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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, 1998
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-13106
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ESSEX PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Maryland 77-0369576
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
925 East Meadow Drive, Palo Alto, California 94303
(Address of principal executive offices) (Zip code)
(650) 494-3700
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $.0001 par value New York Stock Exchange
Rights to purchase Series A Junior
Participating New York Stock Exchange
Preferred Stock, par value $.0001
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
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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. Yes [X] 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 to the Form 10-K. [X]
As of March 25, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $284,155,992. For purposes of
calculating the preceeding amount only, all directors, executive offiers, and
shareholders holding 5% or more of the registrant's common stock are assumed
to be affilates. The aggregate market value was computed with reference to the
closing price on the New York Stock Exchange on such date. This calculation
does not reflect a determination that persons are affiliates for any other
purpose.
As of March 25, 1999, 16,742,616 shares of Common Stock ($.0001 par value)
were outstanding.
LOCATION OF EXHIBIT INDEX:
The index exhibit is contained in Part IV, Item 14, on page number 40.
DOCUMENTS INCORPORATED BY REFERENCE:
The following document is incorporated by reference in Part III of the
Annual Report on Form 10K: Proxy statement for the annual meeting of
stockholders of Essex Property Trust, Inc. to be held April 27, 1999.
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TABLE OF CONTENTS
FORM 10-K
<TABLE>
<CAPTION>
Page No.
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<C> <S> <C>
PART I
Item 1 Business................................................ 3
Item 2 Properties.............................................. 22
Item 3 Legal Proceedings....................................... 24
Item 4 Submission of Matters to a Vote of Security Holders..... 24
PART II
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters.................................... 25
Item 6 Summary Financial and Operating Data.................... 27
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 29
Item 7A Quantitative and Qualitative Disclosures About Market
Risk................................................... 38
Item 8 Financial Statements and Supplementary Data............. 38
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 38
PART III
Item 10 Directors and Executive Officers of the Registrant...... 39
Item 11 Executive Compensation.................................. 39
Item 12 Security Ownership of Certain Beneficial Owners and
Management............................................. 39
Item 13 Certain Relationships and Related Transactions.......... 39
PART IV
Item 14 Exhibits, Financial Statements Schedules and Reports on
Form 8-K............................................... 40
Signatures.............................................. 41
</TABLE>
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PART I
Forward Looking Statements
Certain statements in this Report on Form 10-K which are not historical
facts may be considered forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, including statements
regarding the Company's expectations, hopes, intentions, beliefs and
strategies regarding the future. Forward looking statements include statements
regarding the Company's expectation as to the timing of completion of current
development projects, beliefs as to the adequacy of future cash flows to meet
operating requirements and to provide for dividend payments in accordance with
REIT requirements, and expectations as to the amount of future revenues,
expenses, and uses of cash resulting from future activities including non-
revenue generating capital expenditures and capital improvement projects,
acquisitions and developments, the performance of existing properties and the
Company's financing activities. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors including, but not limited
to, that the actual completion of development projects will be subject to
delays, that such development projects will not be completed, that future cash
flows will be inadequate to meet operating requirements and/or will be
sufficient to provide for dividend payments in accordance with REIT
requirements, the actual cost of non-revenue generating capital expenditures
and capital improvement programs will exceed the Company's current
expectations, as well as those risks, special considerations, and other
factors discussed under the caption "Other Matters/Risk Factors" in Item 1 in
this Report on Form 10-K, and those other risk factors and special
considerations set forth in the Company's other filings with the Securities
and Exchange Commission which may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements.
Item 1. Business
Description of Business
Essex Property Trust, Inc. ("the Company" or "Essex") is a self-
administered and self-managed equity real estate investment trust ("REIT")
engaged in the ownership, acquisition, development and management of
multifamily apartment communities. The Company's multifamily portfolio
consists of ownership interests in 58 properties (comprising 12,267 apartment
units), 22 of which are located in Southern California (Los Angeles, Ventura,
Orange and San Diego counties), 15 of which are located in Northern California
(the San Francisco Bay Area) and 21 of which are located in the Pacific
Northwest (17 in the Seattle metropolitan area and 4 in the Portland, Oregon
metropolitan area). The Company also has ownership interests in two office
buildings located in Northern California (Palo Alto), one of which houses the
Company's headquarters, and three retail shopping centers located in the
Pacific Northwest (the "Commercial Properties," and together with the
Company's 58 multifamily residential properties, the "Properties"). The
Company also has entered into commitments for the development of 1,578 units
in eight multifamily communities: four in Northern California, two in Southern
California and two in the Pacific Northwest.
The Company was incorporated in the state of Maryland in March 1994. On
June 13, 1994, the Company commenced operations with the completion of an
initial public offering ("the Offering") in which it issued 6,275,000 shares
of common stock at $19.50 per share. The net proceeds of the Offering of
$112.1 million were used to acquire an approximate 77.2% general partnership
interest in 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 approximately 10.1% limited partnership
interests 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.
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Business Objectives
The Company's primary business objective is to maximize Funds from
Operations and total returns to stockholders through active property and
portfolio management including redevelopment of properties. 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
and, if applicable, redevelopment.
. 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 in the west coast region 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.
. Management of Capital and Financial Risk. Optimize the Company's capital
and financial risk positions by maintaining a conservative leverage
ratio, evaluating financing alternatives on an on-going basis and
minimizing the Company's cost of capital.
Business Principles
The Company 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, the Company seeks to retain tenants,
maximize cash flow, enhance property values and compete effectively for new
tenants in the marketplace. The Company's regional portfolio managers are
accountable for overall property operations and performance. They supervise
on-site managers, provide training for the on site staff, 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.
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 and development of
multifamily residential communities, containing between 75 and 600 units.
These types of properties offer attractive opportunities because such
properties (i) are often mispriced by real estate sellers and buyers who lack
the Company'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 are either inadequately capitalized or lack
the professional property management expertise of the Company.
Geographic Focus. The Company focuses its property investments in markets
that meet the following criteria:
. Major Metropolitan Areas. The Company 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.
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. Supply Constraints. The Company believes that properties located in real
estate markets with limited development or redevelopment opportunities
are well-suited to produce increased rental income. When evaluating
supply constraints, The Company 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. The Company 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 and capital expenditures, as a percentage of rent,
are lower in comparison with markets that have a lower cost of owning a
home.
. Job Proximity. the Company believes that most renters select housing
based on its proximity to their jobs and on related commuting factors.
The Company obtains local area information relating to its residential
properties and uses this information when making multifamily residential
property acquisition decisions. The Company also reviews the location of
major employers relative to its portfolio and potential acquisition
properties.
Following the above criteria, the Company is currently pursuing investment
opportunities in selected markets of Northern and Southern California and the
Pacific Northwest.
Active Portfolio Management Through Regional Economic Research and Local
Market Knowledge. The Company 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. The Company 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. The Company maintains and evaluates:
. Regional Economic Data. The Company evaluates and reviews regional
economic factors for the markets in which it owns properties and where
it considers expanding its operations. The Company'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, the Company
regularly evaluates the results of regional economic and local market research
and adjusts portfolio allocations accordingly. The Company actively manages
the allocation of assets within its portfolio. The Company 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, the Company 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 the Company is generally a long-term investor, it does not
establish defined or preferred holding periods for its Properties.
Current Business Activities
The Company conducts substantially all of its activities through the
Operating Partnership, of which it owns an approximate 89.9% general
partnership interest. The approximate 10.1% limited partnership interests in
the Operating Partnership are owned by directors, officers and employees of
the Company and certain third-party investors. As the sole general partner of
the Operating Partnership, the Company has operating control over the
management of the Operating Partnership and each of the Properties. From time
to time, the Company may invest
5
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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.
The Company 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, the
Company 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"). The Company owns 100% of EMC's
19,000 shares of nonvoting preferred stock. Executives of the Company own 100%
of EMC's 1,000 shares of common stock.
The Company owns a 1% limited partnership interest in two partnerships that
acquired three retail properties from the Company. These investments were made
under arrangements whereby EMC became the general partner and the other
limited 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.
In February and April 1998, the Operating Partnership sold 1,200,000 and
400,000 units, respectively 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 from these offerings were
$58,275,000 and $19,500,000 respectively. In November 1998, the Operating
Partnership sold 500,000 units of its 9.125% Series C Cumulative Redeemable
Preferred Units to an institutional investor in a private placement, at a
price of $50.00 per unit. The net proceeds from this offering were
$24,375,000.
Acquisitions
During 1998, the Company acquired ownership interests in five multifamily
properties consisting of 1,798 units with a total capitalized acquisition cost
(including expected renovation costs and adjusted for closing costs) of
approximately $166,995,000. These investments were primarily funded by sales
of preferred units by the Operating Partnership, cash generated from
operations, dispositions of properties and working capital. Of the five
properties purchased in 1998, three properties (1,122 units) are located in
Southern California and two (676 units) are located in Northern California.
Multifamily property ownership interests acquired in 1998 are as follows:
<TABLE>
<CAPTION>
Name Location Units Purchase Price
---- -------- ----- --------------
(in thousands)
<S> <C> <C> <C>
Southern California
Mirabella.............................. Newbury Park, CA 608 $ 50,500
Bunker Hill............................ Los Angeles, CA 456 36,523
Cochran Apartments..................... Los Angeles, CA 58 5,400
Northern California
Wimbledon Woods........................ Hayward, CA 560 44,000
Westwood............................... Cupertino, CA 116 19,850
----- --------
Total................................ 1,798 $156,273
===== ========
</TABLE>
Dispositions
In 1998, Essex sold one Pacific Northwest multifamily property and disposed
of the three Pacific Northwest retail properties for a net sales price of
$26,354,000. The proceeds were used to fund acquisitions of multifamily
properties.
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Development
The Company is currently developing eight development projects that are
expected to have an aggregate of 1,578 multifamily units and an aggregate
estimated development cost, including capitalized interest and overhead costs,
of $204,700,000. Such projects are anticipated to be substantially completed
during 1999.
Park @ Issaquah This development is a 245 unit multifamily community
located in Issaquah, Washington. This Project will feature spacious units,
direct access garages and specialized interior features. The community will
include a pool, spa, exercise room and video theater. As of December 31, 1998,
approximately 40% of the units were completed. Of the units completed,
approximately 50% have been leased through December 31, 1998. The Company
expects to achieve stabilized occupancy (defined as the month in which the
multifamily community has a physical occupancy of 95%) in July 1999. The
project is being developed by Park Hill LLC (the "LLC"). The Company has a 45%
ownership interest in the LLC. According to the terms of the partnership
agreement, the Company is responsible for the leasing and management of the
operations of the property. The Company has the option to purchase the
remaining 55% interest after August 31, 2003. The purchase price will be
calculated based on operating results, as defined in the LLC agreement.
Fountain Court This development is a 320 unit multifamily community located
in Seattle, Washington. This project offers views of downtown Seattle and
Puget Sound. Unit amenities include microwaves, washer/dryers, European style
cabinetry and ceramic tile entryways. This community will also offer a health
club, spa, indoor lap pool, exercise room and entertainment center. The
project is a six-story building and occupancy is expected to commence in April
1999. The project is being developed by Fountain Court Apartment Associates,
L.P. The Company has a 51% limited partnership interest in this entity. In
accordance with the terms of the agreement, in the year 2000, the Company has
the option to purchase the remaining 49% interest for a fixed purchase price.
Hillsborough Park This development is a 235 unit multifamily community
located in La Habra, California. This community will offer a pool, spa, tennis
courts and an exercise room. Individual units will have patios or balconies,
vaulted ceilings, washer/dryers, microwave ovens and individual garages. The
project consists of 15 buildings and is expected to be completed in phases
starting in March 1999 through June 1999. The project is being developed
solely by the Company.
Waterford Place This development is a 238 unit multifamily community
located in San Jose, California. This community will feature a fitness center,
pool, spa, business center and gated security access. Each unit will feature
fireplaces, washer/dryers, and computer workstations with dedicated, high-
speed data transmission lines. In 1997, the Company entered into a contract
with an unrelated third party to purchase the development 18 months after
completion, as defined in the contract. Completion is estimated to be November
1999. The unrelated third party is responsible for the development, leasing
and management of the project until the Company purchases the development.
Bel Air This development is a 114 unit multifamily community located in San
Ramon, California. This project is adjacent to The Shores property that was
acquired by the Company in 1995. The units offers direct access garages, nine-
foot ceilings, individual entry and the majority of units have golf course
views. The project consists of 24 buildings and is expected to be completed in
phases starting in March 1999 through May 1999. Occupancy is scheduled to
begin in April 1999. The project is being developed solely by the Company.
The Carlyle This development is a 132 unit multifamily community located in
San Jose, California. The community features a pool, spa, exercise facility,
clubhouse, business center, as well as gated access and available garages.
Each unit is equipped with state of the art wiring systems for today's high-
tech renter, a washer/dryer and ceiling fans. In May 1998, the Company entered
into a contract with an unrelated third party to purchase the development 18
months after completion, as defined in the contract. Completion is estimated
to be August 1999. The unrelated third party is responsible for the
development, leasing and management of the project until the Company purchases
the development.
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Marina View This development is a 188 unit multifamily community located in
Marina del Rey, California. This project will feature controlled access
underground parking, a pool, spa, fitness center, entertainment center and
business center. Units will have tiled fireplaces, microwaves, washer/dryer
hook-ups, ceiling fans and harbor views. The project is a single building and
is expected to be completed with occupancy beginning in August 1999. This
project is being developed solely by the Company.
Station Park This development is a 106 unit multifamily community in Walnut
Creek, California. This project will offer amenities including high-speed data
transmission lines and internet access, attached garages and washer/dryers.
The community will also offer a pool, spa, exercise facility, business center
and community room. The project is four buildings and is expected to be
completed in phases from June 1999 through August 1999. This project is being
developed solely by the Company.
The Company intends to continue to pursue the development of multifamily
communities to the extent that the market conditions and the specific project
terms are considered favorable.
Offices and Employees
The Company 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, 1998, the Company had
approximately 470 employees.
In February 1999, the Company entered into an agreement with Mr. Marcus,
its Chairman, which replaces and terminates a non-competition agreement that
Mr. Marcus entered into in 1994 in connection with the Company's initial
public offering. Under the February 1999 agreement, Mr. Marcus must generally
give the Company notice of any contract, which he or his affiliates enter
into, for the purchase of a multifamily property in excess of 100 units. If
the Company has submitted a written offer for the same property, then the
Company at its option may require Mr. Marcus to assign his or his affiliate's
contracts to the Company.
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 as 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, management and development of real
properties, the Company could be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, 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 were
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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 former presence of underground fuel storage tanks
that have been removed. There are asbestos-containing material 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, the Company 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, 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, result of operations, or liquidity.
Certain Properties that 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 that have been sold, it is possible that such losses or costs may
materialize in the future.
Except with respect to one Property, the Company has no indemnification
agreements from third parties for potential environmental clean-up costs at
its Properties. The Company 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 the Company. 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. The Company 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. the Company has obtained earthquake insurance for all the
Properties. This earthquake insurance is subject to an aggregate limit of
$40.0 million payable upon a covered loss in excess of a $7.5 million self-
insured retention amount and a 5% deductible. The Company 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 the Company, (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.
Despite earthquake coverage on all of its Properties placed in service, should
a property sustain damage as a result of an earthquake, the Company may incur
losses due to deductibles, co-payments or losses in excess of applicable
insurance, if any.
Although the Company carries certain insurance for non-earthquake damages
to its properties and liability insurance, the Company may still incur losses
due to uninsured risks, deductibles, co-payments or losses in excess of
applicable insurance coverage.
Competition
The Company'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
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competing properties affects the amount of rent charged as well as rental
growth rates, vacancy rates, deposit amounts, and the services and features
provided at each property. While economic conditions are generally stable in
the Company's target markets, a prolonged economic downturn could have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
The Company 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 distribution. 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. The Company has credit facilities in the committed amount
of approximately $110,000,000. At December 31, 1998 the Company had an
outstanding balance of $35,693,000 under these facilities.
Other Matters/Risk Factors
Debt Financing
At December 31, 1998, the Company had approximately $361,515,000 of
indebtedness (including $94,513,000 of variable rate indebtedness), of which
$325,822,000 was secured by certain properties.
The Company is subject to the risks normally associated with debt
financing, including the following:
. cash flow may not be sufficient to meet required payments of principal
and interest;
. inability to refinance existing indebtedness on encumbered Properties;
and
. the terms of any refinancing may not be as favorable as the terms of
existing indebtedness.
Uncertainty of Ability to Refinance Balloon Payments
At December 31, 1998, the Company had an aggregate of approximately
$361,515,000 of mortgage debt and lines of credit, some of which are subject
to balloon payments of principal. The Company does not expect to have
sufficient cash flows from operations to make all of such balloon payments
when due under these mortgages and lines of credit. At December 31, 1998,
these mortgages and lines of credit had the following scheduled maturity
dates: 1999--$2.4 million; 2000--$56.0 million; 2001--$2.4 million; 2002--
$24.5 million; 2003--$30.1 million, 2004 and thereafter--$246.1 million. As a
result, the Company may not be able to refinance such mortgage indebtedness.
The Properties subject to these mortgages could be foreclosed upon or
otherwise transferred to the mortgagee. This could mean a loss to the Company
of income and asset value. Alternatively, the Company may be required to re-
finance the debt at higher interest rates. If the Company is unable to make
such payments when due, a mortgage lender could foreclose on the property
securing the mortgage, which could have a material adverse effect on the
financial condition and results of operations of the Company.
Risk Of Rising Interest Payments
At December 31, 1998, the Company had approximately $58,820,000 of long-
term variable rate indebtedness bearing interest at a floating rate tied to
the rate of short-term tax exempt securities (which matures at various dates
from 2014 through 2026) and $35,693,000 of variable rate indebtedness under
its line of credit bearing interest at 1.15% over LIBOR (which matures in
2000). Although approximately $29,220,000 of the $58,820,000 long-term
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 may have an adverse effect on net income
and results of operations of the Company.
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Risk That Interest Rate Hedging Arrangements Cannot Be Refinanced Or Replaced
The Company has, from time to time, entered into agreements to reduce the
risks associated with increases in interest rates, and may continue to do so.
Although these agreements may partially protect against rising interest rates,
these agreements also may reduce the benefits to the Company when interest
rates decline. There can be no assurance that any such hedging arrangements
can be refinanced or that the Company will be able to enter into other hedging
arrangements to replace existing ones if interest rates decline. Furthermore,
interest rate movements during the term of interest rate hedging arrangements
may result in a gain or loss on our investment in the hedging arrangement. In
addition, if a hedging arrangement is not indexed to the same rate as the
indebtedness that is hedged, the Company may be exposed to losses to the
extent that the rate governing the indebtedness and the rate governing the
hedging arrangement change independently of each other. Finally,
nonperformance by the other party to the hedging arrangement may subject the
Company to increased credit risks. In order to minimize counterparty credit
risk, the Company policy is to enter into hedging arrangements only with large
financial institutions that maintain an investment grade credit rating.
Acquisition Activities: Risks That Acquisitions Will Fail To Meet
Expectations
The Company intends to continue to acquire multifamily residential
properties. There are risks that acquired properties will fail to perform as
expected. Estimates of the costs of improvements necessary to allow the
Company to market an acquired property as originally intended may prove to be
inaccurate. In addition, the Company expects to finance future acquisitions,
in whole or in part, under various 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 dilute the interest of the
Company's existing stockholders. 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 development
may not be available or may be available only on disadvantageous terms. Also,
the Company may not be able to refinance our existing lines of credit upon
maturity, or the terms of such refinancing may not be as favorable as the
terms of the existing 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."
Risks That Development Activities Will Be Delayed Or Not Completed
The Company pursues multifamily residential property development projects
from time to time. Development projects generally require various governmental
and other approvals, the receipt of which cannot be assured. The Company's
development activities generally entail certain risks, including the
following:
. funds may be expended and management's time devoted to projects that may
not be completed;
. construction costs of a project may exceed original estimates possibly
making the project economically unfeasible;
. development projects may be delayed due to, among other things, adverse
weather conditions;
. occupancy rates and rents at a completed project may be less than
anticipated; and
. expenses at a completed development may be higher than anticipated.
These risks may reduce the funds available for distribution to the
Company's stockholders. Further, the development of properties is also 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 And Fluctuations In Local
Market May Adversely Impact Income
Significant amounts of rental revenues for the year ended December 31,
1998, were derived from Properties concentrated in the San Francisco Bay Area,
the Seattle metropolitan area, Southern California and the Portland
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metropolitan area. As a result of this geographic concentration, if a local
property market performs poorly, the income from the Properties in that market
could decrease. As a result of such a decrease in income, the Company may be
unable to pay expected dividends to the Company's stockholders. The
performance of the economy in each of these areas affects occupancy, market
rental rates and expenses and, consequently impacts the income generated from
the Properties and their underlying values. The financial results of major
local employers may also impact the cash flow and value of certain of the
Properties. Economic downturns in the local markets in which the Company owns
properties could have a negative impact on the financial condition and results
from operations of the Company.
Competition In The Multifamily Residential Market May Adversely Affect
Operations And The Rental Demand For the Company's Properties
There are numerous housing alternatives that compete with the multifamily
Properties in attracting residents. These include 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 that are for sale. In addition,
other competitors for development and acquisitions of properties may have
greater resources than the Company. If the demand for the Company's Properties
is reduced or if competitors develop and/or acquire competing properties on a
more cost-effective basis, rental rates may drop, which may have a material
adverse affect on the financial condition and results of operations of the
Company.
The Company also faces competition from other real estate investment
trusts, businesses and other entities in the acquisition, development and
operation of properties. Some of the competitors are larger and have greater
financial resources than the Company. This competition may result in increased
costs of properties the Company acquires and/or develops.
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 provide for additional
investments that the Company could not otherwise make. There is a risk that
the cash flow from the Properties will be insufficient to meet both debt
payment obligations and the distribution requirements of the real estate
investment trust provisions of the Internal Revenue Code of 1986, as amended.
The Company may obtain additional debt financing in the future, through
mortgages on some or all of the Properties. These mortgages may be recourse,
non-recourse, or cross-collateralized. As of December 31, 1998, the Company
had 33 properties encumbered by debt. Of the 33 properties, 18 are secured by
deeds of trust relating solely to those properties, with respect to the
remaining 15 properties, three cross-collateralized mortgages are secured by
eight properties, three properties, and three properties, respectively, and
the Company's $10 million line of credit is secured by one property. The
holders of this indebtedness 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. This may,
in turn, accelerate other indebtedness secured by Properties. Foreclosure of
Properties would cause a loss to the Company of income and asset value.
Increase In Dividend Requirements As A Result Of The Convertible Preferred
Stock, Series B Preferred Stock, And Series C Preferred Stock May Lead to a
Possible Inability To Sustain Dividends
In 1996, the Company sold $40.0 million of its 8.75% convertible preferred
stock, Series 1996A (the "Convertible Preferred Stock") at $25.00 per share 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 I,
L.P. (formerly known as Tiger/Westbrook Real Estate Co-Investment Partnership,
L.P.). Westbrook Real Estate Fund, L.P. and Westbrook Real Estate Co-
Investment Partnership I, L.P. are collectively referred to herein as
"Westbrook. On January 6, 1999, these entities converted 87,500 shares of the
Convertible Preferred Stock into 100,000 shares of Common Stock and they
presently own 1,512,500 shares of Convertible Preferred Stock. The Company has
filed a registration statement covering Tiger/Westbrook's resale of all shares
of common stock
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issuable upon conversion of the Convertible Preferred Stock and the
registration statement was declared effective by the Securities and Exchange
Commission in December 1998.
On February 6 and April 20, 1998, the Operating Partnership completed the
private placement of a total of 1,600,000 units of 7.875% Series B Cumulative
Redeemable Preferred Units (the "Series B Preferred Units"), representing a
limited partnership interest in the Operating Partnership, to an institutional
investor. 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 February 6, 2008 (or
earlier under certain circumstances) for shares of the Company's 7.875% Series
B Cumulative Redeemable Preferred Stock, par value $.0001 per share (the
"Series B Preferred Stock"). The Operating Partnership may redeem the Series B
Preferred Units on or after February 6, 2003. Also, on November 24, 1998, the
Operating Partnership completed the private placement of 500,000 units of
9.125% Series C Cumulative Redeemable Preferred Units (the "Series C Preferred
Units"), representing a limited partnership interest in the Operating
Partnership, to an institutional investor. The Series C Preferred Units will
become exchangeable, on a one for one basis, in whole or in part at any time
on or after November 24, 2008 (or earlier under certain circumstances) for
shares of the Company's 9 1/8% Series C Cumulative Redeemable Preferred Stock,
par value $.0001 per share (the "Series C Preferred Stock"). The Operating
Partnership may redeem the Series C Preferred Units on or after November 24,
2003.
The cash dividends payable on the Convertible Preferred Stock substantially
increase the cash that must be paid out before dividends may be paid on the
Common Stock. Dividends may be paid on shares of Common Stock in any fiscal
quarter only if full, cumulative cash dividends have been paid on all shares
of Convertible Preferred Stock in the annual amount equal to the greater of
(i) $2.1875 per share (8.75% of the $25.00 per share price), or (ii) the
dividends (on an as-converted basis) paid with respect to the Common Stock
plus, in both cases, any accumulated but unpaid dividends on the Convertible
Preferred Stock.
Further, if any of the Series B Preferred Units are exchanged for shares of
Series B Preferred Stock, the holders of Series B Preferred Stock will be
entitled to receive cumulative preferential cash distributions equal to
$3.9375 (7.875% of the $50.00 liquidation preference) per share of Series B
Preferred Stock. For any period of time that any Series B Preferred Stock is
outstanding, no distribution may be authorized, declared or paid on the Common
Stock or any class or series of other stock of the Corporation ranking junior
to the Series B Preferred Stock unless all distributions accumulated on all
Series B Preferred Stock have been paid in full. Also, if any of the Series C
Preferred Units are exchanged for shares of Series C Preferred Stock, the
holders of Series C Preferred Stock will be entitled to receive cumulative
preferential cash distributions equal to $4.5625 (9.125% of the $50.00
liquidation preference) per share of Series C Preferred Stock. For any period
of time that any Series C Preferred Stock is outstanding, no distribution may
be authorized, declared or paid on the Common Stock or any class or series of
other stock of the Corporation ranking junior to the Series C Preferred Stock
unless all distributions accumulated on all Series C Preferred Stock have been
paid in full. The dividends payable on the Series B Preferred Stock and Series
C Preferred Stock would further increase the cash that must be paid out before
dividends may be paid on the Common Stock.
The 1,512,500 outstanding shares of Convertible Preferred Stock Series
1996A are convertible at the option of the holder into shares of Common Stock.
If, after June 20, 2001, the Company requires a mandatory conversion of all of
the Convertible Preferred Stock, each of the holders of the Convertible
Preferred Stock may cause the Company to redeem any or all of their shares of
Convertible Preferred Stock. Such a redemption would decrease the amount of
cash available to pay cash dividends on the Common Stock. When there ceases to
be in excess of 40,000 shares of Convertible Preferred Stock outstanding, we
may purchase all of the outstanding shares of Convertible Preferred Stock from
the holders.
If the Company wishes to issue any Common Stock in the future (including,
upon exercise of stock options), the funds required to continue to pay cash
dividends at current levels will be increased. The Company's ability to pay
dividends will depend largely upon the performance of the Properties and other
properties that may be acquired in the future.
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The Company's ability to pay dividends on the Company's stock is further
limited by the Maryland General Corporation Law. Under the Maryland General
Corporation Law, the Company may not make a distribution on stock if, after
giving effect to such distribution, either
. the Company would not be able to pay its indebtedness as it becomes due
in the usual course of business; or
. the Company's total assets would be less than its total liabilities.
If the Company cannot pay dividends on its stock, it's status as a real
estate investment trust may be jeopardized.
Existing Registration Rights And Preemptive Rights May Have An Adverse Effect
On The Market Price Of The Shares
Registration rights are held by the senior members of the Company's
management and certain outside investors (collectively, the "Founders") who as
of December 31, 1998 owned approximately 10.1% limited partnership interests
in the Operating Partnership. These rights include certain "demand" and
"piggyback" registration rights with respect to shares of Common Stock
issuable in connection with the exchange of their limited partnership
interests in the Operating Partnership. The aggregate 10.1% limited
partnership interests held by the Founders in the Operating Partnership is
exchangeable for an aggregate of 1,873,473 shares of Common Stock. In
addition, the Operating Partnership has invested in certain real estate
partnerships. Certain partners in such limited partnerships have the right to
have their limited partnership interests in such partnerships redeemed for
cash or, at our option, for 779,400 shares of Common Stock. These partners
also have certain "demand" and "piggyback" registration rights with respect to
the shares of Common Stock that may be issued in exchange for such limited
partnership interests. All of the registration rights discussed above could
materially adversely affect the market price for the shares of Common Stock.
In addition, the holders of the Convertible Preferred Stock have preemptive
rights to purchase a pro rata share of shares of Common Stock that may be
offered in the future. These preemptive rights could have a material adverse
effect on the market price for the shares of Common Stock.
Conversion Of The Convertible Preferred Stock May Lead to Substantial
Dilution To The Holders Of Common Stock
The shares of Convertible Preferred Stock are convertible, at the option of
the holders, into the number of shares of Common Stock that is determined
based on the number and price of common shares issued. As of December 31,
1998, the then conversion price was $21.875 per share and, therefore, each
share of Convertible Preferred Stock was convertible into approximately 1.14
shares of Common Stock. All the shares issuable upon conversion of all of the
Convertible Preferred Stock are covered by an existing shelf registration
statement, which would allow such shares to be resold into the public market.
In order to protect the holders of the Convertible Preferred Stock against
dilution, the conversion price may be reduced in certain circumstances,
including if Common Stock is issued at a price below the conversion price.
Such reduction in the conversion price could increase the dilution to holders
of shares of Common Stock if and when the Convertible Preferred Stock is
converted into shares of Common Stock. The proportionate ownership, voting
power and earnings per share of the holders of Common Stock could be
substantially diluted in the event that a substantial number of additional
shares of Common Stock and/or Preferred Stock are issued, either upon
conversion of the Convertible Preferred Stock, in connection with future
acquisitions or otherwise.
Concentration Of Voting Power And Consent Requirements Of The Holders Of the
Convertible Preferred Stock May Be Detrimental To Holders of Common Stock
As of December 31, 1998, George M. Marcus, the Chairman of the Company's
Board of Directors, beneficially owned 1,953,187 shares of Common Stock
(including shares issuable upon exchange of limited partnership interests in
the Operating Partnership and assuming exercise of all vested options). This
represents
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approximately 10.5% of the outstanding shares of Common Stock. Mr. Marcus
currently does not have majority control over the Company. However, he
currently has, and likely will continue to have, significant influence with
respect to the election of directors and approval or disapproval of
significant corporate actions.
The holders of the Convertible Preferred Stock have certain consent rights
to actions the Company may take. The Company may not, among other things, make
certain revisions to its corporate structure and operations, without the
approval of holders of two-thirds of the outstanding shares of Convertible
Preferred Stock, voting as a separate class. This includes (i) revisions that
would affect the rights, priority and preferences of the Convertible Preferred
Stock, (ii) the merger or consolidation of the Company or the Operating
Partnership with another entity, (iii) the sale of all or substantially all of
the Company's assets, (iv) changing the geographic concentration of the
portfolio of Properties, and (v) undergoing a change in control of either the
Company or the Operating Partnership.
The Company's Charter provides that the holders of the Convertible
Preferred Stock, voting as a class, have the right to elect one member of the
Board of Directors. The holders of the Convertible Preferred Stock elected
Gregory J. Hartman to the Board of Directors. Mr. Hartman is a managing
principal of Westbrook Real Estate Partners, L.L.C., the managing member of
the sole general partner of Westbrook.
Under certain circumstances, the holders of the Convertible Preferred Stock
will be entitled to elect up to four additional directors. Such circumstances
include the Company's failure to pay quarterly dividends on the Convertible
Preferred Stock for four quarters and the breach of certain provisions of the
Charter and bylaws affecting the holders of the Convertible Preferred Stock.
Moreover, the Company may not authorize or create any class or series of stock
that ranks equal or senior to the Convertible Preferred Stock with respect to
(i) the payment of dividends or (ii) amounts upon liquidation, dissolution or
winding up without the consent of the holders of two-thirds of the outstanding
shares of Convertible Preferred Stock, voting separately as a single class.
The interests of the holders of the Convertible Preferred Stock, and
indirectly the director or directors elected by the holders of the Convertible
Preferred Stock, may differ from or conflict with the interests of the holders
of Common Stock.
In addition, upon conversion of the Convertible Preferred Stock into shares
of Common Stock, the holders of Convertible Preferred Stock would hold
approximately 8.9% of all outstanding shares of Common Stock (assuming
exchange of all partnership interests in the Operating Partnership into shares
of Common Stock), assuming that such conversion took place on December 31,
1998. Consequently, upon such conversion, the holders of Convertible Preferred
Stock would, as a class, be the second largest stockholder in the Company and
could have considerable influence with respect to the election of directors
and the approval or disapproval of significant corporate actions.
In view of the substantial influence of the holders of the Convertible
Preferred Stock over the Company's affairs, it should be noted that interests
of the holders of the Convertible Preferred Stock do not necessarily coincide
with those of the holders of the Common Stock. Therefore, actions by the
holders of the Convertible Preferred Stock will not necessarily be in the best
interests of the holders of Common Stock.
Certain Voting Rights Of The Series B Preferred Stock And Series C Preferred
Stock
In general, the holders of the Series B Preferred Stock and Series C
Preferred Stock do not have any voting rights. However, if full distributions
are not made on any Series B Preferred Stock or Series C Preferred Stock for
six quarterly distribution periods, the holders of Series B Preferred Stock or
Series C Preferred Stock (as applicable) who have not received distributions,
voting together as a single class, will have the right to elect two additional
directors to serve on the Company's Board of Directors. These voting rights
continue until all distributions in arrears and distributions for the current
quarterly period on the Series B Preferred Stock and/or Series C Preferred
Stock have been paid in full. At that time, the holders of the Series B
Preferred Stock and/or Series C Preferred Stock are divested of these voting
rights, and the term and office of the directors so elected immediately
terminates.
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In addition, the Company may not authorize or create any class or series of
stock that ranks senior to the Series B Preferred Stock or Series C Preferred
Stock with respect to (1) the payment of dividends, (2) rights upon
liquidation, dissolution or winding-up of the Company, or amend, alter or
repeal the provisions of the Company's Charter or Bylaws, that would
materially and adversely affect these rights without the consent of the
holders of two-thirds of the outstanding shares of Series B Preferred Stock or
Series C Preferred Stock (as applicable) each voting separately as a single
class. Also, while any shares of the Series B Preferred Stock or Series C
Preferred Stock are outstanding, the Company may not (1) merge or consolidate
with another entity, or (2) a transfer substantially all of its assets to any
corporation or other entity, without the affirmative vote of the holders of at
least two-thirds of the Series B Preferred Stock and Series C Preferred Stock,
each voting separately as a class, unless the transaction meets certain
criteria.
Exemption Of Westbrook and George Marcus From The Maryland Business
Combination Law May Allow Certain Transactions Between The Company And
Westbrook And/Or George Marcus To Proceed Without Compliance With Such Law
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is
any person who beneficially owns ten percent or more of the voting power of
the then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between the
Company and an interested stockholder unless the Board of Directors approved
the transaction prior to the party becoming an interested stockholder. The
five year period runs from the most recent date on which the interested
stockholder became an interested stockholder. The law also requires a
supermajority stockholder vote for such transactions after the end of the five
year period. This means that the transaction must be approved by at least:
. 80% of the votes entitled to be cast by holders of outstanding voting
shares; and
. 66% of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the interested stockholder with whom
the business combination is to be effected.
However, as permitted by the statute, the Board of Directors irrevocably
has elected to exempt any business combination by the Company with Westbrook
and its affiliates from the "business combination" provision of the Maryland
General Corporation Law. In addition, the Board of Directors similarly
exempted George M. Marcus, William A. Millichap, who are the chairman and a
director of the Company, respectively, and The Marcus & Millichap Company
("M&M") or any entity owned or controlled by Messrs Marcus and Millichap and
M&M. Consequently, the five-year prohibition and the super-majority vote
requirement described above will not apply to any business combination between
the Company and either Westbrook (or its affiliates), Mr. Marcus, Mr.
Millichap, or M&M. As a result, the Company may in the future enter into
business combinations with Westbrook (or its affiliates) or Messrs Marcus and
Millichap and M&M, without compliance with the super-majority vote
requirements and other provisions of the Maryland General Corporation Law.
Influence of Executive Officers, Directors And Significant Stockholders
Under the partnership agreement of the Operating Partnership, the consent
of the holders of limited partnership interests is generally required for any
amendment of the agreement and for certain extraordinary actions. Through
their ownership of limited partnership interests and their positions in the
Company, the Company's directors and executive officers, including Messrs.
Marcus and Millichap, have substantial influence on the Company. Consequently,
their influence could result in decisions that do not reflect the interests of
all stockholders of the Company.
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Anti-Takeover Provisions Contained In The Operating Partnership Agreement,
Charter, Bylaws, The Convertible Preferred Stock And Certain Provisions Of
Maryland Law Could Delay, Defer Or Prevent A Change In Control Of the
Company
While the Company is the sole general partner of the Operating Partnership,
and generally has full and exclusive responsibility and discretion in the
management and control of the Operating Partnership, certain provisions of the
Operating Partnership's Partnership Agreement place limitations on the
Company's ability to act with respect to the Operating Partnership. Such
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the stock or otherwise
be in the best interest of the stockholders or that could otherwise adversely
affect the interest of the stockholders. The Partnership Agreement provides
that if the limited partners own at least 5% of the outstanding units of
limited partnership interest in the Operating Partnership, the Company cannot,
without first obtaining the consent of a majority-in-interest of the limited
partners in the Operating Partnership, transfer all or any portion of the
Company's general partner interest in the Operating Partnership to another
entity. Such limitations on the Company's ability to act may result in the
Company being precluded from taking action that the Board of Directors
believes is in the best interests of the Company's stockholders. In addition,
as of December 31, 1998, two individuals together held more than 50% of the
outstanding units of limited partnership interest in the Operating
Partnership, allowing such actions to be blocked by a small number of limited
partners.
The Company's charter authorizes the issuance of additional shares of
Common Stock or preferred stock and to set the preferences, rights and other
terms of such preferred stock without the approval of the holders of the
Common Stock. The Company must obtain the approval of the holders of two-
thirds of the outstanding shares of Convertible Preferred Stock in order to
authorize, create or issue any class or series of stock that ranks equal or
senior to the Convertible Preferred Stock. Although the Company has no
intention to issue any additional shares of Convertible Preferred Stock or
other preferred stock at the present time, the Company may, subject to the
consent of the holders of Convertible Preferred Stock, establish one or more
series of preferred stock that could delay, defer or prevent a transaction or
a change in control of the Company. Such a transaction might involve a premium
price for the Company's stock or otherwise be in the best interests of the
holders of Common Stock. Also, such a class of preferred stock could have
dividend, voting or other rights that could adversely affect the interest of
holders of Common Stock.
The Company's charter, as well as its stockholder rights plan, also
contains other provisions that may delay, defer or prevent a transaction or a
change in control of the Company that might be in the best interest of the
Company's stockholders. The Company's stockholder rights plan is designed,
among other things, to prevent a person or group from gaining control of the
Company without offering a fair price to all of the Company's stockholders.
Also, the Bylaws may be amended by the Board of Directors (subject to the
consent of the holders of the Convertible Preferred Stock in certain
circumstances) to include provisions that would have a similar effect,
although the Company presently has no such intention. The Charter provides
that the Company must obtain the approval of the holders of the Convertible
Preferred Stock holding two-thirds of the outstanding shares of Convertible
Preferred Stock before the Company or the Operating Partnership may merge or
consolidate with any other entity or sell all or substantially all of the
assets. Also, the terms of the Convertible Preferred Stock require that the
Company must obtain the approval of the holders of more than 50% of the
outstanding shares of Convertible Preferred Stock before undergoing a change
in control (as defined in the Charter). Additionally, the Charter contains
ownership provisions limiting the transferability and ownership of shares of
capital stock, which may have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company. For example, subject to
receiving an exemption from the Board of Directors, potential acquirers may
not purchase more than 6% percent in value of the stock (other than qualified
pension trusts which can acquire 9.9%). This may discourage tender offers that
may be attractive to the holders of Common Stock and limit the opportunity for
stockholders to receive a premium for their shares of Common Stock.
In addition, the Maryland General Corporations Law restricts the voting
rights of shares deemed to be "control shares." Under the Maryland General
Corporations Law, "control shares" are those which, when aggregated with any
other shares held by the acquirer, entitle the acquirer to exercise voting
power within
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specified ranges. Although the Bylaws exempt the Company from the control
share provisions of the Maryland General Corporations Law, the provisions of
the Bylaws may be amended or eliminated by the Board of Directors at any time
in the future, provided that it obtains the approval of the holders of two-
thirds of the outstanding shares of the Convertible Preferred Stock. Moreover,
any such amendment or elimination of such provision of the Bylaws may result
in the application of the control share provisions of the Maryland General
Corporations Law not only to control shares which may be acquired in the
future, but also to control shares previously acquired. If the provisions of
the Bylaws are amended or eliminated, the control share provisions of the
Maryland General Corporations Law could delay, defer or prevent a transaction
or change in control of the Company that might involve a premium price for the
stock or otherwise be in the best interests of its stockholders.
Bond Compliance Requirements May Limit Income From Certain Properties
At December 31, 1998, the Company had approximately $58.8 million of tax-
exempt financing relating to the 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 financings in the future. In addition, the Internal Revenue Code of
1986, as amended, and its related regulations impose various restrictions,
conditions and requirements excluding interest on qualified bond obligations
from gross income for federal income tax purposes. The Internal Revenue Code
of 1986, as amended, also requires 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. These restrictions may limit income from the tax-exempt financed
properties if the Company is required to lower rental rates to attract
residents who satisfy the median income test. If the Company does not reserve
the required number of apartment homes for residents satisfying these income
requirements, the tax-exempt status of the bonds may be terminated, the
obligations under the bond documents may be accelerated and the Company may be
subject to additional contractual liability.
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, cash flow and ability to make distributions to
stockholders will be adversely affected. The performance of the economy in
each of the areas in which the Properties are located affects occupancy,
market rental rates and expenses. Consequently, the income from the Properties
and their underlying values may be impacted. The financial results of major
local employers may have an impact on the cash flow and value of certain of
the Properties as well.
Income from the Properties may be further adversely affected by, among
other things, the following factors:
. 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 Company's ability to provide for adequate maintenance and insurance;
. increased operating expenses.
Also, as leases on the Properties expire, tenants may enter into new leases
on terms that are less favorable to the Company. Income and real estate values
may also be adversely affected by such factors as applicable laws
18
<PAGE>
(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, the Company's
ability to vary its portfolio promptly in response to changes in economic or
other conditions may be adversely affected.
Joint Ventures And Joint Ownership Of Properties And Partial Interests In
Corporations And Limited Partnerships Could Limit the Company's Ability To
Control Such Properties And Partial Interests
Instead of purchasing properties directly, the Company has invested and may
continue to invest as a co-venturer. Joint venturers often have shared control
over the operation of the joint venture assets. Therefore, it is possible that
the co-venturer in an investment might become bankrupt, or have economic or
business interests or goals that are inconsistent with the Company's business
interests or goals, or be in a position to take action contrary to the
Company's instructions or requests, or to Company policies or objectives.
Consequently, a co-venturer's actions might subject property owned by the
joint venture to additional risk. Although the Company seeks to maintain
sufficient control of any joint venture to achieve its objectives, the Company
may be unable to take action without the Company's joint venture partners'
approval, or joint venture partners could take actions binding on the joint
venture without consent. Additionally, should a joint venture partner become
bankrupt, the Company could become liable for such partner's share of joint
venture liabilities.
From time to time, the Company, through the Operating Partnership, invests
in corporations, limited partnerships or other entities that have been formed
for the purpose of acquiring, developing 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) of such an entity in the event that its operations conflict with
the Operating Partnership's objectives. In addition, the Operating Partnership
may not be able to dispose of its interests in such an entity. In the event
that such an entity becomes insolvent, the Operating Partnership may lose up
to its entire investment in and any advances to the entity.
Investments In Mortgages
The Company may invest in mortgages, in part as a strategy for ultimately
acquiring the underlying property. These mortgages may be first, second or
third mortgages that may or may not be insured or otherwise guaranteed. The
Company anticipates that such investment in mortgage receivables will not in
the aggregate be significant. In general, investments in mortgages include the
following risks:
. that the value of mortgaged property may be less than the amounts owed;
. that interest rates payable on the mortgages may be lower than the
Company's cost of funds; and
. in the case of junior mortgages, 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.
Possible Environmental Liabilities
Under various federal, state and local laws, 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. These laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of the hazardous or toxic substances. The presence of these
substances, or the failure to properly clean them up, may adversely affect the
owner's or operator's ability to sell or rent the property. It may also limit
the ability to borrow money using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances
19
<PAGE>
may also be liable for the costs of removal or clean-up of such substances at
a disposal or treatment facility, whether or not such facility is owned or
operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials into the air, and third parties may
seek recovery from owners or operators of real properties for personal
injuries associated with asbestos-containing materials. Therefore, in
connection with the ownership, operation, financing, management and
development of real properties, the Company may be potentially liable for
removal or clean-up costs, as well as certain other costs. The Company may
also be subject to governmental fines and costs related to injuries to persons
and property.
General Uninsured Losses
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.
Further, certain of the Properties are located in areas that are subject to
earthquake activity. Although the Company has obtained certain limited
earthquake insurance coverage, should a Property sustain damage as a result of
an earthquake, the Company may sustain losses due to insurance deductibles,
co-payments on insured losses or uninsured losses.
Changes In Real Estate Tax And Other Laws
Generally the Company does not directly pass through costs resulting from
changes in real estate tax laws to residential property tenants. The Company
also does not generally pass through increases in income, service or other
taxes, to tenants under leases. These costs may adversely affect funds from
operations and the 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 unanticipated
expenditures, which would adversely affect the funds from operations and the
ability to make distributions to stockholders.
Changes In Financing Policy; No Limitation On Debt
The Company has adopted a policy of maintaining a debt-to-total-market-
capitalization ratio of less than 50%. The calculation of debt- to-total-
market-capitalization is as follows:
total property indebtedness
____________________________________ = debt-to-total-market-capitalization
total property indebtedness + total equity market capitalization
As used in the above formula, total market capitalization is equal to 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 the outstanding 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 the gross proceeds
of the preferred units of the Operating Partnership. Based on this calculation
(including the current market price and excluding undistributed net cash
flow), the Company's debt-to-total-market-capitalization ratio was
approximately 33.7% as of December 31, 1998.
The Company's organizational documents and the organizational documents of
the Operating Partnership do not limit the amount or percentage of
indebtedness that may be incurred. Accordingly, the Board of Directors could
change current policies and the policies of the Operating Partnership
regarding indebtedness. If these policies were changed, the Company and the
Operating Partnership could incur more debt, resulting in an increased risk of
default on the Company obligations and the obligations of the Operating
Partnership, and an increase in debt service requirements that could adversely
affect the financial condition and results of operations of the Company. Such
increased debt could exceed the underlying value of the Properties.
20
<PAGE>
Failure To Qualify As A Real Estate Investment Trust
The Company has operated as a qualified real estate investment trust under
the Internal Revenue Code of 1986, as amended, commencing with the taxable
year ended December 31, 1994. Although the Company believes that it has
operated in a manner which satisfies the real estate investment trust
qualification requirements, no assurance can be given that the Company will
continue to do so. A real estate investment trust is generally not taxed on
its net income distributed to its stockholders. It is required to distribute
at least 95% of its taxable income to maintain qualification as a real estate
investment trust. Qualification as a real estate investment trust involves the
satisfaction of numerous requirements (some on an annual or quarterly basis)
established under the highly technical and complex Internal Revenue Code of
1986, as amended, provisions 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.
If the Company fails to qualify as a real estate investment trust in any
taxable year, it would generally be subject to federal and state income tax
(including any applicable alternative minimum tax) at corporate rates on its
taxable income for such year. Moreover, unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a real estate investment trust for the four taxable years
following the year of disqualification. This treatment would reduce net
earnings available for investment or distribution to stockholders because of
the additional tax liability for the years involved. In addition,
distributions would no longer be required to be made.
Other Matters
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 four 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 the
Portland, Oregon metropolitan 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 policies discussed above may be reviewed and modified from time to time
by the Board of Directors without the vote of the stockholders.
21
<PAGE>
Item 2. Properties
Portfolio Overview
The Company's property portfolio (including partial ownership interests)
consists of the following 63 Properties: 58 multifamily residential Properties
containing 12,267 apartment units, two office buildings, one of which houses
the Company's headquarters, with approximately 62,000 square feet and three
retail properties with approximately 236,000 square feet. The Properties are
located in Northern California (the San Francisco bay area), Southern
California and the Pacific Northwest (the Seattle, Washington and Portland,
Oregon metropolitan areas). The Company's multifamily Properties accounted for
approximately 97% of the Company's revenues for the year ended December 31,
1998. The 58 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, 1998 of approximately 96%. As of December 31,
1998, the two office buildings had an occupancy rate (based on leased and
occupied square footage) of 100% and the three retail centers had an occupancy
rate of 98%. With respect to stabilized multifamily properties with sufficient
operating history, occupancy figures are based on Financial Occupancy. With
respect to commercial properties or properties which have not yet stabilized
or have insufficient operating history, occupancy figures are based on
"Physical Occupancy" which refers to the percentage resulting from dividing
leased and occupied square footage by rentable square footage.
For the year ended December 31, 1998, 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.
Multifamily Residential Properties
These Properties are generally suburban garden apartments and townhomes
comprising multiple clusters of two- and three-story buildings situated on
three to fifteen acres of land. The multifamily properties have on average 211
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 the multifamily Properties are designed for and marketed to people
in white-collar or technical professions. The Company selects, trains and
supervises a full team of on-site service and maintenance personnel. The
Company believes that its customer-service approach enhances its ability to
retain tenants and that its multifamily Properties were built well and have
been maintained well since acquisition.
Office Buildings
The Company's corporate headquarters are located in a two-story office
building with approximately 17,400 square feet located at 925 East Meadow
Drive, Palo Alto, California. The Company acquired this property in 1997 and
relocated its corporate headquarters to approximately 15,400 square feet of
this building in March 1998. The remaining 2,000 square feet is leased to an
unrelated third party tenant.
The Company also owns a prepaid ground leasehold interest in its office
building at 777 California Avenue in the Stanford Research Park in Palo Alto,
California. This building has approximately 45,000 rentable square feet of
space and is a multi-tenant, one-story office building. The Marcus & Millichap
Company (an affiliate of Mr. Marcus, the Company's chairman) occupies
approximately 23,000 square feet and the remaining two tenants occupy
approximately 22,000 square feet. 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 the owner in
2054.
22
<PAGE>
The following tables describe the Company's Properties as of December 31,
1998. The first table describes the Company's multifamily residential
Properties and the second table describes the Company'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
Bristol Commons(3)...... Sunnyvale, CA 188 142,668 1989 1995 98%
Eastridge............... San Ramon, CA 188 174,104 1988 1996 97%
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 98%
Plumtree................ Santa Clara, CA 140 113,260 1975 1994 97%
The Shores(3)........... San Ramon, CA 348 275,888 1988 1995 97%
Stevenson Place......... Fremont, CA 200 146,296 1971 1982 95%
Summerhill Commons...... Newark, CA 184 139,012 1987 1987 97%
Summerhill Park......... Sunnyvale, CA 100 78,584 1988 1988 97%
Treetops(3)............. Fremont, CA 172 131,270 1978 1996 98%
Twin Creeks............. San Ramon, CA 44 51,700 1985 1997 96%
Westwood(3)............. Cupertino, CA 116 135,288 1963 1998 92%
Wimbledon Woods......... Hayward, CA 560 462,400 1975 1998 97%
Windsor Ridge........... Sunnyvale, CA 216 161,892 1989 1989 96%
------ ---------- ---
3,270 2,711,936 97%
Pacific Northwest
Seattle, Washington
Metropolitan Area
Anchor Village(5)....... Mukilteo, WA 301 245,928 1981 1997 94%
Bridle Trails(3)........ Kirkland, WA 92 73,448 1986 1997 98%
Brighton Ridge.......... Renton, WA 264 201,300 1986 1996 94%
Castle Creek............ Newcastle, WA 216 191,935 1997 1997 92%(11)
Emerald Ridge........... Bellevue, WA 180 144,036 1987 1994 98%
Evergreen Heights....... Kirkland, WA 200 188,340 1990 1997 95%
Foothill Commons(3)..... Bellevue, WA 360 288,317 1978 1990 95%
Inglenook Court......... Bothell, WA 224 183,624 1985 1994 96%
Laurels at Mill Creek... Mill Creek, WA 164 134,360 1981 1996 96%
Maple Leaf(3)........... Seattle, WA 48 35,584 1986 1997 96%
The Palisades (3)....... Bellevue, WA 192 159,792 1977 1990 97%
Sammamish View.......... Bellevue, WA 153 133,590 1986 1994 96%
Spring Lake(3).......... Seattle, WA 69 42,325 1986 1997 97%
Stonehedge Village(3)... Bothell, WA 196 214,872 1986 1997 91%
Wandering Creek......... Kent, WA 156 124,366 1986 1995 92%
Wharfside Pointe........ Seattle, WA 142 119,290 1990 1994 97%
Woodland Commons(3)..... Bellevue, WA 236 172,316 1978 1990 95%
Pacific Northwest
Portland, Oregon
Metropolitan Area
Jackson School
Village(8)............. Hillsboro, OR 200 196,896 1996 1996 84%
Landmark................ Hillsboro, OR 285 282,934 1990 1996 93%
Meadows at Cascade
Park................... Vancouver, WA 198 199,377 1989 1997 91%
Village at Cascade
Park................... Vancouver, WA 192 178,144 1989 1997 88%
------ ---------- ---
4,068 3,510,774 94%
Southern California
The Bluffs II(6)........ San Diego, CA 224 126,744 1974 1997 98%
Bunker Hill(3).......... Los Angeles, CA 456 346,672 1968 1998 97%
Camarillo Oaks(3)....... Camarillo, CA 564 459,072 1985 1996 97%
Casa del Mar............ Pasadena, CA 96 61,308 1972 1997 97%
Casa Mango(6)........... Del Mar, CA 96 88,112 1981 1997 97%
Cochran Apartments...... Los Angeles, CA 58 51,468 1989 1998 96%
Highridge(5)............ Rancho Palos, CA 255 290,250 1972 1997 95%
Huntington Breakers(3).. Huntington Beach, CA 342 241,763 1984 1997 97%
Kings Road.............. Los Angeles, CA 196 132,112 1979 1997 97%
Meadowood(3)............ Simi Valley, CA 320 264,568 1986 1996 97%
Mirabella............... Newbury Park, CA 608 521,968 1973 1998 92%
Park Place.............. Los Angeles, CA 60 48,000 1988 1997 96%
Pathways(7)............. Long Beach, CA 296 197,720 1975 1991 96%
Riverfront(6)........... San Diego, CA 229 231,006 1990 1997 97%
Tara Village............ Tarzana, CA 168 173,600 1972 1997 97%
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 97%
Village Apartments...... Oxnard, CA 122 122,120 1974 1997 98%
Wilshire Promenade...... Fullerton, CA 128 108,470 1992 1997 97%
Windsor Court........... Los Angeles, CA 58 46,600 1988 1997 96%
Windsor Terrace......... Pasadena, CA 117 74,475 1972 1997 97%
------ ---------- ---
4,929 4,030,630 96%
------ ---------- ---
Total/Weighted Average.. 12,267 10,253,340 96%
====== ==========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Number Rentable
of Square Year Year
Property Name(1) Location Tenants Footage Built Acquired Occupancy(2)
---------------- -------- ------- -------- ----- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Office Buildings
777 California
Avenue(9).............. Palo Alto, CA 3 44,827 1988(10) 1986 100%
925 East Meadow Drive... Palo Alto, CA 2 17,404 1984 1997 100%
--- ------- ---
Total Office
Buildings.......... 5 62,231 100%
Shopping Centers
Canby Square(5)......... Canby, OR 17 102,403 1976 1990 96%
Powell Villa Center(5).. Portland, OR 14 63,645 1959 1990 98%
Garrison Square(5)...... Vancouver, WA 8 69,790 1962 1990 100%
--- ------- ---
Total Shopping
Centers............ 39 235,838 98%
--- -------
44 298,069
=== =======
</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, 1998; for the
Commercial Properties, occupancy rates are based on Physical Occupancy as
of December 31, 1998.
(3) This Property is owned by a single asset limited partnership in which the
Company has a minimum 99.0% 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 1.0% limited partnership interest in this property.
(6) The Company has an 84.0% limited partnership interest in this property.
(7) The Company has a 69.3% ownership interest in this property
(8) The Company has a 49.9% ownership interest in this property.
(9) The Company owns a ground leasehold interest in the building and the land
on which the 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.
(10) Represents a major renovation completion date.
(11) This property was in lease-up during the first three quarters of 1998.
Occupancy rate represents Financial Occupancy for the property for the
fourth quarter of 1998.
Item 3. Legal Proceedings
Neither the Company nor any of the Properties is presently subject to any
material litigation nor, to the Company's knowledge, is there any material
litigation threatened against the Company 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 the Company's financial position
results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1998, no matters were submitted to a vote of
security holders.
24
<PAGE>
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, 1998.................................. $31.750 $28.500 $29.750
September 30, 1998................................. $33.500 $26.940 $31.000
June 30, 1998...................................... $34.500 $30.190 $31.000
March 31, 1998..................................... $34.940 $33.250 $34.310
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
</TABLE>
The closing price as of March 25, 1999 was $27.00.
Holders
The approximate number of holders of record of the shares of the Company's
common stock was 16,742,616 as of March 25, 1999. This number does not include
stockholders whose shares are held in trust by other entities. The actual
number of stockholders is greater than this number of holders of record.
Return of Capital
Under provisions of the Internal Revenue Code of 1986, as amended, the
portion of cash dividend that exceeds earnings and profits is a return of
capital. The return of capital is generated due to the deduction of 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, 1998, 1997 and 1996 for tax purposes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Taxable portion.................................... 85.00% 100.00% 58.00%
Return of capital.................................. 15.00% 0.00% 42.00%
------ ------ ------
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 rate of its dividend payments. The most
significant factor that caused an increase in the 1998 return of capital
percentage over 1997 was that in 1998 the Company incurred a loss on the early
extinguishment of debt of $4,718,000 compared to $361,000 in 1997.
25
<PAGE>
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 per share of common stock:
<TABLE>
<CAPTION>
Quarter Ended 1994 1995 1996 1997 1998
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
3/31............................. N/A $0.4175 $0.4250 $0.4350 $0.4500
6/30............................. $0.0800 $0.4175 $0.4250 $0.4350 $0.5000
9/30............................. $0.4175 $0.4250 $0.4350 $0.4500 $0.5000
12/31............................. $0.4175 $0.4250 $0.4350 $0.4500 $0.5000
</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.
Dividend Reinvestment and Share Purchase Plan
The Company has adopted a dividend reinvestment and share purchase plan
designed to provide holders of Common Stock with a convenient and economical
means to reinvest all or a portion of their cash dividends in shares of Common
Stock and to acquire additional shares of Common Stock through voluntary
purchases. Boston EquiServe, which serves as the Company's transfer agent,
administers the dividend reinvestment and share purchase plan. For a copy of
the plan, contact Boston EquiServe at (800) 945-8245.
Stockholder Rights Plan
The Company's Board recently authorized the adoption of a stockholder
rights plan designed to enhance the ability of all of the Company's
Stockholders to realize the long-term value of their investment. The rights
plan is designed, among other things, to prevent a person or group from
gaining control of the Company without offering a fair price to all of the
Company's stockholders.
On October 13, 1998, the Board declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of Common Stock. Each
Right entitles the registered holder to purchase from the Company one one-
hundredth of a share of Series A Junior Participating Preferred Stock, par
value $.0001 per share, of the Company, at a price of $99.13 per one-hundredth
of a share, subject to adjustment. The description and terms of the Rights are
set forth in a Rights Agreement dated as of November 11, 1998, between the
Company and BankBoston, N.A. as Rights Agent.
Recent Sales of Unregistered Securities
In January 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 purpose 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,
26
<PAGE>
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.
In February and April 1998, the Operating Partnership sold 1,200,000 and
400,000, respectively, of its 7.875% Series B Preferred Limited Partnership
Units (the "Series B Preferred Units"), to an institutional investor in return
for a total contribution to the Operating Partnership of $80 million. The
Series B Preferred Units will become exchangeable, on a one for one basis, in
whole or in part at any time for shares of the Company's 7.875% Series B
Cumulative Redeemable Preferred Stock, par value $.0001 per share (the
"Series B Preferred Stock"). Pursuant to the terms of a registration rights
agreement, entered into in connection with this private placement, the holders
of Series B Preferred Stock will have certain rights to cause the Company to
register such shares of Series B Preferred Stock. 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. In November 1998, the Operating
Partnership sold 500,000 units of its 9.125% Series C Cumulative Redeemable
Preferred Units to an institutional investor in a private placement, at a
price of $50.00 per unit for a contribution of $25 million. The Operating
Partnership utilized the net proceeds from these sales to reduce the Company's
outstanding lines of credit balances.
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, 1998, and (ii) on a pro forma basis for the Company for
the year ended December 31, 1994. The unaudited pro forma financial and
operating information for the year ended December 31, 1994 is based on the
ownership and operation of the 23 properties owned 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").
27
<PAGE>
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>
June 13, Pro forma Jan. 1
Year ended Year ended Year ended Year ended 1994- Year ended 1994-
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, June 12
1998 1997 1996 1995 1994 1994(1) 1994
---------- ---------- ---------- ---------- -------- ---------- -------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Rental................. $119,397 $79,936 $47,780 $41,640 $19,499 $34,154 $12,742
Other property
income................ 2,645 1,464 756 702 376 633 1,794
Interest and other
income................ 3,217 3,169 2,157 1,598 538 1,206 275
-------- ------- ------- ------- ------- ------- -------
Total revenues....... 125,259 84,569 50,693 43,940 20,413 35,993 14,811
Expenses
Property operating
expenses.............. 37,933 25,826 15,505 13,604 6,452 11,414 4,267
Depreciation and
amortization.......... 21,948 13,992 8,855 8,007 4,030 7,047 2,598
Amortization of
deferred financing
costs................. 718 509 639 1,355 773 1,407 96
General and
administrative........ 3,765 2,413 1,717 1,527 457 804 306
Property and asset
management............ -- -- -- -- -- -- 974
Other expenses......... 930 138 42 288 -- -- 314
Interest............... 19,374 12,659 11,442 10,928 4,304 7,086 5,924
-------- ------- ------- ------- ------- ------- -------
Total expenses....... 84,668 55,537 38,200 35,709 16,016 27,758 14,479
-------- ------- ------- ------- ------- ------- -------
Income before gain on
sales, minority
interests, provision
for income taxes and
extraordinary item.... 40,591 29,032 12,493 8,231 4,397 8,235 332
Gain on sales of real
estate................ 9 5,114 2,477 6,013
Minority interests..... (9,554) (4,469) (2,648) (3,486) (1,131) (1,938) 87
Provision for income
taxes................. -- -- -- -- -- -- (267)
Extraordinary item--
loss on early
extinguishment of
debt.................. (4,718) (361) (3,441) (154) -- -- --
-------- ------- ------- ------- ------- ------- -------
Net Income.............. $ 26,328 $29,316 $ 8,881 $10,604 $ 3,266 $ 6,297 $ 152
======== ======= ======= ======= ======= ======= =======
Net income per share--
diluted(2)............. $ 1.36 $ 1.92 $ 1.12 $ 1.69 $ 0.52 $ 1.00 $ --
======== ======= ======= ======= ======= ======= =======
Weighted average
common stock
outstanding--diluted
(in thousands)........ 16,809 15,285 7,348 6,275 6,275 6,275 --
Cash dividend per common
share.................. $ 1.95 $ 1.77 $ 1.72 $ 1.69 $ 0.92 $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate (before
accumulated depreciation)....... $889,964 $730,987 $393,809 $284,358 $282,344
Net investment in real estate.... 875,978 702,716 354,715 244,077 248,232
Real estate under development.... 53,213 20,234 -- -- --
Total assets..................... 931,796 738,835 417,174 273,660 269,065
Total property indebtedness...... 361,515 276,597 153,205 154,524 150,019
Stockholders' equity............. 389,800 398,915 222,807 84,729 84,699
</TABLE>
<TABLE>
<CAPTION>
June 13, Pro Forma
Year ended Year ended Year ended Year ended 1994- Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1996 1995 1994 1994(1)
---------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Debt service coverage
ratio(3)............... 4.3x 4.4x 2.9x 2.6x 3.1x 3.4x
Gross operating
margin(4).............. 68% 68% 68% 67% 67% 67%
Average same-property
monthly rental rate per
apartment unit(5)(6)... $ 944 $ 852 $ 798 $ 749 $ 715 $ --
Average same-property
monthly operating
expenses per apartment
unit(5)(7)............. $ 256 $ 257 $ 248 $ 241 $ 234 $ --
Total multifamily units
(at end of period)..... 12,267 10,700 6,624 4,868 4,410 4,410
Multifamily residential
property
occupancy rate(8)...... 96% 96% 97% 97% 96% 96%
Total properties (at end
of period)............. 63 59 36 30 29 29
</TABLE>
28
<PAGE>
- --------
(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 expense,
taxes, depreciation and amortization ("EBITDA") divided by interest
expense.
(4) Gross operating margin represents rental revenues less property operating
expenses, exclusive of depreciation and amortization divided by rental
revenues.
(5) Same-property apartment units are those units that 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, exclusive of depreciation and amortization,
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.
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, 1998, 1997 and 1996. This information should be read
in conjunction with the accompanying consolidated financial statements and
notes thereto.
Substantially all the assets of the Company are held by, and substantially
all operations are conducted through, Essex Portfolio, L.P. (the "Operating
Partnership"). Essex is the sole general partner of the Operating Partnership
and as of December 31, 1998, 1997, and 1996 owned an approximate 89.9%, 89.9%
and 86.2% general partnership interest in the Operating Partnership,
respectively. The Company has elected to be treated as a real estate
investment trust (a "REIT") for federal income tax purposes.
29
<PAGE>
General Background
The Company's revenues are generated primarily from multifamily property
operations, which accounted for 97%, 96%, and 96% of the Company's revenues
for the years ended December 31, 1998, 1997, and 1996, respectively. The
Company's properties ("the Properties") are located in Northern California
(the San Francisco Bay Area), Southern California (Los Angeles, Ventura,
Orange and San Diego counties) and the Pacific Northwest (the Seattle,
Washington and Portland, Oregon metropolitan areas). Occupancy levels of the
multifamily properties in these markets have averaged over 95% for the last
five 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 conducts 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.
Since the Company's initial public offering (the "IPO") in June 1994, the
Company has acquired ownership interests in 48 multifamily residential
properties and its headquarters building, of which 11 are located in Northern
California, 21 are located in Southern California, 16 are located in the
Seattle Metropolitan Area and one is located in the Portland Metropolitan
Area. In total, these acquisitions consist of 9,498 units with total
capitalized acquisition costs of approximately $716.7 million. As part of its
active portfolio management strategy, the Company has sold, since its IPO, six
multifamily residential properties (five in Northern California and one in the
Pacific Northwest) consisting of a total of 819 units and six retail shopping
centers in the Portland, Oregon metropolitan area at an aggregate gross sales
price of approximately $71.1 million resulting in a net realized gain of
approximately $13.6 million and a deferred gain of $5.0 million.
The Company has committed approximately $204,700,000 relating to eight
development projects which are expected to contain an aggregate of 1,578
multifamily units and to be completed during 1999.
Financial occupancy is defined as the percentage resulting from dividing
actual rental income by total possible rental income. Total possible rental
income is determined by valuing occupied units at contractual rates and vacant
units at market rents. Average financial occupancy rates of the Company's
multifamily properties on a same-property basis decreased to 96.2% for the
year ended December 31, 1998 from 96.6% for the year ended December 31, 1997.
The regional breakdown of financial occupancy on a same-property basis for the
years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Northern California.............................. 96.9% 97.1%
Southern California.............................. 95.8% 95.2%
Pacific Northwest................................ 95.2% 96.4%
</TABLE>
The commercial properties were 100% occupied (based on square footage) as
of December 31, 1998 and 1997.
30
<PAGE>
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997.
Total Revenues increased by $40,690,000 or 48.1% to $125,259,000 in 1998
from $84,569,000 in 1997. The following table sets forth a breakdown of these
revenue amounts, including the revenues attributable to properties owned by
Essex for both 1998 and 1997 ("the Same Store Properties").
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
NUMBER OF ---------------- DOLLAR PERCENTAGE
PROPERTIES 1998 1997 CHANGE CHANGE
---------- -------- ------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Property revenues
Same Store Properties
Northern California.......... 11 $ 33,397 $30,627 $ 2,770 9.0%
Pacific Northwest............ 11 21,035 19,510 1,525 7.8
Southern California.......... 3 8,509 8,085 424 5.2
Commercial................... 1 2,040 1,666 374 22.4
--- -------- ------- ------- -----
Total Same Store Property
revenues.................. 26 64,981 59,888 5,093 8.5%
===
Properties acquired/disposed of
subsequent to January 1,
1997.......................... 57,061 21,512 35,549 165.3%
-------- ------- ------- -----
Total property revenues.... 122,042 81,400 40,642 49.9
Interest and other income...... 3,217 3,169 48 1.5
-------- ------- ------- -----
Total revenues............. $125,259 $84,569 $40,690 48.1%
======== ======= ======= =====
</TABLE>
As set forth in the above table, $35,549,000 of the $40,690,000 increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 1997. During this period, Essex acquired interests in 35
properties, (the "Acquisition Properties"), and disposed of two multifamily
properties and six retail shopping centers, (the "Disposition Properties").
Of the increase in total revenues, $5,093,000 is attributable to increases
in property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 8.5% to $64,981,000 in 1998
from $59,888,000 in 1997. The majority of this increase was attributable to the
11 multifamily Same Store Properties located in Northern California, the
property revenues of which increased by $2,770,000 or 9.0% to $33,397,000 in
1998 from $30,627,000 in 1997. This $2,770,000 increase is primarily
attributable to rental rate increases which were offset in part by a decrease
in average financial occupancy to 96.9% in 1998 from 97.1% in 1997. The 11
multifamily Same Store Properties located in the Pacific Northwest accounted
for the next largest contribution to this Same Store Properties revenues
increase. The property revenues of these properties increased by $1,525,000 or
7.8% to $21,035,000 in 1998 from $19,510,000 in 1997. This $1,525,000 increase
is primarily attributable to rental rate increases, which were offset in part
by a decrease in average financial occupancy to 95.2% in 1998 from 96.4% in
1997. The three multifamily Same Store Properties located in Southern
California accounted for the next largest contribution to this Same Store
Properties revenues increase. The property revenues of these properties
increased by $424,000 or 5.2% to $8,509,000 in 1998 from $8,085,000 in 1997.
This $424,000 increase is attributable to rental rate increases, and an
increase in financial occupancy to 95.8% in 1998 from 95.2% in 1997.
The increase in total revenue also included an increase of $48,000
attributable to interest and other income.
Total Expenses increased by $29,131,000 or approximately 52.5% to
$84,668,000 in 1998 from $55,537,000 in 1997. The most significant factor
contributing to this increase was the growth in the Company's multifamily
portfolio from 29 properties (6,624 units) at January 1, 1997 to 58 properties
(12,267 units) at December 31, 1998. Interest expense increased by $6,715,000
or 53.0% to $19,374,000 in 1998 from $12,659,000 in 1997.
31
<PAGE>
Such interest expense increase was primarily due to the net addition of
mortgage debt in connection with property and investment acquisitions. Property
operating expenses, exclusive of depreciation and amortization, increased by
$12,107,000 or 46.9% to $37,933,000 in 1998 from $25,826,000 in 1997. Of such
increase, $12,356,000 is attributable to properties acquired or disposed of
subsequent to January 1, 1997 which was offset by a decrease in operating
expenses for the Same Store Properties. Property operating expenses, exclusive
of depreciation and amortization, as a percentage of property revenues was
31.1% for 1998 and 31.7% for 1997. General and administrative expenses
represent the costs of the Company's various acquisition and administrative
departments as well as corporate and partnership administration and non-
operating expenses. Such expenses increased by $1,352,000 in 1998 from the 1997
amount. This increase is largely due to additional staffing requirements
resulting from the growth of the Company. General and administrative expenses
as a percentage of total revenues was 3.0% for 1998 and 2.9% for 1997.
Net income decreased by $2,988,000 to $26,328,000 in 1998 from $29,316,000
in 1997. Net income included an extraordinary loss on early extinguishment of
debt of $4,718,000 in 1998 compared to $361,000 in 1997. Net income for 1998
also included a gain on sales of real estate of $9,000 compared with $5,114,000
in 1997. The net effect of these items were offset by the net contribution of
the Acquisition Properties and an increase in net operating income from the
Same Store Properties, as offset by a decrease in net operating income
attributable to the Disposition Properties.
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 1997/1996 Same Store Properties").
<TABLE>
<CAPTION>
YEARS ENDED
NUMBER DECEMBER 31,
OF --------------- DOLLAR PERCENTAGE
PROPERTIES 1997 1996 CHANGE CHANGE
---------- ------- ------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Property revenues
1997/1996 Same Store Properties
Northern California........... 7 $19,451 $17,092 $ 2,359 13.8%
Pacific Northwest............. 9 15,737 14,720 1,017 6.9
Southern California........... 2 4,929 4,844 85 1.8
Retail/Commercial............. 4 4,048 4,046 2 0.0
--- ------- ------- ------- -----
Total 1997/1996 Same Store
Property revenues.......... 22 44,165 40,702 3,463 8.5%
===
Properties acquired/disposed of
subsequent to January 1, 1996.. 37,235 7,834 29,401 375.3%
------- ------- ------- -----
Total property revenues 81,400 48,536 32,864 67.7
Interest and other income....... 3,169 2,157 1,012 46.9
------- ------- ------- -----
Total revenues ............. $84,569 $50,693 $33,876 66.8%
======= ======= ======= =====
</TABLE>
As set forth in the above table, $29,401,000 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 37
properties, and disposed of three multifamily properties and three retail
shopping centers.
Of the increase in total revenues, $3,463,000 is attributable to the
1997/1996 Same Store Properties. Property revenues from the 1997/1996 Same
Store Properties increased by approximately 8.5% to $44,165,000 in 1997 from
$40,702,000 in 1996. The majority of this increase was attributable to the
seven multifamily 1997/1996 Same Store Properties located in Northern
California, the property revenues of which increased by $2,359,000 or 13.8% to
$19,451,000 in 1997 from $17,092,000 in 1996. This $2,359,000 increase is
primarily
32
<PAGE>
attributable to rental rate increases which were offset by a decrease in
average financial occupancy to 97.3% in 1997 from 98.2% in 1996. The nine
multifamily 1997/1996 Same Store Properties located in the Pacific Northwest
accounted for the next largest contribution to this 1997/1996 Same Store
Properties revenues increase. The property revenues of these properties
increased by $1,017,000 or 6.9% to $15,737,000 in 1997 from $14,720,000 in
1996. This $1,017,000 increase is attributable to rental rate increases as
well as an increase in average financial occupancy to 96.6% for 1997 from
95.6% in 1996.
The increase in total revenue also included an increase of $1,012,000
attributable to interest and other income. The most significant component of
this $1,012,000 increase was an increase in interest income earned on notes
receivable balances.
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 was the growth in Essex's multifamily portfolio
from 23 properties, (4,868 units) at January 1, 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 property revenues was 31.7% for 1997 and 31.9%
for 1996. General and administrative expenses represent the costs of the
Company'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
the Company. 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 property
revenues from the 1997/1996 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.
Liquidity and Capital Resources
At December 31, 1998, the Company had $2,548,000 of unrestricted cash and
cash equivalents. The Company expects to meet its short-term liquidity
requirements by using its working capital, cash generated from operations, and
amounts available under lines of credit. 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
$110,000,000 of which $10,000,000 will expire in March 1999 if not renewed. At
December 31, 1998 the Company had $35,693,000 outstanding on its lines of
credit, with interest rates ranging from 6.4% to 8.5% throughout the year. The
Company expects to meet its long-term liquidity requirements relating to
property acquisitions and development (beyond the next 12 months) by using
working capital, amounts available on lines of credit, net proceeds from
public and private debt and equity issuances, and proceeds from the
disposition of properties that may be sold from time to time. There can,
however, be no assurance that the Company will have access to the debt and
equity markets in a timely fashion to meet long-term liquidity requirements or
that future working capital and borrowings under the lines of credit will be
available, or if available, will be sufficient to meet the Company's
requirements or that the Company will be able to dispose of properties in a
timely manner and under terms and conditions that the Company deems
acceptable.
The Company's total cash balances decreased $1,734,000 from $4,282,000 as
of December 31, 1997 to $2,548,000 as of December 31, 1998. The Company
generated $59,034,000 in cash from operations, used $179,901,000 of cash in
investing activities and obtained $119,133,000 of cash from financing
activities. Of the
33
<PAGE>
$179,901,000 net cash used in investing activities, $163,019,000 was used to
purchase and upgrade rental properties, $33,256,000 was used to fund real
estate under development and $9,439,000 was used to fund the Company's
restricted cash; these expenditures were offset by $26,354,000 of proceeds
received from the disposition of one multifamily and three retail properties.
The $119,133,000 net cash provided by financing activities was primarily a
result of $349,540,000 of proceeds from mortgages and other notes payable and
lines of credit, $102,150,000 net proceeds from preferred units sales, as
offset by $283,065,000 of repayments of mortgages and other notes payable and
lines of credit, and $43,212,000 of dividends/distributions paid.
As of December 31, 1998, Essex's outstanding debt was $361,515,000. Such
indebtedness consisted of $267,002,000 in fixed rate debt, $35,693,000 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, 1998, 33 of the Company's 58 majority-owned properties
were encumbered by debt. The agreements underlying these encumbrances contain
customary restrictive covenants which the Company believes do not have a
material adverse effect on its operations. As of December 31, 1998, the
Company is in compliance with such covenants. Also, of the Company's 33
properties encumbered by debt, 18 are secured by deeds of trust relating
solely to those properties. With respect to the remaining 15 properties, three
cross-collateralized mortgages are secured by eight properties, three
properties, and three properties, respectively. The Company's $10 million line
of credit is secured by one property.
Non-revenue generating capital expenditures are improvements and upgrades
that extend the useful life of the asset and are not related to preparing a
multifamily property unit to be rented to a tenant. For the year ended
December 31, 1998, non-revenue generating capital expenditures totaled
approximately $3,498,000 or an annualized $311 per weighted average occupancy
unit. The Company expects to incur approximately $315 per weighted average
occupancy unit in non-revenue generating capital expenditures for the year
ended December 31, 1999. These expenditures do not include the improvements
required in connection with the origination of mortgage loans, expenditures
for acquisition properties renovations and improvements which are expected to
generate additional revenues, and renovation expenditures required pursuant to
tax-exempt bond financings. The Company expects that cash from operations
and/or its lines of credit will fund such expenditures. However, there can be
no assurance that the actual expenditures incurred during 1999 and/or the
funding thereof will not be significantly different than the Company's current
expectations.
The Company is developing eight multifamily residential projects, which are
anticipated to combine an aggregate of 1,578 multifamily units. The Company
expects that such projects will be substantially completed during 1999. Such
projects involve certain risks inherent in real estate development. As of
December 31, 1998, the Company's remaining commitment is approximately
$95,130,000 relating to these projects. The Company expects to fund such
commitments with a combination of its working capital, amounts available on
its lines of credit, net proceeds from public and private equity and debt
issuances, and proceeds from the disposition of properties, which may be sold
from time to time.
The Company 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 February 1998 and April 1998, Essex Portfolio, L.P. (the "Operating
Partnership") sold 1,200,000 and 400,000 units of its 7.875% Series B
Cumulative Redeemable Preferred Units ("Perpetual Preferred Units"),
respectively, to an institutional investor in a private placement at a price
of $50.00 per unit. The net proceeds from this offering were $58,275,000 and
$19,500,000, respectively. Such units are convertible into non-voting
preferred stock of the Company after ten years from the completion of the sale
or earlier under certain circumstances. The Operating Partnership utilized the
proceeds of this transaction to fund the Company's acquisition of multifamily
properties, to reduce outstanding indebtedness and for general corporate
purposes.
34
<PAGE>
In the second quarter of 1998, the Company and the Operating Partnership
filed a registration statement (the "1998 Shelf Registration Statement") with
the Securities and Exchange Commission (the "SEC") to register $300,000,000 of
equity securities of the Company and $250,000,000 of debt securities of the
Operating Partnership. The 1998 Shelf Registration Statement was declared
effective by the SEC in July 1998. Prior to the filing of the 1998 Shelf
Registration Statement, Essex had approximately $42,000,000 of capacity
remaining on a previously filed registration statement that registered equity
securities of the Company. Thus, combined with the prior Shelf Registration
Statement and the 1998 Shelf Registration Statement, the Company has the
capacity to issue up to $342,000,000 of equity securities and the Operating
Partnership has the capacity to issue up to $250,000,000 of debt securities.
In November 1998, the Operating Partnership sold 500,000 units of its
9.125% Series C Cumulative Redeemable Preferred Units to an institutional
investor in a private placement, at a price of $50.00 per unit. The net
proceeds from this placement were $24,375,000. The Operating Partnership
utilized the net proceeds from this placement to reduce balances on the
Company's outstanding lines of credit.
At December 31, 1998 the Company has outstanding 1,600,000 shares of 8.75%
Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock")
which was sold to Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook
Real Estate Co-Investment Partnership, L.P. (collectively "Tiger/Westbrook").
In January 1999, Tiger/Westbrook exercised its option to convert 87,500 shares
of the Convertible Preferred Stock into 100,000 shares of common stock. The
Company has filed a registration statement covering Tiger/Westbrook's resale
of such 100,000 shares of common stock and the registration statement was
declared effective by the Securities and Exchange Commission in December 1998.
Year 2000 Compliance
The Company's State of Readiness. The Company utilizes a number of computer
software programs and operating systems across its entire organization,
including applications used in financial business systems and various
administrative functions. To the extent that the Company's software
applications contains source code that are unable to appropriately interpret
the upcoming calendar year "2000" and beyond, some level of modification or
replacement of such applications will be necessary. The Company currently
believes that its "Year 2000" issues are limited to information technology
("IT") systems (i.e., software programs and computer operating systems). There
are no significant non-IT systems (i.e., devices used to control, monitor or
assist the operation of equipment and machinery), the failure of which would
have a material effect on the Company's operations. The Company has also
completed its assessment of the Year 2000 compliance issues presented by its
IT systems.
Employing a team made up of internal personnel, the Company has completed
its identification of IT systems that are not yet Year 2000 compliant and has
commenced modification or replacement of such systems as necessary, which is
expected to be completed by the fourth quarter of 1999. The Company has
communicated with third parties with whom it does significant business, such
as financial institutions and vendors to determine their readiness for Year
2000 compliance. Based on position statements received by the Company, it
appears that the Year 2000 compliance effort being made by third parties with
which the Company does significant business is sufficient to avoid a material
adverse impact on the Company's liquidity or ongoing results of operations.
However, no assurance can be given regarding the cost of their failure to
comply. The Company is in the process of developing contingency plans should
third parties with which the Company does significant business fail to be Year
2000 compliant.
Costs of Addressing the Company's Year 2000 issues. Given the information
known at this time about the Company's systems that are non-compliant, coupled
with the Company's ongoing, normal course-of-business efforts to upgrade or
replace critical systems, as necessary, management does not expect Year 2000
compliance costs to have any material adverse impact on the Company's
liquidity or ongoing results of operations. As of December 31, 1998, no
compliance costs have been incurred by the Company. The costs of any future
assessment and remediation will be paid out of the Company's general and
administrative expenses.
35
<PAGE>
Risks of the Company's Year 2000 issues. In light of the Company's
assessment and remediation efforts to date, and the planned, normal course-of-
business upgrades planned by the Company and its vendors, management believes
that any residual Year 2000 risk is limited to non-critical business
applications and support hardware. No assurance can be given, however, that
all of the Company's systems will be year 2000 compliant or that compliance
will not have a material adverse effect on the Company's future liquidity or
results of operations or ability to service debt.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations ("Funds from
Operations") an appropriate measure of performance of an equity REIT.
Generally, Funds from Operations adjusts the net income of equity REITS for
non-cash charges such as depreciation and amortization of rental properties
and non-recurring gains or losses. Management generally considers Funds from
Operations to be a useful financial performance measurement of an equity REIT
because, together with net income and cash flows, Funds from Operations
provides investors with an additional basis to evaluate the performance of a
REIT to incur and service debt and to fund acquisitions and other capital
expenditures. Funds from Operations does not represent net income or cash
flows from operations as defined by generally accepted accounting principles
(GAAP) and is not intended to indicate whether cash flows will be sufficient
to fund cash needs. It should not be considered as an alternative to net
income as an indicator of the REIT's operating performance or to cash flows as
a measure of liquidity. Funds from Operations does not measure whether cash
flow is sufficient to fund all cash needs including principal amortization,
capital improvements and distributions to shareholders. Funds from Operations
also does not represent cash flows generated from operating, investing or
financing activities as defined under GAAP. Further, Funds from Operations as
disclosed by other REITs may not be comparable to the Company's calculation of
Funds from Operations. The following table sets forth Essex's calculation of
Funds from Operations for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE
YEAR FOR THE QUARTER ENDED
ENDED --------------------------------------------------
12/31/98 12/31/98 9/30/98 6/30/98 3/31/98
-------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income before gain on
sale of real estate,
minority interests and
extraordinary item..... $40,591,000 $10,933,000 $ 9,998,000 $10,005,000 $ 9,655,000
Adjustments:
Depreciation and
amortization......... 21,948,000 6,072,000 5,575,000 5,632,000 4,669,000
Adjustments for
unconsolidated joint
ventures............. 1,393,000 366,000 365,000 366,000 296,000
Non-recurring items:
Provision for
litigation loss.... 930,000 -- 930,000 -- --
Minority interests(1)... (6,367,000) (2,014,000) (1,754,000) (1,692,000) (907,000)
----------- ----------- ----------- ----------- -----------
Funds from Operations... $58,495,000 $15,357,000 $15,114,000 $14,311,000 $13,713,000
=========== =========== =========== =========== ===========
Weighted average number
shares outstanding
diluted(1)............. 20,510,988 20,522,910 20,523,466 20,549,875 20,550,845
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
FOR THE FOR THE QUARTER ENDED
YEAR ENDED -------------------------------------------------
12/31/97 12/31/97 9/30/97 6/30/97 3/31/97
---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Income before gain on
sale of real estate,
minority interests and
extraordinary item..... $29,032,000 $ 8,483,000 $ 7,899,000 $ 6,907,000 $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 --
Non-recurring items:
Loss from hedge
termination........ 138,000 138,000 -- -- --
Minority interests(1)... (603,000) (162,000) (161,000) (142,000) (138,000)
----------- ----------- ----------- ----------- ----------
Funds from operations... $43,500,000 $12,839,000 $11,535,000 $10,433,000 $8,693,000
=========== =========== =========== =========== ==========
Weighted average number
shares outstanding
diluted(1)............. 17,152,990 19,435,950 17,860,753 16,624,396 14,557,019
<CAPTION>
FOR THE FOR THE QUARTER ENDED
YEAR ENDED -------------------------------------------------
12/31/96 12/31/96 9/30/96 6/30/96 3/31/96
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Income before gain on
sale of real estate,
minority interests and
extraordinary item..... $12,493,000 $ 4,550,000 $ 3,305,000 $ 2,440,000 $2,198,000
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:
Loss from hedge
termination........ 42,000 -- 3,000 18,000 21,000
Minority interests(1)... (560,000) (144,000) (144,000) (132,000) (140,000)
----------- ----------- ----------- ----------- ----------
Funds from operations... $21,338,000 $ 6,877,000 $ 5,570,000 $ 4,503,000 $4,388,000
=========== =========== =========== =========== ==========
Weighted average number
shares outstanding
diluted(1)............. 9,533,269 11,942,857 9,878,075 8,130,000 8,130,000
</TABLE>
- --------
(1) Assumes conversion of all outstanding operating partnership interests in
the Operating Partnership into shares of Essex's common stock. Minority
interests have been adjusted to reflect such conversion. Also assumes
conversion of shares of convertible preferred stock into shares of Essex's
common stock.
37
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result of
its line of credit and long-term debt used to maintain liquidity and fund
capital expenditures and expansion of the Company's real estate investment
portfolio and operations. The Company's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall borrowing costs. To achieve its objectives the
Company borrows primarily at fixed rates and may enter into derivative
financial instruments such as interest rate swaps, caps and treasury locks in
order to mitigate its interest rate risk on a related financial instrument.
The Company does not enter into derivative or interest rate transactions for
speculative purposes.
The Company's interest rate risk is monitored using a variety of
techniques. The table below presents the principal amounts and weighted
average interest rates by year of expected maturity to evaluate the expected
cash flows and sensitivity to interest rate changes. Management of the Company
believes that principal amounts of the Company's mortgage notes payable and
line of credit approximate fair value as of December 31, 1998 as interest
rates are consistent with yields currently available to the Company for
similar instruments.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL
------ ------ ----- ------ ------ ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt......... $2,353 20,395 2,429 24,472 30,083 187,270 $267,002
Average interest rate... 7.06% 7.06% 6.56% 6.56% 5.71% 5.71%
Variable rate LIBOR
debt................... $ -- 35,693 -- -- -- 58,820(1) $ 94,513
Average interest rate... -- 6.20% -- -- -- 5.50%
</TABLE>
- --------
(1) $29,220,000 is capped at 7.2%
The Company has a LIBOR based swap contract for a notional amount of
$12,298,000 fixing the one month LIBOR at 6.14% which limits interest rate
exposure on borrowings under the LIBOR based line of credits and matures in
2002. The fair value of this contract as of December 31, 1998 is approximately
$392,000. The Company also has four forward treasury contracts for an
aggregate notional amount of $60,000,000, locking the 10 year treasury rate at
between 6.14%-6.26% which limit interest rate exposure on certain future debt
financing and will be settled in 2000. The fair value of these contracts as of
December 31, 1998 is approximately $6,016,000. The fair value represents the
estimated payments that would be made to terminate the agreement at December
31, 1998.
As the table incorporates only those exposures that exist as of December
31, 1998, it does not consider those exposures or positions that could arise
after that date. Moreover, because firm commitments are not presented in the
table above, the information presented therein has limited predictive value.
As a result, the Company's ultimate realized gain or loss with respect to
interest rate fluctuations will depend on the exposures that arise during the
period, the Company's hedging strategies at that time, and interest rates.
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.
38
<PAGE>
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 27, 1999.
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 27, 1999.
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 27, 1999.
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 27, 1999.
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(A) Financial Statements and Report of KPMG LLP, independent auditors
<TABLE>
<CAPTION>
Page
----
<S> <C>
(1) Independent Auditors' Report.................................... F-1
(2) Consolidated Financial Statements
Balance Sheets as of December 31, 1998 and December 31, 1997...... F-2
Statements of Operations for the years ended December 31, 1998,
1997 and 1996.................................................... F-3
Statements of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996.......................................... F-4
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.................................................... F-5
Notes to Consolidated Financial Statements........................ F-6
(3) Financial Statement Schedule: Real Estate and Accumulated
Depreciation for the year ended December 31, 1998............... F-23
</TABLE>
(B) Reports on Form 8-K
On November 11, 1998, the Company filed a Current Report on Form 8-K
regarding the adoption of its Shareholder Rights Plan.
(C) Exhibits
The Exhibit Index attached hereto is incorporated into this Item
14(c) by reference.
40
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ESSEX PROPERTY TRUST, INC.
(Registrant)
/s/ Michael J. Schall
Dated: March 31, 1999 By: _________________________________
Michael J. Schall
Executive Vice President and
Chief Financial Officer and
Director
(Principal Financial Officer)
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>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ George M. Marcus Chairman of the Board March 31, 1999
____________________________________
George M. Marcus
/s/ Keith R. Guericke President and Chief March 31, 1999
____________________________________ Executive Officer and Vice
Keith R. Guericke Chairman
/s/ Michael J. Schall Chief Financial Officer March 31, 1999
____________________________________ Executive, Vice President
Michael J. Schall and Director
/s/ Mark J. Mikl Controller (Principal March 31, 1999
____________________________________ Accounting Officer)
Mark J. Mikl
/s/ William A. Millichap Director March 31, 1999
____________________________________
William A. Millichap
/s/ Gary P. Martin Director March 31, 1999
____________________________________
Gary P. Martin
/s/ Robert E. Larson Director March 31, 1999
____________________________________
Robert E. Larson
/s/ Thomas E. Randlett Director March 31, 1999
____________________________________
Thomas E. Randlett
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Anthony Downs Director March 31, 1999
____________________________________
Anthony Downs
/s/ David Brady Director March 31, 1999
____________________________________
David Brady
/s/ Issie N. Rabinovitch Director March 31, 1999
____________________________________
Issie N. Rabinovitch
/s/ Willard H. Smith Director March 31, 1999
____________________________________
Willard H. Smith
/s/ Gregory J. Hartman Director March 31, 1999
____________________________________
Gregory J. Hartman
</TABLE>
42
<PAGE>
Independent Auditors' Report
The Board of Directors
Essex Property Trust, Inc.:
We have audited the accompanying consolidated balance sheets of Essex
Property Trust, Inc. and subsidiaries as of December 31, 1998 and 1997, 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,
1998. 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, 1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, 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 LLP
San Francisco, California
January 30, 1999
F-1
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
------
Real estate:
Rental properties:
Land and land improvements............................. $219,115 $182,416
Buildings and improvements............................. 670,849 548,571
-------- --------
889,964 730,987
Less accumulated depreciation............................ (77,789) (58,040)
-------- --------
812,175 672,947
Investments.............................................. 10,590 9,535
Real estate under development............................ 53,213 20,234
-------- --------
875,978 702,716
Cash and cash equivalents.................................. 2,548 4,282
Restricted cash............................................ 15,532 6,093
Notes and other related party receivables.................. 10,450 9,264
Notes and other receivables................................ 18,809 8,602
Prepaid expenses and other assets.......................... 3,444 3,838
Deferred charges, net...................................... 5,035 4,040
-------- --------
$931,796 $738,835
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Mortgage notes payable..................................... $325,822 $248,997
Lines of credit............................................ 35,693 27,600
Accounts payable and accrued liabilities................... 28,601 21,337
Deferred gain.............................................. 5,002 --
Dividends payable.......................................... 11,145 9,189
Other liabilities.......................................... 5,301 4,208
-------- --------
Total liabilities.................................... 411,564 311,331
Minority interests......................................... 130,432 28,589
Commitments and contingencies
Stockholders' equity:
8.75% Convertible preferred stock, series 1996A: $.0001
par value 1,600,000 authorized; and 1,600,000 issued and
outstanding in 1998 and 1997............................ 1 1
Common stock, $.0001 par value, 665,900,000 shares
authorized; 16,640,616 and 16,614,687 shares issued and
outstanding in 1998 and 1997, respectively.............. 2 2
7.875% Series B cumulative redeemable preferred stock:
$.0001 par value, 2,000,000 shares authorized and no
shares issued and outstanding in 1998................... -- --
9.125% Series C cumulative redeemable preferred stock:
$.0001 par value, 500,000 shares authorized and no
shares outstanding in 1998.............................. -- --
Excess stock, $.0001 par value per share, 330,000,000
shares authorized, no shares issued or outstanding...... -- --
Additional paid-in capital............................... 431,278 430,804
Accumulated deficit...................................... (41,481) (31,892)
-------- --------
Total stockholders' equity........................... 389,800 398,915
-------- --------
$931,796 $738,835
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Rental.................................... $ 119,397 $ 79,936 $ 47,780
Other property income..................... 2,645 1,464 756
---------- ---------- ---------
Total property revenues............... 122,042 81,400 48,536
Interest and other income................. 3,217 3,169 2,157
---------- ---------- ---------
Total revenues........................ 125,259 84,569 50,693
---------- ---------- ---------
Expenses:
Property operating expenses:
Maintenance and repairs................. 8,972 6,814 4,341
Real estate taxes....................... 9,109 6,340 3,790
Utilities............................... 7,809 5,074 3,175
Administrative.......................... 9,228 5,514 2,911
Advertising............................. 1,742 1,225 653
Insurance............................... 1,073 859 635
Depreciation and amortization........... 21,948 13,992 8,855
---------- ---------- ---------
59,881 39,818 24,360
Interest.................................... 19,374 12,659 11,442
Amortization of deferred financing costs.... 718 509 639
General and administrative.................. 3,765 2,413 1,717
Loss from hedge termination................. -- 138 42
Provision for litigation loss............... 930 -- --
---------- ---------- ---------
Total expenses........................ 84,668 55,537 38,200
---------- ---------- ---------
Income before gain on sales of real
estate, minority interests and
extraordinary item................... 40,591 29,032 12,493
Gain on sales of real estate................ 9 5,114 2,477
Minority interests.......................... (9,554) (4,469) (2,648)
---------- ---------- ---------
Income before extraordinary item...... 31,046 29,677 12,322
Extraordinary loss on early extinguishment
of debt.................................... (4,718) (361) (3,441)
---------- ---------- ---------
Net income............................ 26,328 29,316 8,881
Preferred stock dividends................... (3,500) (2,681) (635)
---------- ---------- ---------
Net income available to common
stockholders......................... $ 22,828 $ 26,635 $ 8,246
========== ========== =========
Per share data:
Basic:
Income before extraordinary item
available to common stockholders....... $ 1.65 $ 1.98 $ 1.61
Extraordinary item--debt
extinguishment......................... (0.28) (0.02) (0.48)
---------- ---------- ---------
Net income............................ $ 1.37 $ 1.96 $ 1.13
========== ========== =========
Weighted average number of shares
outstanding during the period.......... 16,630,954 13,644,906 7,283,124
========== ========== =========
Diluted:
Income before extraordinary item
available to common stockholders....... $ 1.64 $ 1.94 $ 1.59
Extraordinary item debt extinguishment.. (0.28) (0.02) (0.47)
---------- ---------- ---------
Net income............................ $ 1.36 $ 1.92 $ 1.12
========== ========== =========
Weighted average number of shares
outstanding during the period.......... 16,808,943 15,285,288 7,347,528
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(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,
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 1 154,013 -- 154,012
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
Shares issued from
Dividend Reinvestment
Plan................... -- -- 2 -- 10 -- 10
Net proceeds from
options
exercised.............. -- -- 24 -- 464 -- 464
Net income.............. -- -- -- -- -- 26,328 26,328
Dividends declared...... -- -- -- -- -- (35,917) (35,917)
----- --- ------ --- --------- -------- --------
Balances at December 31,
1998................... 1,600 $ 1 16,641 $ 2 $ 431,278 $(41,481) $389,800
===== === ====== === ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 26,328 $ 29,316 $ 8,881
Minority interests........................... 9,554 4,469 2,047
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of real estate................ (9) (5,114) (2,477)
Equity in (income) loss of limited
partnerships.............................. (276) 209 (546)
Loss on early extinguishment of debt....... 4,718 361 3,441
Loss from hedge termination................ -- 138 42
Depreciation and amortization.............. 21,948 13,992 8,855
Amortization of deferred financing costs... 718 509 639
Changes in operating assets and
liabilities:
Other receivables........................ (10,207) (1,377) (163)
Prepaid expenses and other assets........ 336 (158) (2,110)
Accounts payable and accrued
liabilities............................. 4,831 2,738 842
Other liabilities........................ 1,093 1,815 684
--------- --------- ---------
Net cash provided by operating
activities............................. 59,034 46,898 20,135
--------- --------- ---------
Cash flows from investing activities:
Additions to rental properties............... (163,019) (247,886) (101,429)
Increase in restricted cash.................. (9,439) (1,899) (4,194)
Issuance of notes receivable................. (610) (1,932) (3,909)
Repayments of notes receivable............... -- -- 6,327
Additions to related party notes and other
receivables................................. (5,616) (28,761) --
Repayments of related party notes and other
receivables................................. 4,430 21,859 --
Distributions from investments in
corporations and limited partnerships....... 1,255 620 665
Dispositions of real estate.................. 26,354 15,470 13,350
Additions to real estate under development... (33,256) (27,422) --
--------- --------- ---------
Net cash used in investing activities... (179,901) (269,951) (89,190)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from mortgage and other notes
payable and lines of credit................. 349,540 204,931 91,253
Repayment of mortgage and other notes payable
and lines of credit......................... (283,065) (164,580) (110,305)
Additions to deferred charges................ (2,345) (752) (2,530)
Net proceeds from preferred unit sales....... 102,150 -- --
Net proceeds from stock offerings............ -- 174,012 143,969
Payment of offering related costs............ (323) (711) 1,140
Net proceeds from stock options exercised and
shares issued through dividend reinvestment
plan........................................ 474 686 68
Net payments made in connection with costs
related to the early extinguishment of
debt........................................ (4,086) -- (620)
Distributions to minority interest/partners.. (8,138) (3,910) (3,189)
Dividends paid............................... (35,074) (25,046) (12,009)
--------- --------- ---------
Net cash provided by financing
activities............................. 119,133 184,630 107,777
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. $ (1,734) $ (38,423) $ 38,722
Cash and cash equivalents at beginning of
period....................................... 4,282 42,705 3,983
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 2,548 $ 4,282 $ 42,705
========= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest, net of amounts
capitalized................................. $ 18,947 $ 12,384 $ 11,575
========= ========= =========
Supplemental disclosure of non-cash investing
and financing activities:
Mortgage note payable assumed in connection
with purchase of real estate................ $ 18,443 $ 83,041 $ 17,733
========= ========= =========
Dividends payable............................ $ 11,145 $ 9,189 $ 6,286
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(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 Company has a 89.9% general partner interest and the limited partners
own a 10.1% interest in the Operating Partnership at December 31, 1998. The
limited partners may convert their 1,873,473 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 shares of common stock for such
conversions. These conversion rights may be exercised by the limited partners
at any time through 2024.
The Company operates and has ownership interests in 58 multifamily
properties (containing 12,267 units) and five commercial properties (with
approximately 290,000 square feet) (collectively, "the Properties"). The
Properties are located in Northern California (San Francisco Bay Area),
Southern California (Los Angeles, Ventura, Orange and San Diego counties), and
the Pacific Northwest (Seattle, Washington and Portland, Oregon metropolitan
areas).
All significant intercompany balances and transactions have been eliminated
in the consolidated financial statements.
(2) Summary of Significant Accounting Policies
(a) Real Estate Rental Properties
Rental properties are recorded at cost less accumulated depreciation.
Depreciation on rental properties has been provided over estimated useful
lives ranging from 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.
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
held for investment 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, 1998. No properties are
classified as held for sale as of December 31, 1998.
(b) Real Estate Investments
The Company consolidates or accounts for its investments in joint ventures
and corporations under the equity method of accounting based on its ownership
interests in those entities.
F-6
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
(c) Revenues
For multifamily properties, rental revenue is reported on the accrual basis
of accounting. For commercial 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.
(d) 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, 1998, 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, 1998, 1997 and 1996, was: $26,625, $23,493
and $7,141, 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, 1998, 1997 and 1996 for tax purposes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Taxable portion.............................................. 85% 100% 58%
Return of capital............................................ 15 -- 42
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
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.
(e) 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 original 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.
(f) 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.
F-7
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
(g) Interest
The Company capitalized $3,494, $1,276 and $281 of interest related to the
development of real estate during 1998, 1997 and 1996, respectively.
(h) 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.
(i) Stock Based Compensation
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock based compensation plans.
(j) Cash Equivalents and Restricted Cash
Highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents. Restricted cash relates to
reserve requirements in connection with the Company's tax exempt variable rate
bond financings and a guarantee the Company has made on a first mortgage loan
held by one of its joint venture partnerships.
(k) Reclassifications
Certain reclassifications have been made to the 1997 and 1996 balances to
conform with the 1998 presentation.
(l) New Accounting Pronouncements
In June 1998, the FASB issued Financial Accounting Statement No. 133 (SFAS
133), Accounting for Derivative Instruments and Hedging Activities. The
Company will adopt SFAS 133 for interim periods beginning in 2000, the
effective date of SFAS 133. Management believes that the adoption of these
statements will not have a material impact on the Company's financial position
or results of operations.
(3) Equity Transactions
In February and April 1998, the Operating Partnership sold 1,200,000 and
400,000 units, respectively, 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 from these offerings were $58,275
and $19,500, respectively. In November 1998, the Operating Partnership sold
500,000 units of its 9.125% Series C Cumulative Redeemable Preferred Units to
an institutional investor in a private placement, at a price of $50.00 per
unit. The net proceeds from this offering were $24,375. Preferred units issued
in connection with the above transactions are included in minority interests
in the Company's consolidated balance sheet as of December 31, 1998.
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
from these transactions were $58,119, $46,080 and $49,814, respectively.
F-8
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
On June 20, 1996, the Company entered into an agreement to sell up to
$40,000 of the 8.75% Convertible Preferred Stock, Series 1996A (the
Convertible Preferred Stock) at $25.00 per share to Tiger/Westbrook Real
Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment Partnership,
L.P. (collectively, Tiger/Westbrook). In accordance with the agreement, on
July 1, 1996 and September 27, 1996, Tiger/Westbrook purchased 340,000 and
460,000 shares, respectively, of Convertible Preferred Stock for an aggregate
purchase price of $8,500 and $11,500, respectively. 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 (on an as-converted basis) paid with respect to the Common Stock
plus, in both cases, any accumulated but unpaid dividends on the Convertible
Preferred Stock. As of December 31, 1998, all of the 1.6 million authorized
shares of Convertible Preferred Stock is convertible into Common Stock at the
option of the holder. 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>
1998 1997 1996
-------------------------- -------------------------- --------------------------
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..... $31,046 $29,677 $12,322
Less: dividends on
preferred stock........ (3,500) (2,681) (635)
------- ------- -------
Basic:
Income available to
common stockholders... 27,546 16,631 $1.65 26,996 13,645 $1.98 11,687 7,283 $1.61
===== ===== =====
Effect of Dilutive
Securities:
Convertible limited
partnership units..... -- -- (1) -- -- (1) -- -- (1)
Convertible preferred
stock................. -- -- (1) 2,681 1,400 -- -- (1)
Stock options.......... -- 178 -- 240 -- 64
------- ------ ------- ------ ------- -----
Diluted:
Income available to
common stockholders
plus assumed
conversions........... $27,546 16,809 $1.64 $29,677 15,285 $1.94 $11,687 7,347 $1.59
======= ====== ===== ======= ====== ===== ======= ===== =====
</TABLE>
- --------
(1) Conversion not considered as effect would be anti-dilutive.
F-9
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
(5) Real Estate
(a) Rental Properties
Rental properties consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Land and land Building and Accumulated
improvements improvements Total depreciation
------------- ------------ ------- ------------
<S> <C> <C> <C> <C>
December 31, 1998:
Apartment properties..... $217,337 651,818 869,155 73,638
Commercial properties.... 1,778 19,031 20,809 4,151
-------- ------- ------- ------
$219,115 670,849 889,964 77,789
======== ======= ======= ======
December 31, 1997:
Apartment properties..... $178,326 520,649 698,975 53,021
Commercial and retail
properties.............. 4,090 27,922 32,012 5,019
-------- ------- ------- ------
$182,416 548,571 730,987 58,040
======== ======= ======= ======
</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.
During the year ended December 31, 1998, the Company sold four properties
to third parties for $26,354 resulting in a gain of $9 and a deferred gain of
$5,002. 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. 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, 1998, 1997, and 1996, depreciation expense
on real estate was $21,890, $13,913 and $8,820, respectively.
(b) 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.
The Operating Partnership owns 31,800 shares of the non-voting preferred
stock of Essex Fidelity I Corporation (Fidelity I). Currently, Fidelity I
holds interests in various real estate investments.
The shares of non-voting preferred stock in EMC 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.
The Operating Partnership holds a 49.9% limited partnership interest in
Jackson School Village, L.P. (JSV) which operates a 200-unit garden style
apartment community in Hillsboro, Oregon.
The Company holds limited partnership interests in seven partnerships which
collectively own two multifamily properties: Anchor Village Apartments
("Anchor Village"), a 301-unit apartment community
F-10
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
located in Mukilteo, Washington and Highridge Apartments ("Highridge"), a 255-
unit apartment community located in Ranchos Palos Verdes, California. In
February 1998 the Company purchased a limited partnership interest in two
partnerships which acquired three retail properties from the Company
("Portland Shopping Centers"), which have approximately 236,000 square feet of
leasable space located in the Portland, Oregon metropolitan area. These
investments were made under arrangements whereby EMC became the general
partner and the other limited partners were granted rights of redemption for
their interests. Such partners can request to be redeemed and the Company can
elect to redeem their rights for cash or by issuing shares of its common
stock. Conversion values will be based on 98 percent of the market value of
the Company's common stock at the time of redemption multiplied by the number
of shares stipulated under the above arrangements.
In September 1997 the Company acquired a 49% limited partnership interest
in Fountain Court Apartment Associates, L.P. which is developing a 320-unit
multifamily community, Fountain Court, located in Seattle, Washington. In
October 1998, the Company purchased an additional 2% limited partnership
interest. Additionally, the Company paid $2,000 for the option to purchase the
remaining 49% interest 18 months subsequent to the occupancy date, as defined
in the agreement.
In August 1997 the Company acquired a 45% Class A Member interest in Park
Hill LLC, whose purpose is the development and operations of a 245-unit
multifamily community, Park Hill Apartments, located in Issaquah, Washington.
Generally, all capital contributions earn a cumulative preferred return of
12%. Profit and loss are allocated to the Members in accordance with their
ownership interests. According to the terms of the Agreement, the Company has
the option to purchase the remaining 55% interest after August 31, 2003. The
purchase price will be calculated based on operating results, as defined in
the Agreement.
The Company accounts for its investments in the above entities under the
equity method of accounting.
Investments consist of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Investments in joint ventures:
Limited partnership interest of 49.9% in Jackson School
Village, L.P. .............................................. $ 2,473 $2,259
Limited partnership interest of 1% in Highridge
Apartments(1)............................................... (987) (409)
Limited partnership interest of 1% in Anchor Village
Apartments(1)............................................... (691) (270)
Limited partnership interest of 1% in Portland Shopping
Centers(1).................................................. (183) --
Limited partnership interest of 51% in Fountain Court
Apartment Associates, L.P. ................................. 5,352 4,137
Class A Member interest of 45% in Park Hill LLC.............. 3,978 3,051
------- ------
9,942 8,768
------- ------
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
------- ------
521 643
------- ------
Other investments.............................................. 127 124
------- ------
$10,590 $9,535
======= ======
</TABLE>
- --------
(1) Balance represents the excess of distributions and allocations over cost
basis.
F-11
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
(6) Notes and Other Related Party Receivables
Notes receivable from joint venture investees and other related party
receivables consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Notes receivable from joint venture investees:
Note receivable from Highridge Apartments, secured,
bearing interest at 9%, due March 2008................... $ 1,047 $2,750
Note receivable from Fidelity I, secured, bearing interest
at 12%, repaid in 1998................................... -- 1,580
Note receivable from Fidelity I, secured, bearing interest
at 8%, due on demand..................................... 1,358 --
Notes receivable from Fidelity I and JSV, secured, bearing
interest at 9.5-10%, due 2015............................ 800 726
Receivable from Highridge Apartments, non-interest
bearing, due on demand................................... 2,928 1,699
Receivable from Las Hadas, non-interest bearing, due on
demand................................................... 1,209 --
Receivable from Anchor Village, non-interest bearing, due
on demand................................................ 933 --
Other related party receivables:
Loans to officers, bearing interest at 8%, due April
2006..................................................... 500 375
Other related party receivables, substantially due on
demand................................................... 1,675 2,134
------- ------
$10,450 $9,264
======= ======
</TABLE>
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.
(7) Notes and Other Receivables
Notes and other receivables consist of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Note receivable from the co-tenants in the Pathways property,
secured, interest payable monthly at 9%, principal due June
2001........................................................ $ 4,452 $4,596
Note receivable from R&V Management, secured, bearing
interest at 12.04%, principal due March 1999................ 7,879 --
Note receivable from R&V Management, secured, bearing
interest at 10.0%, principal due June 2000.................. 2,814 --
Other receivables............................................ 3,664 4,006
------- ------
$18,809 $8,602
======= ======
</TABLE>
F-12
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
(8) 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. Expenses allocated to EMC for the years
ended December 31, 1998, 1997 and 1996 totaled $545, $987 and $1,752,
respectively, and are reflected as a reduction in general and administrative
expenses 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 $833, $709 and $681 for the
years ended December 31, 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998, 1997 and 1996, the Company paid
brokerage commissions totaling $0, $590 and $312 to M&M on the purchase and
sales of real estate. The commissions are either capitalized as a cost of
acquisition or 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.
Other income includes $623, $139 and $820 for the years ended December 31,
1998, 1997 and 1996, respectively, representing dividends from EMC and
management fees and equity income (loss) from Jackson School Village,
Highridge Apartments, Anchor Village Apartments, and the Portland Shopping
Centers. Also included in 1996 are management fees and equity income (loss)
from Essex Bristol Partners (Bristol) and Essex San Ramon Partners (San
Ramon). In January 1997, Essex acquired the joint venture partners' ownership
interest in Bristol and San Ramon.
Interest income includes $1,027, $1,286 and $214 for the years ended
December 31, 1998, 1997 and 1996, respectively, which was earned principally
on the notes receivable from Essex Fidelity I, the partnerships which
collectively own Highridge, the partnerships which collectively own Anchor
Village and the partnerships which collectively own a 30.7% minority interest
in Pathways Apartments.
F-13
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
(9) Mortgage Notes Payable
Mortgage notes payable consist of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Mortgage note payable to a pension fund, secured by deeds of
trust, bearing interest at 6.62%, interest only payments
due monthly through October 2001, principal and interest
payments due monthly thereafter, final principal payment of
$90,596 due in October 2008. Under certain conditions this
loan can be converted to an unsecured note payable......... $100,000 $ --
Mortgage notes payable, secured by deeds of trust, bearing
interest at rates ranging from 6.885% to 8.055%, principal
and interest payments due monthly, and maturity dates
ranging from December 2000 through March 2008.............. 96,214 69,554
Multifamily housing 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 3.5% for
December 1998), 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 58,820
Mortgage notes payable, secured by deeds of trust, bearing
interest at rates ranging from 7.0% to 8.78%, principal and
interest payments due monthly, and maturity dates ranging
from December 2002 through April 2005. Under certain
conditions this loan can be converted to an unsecured note
payable.................................................... 44,788 38,120
Multifamily housing 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 then current tax-
exempt bond rate........................................... 17,273 17,483
Multifamily housing mortgage revenue bonds secured by deed
of trust on rental property, bearing interest at 7.69%,
principal and interest installments due monthly through
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................................................... 8,727 8,915
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......... -- 48,078
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....................... -- 8,027
-------- --------
$325,822 $248,997
======== ========
</TABLE>
F-14
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
The aggregate scheduled maturities of mortgage notes payable are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1999......................................................... $ 2,353
2000......................................................... 20,395
2001......................................................... 2,429
2002......................................................... 24,472
2003......................................................... 30,083
Thereafter................................................... 246,090
--------
$325,822
========
</TABLE>
In October 1997, the Company entered into four forward treasury contracts
for an aggregate notional amount of $60,000, locking the 10 year treasury rate
at between 6.14%-6.26%. These contracts are to limit the interest rate
exposure on identified future debt financing requirements relating to real
estate under development and the refinancing of a $18,327 fixed rate loan.
These contracts will be settled no later than June 2000. If these contracts
were settled as of December 31, 1998, the Company would be obligated to pay
approximately $6,016. Any costs that are incurred when these contracts are
settled are expected to be deferred and recognized over the life of the
related financing.
These forward treasury contracts are not currently required to be reflected
in the accompanying consolidated financial statements. Under FAS 133, which
becomes effective in 2000, the Company expects to recognize the fair value of
these contracts as either assets or liabilities in the financial statements
with another comprehensive income charge directly to stockholders' equity.
In addition, the Company has entered into various other contracts to limit
its interest rate exposure on debt related transactions. During 1998, 1997 and
1996, the Company charged $0, $0 and $42 to income representing amortization
of deferred costs. During 1998, 1997 and 1996, the Company charged $0, $138
and $0 of costs relating to the termination of unmatched positions taken.
During the years ended December 31, 1998, 1997 and 1996, the Company
refinanced various mortgages and incurred a loss on the early extinguishment
of debt of $4,718, $361 and $3,441 related to the write off of the unamortized
mortgage loan fees and prepayment penalties.
(10) Lines of Credit
As of December 31, 1998 and 1997, the Company had the following balances
outstanding under lines of credit with commercial banks:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Unsecured $100,000 line of credit, interest payable monthly
at the bank's reference rate or at the Company's option,
1.15% over the LIBOR rate, expiring June 2000............. $35,693 $25,000
Secured $10,000 line of credit, interest payable monthly at
the bank's reference rate or at the Company's option, 1.5%
over the LIBOR rate, expiring March 1999.................. -- 2,600
------- -------
$35,693 $27,600
======= =======
</TABLE>
F-15
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
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 limits the
Company's interest rate exposure on borrowings under its LIBOR based lines of
credit. This contract expires in June 2002. If this contract were settled as
of December 31, 1998, the Company would be obligated to pay approximately
$392.
As of December 31, 1998, the thirty-day LIBOR rate was approximately 5.06%,
and the prime rate was 7.75%.
(11) 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 commercial properties, which are rented under cancelable and
noncancelable operating leases, certain of which contain renewal options.
Future minimum rental activity for the apartment properties is not included in
the following schedule due to the short-term nature of the leases.
Future minimum rentals due under noncancelable operating leases with
tenants of the commercial properties are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999........................................................... $1,144
2000........................................................... 703
2001........................................................... 707
2002........................................................... 678
2003........................................................... 558
Thereafter..................................................... 618
------
$4,408
======
</TABLE>
Included in this schedule is $347 due from M&M through May 1999. The
Company expects M&M to exercise their option to renew their lease agreement
upon expiration in May 1999.
In addition to minimum rental payments, retail (prior to the disposition of
these properties in February 1998) and commercial property tenants pay
reimbursements for their pro rata share of specified operating expenses. Such
amounts totaled $839, $905 and $964 for the years ended December 31, 1998,
1997 and 1996, respectively, and are included as rental revenue and operating
expenses in the accompanying consolidated statements of operations.
(12) Fair Value of Financial Instruments
Management believes that the carrying amounts of mortgage notes payable,
lines of credit, notes and other related party receivables approximate fair
value as of December 31, 1998 and 1997, because interest rates and yields for
these instruments are consistent with yields currently available to the
Company for similar instruments. Management believes that the carrying amounts
of cash and cash equivalents, restricted cash, accounts payable and dividends
payable approximate fair value as of December 31, 1998 and 1997 due to the
short-term maturity of these instruments. See Note 8 for fair value disclosure
of interest rate risk management contracts.
F-16
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
(13) Stock Option Plans
The Essex Property Trust, Inc. 1994 Stock Incentive Plan provides
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 Company's 1994 initial public 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 1998, 1997 and 1996.
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
consistent with the method of FASB Statement 123, the Company's net income for
the years ended December 31, 1998, 1997 and 1996 would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Net income:
As reported....................................... $26,328 $29,316 $8,881
Pro forma......................................... 26,294 29,216 8,820
</TABLE>
For the years ended December 31, 1998, 1997, and 1996, the effect of
determining compensation cost consistent with FASB Statement No. 123 on basic
and diluted earnings per share was not material.
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 4.19% to
5.77% in 1998; from 5.79% to 6.88% in 1997 and from 5.52% to 6.92% in 1996;
expected lives of 4 years for 1998, 1997, and 1996; volatility of 18.79% for
1998, 17.40% for 1997 and 15.13% for 1996; and dividend yield of 6% for 1998,
1997 and 1996.
F-17
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
A summary of the status of the Company's option plans as of December 31,
1998, 1997 and 1996 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
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................ 828,214 $ 24.57 529,450 $19.08 538,950 $18.93
Granted................. 110,500 30.92 324,905 33.02 14,000 24.55
Exercised............... (19,950) 18.73 (23,286) 17.95 (6,750) 19.07
Forfeited and canceled.. (9,000) (24.57) (2,855) 22.91 (16,750) 18.89
------- ------- -------
Outstanding at end of
year................... 909,764 25.40 828,214 24.57 529,450 19.08
======= ======= =======
Options exercisable at
year end............... 449,457 21.66 284,575 19.23 202,975 19.13
Weighted-average fair
value of options
granted during the
year................... $3.19 $3.56 $2.40
</TABLE>
The following table summarized information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------- -----------------------
Number Weighted Number Weighted
outstanding at Weighted average average exercisable at average
December 31, remaining exercise December 31, exercise
Range of exercise prices 1998 contractual life price 1998 price
------------------------ -------------- ---------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$13.70-17.13........... 52,080 6.2 years $15.50 26,880 $15.50
17.14-20.55........... 418,834 5.5 years 19.44 330,629 19.43
20.56-23.98........... 4,000 7.2 years 20.75 2,666 20.75
23.99-27.40........... 5,750 7.7 years 24.88 2,150 24.88
27.41-30.83........... 163,500 9.0 years 29.78 39,332 29.19
30.84-34.25........... 265,600 8.9 years 34.12 47,800 34.25
------- -------
909,764 $25.40 449,457 $21.66
======= =======
</TABLE>
Through December 31, 1998, the Company has granted 18,267 stock units under
the Company's Phantom Stock Unit Agreement to two of the Company's executives.
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 five years from the date of issuance. 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 years ended December 31, 1998 and 1997, compensation cost was
$20 and $19, respectively, related to this plan.
(14) Shareholder Rights Plan
On November 12, 1998, the Company's Board of Directors adopted a
Stockholder Rights Plan. A dividend of one right (a Right) per share of common
stock was distributed to stockholders of record on November 21, 1998. Each
Right, expiring November 11, 2008, represents a right to buy from the Company
1/100th of a share of Series A Junior Participating Preferred Stock at a price
of $99.13 per Right.
F-18
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
Generally the Rights will not be exercisable unless a person or group
acquires 15 percent or more, or announces an offer that could result in
acquiring 15 percent or more, of the Company's common stock unless such person
is or becomes the beneficial owner of 15 percent or more of the Company's
outstanding common stock and had a contractual right or the approval of the
Company's Board of Directors, provided that such percentage shall not be
greater than 19.9%. Following an acquisition of 15 percent or more of the
Company's common stock, each Right holder, except the 15 percent or more
shareholder, has the right to receive, upon exercise, shares of common stock
valued at twice the then applicable exercise price of the Right, unless the
15 percent or more shareholder has offered to acquire all of the outstanding
shares of the Company under terms that a majority of the independent directors
of the Company have determined to be fair and in the best interest of the
Company and its shareholders.
Similarly, unless certain conditions are met, if the Company engages in a
merger or other business combination following a stock acquisition where it
does not survive or survives with a change or exchange of its common stock or
if 50 percent or more of its assets, earning power or cash flow is sold or
transferred, the Rights will become exercisable for shares of the acquiror's
stock having a value of twice the exercise price.
Generally, Rights may be redeemed for $.01 each (in cash, common stock or
other consideration the Company deems appropriate) until the tenth day
following a public announcement that a 15 percent or greater position has been
acquired of the Company's stock.
(15) Segment Information
In accordance with Financial Accounting Standards Board No. 131,
Disclosures about Segments of an Enterprise and Related Information (FAS 131),
the Company defines its reportable operating segments as the three
geographical regions in which its multifamily residential properties are
located, Northern California, Southern California, and the Pacific Northwest.
Non-segment revenues and net operating income included in the following
schedule consists of revenue generated from the two commercial properties.
Also excluded from segment revenues is interest and other corporate income.
Other non-segment assets include investments, real estate under development,
cash, receivables and other assets.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates performance based upon net operating income from
the combined properties in each segment.
F-19
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
The revenues, net operating income, and assets for each of the reportable
operating segments are summarized as follows for the years ended and as of
December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Year ended
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Northern California............................ $ 42,078 $ 33,481 $ 21,359
Southern California............................ 45,252 20,026 6,836
Pacific Northwest.............................. 32,137 23,356 15,483
-------- -------- --------
Total segment revenues....................... 119,467 76,863 43,678
Non-segment property revenues.................... 2,575 4,537 4,858
Interest and other income........................ 3,217 3,169 2,157
-------- -------- --------
Total revenues............................... $125,259 $ 84,569 $ 50,693
======== ======== ========
Net operating income:
Northern California............................ $ 31,681 $ 24,664 $ 15,476
Southern California............................ 29,758 12,955 4,372
Pacific Northwest.............................. 21,138 14,916 9,676
-------- -------- --------
Total segment net operating income........... 82,577 52,535 29,524
Non-segment net operating income................. 1,532 3,039 3,507
Interest and other income........................ 3,217 3,169 2,157
Depreciation and amortization.................... (21,948) (13,992) (8,855)
Interest......................................... (19,374) (12,659) (11,442)
Amortization of deferred financing costs......... (718) (509) (639)
General and administrative....................... (3,765) (2,413) (1,717)
Loss from hedge termination...................... -- (138) (42)
Provision for litigation loss.................... (930) -- --
-------- -------- --------
Income before gain on sales of real estate,
minority interests, and extraordinary item.. $ 40,591 $ 29,032 $ 12,493
======== ======== ========
Assets:
Northern California............................ $241,676 $175,116 $118,696
Southern California............................ 355,077 257,714 76,055
Pacific Northwest.............................. 198,761 213,125 124,348
-------- -------- --------
Total segment net real estate assets......... 795,514 645,955 319,099
Non-segment net real estate assets............... 16,661 26,992 27,079
-------- -------- --------
Net real estate assets....................... 812,175 672,947 346,178
Non-segment assets............................... 119,621 65,888 70,996
-------- -------- --------
Total assets................................. $931,796 $738,835 $417,174
======== ======== ========
</TABLE>
F-20
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
(16) Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for 1998 and
1997:
<TABLE>
<CAPTION>
Quarter ended Quarter ended Quarter ended Quarter ended
December 31 September 30 June 30 March 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1998:
Total revenues before
gain on sale of real
estate.............. $33,088 $32,651 $31,684 $27,836
Gain on sale of real
estate.............. -- 9 -- --
------- ------- ------- -------
Total
revenues...... $33,088 $32,660 $31,684 $27,836
======= ======= ======= =======
Extraordinary
item.......... $(3,912) $ (806) -- --
======= ======= ======= =======
Net income..... $ 4,177 $ 6,678 $ 7,548 $ 7,925
======= ======= ======= =======
Per share data:
Net income:
Basic............ $ 0.20 $ 0.35 $ 0.40 $ 0.42
======= ======= ======= =======
Diluted.......... $ 0.20 $ 0.34 $ 0.40 $ 0.42
======= ======= ======= =======
Market price:
High............. $ 31.75 $ 33.50 $ 34.50 $ 34.94
======= ======= ======= =======
Low.............. $ 28.50 $ 26.94 $ 30.19 $ 33.25
======= ======= ======= =======
Close............ $ 29.75 $ 31.00 $ 31.00 $ 34.31
======= ======= ======= =======
Dividends
declared.......... $ 0.500 $ 0.500 $ 0.500 $ 0.450
======= ======= ======= =======
1997:
Total revenues before
gain on sale of real
estate.............. $24,463 $21,975 $19,580 $18,551
Gain (loss) on sale
of real estate...... (13) 4,713 414 --
------- ------- ------- -------
Total
revenues...... $24,450 $26,688 $19,994 $18,551
======= ======= ======= =======
Extraordinary
item.......... $ (257) $ -- $ (104) $ --
======= ======= ======= =======
Net income..... $ 7,227 $10,967 $ 6,254 $ 4,868
======= ======= ======= =======
Per share data:
Net income:
Basic............ $ 0.41 $ 0.73 $ 0.43 $ 0.39
======= ======= ======= =======
Diluted.......... $ 0.41 $ 0.69 $ 0.43 $ 0.39
======= ======= ======= =======
Market price:
High............. $ 37.50 $ 35.06 $ 32.37 $ 30.87
======= ======= ======= =======
Low.............. $ 32.81 $ 30.50 $ 27.62 $ 28.50
======= ======= ======= =======
Close............ $ 35.00 $ 34.81 $ 32.12 $ 29.87
======= ======= ======= =======
Dividends
declared.......... $ 0.450 $ 0.450 $ 0.435 $ 0.435
======= ======= ======= =======
</TABLE>
F-21
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per share amounts)
(17) 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 individual) per year. Company contributions to
the Plan were approximately $46, $41 and $27 for the years ended December 31,
1998, 1997 and 1996.
(18) 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 $2,604 which expire between July 1999 and May 2005.
The Company is developing eight multifamily residential projects, which are
anticipated to have an aggregate of approximately 1,578 multifamily units. The
Company expects that such projects will be completed during the next two
years. In connection with these projects, the Company has directly, or in some
cases through its joint venture partners, entered into contractual
construction related commitments with unrelated third parties. As of December
31, 1998, the Company is committed to fund approximately $95,130 relating to
these projects.
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 position, results of 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.
(19) Subsequent Event
In accordance with the terms of the Convertible Preferred Stock Agreement,
Tiger/Westbrook exercised the option to convert 87,500 shares of the total
1,600,000 outstanding shares of Convertible Preferred Stock into 100,000
shares of common stock on January 6, 1999.
F-22
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Gross amount carried at close of
Initial cost Costs period
--------------------- capitalized ----------------------------------
Buildings subsequent Buildings
and to Land and and
Property Units Location Encumbrance Land improvements acquisition improvements improvements Total(1)
-------- ----- -------- ----------- -------- ------------ ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Encumbered
multifamily
properties
Summerhill Park 100 Sunnyvale, CA $ $ 2,654 $ 4,918 $ 378 $ 2,654 $ 5,296 $ 7,950
Oak Pointe 390 Sunnyvale, CA 4,842 19,776 4,023 4,844 23,797 28,641
Summerhill 184 Newark, CA 1,608 7,582 623 1,518 8,295 9,813
Commons
Pathways 296 Long Beach, CA 4,083 16,757 559 4,085 17,314 21,399
Villa Rio Vista 286 Anaheim, CA 3,013 12,661 1,653 2,985 14,342 17,327
Foothill 360 Bellevue, WA 2,435 9,821 1,894 2,437 11,713 14,150
Commons
Woodland 236 Bellevue, WA 2,040 8,727 986 2,042 9,711 11,753
Commons
Palisades 192 Bellevue, WA 1,560 6,242 1,314 1,561 7,555 9,116
-------- -------- -------- ------- -------- -------- --------
100,000 22,235 86,484 11,430 22,126 98,023 120,149
-------- -------- -------- ------- -------- -------- --------
<CAPTION>
Depreciable
Accumulated Date of Date lives
Property depreciation construction acquired (years)
-------- ------------ -------------- -------- -----------
<S> <C> <C> <C> <C>
Encumbered
multifamily
properties
Summerhill Park $ 1,609 1988 9/88 3-40
Oak Pointe 9,184 1973 12/88 3-30
Summerhill 2,546 1987 7/87 3-40
Commons
Pathways 4,819 1975 2/91 3-30
Villa Rio Vista 7,019 1968 7/85 3-30
Foothill 4,227 1978 3/90 3-30
Commons
Woodland 3,397 1978 3/90 3-30
Commons
Palisades 2,844 1969/1977(2) 5/90 3-30
------------
35,645
------------
Wharfside 142 Seattle, WA 2,245 7,020 520 2,252 7,533 9,785
Pointe
Emerald Ridge 180 Bellevue, WA 3,449 7,801 410 3,446 8,214 11,660
Sammamish View 153 Bellevue, WA 3,324 7,501 330 3,328 7,827 11,155
-------- -------- -------- ------- -------- -------- --------
19,520 9,018 22,322 1,260 9,026 23,574 32,600
-------- -------- -------- ------- -------- -------- --------
Brighton Ridge 264 Renton, WA 2,623 10,800 471 2,653 11,241 13,894
Landmark 285 Hillsboro, OR 3,655 14,200 404 3,697 14,562 18,259
Apartments
Eastridge 188 San Ramon, CA 6,068 13,628 286 6,088 13,894 19,982
Apartments
-------- -------- -------- ------- -------- -------- --------
27,733 12,346 38,628 1,161 12,438 39,697 52,135
-------- -------- -------- ------- -------- -------- --------
Bridle Trails 92 Kirkland, WA 4,232 1,500 5,930 95 1,528 5,997 7,525
Bunker Hill 456 Los Angeles, CA 18,311 11,498 27,871 349 11,660 28,058 39,718
Towers
Camarillo Oaks 564 Camarillo, CA 19,420 10,953 25,254 2,656 11,016 27,847 38,863
Evergreen 200 Kirkland, WA 9,143 3,566 13,395 231 3,644 13,548 17,192
Heights
Huntington 342 Huntington Beach, CA 16,000 9,306 22,720 174 9,312 22,888 32,200
Breakers
Inglenook Court 224 Bothell, WA 8,300 3,467 7,881 1,139 3,473 9,014 12,487
Maple Leaf 48 Seattle, WA 2,068 805 3,283 46 825 3,309 4,134
Meadowood 320 Simi Valley, CA 17,273 7,852 18,592 480 7,894 19,030 26,924
Spring Lake 69 Seattle, WA 2,265 838 3,399 54 857 3,434 4,291
Stonehedge 196 Bothell, WA 9,156 3,167 12,603 142 3,196 12,716 15,912
Village
The Bluffs 224 San Diego, CA 8,464 3,405 7,743 125 3,439 7,834 11,273
The Shores (7) 348 San Ramon, CA 18,327 8,789 18,252 (916) 7,098 19,027 26,125
Treetops 172 Fremont, CA 9,800 3,520 8,182 783 3,576 8,909 12,485
Villa Scandia 118 Ventura, CA 8,727 1,570 3,912 107 1,592 3,997 5,589
Wandering Creek 156 Kent, WA 5,300 1,285 4,980 717 1,295 5,687 6,982
Wilshire 128 Fullerton, CA 7,912 3,118 7,385 173 3,137 7,539 10,676
Promenade
Windsor Ridge 216 Sunnyvale, CA 13,871 4,017 10,315 433 4,018 10,747 14,765
-------- -------- -------- ------- -------- -------- --------
325,822 122,255 349,131 20,639 121,150 370,875 492,025
-------- -------- -------- ------- -------- -------- --------
Wharfside 1,250 1990 6/94 3-30
Pointe
Emerald Ridge 1,276 1987 11/94 3-30
Sammamish View 1,135 1986 11/94 3-30
------------
3,661
------------
Brighton Ridge 732 1986 12/96 3-30
Landmark 1,133 1990 08/96 3-30
Apartments
Eastridge 1,086 1988 08/96 3-30
Apartments
------------
2,951
------------
Bridle Trails 233 1986 10/97 3-30
Bunker Hill 623 1968 3/98 3-30
Towers
Camarillo Oaks 1,493 1985 07/96 3-30
Evergreen 676 1990 06/97 3-30
Heights
Huntington 890 1984 10/97 3-30
Breakers
Inglenook Court 1,866 1985 10/94 3-30
Maple Leaf 126 1986 10/97 3-30
Meadowood 1,388 1986 11/96 3-30
Spring Lake 125 1986 10/97 3-30
Stonehedge 301 1986 10/97 3-30
Village
The Bluffs 390 1974 06/97 3-30
The Shores (7) 1,225 1988 01/97 3-30
Treetops 878 1978 01/96 3-30
Villa Scandia 198 1971 06/97 3-30
Wandering Creek 671 1986 11/95 3-30
Wilshire 479 1992 01/97 3-30
Promenade
Windsor Ridge 2,744 1989 03/89 3-40
------------
56,563
------------
</TABLE>
F-23
<PAGE>
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation--(Continued)
December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Gross amount carried at close of
Initial cost Costs period
--------------------- capitalized ----------------------------------
Buildings subsequent Buildings
and to Land and and
Property Units Location Encumbrance Land improvements acquisition improvements improvements Total(1)
-------- ------ -------- ----------- -------- ------------ ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unencumbered
multifamily
properties
Bristol Commons 188 Sunnyvale, CA 5,278 11,853 604 5,284 12,451 17,735
Casa Del Mar 96 Pasadena, CA 1,857 4,713 64 1,873 4,761 6,634
Casa Mango 96 San Diego, CA 3,011 7,006 183 3,038 7,162 10,200
Castle Creek 216 Newcastle, WA 4,149 16,028 695 4,817 16,055 20,872
Foothill/Twincreeks 176 San Ramon, CA 5,875 13,992 478 5,940 14,405 20,345
Kings Road 196 Los Angeles, CA 4,023 9,527 116 4,029 9,637 13,666
Marina Cove (3) 292 Santa Clara, CA 5,320 16,431 858 5,322 17,287 22,609
Meadows @ 198 Vancouver, WA 2,261 9,070 230 2,333 9,228 11,561
Cascade
Mirabella 608 Newbury Park, CA 15,318 40,601 516 15,729 40,706 56,435
Park 176 Los Angeles, CA 4,965 11,806 157 5,013 11,915 16,928
Place/Windsor
Court/Cochran
(6)
Plumtree 140 Santa Clara, CA 3,090 7,421 392 3,091 7,812 10,903
Riverfront 229 San Diego, CA 8,637 20,119 165 8,658 20,263 28,921
Stevenson Place 200 Fremont, CA 996 5,582 5,019 997 10,600 11,597
Tara Village 168 Tarzana, CA 3,178 7,535 319 3,203 7,829 11,032
The Laurels 164 Mill Creek, WA 1,559 6,430 278 1,594 6,673 8,267
The Village 122 Oxnard, CA 2,349 5,579 114 2,393 5,649 8,042
Apartments
Trabucco Villas 132 Lake Forest, CA 3,638 8,640 338 3,841 8,775 12,616
Village @ 192 Vancouver, WA 2,103 8,753 99 2,151 8,804 10,955
Cascade
Wimbledon Woods 560 Hayward, CA 9,883 37,670 521 10,334 37,740 48,074
Windsor Terrace 117 Pasadena, CA 2,188 5,263 1,028 2,497 5,982 8,479
Westwood 116 Cupertino, CA 3,989 17,185 85 4,050 17,209 21,259
------ -------- -------- -------- ------- -------- -------- --------
11,511 $325,822 $215,922 $620,335 $32,898 $217,337 $651,818 $869,155
====== ======== ======== ======== ======= ======== ======== ========
<CAPTION>
Depreciable
Accumulated Date of Date lives
Property depreciation construction acquired (years)
-------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
Unencumbered
multifamily
properties
Bristol Commons 794 1989 01/97 3-30
Casa Del Mar 238 1972 06/97 3-30
Casa Mango 240 1981 12/97 3-30
Castle Creek 134 1997 12/97 3-30
Foothill/Twincreeks 865 1985 02/97 3-30
Kings Road 456 1979 06/97 3-30
Marina Cove (3) 2,887 1974 6/94 3-30
Meadows @ 337 1988 11/97 3-30
Cascade
Mirabella 1,131 1973 3/98 3-30
Park 444 1988 08/97 3-30
Place/Windsor
Court/Cochran
(6)
Plumtree 1,319 1975 2/94 3-30
Riverfront 682 1990 12/97 3-30
Stevenson Place 4,337 1971 4/82 3-30
Tara Village 489 1972 01/97 3-30
The Laurels 431 1981 12/96 3-30
The Village 266 1974 07/97 3-30
Apartments
Trabucco Villas 370 1985 10/97 3-30
Village @ 295 1995 12/97 3-30
Cascade
Wimbledon Woods 944 1975 3/98 3-30
Windsor Terrace 226 1972 09/97 3-30
Westwood 190 1963 3/98 3-30
------------
$73,638
============
</TABLE>
F-24
<PAGE>
Schedule 1
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Gross annual
Initial cost carried at close of period
--------------------- Costs ----------------------------------
Total capitalized
rentable Buildings subsequent Buildings
square and to Land and and
Property footage Location Encumbrance Land improvements acquisition improvements Improvements Total(1)
-------- -------- ------------- ----------- -------- ------------ ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
properties
925 East Meadow.. 17,404 Palo Alto, CA -- 1,401 3,172 805 1,762 3,616 5,378
777 California(4)(5).. 44,827 Palo Alto, CA -- -- 6,700 8,731 16 15,415 15,431
------ -------- -------- -------- ------- -------- -------- --------
62,231 -- 1,401 9,872 9,536 1,778 19,031 20,809
------ -------- -------- -------- ------- -------- -------- --------
Total
multifamily and
commercial
properties...... $325,822 $217,323 $630,207 $42,434 $219,115 $670,849 $889,964
======== ======== ======== ======= ======== ======== ========
<CAPTION>
Depreciable
Accumulated Date of Date lives
Property depreciation construction acquired (years)
-------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
Commercial
properties
925 East Meadow.. 145 1984 11/97 3.30
777 California(4)(5).. 4,006 1987 7/86 3.30
------------
4,151
------------
Total
multifamily and
commercial
properties...... $77,789
============
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year................. $730,987 $393,809 $284,358
Improvements................................. 12,200 4,533 3,406
Acquisition of real estate................... 169,934 345,750 118,107
Disposition of real estate................... (23,157) (13,105) (12,062)
-------- -------- --------
Balance at end of year....................... $889,964 $730,987 $393,809
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Accumulated depreciation:
Balance at beginning of year.................... $58,040 $47,631 $40,281
Dispositions.................................... (2,183) (3,504) (1,470)
Depreciation expense--Acquisitions.............. 2,888 2,086 905
Depreciation expense............................ 19,044 11,827 7,915
------- ------- -------
Balance at end of year.......................... $77,789 $58,040 $47,631
======= ======= =======
</TABLE>
- ----
(1) The aggregate cost for federal income tax purposes is $749,718.
(2) Phase I was built in 1969 and Phase II was built in 1977.
(3) A portion of land is leased pursuant to a ground lease expiring in 2028.
(4) Land is leased pursuant to a ground lease expiring in 2054.
(5) This property secures the Operating Partnership's $10,000 line of credit.
(6) Cochran Apartments, a 58 unit multifamily community, was purchased in
April 1998 and is adjacent to Park Place/Windsor Court. Initial
capitalized cost was $5,547.
(7) A portion of The Shores land value was allocated to real estate under
development for the Canyon Point project in the amount of $1,757.
A summary of activity for real estate and accumulated depreciation is as
follows:
F-25
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document
------- --------
<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 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 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 incorporated herein by
reference.
3.4 Certificate of Correction to Exhibit 3.2 dated December 20, (2)
1996.
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 incorporated herein by reference.
3.6 Certificate of Amendment of the Bylaws of Essex Property Trust, (2)
Inc., dated December 17, 1996.
3.7 Articles Supplementary reclassifying 2,000,000 shares of Common --
Stock as 2,000,000 shares of 7.875% Series B Cumulative
Redeemable Preferred Stock, filed with the State of Maryland on
February 10, 1998, attached as Exhibit 3.1 to Essex's Current
Report on Form 8-K, filed March 3, 1998, and incorporated
herein by reference.
3.8 Articles Supplementary reclassifying 500,000 shares of Common --
Stock as 500,000 shares of 9 1/8% Series C Cumulative
Redeemable Preferred Stock, filed with the State of Maryland on
November 25, 1998.
3.9 Certificate of Correction to Exhibit 3.2 dated February 12, --
1999.
4.0 Articles Supplementary reclassifying 6,617,822 shares of Common --
Stock as 6,617,822 shares of Series A Junior Participating
Preferred Stock, filed with the State of Maryland on November
13, 1998.
4.1 Rights Agreement, dated as of November 11, 1998, between Essex --
Property Trust, Inc., and attached as Exhibit 1 to Essex's
Registration Statement filed on Form 8-A BankBoston, N.A., as
Rights Agent, including all exhibits thereto, dated November
12, 1998, and 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 the Essex's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, and 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 incorporated herein by reference.
10.3 First Amendment to the 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 incorporated herein by
reference.
10.4 Second Amendment to the First Amended and Restated Agreement of --
Limited Partnership of Essex Portfolio, L.P. dated April 20,
1998, attached as Exhibit 10.1 to Essex's Current Report on
Form 8-K, filed April 23, 1998, and incorporated herein by
reference.
10.5 Third Amendment to the First Amended and Restated Agreement of --
Limited Partnership of Essex Portfolio, L.P. dated November 24,
1998.
10.6 Form of Essex Property Trust, Inc. 1994 Non-Employee and (1)
Director Stock Incentive Plan.
10.7 Form of Essex Property Trust, Inc. 1994 Employee Stock Incentive (1)
Plan.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document
------- --------
<C> <S> <C>
10.8 Form of Non-Competition Agreement between Essex and each of (1)
Keith R. Guericke and George M. Marcus.*
10.9 Termination of Non-Compete Agreement between Essex Property --
Trust, Inc. and George M. Marcus.*
10.10 Contribution Agreement by and among Essex, the Operating (1)
Partnership and the Limited Partners in the Operating
Partnership.
10.11 Form of Indemnification Agreement between Essex and its (1)
directors and officers.
10.12 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 incorporated
herein by reference.
10.13 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 incorporated herein by reference.
10.14 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 incorporated herein by
reference.
10.15 Leasehold agreement between Houghton Mifflin Company and (1)
Stanford University dated as of February 1, 1955, as amended.
10.16 Agreement by and among M&M, M&M REIBC and the Operating (1)
Partnership and Essex regarding Stock Options.
10.17 Co-Brokerage Agreement by and among Essex, the Operating (1)
Partnership, M&M REIBC and Essex Management Corporation.
10.18 General Partnership Agreement of Essex Washington Interest (1)
Partners.
10.19 Form of Office Lease between the Operating Partnership and the (1)
Marcus and Millichap Company.
10.20 Form of Management Agreement between the Operating Partnership (1)
and Essex Management Corporation regarding the retail
Properties.
10.21 Form of Amended and Restated Agreement among Tenants-in-Common (1)
regarding Pathways Property.
10.22 Form of Promissory Note made by Gilroy Associates and San Pablo (1)
Medical Investors in favor of the Operating Partnership.
10.23 Form of Investor Rights Agreement between Essex and the Limited (1)
Partner of the Operating Partnership.
10.24 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 incorporated herein by reference.
10.25 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 incorporated
herein by reference.
10.26 Letter Agreement with Tiger/Westbrook entities re: Limitations --
on Ownership of Stock of the Company, attached as Exhibit 10.1
to Essex's 10-Q as of September 30, 1996, and incorporated
herein by reference.
10.27 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 incorporated herein by
reference.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document
------- --------
<C> <S> <C>
10.28 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 incorporated herein by reference.*
10.29 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 incorporated herein by reference.
10.30 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
incorporated herein by reference.
10.31 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 incorporated herein by reference.
10.32 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
incorporated herein by reference.
10.33 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 incorporated
herein by reference.
10.34 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 incorporated
herein by reference.
10.35 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 incorporated
herein by reference.
10.36 Fourth Amended and Restated Agreement of Limited Partnership of --
Western Riviera Investor, 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 incorporated
herein by reference.
10.37 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 incorporated
herein by reference.
10.38 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 incorporated herein by reference.
10.39 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 incorporated herein by reference.
10.40 Revolving Loan Agreement between Essex Portfolio, L.P., a --
California limited partnership and Bank of America National
Trust and Savings Association dated as of May 11, 1998,
attached as Exhibit 10.1 to Essex's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, and incorporated
herein by reference.
10.41 $100,000,000 Promissory Note between Essex Portfolio, L.P., and --
Essex Morgan Funding Corporation, attached as Exhibit 10.1 to
Essex's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, and incorporated herein by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document
------- --------
<C> <S> <C>
12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges --
and Preferred Stock Dividends.
21.1 List of Subsidiaries of Essex Property Trust, Inc. --
23.1 Consent of Independent Public Accountants. --
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>
EXHIBIT 3.8
ESSEX PROPERTY TRUST, INC.
--------------------------
ARTICLES SUPPLEMENTARY
Reclassifying 500,000 shares of Common Stock
as 500,000 shares of
9 1/8% SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK
Essex Property Trust, Inc., a corporation organized and existing under
the laws of Maryland (the "Corporation"), does hereby certify to the State
Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority conferred upon the Board of Directors of
-----
the Corporation by Article FIFTH of its Charter (the "Charter") in accordance
with Section 2-105 of the Maryland General Corporation Law (the "MGCL"), the
Board of Directors of the Corporation, at a teleconference meeting held on
November 24, 1998, duly adopted a resolution reclassifying 500,000 authorized
but unissued shares of Common Stock (par value $.0001 per share) as Preferred
Stock (par value $.0001 per share), designating such newly reclassified
Preferred Stock as 9-1/8% Series C Cumulative Redeemable Preferred Stock, the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications and terms
and conditions of redemption as set forth below and authorizing the issuance of
such series of Preferred Stock as set forth below. Upon any restatement of the
Charter, Sections 1 through 9 of Article THIRD shall become subsection (g) of
Article FIFTH of the Charter.
SECOND: The reclassification increases the number of shares
------
classified as 9 1/8% Series C Cumulative Redeemable Preferred Stock from no
shares immediately prior to the reclassification to 500,000 shares immediately
after the reclassification. The reclassification decreases the number of shares
classified as Common Stock (par value $.0001 per share) from 659,782,178 shares
immediately prior to the reclassification to 659,282,178 shares immediately
after the reclassification.
THIRD: Subject in all cases to the provisions of Article EIGHTH of
-----
the Charter of the Corporation with respect to Excess Stock, the following is a
description of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of 9 1/8% Series C Cumulative Redeemable Preferred
Stock of the Corporation:
9 1/8% Series C Cumulative Redeemable Preferred Stock
-----------------------------------------------------
Section 1. Designation and Amount.
----------------------
Of the 659,782,178 authorized shares of Common Stock, 500,000 shares
are reclassified and designated "9 1/8% Series C Cumulative Redeemable Preferred
Stock (par value $.0001 per share)" (the "Series C Preferred Stock").
Section 2. Rank. The Series C Preferred Stock will, with respect to
----
distributions and rights upon voluntary or involuntary liquidation, winding-up
or dissolution of the Corporation, rank senior to all classes or series of
Common Stock (as defined in the Charter) and
1
<PAGE>
to all classes or series of equity securities of the Corporation now or
hereafter authorized, issued or outstanding, other than the 8.75% Convertible
Preferred Stock, Series 1996A (the "Series A Preferred Stock") and the 7.875%
Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock")
with which it shall be on a parity and any other class or series of equity
securities of the Corporation expressly designated as ranking on a parity with
or senior to the Series C Preferred Stock as to distributions and rights upon
voluntary or involuntary liquidation, winding-up or dissolution of the
Corporation. For purposes of these terms of the Series C Preferred Stock, the
term "Parity Preferred Stock" shall be used to refer to the Series A Preferred
Stock, the Series B Preferred Stock and any other class or series of equity
securities of the Corporation now or hereafter authorized, issued or outstanding
expressly designated by the Corporation to rank on a parity with Series C
Preferred Stock with respect to distributions and rights upon voluntary or
involuntary liquidation, winding-up or dissolution of the Corporation.
Section 3. Distributions.
-------------
(a) Payment of Distributions. Subject to the rights of holders of
------------------------
Parity Preferred Stock as to the payment of distributions, holders of Series C
Preferred Stock will be entitled to receive, when, as and if declared by the
Corporation, out of funds legally available for the payment of distributions,
cumulative preferential cash distributions at the rate per annum of 9 1/8% of
the $50.00 liquidation preference per share of Series C Preferred Stock. Such
distributions shall be cumulative, shall accrue from the original date of
issuance and will be payable quarterly in arrears (such quarterly periods, for
purposes of payment and accrual shall be the quarterly periods ending on the
dates specified in this sentence and not calendar quarters), on or before the
15th of February, May, August and November of each year (each a "Preferred Stock
Distribution Payment Date"), commencing in each case on the first Preferred
Stock Distribution Payment Date after the original date of issuance. The amount
of the distribution payable for any period will be computed on the basis of a
360-day year of twelve 30-day months and for any period shorter than a full
quarterly period for which distributions are computed, the amount of the
distribution payable will be computed on the basis of the actual number of days
elapsed in such a 30-day month. If any date on which distributions are to be
made on the Series C Preferred Stock is not a Business Day (as defined herein),
then payment of the distribution to be made on such date will be made on the
next succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay) except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. Distributions on the Series C Preferred Stock will be made to the
holders of record of the Series C Preferred Stock on the relevant record dates,
which, unless otherwise provided by the Corporation with respect to any
distribution, will be 15 Business Days prior to the relevant Preferred Stock
Distribution Payment Date (each a "Distribution Record Date"). Notwithstanding
anything to the contrary set forth herein, each share of Series C Preferred
Stock shall also continue to accrue all accrued and unpaid distributions to the
exchange date on any Series C Preferred Unit (as defined in the Third Amendment
to First Amended and Restated Agreement of Limited Partnership of Essex
Portfolio, L.P., dated as of November 24, 1998 (the "Third Amendment")) validly
exchanged into such share of Series C Preferred Stock in accordance with the
provisions of such Third Amendment.
2
<PAGE>
The term "Business Day" shall mean each day, other than a Saturday or
a Sunday, which is not a day on which banking institutions in New York, New York
are authorized or required by law, regulation or executive order to close.
(b) Limitations on Distributions. No distributions on the Series C
----------------------------
Preferred Stock shall be declared or paid or set apart for payment by the
Corporation at such time as the terms and provisions of any agreement of the
Corporation, including any agreement relating to its indebtedness, prohibits
such declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration, payment or setting
apart for payment shall be restricted or prohibited by law.
(c) Distributions Cumulative. Notwithstanding the foregoing,
------------------------
distributions on the Series C Preferred Stock will accrue whether or not the
terms and provisions set forth in Section 3(b) hereof at any time prohibit the
current payment of distributions, whether or not the Corporation has earnings,
whether or not there are funds legally available for the payment of such
distributions and whether or not such distributions are authorized. Accrued but
unpaid distributions on the Series C Preferred Stock will accumulate as of the
Preferred Stock Distribution Payment Date on which they first become payable.
Accumulated and unpaid distributions will not bear interest.
(d) Priority as to Distributions.
----------------------------
(i) So long as any Series C Preferred Stock is outstanding,
no distribution of cash or other property shall be authorized, declared, paid or
set apart for payment on or with respect to any class or series of Common Stock
or any class or series of other stock of the Corporation ranking junior to the
Series C Preferred Stock as provided in this Section 3 (such Common Stock or
other junior stock, collectively, "Junior Stock"), nor shall any cash or other
property be set aside for or applied to the purchase, redemption or other
acquisition for consideration of any Series C Preferred Stock, any Parity
Preferred Stock with respect to distributions or any Junior Stock, unless, in
each case, all distributions accumulated on all Series C Preferred Stock and all
classes and series of outstanding Parity Preferred Stock as to payment of
distributions have been paid in full. The foregoing sentence will not prohibit
(i) distributions payable solely in Junior Stock, (ii) the conversion of Junior
Stock or Parity Preferred Stock into Junior Stock of the Corporation, (iii) the
redemption, purchase or other acquisition of Junior Stock made for purposes of
and in compliance with requirements of an employee incentive or benefit plan of
the Corporation or any subsidiary of the Corporation, and (iv) purchase by the
Corporation of such Series C Preferred Stock, Parity Preferred Stock with
respect to distributions or Junior Stock pursuant to Article EIGHTH of the
Charter to the extent required to preserve the Corporation's status as a real
estate investment trust.
(ii) So long as distributions have not been paid in full (or a
sum sufficient for such full payment is not irrevocably so set apart) upon the
Series C Preferred Stock, all distributions authorized and declared on the
Series C Preferred Stock and all classes or series of outstanding Parity
Preferred Stock with respect to distributions shall be authorized and declared
so that the amount of distributions authorized and declared per share of Series
C Preferred Stock and such other classes or series of Parity Preferred Stock
shall in all cases bear to
3
<PAGE>
each other the same ratio that accrued distributions per share on the Series C
Preferred Stock and such other classes or series of Parity Preferred Stock
(which shall not include any accumulation in respect of unpaid distributions for
prior distribution periods if such class or series of Parity Preferred Stock do
not have cumulative distribution rights) bear to each other.
(e) No Further Rights. Holders of Series C Preferred Stock shall not
-----------------
be entitled to any distributions, whether payable in cash, other property or
otherwise, in excess of the full cumulative distributions described herein.
Section 4. Liquidation Preference.
----------------------
(a) Payment of Liquidating Distributions. Subject to the rights of
------------------------------------
holders of Parity Preferred Stock with respect to rights upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation, the
holders of Series C Preferred Stock shall be entitled to receive out of the
assets of the Corporation legally available for distribution or the proceeds
thereof, after payment or provision for debts and other liabilities of the
Corporation, but before any payment or distributions of the assets shall be made
to holders of Common Stock or any other class or series of shares of the
Corporation that ranks junior to the Series C Preferred Stock as to rights upon
liquidation, dissolution or winding-up of the Corporation, an amount equal to
the sum of (i) a liquidation preference of $50 per share of Series C Preferred
Stock, and (ii) an amount equal to any accumulated and unpaid distributions
thereon to the date of payment. In the event that, upon such voluntary or
involuntary liquidation, dissolution or winding-up, there are insufficient
assets to permit full payment of liquidating distributions to the holders of
Series C Preferred Stock and any Parity Preferred Stock as to rights upon
liquidation, dissolution or winding-up of the Corporation, all payments of
liquidating distributions on the Series C Preferred Stock and such Parity
Preferred Stock shall be made so that the payments on the Series C Preferred
Stock and such Parity Preferred Stock shall in all cases bear to each other the
same ratio that the respective rights of the Series C Preferred Stock and such
other Parity Preferred Stock (which shall not include any accumulation in
respect of unpaid distributions for prior distribution periods if such Parity
Preferred Stock do not have cumulative distribution rights) upon liquidation,
dissolution or winding-up of the Corporation bear to each other.
(b) Notice. Written notice of any such voluntary or involuntary
------
liquidation, dissolution or winding-up of the Corporation, stating the payment
date or dates when, and the place or places where, the amounts distributable in
such circumstances shall be payable, shall be given by (i) fax and (ii) by first
class mail, postage pre-paid, not less than 30 and not more than 60 days prior
to the payment date stated therein, to each record holder of the Series C
Preferred Stock at the respective addresses of such holders as the same shall
appear on the share transfer records of the Corporation.
(c) No Further Rights. After payment of the full amount of the
-----------------
liquidating distributions to which they are entitled, the holders of Series C
Preferred Stock will have no right or claim to any of the remaining assets of
the Corporation.
(d) Consolidation, Merger or Certain Other Transactions. The
---------------------------------------------------
consolidation or merger or other business combination of the Corporation with or
into any corporation, trust or other entity (or of any corporation, trust or
other entity with or into the Corporation), or the
4
<PAGE>
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of shall not be deemed to constitute a liquidation, dissolution or
winding-up of the Corporation.
Section 5. Optional Redemption.
-------------------
(a) Right of Optional Redemption. The Series C Preferred Stock may
----------------------------
not be redeemed prior to November 24, 2003. On or after such date, subject to
the terms and conditions of any Parity Preferred Stock, the Corporation shall
have the right to redeem the Series C Preferred Stock, in whole or in part, at
any time or from time to time, upon not less than 30 nor more than 60 days'
written notice, at a redemption price, payable in cash, equal to $50 per share
of Series C Preferred Stock plus accumulated and unpaid distributions to the
date of redemption. If fewer than all of the outstanding shares of Series C
Preferred Stock are to be redeemed, the shares of Series C Preferred Stock to be
redeemed shall be selected pro rata (as nearly as practicable without creating
fractional units). Further, in order to ensure that the Corporation remains a
qualified real estate investment trust for federal income tax purposes, the
Series C Preferred Stock will also be subject to the provisions of Article
EIGHTH of the Charter pursuant to which Series C Preferred Stock owned by a
stockholder in excess of the Ownership Limit (as defined in the Charter) will be
automatically transferred to a Trust (as defined in the Charter) and the
Corporation shall have the right to purchase such shares, as provided in Article
EIGHTH of the Charter.
(b) Limitation on Redemption.
------------------------
(i) The redemption price of the Series C Preferred Stock
(other than the portion thereof consisting of accumulated but unpaid
distributions) will be payable solely out of the sale proceeds of capital stock
of the Corporation and from no other source. For purposes of the preceding
sentence, "capital stock" means any equity securities (including Common Stock
and Preferred Stock of the Corporation and units of partnership interest of
Essex Portfolio, L.P., as to which the Corporation is the general partner),
shares, participation or other ownership interests (however designated) and any
rights (other than debt securities convertible into or exchangeable for equity
securities) or options to purchase any of the foregoing.
(ii) The Corporation may not redeem fewer than all of the
outstanding shares of Series C Preferred Stock unless all accumulated and unpaid
distributions have been paid on all Series C Preferred Stock for all quarterly
distribution periods terminating on or prior to the date of redemption;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of shares of Series C Preferred Stock or Parity Preferred Stock
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Series C Preferred Stock or Parity Preferred Stock, as
the case may be.
(c) Rights to Distributions on Stock Called for Redemption.
------------------------------------------------------
Immediately prior to any redemption of Series C Preferred Stock, the Corporation
shall pay, in cash, any accumulated and unpaid distributions through the
redemption date, unless a redemption date falls after a Distribution Record Date
and prior to the corresponding Preferred Stock Distribution Payment Date, in
which case each holder of Series C Preferred Stock at the close of business on
such Distribution Record Date shall be entitled to the
distributions payable on such shares on the
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<PAGE>
corresponding Distribution Payment Date notwithstanding the redemption of such
shares before the Distribution Payment Date.
(d) Procedures for Redemption.
-------------------------
(i) Notice of redemption will be (i) faxed, and (ii) mailed
by the Corporation, postage prepaid, not less than 30 nor more than 60 days
prior to the redemption date, addressed to the respective holders of record of
the Series C Preferred Stock to be redeemed at their respective addresses as
they appear on the transfer records of the Corporation. No failure to give or
defect in such notice shall affect the validity of the proceedings for the
redemption of any Series C Preferred Stock except as to the holder to whom such
notice was defective or not given. In addition to any information required by
law or by the applicable rules of any exchange upon which the Series C Preferred
Stock may be listed or admitted to trading, each such notice shall state: (i)
the redemption date, (ii) the redemption price, (iii) the number of shares of
Series C Preferred Stock to be redeemed, (iv) the place or places where such
shares of Series C Preferred Stock are to be surrendered for payment of the
redemption price, (v) that distributions on the Series C Preferred Stock to be
redeemed will cease to accumulate on such redemption date and (vi) that payment
of the redemption price and any accumulated and unpaid distributions will be
made upon presentation and surrender of such Series C Preferred Stock. If fewer
than all of the shares of Series C Preferred Stock held by any holder are to be
redeemed, the notice mailed to such holder shall also specify the number of
shares of Series C Preferred Stock held by such holder to be redeemed.
(ii) If the Corporation gives a notice of redemption in
respect of Series C Preferred Stock (which notice will be irrevocable) then, by
12:00 noon, New York City time, on the redemption date, the Corporation will
deposit irrevocably in trust for the benefit of the Series C Preferred Stock
being redeemed funds sufficient to pay the applicable redemption price, plus any
accumulated and unpaid distributions, if any, on such shares to the date fixed
for redemption, without interest, and will give irrevocable instructions and
authority to pay such redemption price and any accumulated and unpaid
distributions, if any, on such shares to the holders of the Series C Preferred
Stock upon surrender of the Series C Preferred Stock by such holders at the
place designated in the notice of redemption. On and after the date of
redemption, distributions will cease to accumulate on the Series C Preferred
Stock or portions thereof called for redemption, unless the Corporation defaults
in the payment thereof. If any date fixed for redemption of Series C Preferred
Stock is not a Business Day, then payment of the redemption price payable on
such date will be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay) except that,
if such Business Day falls in the next calendar year, such payment will be made
on the immediately preceding Business Day, in each case with the same force and
effect as if made on such date fixed for redemption. If payment of the
redemption price or any accumulated or unpaid distributions in respect of the
Series C Preferred Stock is improperly withheld or refused and not paid by the
Corporation, distributions on such Series C Preferred Stock will continue to
accumulate from the original redemption date to the date of payment, in which
case the actual payment date will be considered the date fixed for redemption
for purposes of calculating the applicable redemption price and any accumulated
and unpaid distributions.
6
<PAGE>
(e) Status of Redeemed Stock. Any Series C Preferred Stock that shall
------------------------
at any time have been redeemed shall after such redemption have the status of
authorized but unissued Preferred Stock, without designation as to class or
series, until such shares are once more designated as part of a particular class
or series by the Board.
Section 6. Voting Rights.
-------------
(a) General. Holders of the Series C Preferred Stock will not have any
-------
voting rights, except as set forth below.
(b) Right to Elect Directors. If at any time full distributions shall
------------------------
not have been made on any Series C Preferred Stock with respect to any six (6)
prior quarterly distribution periods, whether or not consecutive, (a "Preferred
Distribution Default"), such that distributions for such six (6) distribution
periods have not been fully paid and are outstanding in whole or in part at the
same time, the holders of such Series C Preferred Stock, voting together as a
single class with the holders of each class or series of Parity Preferred Stock
upon which like voting rights have been conferred and are exercisable (other
than holders of Parity Preferred Stock who are deemed to be "affiliates" of the
Corporation as such term is defined in Rule 144 of the General Rules and
Regulations Under the Securities Act of 1933), will have the right to elect two
additional directors to serve on the Corporation's Board (the "Preferred Stock
Directors"), which shall be in addition to the rights of holders of Series A
Preferred Stock to elect directors pursuant to the articles supplementary
pertaining to the Series A Preferred Stock, at a special meeting called by the
holders of record of at least 10% of the outstanding shares of Series C
Preferred Stock or any such class or series of Parity Preferred Stock or at the
next annual meeting of stockholders, and at each subsequent annual meeting of
stockholders or special meeting held in place thereof, until all such
distributions in arrears and distributions for the current quarterly period on
the Series C Preferred Stock and each such class or series of Parity Preferred
Stock have been paid in full. At any such annual or special meeting, the holders
of the Series B Preferred Stock, the Series C Preferred Stock and any
subsequently issued series of Parity Preferred Stock upon which like voting
rights have been conferred and are exercisable, will be entitled to cast votes
for such Preferred Stock Directors on the basis of one vote per $50.00 of
liquidation preference to which such class of Parity Preferred Stock is entitled
by its terms (excluding amounts in respect of accumulated and unpaid dividends)
and not cumulatively. If and when all accumulated distributions and the
distribution for the current distribution period on the Series C Preferred Stock
shall have been paid in full or irrevocably set aside for payment in full, the
holders of the Series C Preferred Stock shall be divested of the voting rights
set forth in Section 6(b) herein (subject to revesting in the event of each and
every Preferred Distribution Default) and, if all distributions in arrears and
the distributions for the current distribution period have been paid in full or
irrevocably set aside for payment in full on all other classes or series of
Parity Preferred Stock upon which like voting rights have been conferred and are
exercisable, the term and office of each Preferred Stock Director so elected
shall immediately terminate. Any Preferred Stock Director may be removed at any
time with or without cause by the vote of, and shall not be removed otherwise
than by the vote of, the holders of record of a majority of the outstanding
Series C Preferred Stock when they have the voting rights set forth in Section
6(b) (voting separately as a single class with all other classes or series of
Parity Preferred Stock upon which like voting rights have been conferred and are
exercisable). So long as a Preferred Distribution Default shall continue, any
vacancy in the office of a Preferred Stock Director may
7
<PAGE>
be filled by written consent of the Preferred Stock Director remaining in
office, or if none remains in office, by a vote of the holders of record of a
majority of the outstanding Series C Preferred Stock when they have the voting
rights set forth in Section 6(b) (voting separately as a single class with all
other classes or series of Parity Preferred Stock upon which like voting rights
have been conferred and are exercisable). The Preferred Stock Directors shall
each be entitled to one vote per director on any matter.
(c) Certain Voting Rights. (i) While any shares of the Series C
---------------------
Preferred Stock are outstanding, the Corporation shall not, without the
affirmative of the holders of at least two-thirds (2/3) of the Series C
Preferred Stock outstanding at the time (i) authorize or create, or increase the
authorized or issued amount of, any class or series of shares ranking prior to
the Series C Preferred Stock with respect to payment of distributions and rights
upon liquidation, dissolution or winding-up or reclassify any authorized shares
of the Corporation into any such shares, or create, authorize or issue any
obligations or security convertible into or evidencing the right to purchase any
such shares, (ii) either amend, alter or repeal the provisions of the
Corporation's Charter (including these Articles Supplementary) or Bylaws, that
would materially and adversely affect the preferences, other rights, voting
powers, restrictions, limitations as to dividends and other distributions,
qualifications, or terms and conditions of redemption, of any outstanding shares
of the Series C Preferred Stock; provided that any increase in the amount of
authorized Preferred Stock or the creation or issuance of any other class or
series of Preferred Stock, or any increase in an amount of authorized shares of
each class or series, in each case ranking junior or on a parity to the Series C
Preferred Stock with respect to payment of distributions or the distribution of
assets upon liquidation, dissolution or winding-up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers. While any shares of the Series C Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of the holders of at least
two-thirds (2/3) of the Series C Preferred Stock outstanding at the time
consolidate, amalgamate, merge with or into, or convey, transfer or lease its
assets substantially as an entirety to, any corporation or other entity, unless
(a) the Corporation is the surviving entity and the shares of the Series C
Preferred Stock remain outstanding with the terms thereof unchanged, (b) the
resulting, surviving or transferee entity is a corporation or other entity
organized under the laws of any state and substitutes for the Series C Preferred
Stock other preferred stock having substantially the same terms and same rights
as the Series C Preferred Stock, including with respect to distributions, voting
rights and rights upon liquidation, dissolution or winding-up, or (c) such
merger, consolidation, amalgamation or asset transfer does not adversely affect
the powers, special rights, preferences and privileges of the holders of the
Series C Preferred Stock in any material respect. However, the Corporation may
create additional classes of Parity Preferred Stock and Junior Stock, increase
the authorized number of shares of Parity Preferred Stock and Junior Stock and
issue additional series of Parity Preferred Stock and Junior Stock without the
consent of any holder of Series C Preferred Stock.
Section 7. Transfer Restrictions. The Series C Preferred Stock shall
---------------------
be subject to the provisions of Article EIGHTH of the Charter.
Section 8. No Conversion Rights. The holders of the Series C Preferred
--------------------
Stock shall not have any rights to convert such shares into shares of any other
class or series of stock, or into any other securities of, or interest in, the
Corporation,
8
<PAGE>
Section 9. No Sinking Fund. No sinking fund shall be established for
---------------
the retirement or redemption of Series C Preferred Stock.
FOURTH: The Series C Preferred Stock have been classified and
------
designated by the Board under the authority contained in the Charter.
FIFTH: These Articles Supplementary have been approved by the Board
-----
in the manner and by the vote required by law.
SIXTH: The undersigned President of the Corporation acknowledges
-----
these Articles Supplementary to be the corporate act of the Corporation and, as
to all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
9
<PAGE>
IN WITNESS WHEREOF, these Articles Supplementary are executed on
behalf of the Corporation by its President and attested by its Assistant
Secretary this ____ day of November, 1998.
ESSEX PROPERTY TRUST, INC.
By:
---------------------------
Keith R. Guericke
President
[SEAL]
Attest:
______________________________
Michael J. Schall
Executive Vice President,
Chief Financial Officer and
Assistant Secretary
THE UNDERSIGNED, President of ESSEX PROPERTY TRUST, INC., who executed on
behalf of the Corporation, the Articles Supplementary of which this certificate
is made a part, hereby acknowledges in the name and on behalf of said
Corporation the foregoing Articles Supplementary to be the corporate act of said
Corporation and hereby certifies that the matters and facts set forth herein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
By:
---------------------------------
Keith R. Guericke
President
10
<PAGE>
EXHIBIT 4.0
ESSEX PROPERTY TRUST, INC.
--------------------------
ARTICLES SUPPLEMENTARY
Reclassifying 6,617,822 shares of Common Stock
as 6,617,822 shares of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
Essex Property Trust, Inc., a corporation organized and existing under the
laws of Maryland (the "Corporation"), does hereby certify to the State
Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority conferred upon the Board of Directors of the
-----
corporation by Article FIFTH of its Charter (the "Charter") in accordance with
Section 2-208 of the Maryland General Corporation Law (the "MGCL"), the Board of
Directors of the Corporation, at a meeting held on October 13, 1998, duly
adopted a resolution reclassifying 6,617,822 authorized but unissued shares of
Common Stock (par value $.0001 per share) as Preferred Stock (par value $.0001
per share), designating such newly reclassified Preferred Stock as Series A
Junior Participating Preferred Stock, with the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption as set
forth below and authorizing the issuance of such series of Preferred Stock as
set forth below. Upon any restatement of the Charter, Sections ___ through 11
of this Article FIRST shall become subsection (g) of Article FIFTH of the
Charter.
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series A Junior Participating Preferred Stock" and the number of
shares constituting such series shall be 6,617,822.
Section 2. Dividends and Distributions.
---------------------------
a. Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series A Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Participating Preferred Stock shall be
entitled to receive, when, as and if authorized by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the 15th day of January, April, July and October in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Junior Participating Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a) 60.01
or (b) subject to the provision for adjustment hereinafter set forth, 100 times
the aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par
1
<PAGE>
value $.0001 per share, of the Corporation (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Junior Participating Preferred Stock. In the
event the Corporation shall at any time after November 11, 1998 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount to which holders of shares of Series A Junior Participating Preferred
Stock were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
b. The Corporation shall declare a dividend or distribution on the Series
A Junior Participating Preferred Stock as provided in Paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock), provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, dividend of $0.01 per share on the Series A Junior
Participating Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
c. Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Junior Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A Junior
Participating Preferred Stock, unless the date of issue of such shares is prior
to the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
A Junior Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Junior Participating Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 30 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Junior
-------------
Participating Preferred Stock shall have the following voting rights:
2
<PAGE>
a. Subject to the provision for adjustment hereinafter set forth, each
share of Series A Junior Participating Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
b. Except as otherwise provided herein or by law, the holders of shares of
Series A Junior Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
c. (i) If at any time dividend on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which shall extend
until such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period on
all shares of Series A Junior Participating Preferred Stock then
outstanding shall have been declared and paid or set apart for payment.
During each default period, all holders of Preferred Stock (including
holders of the Series A Junior Participating Preferred Stock) with
dividends in arrears in an amount equal to six (6) quarterly dividends
thereon, voting as a class, irrespective of series, shall have the right to
elect two (2) directors.
(ii) During any default period, such voting right of the holders of
Series A Junior Participating Preferred Stock may be exercised initially at
a special meeting called pursuant to subparagraph (iii) of this Section
3(C) or at any annual meeting of stockholders, and thereafter at annual
meetings of stockholders, provided that neither such voting right nor the
right of the holders of any other series of Preferred Stock, if any, to
increase, in certain cases, the authorized number of directors shall be
exercised unless the holders of ten percent (10%) in number of shares of
Preferred Stock outstanding shall be present in person or by proxy. The
absence of a quorum of the holders of Common Stock shall not affect the
exercise by the holders of Preferred Stock of such voting right. At any
meeting at which the holders of Preferred Stock shall exercise such voting
right initially during an existing default period, they shall have the
right, voting as a class, to elect directors to fill such vacancies, if
any, in the Board of Directors as may then exist up to two (2) directors
or, if such right is exercised at an annual meeting, to elect two (2)
directors. If the number which may be so elected at any special meeting
does not amount to the required number, the holders of the
3
<PAGE>
Preferred Stock shall have the right to make such increase in the number of
directors as shall be necessary to permit the election by them of the
required number. After the holders of the Preferred Stock shall have
exercised their right to elect directors in any default period and during
the continuance of such period, the number of directors shall not be
increased or decreased except by vote of the holders of Preferred Stock as
herein provided or pursuant to the rights of any equity securities ranking
senior to or pari passu with the Series A Junior Participating Preferred
---- -----
Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect directors,
the Board of Directors may order, or any stockholder or stockholders owning
in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series, may request,
the calling of a special meeting of the holders of Preferred Stock, which
meeting shall thereupon be called by the President, a Vice-President or the
Secretary of the Corporation. Notice of such meeting and of any annual
meeting at which holders of Preferred Stock are entitled to vote pursuant
to this Paragraph (C)(iii) shall be given to each holder of record of
Preferred Stock by mailing a copy of such notice to him at his last address
as the same appears on the books of the Corporation. Such meeting shall be
called for a time not earlier than 20 days and not later than 60 days after
such order or request or in default of the calling of such meeting within
60 days after such order or request, such meeting may be called on similar
notice by any stockholder or stockholders owning in the aggregate not less
than ten percent (10%) of the total number of shares of Preferred Stock
outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no
such special meeting shall be called during the period within 60 days
immediately preceding the date fixed for the next annual meeting of the
stockholders.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of directors until the holders of
Preferred Stock shall have exercised their right to elect two (2) directors
voting as a class, after the exercise of which right (x) the directors so
elected by the holders of Preferred Stock shall continue in office until
their successors shall have been elected by such holders or until the
expiration of the default period, and (y) any vacancy in the Board of
Directors may (except as provided in Paragraph (C)(ii) of this Section 3)
be filled by vote of a majority of the remaining directors theretofore
elected by the holders of the class of stock which elected the director
whose office shall have become vacant. References in this Paragraph (C) to
directors elected by the holders of a particular class of stock shall
include directors elected by such directors to fill vacancies as provided
in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right
of the holders of Preferred Stock as a class to elect directors shall
cease, (y) the term of any directors elected by the holders of Preferred
Stock as a class shall terminate, and (z) the number of directors shall be
such number as may be
4
<PAGE>
provided for in the Charter or by-laws irrespective of any increase made
pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such
number being subject, however, to change thereafter in any manner provided
by law or in the Charter or by-laws). Any vacancies on the Board of
Directors affected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining directors.
d. Except as set forth herein, holders of Series A Junior Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
--------------------
a. Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock,
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, except dividends paid ratably on the Series
A Junior Participating Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled,
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, provided that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up) to
the Series A Junior Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series A Junior Participating Preferred Stock, or any shares of stock
ranking on a parity with the Series A Junior Participating Preferred Stock,
except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other
5
<PAGE>
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
b. The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under Paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior Participatin
-----------------
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be treated by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up.
--------------------------------------
a. Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the Corporation, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received an amount equal to $100 per share of Series A Participating
Preferred Stock, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment (the
"Series A Liquidation Preference"). Following the payment of the full amount of
the Series A Liquidation Preference, no additional distributions shall be made
to the holders of shares of Series A Junior Participating Preferred Stock
unless, prior thereto, the holders of shares of Common Stock shall have received
an amount per share (the "Common Adjustment") equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately
adjusted as set forth in subparagraph (3) below to reflect such events as stock
splits, stock dividends and recapitalizations with respect to the Common Stock)
(such number in clause (ii), the "Adjustment Number"). Following the payment of
the full amount of the Series A Liquidation Preference and the Common Adjustment
in respect of all outstanding shares of Series A Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series A Junior Participating
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ratio of the Adjustment Number to 1 with respect to such Preferred Stock and
Common Stock, on a per share basis, respectively.
b. In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
6
<PAGE>
In the event, however, that there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
c. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
--------------------------
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 100 times the aggregate number of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Junior Participating Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Junior Participating
-------------
Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series A Junior Participating Preferred Stock
-------
shall rank senior to the Common Stock and junior to all other series of the
Corporation's Preferred Stock as to the payment of dividends and the
distribution of assets, unless the terms of any such series shall provide
otherwise.
Section 10. Amendment. At any time when any shares of Series A Junior
---------
Participating Preferred Stock are outstanding, neither the Charter of the
Corporation nor these Articles Supplementary shall be amended in any manner
which would materially alter or change the powers, preferences or special rights
of the Series A Junior Participating Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of a majority or more of
the outstanding shares of Series A Junior Participating Preferred Stock, voting
separately as a class.
7
<PAGE>
Section 11. Fractional Shares. Series A Junior Participating Preferred
-----------------
Stock may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
SECOND: The Series A Junior Participating Preferred Stock has been
------
reclassified by the Board of Directors under a power contained in the Charter.
THIRD: These Articles Supplementary have been approved by the Board of
-----
Directors in the manner and by the vote required by law.
FOURTH: The undersigned acknowledges these Articles Supplementary to be
------
the act of the Corporation and states as to all matters and facts required to be
verified under oath that, to the best of his knowledge, information and belief,
these matters and facts are true in all material respects and such statement is
made under the penalties for perjury.
IN WITNESS WHEREOF, these Articles Supplementary are executed on behalf of
the Corporation by its Vice Chairman of the Board, Chief Executive Officer and
President and attested by its Vice President, General Counsel and Secretary this
11th day of November, 1998.
ESSEX PROPERTY TRUST, INC.
By: /s/ Keith R. Guericke
--------------------------
Name: Keith R. Guericke
Title: Vice Chairman of the Board,
Chief Executive Officer and President
(SEAL)
Attest:
By: /s/ Jordan E. Ritter
-------------------------
Name: Jordan E. Ritter
Title: Vice President,
General Counsel and
Secretary
8
<PAGE>
EXHIBIT 10.5
THIRD AMENDMENT TO
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
ESSEX PORTFOLIO, L.P.
Dated as of November 24, 1998
This Third Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portolio, L.P., as amended (the "Partnership Agreement"),
dated as of the date shown above (the "Amendment"), is executed by Essex
Property Trust, Inc. a Maryland Corporation (the "Company"), as the General
Partner and on behalf of the existing Limited Partners of Essex Portfolio, L.P.
(the "Partnership") and Belcrest Realty Corporation, a Delaware corporation
("Belcrest") and Belair Real Estate Corporation, a Delaware corporation
("Belair," and together with Belcrest, the "Contributors").
RECITALS
WHEREAS, the Partnership was formed pursuant to the Partnership Agreement,
which has been amended and restated as of September 30, 1997;
WHEREAS, on the date hereof, Contributors have made a Capital Contribution
of an aggregate of $25,000,000.00, in cash, to the Partnership in exchange for
which Contributors are entitled to receive an aggregate of 500,000 9 1/8%
Series C Cumulative Redeemable Preferred Units (the "Series C Preferred Units")
of limited partnership interests in the Partnership with rights, preferences,
exchange and other rights, voting powers and restrictions, limitations as to
distributions, qualifications and terms and conditions as set forth herein;
WHEREAS, pursuant to the authority granted to the General Partner under the
Partnership Agreement, the General Partner desires to amend the Partnership
Agreement to reflect (i) the issuance of the Series C Preferred Units, (ii) the
admission of the Contributors as Additional Limited Partners and holders of a
certain number of Series C Preferred Units and (iii) certain other matters
described herein;
WHEREAS, Contributors desire to become a party to the Partnership Agreement
as Limited Partners and to be bound by all terms, conditions and other
provisions of this Amendment and the Partnership Agreement.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement as
follows:
1
<PAGE>
1. Definitions. Capitalized terms used herein, unless otherwise defined
-----------
herein, shall have the same meanings as set forth in the Partnership Agreement.
2. Admission of Contributors. Contributors are hereby admitted as
-------------------------
Additional Limited Partners in accordance with Section 4.6 of the Partnership
Agreement holding such number of Series C Preferred Units as is set forth on
Exhibit A, as amended. Contributors each hereby agree to become a party to the
Partnership Agreement as a Limited Partner and to be bound by all the terms,
conditions and other provisions of the Partnership Agreement, as amended by this
Amendment. Pursuant to Section 4.6(b) of the Partnership Agreement, the General
Partner hereby consents to the admission of each Contributor as an Additional
Limited Partner of the Partnership. The admission of Contributors shall become
effective as of the date of this Amendment, which shall also be the date on
which the name of each Contributor is recorded on the books and records of the
Partnership.
3. Percentage Interest. Section 1.1 of the Partnership Agreement is
-------------------
hereby amended to delete the definition of "Percentage Interest" in its entirety
and the following definition of "Percentage Interest" is hereby substituted in
its place:
"Percentage Interest" shall mean, with respect to any Partner other
than holders of Series B Preferred Units or Series C Preferred Units, the
undivided percentage ownership interest of such Partner in the Partnership,
as determined by dividing the number of Partnership Units owned by such
Partner by the total number of Partnership Units then outstanding
(excluding the Series A Preferred Interest, the Series B Preferred
Interest, the Series B Partnership Units, Series C Preferred Interest and
Series C Preferred Units).
4. Restatement of Exhibit A and Exhibit M. Exhibit A to the Partnership
--------------------------------------
Agreement is amended and restated by replacing such Exhibit A with Exhibit A
attached to this Amendment. Exhibit M to the Partnership Agreement is amended
and restated by replacing such Exhibit M with Exhibit M attached to this
Amendment.
5. Preferred Interest. Section 1.1 of the Partnership Agreement is
------------------
hereby amended to include the following definition of "Series C Preferred
Interest" after the definition of "Series B Preferred Interest" and before the
definition of "Series A Preferred Stock."
"Series C Preferred Interest" shall mean the interest in the
Partnership received by the General Partner in connection with the issuance
of shares of Series C Preferred Stock, as and when issued, which Series C
Preferred Interest includes and shall include the right to receive
preferential distributions and certain other rights as set forth in this
Agreement.
6. Series C Preferred Stock. Section 1.1 of the Partnership Agreement is
------------------------
hereby amended to include the following definitions of "Series C Preferred
Stock" and "Series C Preferred Units" which are hereby inserted after the
definition of "Series B Preferred Units" and before the definition of "Stock
Incentive Plans":
"Series C Preferred Stock" shall mean the preferred stock of the
General Partner described in Article FIRST of the Articles Supplementary
reclassifying
2
<PAGE>
500,000 shares of Common Stock as 500,000 shares of 9 1/8% Series C
Cumulative Redeemable Preferred Stock to be filed with the Department on or
about November 24, 1998.
"Series C Preferred Units" shall mean the 9 1/8% Series C Cumulative
Redeemable Preferred Units of limited partnership interests in the
Partnership with rights, preferences, exchange and other rights, voting
powers and restrictions, limitations as to distributions, qualifications
and terms and conditions as set forth in Exhibit O hereto.
7. Distributions. Section 6.2(a) of the Partnership Agreement is hereby
-------------
deleted in its entirety, and the following is hereby substituted in the place
thereof:
"(a) Distributions shall be made in accordance with the following
order of priority:
(i) First, on a pro rata basis, (based upon the same ratio that
--------
accrued distributions per share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and per unit of Series B
Preferred Units and Series C Preferred Units (which shall not include any
accumulation in respect of unpaid distributions for prior distribution
periods if such stock or units do not have cumulative distribution rights)
bear to each other) (x) to the General Partner, on account of the Series A
Preferred Interest, Series B Preferred Interest and Series C Preferred
Interest until the total amount of distributions made pursuant to this
Section 6.2(a)(i)(x) equals the total amount of accrued but unpaid
dividends (if any) payable with respect to the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock as of the
date of such distribution; (y) to the Limited Partners holding Series B
Preferred Units, on account of the Series B Preferred Units until the total
amount of distributions made pursuant to this Section 6.2(a)(i)(y) equals
the total amount of accrued but unpaid dividends (if any) payable with
respect to the Series B Preferred Units, in accordance with Exhibit N of
the Partnership Agreement, as of the date of such distribution; and (z) to
the Limited Partners holding Series C Preferred Units, on account of the
Series C Preferred Units until the total amount of distributions made
pursuant to this Section 6.2(a)(i)(z) equals the total amount of accrued
but unpaid dividends (if any) payable with respect to the Series C
Preferred Units, in accordance with Exhibit O of the Partnership Agreement,
as of the date of such distribution.
(ii) Next, to the Partners, pro rata in accordance with the
--------
Partners' then Percentage Interests.
Neither the Partnership nor the Limited Partners shall have any
obligation to see that any funds distributed to the General Partner
pursuant to subparagraph (a)(i) of this Section 6.2 are in turn used by the
General Partner to pay dividends on the Series A Preferred Stock, the
Series B Preferred Stock or the Series C Preferred Stock (or any other
Preferred Stock) or that funds distributed to the General Partner
3
<PAGE>
pursuant to subparagraph (a)(ii) of this Section 6.2 are in turn used by
the General Partner to pay dividends on the Common Stock or for any other
purpose."
8. Distributions in Kind. Section 8.5 of the Partnership Agreement is
---------------------
hereby amended by adding the following sentence to the end of such section:
"Notwithstanding the foregoing, the Liquidating Trustee shall not
distribute to the holders of Series B Partnership Units, Series C
Partnership Units, Series A Preferred Interest, Series B Preferred Interest
and Series C Preferred Interest Partnership assets other than cash."
9. Exhibit E. Exhibit E to the Partnership Agreement is hereby deleted
--------- ---------
in its entirety, and the attached Exhibit E is hereby inserted in the place
---------
thereof.
10. Exhibit N. Exhibit N is hereby amended by (i) deleting the word
---------
"Stock" in the ninth (9th) line of Section 2G(i) thereof and inserting the word
"Units" in lieu thereof; and (ii) inserting the following sentence at the end of
said Section 2G(i):
"The Series B Preferred Units will become exchangeable at any time in
whole or in part at the option of the holders of the Series B
Preferred Units if, at any time (i) the Partnership takes the position
that the assets and income of the Partnership are such as would not
permit the Partnership to satisfy the income and assets tests of
Section 856 of the Code if the Partnership were a real estate
investment trust within the meaning of the Code; or (ii) any holder of
the Series B Preferred Units shall deliver to the Partnership and the
Company an opinion of independent counsel reasonably acceptable to the
Company to the effect that the assets and income of the Partnership
are such as would not permit the Partnership to satisfy the income and
assets tests of Section 856 of the Code if the Partnership were a real
estate investment trust within the meaning of the Code."
11. Exhibit O. The Partnership Agreement is hereby amended by adding a
---------
new exhibit, Exhibit O, a copy of which is attached hereto. Exhibit O is hereby
---------
inserted into the Partnership Agreement following Exhibit N.
---------
12. Continuing Effect of Partnership Agreement. Except as modified
------------------------------------------
herein, the Partnership Agreement is hereby ratified and confirmed in its
entirety and shall remain and continue in full force and effect, provided,
however, that to the extent there shall be a conflict between the provisions of
the Partnership Agreement and this Amendment the provisions in this Amendment
will prevail. All references in any document to the Partnership Agreement shall
mean the Partnership Agreement, as amended hereby.
13. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same agreement. Facsimile signatures shall be
deemed effective execution of this Agreement and may be relied upon as such by
the other party. In the event facsimile signatures are delivered, originals of
such signatures shall be delivered to the other party within three (3) business
days after execution.
4
<PAGE>
IN WITNESS WHEREOF, the General Partner and the Contributor have executed
this Amendment as of the date indicated above.
GENERAL PARTNER
ESSEX PROPERTY TRUST, INC.,
a Maryland corporation as General Partner of Essex
Portfolio, L.P. and on behalf of the existing
Limited Partners
By:
------------------------------------------
Name: Keith R. Guericke
Title: Chief Executive Officer & President
CONTRIBUTOR:
BELCREST REALTY CORPORATION,
a Delaware corporation
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
5
<PAGE>
BELAIR REAL ESTATE CORPORATION
a Delaware Corporation
By:
------------------------------------------
Name:
------------------------------------------
Title:
----------------------------------------
6
<PAGE>
EXHIBIT A
PARTNERSHIP UNITS
(As of November 24, 1998)
PARTNERSHIP UNITS
-----------------
<TABLE>
<CAPTION>
General Partner: Units
- ----------------------------- ----------
<S> <C>
Essex Property Trust, Inc. 16,615,924
</TABLE>
Limited Partners:
- ----------------
<TABLE>
<S> <C>
1. Essex Portfolio Management Company 15,941
2. Essex Property Corporation 9,909
3. GMMS Partners 43,414
4. M & M Projects, Inc. 128,138
5. SummerHill Homes 163,447
6. Paula Amanda 1,785
7. Robert and Margaret Arnold 2,242
8. Randall I. Barkan 2,564
9. David Bernstein Revocable Trust 5,771
10. John D. and Robbin Eudy 7,457
11. Kenneth and Angeliki Frangadakis 2,675
12. George and Katherine Frangadakis, 4,697
Trustees
Frangadakis Family Revocable Trust
13. Kenneth and Angeliki Frangadakis, 24,334
Trustees
Frangadakis Family Revocable Trust
14. Harvey Friedman 4,042
15. Harvey and Margaret Green 16,735
16. Keith R. and Thelma Guericke 48,116
<PAGE>
17. George P. Katsoulis 5,000
18. Gerald E. and Annette Kelly 5,643
19. Nancy Kukkola 11,637
20. George M. Marcus 1,136,227
21. Meistrich Family Trust UTA 12/6/90 4,042
22. Charles E. Martin 1,785
23. William A. and Sherrie Millichap 73,099
24. J. Peter and Cherie Otten 9,447
25. Milton Pagonis 10,267
26. Gary Pagonis Family Trust 10,267
27. G. Michael Roark 54,740
28. Michael and Ann Schall 26,388
29. J. Lawrence Schnadig 1,729
30. J.A. Shafran 2,889
31. Swanson Survivors Trust 7,687
32. Marcus & Millichap 2,564
33. The Way 1994 Living Trust Dtd. 2,226
11/2/94
34. Gay A. Yamagiwa 10,720
35. Craig K. Zimmerman 15,849
7.875% SERIES B PREFERRED UNITS
-------------------------------
Limited Partner:
- ----------------
Belair Real Estate Corporation 1,600,000
2
<PAGE>
9 1/8% SERIES C PREFERRED UNITS
-------------------------------
Limited Partner:
- ----------------
Belcrest Realty Corporation 420,000
Belair Real Estate Corporation 80,000
________
TOTAL PARTNERSHIP UNITS: 2,100,000
</TABLE>
3
<PAGE>
EXHIBIT M
ADDRESSES OF PARTNERS
PARTNERSHIP UNIT HOLDERS
------------------------
Essex Portfolio Management Company Essex Property Corporation
777 California Avenue 777 California Avenue
Palo Alto, CA 94304 Palo Alto, CA 94304
GMMS Partners M & M Projects, Inc.
777 California Avenue 777 California Avenue
Palo Alto, CA 94304 Palo Alto, CA 94304
SummerHill Homes Paula Amanda
777 California Avenue 1001 Bridgeway #460
Palo Alto, CA 94304 Sausalito, CA 94965
Robert and Margaret Arnold Randall I. Barkan
460 Marlowe 777 California Avenue
Palo Alto, CA 94301 Palo Alto, CA 94304
Belair Capital Fund LLC David Bernstein, Trustee
c/o Eaton Vance Management David Bernstein Revocable Trust
24 Federal Street 8773 Midnight Pass Road #406
Boston, Massachusetts 02110 Sarasota, FL 34242
Attention: Mr. Alan Dynner
Fax: 617-338-8054
Kenneth and Angeliki Frangadakis John D. and Robbin Eudy
10383 Torre Avenue 777 California Avenue
Cupertino, CA 95014 Palo Alto, CA 94304
Kenneth and Angeliki Frangadakis, George and Katherine Frangadakis,
Trustees Trustees
Frangadakis Family Revocable Trust Frangadakis Family Revocable Trust
10383 Torre Avenue 7408 Fallenleaf Lane
Cupertino, CA 95014 Cupertino, CA 95014
Keith R. and Thelma Guericke Harvey Friedman
14341 Lutheria Way 720 Rochedale Way
Saratoga, CA 95070 Los Angeles, CA 90049
Gerald E. and Annette Kelly Harvey and Margaret Green
1517 Kalmia Street 12243 Huston Street
San Mateo, CA 94402 N. Hollywood, CA 91607
4
<PAGE>
Charles E. Martin George P. Katsoulis
1001 Bridgeway #134 3300 Webster Street #612
Sausalito, CA 94965 Oakland, CA 94609
J. Peter and Cherie Otten Nancy Kukkola
250 El Bonito Way 123 Greenmeadow Way
Millbrae, CA 94030 Palo Alto, CA 94306
Gary and Elisa Pagonis, Trustees George M. Marcus
Gary Pagonis Family Trust 777 California Avenue
10383 Torre Avenue, Suite 1 Palo Alto, CA 94304
Cupertino, CA 95014
Michael and Ann Schall Herbert Meistrich
1544 Sioux Court 1320 W. Muirlands Drive
Fremont, CA 94539 La Jolla, CA 92037
William A. and Sherrie Millichap G. Michael Roark
2626 Hanover P.O. Box 2767
Palo Alto, CA 94304 Sausalito, CA 94966
Milton Pagonis Roger and Anita Swanson, Trustees
10383 Torre Avenue, Suite 1 Swanson Survivors Trust
Cupertino, CA 95014 889 Norfolk Pine Avenue
Sunnyvale, CA 94087
J.A. Shafran J. Lawrence Schnadig
30360 Morning View Drive 833 MOraga Drive #6
Malibu, CA 90265 Los Angeles, CA 90049
Linwood C. Thompson J.A. Shafran
Marcus & Millichap 30360 Morning View Drive
8750 W. Bryn Mawr #750 Malibu, CA 90265
Chicago, IL 60631
Gay A. Yamagiwa Stephen and Patricia Way, Trustees
341 Seville The Way 1994 Living Trust Dtd.
San Mateo, CA 94402 11/2/94
338 Georgetown Avenue
San Mateo, CA 94402
5
<PAGE>
Belcrest Realty Corporation Craig K. Zimmerman
c/o Eaton Vance Management 409 Georgetown Avenue
24 Federal Street San Mateo, CA 94402
Boston, MA 02110
Attn: Mr. Alan Dynner
Belair Real Estate Corporation
c/o Eaton Vance Management
24 Federal Street
Boston, MA 02110
Attn: Mr. Alan Dynner
6
<PAGE>
EXHIBIT E
ALLOCATIONS
1. Allocation of Net Income and Net Loss.
-------------------------------------
(a) Net Income. Except as otherwise provided herein, Net Income for
----------
any fiscal year or other applicable period shall be allocated in the following
order and priority:
(1) First, to the Partners, until the cumulative Net Income
allocated pursuant to this subparagraph (a)(1) for the current and all prior
periods equals the cumulative Net Loss allocated pursuant to subparagraph (b)(2)
hereof for all prior periods, among the Partners in the reverse order that such
Net Loss was allocated to the Partners pursuant to subparagraph (b)(2) hereof
(and, in the event of a shift of a Partner's interest in the Partnership, to the
Partners in a manner that most equitably reflects the successors in interest to
the Partners).
(2) Thereafter, the balance of the Net Income, if any, shall be
allocated to the Partners in accordance with their respective Percentage
Interests.
(b) Net Loss. Except as otherwise provided herein, Net Loss of the
--------
Partnership for each fiscal year or other applicable period shall be allocated
as follows:
(1) To the Partners in accordance with their respective
Percentage Interests.
(2) Notwithstanding subparagraph (b)(1) hereof, to the extent any
Net Loss allocated to a Partner under subparagraph (b)(1) hereof or this
subparagraph (b)(2) would cause such Partner (hereinafter, a "Restricted
Partner") to have an Adjusted Capital Account Deficit as of the end of the
fiscal year to which such Net Loss relates, such Net Loss shall not be allocated
to such Restricted Partner and instead shall be allocated to the other
Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance with
their relative Percentage Interests.
(c) Notwithstanding Sections 1(a) and (b) above, on any date on which
any Series A Preferred Stock, any Series B Preferred Stock, any Series C
Preferred Stock or any Series B Preferred Unit or any Series C Preferred Unit
(or other Preferred Stock or other preferred units) is outstanding, Net Income
and Net Loss shall be allocated as follows:
(1) Net Income for any fiscal year or other applicable period
shall be allocated in the following order and priority:
(i) First, to the Partners, until the cumulative Net
Income allocated pursuant to this subparagraph (c)(1)(i) for the current and all
prior periods equals the cumulative Net Loss allocated pursuant to subparagraphs
(c)(2)(iii) and (iv)
1
<PAGE>
hereof for all prior periods, among the Partners in the reverse order that such
Net Loss was allocated (and, in the event of a shift of a Partner's interest in
the Partnership, to the Partners in a manner that most equitably reflects the
successors in interest to such Partners);
(ii) Second, to the General Partner, until the cumulative
Net Income allocated pursuant to this subparagraph (c)(1)(ii) for the current
and all prior periods equals the cumulative Net Loss allocated pursuant to
subparagraph (c)(2)(ii) hereof for all prior periods;
(iii) Third, on a pari passu basis, to (A) the General
---- -----
Partner until the cumulative amount of Net Income allocated pursuant to this
subparagraph (c)(1)(iii) equals the total amount of dividends paid on the Series
A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock
(and other Preferred Stock) as of or prior to the date of such allocation plus
the total amount of accrued but unpaid dividends on the Series A Preferred
Stock, the Series B Preferred Stock and the Series C Preferred Stock (and other
Preferred Stock) as of such date; (B) to the holders of Series B Preferred Units
until the cumulative amount of Net Income allocated pursuant to this
subparagraph (c)(i)(iii) equals the total amount of Priority Return paid on the
Series B Preferred Units as of or prior to the date of such allocation plus the
total amount of accrued but unpaid Priority Return on the Series B Preferred
Units; and (C) to the holders of Series C Preferred Units until the cumulative
amount of Net Income allocated pursuant to this subparagraph (c)(i)(iii) equals
the total amount of Priority Return paid on the Series C Preferred Units as of
or prior to the date of such allocation plus the total amount of accrued but
unpaid Priority Return on the Series C Preferred Units;
(iv) Thereafter, the balance of the Net Income, if any,
shall be allocated to the Partners in accordance with their respective
Percentage Interests.
(2) Net Loss of the Partnership for each fiscal year or other
applicable period shall be allocated as follows:
(i) First, to the Partners in accordance with their
respective Percentage Interests until the Capital Account balances of the
Limited Partners (not including the holders of the Series B Preferred Units and
the Series C Preferred Units) are reduced to zero (for purpose of this
calculation, such Partners' share of Partnership Minimum Gain shall be added
back to their Capital Accounts);
(ii) Second, on a pari passu basis, to (A) the General
---- -----
Partner until its Capital Account balance has been reduced to zero (for purpose
of this calculation, such Partner's share of Partnership Minimum Gain shall be
added back to its Capital Account); (B) to the holders of Series B Preferred
Units until their Capital Account balances have been reduced to zero (for
purpose of this calculation, such Partners' share of Partnership Minimum Gain
shall be added back to their Capital Accounts); and (C) to the holders of Series
C Preferred Units until their Capital Account Balances have been reduced to zero
(for purposes of this calculation, such Partners' share of Partnership Minimum
Gain shall be added back to their Capital Accounts);
2
<PAGE>
(iii) Thereafter, to the Partners in accordance with
their then Percentage Interests;
(iv) Notwithstanding subparagraph (c)(2)(iii) hereof, to
the extent any Net Loss allocated to a Partner under subparagraph (c)(2) would
cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted
Capital Account Deficit as of the end of the fiscal year to which such Net Loss
relates, such Net Loss shall not be allocated to such Restricted Partner and
instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted
Partners") pro rata in accordance with their relative Percentage Interests.
(d) Book-Up and Capital Account Adjustments. On any day on which
---------------------------------------
Series A Preferred Stock (or other Preferred Stock) is redeemed or converted
into Common Stock, the Partnership shall adjust the Gross Asset Values of all
Partnership assets to equal their respective gross fair market values and shall
allocate the amount of such adjustment as Net Income or Net Loss pursuant to
Section 1(c) hereof, provided, however, that if no Series A Preferred Stock (or
other Preferred Stock) is outstanding after such redemption or conversion, such
Net Income or Net Loss shall be allocated in such a manner that after such
allocation the Capital Accounts of the Partners are in proportion to their
Percentage Interests.
(e) Adjustment of Percentage Interests Upon Conversion of Convertible
-----------------------------------------------------------------
Preferred Stock to Common Stock. Upon the conversion of any Series A Preferred
- -------------------------------
Stock to Common Stock of the General Partner , the Percentage Interests of the
Partners shall be adjusted in accordance with the provisions of Article 4 of the
Partnership Agreement as if, on the date of such conversion, the General Partner
had made an additional Capital Contribution to the Partnership in an amount
equal to the number of shares of Common Stock issued as a result of such
conversion multiplied by the fair market value of such shares on the date of
conversion, and provided that in calculating such adjustments, the General
Partner shall be deemed not to have incurred any expenses in connection with
raising the funds used to make such additional Capital Contribution.
2. Special Allocations.
-------------------
Notwithstanding any provisions of paragraph 1 of this Exhibit E, the
following special allocations shall be made in the following order:
(a) Minimum Gain Chargeback (Nonrecourse Liabilities). If there is a
-------------------------------------------------
net decrease in Partnership Minimum Gain for any Partnership fiscal year (except
as a result of conversion or refinancing of Partnership indebtedness, certain
capital contributions or revaluation of the Partnership property as further
outlined in Regulation Sections 1.704-2(d)(4), (f)(2) or (f)(3)), each Partner
shall be specially allocated items of Partnership income and gain for such year
(and, if necessary, subsequent years) in an amount equal to that Partner's share
of the net decrease in Partnership Minimum Gain. The items to be so allocated
shall be determined in accordance with Regulation Section 1.704-2(f). This
paragraph (a) is intended to comply with the minimum gain chargeback requirement
in said section of the Regulations and shall be interpreted consistently
3
<PAGE>
therewith. Allocations pursuant to this paragraph (a) shall be made in
proportion to the respective amounts required to be allocated to each Partner
pursuant hereto.
(b) Minimum Gain Attributable to Partner Nonrecourse Debt. If there
-----------------------------------------------------
is a net decrease in Minimum Gain Attributable to Partner Nonrecourse Debt
during any fiscal year (other than due to the conversion, refinancing or other
change in the debt instrument causing it to become partially or wholly
nonrecourse, certain capital contributions, or certain revaluations of
Partnership property as further outlined in Regulation Section 1.704-2(i)(4)),
each Partner shall be specially allocated items of Partnership income and gain
for such year (and, if necessary, subsequent years) in an amount equal to that
Partner's share of the net decrease in the Minimum Gain Attributable to Partner
Nonrecourse Debt. The items to be so allocated shall be determined in
accordance with Regulation Section 1.704-2(i)(4) and (j)(2). This paragraph (b)
is intended to comply with the minimum gain chargeback requirement with respect
to Partner Nonrecourse Debt contained in said section of the Regulations and
shall be interpreted consistently therewith. Allocations pursuant to this
paragraph (b) shall be made in proportion to the respective amounts required to
be allocated to each Partner pursuant hereto.
(c) Qualified Income Offset. In the event a Limited Partner
-----------------------
unexpectedly receives any adjustments, allocations or distributions described in
Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6), and such Limited
Partner has an Adjusted Capital Account Deficit, items of Partnership income and
gain shall be specially allocated to such Partner in an amount and manner
sufficient to eliminate the Adjusted Capital Account Deficit as quickly as
possible. This paragraph (c) is intended to constitute a "qualified income
offset" under Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted
-
consistently therewith.
(d) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal
----------------------
year or other applicable period shall be allocated to the Partners in accordance
with their respective Percentage Interests.
(e) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
------------------------------
for any fiscal year or other applicable period shall be specially allocated to
the Partner that bears the economic risk of loss for the debt (i.e., the Partner
Nonrecourse Debt) in respect of which such Partner Nonrecourse Deductions are
attributable (as determined under Regulation Section 1.704-2(b)(4) and (i)(1)).
(f) Curative Allocations. It is the intent of the Partnership that,
--------------------
to the extent possible, the Capital Account balances of the Partners be in
proportion to the Partners' Percentage Interests. Thus, items of "book" income,
gain, loss, and deduction shall be allocated among the Partners so that, to the
extent possible, the resulting Partners' Capital Account balances bear this
relationship. This subparagraph (f) is intended to minimize to the extent
possible and to the extent necessary any economic distortions which may result
from application of the Regulatory Allocations and shall be interpreted in a
manner consistent therewith. For purposes hereof, "Regulatory Allocations"
shall mean the
4
<PAGE>
allocations provided under paragraph 1(b)(2) and this paragraph 2 (save
subparagraphs (d) and (f) hereof).
3. Tax Allocations.
---------------
(a) Generally. Subject to paragraphs (b) and (c) hereof, items of
---------
income, gain, loss, deduction and credit to be allocated for income tax purposes
(collectively, "Tax Items") shall be allocated among the Partners on the same
basis as their respective book items.
(b) Sections 1245/1250 Recapture. If any portion of gain from the
----------------------------
sale of property is treated as gain which is ordinary income by virtue of the
application of Code Section 1245 or 1250 ("Affected Gain"), then (A) such
Affected Gain shall be allocated among the Partners in the same proportion that
the depreciation and amortization deductions giving rise to the Affected Gain
were allocated and (B) other Tax Items of gain of the same character that would
have been recognized, but for the application of Code Sections 1245 and/or 1250,
shall be allocated away from those Partners who are allocated Affected Gain
pursuant to Clause (A) so that, to the extent possible, the other Partners are
allocated the same amount, and type, of capital gain that would have been
allocated to them had Code Sections 1245 and/or 1250 not applied; provided,
however, that the net amount of Tax Items allocated to each Partner shall be the
same as if this paragraph 3(a) did not exist. For purposes hereof, in order to
determine the proportionate allocations of depreciation and amortization
deductions for each fiscal year or other applicable period, such deductions
shall be deemed allocated on the same basis as Net Income and Net Loss for such
respective period.
(c) Allocations Respecting Section 704(c) and Revaluations. If any
------------------------------------------------------
Partnership property is subject to Code Section 704(c) or is reflected in the
Capital Accounts of the Partners and on the books of the Partnership at a book
value that differs from the adjusted tax basis of such property, then the tax
items with respect to such property shall, in accordance with the requirements
of Regulations Section 1.704-1(b)(4)(i), be shared among the Partners in a
manner that takes account of the variation between the adjusted tax basis of the
applicable property and its book value in the same manner as variations between
the adjusted tax basis and fair market value of property contributed to the
Partnership are taken into account in determining the Partners' share of tax
items under Code Section 704(c). The General Partner is authorized to choose
any reasonable method permitted by the Regulations pursuant to Code Section
704(c), including the "remedial allocation" method, the "curative allocation"
method and the traditional method; provided that the General Partner agrees to
use reasonable efforts to minimize the amount of taxable income in excess of
book income allocated to the holders of the Series B Preferred Units and the
Series C Preferred Units.
(d) Code Section 752 Specification. Pursuant to Regulations Section
------------------------------
1.752-3, the Partners' interest in Partnership profits for purposes of
determining the Partners' shares of excess nonrecourse liabilities shall be
their Percentage Interests.
5
<PAGE>
EXHIBIT O
DESCRIPTION OF PREFERENCES, OTHER RIGHTS, VOTING POWERS, RESTRICTIONS,
LIMITATIONS AS TO DISTRIBUTIONS, QUALIFICATIONS AND
TERMS AND CONDITIONS OF REDEMPTION
OF THE
SERIES C PREFERRED UNITS
1. Definitions.
In addition to those terms defined in the Agreement, the following
definitions shall be for all purposes, unless otherwise clearly indicated to the
contrary, applied to the terms used in the Agreement and this Exhibit O:
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which state or federally chartered banking institutions in New York, New
York are not required to be open.
"Distribution Payment Date" shall have the meaning set forth in
Section 2(c) hereof.
"Parity Units" means (i) the Series A Preferred Interest, (ii) the
Series B Preferred Interest, (iii) the Series C Preferred Interest, and (iv) any
class or series of Partnership Interests of the Partnership now or hereafter
authorized, issued or outstanding expressly designated by the Partnership to
rank on a parity with Series C Preferred Units with respect to distributions or
rights upon voluntary or involuntary liquidation, winding-up or dissolution of
the Partnership, or both, as the context may require.
"Priority Return" means, an amount equal to 91/8% per annum,
determined on the basis of a 360 day year of twelve 30 day months (or actual
days for any month which is shorter than a full monthly period), cumulative to
the extent not distributed for any given distribution period pursuant to Section
6.2(a) of the Partnership Agreement, of the stated value of $50 per Series C
Preferred Unit, commencing on the date of issuance of the Series C Preferred
Units.
"Series C Preferred Stock" means the 91/8% Series C Cumulative
Redeemable Preferred Stock (liquidation preference $50.00 per share), $.0001 par
value, issued by the General Partner.
"Series C Preferred Unit" means a Partnership Unit issued by the
Partnership to certain Persons. The Series C Partnership Units shall constitute
a series of Partnership Units. The Series C Preferred Units shall have the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms and conditions of
redemption as are set forth in this Exhibit O.
"set apart for payment" shall mean placing such funds in a separate
account or delivering such funds to a disbursing, paying or other similar agent.
1
<PAGE>
2. Terms of Series C Preferred Units.
A. Number. The number of authorized Series C Preferred Units shall be
------
500,000.
B. Ranking. The Series C Preferred Units will, with respect to distributions
-------
and rights upon voluntary or involuntary liquidation, winding-up or dissolution
of the Partnership, rank senior to all classes or series of Partnership
Interests (as defined in the Partnership Agreement) of the Partnership now or
hereafter authorized, issued or outstanding, other than (i) the Series A
Preferred Interest, the Series B Preferred Interest and the Series C Preferred
Interest, with which it shall rank on a parity, and (ii) any class or series of
Partnership Interests or Partnership Units expressly designated as ranking on a
parity with or senior to the Series A Preferred Units, Series B Preferred Units
and Series C Preferred Units as to distributions and rights upon voluntary or
involuntary liquidation, winding-up or dissolution of the Partnership.
C. Distributions.
-------------
(i) Subject to the rights of the holders of the Parity Units as to the
payments of distributions, holders of Series C Preferred Units will be entitled
to receive, when, as and if declared by the Partnership, acting through the
Company as the sole general partner of the Partnership, cumulative preferential
cash distributions at the rate per annum of 9 1/8% of the original Capital
Contribution per Series C Preferred Unit. Distributions shall be cumulative,
shall accrue from the original date of issuance (the "Issue Date") and shall be
payable (A) quarterly in arrears (such quarterly periods, for purposes of
payment and accrual shall be the quarterly periods ending on the dates specified
in this sentence and not calendar quarters), on the 15th day of February, May,
August and November of each year and (B) in the event of (i) an exchange of
Series C Preferred Units into shares of Series C Preferred Stock, or (ii) upon a
redemption of Series C Preferred Units, on the exchange date or redemption date
(each a "Distribution Payment Date"), commencing on February 15, 1999. The
amount of distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months and for any period shorter than a full
quarterly period for which distributions are computed, the amount of the
distribution payable will be computed on the basis of the actual number of days
elapsed in such a 30-day month. If any date on which distributions are to be
made on the Series C Preferred Units is not a Business Day, then payment of the
distribution to be made on such date will be made on the next succeeding day
that is a Business Day (and without any interest or other payment in respect of
any such delay) except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on such date.
Distributions on the Series C Preferred Units will be made to the holders of
record of the Series C Preferred Units on the relevant record dates, which,
unless otherwise provided by the Company with respect to any distribution, will
be 15 Business Days prior to the relevant Distribution Payment Date.
(ii) No distributions on the Series C Preferred Units shall be declared
or paid or set apart for payment by the Partnership at such time as the terms
and provisions of any agreement of the Partnership, including any agreement
relating to its indebtedness, prohibits such declaration, payment or
2
<PAGE>
setting apart for payment or provides that such declaration, payment or setting
apart for payment would constitute a breach thereof or a default thereunder, of
if such declaration, payment or setting apart for payment shall be restricted or
prohibited by law.
(iii) Notwithstanding the foregoing, distributions on the Series C
Preferred Units will accrue whether or not the terms and provisions set forth in
Section 2.C.(ii) hereof at any time prohibit the current payment of
distributions, whether or not the Corporation has earnings, whether or not there
are funds legally available for the payment of such distributions and whether or
not such distributions are authorized. Accrued but unpaid distributions on the
Series C Preferred Units will accumulate as of the Distribution Payment Date on
which they first become payable. Accumulated and unpaid distributions will not
bear interest.
(iv) So long as any Series C Preferred Unit is outstanding, no
distribution of cash or other property shall be authorized, declared, paid or
set apart for payment on or with respect to any class or series of Partnership
Interests ranking junior to the Series C Preferred Units as provided in this
Section 2 (such Partnership Interests, collectively, "Junior Units"), nor shall
any cash or other property be set aside for or applied to the purchase,
redemption or other acquisition for consideration of any Series C Preferred
Units, any Parity Units with respect to distributions or any Junior Units,
unless, in each case, all distributions accumulated on all Series C Preferred
Units and all classes and series of outstanding Parity Units as to payment of
distributions have been paid in full. The foregoing sentence will not prohibit
(i) distributions payable solely in Junior Units, (ii) the conversion of Junior
Units or Parity Units into common stock or preferred stock of the Company in
accordance with the exchange rights of such Junior Units or Parity Units, or
(iii) the redemption, purchase or other acquisition of Junior Units made for
purposes of and in compliance with requirements of an employee incentive or
benefit plan of the Corporation or any subsidiary of the Partnership or the
Corporation.
(v) So long as distributions have not been paid in full (or a sum
sufficient for such full payment is not so set apart) upon the Series C
Preferred Units, all distributions authorized and declared on the Series C
Preferred Units and all classes or series of outstanding Parity Units with
respect to distributions shall be authorized and declared so that the amount of
distributions authorized and declared per share of Series C Preferred Units and
such other classes or series of Parity Units shall in all cases bear to each
other the same ratio that accrued distributions per share on the Series C
Preferred Units and such other classes or series of Parity Units (which shall
not include any accumulation in respect of unpaid distributions for prior
distribution periods if such class or series of Parity Units do not have
cumulative distribution rights) bear to each other.
(vi) Holders of Series C Preferred Units shall not be entitled to any
distributions, whether payable in cash, other property or otherwise, in
excess of the full cumulative distributions described herein.
D. Allocation of Net Income.
------------------------
With respect to the Series C Preferred Units, the net income of the
Partnership will be allocated as provided in Exhibit E to the Partnership
Agreement.
3
<PAGE>
E. Liquidation.
-----------
Subject to the rights of holders of any series of Parity Units with
respect to rights upon any voluntary or involuntary liquidation dissolution or
winding-up of the Partnership, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Partnership, the holders of the Series C
Preferred Units will be entitled to receive out of the assets of the Partnership
legally available for distribution or the proceeds thereof, after payment or
provision for debts and other liabilities of the Partnership, an amount equal to
their respective Capital Account balances. Written notice of any such voluntary
or involuntary liquidation, dissolution or winding-up of the Partnership,
stating the payment date or dates when, and the place or places where, the
amounts distributable in such circumstances shall be payable, shall be given by
(i) fax and (ii) by first class mail, postage pre-paid, not less than 30 and not
more than 60 days prior to the payment date stated therein, to each record
holder of the Series C Preferred Units at the respective addresses of such
holders as the same shall appear on the transfer records of the Partnership.
The consolidation or merger of the Partnership with or into any corporation,
trust or other entity (or of any corporation, trust or other entity with or into
the Partnership) shall not be deemed to constitute a liquidation, dissolution,
winding-up or termination of the Partnership.
F. Optional Redemption.
-------------------
(i) The Series C Preferred Units may not be redeemed prior to
November 24, 2003. On or after such date, subject to the terms and conditions of
any Parity Preferred Stock or any Parity Units, the Partnership shall have the
right to redeem the Series C Preferred Units, in whole or in part, from time to
time, upon not less than 30 nor more than 60 days' notice, at a redemption
price, payable in cash, equal to the Capital Account balance of such holders of
Series C Preferred Units (the "Redemption Price"); provided; however that such
redemption shall not be permitted if such Redemption Price shall be less than
the original Capital Contribution of such Partner and the cumulative Priority
Return to the redemption date to the extent not previously distributed.
(ii) Except in connection with a liquidation, dissolution,
winding-up or termination of the Partnership as described under "Liquidation"
above, the Redemption Price of the Series C Preferred Units (other than the
portion thereof consisting of accumulated but unpaid distributions) will be
payable solely out of the sale proceeds of capital stock of the Company, which
will be contributed by the Company to the Partnership as an additional capital
contribution, or out of the sale proceeds of limited partner interests of the
Partnership and from no other source. Unless previously redeemed, the Series C
Preferred Units will be redeemed for cash upon termination of the Partnership.
Unless sooner dissolved, the Partnership will terminate on December 31, 2054.
The Series C Preferred Units will not be subject to any sinking fund.
(iii) If the Partnership gives a notice of redemption in respect
of Series C Preferred Units (which notice will be irrevocable) then, by 12:00
noon, New York City time, on the redemption date, the Partnership will deposit
irrevocably in trust for the benefit of the Series C Preferred Units being
redeemed funds sufficient to pay the applicable Redemption Price and will give
irrevocable instructions and authority to pay such Redemption Price to the
holders of the Series C Preferred Units. On and after the date of redemption,
distributions will cease to accumulate on the Series C Preferred Units or
portions thereof called for redemption, unless the
4
<PAGE>
Partnership defaults in the payment thereof. If any date fixed for redemption of
Series C Preferred Units is not a Business Day, then payment of the Redemption
Price payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay) except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date fixed for redemption. If
payment of the Redemption Price in respect of the Series C Preferred Units is
improperly withheld or refused and not paid by the Partnership, distributions on
such Series C Preferred Units will continue to accumulate from the original
redemption date to the date of payment, in which case the actual payment date
will be considered the date fixed for redemption for purposes of calculating the
applicable Redemption Price. If fewer than all the Series C Preferred Units are
to be redeemed, the Series C Preferred Units to be redeemed shall be selected
pro rata (as nearly as practicable without creating fractional units).
(iv) The Partnership may not redeem fewer than all the outstanding
Series C Preferred Units unless all accumulated and unpaid distributions have
been paid on all Series C Preferred Units for all quarterly distribution periods
terminating on or prior to the date of redemption.
(v) Notice of redemption will be (i) faxed, and (ii) mailed by the
Partnership, postage prepaid, not less than 30 nor more than 60 days prior to
the redemption date, addressed to the respective holders of record of the Series
C Preferred Units to be redeemed at their respective addresses as they appear on
the transfer records of the Partnership. No failure to give or defect in such
notice shall affect the validity of the proceedings for the redemption of any
Series C Preferred Units except as to the holders to whom notice was defective
or not given. Each notice shall state: (i) the redemption date, (ii) the
Redemption Price, (iii) the number of Series C Preferred Units to be redeemed;
(iv) the place or places where the Series C Preferred Units are to be
surrendered for payment of the Redemption Price; (v) that distributions on the
Series C Preferred Units to be redeemed will cease to accumulate on such
redemption date and (vi) that payment of the Redemption Price will be made upon
presentation and surrender of such Series C Preferred Units. If fewer than all
of the Series C Preferred Units held by any holder are to be redeemed, the
notice mailed to such holder shall also specify then number of Series C
Preferred Units to be redeemed from such holder.
G. Exchange Rights.
---------------
(i) Unless called for redemption as described above under
"Optional Redemption," Series C Preferred Units will be exchangeable in whole or
in part at anytime on or after the tenth anniversary of the Issue Date, at the
option of the holders thereof, for authorized but previously unissued shares of
the Company's Series C Preferred Stock at an exchange price of $50.00 per share
of Series C Preferred Stock (equivalent to an exchange rate of one share of
Series C Preferred Stock for each Series C Preferred Unit), subject to
adjustment as described below (the "Exchange Price"), provided that the Series C
Preferred Units will become immediately exchangeable at any time in whole or in
part at the option of the holders for Series C Preferred Units (y) if at any
time full distributions shall not have made on any outstanding Series C
Preferred Units with respect to any six (6) prior quarterly distribution
periods, whether or not consecutive, such that distributions for such six (6)
distribution periods have not been fully
5
<PAGE>
paid and are outstanding in whole or in part at the same time or (z) upon
receipt by holders of Series C Preferred Units of (A) notice from the General
Partner that the General Partner or a subsidiary of the General Partner has
taken the position that the Partnership is, or upon the occurrence of a defined
event in the immediate future will be a "publicly traded partnership" (a "PTP")
within the meaning of Section 7704 of the Internal Revenue Code of 1986, as
amended, and (B) an opinion rendered by independent counsel to the General
Partner familiar with such matter (or, in the event of a conflict, other
reputable independent counsel designated by such General Partner counsel),
addressed to a holder or holders of Series C Preferred Units, that the
Partnership is, or likely is, or upon the occurrence of a defined event in the
immediate future will be or likely will be, a PTP. Series C Preferred Units may
be exchanged for Series C Preferred Stock in whole or in part at the option of
any holder prior to the tenth anniversary of the Issue Date and after the third
anniversary thereof if such holder delivers to the Partnership and the Company
either (i) a private letter ruling addressed to a holder of Series C Preferred
Units or (ii) an opinion of independent counsel reasonably acceptable to the
Company based on the enactment of temporary or final Treasury Regulations or the
publication of a Revenue Ruling, in either case to the effect that an exchange
of the Series C Preferred Units at such earlier time would not cause the Series
C Preferred Units to be considered "stock and securities" within the meaning of
section 351(e) of the Code for purposes of determining whether the holder of
such Series C Preferred Units is an "investment company" under section 721(b) of
the Code if an exchange is permitted at such earlier date. The Series C
Preferred Units will become exchangeable in whole or in part at the option of
the holders of the Series C Preferred Units if (i) the Partnership is advised by
independent counsel that, based on the assets and income of the Partnership for
a taxable year after 1998, the Partnership would not satisfy the income and
assets tests of Section 856 of the Code for such taxable year if the Partnership
were a real estate investment trust within the meaning of the Code; or (ii) any
holder of the Series C Preferred Units shall deliver to the Partnership and the
Company an opinion of independent counsel reasonably acceptable to the Company
to the effect that, based on the assets and income of the Partnership for a
taxable year after 1998, the Partnership would not satisfy the income and assets
tests of Section 856 of the Code for such taxable year if the Partnership were a
real estate investment trust within the meaning of the Code and that such
failure would create a meaningful risk that a holder of the Series C Preferred
Units would fail to maintain its qualification as a real estate investment
trust.
(ii) Notwithstanding anything to the contrary set forth in
2.G.(i), if an Exchange Notice (as defined herein) has been delivered to the
General Partner, then the General Partner may, at its option, elect to redeem or
cause the Partnership to redeem all or a portion of the outstanding Series C
Preferred Units for cash in an amount equal to the original Capital Contribution
per Series C Preferred Unit and all accrued and unpaid distributions thereon to
the date of redemption. The General Partner may exercise its option to redeem
the Series C Preferred Units for cash pursuant to this 2.G.(ii) by giving each
holder of record of Series C Preferred Units notice of its election to redeem
for cash, within fifteen (15) Business Days after receipt of the Exchange
Notice, by (i) fax, and (ii) registered mail, postage paid, at the address of
each holder as it may appear on the records of the Partnership stating (i) the
redemption date, which shall be no later than sixty (60) days following the
receipt of the Exchange Notice, (ii) the Redemption Price, (iii) the place or
places where the Series C Preferred Units are to be surrendered for payment of
the Redemption Price, (iv) that distributions on the Series C Preferred
6
<PAGE>
Units will cease to accrue on such redemption date; (v) that payment of the
Redemption Price will be made upon presentation and surrender of the Series C
Preferred Units and (vi) the aggregate number of Series C Preferred Units to be
redeemed, and if fewer than all of the outstanding Series C Preferred Units are
to be redeemed, the number of Series C Preferred Units to be redeemed held by
such holder, which number shall equal such holder's prorata share (based on the
percentage of the aggregate number of outstanding Series C Preferred Units the
total number of Series C Preferred Units held by such holder represents) of the
aggregate number of Series C Preferred Units being redeemed. The redemption of
Series C Preferred Units described in this Section 2.G.(iii) shall be subject to
the provisions of Section 2.F.(ii) and (iii); provided, however, that the term
"Redemption Price" in such Sections shall be read to mean the original Capital
Contribution per Series C Preferred Unit being redeemed plus all accrued and
unpaid distributions to the redemption date.
(iii) In the event an exchange of all or a portion of the Series C
Preferred Units pursuant to Section 2.G.(i) would violate the Ownership Limit of
the General Partner set forth in Article EIGHTH of the Charter, the General
Partner will give written notice thereof to each holder of record of Series C
Preferred Units exercising such exchange right, within fifteen (15) Business
Days following receipt of the Exchange Notice, by (i) fax, and (ii) mail,
postage prepaid, at the address of each such holder set forth in the records of
the Partnership. In such event, each holder of Series C Preferred Units
exercising its exchange right, shall be entitled to exchange a number of Series
C Preferred Units which would comply with the Ownership Limit of the General
Partner set forth in Article EIGHTH of the Charter and any Series C Preferred
Units not so exchanged (the "Excess Units") shall be redeemed by the Partnership
for cash in an amount equal to the original Capital Contribution per Excess
Unit, plus any accrued and unpaid distributions thereon to the date of
redemption. The written notice of the General Partner shall state (i) the number
of Excess Units held by such holder, (ii) the Redemption Price of the Excess
Units, (iii) the date on which such Excess Units shall be redeemed, which date
shall be no later than ninety (90) days following the receipt of the Exchange
Notice, except as provided below, (iv) the place or places where such Excess
Units are to be surrendered for payment of the Redemption Price, (iv) that
distributions on the Excess Units will cease to accrue on such redemption date,
and (v) that payment of the Redemption Price will be made upon presentation and
surrender of such Excess Units. The redemption of Series C Preferred Units
described in this Section 2.G.(iii) shall be subject to the provisions of
Section 2.F.(ii) and (iii); provided, however, that the term "Redemption Price"
in such Sections shall be read to mean the original Capital Contribution per
Series C Preferred Unit being redeemed plus all accrued and unpaid distributions
to the redemption date. The Partnership may at its option delay the payment of
cash to effect redemption of Series C Preferred Units pursuant to this Section
2.G.(iii) for up to two hundred seventy (270) days following the end of the 90
day period set forth in clause (iii) above of this Section 2.G.(iii), provided
that during such two hundred seventy (270) day period, the Corporation shall
pay, in addition to the Redemption Price of the Excess Units and any accrued and
unpaid distribution with respect to the Excess Units, to the holder of such
Excess Units an amount equal to 1 1/4% per annum of the original Capital
Contribution per such Excess Unit from the end of such 90 day period through the
date of redemption.
(iv) Any exchange shall be exercised pursuant to a notice of
exchange (the "Exchange Notice") delivered to the General Partner by the holder
who is exercising such
7
<PAGE>
exchange right, by (i) fax, and (ii) by mail, postage prepaid. The exchange of
Series C Preferred Units, or a specified portion thereof, may be effected after
the fifteenth (15th) Business Day following receipt by the General Partner of
the Exchange Notice by delivering certificates, if any, representing such Series
C Preferred Units to be exchanged together with written notice of exchange and a
proper assignment of such Series C Preferred Units to the office of the Company
maintained for such purpose. Currently, such office is Essex Property Trust,
Inc., 925 E. Meadow Drive, Palo Alto, California 94303.
(v) Each exchange will be deemed to have been effected immediately
prior to the close of business on the date on which such Series C Preferred
Units to be exchanged (together with all required documentation) shall have been
surrendered and notice shall have been received by the Company as aforesaid and
the exchange shall be at the Exchange Price in effect at such time and on such
date. The right to exchange Series C Preferred Units called for redemption will
terminate upon receipt by the holder of such Series C Preferred Units of a
notice of redemption from the Partnership that pertains to such Series C
Preferred Units.
(vi) In the event of an exchange of Series C Preferred Units into
shares of Series C Preferred Stock, an amount equal to the accrued and unpaid
distributions to the date of exchange on any Series C Preferred Units tendered
for exchange shall accrue on the shares of the Series C Preferred Stock into
which such Series C Preferred Units are exchanged and the Series C Preferred
Units so exchanged shall no longer be outstanding.
(vii) Fractional shares of Series C Preferred Stock are not to be
issued upon exchange but, in lieu thereof, the Company will pay a cash
adjustment based upon the fair market value of the Series C Preferred Stock on
the day prior to the exchange date as determined in good faith by the Board of
Directors of the Company.
H. Exchange Price Adjustments.
--------------------------
(i) The Exchange Price is subject to adjustment upon certain
events, including (i) subdivisions, combinations and reclassification of the
Series C Preferred Stock, and (ii) distributions to all holders of Series C
Preferred Stock of evidences of indebtedness of the Company or assets (including
securities, but excluding dividends and distributions paid in cash out of equity
applicable to the Series C Preferred Stock). In addition to the foregoing
adjustments, the Company will be permitted to make such reduction in the
Exchange Price as it considers to be advisable in order that any event treated
for Federal income tax purposes as a dividend of stock or stock rights will not
be taxable to the holders of the Common Stock.
(ii) In case the Company shall be a party to any transaction
(including, without limitation, a merger, consolidation, statutory share
exchange, tender offer for all or substantially all of the Company's capital
stock or sale of all or substantially all of the Company's assets), in each case
as a result of which the Series C Preferred Stock will be converted into the
right to receive shares of capital stock, other securities or other property
(including cash or any combination thereof), each Series C Preferred Unit, will
thereafter be exchangeable into the kind and amount of shares of capital stock
and other securities and property receivable (including cash or any combination
thereof) upon the consummation of such transaction by a holder of that number of
shares of Series C Preferred Stock or fraction thereof into which one Series C
8
<PAGE>
Preferred Unit was exchangeable immediately prior to such transaction. The
Company may not become a party to any such transaction unless the terms thereof
are consistent with the foregoing.
(iii) No adjustment of the Exchange Price is required to be made in
any case until cumulative adjustments amount to 1% or more of the Exchange
Price. Any adjustments not so required to be made will be carried forward and
taken into subsequent adjustments.
I. Voting Rights.
--------------
(i) Holders of the Series C Preferred Units will not have any
voting rights or rights to consent to any matters, except as set forth below.
(ii) So long as any Series C Preferred Units remains outstanding,
the Partnership shall not, without the affirmative vote of the holders of at
least two-thirds (2/3) of the Series C Preferred Units outstanding at the time
(i) authorize or create, or increase the authorized or issued amount of, any
class or series of Partnership Interests ranking prior to the Series C Preferred
Units with respect to payment of distributions or rights upon liquidation,
dissolution or winding-up or reclassify any Partnership Interests of the
Partnership into any such Partnership Interest, or create, authorize or issue
any obligations or security convertible into or evidencing the right to purchase
any such Partnership Interest, (ii) amend, alter or repeal the provisions of the
Partnership Agreement, whether by merger, consolidation or otherwise, that would
materially and adversely affect the powers, special rights, preferences,
privileges or voting power of the Series C Preferred Units or the holders
thereof; provided that any increase in the amount of Partnership Interests or
the creation or issuance of any other class or series of Partnership Interests
ranking junior to or on a parity with the Series C Preferred Units with respect
to payment of distributions and the distribution of assets upon liquidation,
dissolution or winding-up shall not be deemed to materially and adversely affect
such rights, preferences, privileges or voting powers, or (iii) consolidate,
amalgamate, merge into or with, or convey, transfer or lease its assets
substantially as an entirety to, any corporation or other entity, unless (a) the
Partnership is the surviving entity and the Series C Preferred Units remain
outstanding with the terms thereof unchanged, (b) the resulting, surviving or
transferee entity is a partnership, limited liability company or other pass-
through entity organized under the laws of any state and substitutes the Series
C Preferred Units for other interests in such entity having substantially the
same terms and rights as the Series C Preferred Units, including with respect to
distributions, voting rights and rights upon liquidation, dissolution or
winding-up, or (c) such merger, consolidation, amalgamation or asset transfer
does not adversely affect the powers, special rights, preferences and privileges
of the holders of the Series C Preferred Units in any material respect. However,
the Partnership may create additional classes and series of Parity Units and
Junior Units, increase the authorized number of Parity Units and Junior Units
and issue additional classes and series of Parity Units and Junior Units without
the consent of any holders of Series C Preferred Units.
J. Restrictions on Ownership and Transfer.
--------------------------------------
Each holder of the Series C Preferred Units shall be permitted to
transfer its units if such transfer is in accordance with the provisions and
restrictions on Transfers of Limited Partnership Interests set forth in Sections
9.2 and 9.3(b) of the Partnership Agreement; provided, however, that upon any
Transfer by a holder of Series C Preferred Units to any Controlled Entity,
9
<PAGE>
such transferee shall, subject to compliance with Section 9.3 and clauses (A),
(B) and (D) of Section 9.2 of the Partnership Agreement, be admitted as a
Substituted Limited Partner.
10
<PAGE>
EXHIBIT 10.9
TERMINATION OF NON-COMPETE AGREEMENT
THIS TERMINATION OF NON-COMPETE AGREEMENT (this "Agreement") is hereby made
and entered into as of this day ____ day of February, 1999, by and between
George M. Marcus, for both himself and his Affiliated Companies (as defined
below) (collectively, "Marcus"), and Essex Property Trust, Inc., a Maryland
corporation, and its Affiliated Companies (collectively, "Essex").
RECITALS
WHEREAS, Marcus previously entered into a certain Non-Compete Agreement
dated June 13, 1994, for the benefit of Essex (the "Non-Compete Agreement").
WHEREAS, Marcus and Essex, subject to the terms and conditions provided for
herein, wish to terminate the Non-Compete Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. The Recitals set forth above are true and correct.
2. Subject to the terms and conditions provided for in this Agreement, the
Non-Compete Agreement is hereby terminated in its entirety.
3. Marcus hereby agrees, on behalf of both himself and all of his
Affiliated Companies, that if Marcus and/or any of his Affiliated Companies
enters into, whether directly or indirectly, a contract or agreement ("Subject
Contract") providing for the acquisition or development of any residential
rental properties containing, in the aggregate, more than one hundred (100)
residential rental units, then within ten (10) business days thereafter Marcus
shall give (or shall cause the respective Affiliated Company to give) written
notice to Essex of such Subject Contract and the essential terms thereof
("Notice of Contract"). If Essex, within forty eight (48) hours following
receipt of the Notice of Contract, delivers to Marcus (i) reasonable evidence
that prior to the date of the Subject Contract Essex had submitted to the other
party to the Subject Contract a bona fide good faith written offer respecting
the property that is the subject of the Subject Contract, and (ii) written
notice of the election by Essex to take an assignment of the Subject Contract,
then, within ten (10) business days following receipt by Marcus of the items
described in clauses (i) and (ii) of this sentence, Marcus shall assign (or
shall cause the respective Affiliated Company to assign) to Essex or its
designee, the Subject Contract. Such assignment shall be without compensation
of any kind or nature being paid to either Marcus, any such Affiliated Company
or to any other person or entity for or in connection with such assignment.
Each Notice of Contract shall be in writing, and delivered to Essex at 925 East
Meadow Drive, Palo Alto, California 94303-4233, Attention: Keith R. Guericke,
via telecopy at (650) 858-0139, with a copy
<PAGE>
to be sent via regular mail. Each notice to Marcus shall be in writing, and
delivered to Marcus at 777 California Avenue, Palo Alto, California 94304, via
telecopy at (650) 424-9136, with a copy sent via regular mail. The term
"Affiliated Company" is hereby defined to mean (i) any person or entity as to
which Essex (and/or Essex Portfolio, L.P., a California limited partnership
("EPLP") or Marcus, as the case may be, owns, whether directly or indirectly, a
twenty percent (20%) or greater interest in, (ii) any person or entity which
owns, whether directly or indirectly, a twenty percent (20%) or greater interest
in Essex (and/or EPLP) or Marcus, as the case may be, (iii) any person or entity
which as the ability to control the decision making process of Essex (and/or
EPLP) or Marcus, as the case may be, (iv) any person or entity over which Essex
(and/or EPLP) or Marcus, as the case may be, has the ability to control the
decision making process of, or (v) for Essex, EPLP.
4. This Agreement shall be governed by and construed under the laws of the
State of California.
5. This Agreement may be executed in two of more counterparts, each such
counterpart being deemed to be an original, but all of which counterparts taken
together being deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
ESSEX:
ESSEX PROPERTY TRUST, INC.
a Maryland corporation
By: /s/ Keith R. Guericke
--------------------------
Its: President
--------------------------
MARCUS:
-------------------------------
George M. Marcus
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
ESSEX PROPERTY TRUST, INC.
Schedule of computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
(Dollars in thousands, except ratios)
Years ended December 31
-------------------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Earnings:
Income before minority interests
and extraordinary item $ 40,600 $ 34,146 $ 14,970
Interest expense 19,374 12,659 11,442
Amortization of deferred financing costs 718 509 639
---------------- ---------------- -----------------
Total earnings $ 60,692 $ 47,314 $ 27,051
================ ================= =================
Fixed charges:
Interest expense $ 19,374 $ 12,659 $ 11,442
Convertible preferred stock dividends 3,500 2,681 635
Perpetual preferred unit distributions 5,595 - -
Amortization of deferred financing costs 718 509 639
Capitalized interest 3,494 1,276 281
---------------- ---------------- -----------------
Total fixed charges and preferred
stock dividends $ 32,681 $ 17,125 $ 12,997
================ ================= =================
Ratio of earnings to fixed charges
(excluding preferred stock dividends) 2.57X 3.28X 2.19X
================ ================= =================
Ratio of earnings to combined fixed
charges and preferred dividends 1.86X 2.76X 2.08X
================ ================= =================
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<C> <S>
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 Fidelity I Corporation, a California corporation
9. Essex Camarillo Corporation, a California corporation
10. Essex Camarillo L.P., a California limited partnership
11. Essex Meadowood Corporation, a California corporation
12. Essex Bunker Hill 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
24. Essex Bunker Hill, L.P., a California limited partnership
25. Essex Westwood, L.P. a California limited partnership
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Essex Property Trust, Inc.;
We consent to incorporation by reference in the registration statement (No.
333-68503) on Form S-3, the registration statement (No. 333-44467) on Form S-
3, the registration statement (No. 333-21989) on Form S-3, and the
registration statement (No. 33-84830) on Form S-8 of Essex Property Trust,
Inc. of our report dated January 30, 1999, relating to the consolidated
balance sheets of Essex Property Trust, Inc. and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows of Essex Property Trust, Inc. and
subsidiaries for each of the years in the three-year period ended December 31,
1998. and the related financial statement schedule, which report appears in
the December 31, 1998 annual report on Form 10-K of Essex Property Trust, Inc.
KPMG LLP
San Francisco, California
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ESSEX
PROPERTY TRUST, INC. REPORT FOR THE YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,080
<SECURITIES> 0
<RECEIVABLES> 29,259
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,217
<PP&E> 943,177
<DEPRECIATION> 77,789
<TOTAL-ASSETS> 931,796
<CURRENT-LIABILITIES> 45,047
<BONDS> 361,515
0
1
<COMMON> 2
<OTHER-SE> 389,797
<TOTAL-LIABILITY-AND-EQUITY> 931,796
<SALES> 0
<TOTAL-REVENUES> 125,268
<CGS> 0
<TOTAL-COSTS> 59,881
<OTHER-EXPENSES> 13,319
<LOSS-PROVISION> 930
<INTEREST-EXPENSE> 20,092
<INCOME-PRETAX> 31,046
<INCOME-TAX> 0
<INCOME-CONTINUING> 31,046
<DISCONTINUED> 0
<EXTRAORDINARY> (4,718)
<CHANGES> 0
<NET-INCOME> 26,328
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.36
</TABLE>
