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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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)
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MARYLAND 77-0369576
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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925 E. MEADOW DRIVE, PALO ALTO, CALIFORNIA 94303
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 494-3700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.0001 par value New York Stock Exchange
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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. [ ]
As of March 25, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $547,432,836. The aggregate market value
was computed with reference to the closing price on the New York Stock Exchange
on such date. This calculation does not reflect a determination that persons are
affiliates for any other purpose.
As of March 25, 1998, 16,625,410 shares of Common Stock ($.0001 par value)
were outstanding.
LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part IV, Item
14, on page number 28.
DOCUMENTS INCORPORATED BY REFERENCE:
The following document is incorporated by reference in Part III of the
Annual Report on Form 10-K: Proxy statement for the annual meeting of
stockholders of Essex Property Trust, Inc. to be held April 28, 1998.
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TABLE OF CONTENTS
FORM 10-K
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PAGE NO.
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 12
Item 3 Legal Proceedings........................................... 15
Item 4 Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6 Summary Financial and Operating Data........................ 19
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
Item 8 Financial Statements and Supplemental Data.................. 28
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 28
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 28
Item 11 Executive Compensation...................................... 28
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 28
Item 13 Certain Relationships and Related Transactions.............. 28
PART IV
Item 14 Exhibits, Financial Statements Schedules and Reports on Form
8-K......................................................... 28
Signatures........................................................... 30
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
The Company is a self-administered and self-managed equity real estate
investment trust ("REIT") that was formed in 1994 to continue and expand the
real estate investment and management operations conducted by Essex Property
Corporation since 1971. The Company's multifamily residential portfolio consists
of ownership interests in 54 properties comprising 10,700 apartment units, of
which 19 properties are located in Southern California, 13 are located in the
San Francisco Bay Area, 18 are located in the Seattle metropolitan area, and
four are located in Portland, Oregon metropolitan area. The Company also owns
three retail properties, which are located in the Portland, Oregon metropolitan
area and which the Company presently considers to be held for sale, and two
office buildings located in Palo Alto, California, one of which houses the
Company's headquarters (collectively, the "Commercial Properties," and together
with the Company's 54 multifamily residential properties, the "Properties").
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 89.9% general
partnership interest and senior members of the Company's management and certain
outside investors own an approximate 10.1% 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" or the "Company" 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 187 property and portfolio assets in seven major metropolitan
markets in the western United States at an aggregate investment in excess of
$1.2 billion. 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 19,780
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.
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- 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 600 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.
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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, Oregon Metropolitan Area.
Active Portfolio Management Through Regional Economic Research and Local
Market Knowledge. Essex was founded on the belief that the key elements of
successful real estate investment and portfolio growth include extensive
regional economic research and local market knowledge. Essex utilizes its
economic research and local market knowledge to make appropriate portfolio
allocation decisions that it believes result in better overall operating
performance and lower portfolio risk. Essex maintains and evaluates:
- 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 longterm 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 89.9% general partnership
interest. An approximate 10.1% limited partnership interest in the Operating
Partnership is owned by 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. From time to time, the Company may invest in Properties
through the acquisition of an interest in another entity, based upon the
criteria described above. The Company does not plan to invest in any securities
of other entities not engaged in real estate activities. 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.
Ten of the Operating Partnership's properties are owned by single asset limited
partnerships of which Essex Portfolio, L.P. has a minimum 99% limited
partnership interest. The maximum 1% general partnership interest is owned by
Essex Management Corporation ("EMC") or a corporation of which EMC owns 100% of
the voting common stock. Three of the Operating Partnerships properties are
owned by single asset partnerships of which Essex Portfolio, L.P. has an 84%
limited partnership interest, EMC has a 1% general partnership interest; the
remaining 15% is owned by an unrelated third party. The Operating Partnership
owns a 49.9% limited partnership in Jackson School Village L.P., ("JSV") which
was formed to develop and operate a 200 unit apartment community. The unrelated
third party general partner in JSV provides development services to the
partnership.
The Company holds a 1% limited partnership interest in seven partnerships
which collectively own two multifamily properties. These investments were made
under arrangements whereby EMC became the general partner and the existing
partners were, granted the right to require the applicable partnership to redeem
their interests for cash. Subject to certain conditions, the Company may,
however, elect to deliver an equivalent number of shares of the Company's Common
Stock in satisfaction of the applicable partnership's cash redemption
obligation.
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Essex has elected to be treated as a real estate investment trust ("REIT")
for federal income tax purposes, commencing with the year ended December 31,
1994. In order to maintain compliance with REIT tax rules, Essex provides some
of its fee-based asset management and disposition services as well as third-
party property management and leasing services through 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.
On June 20, 1996, the Company entered into a definitive agreement to sell
1,600,000 shares or $40,000,000 of the Company's 8.75% Convertible Preferred
Stock, Series 1996A (the "Convertible Preferred Stock") at $25.00 per share to
Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook Real Estate
Co-investment Partnership, L.P. (collectively, "Tiger/Westbrook"). In September
1996, Tiger/Westbrook completed the purchase of 800,000 shares of Convertible
Preferred Stock and, in June 1997, Tiger/Westbrook purchased the remaining
800,000 shares. 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. As of March 20, 1998 all of the 1.6 million authorized shares
of Convertible Preferred Stock are convertible into common stock at the option
of the holder. The conversion price per share of Convertible Preferred Stock is
$21.875, subject to adjustment under certain circumstances.
In August 1996, Essex sold 2,530,000 shares of common stock in a public
offering for $22.75 per share. In December 1996, Essex sold 2,783,000 shares of
common stock in a public offering for $27.75 per share. In March 1997, Essex
completed the sale of 2,000,000 shares of its common stock to Cohen & Steers at
a price of $29.13 per share. In September 1997, the Company completed a public
offering of 1,495,000 shares of its common stock at a price of $31.00 per share.
In December 1997, the Company completed a public offering of 1,500,000 shares of
common stock at a price of $35.50 per share.
The Company contributed the net proceeds from each of the offerings and
sales to the Operating Partnership and, as a result of such contributions, the
Company increased its ownership interest in the Operating Partnership to an
approximate 89.9% general partnership interest.
Subsequent to December 31, 1997, the Operating Partnership completed the
sale of 1,200,000 units of its 7.875% Series B Cumulative Redeemable Preferred
units to an institutional investor in a private placement at a price of $50.00
per unit.
The Operating Partnership utilized the proceeds of these equity
transactions to fund the acquisition and development of multifamily properties,
to reduce outstanding indebtedness, and for general corporate purposes.
ACQUISITIONS
During 1997, Essex acquired ownership interests in twenty-seven multifamily
properties consisting of 4,213 units for an aggregate contract purchase price of
approximately $317.1 million. These investments were primarily funded by the
equity transactions completed in 1997. Sixteen properties (2,525 units) are
located in Southern California, seven of these properties (1,122 units) are
located in the greater Seattle metropolitan area, two (176 units) are located in
Northern California, and two (390 units) are located in the greater Portland,
Oregon metropolitan area. Multifamily property ownership interests acquired in
1997 are as follows:
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NAME LOCATION UNITS PURCHASE PRICE
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(IN MILLIONS)
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SOUTHERN CALIFORNIA PROPERTIES
Camarillo Oaks.................... Camarillo, CA 193 $ 12.0
Casa del Mar...................... Pasadena, CA 96 6.1
Casa Mango........................ San Diego, CA 96 9.9
Huntington Breakers............... Huntington Beach, CA 342 30.4
Kings Road........................ Los Angeles, CA 196 12.9
Park Place/Windsor Court.......... Los Angeles, CA 118 11.0
Riverfront Apartments............. San Diego, CA 228 28.1
Highridge(1)...................... Rancho Palos Verdes, CA 255 25.3
Tara Village...................... Tarzana, CA 168 10.3
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NAME LOCATION UNITS PURCHASE PRICE
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(IN MILLIONS)
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The Bluffs II..................... San Diego, CA 224 10.7
The Village....................... Oxnard, CA 122 7.7
Trabuco Villas.................... Lake Forest, CA 132 11.9
Villa Scandia..................... Ventura, CA 118 5.2
Wilshire Promenade................ Fullerton, CA 128 10.3
Windsor Terrace................... Pasadena, CA 109 7.1
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2,525 $198.9
SEATTLE METROPOLITAN AREA
Anchor Village(1)................. Mukilteo, WA 301 $ 13.1
Bridle Trails..................... Kirkland, WA 92 6.6
Castle Creek...................... Newcastle, WA 216 20.0
Evergreen Heights................. Kirkland, WA 200 15.8
Maple Leaf........................ Seattle, WA 48 3.8
Spring Lake....................... Seattle, WA 69 3.9
Stonehedge Village................ Bothell, WA 196 14.2
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1,122 $ 77.4
PORTLAND METROPOLITAN AREA
Meadows at Cascade Park........... Vancouver, WA 198 $ 11.1
Village at Cascade Park........... Vancouver, WA 192 10.4
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390 $ 21.5
NORTHERN CALIFORNIA
Foothill Gardens/Twin Creeks...... San Ramon, CA 176 $ 19.2
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Total................... 4,213 $317.1
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(1) The Company holds a 1% limited partner interest in the partnerships which
own these multifamily properties. These investments were made under
arrangements whereby EMC became the general partner and the existing
partners were granted the right to require the applicable partnership to
redeem their interests for cash. Subject to certain conditions, the Company
may, however, elect to deliver an equivalent number of shares of the
Company's Common Stock in satisfaction of the applicable partnership's cash
redemption obligation.
DISPOSITIONS
In 1997, Essex sold one Northern California multifamily property and three
Portland retail properties for an aggregate net sales price of $15,470,000. The
proceeds were used to fund acquisitions of multifamily properties.
DEVELOPMENT
The Company has approved six development projects comprising of 1,330
multifamily units and having an approximate projected cost of $150,000,000 to be
completed over the next two years.
In August 1997, Essex entered into a partnership which has acquired a 15
acre site located in Issaquah, Washington. The partnership is developing a 245
unit multifamily community on this site. Essex has contributed $3,500,000 to the
partnership in return for a 45% ownership interest in it. The estimated total
capitalized cost is $25,300,000. Essex has the option to purchase the property
within five years of completion. The partnership began development on this
project in August 1997.
In September 1997, Essex broke ground on the Fountain Court Property,
located in Seattle, Washington, which is anticipated to consist of a 320 unit
multifamily community. Essex has contributed $4,000,000 to the joint venture in
return for a 49% ownership interest in it. A $22,500,000 construction loan
commitment has been obtained. Essex's partner in this joint venture is a local
Seattle developer. In accordance with the terms of the agreement, in the year
2000 the Operating Partnership is to purchase its partners' 51% interest,
resulting in an estimated total capitalized cost for Fountain Court of
$31,350,000.
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In September 1997, Essex purchased a 2.5 acre site located in Marina Del
Rey, California, on which it intends to build a multifamily property of up to
188 units. The estimated total capitalized cost for the community is
$28,900,000. Essex expects to begin development of the project in May 1998.
In September 1997, Essex purchased a 14.8 acre site located in La Habra,
California. Essex plans to develop Hillsborough Park Apartments, a 235 unit
multifamily community, on this site. The estimated total capitalized cost is
$19,100,000. Essex began development of the project in March 1998.
In December 1997, Essex entered into a contract to purchase a 238 unit
multifamily community currently under construction in San Jose, California. The
estimated total capitalized cost for the community is $36,100,000. Essex's
acquisition is scheduled to close upon completion of the project in March 1999.
In December 1997, Essex acquired a 2.6-acre parcel of land in Walnut Creek,
California for approximately $2.5 million. Essex intends to construct an
approximate 106 unit multifamily community at an estimated total capitalized
cost of approximately $11,400,000. Construction is anticipated to begin in the
spring of 1998.
As part of its previous acquisition of The Shores Property, Essex acquired
an adjacent 8.1-acre parcel of land which is zoned for additional apartment
development. Essex is developing 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 will begin construction of the additional units in 1998. The
estimated total capitalized cost of this project is approximately $13,100,000.
This project is still in its entitlement phase.
OFFICES AND EMPLOYEES
Essex is headquartered in Palo Alto, California, and has regional offices
in Seattle, Washington, Portland, Oregon, West Lake Village, California and
Tustin, California. As of December 31, 1997, Essex had approximately 370
employees.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on, or in such property.
Such laws often 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. In addition, certain environmental laws impose
liability for release of asbestos-containing materials ("ACMs"), into the air,
and third parties may seek recovery from owners or operators of real properties
for personal injury associated with ACMs. In connection with the ownership
(direct or indirect), operation, financial results, 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, may be potentially liable for removal or
remediation costs, as well as certain other costs, including governmental fines
and costs related to injuries of persons and property.
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
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were subjected to additional environmental investigations, including, in a few
cases, soil sampling or ground water analysis to further evaluate the
environmental conditions of those Properties.
The environmental studies revealed the presence of groundwater
contamination on certain of the Properties. Certain of these Properties had
contamination which was reported to have migrated on-site from adjacent
industrial manufacturing operations, and one Property was previously occupied by
an industrial user that was identified as the source of contamination. The
environmental studies noted that certain of the Properties are located adjacent
to and possibly down gradient from sites with known groundwater contamination,
the lateral limits of which may extend onto such Properties. The environmental
studies also noted that contamination existed at certain Properties because of
the presence of underground fuel storage tanks which have been removed. There
are asbestos-containing materials in a number of the properties, primarily in
the form of ceiling texture, floor tiles and adhesives, which are generally in
good condition. At properties where radon has been identified as a potential
concern, Essex has implemented remediating measures and additional testing.
Based on its current knowledge, the Company does not believe that future
liabilities associated with asbestos and radon will be material. 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 Properties would not have a material adverse effect on
Essex's financial condition, result of operations, or liquidity.
Certain Properties which have been sold by the Company were identified as
having potential groundwater contamination. While the Company does not
anticipate any losses or costs related to groundwater contamination on
Properties which have been sold, it is possible that such losses or costs may
materialize in the future.
Except with respect to one Property, Essex has no indemnification
agreements from third parties for potential environmental clean-up costs at its
Properties. Essex has no way of determining at this time the magnitude of any
potential liability to which it may be subject arising out of unknown
environmental conditions or violations with respect to the properties formerly
owned by Essex. 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. Essex has no insurance coverage for the types of environmental
liabilities described above.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance for each of the Properties. There are, however, certain
types of extraordinary losses for which the Company does not have insurance. All
of the Properties are located in areas that are subject to earthquake activity,
including 34 Properties in California, 19 Properties in Washington and 6
Properties in Oregon. Essex has obtained earthquake insurance for all the
Properties. This earthquake insurance is subject to an aggregate limit of $25.0
million payable upon a covered loss in excess of a $5.0 million self-insured
retention amount and a 15% 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 placed in service, 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
uninsured risks, deductibles, co-payments or losses in excess of applicable
insurance.
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
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stable in Essex's target markets, a prolonged economic downturn could have a
material adverse effect on Essex's financial position, results of operations or
liquidity.
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
The Company expects to meet its short-term liquidity requirements by using
working capital, amounts available on lines of credit, and any portion of net
cash flow from operations not required for distributions. The Company believes
that its future net cash flows will be adequate to meet operating requirements
and to provide for payment of distributions by the Company in accordance with
REIT requirements. Essex has credit facilities in the committed amount of
approximately $75,110,000. At December 31, 1997 Essex had an outstanding balance
of $27,600,000 under these facilities.
OTHER MATTERS
Essex's operating results may be affected by the matters discussed above
under the captions "Environmental Matters" and "Insurance" as well as by the
following factors:
Debt Financing; Risk of Uncertainty of Ability to Refinance Balloon
Payments and Risk of Rising Interest 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, 1997,
Essex had outstanding approximately $276.6 million of indebtedness (including
$58.8 million of variable rate mortgage investments), of which $251.7 million is
secured by certain of the Properties.
Essex is not expected to have sufficient cash flows to make all of the
balloon payments of principal when due under its mortgage indebtedness and lines
of credit which were, as of December 31, 1997, an aggregate of approximately
$276.6 million. As of December 31, 1997, such mortgage indebtedness and lines of
credit have the following scheduled maturity dates: 1998 -- $31.7 million;
1999 -- $4.5 million; 2000 -- $4.8 million; 2001 -- $60.9 million; 2002 and
thereafter -- $174.7 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.
As of December 31, 1997, Essex had approximately $58.8 million of variable
rate mortgage indebtedness, which bears interest at a floating rate tied to the
rate of short-term tax exempt securities. Although approximately $29.2 million
of such variable rate indebtedness is subject to an interest rate protection
agreement which may reduce the risks associated with fluctuations in interest
rates, an increase in interest rates would have an adverse effect on Essex's net
income and results of operations.
Acquisition Activities; Risks that Acquisitions Will Fail to Meet
Expectations. The Company intends to actively continue to acquire multifamily
residential properties. Acquisitions of such properties entail risks that
investments will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. The Company anticipates that future acquisitions will be financed,
in whole or in part, under existing credit facilities or loan commitments or
other lines of credit or other forms of secured or unsecured financing or
through the issuance of partnership units by the Operating Partnership or
additional equity by the Company. The use of equity financing, rather than debt,
for future developments or acquisitions could have a diluting effect on the
interest of existing shareholders of the Company. If new acquisitions are
financed under existing lines of credit, there is a risk that, unless substitute
financing is obtained, further availability under the lines of credit for new
acquisitions may not be available or may be available only on disadvantageous
terms. In addition, there is a risk that upon the maturity of such existing
lines of credit, the lines of credit will not be able to be refinanced or that
the terms of such refinancing will not be as favorable as the terms of the
existing
8
<PAGE> 11
indebtedness. Further, acquisitions of properties are subject to the general
risks associated with real estate investments. See "Adverse Effect to Property
Income and Value Due to General Real Estate Investment Risks".
Development Activities; Risks that Developments Will Be Delayed or Not
Completed. The Company pursues multifamily residential property development
projects. Such projects generally require various governmental and other
approvals, the receipt of which cannot be assured. The Company's development
activities will entail certain risks, including the expenditure of funds on and
devotion of management's time to projects which may not come to fruition; the
risk that construction costs of a project may exceed original estimates,
possibly making the project not economical; the risk that a development project
may experience delays due to, among other things, adverse weather conditions;
the risk that occupancy rates and rents at a completed project will be less that
anticipated; and the risk that expenses at a completed development will be
higher than anticipated. These risks may result in a development project causing
a reduction in the funds available for distribution. Further, development of
properties is subject to the general risks associated with real estate
investments. See "Adverse Effect to Property Income and Value Due to General
Real Estate Investment Risks."
The Geographic Concentration of the Properties may Adversely Impact Essex's
Income Due to Fluctuations in Local Markets. Approximately 43%, 25%, 26% and 6%
of Essex's rental revenues for the year ended December 31, 1997 were derived
from Properties located in the San Francisco Bay Area, the Seattle metropolitan
area, Southern California and the Portland metropolitan area, respectively. As a
result of this geographic concentration, if a local property market performs
poorly, the income from the Properties in that market could decrease and, in
turn, the ability of the Company to make expected dividends to stockholders
could be adversely affected. The performance of the economy in each of these
areas affects occupancy, market rental rates and expenses and, consequently, has
an impact on the income from the Properties and their underlying values. The
financial results of major local employers may have an impact on the cash flow
and value of certain of the Properties.
Competition in the Multifamily Residential Market May Adversely Affect the
Company's Operations and the Demand for the Company's Properties. There are
numerous housing alternatives that compete with the multifamily Properties in
attracting residents. The multifamily Properties compete directly with other
multifamily rental apartments and single family homes that are available for
rent in the markets in which the Properties are located. The Properties also
compete for residents with new and existing homes and condominiums. In addition,
other competitors for development and acquisitions of properties may have
greater resources than the Company. If such competition results in a reduced
demand for the Company's Properties or if the Company's competitors develop
and/or acquire competing properties on a more cost-effective basis than the
Company, the Company may experience a drop in rental rates, which may have a
material adverse effect on the Company's financial position and results of
operations.
The Company faces competition from other REITs, businesses and other
entities in the acquisition, development, operation of its properties. Some of
the Company's competitors are larger and have greater financial resources than
the Company. This competition may result in a higher cost for properties the
Company wishes to acquire and/or develop.
Debt Financing on Properties May Result in Insufficient Cash Flow. Where
possible, the Company intends to continue to use leverage to increase the rate
of return on its investments and to allow the Company to make more investments
than it otherwise could. Such use of leverage presents an additional element of
risk in the event that the cash flow from the Properties is insufficient to meet
both debt payment obligations and the distribution requirements of the REIT
provisions of the Code. To the extent the Company or Operating Partnership
determines to obtain additional debt financing in the future, it may do so
through mortgages on some or all of its properties. These mortgages may be on
recourse, non-recourse, or cross-collateralized bases. As of December 31, 1997,
the Company had mortgages on 15 Properties which were secured by deeds of trust
relating solely to those Properties, one mortgage which was cross-collateralized
by 8 Properties and two mortgages each of which were cross-collateralized by 3
Properties. The Company also held a line of credit that was secured by 6
Properties. Holders of indebtedness which is so secured will have a claim
against these Properties and to the extent indebtedness is cross-collateralized,
lenders may seek to foreclose upon properties which are not the primary
collateral for their loan, which may, in turn, result in acceleration of other
9
<PAGE> 12
indebtedness secured by Properties. Foreclosure of Properties would result in a
loss of income and asset value to the Operating Partnership and the Company.
Bond Compliance Requirements May Limit the Company's Income from Certain
Properties. As of December 31, 1997 the Company had approximately $60.3 million
of tax-exempt financing relating to its Inglenook Court Apartments, Wandering
Creek Apartments, Treetops Apartments, Meadowood Apartments and Camarillo Oaks
Apartments. The tax-exempt financing subjects these Properties to certain deed
restrictions and restrictive covenants. The Company expects to engage in
tax-exempt financing in the future. In addition, the Internal Revenue Code of
1986, as amended (the "Code") and the regulations promulgated thereunder impose
various restrictions, conditions and requirements relating to the exclusion from
gross income for federal income tax purposes of interest on qualified bond
obligations, including requirements that at least 20% of apartment units be made
available to residents with gross incomes that do not exceed 50% of the median
income for the applicable family size as determined by the Housing and Urban
Development Department of the federal government. In addition to federal
requirements, certain state and local authorities may impose additional rental
restrictions. The bond compliance requirements and the requirements of any
future tax-exempt bond financing utilized by the Company may have the effect of
limiting the Company's income from the tax-exempt financed properties if the
Company is required to lower its rental rates to attract residents who satisfy
the median income test. If the required number of apartment homes are not
reserved for residents satisfying these income requirements, the tax-exempt
status of the bonds may be terminated, the obligations of the Company under the
bond documents may be accelerated and other contractual remedies against the
Company may be available.
Adverse Effect to Property Income and Value Due to General Real Estate
Investment Risks. Real property investments are subject to a variety of risks.
The yields available from equity investments in real estate depend on the amount
of income generated and expenses incurred. If the Properties do not generate
sufficient income to meet operating expenses, including debt service and capital
expenditures, Essex's cash flow and ability to make distributions to its
stockholders will be adversely affected. The performance of the economy in each
of the areas which the Properties are located affects occupancy, market rental
rates and expenses and, consequently, has an impact on the income from the
Properties and their underlying values. The financial results of major local
employers may have an impact on the cash flow and value of certain Properties.
Income from the Properties may be further adversely affected by, among
other things, the general economic climate, local economic conditions in which
the Properties are located, such as oversupply of space or a reduction in demand
for rental space, the attractiveness of the Properties to tenants, competition
from other available space, the ability of 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., the
Americans with Disabilities Act of 1990 and tax laws), interest rate levels and
the availability and terms of financing. In addition, real estate investments
are relatively 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.
Joint Ventures and Joint Ownership of Properties and Interests in
Corporations and Limited Partnerships Could Limit the Company's Ability to
Control Such Properties. Instead of purchasing properties directly, the Company
may invest as a co-venturer or acquire interests in corporations and limited
partnerships.
Joint venturers often have equal control over the operation of the joint
venture assets. Therefore, such investments may, under certain circumstances,
involve risks such as the possibility that the co-venturer in an investment
might become bankrupt, or have economic or business interests or goals that are
inconsistent with the business interests or goals of the Company, or be in a
position to take action contrary to the instructions or the requests of the
Company or contrary to the Company's policies or objectives. Consequently,
actions by a co-venturer might result in subjecting property owned by the joint
venture to additional risk. Although the Company seeks to maintain sufficient
control of any joint venture to permit the Company's objectives to be achieved,
it may be unable to take action without the approval of its joint venture
partners or its joint venture partners could take actions binding on the joint
venture without the Company's consent. Additionally, should a joint venture
partner become bankrupt, the Company could become liable for such partner's
share of joint venture liabilities.
10
<PAGE> 13
From time to time, the Company, through the Operating Partnership, invests
in corporations or limited partnerships which have been formed for the purpose
of acquiring or managing real property. In certain circumstances, the Operating
Partnership's interest in a particular entity may be less than a majority of the
outstanding voting interests of that entity. Therefore, the Operating
Partnership's ability to control the daily operations of such an entity may be
limited. Furthermore, the Operating Partnership may not have the power to remove
a majority of the board of directors (in the case of a corporation) or the
general partner or partners (in the case of a limited partnership) in the event
that the operations of such an entity conflict with the Operating Partnership's
objectives. In addition, the Operating Partnership's ability to dispose of its
interests in such an entity may be limited. In the event that such an entity
becomes insolvent, the Operating Partnership may lose up to its entire
investment in the entity.
Investments in Mortgages. The Company may invest in mortgages (first,
second or third mortgages which may or may not be insured by the Federal Housing
Administration or guaranteed by the Veterans Administration or otherwise
guaranteed), in part as a strategy for ultimately acquiring the underlying
property. In general, investments in mortgages include the risk that the value
of mortgaged property may be less than the amounts owed, the risk that interest
rates payable on the mortgages may be lower than the Company's cost of funds,
and, in the case of junior mortgages, the risk that foreclosure of a senior
mortgage would eliminate the junior mortgage. If any of the above were to occur,
cash flows from operations and the Company's ability to make expected dividends
to stockholders could be adversely affected. The Company anticipates that such
investment in mortgage receivable will not in the aggregate be significant. In
March 1997, the Company acquired a mortgage receivable for approximately
$785,000 which had an outstanding balance of approximately $885,000 as of
December 31, 1997, and is secured by a multifamily property. This mortgage
receivable represents the only mortgage receivable investment of the Company as
of the date hereof.
Changes in Real Estate Tax and Other Laws. Costs resulting from changes in
real estate tax laws generally are not directly passed through to residential
property tenants and increases in income, service or other taxes, generally are
also not passed through to tenants under leases and may adversely affect the
Company's funds from operations and its ability to make distributions to
stockholders. Similarly, compliance with changes in (i) laws increasing the
potential liability for environmental conditions existing on properties or the
restrictions on discharges or other conditions or (ii) rent control or rent
stabilization laws or other laws regulating housing may result in significant
reduction in revenue or unanticipated expenditures, which would adversely affect
the Company's funds from operations and its ability to make distributions to
stockholders.
Changes in Financing Policy; No Limitation on Debt. Essex has adopted a
policy of maintaining a debt-to-total-marketcapitalization ratio of less than
50%. Essex calculates the debt-to-total-market capitalization ratio based on the
ratio of total property indebtedness to the sum of (i) the aggregate market
value of the outstanding shares of common stock (based on the greater of current
market price or the gross proceeds per share from public offerings of its shares
plus any undistributed net cash flow), assuming the conversion of all limited
partnership interests in the Operating Partnership into shares of Common Stock
and the conversion of all shares of Convertible Preferred Stock into shares of
common stock and (ii) the total property indebtedness. Based on this
calculation, Essex's debt-to-total-marketcapitalization ratio was 28% as of
December 31, 1997.
The organizational documents of the Company and the Operating Partnership
do not limit the amount or percentage of indebtedness that may incur.
Accordingly, the Board of Directors of the Company could change the current
policies of the Company and the Operating Partnership regarding indebtedness. If
these policies were changed, the Company and the Operating Partnership could
become more highly leveraged, resulting in an increased risk of default on the
obligations of the Company and the Operating Partnership and in an increase in
debt service requirements that could adversely affect the financial condition,
results of operations and liquidity of the Company. Such increased leverage
could exceed the underlying value of the Properties.
Failure to Qualify as a REIT. The Company has operated so as to qualify as
a REIT under the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ended December 31, 1994. Although the Company
believes that it has operated in a manner which satisfies the REIT qualification
requirements, no assurance can be given that the Company will continue to do so.
A REIT is generally not taxed on its net income distributed to its stockholders
so long as it annually distributes to its stockholders at least 95% of its
taxable income. Qualification as a REIT involves the satisfaction of numerous
requirements (some on an annual or quarterly basis) established under highly
technical and complex provisions of the Code,
11
<PAGE> 14
for which there are only limited judicial or administrative interpretations and
involves the determination of various factual matters and circumstances not
entirely within the Company's control.
CERTAIN POLICIES OF THE COMPANY
The Company intends to continue to operate in a manner that will not
subject it to regulation under the Investment Company Act of 1940. The Company
has in the past three years and may in the future (i) issue securities senior to
its Common Stock, (ii) fund acquisition activities with borrowings under its
line of credit and (iii) offer shares of Common Stock and/or units of limited
partnership interest in the Operating Partnership as partial consideration for
property acquisitions. The Company from time to time acquires partnership
interests in partnerships, either directly or indirectly through subsidiaries of
the Company, when such partnership's underlying assets are real estate. In
general, the Company does not (i) underwrite securities of other issuers or (ii)
actively trade in loans or other investments.
The Company primarily invests in multifamily properties in the Southern
California area, San Francisco Bay Area, Seattle metropolitan area and Portland,
Oregon metropolitan area. The Company also owns three retail properties located
in the Portland, Oregon area and two office buildings located in the San
Francisco Bay Area. The Company currently intends to continue to invest in
multifamily properties in such regions, but may change such policy without a
vote of the stockholders.
The Company may, under certain circumstances, purchase its shares of Common
Stock in the open market or otherwise. The Board of Directors has no present
intention of causing the Company to repurchase any of the shares of Common
Stock, and any such action would be taken only in conformity with applicable
federal and state laws and the requirements for qualifying as a real estate
investment trust under the Code and the Treasury Regulations.
The Company's policies with respect to the policies discussed above may be
reviewed and modified from time to time by the Board of Directors without the
vote of the stockholders.
ITEM 2. PROPERTIES
PORTFOLIO OVERVIEW
Essex's property portfolio (including partial ownership interests) consists
of the following 59 Properties: (i) 54 multifamily residential Properties
containing 10,70 apartment units, (ii) three neighborhood shopping centers
containing approximately 236,000 rentable square feet of space and (iii) two
office buildings, one of which houses the Company's headquarters, with
approximately 62,000 rentable square feet of space. The Properties are located
in California, Washington, and Oregon. Essex's multifamily residential
Properties accounted for approximately 94% of Essex's rental revenues for the
year ended December 31, 1997. The 54 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, 1997 of approximately 96%. As
of December 31, 1997, the three retail Properties had an occupancy rate (based
on "Physical Occupancy" which relates to leased and occupied square footage
divided by rentable square footage) of approximately 97%, and the two office
buildings had an occupancy rate (based on leased and occupied square footage) of
100%. With respect to stabilized multifamily properties with sufficient
operating history, occupancy is represented as Financial Occupancy. With respect
to commercial properties or properties which have not yet stabilized or which
have insufficient operating history, occupancy is represented as Physical
Occupancy. For the year ended December 31, 1997, none of the Company's
Properties had book values equal to 10% or more of total assets of the Company
or gross revenues equal to 10% or more of aggregate gross revenues of the
Company.
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<PAGE> 15
THE LOCATION AND TYPE OF THE COMPANY'S PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF OCCUPANCY RENTAL PERCENTAGE OF
PROPERTY TYPE PROPERTIES LOCATION SIZE RATE(1) REVENUE PORTFOLIO(2)
------------- ---------- -------- ---- --------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Multifamily Residential
Properties
13 San Francisco South Bay 2,594 units 97% $32,972 41%
18 Seattle Metropolitan area 3,433 units 96% 20,27 25%
19 Southern California 3,798 units 95% 19,610 25%
4 Portland, Oregon 875 units 93% 2,577 3%
Metropolitan Area
-- --------------- ---
Subtotal 54 10,700 units 94%
Neighborhood Shopping Centers 3 Portland, Oregon 235,838 sq. ft. 97% 2,829 4%
Metropolitan Area
Office Buildings 2 San Francisco South Bay 62,231 sq. ft. 100% 1,678 2%
-- ------- ---
TOTAL 59 $79,936 100%
== ======= ===
</TABLE>
- ---------------
(1) For multifamily residential Properties, occupancy rates are based on
Financial Occupancy for the year ended December 31, 1997; for the Commercial
Properties, occupancy rates are based on Physical Occupancy as of December
31, 1997.
(2) Based upon rental revenues for the year ended December 31, 1997.
MULTIFAMILY RESIDENTIAL PROPERTIES
Essex has ownership interests in 54 multifamily residential apartment
communities containing 10,700 units. The majority of these Properties are
suburban garden apartments or townhomes comprising multiple clusters of two- and
three-story buildings situated on three to fifteen acres of land. The
multifamily Properties have on average 198 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 built well and have
been maintained well.
NEIGHBORHOOD SHOPPING CENTERS AND OFFICE BUILDINGS
Essex's three neighborhood shopping centers are in the Portland, Oregon
metropolitan area. These neighborhood shopping centers contain an aggregate of
approximately 236,000 rentable square feet of space and, as of December 31,
1997, had an occupancy rate, based on Physical Occupancy, of approximately 97%.
These Properties are located in certain sub-markets in Portland. 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. Essex acquired this Property in 1986 and
redeveloped it in 1988. This building has approximately 45,000 rentable square
feet of space and is a multi-tenant, one-story office building, located at 777
California Avenue in the Stanford Research Park in Palo Alto, California. Essex
currently occupies approximately 6,000 square feet of this 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 this
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
this 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.
In November 1997 the Company purchased an approximate 17,400 rentable
square foot two-story office building located at 925 E. Meadow Drive, Palo Alto,
California. The building was constructed in 1984. The
13
<PAGE> 16
Company relocated its corporate headquarters to approximately 15,400 square feet
of this building in March 1998. The remaining 2,000 square feet is being leased
to an unrelated third party tenant.
The following tables describe Essex's Properties as of December 31, 1997.
The first table describes Essex's multifamily residential Properties and the
second table describes Essex's Commercial Properties.
<TABLE>
<CAPTION>
RENTABLE
MULTIFAMILY RESIDENTIAL SQUARE YEAR YEAR
PROPERTIES(1) LOCATION UNITS FOOTAGE BUILT ACQUIRED OCCUPANCY(2)
----------------------- -------- ----- -------- ----- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Northern California
The Apple Fremont, CA 200 146,296 1971 1982 94%
Bristol Commons(3) Sunnyvale, CA 188 142,668 1989 1997 98%
Eastridge San Ramon, CA 188 174,104 1988 1996 94%
Foothill Gardens San Ramon, CA 132 155,100 1985 1997 96%
Marina Cove(4) Santa Clara, CA 292 250,294 1974 1994 98%
Oak Pointe Sunnyvale, CA 390 294,180 1973 1988 97%
Plumtree Santa Clara, CA 140 113,260 1975 1994 97%
The Shores(3) San Ramon, CA 348 275,888 1988 1997 95%
Summerhill Commons Newark, CA 184 139,012 1987 1987 97%
Treetops(3) Fremont, CA 172 131,270 1978 1996 98%
Twin Creeks San Ramon, CA 44 51,700 1985 1997 96%
Windsor Ridge Sunnyvale, CA 216 161,892 1989 1989 97%
----- --------- --
2,594 2,114,248 97%
SEATTLE METROPOLITAN AREA
Anchor Village(5) Mukilteo, WA 301 245,928 1981 1997 94%
Bridle Trails(3) Kirkland, WA 92 73,448 1986 1997 94%
Brighton Ridge Renton, WA 264 201,300 1986 1996 94%
Castle Creek Newcastle, WA 216 191,935 1997 1997 (6)
Emerald Ridge Bellevue, WA 180 144,036 1987 1994 98%
Evergreen Heights Kirkland, WA 200 188,340 1990 1997 95%
Foothills Commons Bellevue, WA 360 288,317 1978 1990 97%
Inglenook Court Bothell, WA 224 183,624 1985 1994 98%
Laurels at Mill Creek Mill Creek, WA 164 134,360 1981 1996 97%
Maple Leaf(3) Seattle, WA 48 35,584 1986 1997 97%
The Palisades Bellevue, WA 192 159,792 1977 1990 96%
Sammamish View Bellevue, WA 153 133,590 1986 1994 95%
Santa Fe Ridge Silverdale, WA 240 262,340 1993 1994 85%
Spring Lake(3) Seattle, WA 69 42,325 1986 1997 99%
Stonehedge Village(3) Bothell, WA 196 214,872 1986 1997 96%
Wandering Creek Kent, WA 156 124,366 1986 1995 96%
Wharfside Pointe Seattle, WA 142 119,290 1990 1994 98%
Woodland Commons Bellevue, WA 236 172,316 1978 1990 98%
===== ========= ==
3,433 2,915,763 96%
SOUTHERN CALIFORNIA
The Bluffs II(7) San Diego, CA 224 126,744 1974 1997 98%
Camarillo Oaks(3) Camarillo, CA 564 459,072 1985 1996 94%
Casa del Mar Pasadena, CA 96 61,308 1972 1998 96%
Casa Mango(7)(8) Del Mar, CA 96 88,112 1981 1997 98%
Highridge(5) Rancho Palos Verde, CA 255 290,250 1972 1997 95%
Huntington Breakers(3) Huntington Beach, CA 342 241,763 1984 1997 95%
Kings Road Los Angeles, CA 194 132,112 1979 1997 99%
Meadowood(3) Simi Valley, CA 320 264,568 1986 1996 97%
Park Place Los Angeles, CA 60 48,000 1988 1997 95%
Pathways(9) Long Beach, CA 296 197,720 1975 1991 97%
Riverfront(7)(8) San Diego, CA 229 231,006 1990 1997 90%
Tara Village Tarzana, CA 168 173,600 1972 1997 94%
Trabuco Villas Lake Forest, CA 132 131,032 1985 1997 96%
Villa Rio Vista Anaheim, CA 286 242,410 1968 1985 94%
Villa Scandia Ventura, CA 118 71,160 1971 1997 96%
Village Apartments Oxnard, CA 122 122,120 1974 1997 98%
Wilshire Promenade Fullerton, CA 128 108,470 1992 1997 99%
Windsor Court Los Angeles, CA 58 46,600 1988 1997 95%
Windsor Terrace Pasadena, CA 110 68,325 1972 1997 94%
----- --------- --
3,798 3,104,372 95%
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
RENTABLE
MULTIFAMILY RESIDENTIAL SQUARE YEAR YEAR
PROPERTIES(1) LOCATION UNITS FOOTAGE BUILT ACQUIRED OCCUPANCY(2)
----------------------- -------- ----- -------- ----- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
PORTLAND, OREGON
METROPOLITAN AREA
Jackson School Village(10) Hillsboro, OR 200 196,896 1996 1996 84%
Landmark Hillsboro, OR 285 282,934 1990 1996 87%
Meadows at Cascade Park Vancouver, WA 198 199,377 1988 1997 95%
Village at Cascade Park(8) Vancouver, WA 1989 1997 97%
----- --------- --
875 857,351 93%
----- --------- --
Total/Weighted Average 10,700 8,991,734 96%
===== ========= ==
NEIGHBORHOOD SHOPPING CENTERS
Canby Square Canby, OR 16 102,403 1976 1990 94%
Powell Villa Center Portland, OR 9 63,645 1959 1990 97
Garrison Square Vancouver, WA 13 69,790 1962 1990 100
----- --------- --
Subtotal 38 235,835 97%
Office Buildings
777 California Avenue(11) Palo Alto, CA 3 44,827 1988(12) 1986 100
925 East Meadow Drive Palo Alto, CA 1 17,404 1984 1997 100
----- --------- --
Total/Weighted Average 42 298,069 100%
===== ========= ==
</TABLE>
- ---------------
(1) Unless otherwise specified, the Company has a 100% ownership interest in
each Property.
(2) For multifamily residential Properties, occupancy rates are based on
Financial Occupancy for the year ended December 31, 1997; for the
Commercial Properties, occupancy rates are based on Physical Occupancy as
of December 31, 1997.
(3) This Property is owned by a single asset limited partnership in which the
Company has a minimum 99% limited partnership interest.
(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 1% limited partnership interest in this Property.
(6) This Property was developed in 1997 and has not yet achieved a stabilized
occupancy level. This Property had an occupancy rate of 48% based on
Physical Occupancy as of December 31, 1997.
(7) The Company has an 84% limited partnership interest in this property.
(8) Purchased in late December 1997, occupancy rate is based on Physical
Occupancy as of December 31, 1997.
(9) The Company has a 69% ownership interest in this Property
(10) The Company has a 49.9% ownership interest in this Property.
(11) 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.
(12) Represents the completion date for a major renovation.
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's financial position, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matters were submitted to a vote of
security holders.
15
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of the Company's common stock are traded on the New York Stock
Exchange ("NYSE") under the symbol ESS.
MARKET INFORMATION
The Company's common stock has been traded on the NYSE since June 13, 1994.
The high, low and closing price per share of common stock reported on the NYSE
for the quarters indicated are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW CLOSE
------------- ------- ------- -------
<S> <C> <C> <C>
December 31, 1997............................. $37.500 $32.812 $35.000
September 30, 1997............................ $35.062 $30.500 $34.812
June 30, 1997................................. $32.375 $27.625 $32.125
March 31, 1997................................ $30.875 $28.500 $29.875
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
</TABLE>
The closing price as of March 25, 1998 was $35.562.
HOLDERS
The approximate number of holders of record of the shares of the Company's
common stock was 105 as of March 25, 1998. 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 dividends that exceed earnings and profits is a return of
capital. The return of capital is generated due to the deduction of non-cash
expenses, primarily depreciation, in the determination of earnings and profits.
The status of the cash dividends distributed for the years ended December 31,
1997, 1996 and 1995 for tax purposes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Taxable portion.................................. 100.00% 58.00% 69.00%
Return of capital................................ 0.00% 42.00% 31.00%
------ ------ ------
100.00% 100.00% 100.00%
====== ====== ======
</TABLE>
The most significant factor that caused the reduction of the 1997 return of
capital percentage over 1996 was that in 1997 the Company's earnings grew at a
greater rate than the growth rates of its dividend payments.
16
<PAGE> 19
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:
<TABLE>
<CAPTION>
QUARTER ENDED AMOUNT QUARTER ENDED AMOUNT
- ------------- ------- ------------- -------
<S> <C> <C> <C>
06/30/94 $0.0800 03/31/96 $0.4250
09/30/94 $0.4175 06/30/96 $0.4250
12/31/94 $0.4175 09/30/96 $0.4350
03/31/95 $0.4175 12/31/96 $0.4350
06/30/95 $0.4175 03/31/97 $0.4350
09/30/95 $0.4250 06/30/97 $0.4350
12/30/95 $0.4250 09/30/97 $0.4500
12/31/97 $0.4500
</TABLE>
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.
RECENT SALES OF UNREGISTERED SECURITIES
In June 1997, the Company completed the second phase of a private placement
transaction whereby in that month 800,000 shares of the Company's 8.75%
Convertible Preferred Stock, Series 1996A (the "1996A Preferred Stock") were
issued to Westbrook Real Estate Fund I, L.P. (formerly known as Tiger/Westbrook
Real Estate Fund, L.P.) and Westbrook Real Estate Co-Investment Partnership,
L.P.) (collectively, the "Westbrook Entities") for a purchase price of $25.00
per share, representing an aggregate investment of $20 million. The purchase
price for the 1996A Preferred Stock was paid in cash. The 1996A Preferred Stock
is convertible into common stock of the Company at an initial conversion price
per share of $21.875, subject to adjustment as more fully provided in the
Company's Charter. The 1996A Preferred Stock was issued by the Company in a
privately negotiated transaction to the Westbrook Entities, who are accredited
investors, in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
Effective January 7,1998, Essex Management Corporation, a California
corporation ("EMC") and an affiliate of the Company, as general partner, and
Essex Portfolio, L.P., a California limited partnership (the "Operating
Partnership", as to which the Company is the general partner), as special
limited partner, entered into (a) a First Amended and Restated Agreement of
Limited Partnership of Western-Las Hadas Investors, and (b) a Second Amended and
Restated Agreement of Limited Partnership of Western-Seven Trees Investors
(collectively, the "Las Hadas Partnerships"), pursuant to which the existing Las
Hadas Partnerships were reorganized for the purposes of acquiring the properties
owned by the Las Hadas Partnerships. In connection with the reorganization,
268,631 units of limited partnership interest ("Units") in the Las Hadas
Partnerships were issued to the existing partners of the Las Hadas Partnerships,
all of whom the Company believes qualify as accredited investors, pursuant to an
exemption from registration provided in Regulation D under the Securities Act.
Under the terms of the agreements of limited partnership of these Partnerships,
holders of Units have the right to require the applicable partnership to redeem
their Units for cash, subject to certain conditions. Subject to certain
conditions, the Company may, however, elect to deliver an equivalent number of
unregistered shares of the Company's Common Stock to the holders of the Units in
satisfaction of the applicable Partnership's obligation to redeem the units for
cash, upon which delivery, the holders will have certain rights to require the
Company to register the shares of Common Stock pursuant to the Securities Act.
On February 6, 1998, the Operating Partnership completed the private
placement of 1,200,000 units of its 7.875% Series B Preferred Limited
Partnership Units (the "Series B Preferred Units"), representing a limited
partnership interest in the Operating Partnership, to an institutional investor
in return for a contribution to the Operating Partnership of $60 million. The
Series B Preferred Units will become exchangeable, on a one for one basis, in
whole or in part at any time on or after the February 1998 completion of the
private placement (or earlier under certain circumstances) for shares of the
Company's 7.875% Series B Cumulative
17
<PAGE> 20
Redeemable Preferred Stock, par value $.0001 per share (the "Series B Preferred
Stock"). Pursuant to the terms of a registration rights agreement, entered into
in connection with this private placement, the holders of Series B Preferred
Stock will have certain rights to cause the Company to register such shares of
Series B Preferred Stock. The Series B Preferred Units were issued by the
Operating Partnership in a privately negotiated transaction to an accredited,
institutional investor in reliance on the exemption provided by Section 4(2) of
the Securities Act. Other sales of unregistered securities by the Company during
1997 are set forth in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
18
<PAGE> 21
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, 1997, (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 period from
January 1, 1993 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 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) 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.
<TABLE>
<CAPTION>
YEAR YEAR YEAR JUNE 13,
ENDED ENDED ENDED 1994 -
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
OPERATING DATA:
REVENUES
Rental........................... $79,936 $47,780 $41,640 $19,499
Property and asset management.... -- -- -- --
Other............................ 4,633 2,913 2,300 914
------- ------- ------- -------
Total revenues................. 84,569 50,693 43,940 20,413
EXPENSES
Property operating expenses...... 25,826 15,505 13,604 6,452
Depreciation and amortization.... 13,992 8,855 8,007 4,030
Amortization of deferred
financing costs................ 509 639 1,355 773
General and administrative....... 2,413 1,717 1,527 457
Property and asset management.... -- -- -- --
Other expenses................... 138 42 288 --
Interest......................... 12,659 11,442 10,928 4,304
------- ------- ------- -------
Total expenses................. 55,537 38,200 35,709 16,016
------- ------- ------- -------
Income before gain on sales,
minority interests, provision for
income taxes and extraordinary
item............................. 29,032 12,493 8,231 4,397
Gain on sales.................... 5,114 2,477 6,013
Minority interests............... (4,469) (2,648) (3,486) (1,131)
Provision for income taxes....... -- -- -- --
Extraordinary item -- loss on
early extinguishment of debt... (361) (3,441) (154) --
------- ------- ------- -------
Net income (loss) after minority
interests........................ $29,316 $ 8,881 $10,604 $ 3,266
======= ======= ======= =======
<CAPTION>
PRO FORMA JANUARY 1, YEAR
YEAR ENDED 1994 - ENDED
DECEMBER 31, JUNE 12, DECEMBER 31,
1994(1) 1994 1993
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING DATA:
REVENUES
Rental........................... $34,154 $12,742 $26,509
Property and asset management.... 257 1,794 3,277
Other............................ 1,582 275 643
------- ------- -------
Total revenues................. 35,993 14,811 30,429
EXPENSES
Property operating expenses...... 11,414 4,267 9,348
Depreciation and amortization.... 7,047 2,598 5,537
Amortization of deferred
financing costs................ 1,407 96 219
General and administrative....... 804 306 688
Property and asset management.... -- 974 1,396
Other expenses................... -- 314 952
Interest......................... 7,086 5,924 11,902
------- ------- -------
Total expenses................. 27,758 14,479 30,042
------- ------- -------
Income before gain on sales,
minority interests, provision for
income taxes and extraordinary
item............................. 8,235 332 387
Gain on sales....................
Minority interests............... (1,938) 87 161
Provision for income taxes....... -- (267) (581)
Extraordinary item -- loss on
early extinguishment of debt... -- -- --
------- ------- -------
Net income (loss) after minority
interests........................ $ 6,297 $ 152 $ (33)
======= ======= =======
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
YEAR YEAR YEAR JUNE 13,
ENDED ENDED ENDED 1994 -
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) per share --
diluted(2)....................... $ 1.92 $ 1.12 $ 1.69 $ 0.52
======= ======= ======= =======
Weighted average common stock
outstanding -- diluted (in
thousands)....................... 15,285 7,348 6,275 6,275
======= ======= ======= =======
<CAPTION>
PRO FORMA JANUARY 1, YEAR
YEAR ENDED 1994 - ENDED
DECEMBER 31, JUNE 12, DECEMBER 31,
1994(1) 1994 1993
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss) per share --
diluted(2)....................... $ 1.00 -- --
======= ======= =======
Weighted average common stock
outstanding -- diluted (in
thousands)....................... 6,275 -- --
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate (before
accumulated depreciation)........ $730,987 $393,809 $284,358 $282,344 $186,447
Net investment in real estate...... 702,716 354,715 244,077 248,232 158,873
Total assets....................... 738,835 417,174 273,660 269,065 171,287
Total property indebtedness........ 276,597 153,205 154,524 150,019 152,501
Stockholders' equity............... 398,915 222,807 84,729 84,699 7,772
<CAPTION>
<S> <C>
BALANCE SHEET DATA:
Investment in real estate (before
accumulated depreciation)........
Net investment in real estate......
Total assets.......................
Total property indebtedness........
Stockholders' equity...............
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR JUNE 13, PRO FORMA YEAR
ENDED ENDED ENDED 1994 - YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1994(1) 1993
------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Debt service coverage ratio(3)..... 4.4x 2.9x 2.6x 3.1x 3.4x 1.5x
Gross operating margin(4).......... 68% 68% 67% 67% 67% 67%
Average same-property monthly
rental rate per apartment
unit(5)(6)....................... $ 852 $ 798 $ 749 $ 715 -- --
Average same-property monthly
operating expenses per apartment
unit(5)(7)....................... $ 257 $ 248 $ 241 $ 234 -- --
Total multi-family units (at end of
period).......................... 10,700 6,624 4,868 4,410 4,410 2,817
Multi-family residential property
occupancy rate(8)................ 96% 97% 97% 96% 96% 95%
Total properties (at end of
period).......................... 59 36 30 29 29 20
<CAPTION>
<S> <C>
OTHER DATA:
Debt service coverage ratio(3).....
Gross operating margin(4)..........
Average same-property monthly
rental rate per apartment
unit(5)(6).......................
Average same-property monthly
operating expenses per apartment
unit(5)(7).......................
Total multi-family units (at end of
period)..........................
Multi-family residential property
occupancy rate(8)................
Total properties (at end of
period)..........................
</TABLE>
- ---------------
(1) The unaudited pro forma financial and operating information for the year
ended December 31, 1994 is based on the ownership and operations 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.
(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) Debt service coverage ratio represents earnings before interest, taxes,
depreciation and amortization ("EBITDA") divided by interest expense.
(4) Gross operating margin represents rental revenues less property operating
expenses divided by rental revenues.
(5) Same-property apartment units are those units which the Company has owned
for the entire two years ended as of the end of the period set forth.
(6) Average same-property monthly rental rate per apartment unit represents
total scheduled rent for the same-property apartment units for the period
(actual rental rates on occupied apartment units plus market rental rates on
vacant apartment units) divided by the number of such apartment units and
further divided by the number of months in the period.
(7) Average same-property monthly expenses per apartment unit represents total
monthly operating expenses for the same property apartment units for the
period divided by the total number of such apartment units and further
divided by the number of months in the period.
(8) Occupancy rates are based on Financial Occupancy, (which refers to the
percentage resulting from dividing actual rents by total possible rents as
determined by valuing occupied units at contractual rates and vacant units
at market rates for the period in question), during the period presented.
Financial Occupancy rates exclude occupancy rates for the Casa Mango,
Riverfront, Village at Cascade Park and Castle Creek properties because they
were acquired in late December 1997.
20
<PAGE> 23
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, 1997, 1996 and 1995. The following discussion compares
Essex's results of operations for the years ended December 31, 1997, 1996, and
1995.
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, 1997
owned an approximate 89.9% general partnership interest in the Operating
Partnership and as of December 31, 1996 and 1995, owned a general partner
interest in the Operating Partnership of approximately 86.2% and 77.2%,
respectively.
Certain statements in the Report on Form 10-K and in this Management's
Discussion and Analysis of Financial Condition and Results of Operations contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended. 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 include the risk factors set forth in Item 1 under the
caption "Business -- Other Matters" in this Annual Report on Form 10-K, the risk
factors set forth in Essex's other filings with the Securities and Exchange
Commission, changes in general economic conditions, and changes in the
assumptions used in making such forward-looking statements.
GENERAL BACKGROUND
Essex's revenues are generated primarily from multifamily and commercial
property rental income, which accounted for 95%, 94%, and 95% of Essex's
revenues for the years ended December 31, 1997, 1996, and 1995, respectively.
Such properties are located in California, Washington and Oregon. Occupancy
levels for Essex's multifamily properties in these markets have generally
remained high (averaging approximately 95% over the last five years).
During 1997, Essex acquired ownership interests in twenty-seven multifamily
properties consisting of 4,213 units for an aggregate contract price of
approximately $317.1 million. These investments were primarily funded by the
equity transactions completed in 1997. Sixteen (2,525 units) are located in
Southern California, seven of these properties (1,122 units) are located in the
greater Seattle metropolitan area, two (176 units) are located in Northern
California, and two (390 units) are located in the greater Portland, Oregon
metropolitan area.
In 1997, Essex sold one Northern California multifamily property and three
Portland retail properties for an aggregate net sales price of $15,470,000. The
proceeds were used to fund acquisitions of multifamily properties.
The Company has committed approximately $150,000,000 relating to six
development projects comprising approximately 1,330 multifamily units to be
completed over the next two years.
Essex has elected to be treated as a real estate investment trust ("REIT")
for federal income tax purposes, commencing with the year ended December 31,
1994. In order to maintain compliance with REIT tax rules, Essex provides some
of its fee based asset management and disposition services as well as
third-party property management and leasing services through Essex Management
Corporation ("EMC"). 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.
21
<PAGE> 24
Average financial occupancy rates for the year ended December 31, 1997 for
Essex's multifamily properties are as follows:
<TABLE>
<S> <C>
Northern California.......................... 97.3%
Seattle, Washington.......................... 96.4%
Southern California.......................... 95.0%
Portland, Oregon............................. 92.6%
</TABLE>
The commercial properties were 97.2% occupied (based on square footage) as
of December 31, 1997.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Total Revenues increased by $33,876,000 or 66.8% to $84,569,000 in 1997
from $50,693,000 in 1996. The following table sets forth a breakdown of these
revenue amounts, including the revenues attributable to properties that Essex
owned for both 1997 and 1996 ("the Same Store Properties").
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
NUMBER OF ------------------ PERCENTAGE
PROPERTIES 1997 1996 DOLLAR CHANGE CHANGE
---------- ------- ------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rental income
Same Store Properties
Northern California............ 7 $19,142 $16,791 $ 2,351 14.0%
Seattle Metropolitan........... 9 15,433 14,476 957 6.6
Southern California............ 2 4,872 4,780 92 1.9
Retail and commercial.......... 4 3,964 3,934 30 0.7
-- ------- ------- ------- -----
Total Same Store 22
Properties.............. 43,411 39,981 3,430 8.6%
Properties acquired/disposed of
subsequent to January 1, 1996..... 36,525 7,799 28,726 368.3%
------- ------- ------- -----
Total rental income................. 79,936 47,780 32,156 67.3
Other income........................ 4,633 2,913 1,720 59.0
------- ------- ------- -----
Total revenues...................... $84,569 $50,693 $33,876 66.8%
======= ======= ======= =====
</TABLE>
As set forth in the above table, $28,726,000 of the $33,876,000 increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 1996. During this period, Essex acquired interests in thirty seven
properties, (the "Acquisition Properties"), and disposed of three multifamily
properties and three retail shopping centers.
Of the increase in total revenues, $3,430,000 is attributable to increases
in rental income from the Same Store Properties. Rental income from the Same
Store Properties increased by approximately 8.6% to $43,411,000 in 1997 from
$39,981,000 in 1996. The majority of this increase was attributable to the seven
multifamily Same Store Properties located in Northern California, the rental
income of which increased by $2,351,000 or 14.0% to $19,142,000 in 1997 from
$16,791,000 in 1996. This $2,351,000 increase is primarily attributable to
rental rate increases which were offset by a decrease in average financial
occupancy to 97.3% for the year ended December 31, 1997 from 98.2% for the year
ended December 31,1996. The nine multifamily residential properties located in
the Seattle metropolitan area accounted for the next largest contribution to
this Same Store Properties rental income increase. The rental income of these
properties increased by $957,000 or 6.6% to $15,433,000 in 1997 from $14,476,000
in 1996. This $957,000 increase is attributable to rental rate increases as well
as increases in average financial occupancy which increased to 96.6% for 1997
from 95.6% in 1996.
The increase in total revenue also included an increase of $1,720,000
attributable to interest and other income. The most significant component of
this $1,720,000 increase was an increase in interest income of $1,402,000 which
was largely due to an increase in notes receivable.
22
<PAGE> 25
Total Expenses increased by $17,337,000 or approximately 45.4% to
$55,537,000 in 1997 from $38,200,000 in 1996. The most significant factor
contributing to this increase is the growth in Essex's multifamily portfolio
from 29 properties, (6,624 units) at the end of 1996 to 54 properties, (10,700
units) at December 31, 1997. Interest expense increased by $1,217,000 or 10.6%
to $12,659,000 in 1997 from $11,442,000 in 1996. Such interest expense increase
was primarily due to the net addition of outstanding mortgage debt in connection
with property and investment acquisitions. Property operating expenses,
exclusive of depreciation and amortization, increased by $10,321,000 or 66.6% to
$25,826,000 in 1997 from $15,505,000 in 1996. Of such increase, $10,046,000 is
attributable to properties acquired or disposed of subsequent to January 1,
1996. Property operating expenses, exclusive of depreciation and amortization as
a percentage of rental revenues was 32.3% for 1997 and 32.5% for 1996. General
and administrative expenses represent the costs of Essex's various acquisition
and administrative departments as well as corporate and partnership
administration and non-operating expenses. Such expenses increased by $696,000
in 1997 from the 1996 amount. This increase is largely due to additional
staffing requirements resulting from the growth of Essex. General and
administrative expenses as a percentage of total revenues was 2.9% for 1997 and
3.4% for 1996.
Net income increased by $20,435,000 to $29,316,000 in 1997 from $8,881,000
in 1996. The increase in net income was primarily a result of the net
contribution of acquisitions and dispositions, the increase in income from the
Same Store Properties, the increase in the gain on sales of real estate of
$2,637,000 to $5,114,000 in 1997 from $2,477,000 in 1996 and a reduction in
extraordinary loss on early extinguishment of debt of $3,080,000 to $361,000 in
1997 from $3,441,000 in 1996.
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. The following table sets forth a breakdown of these revenue
amounts, including the revenues attributable to properties that Essex owned for
both 1996 and 1995 ("1996/1995 Same Store Properties").
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
NUMBER OF ------------------ PERCENTAGE
PROPERTIES 1997 1996 DOLLAR CHANGE CHANGE
---------- ------- ------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rental income
1996/1995 Same Store Properties
Northern California............ 8 $17,975 $16,430 $1,545 9.4%
Seattle Metropolitan........... 8 13,430 12,853 577 4.5
Southern California............ 2 4,780 4,597 183 4.0
Retail and commercial.......... 7 4,821 4,550 271 5.9
-- ------- ------- ------ -----
Total 1996/1995 Same Store
Properties.............. 25 41,006 38,430 2,576 6.7%
Properties acquired/disposed of
subsequent to January 1, 1995..... 6,774 3,210 3,564 111.0%
------- ------- ------ -----
Total rental income................. 47,780 41,640 6,140 14.7
Other income........................ 2,913 2,300 613 26.7
------- ------- ------ -----
Total revenues...................... $50,693 $43,940 $6,753 15.4%
======= ======= ====== =====
</TABLE>
As set forth in the above table, $3,564,000 of the $6,753,000 increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 1995. During this period, Essex acquired interests in eight
properties, and disposed of two multifamily properties.
Of the increase in total revenues, $2,576,000 is attributable to increases
in rental income from the 1996/ 1995 Same Store Properties. Rental income from
the 1996/1995 Same Store Properties increased by approximately 6.7% to
$41,006,000 in 1996 from $38,430,000 in 1995. The majority of this increase was
attributable to the eight multifamily 1996/1995 Same Store Properties located in
Northern California, the rental income of which increased by $1,545,000 or 9.4%
to $17,975,000 in 1996 from $16,430,000 in 1995. This $1,545,000 increase is
primarily attributable to rental rate increases and financial occupancy for this
23
<PAGE> 26
region increasing to 98.6% for 1996 from 98.4% in 1995. The eight multifamily
residential properties located in the Seattle metropolitan area was the next
largest regional contribution to this 1996/1995 Same Store Properties rental
income increase. The rental income of these properties increased by $577,000 or
4.5% to $13,430,000 in 1996 from $12,853,000 in 1995. This $577,000 increase is
attributable to rental rate increases and financial occupancy for this region
which increased to 95.8% in 1996 from 95.6% in 1995.
The increase in total revenue also reflected an increase of $613,000
attributable to other income. The most significant components were an increase
in joint venture income of $437,000 and an increase in interest income of
$154,000 which was largely due to an increase in notes receivable.
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 net addition of outstanding mortgage debt in connection
with property acquisitions. 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. Property operating expenses, exclusive of
depreciation and amortization, as a percentage of rental revenues was 32.5% for
1996 and 32.7% for 1995. Of such increase, $1,293,000 was attributable to the
properties acquired or disposed of subsequent to January 1, 1995. General and
administrative expenses represent the costs of Essex's various acquisition and
administrative departments as well as partnership administration and
non-operating expenses. Such expenses increased by $190,000 in 1996 from the
amount for 1995. This increase is largely due to additional staffing
requirements resulting from the growth of Essex. General and administrative
expenses as a percentage of total revenues was 3.4% for 1996 and 3.5% for 1995.
Net income decreased by $1,723,000 to $8,881,000 in 1996 from $10,604 ,000
in 1995. The decrease in the 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 the net contribution of the acquisition
properties and an increase in net operating income from the 1996/1995 Same Store
Properties.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, Essex had $4,282,000 of unrestricted cash and cash
equivalents. The Company expects to meet its short-term liquidity requirements
(during the next 12 months) by using working capital, amounts available on lines
of credit, and any net cash flow from operations not distributed. The Company
believes that its future net cash flows will be adequate to meet operating
requirements and to provide for payment of dividends by the Company in
accordance with REIT requirements. Essex has credit facilities in the committed
amount of approximately $75,110,000. At December 31, 1997 Essex had an
outstanding balance of $27,600,000 on its lines of credit. Essex expects to meet
its long-term liquidity requirements (beyond the next 12 months) by using
working capital, amounts available on lines of credit, any portion of
undistributed net cash flow, net proceeds from public and private debt and
equity offerings, and proceeds from the disposition of properties that may be
sold from time to time. There can, however, be no assurance that Essex will have
access to the debt and equity markets in a timely fashion to meet long-term
liquidity requirements or that future working capital, net cash flow and
borrowings under the lines of credit will be available, or if available, will be
sufficient to meet Essex's needs.
Essex's total cash balances decreased $38,423,000 from $42,705,000 as of
December 31, 1996 to $4,282,000 as of December 31, 1997. This decrease was
primarily a result of $263,049,000 of cash used in investing activities, which
was offset by $46,898,000 of cash provided by operating activities, and
$177,728,000 of cash provided by financing activities. Of the $263,049,000 net
cash used in investing activities, $247,886,000 was used to purchase and upgrade
rental properties, and $27,442,000 was used to fund real estate under
development, which was offset by $15,470,000 of proceeds received from the
disposition of one multifamily and three retail properties. The $177,728,000 net
cash provided by financing activities was primarily a result of $204,931,000 of
proceeds from mortgages and other notes payable and lines of credit,
$174,012,000 net proceeds from stock offerings, (including $20,000,000 of net
proceeds from a convertible preferred stock sale) and $21,859,000 of repayments
of related party notes and other receivables as offset by $164,580,000 of
24
<PAGE> 27
repayments of mortgages and other notes payable and lines of credit, $28,761,000
issued in related party notes and other receivables and $28,956,000 of
dividends/distributions paid.
As of December 31, 1997, Essex's outstanding indebtedness under mortgages
and lines of credit of consisted of $190,177,000 in fixed rate debt, $27,600,000
of variable rate debt and $58,820,000 of debt represented by tax exempt variable
rate demand bonds, of which $29,220,000 is capped at a maximum interest rate of
7.2%.
As of December 31, 1997, 35 of the Company's majority owned properties were
encumbered by debt. The total amount of the outstanding debt is $276,597,000.
The agreements underlying these encumbrances contain customary restrictive
covenants which Essex believes do not have a material adverse effect on its
operations. Currently, Essex is in compliance with such covenants. As of
December 31, 1997, the Company had mortgages on 17 Properties which were secured
by deeds of trust relating solely to those Properties, one mortgage which was
cross-collateralized by 8 Properties and two mortgages each of which were cross-
collateralized by 3 Properties. The Company also held a line of credit that was
secured by 6 properties.
For the year ended December 31, 1997, non-revenue generating capital
expenditures totaled approximately $2,270,000 or an annualized $291 per weighted
average occupancy unit. Essex expects to incur approximately $300 per weighted
average occupancy unit in non-revenue generating capital expenditures for the
year ended December 31, 1998. These expenditures do not include the improvements
required by lenders in connection with the origination of mortgage loans,
improvements to acquisition properties to correct physical deficiencies,
expenditures that Essex expects to generate additional revenues, and renovation
expenditures required pursuant to tax-exempt bond financings. 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
1998 and/or the funding thereof will not be significantly different than that of
the Company's current expectations. Essex is developing six multifamily
residential projects, which are anticipated to have an aggregate of
approximately 1,330 multifamily units. Essex expects that such projects will be
completed during the next two years (1998 and 1999). Such projects involve
certain risks inherent in real estate development. In connection with these
development projects, the Operating Partnership has directly, or in cases
through its joint venture partners, entered into contractual construction
related commitments with unrelated third parties for approximately $77 million.
Essex expects to fund such commitments with some combination of its lines of
credit, net proceeds from public and/or private debt and equity offerings and
any portion of undistributed net cash flow.
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.
In September 1996, Essex sold $20,000,000 of its 8.75% Convertible
Preferred Stock, Series 1996A (the "Convertible Preferred Stock") to
Tiger/Westbrook Real Estate Fund, L.P., and Tiger/Westbrook Real Estate
Co-Investment Partnership, L.P., (collectively "Tiger/Westbrook"). On June 20,
1997, the Company completed the second phase of the this transaction with the
sale of an additional $20,000,000 of its Convertible Preferred Stock to
Tiger/Westbrook.
During 1996, Essex sold shares of Common Stock in public offerings in
August and December. In connection with the August and December 1996 offerings,
Essex sold 2,530,000 and 2,783,000 shares at $22.75 and $27.75 per share,
respectively. The net proceeds received for these two transactions were
$53,996,000 and $72,468,000, respectively.
During 1997, Essex sold additional shares of Common Stock in public
offerings in March, September and December. In connection with the March,
September and December 1997 offerings, Essex sold 2,000,000, 1,495,000 and
1,500,000 shares at $29.13, $31.00 and $35.50 per share, respectively. The net
proceeds received for these transactions were $58,119,000, $46,080,000 and
$49,814,000, respectively.
Subsequent to December 31, 1997, Essex Portfolio, L.P. (the "Operating
Partnership") completed the sale of 1,200,000 units of its 7.875% Series B
Cumulative Redeemable Preferred Units to an institutional investor in a private
placement at a price of $50.00 per unit. Such units are convertible into
non-voting
25
<PAGE> 28
preferred stock of Essex after ten years from the February 1998 completion of
the sale or earlier under certain circumstances. The Operating Partnership
utilized the proceeds of this transaction to fund the acquisition of multifamily
properties, to reduce outstanding indebtedness and for general corporate
purposes.
Subsequent to December 31, 1997, Essex and the Operating Partnership filed
a registration statement (the "January 1998 Shelf Registration Statement") with
the Securities and Exchange Commission (the "SEC") to register $100,000,000 of
equity securities of Essex and $250,000,000 of debt securities of the Operating
Partnership. Prior to the filing of the January 1998 Shelf Registration
Statement, Essex had approximately $42,000,000 of capacity remaining on a
previously filed registration statement which registered shares of common stock,
preferred stock, depository shares and warrants to purchase common and preferred
stock.
The Company is currently evaluating appropriate courses of action regarding
"year 2000" compliance. The Company has contacted its current software vendor
and has determined that an upgraded package will be available for
implementation. Total costs are not expected to have a material impact on
operations.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations an appropriate
alternative measure of performance of an equity REIT. Generally, Funds from
Operations adjusts net income 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 and its ability 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 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 1997, 1996 and
1995.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE QUARTER ENDED
ENDED -------------------------------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997 1997
------------ ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Income before minority
interest....................... $33,785,000 $ 8,213,000 $12,612,000 $ 7,217,000 $5,743,000
Adjustments:
Depreciation and
amortization................ 13,992,000 4,129,000 3,555,000 3,220,000 3,088,000
Adjustments for unconsolidated
joint ventures.............. 941,000 251,000 242,000 448,000 0
Non-recurring items
Gains of the sales of real
estate.................... (5,114,000) 13,000 (4,713,000) (414,000) 0
Other non-recurring
items(1).................. 499,000 395,000 0 104,000 0
Minority interest.............. (603,000) (162,000) (161,000) (142,000) (138,000)
----------- ----------- ----------- ----------- ----------
Funds from operations -- NAREIT
"revised definition"........ $43,500,000 $12,839,000 $11,535,000 $10,433,000 $8,693,000
=========== =========== =========== =========== ==========
Weighted average number of
Shares -- diluted(2)........... 17,152,990 19,435,950 17,860,753 16,624,396 14,557,019
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE QUARTER ENDED
ENDED -------------------------------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996 1996
------------ ------------ ------------- ----------- ----------
<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
Gains of the sales of real
estate.................... (2,477,000) 3,000 (71,000) (2,409,000) 0
Other non-recurring
items(1).................. 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 -- diluted(2)........... 9,533,269 11,942,857 9,878,075 8,130,000 8,130,000
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE QUARTER ENDED
ENDED -------------------------------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995 1995
------------ ------------ ------------- ----------- ----------
<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
Gains of the sales of real
estate.................... (6,013,000) (5,224,000) 0 (789,000) 0
Other non-recurring
items(1).................. 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
=========== =========== =========== =========== ==========
Weighted average number of
Shares -- diluted(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, 1997, 1996 and
1995 consists of $138,000, $42,000 and $288,000 of loss from hedge
termination and $361,000, $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.
The National Association of Real Estate Investment Trusts ("NAREIT"), a
leading industry group, has approved a revised definition of Funds from
Operations, which provides, in part, that the amortization of deferred financing
costs is no longer to be added back to net income in the calculation of Funds
for Operations. Consistent with the NAREIT recommendation Essex has adopted this
new definition beginning in 1996. The following table sets forth Essex's
calculation of actual Funds from Operations for 1997, 1996 and 1995 using the
revised definition.
27
<PAGE> 30
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 April 28, 1998.
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 April 28, 1998.
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 April 28, 1998.
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 April 28, 1998.
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Financial Statements:
Balance Sheets as of December 31, 1997 and 1996............. F-2
Statements of Operations for the years ended December 31,
1997, 1996 and 1995....................................... F-3
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995....................................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
(b) Reports on Form 8-K
On December 1, 1997, the Company filed a Current Report on Form 8-K regarding
(i) its 1997 acquisitions, including the acquisition of the following
properties: (a) Stonehedge Village, (b) Bridle Trails, (c) Spring Lake, (d)
Maple Leaf, (e) Trabuco Villas, (f) Meadows at Cascade Park, and (g) Palo Alto,
California office building that will house the Company's corporate headquarters,
(ii) the pending acquisition of the following properties: (a) Village at Cascade
Park, (b) Casa Mango, and (c) Castle Creek, and (iii) the disposition of the
following properties: (a) Countrywood, and (b) Riviera Plaza.
28
<PAGE> 31
On December 6, 1997, the Company filed a Current Report on Form 8-K with respect
to its public offering of 1,500,000 shares of Common Stock.
(c) Exhibits. The Exhibit Index attached hereto is incorporated into this Item
14(c) by reference.
29
<PAGE> 32
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.
<TABLE>
<S> <C>
ESSEX PROPERTY TRUST, INC.
(Registrant)
Dated: March 30, 1998 By: /s/ MICHAEL J. SCHALL
----------------------------------------
Michael J. Schall
Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and on the date indicated.
<TABLE>
<S> <C>
Dated: March 30, 1998 /s/ GEORGE M. MARCUS
----------------------------------------------
George M. Marcus
Chairman of the Board
Dated: March 30, 1998 /s/ KEITH R. GUERICKE
----------------------------------------------
Keith R. Guericke
President and Chief Executive Officer and
Vice Chairman
Dated: March 30, 1998 /s/ MICHAEL J. SCHALL
----------------------------------------------
Michael J. Schall
Chief Financial Officer Executive, Vice
President
and Director
Dated: March 30, 1998 /s/ MARK J. MIKL
----------------------------------------------
Mark J. Mikl
Controller (Principal Accounting Officer)
Dated: March 30, 1998 /s/ WILLIAM A. MILLICHAP
----------------------------------------------
William A. Millichap
Director
Dated: March 30, 1998 /s/ GARY P. MARTIN
----------------------------------------------
Gary P. Martin
Director
Dated: March 30, 1998 /s/ ROBERT E. LARSON
----------------------------------------------
Robert E. Larson
Director
Dated: March 30, 1998 /s/ ROBERT E. LARSON
----------------------------------------------
Robert E. Larson
Director
</TABLE>
30
<PAGE> 33
<TABLE>
<S> <C>
Dated: March 30, 1998 /s/ THOMAS E. RANDLETT
----------------------------------------------
Thomas E. Randlett
Director
Dated: March 30, 1998 /s/ ANTHONY DOWNS
----------------------------------------------
Anthony Downs
Director
Dated: March 30, 1998 /s/ DAVID BRADY
----------------------------------------------
Director
Dated: March 30, 1998 /s/ ISSIE N. RABINOVITCH
----------------------------------------------
Issie N. Rabinovitch
Director
Dated: March 30, 1998 /s/ WILLARD H. SMITH
----------------------------------------------
Willard H. Smith
Director
Dated: March 30, 1998 /s/ GREGORY J. HARTMAN
----------------------------------------------
Gregory J. Hartman
Director
</TABLE>
31
<PAGE> 34
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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997. In
connection with our audits of the consolidated financial statements, we have
also audited the related financial statement schedule of Real Estate and
Accumulated Depreciation as of December 31, 1997. These consolidated financial
statements and the financial statement schedule are the responsibility of the
management of Essex Property Trust, Inc. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, 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.
/s/ KPMG Peat Marwick LLP
San Francisco, California
January 30, 1998
F-1
<PAGE> 35
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Real estate:
Rental properties:
Land and land improvements............................. $182,416 $ 90,557
Buildings and improvements............................. 548,571 303,252
-------- --------
730,987 393,809
Less accumulated depreciation............................. (58,040) (47,631)
-------- --------
672,947 346,178
Investments............................................... 2,347 8,537
Real estate under development............................. 27,422 --
-------- --------
702,716 354,715
Cash and cash equivalents................................... 4,282 42,705
Restricted cash............................................. 6,093 4,194
Notes and other related party receivables................... 9,264 2,362
Notes and other receivables................................. 8,602 5,293
Prepaid expenses and other assets........................... 3,838 3,745
Deferred charges, net....................................... 4,040 4,160
-------- --------
$738,835 $417,174
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable...................................... $248,997 $153,205
Lines of credit............................................. 27,600 --
Accounts payable and accrued liabilities.................... 21,337 7,346
Dividends payable........................................... 9,189 6,286
Other liabilities........................................... 4,208 2,249
-------- --------
Total liabilities................................. 311,331 169,086
Minority interests.......................................... 28,589 25,281
Stockholders' equity:
8.75% Convertible preferred stock, series 1996A: $.0001
par value,
1,600,000 and 1,600,000 authorized; 1,600,000 and
800,000
issued and outstanding in 1997 and 1996,
respectively........................................... 1 1
Common stock, $.0001 par value, 668,400,000 and
668,400,000 shares authorized; 16,614,687 and
11,591,650
shares issued and outstanding, in 1997 and 1996,
respectively........................................... 2 1
Excess stock, $.0001 par value, 330,000,000 shares
authorized;
no shares issued or outstanding........................ -- --
Additional paid-in capital................................ 430,804 256,106
Accumulated deficit....................................... (31,892) (33,301)
-------- --------
Total stockholders' equity........................ 398,915 222,807
-------- --------
$738,835 $417,174
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 36
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental.............................................. $ 79,936 $ 47,780 $ 41,640
Interest and other income........................... 4,633 2,913 2,300
----------- ---------- ----------
84,569 50,693 43,940
----------- ---------- ----------
Expenses:
Property operating expenses:
Maintenance and repairs.......................... 6,814 4,341 3,811
Real estate taxes................................ 6,340 3,790 3,371
Utilities........................................ 5,074 3,175 2,974
Administrative................................... 5,514 2,911 2,592
Advertising...................................... 1,225 653 299
Insurance........................................ 859 635 557
Depreciation and amortization.................... 13,992 8,855 8,007
----------- ---------- ----------
39,818 24,360 21,611
Interest............................................ 12,659 11,442 10,928
Amortization of deferred financing costs............ 509 639 1,355
General and administrative.......................... 2,413 1,717 1,527
Loss from hedge termination......................... 138 42 288
----------- ---------- ----------
Total expenses................................... 55,537 38,200 35,709
----------- ---------- ----------
Income before gain on sales of real estate,
minority interests and extraordinary item...... 29,032 12,493 8,231
Gain on sales of real estate.......................... 5,114 2,477 6,013
Minority interests.................................... (4,469) (2,648) (3,486)
----------- ---------- ----------
Income before extraordinary item................. 29,677 12,322 10,758
Extraordinary loss on early extinguishment of debt.... (361) (3,441) (154)
----------- ---------- ----------
Net income.................................. $ 29,316 $ 8,881 $ 10,604
=========== ========== ==========
Per share data:
Basic:
Net income before extraordinary item............. $ 1.98 $ 1.61 $ 1.71
Extraordinary item - debt extinguishment......... (0.02) (0.48) (0.02)
----------- ---------- ----------
Net income.................................. $ 1.96 $ 1.13 $ 1.69
=========== ========== ==========
Weighted average number of shares outstanding
during the period.............................. 13,644,906 7,283,124 6,275,000
=========== ========== ==========
Diluted:
Net income before extraordinary item............. $ 1.94 $ 1.59 $ 1.71
Extraordinary item -- debt extinguishment........ (0.02) (0.47) (0.02)
----------- ---------- ----------
Net income.................................. $ 1.92 $ 1.12 $ 1.69
=========== ========== ==========
Weighted average number of shares outstanding
during the period.............................. 15,285,288 7,347,528 6,275,000
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 37
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net proceeds from preferred stock
offering............................. 800 -- -- -- 20,000 -- 20,000
Net proceeds from common stock
offerings............................ -- -- 4,995 1 154,012 -- 154,013
Net proceeds from options exercised.... -- -- 28 -- 686 -- 686
Net income............................. -- -- -- -- -- 29,316 29,316
Dividends declared..................... -- -- -- -- -- (27,907) (27,907)
----- --- ------ --- -------- -------- --------
Balances at December 31, 1997.......... 1,600 $ 1 16,615 $ 2 $430,804 $(31,892) $398,915
===== === ====== === ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 38
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 29,316 $ 8,881 $ 10,604
Minority interests....................................... 4,469 2,047 3,003
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sales of real estate.......................... (5,114) (2,477) (6,013)
Equity in income (loss) of limited partnerships....... 209 (546) (92)
Loss on early extinguishment of debt.................. 361 3,441 154
Loss from hedge termination........................... 138 42 62
Depreciation and amortization......................... 13,992 8,855 8,007
Amortization of deferred financing costs.............. 509 639 1,355
Changes in operating assets and liabilities:
Other receivables................................... (1,377) (163) (48)
Prepaid expenses and other assets................... (158) (2,110) (561)
Accounts payable and accrued liabilities............ 2,738 842 (73)
Other liabilities................................... 1,815 684 197
-------- -------- --------
Net cash provided by operating activities........ 46,898 20,135 16,595
-------- -------- --------
Cash flows from investing activities:
Additions to rental properties........................... (247,886) (101,429) (9,516)
Increase in restricted cash.............................. (1,899) (4,194) --
Issuance of notes receivable............................. 1,932) (3,909) (500)
Repayments of notes receivable........................... -- 6,327 333
Investments in corporations and limited partnerships..... 620 665 (7,426)
Dispositions of real estate.............................. 15,470 13,350 12,147
Additions to real estate under development............... (27,422) -- --
-------- -------- --------
Net cash used in investing activities............ (263,049) (89,190) (4,962)
-------- -------- --------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable and lines
of credit............................................. 204,931 91,253 21,700
Repayment of mortgage and other notes payable and lines
of credit............................................. (164,580) (110,305) (17,195)
Additions to deferred charges............................ (752) (2,530) (930)
Additions to related party notes and other receivables... (761) -- --
Repayments of related party notes and other
receivables........................................... 21,859 -- --
Net proceeds from stock offerings........................ 174,012 143,969 --
Increase (decrease) in offering related accounts
payable............................................... (711) 1,140 --
Net proceeds from stock options exercised................ 686 68 --
Net payments made in connection with costs related to the
early extinguishment of debt.......................... -- (620) --
Distributions to minority interest/partners.............. (3,910) (3,189) (3,123)
Dividends paid........................................... (25,046) (12,009) (10,513)
-------- -------- --------
Net cash provided by (used in) financing activities... 177,728 107,777 (10,061)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (38,423) 38,722 1,572
Cash and cash equivalents at beginning of period........... 42,705 3,983 2,411
-------- -------- --------
Cash and cash equivalents at end of period................. $ 4,282 $ 42,705 $ 3,983
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized....... $ 12,384 $ 11,575 $ 10,927
======== ======== ========
Supplemental disclosure of non-cash investing and financing
activities:
Mortgage note payable assumed in connection with
purchase of real estate............................. $ 83,041 $ 17,733 $ --
======== ======== ========
Dividends payable..................................... $ 9,189 $ 6,286 $ 3,455
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 39
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements present the accounts of
Essex Property Trust, Inc. (the Company) which include the accounts of the
Company and Essex Portfolio, L.P. (the Operating Partnership, which holds the
operating assets of the Company). The Company was incorporated in the state of
Maryland in March 1994. On June 13, 1994, the Company commenced operations with
the completion of an initial public offering (the Offering) in which it issued
6,275,000 shares of common stock at $19.50 per share. The net proceeds of the
Offering of $112,070 were used to acquire a 77.2% general partnership interest
in the Operating Partnership.
The limited partners own an aggregate 10.1% interest in the Operating
Partnership at December 31, 1997. 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 1,873,473
shares of common stock for such conversions. These conversion rights may be
exercised by the limited partners at any time through 2024.
All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.
(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.
Certain rental properties are pledged as collateral for the related
mortgage notes payable.
In the normal course of business, when the Company determines that a
property is held for sale, it discontinues the periodic depreciation of that
property in accordance with the provisions of SFAS 121. Assets held for sale 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, 1997.
Real Estate Investments
The Company accounts for its investments in joint ventures and corporations
under the equity method of accounting.
Cash Equivalents and Restricted Cash
Highly liquid investments with a maturity of three months or less when
purchased are classified as cash equivalents. Restricted cash relates to reserve
requirements in conjunction with the Company's tax exempt variable rate bond
financings.
F-6
<PAGE> 40
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Revenues
For multi-family properties, rental revenue is reported on the accrual
basis of accounting. For the retail and corporate properties, rental income is
recognized 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.
Interest
During 1997, the Company capitalized $1,276 of interest related to the
development of real estate.
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, Swap, and Forward Contracts
The Company will from time to time use interest rate protection, swap and
forward contracts to reduce its interest rate exposure on current or identified
future debt transactions. Amounts paid in connection with such contracts are
capitalized and amortized over the term of the contract or related debt. If the
contract is terminated, the gain or loss on termination is deferred and
amortized over the remaining term of the contract. If the related debt is
repaid, the unamortized portion of the deferred amount is charged to income or
the contract is marked to market, as appropriate. The Company's policy is to
manage interest rate risk for existing or anticipated borrowings. As indicated
above, there was no exposure to unmatched positions at December 31, 1997.
Income Taxes
Generally 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), it is not subject to federal income tax on that
portion of its income that it distributes to stockholders. No provision for
federal income taxes has been made in the accompanying consolidated financial
statements for each of the three years in the period ended December 31, 1997, as
the Company believes it qualifies under the code as a REIT and has made
distributions during the periods in excess of taxable income.
Federal taxable income of the Company prior to the dividend paid deductions
for the years ended December 31, 1997, 1996 and 1995, was: $21,800, $7,141 and
$7,295, 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, 1997, 1996 and 1995 for tax purposes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Taxable portion................................... 100% 58% 69%
Return of capital................................. -- 42 31
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
F-7
<PAGE> 41
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
The most significant component causing the reduction of the return of
capital percentage for 1997 was earnings growing at a faster rate than dividends
paid.
Stock Based Compensation
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock based compensation plans.
Use of Estimates
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.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 balances to
conform with the 1997 presentation.
New Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." These statements, which are effective for
periods beginning after December 15, 1997, expand or modify disclosures and,
accordingly, will have no impact on the Company's reported financial position,
results of operations or cash flows.
(3) EQUITY TRANSACTIONS
During 1997, the Company sold additional shares of Common Stock on March
31, 1997, September 10, 1997 and December 8, 1997. In connection with these
offerings, the Company sold 2,000,000, 1,495,000 and 1,500,000 shares at $29.13,
$31.00 and $35.50 per share, respectively. The net proceeds received for these
transactions was $58,119, $46,080 and $49,814, respectively.
During 1996, the Company sold additional shares of Common Stock 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 net proceeds received for these two transactions was $53,996
and $72,468, respectively.
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 purchased an additional $20,000 of Convertible Preferred Stock,
in accordance with the agreement on 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
F-8
<PAGE> 42
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
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. Under certain circumstances, if, after June 20, 2001, the Company
requires a mandatory conversion of all of the Convertible Preferred Stock, but
under no other circumstances, each of the holders of the Convertible Preferred
Stock may cause the Company to redeem any or all of such holder's shares of
Convertible Preferred Stock.
(4) PER SHARE DATA
Basic income per share before extraordinary item and diluted income per
share before extraordinary item were calculated as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
WEIGHTED PER- WEIGHTED PER- WEIGHTED PER-
AVERAGE SHARE AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ -------- ------ ------ -------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item......................... $29,677 $12,322 $10,758
Less: preferred stock
dividends.................... (2,681) (635) --
------- ------- -------
Basic:
Income available to common
stockholders............. 26,996.. 13,645 $ 1.98 11,687 7,283 $ 1.61 10,758 6,275 $ 1.71
========= ========= =========
Effect of Dilutive Securities:
Convertible limited
partnership units(1)..... -- -- -- -- -- --
Convertible preferred
stock.................... 2,681.. 1,400 -- --(1) -- --
Stock options.............. -- 240 -- 64 -- --
------- -------- ------- -------- ------- --------
Diluted:
Income available to common
stockholders plus assumed
conversions.............. $29,677 15,285 $ 1.94 $11,687 7,347 $ 1.59 $10,758 6,275 $ 1.71
======= ======== ========= ======= ======== ========= ======= ======== =========
</TABLE>
- ---------------
(1) Conversion not considered as effect would be anti-dilutive.
F-9
<PAGE> 43
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(5) REAL ESTATE
Rental Properties
Rental properties consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
LAND AND LAND BUILDINGS AND ACCUMULATED
IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION
------------- ------------- ----- ------------
<S> <C> <C> <C> <C>
December 31, 1997:
Apartment properties.................. $178,326 $520,649 $698,975 $53,021
Retail and corporate.................. 4,090 27,922 32,012 5,019
-------- -------- -------- -------
$182,416 $548,571 $730,987 $58,040
======== ======== ======== =======
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
======== ======== ======== =======
</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.
At December 31, 1997, the Company's three retail properties in Portland
Oregon with a carrying amount of $10,500 are held for sale. These properties
consist of approximately 235,838 square feet of retail space which contributed
$2,301 to revenues and $1,724 to net income in 1997.
During the year ended December 31, 1997, the Company sold four properties
to third parties for $15,470 resulting in a gain of $5,114. During the year
ended December 31, 1996, the Company sold two properties to third parties for
$13,350, resulting in a gain of $2,477. During the year ended December 31, 1995,
the Company sold two properties to third parties for $12,147, resulting in a
gain of $6,013. The Company utilized Internal Revenue Code Section 1031 to defer
the majority of the taxable gains resulting from these sales.
For the years ended December 31, 1997, 1996, and 1995, depreciation expense
on real estate was $13,913, $8,820 and $7,978, respectively, and amortization of
capitalized leasing commissions was $79, $35, and $29, respectively.
Investments
The Operating Partnership owns 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.
The Operating Partnership owns all of the 62,500 and 31,800 shares of
non-voting preferred stock of Essex Sacramento, Inc. (Sacramento) and Essex
Fidelity I Corporation (Fidelity I), respectively. Management of the Company
owns 100 percent of the common stock of Sacramento and Fidelity I. Sacramento
and Fidelity I hold a 68% and 32% partnership interest respectively, in Essex
Fidelity Sacramento Partners (EFSP). EFSP owns 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
and owns 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
F-10
<PAGE> 44
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
company. Both Blythe, Limited Partnership and Golden Bear Homes I - IV, Limited
Partnerships have completed their chartered business plan and are in the process
of being liquidated. The Company accounts for its investments in Sacramento and
Fidelity I on the equity method of accounting.
The shares of non-voting preferred stock in EMC, Sacramento and Fidelity I
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.
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 multi-family rental properties located in Sunnyvale
and San Ramon, California, respectively. 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 investment in JSV on the equity method of accounting. Prior to
January 30, 1997, the Company accounted for its investment in Bristol and San
Ramon on the equity method of accounting.
On January 30, 1997, the Company purchased the ownership interest of its
joint venture partner, Acacia Capital Corporation (Acacia), in Bristol and San
Ramon, and is now the sole owner of these properties. The Company acquired
Acacia's approximate 55% ownership interest in these properties for $7,900.
Concurrent with the purchase of Acacia's ownership interest, these properties,
their underlying debt and their operations have been consolidated into the
Company's financial statements. The debt consolidated into the balance sheet
consists of an $18,520, 7.25% fixed rate loan secured by the San Ramon property,
due in December 2000, and a $12,298, 7.54% fixed rate loan, with interest fixed
pursuant to an interest rate swap agreement, secured by the Bristol property and
due in June 2002. In April 1997, the Company repaid the loan secured by the
Bristol property with a portion of the proceeds from its sale of 2,000,000
shares of Common Stock.
In May of 1997, the Company invested as a limited partner in two existing
partnerships which owned multi-family properties: Anchor Village Apartments
("Anchor Village"), a 301 unit apartment community located in Mukilteo,
Washington and Highridge Apartments ("Highridge"), a 255 unit apartment
community located in Ranchos Palos Verdes, California. Anchor Village was valued
at $13,100 and Highridge was valued at $25,300. These investments were made
under arrangements whereby EMC became the general partner and the existing
partners were granted rights of redemption for their interests. Such partners
can request to be redeemed and the Company can elect to redeem for cash or by
issuing shares its common stock. Conversion values will be based on 98 percent
of the market value of the Company's shares at the time of redemption multiplied
the number of shares stipulated under the above arrangements. The Company
accounts for its investments in these properties on the equity method of
accounting.
F-11
<PAGE> 45
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Investments consists of the following as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Investments in joint ventures:
Limited partnership interest of 49.9%
in Jackson School Village, L.P........................ $2,259 $ 2,032
Limited partnership interest of 1%
in Highridge Apartments............................... (409) --
Limited partnership interest of 1%
in Anchor Village Apartments.......................... (270) --
Limited partnership interest of 45%
in Essex Bristol Partners............................. -- 1,921
Limited partnership interest of 45%
in Essex San Ramon Partners........................... -- 3,436
------ -------
1,580 7,389
------ -------
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.................................... 122 627
------ -------
643 1,148
------ -------
Other investments.......................................... 124 --
------ -------
$2,347 $ 8,537
====== =======
</TABLE>
(6) RECEIVABLES
Receivables consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Notes and other related party receivables:
Note receivable from Highridge Apartments secured bearing
interest at 9%, due March, 2008....................... $2,750 $ --
Note receivable from Fidelity I and Sacramento, secured,
bearing interest at 9%, due on demand................. -- 718
Note receivable from Fidelity I, secured, bearing
interest at 12%, due December 1998.................... 1,580 --
Notes receivable from Fidelity I and JSV, secured,
bearing interest at 9.5 -- 10%, due 2015.............. 726 726
------ ------
Receivable from Highridge Apartments, non-interest
bearing, due on demand................................ 1,699 --
------ ------
Loans to officers, bearing interest at 8%, due April
2006.................................................. 375 250
Other related party receivables, substantially due on
demand................................................ 2,134 668
------ ------
$9,264 $2,362
====== ======
</TABLE>
F-12
<PAGE> 46
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Other related party receivables consist primarily of accrued interest
income on related party notes receivable and loans to officers, advances and
accrued management fees from joint venture partnerships, and unreimbursed
expenses due from EMC.
The Company's officers and directors do not have a substantial economic
interest in these related party entities.
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Notes and other receivables:
Note receivable from the co-tenants in the Pathways
property, secured, interest payable monthly at 9%,
principal due June 2001............................... $4,596 $4,728
Other receivables........................................ 4,006 565
------ ------
$8,602 $5,293
====== ======
</TABLE>
(7) RELATED PARTY TRANSACTIONS
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, 1997, 1996 and 1995 totaled $987, $1,752 and
$2,116, respectively, and are reflected as a reduction in general and
administrative expenses in the accompanying consolidated statements of
operations.
EMC provides property management services to the Company's neighborhood
shopping centers. The fees paid by the Company for the years ended December 31,
1997, 1996 and 1995, were $80, $113 and $108, respectively, and are included in
administrative expense in the accompanying consolidated statements of
operations.
Included in rental revenue in the accompanying consolidated statements of
operations are rents earned from space leased to Marcus & Millichap (M&M),
including operating expense reimbursements, of $709, $681 and $675 for the years
ended December 31, 1997, 1996 and 1995, respectively.
During the years ended December 31, 1997, 1996 and 1995, the Company paid
brokerage commissions totaling $590, $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. EMC is
entitled to receive a percentage of M&M brokerage commissions on certain
transactions in which the Company is a party. The Board of Directors of the
Company periodically reviews the calculation of this percentage.
Included in other income for the years ended December 31, 1997, 1996 and
1995 are $139, $820 and $183, respectively, representing dividends from EMC and
Essex Sacramento and management fees and equity income (loss) from Essex Bristol
Partners, Essex San Ramon Partners, Jackson School Village, Highridge Apartments
and Anchor Village Apartments. Interest income includes $1,286, $214 and $358
earned principally on the notes receivable from Essex Fidelity I, Essex
Sacramento, the partnerships which collectively own Highridge and the
partnerships which collectively own Anchor Village and the partnerships which
collectively own a 30.7% minority interest in Pathways Apartments for the years
ended December 31, 1997, 1996 and 1995, respectively.
F-13
<PAGE> 47
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(8) MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Mortgage notes payable to a 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 $40,800 due June 2001.................. $ 48,078 $ 50,240
Multifamily housing demand mortgage revenue bonds secured by
deed of trust on rental property, bearing interest at 7.69%,
principal and interest installments due monthly, remaining
principal due June 2018. Among the terms imposed on the
property, which is security for the bonds, is that twenty
percent of the units are subject to tenant income
qualifications criteria..................................... 8,915 --
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 3.9%
for December 1997), 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 security for the 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 July 2014 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%........................................................ 58,820 42,820
Mortgage note payable to a life insurance company, secured
by deed of trust, bearing interest at 8.78%, principal and
interest payments due monthly, final principal payment of
$8,500 due December 2002. Under
certain conditions this loan can be converted to an
unsecured note payable...................................... 9,320 --
Mortgage note payable to a mutual life insurance company,
secured by deeds of trust, bearing interest at 7.5%,
principal and interest payments due monthly, final principal
payment of $18,200 due March 2003........................... 19,845 19,991
Mortgage note payable to a life insurance company, secured
by deeds of trust, bearing interest at 7.08%, principal and
interest payments due monthly, final principal payment of
$25,500 due January 2005. Under certain conditions this loan
can be converted to an unsecured note payable............... 28,800 --
Mortgage notes payable to a life insurance company, secured
by deed 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 $6,900 due April 2005. Under certain conditions
this loan can be converted to an unsecured note payable..... 8,027 8,100
</TABLE>
F-14
<PAGE> 48
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Note payable to a life insurance company, bearing interest
at 7.25%, secured by deed of trust, interest only payments
due through January 1, 1998, thereafter principal and
interest payments monthly, final principal payment of
$18,000 due December 2000................................... $ 18,520 $ --
Mortgage note payable to a commercial bank, secured by deed
of trust, bearing interest at 7.09%, principal and interest
payments due monthly, final principal payment of $11,600 due
March 2006.................................................. 14,104 14,321
Four mortgage notes payable to a mortgage finance company
bearing interest from 7.985% to 8.055%, secured by deeds of
trust, principal and interest payments due monthly,
remaining principal due March 2007.......................... 17,885 --
Multifamily housing demand mortgage revenue bonds secured by
deed of trust on a rental property and guaranteed by a
collateral pledge agreement, bearing interest at 6.455%,
principal and interest payments due monthly, final principal
payment of $14,800 due January 2026. Among the terms imposed
on the property, which is security for the bonds, is that
twenty percent of the units are subject to tenant income
qualification criteria. The interest rate will be repriced
in February 2008 at the current tax-exempt bond rate........ 17,483 17,733
-------- --------
$248,997 $153,205
======== ========
</TABLE>
The aggregate scheduled maturities of mortgage notes payable are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998............................ $ 4,110
1999............................ 4,455
2000............................ 4,803
2001............................ 60,935
2002............................ 24,128
Thereafter...................... 150,566
--------
$248,997
========
</TABLE>
In October 1997, the Company entered into five forward treasury contracts
for an aggregate notional amount of $67,500, locking the 10 year treasury rate
at between 6.16% - 6.26%. These contracts are to limit the interest rate
exposure on identified future debt financing requirements relating to real
estate under development and a maturity of an $18,520 fixed rate loan. These
contracts will be settled no later than June 2000. If the contracts were settled
as of December 31, 1997, the Company would be obliged to pay approximately
$1,316.
The Company has a LIBOR based swap contract for a notional amount of
$12,298, fixing the one month LIBOR rate at 6.14%. This contract was originally
purchased to cover a variable rate loan which was paid off in March 1997. The
Company has kept this contract in place to limit its interest rate exposure on
borrowings on its LIBOR based lines of credit. If this contract were settled as
of December 31 ,1997, the Company would be obligated to pay approximately $91.
F-15
<PAGE> 49
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
In addition, the Company has entered into various other contracts to limit
its interest rate exposure on debt related transactions. During 1997, 1996 and
1995, the Company charged $-0-, $42, and $62 to income representing amortization
of deferred costs. During 1997, 1996 and 1995, the Company charged $183, $-0-,
and $226 of costs relating to the termination of unmatched positions taken.
During the years ended December 31, 1997, 1996 and 1995, the Company
refinanced various mortgages and incurred a loss on the early extinguishment of
debt of $361, $3,441 and $154 related to the write off of the unamortized loan
fees and prepayment penalties.
(9) LINES OF CREDIT
As of December 31, 1997 and 1996, the Company had the following balances
outstanding under lines of credit with commercial banks:
<TABLE>
<CAPTION>
1997 1996
------- ----
<S> <C> <C>
Secured $25,110 line of credit, interest payable monthly at
1% over the banks' prime rate or at the Company's option,
1.5% over the LIBOR rate, expiring April 1998............ $ 2,600 $--
Two unsecured, aggregate $50,000 lines of credit, interest
payable monthly at .50% over the bank's prime rate or at
the Company's option, 1.5% over the LIBOR rate, expiring
March 1998............................................... 25,000 --
------- ---
$27,600 $--
======= ===
</TABLE>
As of December 31, 1997, the thirty-day LIBOR rate was approximately 5.8%,
and the prime rate was 8.5%.
(10) 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 shortterm 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>
1998............................. $ 3,030
1999............................. 2,705
2000............................. 2,205
2001............................. 1,957
2002............................. 976
Thereafter......................... 4,892
-------
$15,765
=======
</TABLE>
Included in this schedule is $556 due from M&M in 1998 and $248 due through
May 1999.
In addition to minimum rental payments, retail and headquarters building
tenants pay reimbursements for their pro rata share of specified operating
expenses. Such amounts totaled $905, $964 and $1,018 for the
F-16
<PAGE> 50
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
years ended December 31, 1997, 1996 and 1995, respectively, and are included as
rental revenue 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.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that the carrying amounts of its financial instruments,
which include cash and cash equivalents, restricted cash, notes and other
receivables, mortgage notes payable, lines of credit, accounts payable, and
dividends payable approximate fair value as of December 31, 1997 and 1996,
because interest rates and yields for these instruments are consistent with
yields currently available to the Company for similar instruments.
(12) STOCK OPTION PLANS
The Company has adopted the Essex Property Trust, Inc. 1994 Stock Incentive
Plan to provide incentives to attract and retain officers, directors and key
employees. The Stock Incentive Plan provides for the grants of options to
purchase a specified number of shares of common stock or grants of restricted
shares of common stock. Under the Stock Incentive Plan, the total number of
shares available for grant is approximately 875,400. The Board of Directors (the
Board) may adjust the aggregate number and type of shares reserved for issuance.
Participants in the Stock Incentive Plans are selected by the Compensation
Committee of the Board, which is comprised of independent directors. The
Compensation Committee is authorized to establish the exercise price; however,
the exercise price cannot be less than 100 percent of the fair market value of
the common stock on the grant date.
The Company's options have a life of ten years. Option grants fully vest
between one year and five years after the grant date.
In connection with the 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 1997, 1996 and 1995.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock based compensation 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, 1997, 1996
and 1995 would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C> <C>
Net income..................... As reported $29,316 $8,881 $10,604
Pro forma 29,216 8,820 10,566
</TABLE>
For the years ended December 31, 1997, 1996, and 1995, the effect of
determining compensation cost consistent with FASB Statement No. 123 on basic
and diluted earnings per share was not material.
F-17
<PAGE> 51
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: risk-free interest rates ranging from 5.79% to
6.88% in 1997 and from 5.52% to 6.92% in 1996 and 1995; expected lives of 4
years for 1997, 1996, and 1995; expected volatility of 17.40% for 1997 and
15.13% for 1996 and 1995; and dividend yield of 6% for 1997, 1996 and 1995.
A summary of the status of the Company's option plans as of December 31,
1997, 1996 and 1995 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
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.... 529,450 $ 19.08 538,950 $ 18.93 444,950 $ 19.44
Granted................ 324,905 33.02 14,000 24.55 100,400 16.72
Exercised.............. (23,286) 17.95 (6,750) 19.07 -- --
Forfeited.............. (2,855) 22.91 (16,750) 18.89 (6,400) 19.21
------- ------- -------
Outstanding at end of
year................. 828,214 24.57 529,450 19.08 538,950 18.93
======= ======= =======
Options exercisable at
year end............. 284,575 $ 19.23 202,975 $ 19.13 104,010 $ 19.39
Weighted-average fair
value of options
granted during the
year................. $ 3.56 $ 2.40 $ 1.67
</TABLE>
The following table summarized information about stock options outstanding
at December 31, 1997:
<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 1997 LIFE PRICE 1997 PRICE
--------------- -------------- ----------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 15.01 to
20.00........ 490,314 6.6 years $18.99 280,790 $ 19.16
20.01 to
25.00........ 10,000 8.5 years 23.23 2,533 22.70
25.01 to
30.00........ 81,900 9.2 years 29.25 1,333 27.88
30.01 to
35.00........ 246,000 9.8 years 34.21 -- --
------- -------
828,214 $24.57 284,656 $ 19.23
======= =======
</TABLE>
On January 1, 1997, the Company granted 13,277 Stock Units under the
Company's Phantom Stock Unit Agreement to two of the Company's executives. The
market value at the date of grant was $29.27 per share. The units vest in
installments in accordance with the vesting schedule set forth in the Phantom
Stock Unit Agreement such that the units will be fully vested on January 1,
2002. At that time, the Company expects to issue to the executives the number of
shares of common stock equal to the number of units vested, or at the Company's
option, an equivalent amount in cash. Dividends are paid by the Company on the
vested and unvested portion of shares. For the year ended December 31, 1997,
compensation cost was $19 related to this plan.
F-18
<PAGE> 52
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for 1997 and
1996:
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997
Total revenues before gain on sale of real
estate.................................... $18,551 $19,580 $21,975 $24,463
Gain (loss) on sale of real estate.......... -- 414 4,713 (13)
------- ------- ------- -------
Total revenues.............................. $18,551 $19,994 $26,688 $24,450
======= ======= ======= =======
Extraordinary item.......................... $ -- $ (104) $ -- $ (257)
======= ======= ======= =======
Net income.................................. $ 4,868 $ 6,254 $10,967 $ 7,227
======= ======= ======= =======
Per share data:
Net income:
Basic.................................. $ 0.39 $ 0.43 $ 0.73 $ 0.41
======= ======= ======= =======
Diluted................................ $ 0.39 $ 0.43 $ 0.69 $ 0.41
======= ======= ======= =======
Market price:
High................................... $ 30.87 $ 32.37 $ 35.06 $ 37.50
======= ======= ======= =======
Low.................................... $ 28.50 $ 27.62 $ 30.50 $ 32.81
======= ======= ======= =======
Close.................................. $ 29.87 $ 32.12 $ 34.81 $ 35.00
======= ======= ======= =======
Dividends declared........................ $ .435 $ .435 $ .450 $ .450
======= ======= ======= =======
1996
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:
Basic.................................. $ (0.01) $ 0.51 $ 0.28 $ 0.35
======= ======= ======= =======
Diluted................................ $ (0.01) $ 0.51 $ 0.27 $ 0.35
======= ======= ======= =======
Market price:
High................................... $ 21.25 $ 22.50 $ 24.87 $ 29.37
======= ======= ======= =======
Low.................................... $ 18.75 $ 19.37 $ 21.37 $ 24.62
======= ======= ======= =======
Close.................................. $ 20.75 $ 21.50 $ 24.87 $ 29.37
======= ======= ======= =======
Dividends declared........................ $ .425 $ .425 $ .435 $ .435
======= ======= ======= =======
</TABLE>
F-19
<PAGE> 53
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(14) 401(K) PLAN
The Company has a 401(k) pension plan (the Plan) for all full time
employees who have completed one year of service. Employees may contribute up to
23% of their compensation, to the maximum allowed under Section 401(k) of the
Internal Revenue Code. The Company matches the employee contributions for non-
highly compensated personnel, up to 50% of their compensation to a maximum of
five hundred dollars per year. Company contributions to the Plan were
approximately $41, $27, and $37 for the years ended December 31, 1997, 1996, and
1995.
(15) COMMITMENTS AND CONTINGENCIES
A commercial bank has issued on behalf of the Company various letters of
credit relating to financing and development transactions for an aggregate
amount of $9,931 which expire between July 1998 and June 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, 1997, the Company
had one commitment to fund an acquisition for $37,400.
The Company is developing six multifamily residential projects, which are
anticipated to have an aggregate of approximately 1,330 multifamily units. Essex
expects that such projects will be completed during the next two years. In
connection with these projects, the Operating Partnership has directly, or in
cases through its joint venture partners, entered into contractual construction
related commitments with unrelated third parties for $77 million.
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 certain properties; such contamination at certain of these
properties was reported to have migrated on-site from adjacent industrial
manufacturing operations. The former industrial users of the properties were
identified as the source of contamination. The environmental studies noted that
certain properties are located adjacent to and possibly down gradient from sites
with known groundwater contamination, the lateral limits of which may extend
onto such properties. The environmental studies also noted that at certain of
these properties, contamination existed because of the presence of underground
fuel storage tanks, which have been removed. Based on the information contained
in the environmental studies, the Company believes that the costs, if any, it
might bear as a result of environmental contamination or other conditions at
these properties would not have a material adverse effect on the Company's
financial condition or results of operations.
The Company is involved in various lawsuits arising out of the ordinary
course of business and certain other legal matters. In the opinion of
management, the resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
(16) SUBSEQUENT EVENT
Subsequent to December 31, 1997, the Company completed the sale of
1,200,000 units of its 7.875% Series B Cumulative Redeemable Preferred Units to
an institutional investor in a private placement, at a price of $50.00 per unit.
The net proceeds of this offering were used to pay off lines of credit and will
be used to fund acquisition and development of additional multifamily
properties.
F-20
<PAGE> 54
SCHEDULE 1
PAGE 1 OF 3
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST COSTS
----------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
-------- ----- -------- ----------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Apartments:
The Apple(5) 200 Fremont, CA $ $ 995 $ 5,582 $1,173
Plumtree(5) 140 Santa Clara, CA $ 3,090 7,421 287
------ ------- ------- ------
-- 4,086 13,003 1,380
------ ------- ------- ------
Summerhill Park 100 Sunnyvale, CA 2,654 4,918 315
Oak Pointe 390 Sunnyvale, CA 4,842 19,776 3,746
Summerhill Commons 184 Newark, CA 1,608 7,582 389
Pathways 296 Long Beach, CA 4,083 16,757 421
Villa Rio Vista 286 Anaheim, CA 3,013 12,661 1,266
Foothill Commons 360 Bellevue, WA 2,435 9,821 1,485
Woodland Commons 236 Bellevue, WA 2,040 3,727 735
Palisades 192 Bellevue, WA 1,560 6,242 2,069
------ ------- ------- ------
48,078 22,235 86,484 9,424
------ ------- ------- ------
Marina Cove(3) 292 Santa Clara, CA -- 5,320 16,431 950
------ ------- ------- ------
Santa Fe Ridge 240 Silverdale, WA 8,027 4,137 7,925 224
------ ------- ------- ------
Wharfside Pointe 142 Seattle, WA 2,245 7,020 381
Emerald Ridge 180 Bellevue, WA 3,449 7,801 236
Sammanish View 153 Bellevue, WA 3,324 7,501 120
------ ------- ------- ------
19,845 9,018 22,321 737
------ ------- ------- ------
Inglenook Court 214 Bothell, WA 8,300 3,467 7,881 996
------ ------- ------- ------
Brighton Ridge 264 Renton, WA 2,625 10,800 500
Landmark Apartments 285 Hillsboro, OR 3,655 14,200 208
Eastridge
Apartments 188 San Ramon, CA 6,068 13,628 278
------ ------- ------- ------
28,000 12,346 38,628 986
------ ------- ------- ------
Camarillo Oaks 564 Camarillo, CA 28,335 10,953 25,254 1,201
------ ------- ------- ------
Windsor Ridge 216 Sunnyvale, CA 14,104 4,017 10,315 291
------ ------- ------- ------
Wandering Creek 156 Kent, WA 5,300 1,285 4,980 544
------ ------- ------- ------
Treetops 172 Fremont, CA 9,800 3,520 8,182 711
------ ------- ------- ------
<CAPTION>
GROSS AMOUNT
CARRIED AT CLOSE OF PERIOD
-------------------------------------- DEPRECIABLE
LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES
PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL($) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
-------- ------------ ------------ -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Apartments:
The Apple(5) $ 996 $ 6,755 $ 7,751 $ 4,064 1971 4/82 3-30
Plumtree(5) 3,090 7,628 10,718 996 1975 2/94 3-30
------- ------- -------- -------
4,086 14,383 18,469 5,060
------- ------- -------- -------
Summerhill Park 2,654 5,233 7,887 1,411 1988 9/88 3-40
Oak Pointe 4,842 23,522 28,364 8,052 1973 12/88 3-30
Summerhill Commons 1,587 8,062 9,579 2,246 1987 7/87 3-40
Pathways 4,081 17,178 21,261 4,158 1975 2/91 3-30
Villa Rio Vista 2,954 13,956 16,940 6,364 1968 7/85 3-30
Foothill Commons 2,435 11,304 13,739 3,640 1978 3/90 3-30
Woodland Commons 2,040 9,462 11,502 2,935 1976 3/90 3-30
Palisades 1,560 7,311 8,871 2,412 1969/1977(2) 5/90 3-30
------- ------- -------- -------
22,115 96,028 118,143 31,118
------- ------- -------- -------
Marina Cove(3) 5,320 16,981 22,301 2,156 1974 6/94 3-30
------- ------- -------- -------
Santa Fe Ridge 4,142 8,144 12,286 747 1993 10/94 3-30
------- ------- -------- -------
Wharfside Pointe 2,252 7,394 9,646 922 1990 6/94 3-30
Emerald Ridge 3,445 8,041 11,486 939 1987 11/94 3-30
Sammanish View 3,328 7,617 10,945 825 1986 11/94 3-30
------- ------- -------- -------
9,025 23,012 32,077 2,686
------- ------- -------- -------
Inglenook Court 3,472 8,872 12,344 1,306 1985 10/94 3-30
------- ------- -------- -------
Brighton Ridge 2,652 11,271 13,923 360 1986 12/95 3-30
Landmark Apartments 3,695 14,368 18,063 639 1990 08/96 3-30
Eastridge
Apartments 6,087 13,887 19,974 616 1988 08/96 3-30
------- ------- -------- -------
12,431 39,526 51,960 1,615
------- ------- -------- -------
Camarillo Oaks 10,902 26,509 37,411 890 1985 07/96 3-30
------- ------- -------- -------
Windsor Ridge 4,017 10,613 14,630 2,404 1989 01/89 3-30
------- ------- -------- -------
Wandering Creek 1,294 5,515 6,809 416 1986 11/95 3-30
------- ------- -------- -------
Treetops 3,524 8,839 12,413 580 1978 01/96 3-30
------- ------- -------- -------
</TABLE>
F-21
<PAGE> 55
SCHEDULE 1
PAGE 2 OF 3
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST COSTS
----------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
-------- ----- -------- ----------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Foothill/Twincreeks 176 San Ramon, CA -- 5,875 13,992 168
------ ------- ------- ------
Bristol Commons 188 Sunnyvale, CA -- 5,278 11,853 450
------ ------- ------- ------
The Shores 348 San Ramon, CA 18,520 8,789 18,252 769
------ ------- ------- ------
The Laurela 164 Mill Creek, WA -- 1,599 6,430 210
------ ------- ------- ------
Meadowood 320 Simi Valley, CA 17,483 7,852 18,592 229
------ ------- ------- ------
Casa Del Mar 96 Pasadena, CA -- 1,857 4,713 32
------ ------- ------- ------
Huntington Breakers 342 Huntington Beach, CA 16,000 9,306 22,720 32
------ ------- ------- ------
Kings Road 194 Los Angeles, CA -- 4,023 9,527 65
------ ------- ------- ------
Park Place/
Windsor Court 118 Los Angeles, CA -- 3,343 7,881 61
------ ------- ------- ------
Tara Village 168 Tarzana, CA -- 3,178 7,535 192
------ ------- ------- ------
The Bluffs 224 San Diego, CA -- 3,405 7,743 41
------ ------- ------- ------
The Village
Apartments 122 Oxnard, CA -- 2,349 5,579 57
------ ------- ------- ------
Trabuco Villas 132 Lake Forest, CA -- 3,638 8,640 97
------ ------- ------- ------
Villa Scandia 118 Ventura, CA -- 1,570 3,912 55
------ ------- ------- ------
Wilshire Promenade 128 Fullerton, CA -- 3,118 7,385 76
------ ------- ------- ------
Windsor Terrace 110 Pasadena, CA -- 2,188 5,263 180
------ ------- ------- ------
Casa Mango 96 San Diego, CA -- 3,011 7,006 22
------ ------- ------- ------
Riverfront 229 San Diego, CA -- 8,637 20,119 27
------ ------- ------- ------
Bridle Trails 92 Kirkland, WA 4,271 1,500 5,930 26
------ ------- ------- ------
Castle Creek 216 Newcastle, WA -- 4,149 16,028 1
------ ------- ------- ------
Evergreen Heights 200 Kirkland, WA 9,320 3,566 13,395 65
------ ------- ------- ------
Maple Leaf 48 Seattle, WA 2,087 805 3,285 17
------ ------- ------- ------
Meadows at Cascade 198 Vancouver, WA -- 2,261 9,070 24
------ ------- ------- ------
Spring Lake 69 Seattle, WA 2,286 838 3,399 19
------ ------- ------- ------
Stonehedge Village 195 Bethel, WA 9,241 3,167 12,603 30
------ ------- ------- ------
Village at Cascade 192 Vancouver, WA -- 2,101 8,753 19
----- ------ ------- ------- ------
9,944
=====
<CAPTION>
GROSS AMOUNT
CARRIED AT CLOSE OF PERIOD
-------------------------------------- DEPRECIABLE
LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES
PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL($) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
-------- ------------ ------------ -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Foothill/Twincreeks 5,939 14,096 20,035 389 1985 02/97 3-30
------- ------- -------- -------
Bristol Commons 5,283 12,298 17,581 396 1989 01/97 3-30
------- ------- -------- -------
The Shores 8,853 18,957 27,110 613 1988 01/97 3-30
------- ------- -------- -------
The Laurela 1,593 6,606 8,199 214 1981 12/96 3-30
------- ------- -------- -------
Meadowood 7,892 18,781 26,673 691 1985 11/96 3-30
------- ------- -------- -------
Casa Del Mar 1,870 4,732 6,602 79 1972 06/97 3-30
------- ------- -------- -------
Huntington Breakers 9,307 22,751 32,038 126 1984 10/97 3-30
------- ------- -------- -------
Kings Road 4,028 9,587 13,615 136 1979 06/97 3-30
------- ------- -------- -------
Park Place/
Windsor Court 3,371 7,914 11,285 88 1988 08/97 3-30
------- ------- -------- -------
Tara Village 3,202 7,703 10,905 231 1972 01/97 3-30
------- ------- -------- -------
The Bluffs 3,416 7,773 11,189 130 1974 06/97 3-30
------- ------- -------- -------
The Village
Apartments 2,385 5,600 7,985 78 1974 07/97 3-30
------- ------- -------- -------
Trabuco Villas 3,659 8,716 12,375 53 1985 10/97 3-30
------- ------- -------- -------
Villa Scandia 1,591 3,946 5,537 66 1971 06/97 3-30
------- ------- -------- -------
Wilshire Promenade 3,136 7,443 10,579 227 1982 01/97 3-30
------- ------- -------- -------
Windsor Terrace 2,300 5,531 7,831 45 1972 09/97 3-30
------- ------- -------- -------
Casa Mango 3,021 7,018 10,039 -- 1981 12/97 3-30
------- ------- -------- -------
Riverfront 8,652 20,131 28,783 -- 1990 12/97 3-30
------- ------- -------- -------
Bridle Trails 1,514 5,942 7,456 34 1986 10/97 3-30
------- ------- -------- -------
Castle Creek 4,138 16,040 20,178 -- 1997 12/97 3-30
------- ------- -------- -------
Evergreen Heights 3,577 13,449 17,026 223 1990 06/97 3-30
------- ------- -------- -------
Maple Leaf 811 3,294 4,103 16 1985 08/97 3-30
------- ------- -------- -------
Meadows at Cascade 2,270 9,085 11,355 25 1988 11/97 3-30
------- ------- -------- -------
Spring Lake 844 3,012 4,236 18 1986 10/97 3-30
------- ------- -------- -------
Stonehedge Village 3,183 12,617 15,800 42 1986 10/97 3-30
------- ------- -------- -------
Village at Cascade 2,110 8,765 10,875 -- 3-30
------- ------- -------- -------
</TABLE>
F-22
<PAGE> 56
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL INITIAL COSTS COSTS
RENTABLE ---------------------- CAPITALIZED
SQUARE BUILDING AND SUBSEQUENT TO
PROPERTY FOOTAGE LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
-------- -------- -------- ----------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial:
925 East Meadow 17,404 Palo Alto, CA $ $ 1,401 $ 3,172 $ 144
-------- ------- -------- -------
777 California(4)(5) 44,827 Palo Alto, CA -- -- 6,700 8,661
-------- ------- -------- -------
Retail:
Canby Square(5) 102,403 Canby, OR $ $ 801 $ 2,507 $ 1,819
Powell Villa
Center(5) 63,645 740 1,393 1,235
Garrison Square(5) 69,790 Vancouver, WA 1,004 1,676 759
------- -------- ------- -------- -------
235,838 -- 2,545 5,576 3,813
------- -------- ------- -------- -------
298,069 $248,997 $81,695 $516,456 $32,836
======= ======== ======= ======== =======
<CAPTION>
GROSS AMOUNT
CARRIED AT CLOSE OF PERIOD
---------------------------------------- DEPRECIABLE
LAND AND BUILDINGS AND ACCUMULATED DATE OF DATE LIVES
PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
-------- ------------ -------------- -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial:
925 East Meadow $ 1,545 $ 3,172 $ 4,717 $ 9 1984 11/97 3-30
-------- -------- -------- -------
777 California(4)(5) -- 15,361 15,361 3,575 1987 7/86 3-30
-------- -------- -------- -------
Retail:
Canby Square(5) $ 802 $ 4,325 $ 5,127 $ 479 1976 1/90 3-30
Powell Villa
Center(5) 739 2,629 3,368 472 1959 1/90 3-30
Garrison Square(5) 1,004 2,435 3,439 485 1962 1/90 3-30
-------- -------- -------- -------
2,545 9,389 11,935 1,436
-------- -------- -------- -------
$182,416 $548,571 $730,987 $58,040
======== ======== ======== =======
</TABLE>
- ---------------
(1) The aggregate cost for federal income tax purposes is $504,093.
(2) Phase I was built in 1969 and Phase II was built in 1977.
(3) A portion of land is leased pursuant to a ground lease expiring in 2028.
(4) Land is leased pursuant to a ground lease expiring in 2054.
(5) These properties secure the Company's $25,110 line of credit.
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year................. $393,809 $284,358 $282,344
Improvements................................. 4533 3,406 3,193
Acquisition of real estate................... 345,750 118,107 6,265
Disposition of real estate................... (13,105) (12,062) (7,444)
-------- -------- --------
Balance at end of year....................... $730,987 $393,809 $284,358
======== ======== ========
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C> <C>
Real estate: Accumulated depreciation:
Balance at beginning of year................. Balance at beginning of year................... $47,631 $40,281 $34,112
Improvements................................. Dispositions................................... (3,504) (1,470) (1,809)
Acquisition of real estate................... Depreciation expense -- Acquisitions........... 2,086 905 --
Disposition of real estate................... Depreciation expense........................... 11,827 7,915 7,978
------- ------- -------
Balance at end of year....................... Balance at end of year......................... $58,040 $47,631 $40,281
======= ======= =======
</TABLE>
F-23
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT # DOCUMENT PAGE
- --------- -------- ----
<C> <S> <C>
3.1 Articles of Amendment and Restatement of Essex dated June
22, 1995, attached as Exhibit 3.1 to Essex's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, and
hereby incorporated herein by reference..................... --
3.2 Articles Supplementary of Essex Property Trust, Inc. for the
8.75% Convertible Preferred Stock, Series 1996A, attached as
Exhibit 3.1 to 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 10-Q as of September 30, 1996, and hereby
incorporated herein by reference............................ --
3.4 Certificate of Correction dated December 20, 1996........... (2)
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........................ (2)
3.7 Articles Supplementary for the 7.875% Series B Cumulative
Redeemable Preferred Stock, attached as Exhibit 3.1 to
Essex's Current Report on Form 8-K, filed March 3, 1998, and
hereby incorporated herein by reference..................... --
10.1 Essex Property Trust, Inc. 1994 Stock Incentive Plan
(amended and restated as of April 3, 1997 and previously
known as the 1994 Employee Stock Incentive Plan), attached
as Exhibit 10.7 to Essex's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, and hereby incorporated
herein by reference.*....................................... --
10.2 First Amended and Restated Agreement of Limited Partnership
of Essex Portfolio, L.P., attached as Exhibit 10.1 to
Essex's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and hereby incorporated herein by
reference................................................... --
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 First Amendment to First Amended and Restated Agreement of
Limited Partnership of Essex Portfolio, L.P., dated February
6,1998, attached as Exhibit 10.1 to Essex's Current Report
on Form 8-K, filed March 3, 1998, and hereby incorporated
herein by reference......................................... --
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT # DOCUMENT PAGE
- --------- -------- ----
<C> <S> <C>
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)
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 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
8-K, filed August 13, 1996, and hereby incorporated herein
by reference................................................ --
10.22 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..................... --
10.23 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........... --
10.24 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............................ --
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT # DOCUMENT PAGE
- --------- -------- ----
<C> <S> <C>
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 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
Quarterly Report on Form 10-Q for the quarter end June 30,
1994 and hereby incorporated herein by reference............ --
10.28 Revolving credit agreement between Essex and Bank of
America, attached as Exhibit 10.4 to Essex's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994, and
hereby incorporated herein by reference..................... --
10.29 Interest rate protection agreement dated June 10, 1994,
attached as Exhibit 10.6 to Essex's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, and hereby
incorporated herein by reference............................ --
10.30 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 Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996,
and hereby incorporated herein by reference................. --
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 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................................................ --
10.33 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................. --
10.34 Letter Agreement with Tiger/Westbrook entities re:
Limitations on Ownership of Stock of the Company, attached
as Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, and hereby
incorporated herein by reference............................ --
10.35 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 Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996,
and hereby incorporated herein by reference................. --
10.36 Phantom Stock Unit Agreement for Mr. Guericke, attached as
Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, and hereby incorporated
herein by reference.*....................................... --
10.37 Phantom Stock Unit Agreement for Mr. Schall, attached as
Exhibit 10.2 to Essex's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, and hereby incorporated
herein by reference.*....................................... --
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT # DOCUMENT PAGE
- --------- -------- ----
<C> <S> <C>
10.38 Replacement Promissory Note (April 15, 1996) and Pledge
Agreement for Mr. Guericke, attached as Exhibit 10.3 to
Essex's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, and hereby incorporated herein by
reference................................................... --
10.39 Promissory Note (December 31, 1996) and Pledge Agreement for
Mr. Guericke, attached as Exhibit 10.4 to Essex's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997,
and hereby incorporated herein by reference................. --
10.40 Replacement Promissory Note (April 30, 1996) and Pledge
Agreement for Mr. Schall, attached as Exhibit 10.5 to
Essex's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, and hereby incorporated herein by
reference................................................... --
10.41 Promissory Note (December 31, 1996) and Pledge Agreement for
Mr. Schall, attached as Exhibit 10.6 to Essex's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997,
and hereby incorporated herein by reference................. --
10.42 First Amended and Restated Agreement of Limited Partnership
of Western-Highridge I Investors, effective as of May 13,
1997, attached as Exhibit 10.1 to Essex's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, and hereby
incorporated herein by reference............................ --
10.43 First Amended and Restated Agreement of Limited Partnership
of Irvington Square Associates, effective as of May 13,
1997, attached as Exhibit 10.2 to Essex's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, and hereby
incorporated herein by reference............................ --
10.44 Fourth Amended and Restated Agreement of Limited Partnership
of Western-Palo Alto II Investors, effective as of May 13,
1997, attached as Exhibit 10.3 to Essex's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, and hereby
incorporated herein by reference............................ --
10.45 Fourth Amended and Restated Agreement of Limited Partnership
of Western Riviera Investors, effective as of May 13, 1997,
attached as Exhibit 10.4 to Essex's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and hereby
incorporated herein by reference............................ --
10.46 Fourth Amended and Restated Agreement of Limited Partnership
of Western-San Jose III Investors, effective as of May 13,
1997, attached as Exhibit 10.5 to Essex's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, and hereby
incorporated herein by reference............................ --
10.47 Registration Rights Agreement, effective as of May 13, 1997,
by and between the Company and the limited partners of
Western-Highridge I Investors, Irvington Square Associates,
Western-Palo Alto II Investors, Western Riviera Investors,
and Western-San Jose III Investors, attached as Exhibit 10.6
to Essex's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, and hereby incorporated herein by
reference................................................... --
10.48 Ninth Modification Agreement to the Amended and Restated
Revolving Loan Agreement, attached as Exhibit 10.2 to
Essex's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and hereby incorporated herein by
reference................................................... --
11.1 Schedule regarding Computation of Earnings Per Share........ 63
12.1 Schedule of Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividends....................... 64
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT # DOCUMENT PAGE
- --------- -------- ----
<C> <S> <C>
21.1 List of Subsidiaries of Essex Property Trust, Inc........... 65
23.1 Consent of Independent Certified 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.
(2) Incorporated by reference to the identically numbered exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
* Management contract or compensatory plan or agreement.
<PAGE> 1
EXHIBIT 11.1
ESSEX PROPERTY TRUST, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BASIC:
Net income $ 29,316 $ 8,881 $ 10,604
Less:
Dividends on 8.75% Convertible Preferred Stock, Series 1996A 2,681 635 0
=========== =========== ===========
Net income applicable to common stockholders $ 26,635 $ 8,246 $ 10,604
=========== =========== ===========
Weighted average shares outstanding 13,644,906 7,283,124 6,275,000
Weighted average shares of dilutive stock options using
average stock price under the treasury stock method 0 0 0
=========== =========== ===========
Weighted average shares used in net income per share calculation 13,644,906 7,283,124 6,275,000
=========== =========== ===========
Net income per share $ 1.96 $ 1.13 $ 1.69
=========== =========== ===========
DILUTED:
Adjusted shares - basic, from above 13,644,906 7,283,124 --
Weighted average shares issuable upon conversion of the
8.75% Convertible Preferred Stock, Series 1996A 1,400,235 -- --
Additional weighted average shares of dilutive stock options
using end of period stock price under the treasury stock
method 240,147 64,404 --
=========== =========== ===========
Weighted average number of common shares - assuming full dilution 15,285,288 7,347,528 N/A
=========== =========== ===========
Earnings per common share - assuming full dilution $ 1.92 $ 1.12(1) N/A(2)
=========== =========== ===========
</TABLE>
(1) For 1996, the 8.75% Convertible Preferred Stock, Series 1996A were
antidilutive and accordingly, the results of the basic 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.
<PAGE> 1
EXHIBIT 12.1
ESSEX PROPERTY TRUST, INC.
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(in thousands, except ratios)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
EARNINGS:
Income before extraordinary items and
minority interests $34,146 $14,970 $14,244
Interest expense 12,659 11,442 10,928
Amortization of deferred financing costs 509 639 1,355
------- ------- -------
TOTAL EARNINGS $47,314 $27,051 $26,527
------- ------- -------
FIXED CHARGES:
Interest expense $12,659 $11,442 $10,928
Amortization of deferred financing costs 509 639 1,355
Capitalized interest 1,276 115 92
Convertible preferred stock dividends 2,681 635 --
------- ------- -------
SUBTOTAL (FIXED) 14,444 12,196 12,375
------- ------- -------
TOTAL FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS $17,125 $12,831 $12,375
RATIO OF EARNINGS TO FIXED CHARGES
(EXCLUDING PREFERRED STOCK DIVIDENDS) 3.28X 2.22X 2.14X
======= ======= =======
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED DIVIDENDS 2.76X 2.11X 2.14X
======= ======= =======
</TABLE>
<PAGE> 1
SCHEDULE 21.1
List of Subsidiaries
<TABLE>
<S> <C>
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 Sacramento Corporation, a California corporation
9. Essex Fidelity I Corporation, a California corporation
10. Essex Camarillo Corporation, a California corporation
11. Essex Camarillo L.P., a California limited partnership
12. Essex Meadowood Corporation, a California corporation
13. Essex Meadowood, L.P., a California limited partnership
14. Essex Treetops Corporation, a California corporation
15. Essex Treetops, L.P., a California limited partnership
16. Essex Bluffs, L.P., a California limited partnership
17. Essex Huntington Breakers, L.P., a California limited partnership
18. Essex Stonehedge, L.P., a California limited partnership
19. Essex Bridle Trails, L.P., a California limited partnership
20. Essex Spring Lake, L.P., a California limited partnership
21. Essex Maple Leaf, L.P., a California limited partnership
22. Essex Riverfront, L.P., a California limited partnership
23. Essex Casa Mango, L.P., a California limited partnership
</TABLE>
<PAGE> 1
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 statements on Form
S-3 (Nos. 333-44467 and 333-21989) and the registration statement on Form S-8
(No. 33-84830) of Essex Property Trust, Inc. of our report dated January 30,
1998, relating to the consolidated balance sheets of Essex Property Trust, Inc.
and subsidiaries as of December 31, 1997 and 1996, 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, 1997, 1996 and
1995 and the related financial statement schedule, which report appears in the
December 31, 1997, annual report on Form 10-K.
We also consent to the reference to our firm under the heading "Experts" in each
prospectus, statements.
KPMG Peat Marwick LLP
San Francisco, California
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Essex
Property Trust, Inc. year ended report for the twelve months ended December,
1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,375
<SECURITIES> 0
<RECEIVABLES> 17,866
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,079
<PP&E> 738,835
<DEPRECIATION> 58,040
<TOTAL-ASSETS> 738,835
<CURRENT-LIABILITIES> 34,734
<BONDS> 276,597
0
2
<COMMON> 1
<OTHER-SE> 398,915
<TOTAL-LIABILITY-AND-EQUITY> 738,835
<SALES> 0
<TOTAL-REVENUES> 89,683
<CGS> 0
<TOTAL-COSTS> 39,818
<OTHER-EXPENSES> 6,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,306
<INCOME-PRETAX> 29,677
<INCOME-TAX> 0
<INCOME-CONTINUING> 29,677
<DISCONTINUED> 0
<EXTRAORDINARY> 361
<CHANGES> 0
<NET-INCOME> 29,316
<EPS-PRIMARY> 1.96<F1>
<EPS-DILUTED> 1.92
<FN>
<F1>As it relates to this schedule, Primary means Basic.
</FN>
</TABLE>
