 153,205
0
1
<COMMON> 1
<OTHER-SE> 222,807
<TOTAL-LIABILITY-AND-EQUITY> 417,174
<SALES> 0
<TOTAL-REVENUES> 50,693
<CGS> 0
<TOTAL-COSTS> 24,360
<OTHER-EXPENSES> 4,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,442
<INCOME-PRETAX> 14,970
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,970
<DISCONTINUED> 0
<EXTRAORDINARY> 3,441
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
</TABLE>
